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Although the lawyers involved were surely passing around cigars afterward, the final act of the pioneering stock-drop suit involving Santa Clara, Calif.-based Network Associates Inc. was not without fireworks. On Monday, federal Judge William Alsup of the U.S. District Court for the Northern District of California approved a class settlement of $30 million and legal fees of just 7 percent, a figure far below the benchmark and one which was hailed as proof that a novel process of requiring firms to bid for class counsel status means more money for class members. But Alsup caused sparks with a few choice words for the firm of Weiss & Yourman, which asked to be reimbursed for its expenses — even though Weiss & Yourman didn’t win the bidding process. It lost that contest when Alsup issued a key ruling on selection of lead plaintiffs in securities fraud class actions in late 1999. But the firm had litigated an issue of first impression when the case was before Judge Saundra Brown Armstrong. Weiss & Yourman was the first to pay brokerage houses to send out mailers notifying the class of the litigation — on the firm’s letterhead. The gambit was successful on two fronts. First, it netted the firm several clients whose losses ran into the tens of millions. Under the Private Securities Litigation Reform Act, institutional investors with the largest losses are favored in the selection of the lead plaintiff. Second, both Armstrong and the Securities and Exchange Commission agreed that the practice was ethical and legal, despite allegations to the contrary from competing firms. After the case was transferred to Alsup, it quickly became a laboratory for the metamorphosis of securities litigation. First, Alsup sounded a death knell for “aggregation” — the process by which a firm assembles a group of investors to achieve the highest total losses — with the key November 1999 ruling. Since then, aggregation as a litigation tactic has withered on the vine. Then, when the judge balked at rubber-stamping a Philadelphia pension fund’s selection of lead counsel and the fund backed out of the case, he personally interviewed replacements. Eventually, he chose lawyer Robert Vatuone as the lead plaintiff. Through the bidding process, which remains rare but is gaining wider acceptance, Vatuone chose Lieff, Cabraser, Heimann & Bernstein to represent the class. Weiss & Yourman was shut out. But that didn’t stop the firm from asking, on Monday, to be reimbursed for its controversial mailers. “These expenses were incurred by the firm in the process of notification, discovery and litigation of issues surrounding the appointment of lead plaintiff and selection of lead counsel,” wrote name partner Joseph Weiss in court papers. “At the time these acts occurred, these issues were ones of first impression regarding the interpretation of the lead plaintiff provisions of the [Private Securities Litigation Reform Act]. Since that time, it … has become standard practice for law firms to employ the same mailing procedures used by Weiss & Yourman in this case, and to mail notices of the pendancy of securities class actions directly to potential class members.” However, the firm may as well have thrown its brief in front of a charging rhinoceros. According to lawyers present at the hearing, Alsup went ballistic. He reportedly told the Weiss & Yourman lawyers he was “offended” by their request, and that theirs was a request to reimburse self-promotion, not for activity that benefited the class. Alsup denied Weiss & Yourman’s fee request. A call to the firm went unreturned. In the end, Alsup approved the 7 percent fee agreement, which will be calculated after Lieff Cabraser deducts expenses of approximately $360,000. The firm will earn more than $2 million for its work on the case. The fee is far below the benchmark in such cases, and Alsup’s intention to find a lead plaintiff to adequately navigate the litigation and drive a hard bargain on fees seems to have worked. Even class action critic Lawrence Schonbrun submitted a declaration approving of the agreement. “Here, the answer very simply is … the proof is in the pudding,” said Stanford Law School professor Joseph Grundfest. “You could either pay [an oft-used figure of] 33 percent or you could pay 7 percent” with Alsup’s method of selecting lead counsel. That method, where the court scrutinizes a plaintiff’s selection of legal counsel and requires a bid process or “auction,” was essentially invented by Alsup’s fellow Northern District judge, Vaughn Walker. The process was also employed in the country’s biggest stock drop suit, filed in Philadelphia against Cendant Corp. The case settled months ago for more than $3 billion. Plaintiffs’ attorneys were awarded $256 million. According to some lawyers, however, the auction process in that case was misapplied, if not botched. The 3rd U.S. Circuit Court of Appeals, which on Tuesday heard a daylong appeal of the Cendant case — including the issue of attorneys’ fees — recently convened a task force to study lead counsel auctions and invited Walker to testify about them. Lieff Cabraser partner James Finberg said the process worked in In re Network Associates, 99-1729. “I think Judge Alsup benefited the class by … requiring the lead plaintiff to hire an experienced firm and also to negotiate” an attractive fee agreement, Finberg said. Finberg added that the $30 million settlement recovers 25 cents for every dollar lost by shareholders after Network Associates announced accounting irregularities in 1999. And he said Weiss & Yourman could be out even more money, because he’s asking Alsup to require the firm to send corrective notices for its “confusing” mailers. Finberg wasn’t the only one who thought Weiss & Yourman should have left well enough alone. Choosing his words carefully, Milberg Weiss Bershad Hynes & Lerach partner Reed Kathrein, whose firm also lost out in the lead counsel contest, said, “To put it mildly, when you lose — you lose.”

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