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According to its legislative history, one purpose of the Private Securities Litigation Reform Act of 1995 (Reform Act or Act) was to return control of securities class action suits to the investors on whose behalf they purportedly are brought and away from plaintiffs’ attorneys. SeeH.R. Conf. Rep. No. 104-369, at 31-35 (1995), reprinted in 1995 U.S.C.C.A.N. 679, 730-34. Although articulating that goal in the abstract is relatively easy, achieving it in practice has proven more difficult. Various means have been tried to maintain effective plaintiff control of these suits. Initially, “groups” of unrelated investors were cobbled together to serve as lead plaintiff. As courts began to reject such “groups” as too unwieldy or incapable of fulfilling the lead plaintiff’s responsibilities under the Reform Act, the battle shifted to the lead counsel selection process. Court-sanctioned auctions that award the coveted lead counsel role to the lowest qualified bidder were (not surprisingly) encouraged by the plaintiff’s bar. If current trends continue, these efforts may result in more active involvement by courts in both lead plaintiff appointments and selection of lead counsel. This involvement rests on the judiciary’s growing recognition of its fiduciary obligations to the interests of the putative shareholder class. In the end, what some have perceived as the refusal by plaintiffs’ counsel to release their stranglehold on securities litigation may finally (and ironically) result in the fulfillment of the Reform Act’s promise — to remove control of these suits from plaintiff’s attorneys. THE REFORM ACT’S PROMISE Before the Reform Act, there was a race to the courthouse to file the first securities class action complaint after significant negative announcements by a publicly traded company. The plaintiff’s bar acted thus quickly because courts frequently appointed the first plaintiff to file a complaint as the lead plaintiff. The result, however, according to the Reform Act’s legislative history, was that speed supplanted diligence in drafting complaints in lawyer-driven, class action suits. Id.at 33-35. The Reform Act replaces the “first come, first served” process with one intended to increase the likelihood that institutional or other large investors will serve as lead plaintiff. It does so by requiring the first plaintiff who files a complaint to notify all potential class members of their right to apply to be the lead plaintiff. Once these applications are filed, the Act requires the court to appoint as lead plaintiff the “person or group of persons” in the putative class whom the court determines is most capable of adequately representing the interests of the class. The Act establishes a rebuttable presumption that the person or group with the “largest financial interest” (i.e., greatest claimed loss) be appointed as lead plaintiff. As noted above, the initial response from the plaintiff’s bar was to aggregate otherwise unrelated investors into lead plaintiff “groups” that arguably would enjoy this presumption and thereby capture the coveted lead plaintiff role. Often these groups, which are frequently a “group” in name only, because they have no decision-making structure and their members have nothing in common except their lawyer, consist of hundreds of investors unknown to one another. Once installed as lead plaintiff, the group would select the attorneys who brought the group together as lead counsel or as part of a lead counsel committee. Because of the perceived inability of the “group” to act as anything other than a multi-headed sub-part of the putative class, the inevitable result was litigation run by, and prosecuted for, the plaintiffs’ lawyers, the very result the Reform Act attempted to eliminate. Perhaps not surprisingly, battles for lead plaintiff and lead counsel appointments are hotly contested. Reflecting on these contests, one court observed that the inevitable “mud-slinging” rarely leaves any party (or counsel) unscathed. Instead, the battles merely prove the truth of the adage that “in the land of the blind, the one-eyed man is king.” Krim v. pcOrder.com, Inc., No. A-00-CA776(SS), 2001 U.S. Dist. LEXIS 6592; Fed. Sec. L. Rep. (CCH) �91,453 (W.D. Tex. May 14, 2001). The frequent result is selection of the least objectionable plaintiff and counsel to steer the litigation. Courts are beginning to feel, however, that fulfillment of the Reform Act’s goals requires that they play a more active role. Judge Jed S. Rakoff recently acknowledged the need for increased judicial involvement in lead plaintiff and lead counsel selections by observing that “securities class action litigation continues to be lawyer-driven in material respects and the reforms Congress contemplated in the Reform Act can be achieved, if at all, only with some help from the courts.” In re Razorfish, Inc. Sec. Litig., 143 F. Supp. 2d 304, 307 (S.D.N.Y. 2001). In Razorfish, Judge Rakoff did his part by rejecting lead plaintiff bids by three competing groups, each of which he labeled “an artifice cobbled together by cooperating counsel for the obvious purpose of creating a large enough grouping of investors to qualify as ‘lead plaintiff.’” Id.at 308. Selecting one would “allow and encourage lawyers to direct the litigation.” Id.at 309. Instead, he chose from the competing “groups” the institutional investor with the greatest purported loss and ordered that it fulfill its fiduciary duty to select lead counsel as the Reform Act requires. Id. PART OF A TREND Judge Rakoff’s decision is part of a judicial trend to reject attempts by the plaintiffs’ bar to aggregate losses of so-called “groups” in an effort to take advantage of the presumption accorded the lead plaintiff candidate with the greatest losses. This trend was sparked by Judge William Alsup’s decision in In re Network Associates, Inc. Sec. Litig., 76 F. Supp. 2d 1017 (N.D. Cal. 1999). After refusing to appoint a multi-party “group” as the lead plaintiff, the court in Network Associatesconducted the first in-depth inquiry into the qualifications of the shareholders who applied to become lead plaintiff. As part of his inquiry, Judge Alsup convened an extensive hearing at which, in addition to allowing questions by counsel for the competing lead plaintiff camps, he personally interrogated the plaintiffs and their lawyers, apparently to satisfy himself that the lead plaintiff candidates were willing (and capable of) directing the litigation (and controlling their lawyers) as the Reform Act requires. More recently, the 5th U.S. Circuit Court of Appeals became the first appellate court to confirm the active role the Reform Act requires of courts to ensure that lead plaintiffs are capable of directing the litigation. See Berger v. Compaq Computer Corp., No. 00-20875, 2001 U.S. App. LEXIS 16710 (5th Cir. Jul. 25, 2001). According to Compaq, “because absent class members are conclusively bound by the judgment in any class action brought on their behalf, the court must be especially vigilant to ensure that the due process rights of all class members are safeguarded through adequate representation at all times.” Id.at 9. Moreover, it is reversible error for the court to adopt a presumption that lead plaintiffs are capable — “adequacy is for the plaintiffs to demonstrate; it is not up to the defendants to disprove.” Id.at 14. Drawing on precedents from outside the securities context, Compaqholds that lead plaintiffs must “possess a sufficient level of knowledge and understanding to be capable of ‘controlling’ or ‘prosecuting’ the litigation.” Id.at 18. Indeed, Compaqholds that the Reform Act “raises the standard adequacy threshold” due to “Congress’s emphatic command that competent plaintiffs, rather than lawyers, direct such cases.” Id.at 21. HOW TO PICK LEAD COUNSEL As courts continue to wrestle with attempts to promote large, unwieldy groups as lead plaintiff, the battle to control the litigation is, as noted above, shifting to the lead counsel selection process. So intense is the desire for a place at counsel’s table that some firms submit bids for lead counsel even though they have not proffered a lead plaintiff candidate. Recent cases confirm, however, courts’ explicit recognition of their fiduciary duty to examine — and, in appropriate circumstances, overturn — lead plaintiffs’ choice of counsel. Illustrative of the courts’ willingness to accept this duty are two unrelated securities class actions that Judge Vaughn R. Walker (who, years ago, pioneered the use of the bidding procedures) dealt with in a combined decision. The decision demonstrates Judge Walker’s belief that under Rule 23, the court, lead plaintiff and class counsel are fiduciaries for absent class members. In the first case, In re Copper Mountain Networks Securities Litigation, No. C-00-3849 (VRW), 2000 U.S. Dist. LEXIS 8552 (N.D. Cal. May 31, 2001), Judge Walker approved the lead plaintiff’s selection of counsel, finding that the lead plaintiff had engaged qualified attorneys to serve as lead counsel on terms he believed were advantageous to the putative class. In the second action, however, Judge Walker found that the provisionally appointed lead plaintiff failed to discharge its duty to retain counsel on terms favorable to the class. See In re Quintus Sec. Litig., No. C-00-4263 (VRW), 2001 U.S. Dist. LEXIS 8552, (N.D. Cal. May 31, 2001). Not only did Judge Walker express the view that both lead plaintiff and lead counsel have an obligation to enter into a fair fee arrangement, but he also concluded that the court has an independent obligation under FRCP 23 is to ensure that this occurs. Judge Walker analogized the duties that plaintiffs owe to absent class members to the duties corporate directors owe in the sale of the corporation or its assets. From this perspective, the decision to hire counsel on a contingency basis on behalf of the class is tantamount to a decision to sell to counsel a portion of the class’s return in exchange for counsel’s services. In both instances, fiduciary obligations require procedures to obtain a fair price for the “asset” being sold. Moreover, in the view of some courts, how the lead plaintiff selects and retains counsel provides empirical evidence of whether the lead plaintiff can adequately represent the putative class. As Judge Walker observed, where courts believe that lead plaintiffs have the ability to, and in fact have undertaken, a hard look at which firm should be selected as lead counsel, courts are more reticent to disturb lead plaintiffs’ decision regarding counsel. Id.at 10. By contrast, where the purported lead plaintiff lacks the ability and incentive to negotiate an adequate arrangement with class counsel or fails to negotiate an acceptable arrangement, courts are increasingly likely, in the exercise of their fiduciary duties to class members, to take an active role. Drawing from the corporate takeover arena (where companies or their assets have been sold to the highest bidder), Judge Walker has attempted to protect the class’s interest by overseeing competitive bidding processes in the selection of lead counsel. Id.at 11-21. Judge Walker and, increasingly, other federal courts find that this approach balances the Reform Act’s desire to have the lead plaintiff select lead counsel with the class’s objective of securing cost-effective representation for the class through a competitive selection process. See also In re Comdisco Sec. Litig., No. 01-C2110, 2001 U.S. Dist. LEXIS 8652, 19-20 (N.D. Ill. June 25, 2001) (“a neutrally conducted and confidential competitive bidding process under the auspices of the court affords the best means — in fact, it would seem the only means — to . . . [obtain] the best available combination of highly competent representation at the least cost”). Thus, in Quintas, Judge Walker solicited bids from each firm vying for the lead counsel position. He required the bids to address specified criteria, including a sliding scale for the firm’s portion of any damages recovered based on the amount of recovery and the stage at which the recovery was achieved. Judge Walker then analyzed the bids and selected the counsel he believed would best represent the interests of the Quintasclass — the one that provided the smallest recovery for the attorneys (and, thus, the largest for shareholders) under various recovery scenarios. AUCTION MODEL REJECTED The auction approach favored by Judge Walker (and other courts) is by no means universally accepted, however. Judge Rakoff, for example, is among those who have rejected it as inconsistent with the Reform Act’s goal of close client supervision of counsel. See Razorfish, supra, at 310. Judge Rakoff recently criticized the bidding approach because it promotes the “cheapest lawyer, who is then more or less forced upon the largely irrelevant lead plaintiff.” Id.Judge Rakoff has colorfully criticized this “transmogrification” by courts of their right under the Reform Act to approve (or veto) lead plaintiff’s counsel selection into a right to arrange “shot-gun marriages between strangers.” Id. Though subtle, the distinction Judge Rakoff urges is to focus on the selection of lead plaintiff, not on its choice of counsel. In Razorfish, he required that prospective counsel for each of three proposed lead plaintiff candidates submit, under seal, their proposed fee arrangements. Id.at 311. When, after reviewing the bids, the court concluded that one was excessive relative to the others, the court so advised the submitting firm and gave it an opportunity to submit another proposal, which the court ultimately approved. Id.According to Judge Rakoff, such “modest intervention,” unlike an auction system, “is fully consistent with the mandate of the Reform Act that the lead plaintiff’s selection and retention of counsel be subject to a court approval.” Id. Other courts have also criticized or refused to follow the auction model. See, e.g., In re Microstrategy Inc. Sec. Litig., 110 F. Supp. 2d 427, 438 (E.D. Va. 2000) (suggesting that what fees plaintiffs’ lawyers will keep from any award is an issue best left for the conclusion of the litigation, not to be negotiated up front); Weltz v. Lee, 2001 U.S. Dist. LEXIS 419, Fed. Sec. L. Rep. (CCH) �91,342 (S.D.N.Y. Mar. 9, 2001) (refusing to appoint proposed 15-firm lead counsel committee and ordering that lead plaintiff select lead counsel); In re Guess?, Inc. Sec. Litig., 2001 U.S. Dist. LEXIS 6057 at 15, Fed. Sec. L. Rep. (CCH) �91,429 (C.D. Cal. Apr. 27, 2001) (acknowledging court’s role under the Reform Act to reject lead plaintiffs’ selection of counsel “only if it is necessary to protect the interests of the class”). Further judicial guidance on selection of lead counsel is expected later this year. Several months ago, Chief Judge Edward Becker of the 3rd U.S. Circuit Court of Appeals convened a task force to study how lead counsel are selected. The task force, which continues to conduct hearings, is scheduled to release its recommendations in October. SHOULD DEFENDANTS SPEAK? An interesting question left unresolved by the Reform Act is whether defendants should be heard in the debates regarding appointment of the lead plaintiff and selection of lead counsel. Although no reported appellate decision has addressed whether defendants may be heard concerning motions for lead plaintiff appointment, a split has developed among the few district courts to address the question. Decisions that preclude defendants from being heard generally cite to the Reform Act’s procedural rules that permit only purported class members to seek lead plaintiff appointment. See, e.g., Gluck v. Cellstar Corp., 976 F. Supp. 542 (N.D. Tex. 1997). By contrast, decisions that permit defendants to address the issue reference a belief that courts benefit from hearing all views, regardless of whether defendants have standing. See, e.g., King v. Livent, Inc., 36 F. Supp. 2d 187 (S.D.N.Y. 1999). Still other courts believe that whether defendants should be heard depends on the nature of the objections defendants raise. See, e.g., Greebel v. FTP Software, Inc., 939 F. Supp. 57 (D. Mass. 1996). According to these courts, defendants may be heard, for example, regarding “procedural prerequisites” ( e.g., plaintiffs’ alleged failures to file a class certification or to provide notice to class members), but not as to who should be lead plaintiff or whether (at least at the lead plaintiff determination stage) the class should be certified. Id. The better view, however, is for courts to hear from defendants on the lead plaintiff appointment and lead counsel selection, regardless of whether, as a technical matter, defendants have standing to submit proof on those matters. This is especially true where one or more plaintiffs’ firms attempts to amass a “group” of investors to serve as lead plaintiff or a group of lawyers to serve as a lead counsel “committee.” Unless defendants are permitted to raise this or other objections, these issues may be ignored, since raising them is not in the interests of plaintiffs or their counsel. Interestingly, courts accept, and sometimes invite, participation from the Securities and Exchange Commission regarding many of the same issues that defendants, if permitted, would raise concerning the lead plaintiff and lead counsel appointment. These issues include both procedural matters like sufficiency of notice, as well as substantive issues concerning the ability of the proposed lead plaintiff or lead counsel to adequately represent the class. Although final resolution of these issues may, as plaintiffs often suggest, be best left to the class certification stage, others should not be put off that long. Indeed, the Reform Act’s goal to streamline securities class action suits and return control of them to investors suggests that valid objections should be heard as early as possible, regardless of who raises them. Only by doing so, and by hearing from defendants, can courts achieve the Reform Act’s laudable goal of returning to shareholders control over these suits. Richard J. Morvillo is a partner at Crowell & Moring LLPand chairs the firm’s securities enforcement group. Jeffrey F. Robertson is of counsel. Both authors are resident in the firm’s New York and Washington, D.C. offices.

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