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With a grand jury investigation hanging over the firm’s head, things have been tough at New York-based Milberg Weiss Bershad Hynes & Lerach lately. But Friday was a very good day. The firm is almost a lock to win a closely watched securities class action ruling in the 9th U.S. Circuit Court of Appeals that could have allowed judges to force plaintiffs’ firms to lowball each other in order to prosecute class actions. And a Texas judge handed the firm the most sought-after securities case going by giving it the right to represent shareholders in the stock-drop suit over Enron Corp.’s collapse. Following the 9th Circuit oral arguments, Milberg Weiss appeared set to score a ruling that lower courts would do well to defer to a lead plaintiff’s choices — including who they hire as counsel and for how much. As a result, the firm will likely see its clients installed as lead plaintiffs in a closely watched securities class action. “[The client] picked the lawyer that defendants love to hate — simple as that,” said 9th Circuit Judge Alex Kozinski, suggesting that fee agreements aren’t the only standard of a plaintiff’s competence. “If there is someone that defendants would least like to see on the other side, it’s Milberg Weiss.” The case, Cavanaugh v. U.S. District Court, 01-70772, will help define the limits of a judge’s discretion in appointing plaintiffs to run securities class actions. Under 1995′s Private Securities Litigation Reform Act, the lead plaintiff designation goes to the shareholder with the largest financial stake in the litigation. But in Cavanaugh, a stock-drop case involving Copper Mountain Networks Inc., U.S. District Judge Vaughn Walker of the Northern District of California decided that the investors who lost the most — a group of five proposed by Milberg Weiss — negotiated a too-high fee agreement and were therefore not adequate to represent the class. Walker tapped a shareholder who lost a mere $59,000 because he signed a fee agreement for roughly half of what Milberg Weiss would have been paid. Walker held that the Milberg Weiss group’s inability to negotiate a lower fee meant they would not adequately represent the class. With that, the lead firm in the case switched from Milberg Weiss to a six-lawyer New York outfit, Beatie & Osborn. “Cheap was Judge Walker’s standard and that was the standard that he followed,” argued Milberg Weiss partner Sanford Svetcov. “He looked at the two contracts, and he weighed them.” The 9th Circuit panel — Kozinski, Judge Richard Paez and Senior Judge J. Clifford Wallace — seemed uncomfortable with the idea that a judge, once the presumptive lead plaintiff is established, should be allowed to engage in a comparative analysis between plaintiffs. Furthermore, they were upset that Walker appeared to have done so by looking strictly at dollars and ignoring Milberg Weiss’ reputation as the pre-eminent securities plaintiffs firm in the country. “He [Judge Walker] really thinks there are levels of adequacy, but these are not things that exist in the statute,” Kozinski said, later saying that Walker ignored qualitative questions in favor of quantitative ones. “It’s not the same law firm for less money,” he said. “You want Arnold Schwarzenegger, not Matthew Broderick.” Beatie & Osborn’s Daniel Osborn began by arguing that fees can be considered, and that Milberg Weiss’ argument was that Walker gave fee agreements “too much weight.” He then tried to argue that under the Bauman factors for considering writs of mandamus, it was not clear error and therefore Walker’s decision should stand. It was a good idea that was quickly foreclosed. Wallace wrote the 1977 Bauman decision, and noted that all the factors don’t have to “point in the same direction” for the panel to overturn Walker. “The clock is ticking and I don’t think this is maybe your best avenue,” chimed in Kozinski, virtually insuring that the panel will reach the substantive issues in the case. From there it was downhill for Osborn, his descent picking up steam when Kozinski asked him to get his copy of the PSLRA and started combing through the statutory language. “What is it … that authorizes what Judge Walker did?” Kozinski asked. “Aren’t judges supposed to apply statutory language or are they supposed to sort of go freestyle?” Osborn reached a nadir after unsatisfactorily answering a series of questions about whether Walker conferred lead plaintiff status to a shareholder he felt was “more adequate and more fair” — a comparative analysis they suggested could not be done. In the interest of reserving the remainder of his argument time, Osborn tried to step away from the podium. Instead, the panel quickly volunteered more time. The argument lasted more than 90 minutes. Walker himself was represented at the hearing by Elliott Weiss, the University of Arizona law professor who co-authored an article that became the lead plaintiff provisions of the PSLRA. But Weiss could not save the case, either, finding out what many defense attorneys already know: A client’s own words are sometimes a problem. In this case, the panel questioned the lead plaintiff order at issue in Cavanaugh. “Where do we have a finding of inadequacy in Judge Walker’s order?” Kozinski asked, something Wallace and Paez both seemed keenly interested in. Weiss later said Walker’s actions were “not only appropriate, but within the responsibilities of the district court to conduct the kind of inquiries which occurred in this case.” After the 9th Circuit arguments concluded, Milberg Weiss received more good news in the form of Texas-based U.S. District Judge Melinda Harmon’s order granting the University of California the right to represent shareholders in the stock-drop suit against Enron Corp. The ruling means Milberg Weiss will most likely run a case arguably as valuable for its publicity as it is for any share of the recovery the firm receives. “This civil litigation is essential to right the wrongs and recover the losses suffered by millions of Americans,” Milberg Weiss partner William Lerach said in a statement.

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