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The 9th U.S. Circuit Court of Appeals on Monday gave securities fraud class action firms more comfort in negotiating fee agreements, largely insulating them from the pretrial inquiries of curious judges. The unanimous three-judge panel decision strongly rebukes a practice of using fee agreements to help determine the adequacy of plaintiffs seeking to run lucrative securities fraud cases. In doing so, the panel most likely handed New York-based Milberg Weiss Bershad Hynes & Lerach the right to litigate a stock drop suit against Copper Mountain Networks Inc. “Selecting a lawyer in whom a litigant has confidence is an important client prerogative and we will not lightly infer that Congress meant to take away this prerogative from securities plaintiffs. And, indeed, it did not,” wrote Judge Alex Kozinski. He was joined by Judge Richard Paez and Senior Judge Clifford Wallace. The decision is a blow to federal Judge Vaughn Walker of the Northern District of California, whose rulings in the Copper Mountain case were reversed. Walker has been aggressive in employing novel judicial techniques in securities fraud class actions. For example, he is credited with pioneering the use of auctions to find lawyers willing to litigate cases with less expense to the class. “I’ve always said, Congress said one thing and Judge Walker does another,” said Milberg Weiss partner Sanford Svetcov, who argued the case. Milberg Weiss proposed a group of five investors who, collectively, lost more than $3.3 million after Copper Mountain’s stock dropped from more than $125 a share to less than $10. Under the 1995 Private Securities Litigation Reform Act, the plaintiff with the largest losses (and his lawyer) is usually assigned to run the case. But that presumption can be rebutted, and Walker and others have used that loophole to pursue deeper inquiries into fee agreements as a means of testing another requirement of class actions — whether the plaintiff can adequately represent the class. In the Copper Mountain case, Walker appointed Quinn Barton, a client of the New York securities firm Beatie and Osborn, a firm that employs seven lawyers. Barton’s losses were estimated by Milberg Weiss to be just $59,000. Walker explained his decision to hand the case to Barton by reasoning, in part, that since no institutional investors were involved, the court had a duty to protect the class by appointing the plaintiff it saw as the most adequate. Walker, whom the court did call “learned,” was nonetheless criticized for supplanting the text of the statute with what he believed were its intentions. “This, of course, was error,” Kozinski wrote. “Congress enacts statutes, not purposes, and courts may not depart from the statutory text because they believe some other arrangement would better serve the legislative goals.” John Coffee Jr., a securities law expert at Columbia University, said Walker’s ruling “seemed to construe the statute out of existence.” The 9th Circuit instructed judges to presume that the investor with the largest losses will be the lead plaintiff — period. Once established, the court said, judges should avoid further inquiry into details such as fee agreements. What judges may then do, however, is invite an adversarial test of that presumption. The challenges should come from other potential lead plaintiffs, however, and not the court itself. The panel went so far as to suggest that courts could hold an evidentiary hearing if need be. But judges have much more power than lawyers to inquire into fee agreements. Under the PSLRA, plaintiffs’ lawyers would have to show a “reasonable basis” for discovery into the matter. To University of Arizona College of Law professor Elliot Weiss, that creates a problem. Weiss represented Walker at the 9th Circuit hearing, but stressed he was not speaking for the judge. If a judge can’t look into the adequacy of a lead plaintiff, it is unlikely that other lawyers will. In trying to persuade a judge to grant them discovery, the lawyers must rely solely on the pleadings — those facts that a firm volunteers to place in the court record. “The opinion creates a kind of Catch-22,” Weiss said. “I think the Ninth Circuit’s approach to this issue is one that � constrains the discretion of district judges during the appointment of lead counsel/lead plaintiff status.” The opinion conflicts with a recent 5th U.S. Circuit Court of Appeals decision, which held that the PSLRA raised the standards for adequacy. But Kozinski rejected that view: “The Fifth Circuit cites no authority for its assertions, either in its opinion or in its order denying rehearing,” Kozinski wrote. Having a client chosen to run a securities fraud class action is the Holy Grail for securities fraud lawyers. They will most likely assume control of the case, negotiate the settlement and receive the lion’s share of any attorney fees once the case is resolved. Also significant was the absence of any discussion of the 9th Circuit’s 25 percent benchmark for reasonable fee agreements. Kozinski suggested that those should be dealt with at the latter stages of litigation, going so far as to remind judges they can award less if they see fit. “In that regard this is not a case that is a total victory for Milberg Weiss,” Coffee said.

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