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The 9th U.S. Circuit Court of Appeals has scheduled oral arguments in a case that could define the limits of a judge’s discretion in determining which lawyers will run lucrative securities fraud class actions. Last week, the court ordered that In re Copper Mountain Networks Securities Litigation, 01-70772, be heard the week of Feb. 11. The appeal challenges whether the presumption that the plaintiffs with the largest losses in a case should run the litigation can be rejected by a judge who does not like their fee agreement with their lawyer. In deciding the case, the 9th Circuit could dictate the standards for the “rebuttable presumption” outlined in 1995′s Private Securities Litigation Reform Act. Under the legislation, intended to curb “lawyer-driven” litigation, plaintiffs who suffered the largest losses as a result of stock-market shenanigans are presumed to be the party that should run the case for the rest of the class. But the presumption can be rebutted. Some federal judges invoke the loophole, citing pricey fee agreements as evidence that a particular client, and his firm, is not the best choice. When the stock of Palo Alto, Calif.-based Copper Mountain Networks Inc. dropped, New York-based Milberg Weiss Bershad Hynes & Lerach, the largest securities fraud plaintiffs’ firm in the country, sued on behalf of several clients. Eventually the firm proposed a group of five investors to run the case. One, David Cavanaugh, lost nearly $1 million. But federal Judge Vaughn Walker of the U.S. District Court for Northern California instead named a Beatie & Osborn client, Quinn Barton, to run the case. Osborn’s loss is estimated at $59,000. While Milberg’s agreement was a 20 percent to 30 percent sliding scale, Beatie & Osborn offered a 10 percent to 15 percent scale. Walker cited Barton’s more favorable fee agreement, holding that selection of counsel was a leading indicator of a plaintiff’s ability to lead a class action. “Absent class members are owed competent counsel at a reasonable fee,” Walker wrote. Milberg’s appeal casts the firm as the victim of “Alice in Wonderland”-like reasoning by the district court. It points out that Walker noted the selection of counsel is one of the most important decisions a plaintiff makes, yet goes on to say that the skill of the lawyers matters little in determining a settlement. “If class counsel are not much responsible for obtaining a good recovery, then why is selection of counsel important? To Judge Walker, cheap is good and cheap is the only standard,” wrote Milberg partner Eric Isaacson. Daniel Osborn, who represents Barton, echoed Walker. “[Fee agreements] are an indication of how the lead plaintiff will run the rest of the litigation.” With the setting of a mandamus petition for oral argument, an already unusual case gets more unusual. It started not long after the case was assigned to Walker. He first ordered hopeful lead plaintiffs to answer a list of 10 questions relating to their relationship with their lawyers. Then Walker bought them all into the courtroom for a kick-the-tires bull session, asking each to explain their fee agreements. Cavanaugh stumbled trying to explain the differences in fee declarations that the five Milberg clients submitted to the court. “I’m confused,” Walker said. “OK. I am, too,” Cavanaugh replied. Milberg lost. The firm appealed. Then things got more curious. In a declaration, Milberg associate Fred Burnside said he was told by Beatie & Osborn that Walker had called them to say he would take care of the opposition brief. (Notice of the appeal was inadvertently served on another law firm, and eventually New York-based Beatie & Osborn did file its own brief.) Indeed, the firm’s lawyers were surprised to find a letter from Walker to the 9th Circuit requesting a chance to defend his own ruling. The request was granted, and Walker did. Then the great white whale of securities fraud clients jumped in the pool. The California Public Employees’ Retirement System (CalPERS) filed an amicus curiae brief supporting Judge Walker’s decision. With assets exceeding $155 billion, CalPERS is the largest public pension fund in the United States. Because it is precisely the type of plaintiff Congress envisioned in the PSLRA, it’s an automatic favorite for lead plaintiff designation in any case. The brief (joined by Barclays Global Investors) is also notable for its authors — Stanford Law School securities fraud expert Joseph Grundfest and Lieff Cabraser Heimann & Bernstein partners Melanie Piech and James Finberg in San Francisco. CalPERS and Barclays are members of the class. “They do not want to pay a higher price for representation that is not even argued to be superior,” the brief reads. Grundfest’s critiques of large class action fee awards have made him a villain to some plaintiffs’ firms, but it is not the first time he has teamed up with Lieff; he’s filed influential briefs in other cases. Milberg has history on its side. The fee agreement Cavanaugh arrived at with Milberg is in line with traditional fee arrangements. But Walker, Grundfest and others are looking to change that. Through the controversial auctioning of lead counsel status in class actions — a process Walker invented — a few cases have shown that “market” rates are, in fact, lower than the 25 percent benchmark to which courts usually defer. Auctions, and the evolution of securities fraud class actions in general, could be affected by a 9th Circuit ruling. But practical matters are still to be determined — mainly, who would argue the case opposite Milberg. It could be Grundfest, Lieff, Osborn or some combination thereof. Then again, it could be Judge Walker. Stranger things have happened.

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