Breaking NewsLaw.com and associated brands will be offline for scheduled maintenance Friday Feb. 26 9 PM US EST to Saturday Feb. 27 6 AM EST. We apologize for the inconvenience.

 
X

Thank you for sharing!

Your article was successfully shared with the contacts you provided.
No. UNITED STATES COURT OF APPEALS FOR THE NINTH CIRCUIT In re DAVID CAVANAUGH, MICHAEL HANNON, RICHARD WEISS, RAYMOND PFEIFER and ROBERT HERRGOTT DAVID CAVANAUGH, MICHAEL HANNON, RICHARD WEISS, RAYMOND PFEIFER and ROBERT HERRGOTT, Petitioners, vs. UNITED STATES DISTRICT COURT NORTHERN DISTRICT OF CALIFORNIA, Respondent, – and - QUINN BARTON, Real Party in Interest. On Petition for Writ of Mandamus to the United States District Court for the Northern District of California No. C-00-3894-VRW The Honorable Vaughn R. Walker PETITION FOR WRIT OF MANDAMUS [ edited for Web publication] Petitioners David Cavanaugh, Michael Hannon, Richard Weiss, Raymond Pfeifer, and Robert Herrgott (collectively, the “CMI group,” or “Petitioners”), submit this Petition for Writ of Mandamus to enforce the lead-plaintiff provisions of the Securities Exchange Act of 1934 (“Exchange Act”), as amended by the Private Securities Litigation Reform Act of 1995 (“PSLRA”), 15 U.S.C. �78u-4(a). Statement of Relief Sought and Issues Presented Petitioners seek a writ of this Court pursuant to 28 U.S.C. �1651(a), the All Writs Statute, directing the district court to appoint one or more of them lead plaintiff to prosecute this matter, as required by Exchange Act �21D(a), 15 U.S.C. �78u-4(a). The issues presented by this petition are: 1. Is the refusal to appoint the statutorily presumed “most adequate plaintiff” an appropriate case for mandamus review? 2. Did the district court clearly err as a matter of law by holding that the presumptively most adequate plaintiff was rendered inadequate solely by virtue of its fee agreement? Summary of Petition Mandamus is warranted in this case because the district court, the Honorable Vaughn Walker presiding, refused to follow the PSLRA’s statutory procedure for appointing a lead plaintiff and approving its choice of counsel. That procedure mandates appointment of the most adequate lead plaintiff at the outset of federal securities class actions. 15 U.S.C. �78u-4(a)(3). The statute commands that “the court shall adopt a presumption that the most adequate plaintiff in any private action arising under this chapter is the person or group of persons that … has the largest financial interest in the relief sought by the class,” and “otherwise satisfies the requirements of Rule 23.” 15 U.S.C. �78u(4)(a)(3)(B)(iii)(I) (emphasis added). But the district court in this case held the opposite: “A named plaintiff enjoys no entitlement to lead plaintiff designation simply because that plaintiff’s loss exceeds the loss for any other plaintiff that has come forward.” APP/A:4. Once appointed, the plaintiff with the largest financial interest “shall, subject to the approval of the court, select and retain counsel to represent the class.” 15 U.S.C. �78u-4(a)(3)(B)(v). Again, Judge Walker held the opposite – that analysis should begin with potential lead plaintiff’s selection of counsel – thereby overriding the statutory presumption that the class members with the greatest financial interest be appointed lead plaintiff and select counsel. The statutory presumption that those with the largest financial interest shall be appointed, “may be rebutted only upon proof by a member of the purported plaintiff class” that the presumptively most adequate plaintiff either “will not fairly and adequately protect the interests of the class,” or “is subject to unique defenses that render such plaintiff incapable of adequately representing the class.” 15 U.S.C. �78u-4(a)(3)(B)(iii)(II). Judge Walker refused to follow the statute’s direct commands. He recognized that the CMI group, whether evaluated as a group or individually, had a larger financial stake in the case than any other applicant for lead plaintiff: “Under the PSLRA, therefore, CMI is presumed to be the most adequate plaintiff.” APP/B:22. But he appointed another applicant, Quinn Barton, with a far smaller financial interest in the relief sought – solely because Judge Walker believed Barton had negotiated a more “competitive” fee agreement. According to Judge Walker, negotiating a fee agreement – in this case a graduated 20%-30% agreement – demonstrated that the CMI group could not fairly and adequately represent the class, making it “inadequate” under Rule 23(a)(4). APP/B:25. Neither the PSLRA’s text nor Rule 23′s adequacy requirements indicate that negotiating such a percentage fee – which is well within the range approved by Ninth Circuit precedent and always subject to judicial review – can be a basis for rejecting the presumptive lead plaintiff. For example, In re Pacific Enters. Sec. Litig., 47 F.3d 373, 379 (9th Cir. 1995), recognized 25% as reasonable benchmark, and approved adjustment up to 33% based on complexity, risk, and non-monetary benefits. In sum, Judge Walker effectively inverted and subverted Congress’s scheme, which directs courts to first appoint class members with the largest financial interest, who may then select counsel subject only to court approval. 15 U.S.C. �78u-4(a)(3)(B)(iii)-(iv). Judge Walker did the opposite, holding that lead-plaintiff appointment should turn on the court’s assessment of the plaintiff’s selection of counsel. His ruling that a class member “cannot be deemed an adequate representative,” APP/B:9-10, if he does not negotiate a “competitive” fee agreement before seeking appointment as lead plaintiff, cannot be reconciled with the statute or historical precedent. Indeed, his Order acknowledges that before his recent innovations, “[a]lmost universally, courts determined counsel’s fees at the close of litigation,” rather than at the outset as a precondition to determining that representation is “adequate.” APP/B:12-13. The Order explains that Judge Walker single-handedly changed the rules in 1990 when, in In re Oracle Sec. Litig., 131 F.R.D. 688 (N.D. Cal. 1990), “the undersigned employed a percentage fee” bidding process to select counsel to represent the class. APP/B:13. As detailed below, Congress considered Judge Walker’s bidding approach, but ultimately chose not to adopt it, endorsing instead the traditional rule that courts should evaluate fee arrangements ex post, after a recovery is obtained for the class. See infra at 14-19. Mandamus is warranted under Ninth Circuit standards laid out in Bauman v. United States Dist. Court, 557 F.2d 650, 654-55 (9th Cir. 1977). The district court’s ruling – rejecting the presumptively most adequate plaintiff and appointing the investor with a dramatically smaller financial loss – is based on a clear error of law and amounts to an arbitrary exercise of judicial power. Petitioners have been deprived of their presumptive statutory right to choose counsel and direct this litigation, have no other adequate remedy, and their petition presents a question of first impression relating to an important new issue of federal law. Accordingly, Petitioners respectfully ask this Court to exercise its jurisdiction, vacate the district court’s April 12, 2001, Order, and direct it to appoint the lead plaintiff with the largest financial interest in the relief sought. Statement of the Case The Complaint This is a securities class action under Exchange Act �10(b), filed on behalf of investors who purchased Copper Mountain Networks, Inc. (“Copper Mountain” or the “Company”) common stock between April 19, 2000, and October 17, 2000. APP/D:1. Defendants appeared at a trade conference in Massachusetts on September 22, 2000, reporting that the Company was on track to report favorable fourth-quarter earnings per share of at least $0.29. APP/D:25. On October 12, 2000, they told investors that customer demand was at an all-time high. APP/D:28-29. Five days later, however, the Company admitted that its fourth-quarter revenue and earnings would decline to approximately $0.04 to $0.06, and the stock plummeted to less than $10 per share. See APP/D:30-31. Before the collapse, however, the individual defendants – officers and directors of Copper Mountain – jettisoned their personal shares of Copper Mountain stock for $15 million, at prices as high as $90 per share. See APP/D:17. Investors who had paid as much as $122 per share filed suit. Selection of Lead Plaintiff On February 5, 2001, the district court issued an Order directing all prospective lead plaintiffs to answer ten questions to assist the court in determining whether “any of them” could fairly and adequately represent the class. APP/A:5. These questions focused in particular on investors’ retention of counsel. See APP/A:5. Three candidates filed for appointment as lead plaintiff and submitted declarations: (1) William Chenoweth, with $295,000 in losses; (2) Quinn Barton, with losses of $59,000; and (3) Petitioners, the “CMI group,” consisting of five investors who lost between $462,000 and $943,000 each, and whose aggregate losses were $3.3 million. APP/B:3-6; see also APP/E (declarations attached to CMI supplemental briefing). In addition, each of the petitioners attended a March 8, 2001, hearing and explained at length their qualifications and the process by which counsel was selected. APP/F. David Cavanaugh, who lost $943,000, told the court he had a degree in business administration and that he was the Vice-President of sales for a large international chemical company. APP/F:23. He also discussed his extensive negotiation experience and how, after researching securities fraud class actions, he had selected Milberg Weiss based on considerations of quality, reputation for success, its large size, and financial resources. APP/F:36-38. Michael Hannon, with losses of $765,000, explained that he is both a business broker and CPA with experience in fraud-related forensic accounting. APP/F:39. Mr. Hannon told the court how he had conferred with approximately a dozen lawyers and consulted with business associates before selecting Milberg Weiss as his counsel. APP/F:28-29. He emphasized to the court that he “ma[kes] [his] living negotiating,” and thus felt confident in his ability to negotiate a fair attorney-fee agreement. APP/F:40. Mr. Hannon chose Milberg Weiss, in part, because of its reputation as “the best firm” in the securities field. APP/F:29. Richard Weiss, who lost $633,000, told the court of his degree in business and of his experiences as a licensed real estate broker. APP/F:24. Mr. Weiss explained that because of his experience as an expert witness in complex real estate litigation, and because he “on a daily basis negotiate[s] with attorneys,” he felt confident in his ability to deal with the attorneys in this case. APP/F:41-42. He said he had met with three lawyers before selecting Scott & Scott and Milberg Weiss as his counsel. APP/G:4. Raymond Pfeifer, with losses of $524,000, explained to the court that he is the Senior Vice President of a high-technology company and that he has a degree in business administration. APP/B:5. Mr. Pfeifer added that he took the time to review all 23 complaints filed in this action – researching each firm – before selecting Milberg Weiss, based on the firm’s experience, resources, and reputation for maximizing class recovery. APP/F:28. Robert Herrgott, who lost $462,000, told the court of his MBA degree and certification as a financial analyst. APP/F:42. He explained that he is the President of a construction company as well as a stockbroker. APP/B:5. Mr. Herrgott selected Milberg Weiss only after meeting with several firms. APP/H:3. The entire CMI group filed a Joint Declaration with the court explaining that, among other reasons, they had selected Milberg Weiss and Scott & Scott based on the firms’ experience, achievements, and the substantial evidence they had already gathered in this case. APP/I:2. Recognizing that the court would have final say on the amount of attorney fees, the CMI group nonetheless negotiated and designed a fee structure that they believed would maximize class recovery. APP/I:4. Mr. Hannon explained that the group believed the increasing percentage fee it negotiated will best incentivize class counsel to maximize the recovery for the class. APP/F:29, 55. The non-CMI group members were much less active in seeking counsel. Barton, for example, admitted that he had suffered the smallest loss of any of the investors – about $59,000 – had only met with the one law firm referred to him by his broker, and had accepted the only fee agreement proposed. APP/B:4; APP/J:1-2; APP/F:17. Chenoweth told the court that he had yet to negotiate a fee agreement. APP/F:7-8. The District Court’s Ruling Judge Walker rejected Chenoweth as lead plaintiff for failing to negotiate a fee agreement with counsel before seeking appointment. APP/B:21-22. “[W]ithout a demonstration that Chenoweth is willing and able to negotiate with class counsel,” Judge Walker held, “the court cannot determine him to be the most adequate plaintiff.” APP/B:22. Barton and the CMI group, on the other hand, had both “demonstrated a willingness to negotiate with counsel.” APP/B:22. Judge Walker acknowledged that the CMI group had the largest financial interest making them, under the PSLRA, the presumptively “most adequate” plaintiff. APP/B:22 (citing 15 U.S.C. �78u-4(a)(3)(B)(iii)(I)). Judge Walker emphasized, however, that the presumption was rebuttable. APP/B:22. In fact, the statute says it “may be rebutted only upon proof by a member of the purported plaintiff class that the presumptively most adequate plaintiff – (aa) will not fairly and adequately protect the interests of the class; or (bb) is subject to unique defenses that render such plaintiff incapable of adequately representing the class.” 15 U.S.C. �78u-4(a)(3)(B)(iii)(II) (emphasis added). No class member attempted such a showing. Judge Walker reasoned, however, that because the PSLRA’s legislative history indicates that institutional investors will often have the largest financial stake, the CMI group’s lack of an institutional investor meant that “the primary objective of the presumption is absent.” APP/B:22-23. The text of the PSLRA does not require – or even mention – institutional investors. See 15 U.S.C. �78u-4(a)(3). Judge Walker then proceeded to substitute his own criterion for the statutory text. Rather than appointing a lead plaintiff who could then choose counsel subject to the court’s approval – as provided by Congress (see 15 U.S.C. �78u-4(a)(3)(B)(v)) – Judge Walker made the appointment of lead plaintiff turn on his evaluation of the fee agreements negotiated between applicants and their counsel. He held that unless the CMI group could demonstrate “that the deal it negotiated with Milberg Weiss is competitive,” whatever that may mean, “then CMI cannot be the most adequate plaintiff.” APP/B:23. Judge Walker concluded that “a negotiated deal with the best, competitive terms supports an inference that the negotiating plaintiff is the most adequate plaintiff.” APP/B:23. Judge Walker failed to define what the “best” or “competitive” terms should be, and effectively ignored Congress’s command that investors with the largest losses must be deemed most adequate unless their inadequacy under Rule 23 is demonstrated by a class member. 15 U.S.C. �78u-4(a)(3)(B)(iii)(II). Petitioners had negotiated a graduated fee agreement limiting attorney fees to 20% of the first $10 million recovered, 25% of the next $15 million recovered, and 30% of any amount recovered over $25 million. APP/B:6. Significantly, all expenses were to be paid out of counsel’s share of the recovery. APP/B:6. The Barton fee agreement has a three-tiered structure placing attorney fees at 15% if the class’s recovery is between $0 and $20 million, $12% if the award is between $20 million and $40 million, and 10% if the fee is greater than $40 million. APP/B:3. In addition, there is a fee cap on the three tiers of $2 million, $4 million, and $8 million, respectively. APP/B:3. Expenses, however, are taken out of the class’s share of the recovery, not the fee award. Thus, Judge Walker observed, assuming each firm would recover the same amount for the class, the CMI group’s fee agreement might result in a larger attorney fee than would Burton’s fee agreement. Judge Walker thus found that “only Barton ha[d] negotiated a competitive fee arrangement.” APP/B:23. He ruled that because of “Barton’s clearly superior fee arrangement” and “the comparative extravagance of the fees [CMI] proposes, CMI has failed to demonstrate that it has negotiated a reasonably competitive fee arrangement.” APP/B:25-26. As a result, the district court “conclude[d] that CMI cannot meet the adequacy requirement of the PSLRA and FRCP 23(a)(4).” APP/B:25. Accordingly, Judge Walker found that the “presumption invoked by the CMI individuals is … rebutted.” APP/B:25. Although Barton had by far the smallest financial stake of any contender, Judge Walker selected him as lead plaintiff. APP/B:27. Judge Walker acknowledged that Barton’s “competitive” fee agreement was the result of no actual competition – because, unlike Petitioners, Barton had consulted no other lawyers – but Judge Walker hypothesized that “it is as if Barton sought out and compared alternative law firms.” APP/B:26 (emphasis added). Judge Walker concluded, without further explanation, that the differences between the two fee agreements could not “be rationally explained by intangible factors such as the well-recognized brand name in securities litigation of CMI’s counsel.” APP/B:25. Notably, he failed to mention Mr. Cavanaugh’s emphasis on quality, past successes, professional backgrounds, size, and resources, Mr. Hannon’s desire to retain “the best firm,” and Mr. Pfeifer’s emphasis on experience, resources, and reputation for maximizing class recovery. Finally, Judge Walker held that Barton’s failure to negotiate that expenses be borne by counsel “does not significantly diminish” the advantages of Barton’s fee proposal because, he suggested, such expenses were apt to be capped at $500,000, citing no authority for his suggestion that expenses cannot exceed $500,000. APP/B:26. In sum, Judge Walker ignored the statutory presumption that the plaintiff with the largest financial interest should be appointed, instead appointing the plaintiff with a far smaller financial interest because he deemed Petitioners’ proposed fee agreement was less “competitive” than Barton’s. APP/B:25. The district court held that despite Petitioners’ statutory presumption as lead plaintiff, its fee agreement – which is in line with Ninth Circuit benchmarks for reasonableness – made it inadequate as a matter of law, thereby rebutting the statutory presumption. His holding that a class representative is inadequate under Rule 23 unless its fee agreement is undefinably “competitive” has no legal support. Judge Walker in effect made appointment of lead plaintiff contingent upon his own preferences regarding the selection of counsel. Reasons for Granting the Writ All of the Bauman Factors Justifying a Writ of Mandamus Are Met Here To determine whether mandamus should issue, the Ninth Circuit considers five factors identified in Bauman, 557 F.2d at 654-55. They are: 1. Whether the Petitioners have “no other adequate means, such as a direct appeal,” to attain the desired relief. Id. at 654. 2. Whether the Petitioners will be “damaged or prejudiced in a way not correctable on appeal.” Id. 3. Whether the district court’s order is “clearly erroneous as a matter of law.” Id. at 654-55. 4. Whether the order presents an “oft-repeated error, or manifests a persistent disregard of the federal rules.” Id. at 655. 5. Whether the District Court’s order raises “new and important problems, or issues of law of first impression.” Id.; accord Medhekar v. United States Dist. Court, 99 F.3d 325, 326 (9th Cir. 1996); SG Cowen Sec. Corp. v. United States Dist. Court, 189 F.3d 909, 913 (9th Cir. 1999). Not every factor need be met for mandamus to be warranted and, indeed, seldom will all be present. See SG Cowen, 189 F.3d at 913. Rather, the factors should be weighed together based on the facts of the individual case, to determine whether relief is warranted. Id. Here, the five-factor Bauman analysis favors issuing the writ. The first Bauman factor is whether petitioners have an adequate remedy, as through direct appeal. The law is settled: no direct appeal may be taken from an interlocutory lead-plaintiff order. Z-Seven Fund, Inc. v. Motorcar Parts & Accessories, 231 F.3d 1215, 1218-19 (9th Cir. 2000). The second Bauman factor asks whether Petitioners will be damaged or prejudiced in any way not readily correctable on appeal. This Court has excused this factor’s absence when, on balance, relief is warranted. See, e.g., Mortgages, Inc. v. United States Dist. Court, 934 F.2d 209, 211-12 (9th Cir. 1991). But it is present here. For unless this Court promptly corrects the error below, Petitioners will be forever denied their presumptive statutory right to select counsel and direct the litigation. As the qualified shareholders with the largest financial interest in the relief sought by the class, Petitioners have a presumptive statutory right to direct and oversee the litigation. 15 U.S.C. �78u-4(a)(3)(B)(iii)(I)(bb). As such, they also have a right to choose counsel to represent them and the class. 15 U.S.C. �78u-4(a)(3)(B)(v). In Christensen v. United States Dist. Court for Cent. Dist., 844 F.2d 694, 697 (9th Cir. 1988), this Court held that mandamus is appropriate where a district court improperly denies a civil litigant his choice of counsel, for “[o]nce a new attorney is brought in, the effect … is irreversible.” If the case is permitted to proceed, led by Barton and his counsel, the effect will be similarly irreversible – if not more so. The third Bauman factor is whether the district court’s Order is clearly erroneous as a matter of law. Here, Judge Walker violated clear statutory commands. The PSLRA mandates that plaintiffs with the largest financial interest are presumptively the most adequate plaintiff, as long as they otherwise satisfy Rule 23′s adequacy requirements. 15 U.S.C. �78u-4(a)(3)(B)(iii)(I). But Judge Walker disregarded this presumption by holding that the CMI group’s fee agreement, by itself, rendered them inadequate. As discussed below, infra at 14-19, holding cannot be reconciled with the statute’s text, or with Rule 23 precedent. The fourth Bauman factor is whether Judge Walker’s order constitutes an “oft-repeated error,” and the fifth is whether it raises important issues of first impression. This Court has recognized that the “fourth and fifth [Bauman] factors [are] rarely if ever present together.” Medhekar, 99 F.3d at 327. But they are here. Judge Walker’s opinion emphasizes that he has single-handedly attempted to change the law governing appointment of class representatives and lead plaintiffs to prosecute class actions, beginning in 1990 with his order in Oracle. APP/B:13. He recounts how he has repeatedly followed that ruling in subsequent decisions – including cases that under the PSLRA that should have been subject to Exchange Act �21D(a)(3)’s statutory presumption favoring appointment of investors with the largest financial stake. APP/B:13-14. See, e.g., Wenderhold v. Cylink Corp., 188 F.R.D. 577 (N.D. Cal. 1999). Judge Walker’s Order recounts how four other district courts have followed his lead. APP/B:14-20. Moreover, the Order itself involves yet another case, against Quintus Corporation, in which Judge Walker’s notions about “competitive” fee agreements override a lead plaintiff’s statutory right to choose counsel. If overriding the statute’s command to suit a few judges’ preference for choosing lead plaintiffs (or their counsel) by taking the lowest bidder is error – as Petitioners contend – then Judge Walker’s order itself shows that the error is an increasingly “oft-repeated” one. And yet, it has so far evaded review because the ruling is interlocutory, and cannot be effectively reviewed at the end of the case. Many district courts have criticized Judge Walker’s approach as contrary to the statute’s clear language. But no appellate court has yet ruled on the practice. Thus, the error is not only “oft repeated,” but presents an issue of first impression for this Court. “[M]andamus is appropriate ‘when the appellate court is convinced that resolution of an important, undecided issue will forestall future error in trial courts, eliminate uncertainty and add importantly to the efficient administration of justice.’” In re Cement Antitrust Litig., 688 F.2d 1297, 1304 (9th Cir. 1982) (quoting Colonial Times, Inc. v. Gasch, 509 F.2d 517, 524 (D.C. Cir. 1975)), aff’d, 459 U.S. 1191 (1983). The PSLRA is a relatively recent statutory scheme enacted by Congress to control and manage private securities litigation, and its provisions are still being interpreted by the Courts of Appeals, and “[m]andamus is particularly appropriate when we are called upon to determine the construction of a federal procedural rule in a new context.” Valenzuela-Gonzalez v. United States Dist. Court, 915 F.2d 1276, 1279 (9th Cir. 1990). “Such a situation presents the rare case where both the fourth and fifth Bauman factors are satisfied: we are presented with a novel question of law that is simultaneously likely to be ‘oft-repeated.’” Id. (emphasis added, citation omitted). In sum, the five Bauman factors support immediate review by mandamus. Congress’s express mandate that the person with the largest loss be the lead plaintiff otherwise will become diluted as other courts do what Judge Walker did here, when he appointed the person with the smallest loss as lead plaintiff. The District Court’s Order Appointing Lead Plaintiff Was Clear Error The third Bauman factor warrants particular attention on the present record. And it is met in spades. The district court’s Order is clearly erroneous as a matter of law. Judge Walker’s preference in fee agreements cannot make one plaintiff, with the smallest stake in the case, adequate – and all others inadequate. Indeed, the statutorily-presumed most adequate plaintiff cannot be rendered inadequate by a fee agreement that is consistent with this Circuit’s standard for reasonableness. The CMI group’s members each lost from $462,000 to $943,000, making them the presumptively “most adequate plaintiff,” whether evaluated individually, or as a group, for the PSLRA imposes a presumption that the most adequate plaintiff is the person, or group of persons that has the largest financial interest and “otherwise satisfies the requirements of Rule 23.” See 15 U.S.C. �78u-4(a)(3)(B)(iii)(I). Yet Judge Walker appointed the investor with the smallest stake, based solely on his own relative preferences regarding fee agreements. Barton, after all, lost only $59,000. By doing this, Judge Walker inverted the statutory scheme, which provides that the court shall appoint a lead plaintiff, who may then select counsel subject to the court’s approval. See 15 U.S.C. �78u-4(a)(3)(B)(iii), (iv). Judge Walker got things backwards when he ruled that the court should start with potential lead plaintiff’s selection of counsel, and use this to determine who shall be selected as lead plaintiff – rather than the statutory criterion of the largest financial stake. Judge Walker justified downplaying the statutory presumption by asserting that if Petitioners are not institutional investors, “the primary objective of the presumption is absent.” APP/B:22-23. The statutory presumption, he reasoned, applies with full force only when institutional investors seek appointment. APP/B:22-23. But while institutional investors may often have the largest financial stake, Congress did not make institutions presumptively the most adequate plaintiff. See In re Telxon Corp. Sec. Litig., 67 F. Supp. 2d 803, 821-22 (N.D. Ohio 1999). Instead, Congress directed courts to evaluate whose financial loss is greatest in choosing the most adequate plaintiff. Id. The Conference Report explains that “class members with large amounts at stake will represent the interests of the plaintiff class more effectively than class members with small amounts at stake.” H.R. Conf. Rep. 104-369, at 34 (1995), reprinted in 1995 U.S.C.C.A.N. 730, 733. Petitioners, who have the largest financial interest, are accordingly the presumptively most adequate plaintiff – as Judge Walker admitted. See APP/B:22. The presumption favoring the CMI group may be rebutted, of course, but only with proof from a class member that the presumptively most adequate plaintiff will not fairly and adequately protect the interests of the class, or is subject to unique defenses. See 15 U.S.C. �78u-4(a)(3)(B)(iii)(II). Although Barton negotiated a different fee arrangement with his lawyers, no member of the plaintiff class offered proof of inadequacy to rebut the CMI group’s position. Judge Walker holds that an applicant for lead plaintiff who has negotiated no fee agreement with counsel cannot be adequate. APP/B:21-22. He then holds that if the CMI group, which did negotiate a cap on attorney fees, cannot demonstrate that the deal it negotiated is “competitive,” then it cannot be the most adequate plaintiff. APP/B:23. Because he thinks Petitioners’ agreement on fees is not “reasonably competitive” when compared to Barton’s, Judge Walker concludes that the “presumption invoked by the CMI individuals is, therefore, rebutted.” APP/B:25. If representation is inadequate unless “competitive” attorney fees are negotiated before seeking lead plaintiff appointment, however, Judge Walker’s ruling means that the nearly universal practice of determining fees at the end of the case violates due process – and that the resulting judgments are not binding. See Eisen v. Carlisle & Jacquelin, 417 U.S. 156, 176-77 (1974) (judgment is binding and due process satisfied only if class representative is adequate); Crawford v. Honig, 37 F.3d 485, 487 (9th Cir. 1994) (same). This cannot be so. Judge Walker’s analysis cannot be reconciled with the statute or with historical precedent. He acknowledges that “[a]lmost universally, courts [have] determined counsel’s fees at the close of litigation,” rather than at the outset as a precondition to determining that representation is “adequate.” APP/B:12-13. He says that he single-handedly changed the rules in 1990, however, when in the Oracle case “the undersigned employed a percentage fee” bidding process to select counsel to represent the class at the outset. APP/B:13. But before enacting the PSLRA’s lead-plaintiff provisions, Congress considered Judge Walker’s bidding approach, and chose not to adopt it. The law review article that the Senate Report says “provided the basis for the ‘most adequate plaintiff’ provision,” S. Rep. 104-98, at 11 n.32 (1995), reprinted in 1995 U.S.C.C.A.N. 679, 690 n.32, states that the lead-plaintiff provisions’ reliance on investors’ financial stake “has clear advantages over” Judge Walker’s bidding system in Oracle. Instead, Congress endorsed the traditional rule that courts should evaluate fee arrangements ex post, after any recovery for the class: “Total attorneys’ fees and expenses awarded by the court to counsel for the plaintiff class shall not exceed a reasonable percentage of the amount of any damages and prejudgment interest actually paid to the class.” 15 U.S.C. �78u-4(a)(6) (emphasis added). Other courts confronted with the argument that a plaintiff is rendered inadequate based on counsel’s fees have recognized that “‘the court does not in [finding Rule 23's requirements met] entrust to the representative parties ultimate responsibility for determining the fairness to the class of settlement decisions which compromise class interests.’” Cohen v. Uniroyal, Inc., 77 F.R.D. 685, 693 (E.D. Pa. 1977) (citation omitted). Rather, Rule 23(e) requires judicial approval of any settlement on behalf of the class, including attorney fees. Id; see also Powers v. Eichen, 229 F.3d 1249, 1256-58 (9th Cir. 2000). Accordingly, a plaintiff’s fee agreement with counsel cannot render it inadequate under either Rule 23 or the PSLRA – and certainly not when the agreement conforms with this Court’s fee precedents. Here, Petitioners negotiated a formal retention and graduated 20%-30% fee agreement with counsel – subject, of course, to subsequent court approval. APP/B:6. All litigation expenses were to be paid out of counsel’s share of the recovery, effectively reducing the percentage actually to be received by counsel. APP/B:6. This fee structure is consistent with the adjustable “benchmark” approved by this Court as reasonable. For example, in Pacific Enters., this Court recognized 25% as a reasonable benchmark, and approved an adjustment up to 33% based on complexity, risk, and non-monetary benefits. 47 F.3d at 379. Many district judges have rejected Judge Walker’s competitive-bidding schemes as contrary to the statute’s clear mandates. See supra, n.4. For example, Judge Claudia Wilken, of the Northern District of California, rejected the argument that the most adequate plaintiff must subject its fee structure to a judicial determination of competitiveness or be rendered inadequate. Steiner, 2000 U.S. Dist. LEXIS 20341, at *16-*17. Judge Wilken held that “[t]he PSLRA gives the court authority both to approve counsel selected by the lead plaintiff, and ultimately to determine the amount of fees awarded to such counsel. This oversight is sufficient to ensure that the interests of the class are protected ….” Id. (citation omitted). She added that the presumptively most adequate plaintiff’s “failure to seek competitive bidding does not indicate that it will inadequately represent the interests of the class.” Id. at *17. Judge Walker justifies his departure from Congress’s statutory plan, because he believes that recoveries in securities class actions “are not solely (or even primarily) the product of class counsel’s efforts.” APP/B:24. Yet he admits that “[s]election of lead counsel is one of the most important decisions a lead plaintiff makes.” APP/B:9. If class counsel are not much responsible for obtaining a good recovery, then why is selection of counsel important? To Judge Walker, cheap is good and cheap is the only standard. By ignoring the presumptive lead plaintiff’s evaluation of attorney experience, competence, and resources, he subverts rather than protects the interest of the class, contrary to Rule 23 and the PSLRA. See, e.g., John C. Coffee, Jr., Securities Class Auctions, Nat’l L.J., Sep. 14, 1998, at B6 (APP/K). Negotiating a percentage fee arrangement that is well within the range approved by Ninth Circuit precedent – and is subject to judicial review in any event – cannot amount to inadequate representation. Judge Walker made appointment of lead plaintiff contingent upon the selection of counsel rather than selection of counsel being contingent upon appointment as lead plaintiff. Rather than following the statute, Judge Walker substituted his preference in fee agreements for that of the plaintiff with the largest financial interest, which resulted in the appointment of the investor with the smallest interest. This appointment is clearly erroneous, and warrants a writ of mandamus. Conclusion For the foregoing reasons, Petitioners respectfully request a writ of mandamus vacating Judge Walker’s April 12, 2001, Order denying Petitioners’ appointment as lead plaintiff, and direct the district court to appoint the lead plaintiff that the statute requires. DATED: May 14, 2001 Respectfully submitted, MILBERG WEISS BERSHAD HYNES & LERACH LLP PATRICK J. COUGHLIN SANFORD SVETCOV RANDI D. BANDMAN LESLEY E. WEAVER 100 Pine Street, Suite 2600 San Francisco, CA 94111 Telephone: 415/288-4545 MILBERG WEISS BERSHAD HYNES & LERACH LLP ERIC A. ISAACSON FREDERICK B. BURNSIDE ERIC A. ISAACSON 600 West Broadway, Suite 1800 San Diego, CA 92101 Telephone: 619/231-1058 SCOTT & SCOTT, LLC DAVID R. SCOTT JAMES E. MILLER 108 Norwich Avenue Colchester, CT 06415 Telephone: 860/537-3818 Attorneys for Petitioners

This content has been archived. It is available through our partners, LexisNexis® and Bloomberg Law.

To view this content, please continue to their sites.

Not a Lexis Advance® Subscriber?
Subscribe Now

Not a Bloomberg Law Subscriber?
Subscribe Now

Why am I seeing this?

LexisNexis® and Bloomberg Law are third party online distributors of the broad collection of current and archived versions of ALM's legal news publications. LexisNexis® and Bloomberg Law customers are able to access and use ALM's content, including content from the National Law Journal, The American Lawyer, Legaltech News, The New York Law Journal, and Corporate Counsel, as well as other sources of legal information.

For questions call 1-877-256-2472 or contact us at [email protected]

 
 

ALM Legal Publication Newsletters

Sign Up Today and Never Miss Another Story.

As part of your digital membership, you can sign up for an unlimited number of a wide range of complimentary newsletters. Visit your My Account page to make your selections. Get the timely legal news and critical analysis you cannot afford to miss. Tailored just for you. In your inbox. Every day.

Copyright © 2021 ALM Media Properties, LLC. All Rights Reserved.