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In a move bound to make plaintiffs’ lawyers shudder, the Securities and Exchange Commission is arguing in a closely watched securities fraud case that too-high attorney fees could get law firms kicked off federal class actions. The SEC last week filed an amicus curiae brief at the 9th U.S. Circuit Court of Appeals in one of the first appellate court cases to contemplate crucial pretrial rulings in such lucrative cases. The anticipated ruling could limit the paydays of securities class action firms. The brief — unusual for the SEC — is also apparently a shift in gears. The agency previously argued that, by and large, courts should grant lead plaintiffs great deference in their choice of counsel and fee arrangement. It now makes the case for courts to consider competition. “The [Private Securities Litigation Reform Act] is intended to provide courts with better and competing candidates from which to choose the lead plaintiff,” SEC special counsel Luis de la Torre wrote. Scheduled for argument Friday, Cavanaugh v. U.S. District Court, 01-70772, challenges the discretion exercised by U.S. District Judge Vaughn Walker of the Northern District of California in rejecting New York-based Milberg Weiss Bershad Hynes & Lerach’s bid to have a group of clients named as lead plaintiff in securities litigation filed against Palo Alto, Calif.-based broadband provider Copper Mountain Networks Inc. In doing so, Walker ruled that the firm’s fee agreement with its clients was too high compared with that of a competing firm — the six-lawyer New York outfit, Beatie & Osborn. Milberg Weiss appealed. “The district court held, correctly in our view, that an applicant’s conduct in dealing with counsel, including a failure to make a meaningful effort in negotiating the counsel fee, can be a basis for a finding of inadequacy,” de la Torre wrote. Milberg Weiss argues that as long as a fee agreement is within the bounds of the generally accepted benchmark (25 percent in the 9th Circuit), a court can’t invoke the fees in rejecting a motion by its client — the plaintiff with the largest financial interest in the case — to run the litigation, as provided by the PSLRA. Milberg Weiss’ fee agreement was between 20 percent and 30 percent, depending on how much money is recovered in the stock drop suit. Beatie & Osborn’s was 10 percent to 15 percent. Together, Milberg Weiss’ clients lost more than $3 million. Beatie & Osborn’s lost $59,000. “The SEC entirely overlooks the district court’s initial determination that — based on the size of their losses and willingness to negotiate with counsel — petitioners were entitled to a statutory presumption that they are the most adequate plaintiffs under the statute,” wrote Milberg Weiss partner Sanford Svetcov, in a reply to the SEC filed Tuesday morning. The SEC also writes that benchmarks should not always be the standard against which “reasonable” fees are measured. “The fact that a fee is ‘customary’ does not mean that it is necessarily reasonable for the particular case. Considerable doubt exists as to whether customary fees in pre-Reform Act cases are in fact generally appropriate,” the SEC’s brief reads. “And the fee arrangements reached by competing applicants may shed light on what is a reasonable fee for the case at hand.” That approach to selecting class action litigators — a market-based approach where competition sets the cut that lawyers take from what are often multimillion-dollar settlements — is the line that divides many camps in the field of securities class actions. De la Torre said the SEC decided to weigh in because the Copper Mountain case is one of the few appellate court cases to have broached the issues — specifically, what role fees should play in a court’s selection of lead plaintiffs. “This would be one of the first times a court of appeals could take up these issues,” he said. It “could well be a big case.” Indeed, some of the biggest players in the securities fraud field are flocking to it. Throwing its weight into the debate is the California Public Employees Retirement System, the largest public pension fund in the country. The brief, co-authored by the San Francisco-based plaintiffs’ firm Lieff, Cabraser, Heimann & Bernstein and Stanford law professor Joseph Grundfest, cuts in the same direction as the SEC. William Lerach, the Milberg Weiss lawyer corporate America fears and hates, was set to argue that Walker got it wrong but recently passed that duty on to appellate specialist Svetcov. Walker himself filed a brief in defense of his ruling, and will be represented by University of Arizona law professor Elliott Weiss, co-author of a famed law review article that was essentially adopted as the so-called lead plaintiff provision of 1995′s PSLRA. Another maverick judge, Alex Kozinski, flanked by Senior Judge Clifford Wallace and Judge Richard Paez, will pepper the lawyers with questions in what is sure to be a lively argument.

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