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Federal Judge Shira Scheindlin of the Southern District of New York may not get to complete her assignment to more than 800 securities class actions over the handling of high-tech IPOs. Lawyers for the underwriters named in the suits have conducted an investigation into the judge’s investing history — and apparently her son’s, too — and what they found are trades they argue are grounds for Scheindlin’s recusal. However, the judge is not pleased with the motion, openly questioning whether the underwriters are engaged in a form of judge-shopping. With briefing on the matter still to come, Scheindlin has not yet given up the case. If she manages to keep the IPO suits in her courtroom, the underwriters may rue the day they ever mentioned it. The securities suits were filed against scores of high-tech companies and virtually every investment bank that helped take them to market, including Credit Suisse First Boston, Goldman Sachs and others. They allege that the underwriters offered lucrative IPO stock to preferred customers for high commissions, or that the underwriters offered IPOs to customers in exchange for promises to buy more stock at ever-increasing prices in the aftermarket to drive up its market value, a process dubbed “laddering.” The underwriters — with the exception of Morgan Stanley Dean Witter and Dain Rauscher — are now raising several issues about Scheindlin’s investing history, while lawyers for the companies have distanced themselves from the imbroglio by remaining quiet. Sullivan & Cromwell partner Gandolfo DiBlasi, liaison for the underwriters, told Scheindlin that because she lost money by trading in Breakaway Solutions Inc. — even though she has since sold the stock — she should be recused. She has since waived her interest in the class, but that hasn’t stopped the banks. Then, in a move that raised some eyebrows — including the judge’s — a lawyer for Deutsche Bank, Alex Brown, told the judge during a recent conference that her son had purchased securities that were the subject of the litigation. The lawyer knew this because the son was a customer of Deutsche Bank. “According to my research,” the judge would later write, “I had no duty to investigate my son’s financial holdings.” Nevertheless, three days after the disclosure the son called Deutsche Bank’s lawyer and asked him to identify the securities. The next day, Judge Scheindlin announced that her son had sold his stock. Melvyn Weiss, of New York’s Milberg Weiss Bershad Hynes & Lerach, who was appointed as chairman of an executive committee of plaintiffs’ lawyers chosen to run the litigation, said he was shocked by Deutsche Bank’s disclosure. “This was a very sordid affair,” Weiss said. “When it was to their advantage he gets up in open court and blurts it out. … I think it’s a disgrace.” If Scheindlin recuses herself, it would likely mean any judge in the Southern District of New York who traded in Internet stocks would not be able to handle the case, and perhaps any judge who had a brokerage relationship with any of the underwriters. Clearly, the underwriters don’t want any judge who traded in any high-tech stocks to handle the case. DiBlasi wrote in an Oct. 10 letter to Scheindlin that the entire late 1990s IPO boom was the issue in the case. “Accordingly, while most of the coordinated cases concern only a single issuer, a judge who purchased any IPO stock during the alleged class period may, based on the broad allegations of the complaints, have an interest in the subject matter or controversy,” DiBlasi wrote. On DiBlasi’s side is Geoffrey Hazard Jr., a University of Pennsylvania Law School professor who literally wrote the book on judicial ethics for the American Bar Association. Since Scheindlin had a financial interest not only in a party to the case, but in the very subject matter at the core of the allegations, she must recuse, Hazard wrote in a declaration. Furthermore, he added, a judge should not be allowed to handle a case if it appears she is seeking to participate in the case. “Indications of such an appearance are presented here,” Hazard wrote. He concluded by saying that any relationship between a judge and an underwriter during the class period is grounds for recusal. The effects of that conclusion could be profound. It leaves open the possibility that the judge who gets the case, if it’s reassigned (and assuming the court can find a judge who will pass muster), would have to have an extremely conservative investment portfolio. What happens with this conflict will leave a lasting impression on the case. It is yet to be determined whether the suits allege facts with enough particularity to survive a motion to dismiss. That is important because once plaintiffs’ lawyers clear that hurdle, they are entitled to discovery. And if Scheindlin keeps the cases, she may now cast a more jaundiced eye on defense motions to dismiss.

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