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The other shoe has dropped in U.S. District Judge William Alsup’s effort to get legal fees in securities fraud cases under control. The target this time is not class action attorneys, but the defense bar. In two short orders notable for several reasons, Alsup, a U.S. District Court judge for the Northern District of California, wrote that he would be loath to approve any settlements where a defense firm’s fees had eaten up much of its client’s insurance policy. “To avoid the recurring problem of defense counsel using up a large part of the insurance available for directors and officers’ liability, leaving less for settlement, the court requests that defense counsel use no more than two lawyers and one legal assistant for the preparation and conduct of any deposition and otherwise economize on timekeepers,” Alsup wrote. He went on to say that he would only approve a settlement in In re Commtouch Software Ltd. Securities Litigation, 01-0719, after the ability of individual defendants — the company’s directors and officers — to contribute to the settlement has been investigated. “Many individual defendants have large net worths,” Alsup wrote. “Arguably, they should contribute to a settlement from their own private resources where the [insurance] coverage is inadequate or has been depleted.” “The judge is concerned that you may be walking away with the guilty ones, having sold large amounts of stock, unscathed,” said Reed Kathrein, a partner in the San Francisco office of Milberg Weiss Bershad Hynes & Lerach. Kathrein’s firm was approved as lead counsel after Alsup held multiple meetings with its client. Satisfied with the lead plaintiff’s competence in selecting lawyers to represent the class, Alsup deferred to her choice of Milberg Weiss. In doing so, he cited a recent 3rd U.S. Circuit Court of Appeals decision, In re Cendant Corp. Litigation, 99-5485. The 3rd Circuit is the highest court in the nation to interpret the lead plaintiff provisions of 1995′s Private Securities Litigation Reform Act. Alsup wrote that if the plaintiff had selected the firm with “due diligence” and the agreement were within the “bounds of reasonableness,” then “a court ought to respect the choice of lead plaintiff and should avoid simply substituting its judgment.” Commtouch is alleged to have committed accounting irregularities, resulting in a restatement of earnings and a 45 percent drop in the price of its stock earlier this year. Alsup also said he would not approve a settlement that included previously dismissed claims without evidence that discovery regarding those claims had been provided to the class’s lawyers.

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