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When PSINet Inc. announced a major restructuring, including the resignation of its president, it was only a matter of time before shareholders began filing lawsuits against the Ashburn, Va.-based Internet access company. In fact, within 24 hours of the Nov. 2 move, Washington, D.C.-based Cohen, Milstein, Hausfeld & Toll filed a securities fraud class action on behalf of three named plaintiffs. Since then, 18 firms have brought six more suits, and Cohen Milstein’s name is on five of them. As securities class actions against high-tech companies proliferate in the Eastern District of Virginia, 38-lawyer Cohen Milstein has become the go-to local counsel for the prominent securities plaintiffs’ firms from New York. One reason is the firm’s size and background. Cohen Milstein has been doing class action work for 27 years in courts across the country, including the 1996 race discrimination suit against Texaco and those arising from the Exxon Valdez oil spill in 1989. Over the years, Cohen Milstein has built a good reputation and relationships with plaintiffs’ lawyers outside the area, who now turn to the firm for cases here. Name partner Steven Toll says he prefers “to think it’s not just relationships but respect” that brings outside law firms to Cohen, Milstein for local counsel. In the securities plaintiffs’ bar, there is a lot of “greed and backbiting,” Toll says. “Our reputation is not that.” While Toll’s colleague Michael Hausfeld may be the best-known attorney at the firm — he negotiated the $176 billion Texaco settlement and represented Holocaust survivors and the descendants of those whose assets were retained by private Swiss banks during and after World War II — Herbert Milstein holds the classic securities litigation pedigree. Milstein served on the Securities and Exchange Commission as the chief enforcement attorney in the division of corporate regulation. Other Washington, D.C. area firms that have been getting a piece of the securities action include Washington, D.C.’s Finkelstein, Thompson & Loughran, which is local counsel on one of the PSINet cases; Arlington, Va.’s Cohen, Gettings & Dunham; and Alexandria, Va.’s Richards McGettigan Reilly & West. Being local counsel in many courts is simply a matter of showing up and filing documents on time. But “there is a somewhat unique situation with the Rocket Docket,” Toll says. Because of the Eastern District’s tome of local rules and its high-speed handling of cases, local counsel here generally do actual legal work and thus rack up hours that are figured into the equation when it is time to allot attorney fees. In the first suit filed against PSINet, it appears that six firms have allied themselves and their clients. In addition to Cohen Milstein, these are Stull, Stull & Brody; Milberg Weiss Bershad Hynes & Lerach; and Weiss & Yourman, all of New York, plus Philadelphia’s Spector & Roseman and Alfred Yates Jr. of Pittsburgh. The case includes as name plaintiffs three individual investors — Charlene Harris, David Goldin, and Myron Harris — who held a total of 3,800 PSINet shares. GREAT EXPECTATIONS This and subsequent complaints allege that PSINet made rosy statements about its financial health and future over the past six months and purposely withheld information about troubles the company was facing. In May, the company issued a press release quoting Chief Executive Officer William Schrader as saying, “Customers, products, network, facilities, and our team are an unbeatable competitive advantage,” and quoting then-Chief Operating Officer Harold (Pete) Wills as saying, “We expect our enhanced sales force will begin generating significant benefits to our hosting business in the second half of the year.” Then, on Nov. 2, the company announced a net loss to common shareholders of $1.4 billion, compared with $215.6 million in the second quarter. PSINet also announced for the first time that it classified e-commerce company Xpedior Inc., which the company paid $50 million to acquire in March, as a discontinued operation. At the time of the deal, PSINet had forecast that Xpedior could lead to $1 billion in revenue annually. The November announcement also stated that President and COO Wills had resigned. The company’s stock, trading at a 52-week high of $60.94 in March, slid steadily throughout the summer and was around $7 before the announcement, and then dropped to less than $3. Last week, PSINet stock was trading at little more than $1 per share. On Nov. 16, the company made the financial headlines again when it engaged investment firm Goldman Sachs & Co. as its financial adviser, a move that is widely considered to be the first step toward putting the company up for sale. “This looks like the kind of case where the defendants were trying to sweep stuff under the rug that they didn’t want to admit,” says one plaintiffs attorney who has filed a case against PSINet. “Not for the purpose of enriching themselves, but because they didn’t want to reveal how much trouble they were having.” Thus far, all the plaintiffs who have filed cases are individual investors who claim losses on between 800 and 19,000 shares. Often, institutional investors such as pension funds, which have hundreds of thousands of shares of the company in question, are favored to be lead plaintiffs in securities cases. Several lawyers already involved in the PSINet suit say they have been in contact with representatives of such funds, but none have joined the class so far. Who will represent PSINet in the class action is still a mystery. A PSINet spokesman, speaking for General Counsel Kathleen Horne, says no decision has yet been made regarding the selection of outside counsel. In past litigation, the company has turned several times to longtime outside counsel Nixon Peabody. Two veteran securities litigators are in Nixon Peabody’s Washington office: Robert Reklaitis and Kenneth Hance. PSINet has also used Arent, Fox, Kintner, Plotkin & Kahn and Wiley, Rein & Fielding in Eastern District litigation.

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