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A federal appeals court is to hear arguments Feb. 15 over one of the more contentious issues currently facing the nation’s securities litigators. A provision of the Private Securities Litigation Reform Act of 1995 instructs federal judges presiding over most securities class actions to select as lead counsel the law firm that represents the plaintiffs with the greatest financial loss. But last May, the federal judge in San Francisco who originated the use of contingency fee auctions for lead counsel balked, refusing to award the lead counsel position to such a firm because of what he deemed to be an exorbitant fee agreement. U.S. District Judge Vaughn R. Walker held in In re Copper Mountain Networks Securities Litigation that the Reform Act does not prevent him from selecting a law firm that represents clients with a lesser financial interest if doing so is in the overall interest of the class. He wrote that judges have a “fiduciary responsibility” to obtain a competitive contingency fee arrangement for the plaintiff class. Class action expert Carol Gilden, a partner at Chicago’s Much Shelist Freed Denenberg Ament & Rubenstein, has written that only 12 cases, of which 10 were securities class actions, have used auctions since Walker created the process in the 1990 case In re Oracles Securities Litigation. Securities lawyers have observed that auctions have led to fee rates several points lower than the national average of 30 percent. But the law firm that lost out in Copper Mountain wasn’t just any securities law firm. It was none other than class action behemoth New York-based Milberg Weiss Bershad Hynes & Lerach, which quickly challenged the ruling, and is now seeking a writ of mandamus from the 9th U.S. Circuit Court of Appeals ordering Walker to designate them lead counsel. STARTS WITH A STOCK DROP Milberg Weiss sued Copper Mountain Networks on behalf of its shareholders on Oct. 27, 2000. The firm alleged that misleading public statements were made by company officials that fall regarding the company’s profitability immediately prior to a sharp drop in its stock value. Milberg was hired by proposed lead plaintiff David Cavanaugh, who had lost $1 million. Walker, however, selected as lead counsel New York’s Beatie and Osborn, whose most damaged client, Quinn Barton, lost only $59,000. Beatie Osborn proposed a contingency fee of a 10 percent to 15 percent sliding scale, while Milberg sought a 20 percent to 30 percent sliding scale. Walker, comparing the two bids, selected Beatie Osborn because it was more “competitive.” “Judge Walker effectively inverted and subverted Congress’ scheme,” Milberg’s lawyers wrote in their brief to the 9th Circuit. “His holding that a class representative is inadequate … unless its fee agreement is undefinably ‘competitive’ has no legal support.” Some securities experts have voiced misgivings about Walker’s class action bidding process. On Oct. 3, the Task Force on Selection of Class Counsel created by the 3rd U.S. Circuit Court of Appeals warned against their use except where it was clear that the plaintiff’s selected counsel was not the “most adequate,” as stated in the Reform Act. Walker and Milberg Weiss disagree over what constitutes adequacy. In his response to Milberg’s appeal to the 9th Circuit, Walker wrote in court papers that a writ of mandamus would be wrong since “there was no clear error or manifest disregard of the federal rules” by his decision that Beatie and Osborn should be lead counsel. Walker told the 9th Circuit that rulings by the 3rd and 5th Circuits last year “clearly affirm that the [Reform Act] entrusts the district court with the fiduciary duty to scrutinize the fee arrangements made by the lead plaintiff.” “Congress has told the federal courts how to choose lead plaintiffs who are then entitled to choose lawyers subject to the district court approval,” counters Milberg lawyer Eric A. Isaacson. “That doesn’t give Judge Walker carte blanche to appoint whoever he pleases.” Quinn Barton’s lawyer, Beatie and Osborn partner Daniel Osborn, filed a brief in support of Walker. Noting that no institutional investors had expressed interest in being lead plaintiff, as the Reform Act favors, Osborn argued that the judge was forced to look to individuals. “One of the best ways to ensure that a prospective lead plaintiff will fairly and adequately represent the interests of the class is to inquire whether the applicant has demonstrated a willingness … [to] negotiate a reasonable retainer agreement with that counsel,” he says. “Accepting what is essentially the standard fee award does not demonstrate such a willingness.” Securities expert Robert Giuffra, who helped draft the Reform Act and is now a partner at New York’s Sullivan & Cromwell, agreed with Isaacson. “The auction phenomenon was a well-intentioned attempt by judges to impose some market discipline on the fees of class action lawyers,” he says, adding that the Reform Act imposes such discipline by requiring that the lead plaintiff “have the biggest stake.” The battle, says Giuffra, is really about institutional investors looking to force down contingency fees from their average of 30 percent. Greg Mashberg, though a defense-side securities lawyer for New York’s Proskauer Rose, nevertheless sides with Milberg. “If you’re going to retain an architect to design a building, you may have a competitive process where people show you what they’re going to do,” explains Mashberg. “But you don’t retain that professional simply by how much it’s going to cost.”

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