Securities Class Action Report

A User's Guide to the Class Action Industrial Complex

November 10, 2009 • 8:00 am

NVIDIA: Selecting Lead Counsel under the PSLRA

The PSLRA gives district court judges some latitude in their selection of class representatives in securities cases. It also vests in lead counsel the authority to select co-counsel for the class and the discretion to divide the contingency fee among its chosen co-counsel as it sees fit. Given such high stakes, the jockeying so often seen between competing plaintiffs firms for lead status should hardly come as a surprise.

But whose favor do the lawyers need to curry in order to attain this vaunted status; the lead plaintiff’s or the court’s? This was the question before the 9th Circuit Court of Appeals in the NVIDIA securities fraud litigation. (The underlying lawsuit alleges that NVIDIA improperly failed to disclose material defects in its manufacturing processes thereby inflating the company’s stock price which subsequently deflated once the information became public.)

The court’s discretion to select plaintiffs to represent the class is circumscribed by the PSLRA which states that the adequacy of a lead plaintiff should be determined by whether or not the individual or group “(a) has either filed the complaint or made a motion in response to the published notice; (b) in the determination of the court, has the largest financial interest in the relief sought by the class; and (c) otherwise satisfies the requirements of Rule 23 of the Federal Rules of Civil Procedure” 15 U.S.C. § 78u-4(a)(3)(B)(iii)(I).

In the NVIDIA case District Court Judge James Ware applied these factors, selecting two lead plaintiffs: the New Jersey Carpenters Pension and Annuity Fund and Mr. Roberto Cohen. But Judge Ware also selected Milberg LLP and Girard Gibbs LLP to serve as lead plaintiffs representing the class despite Roberto Cohen’s selection of Kahn Gauthier Swick, LCC to serve as his counsel. Mr Cohen appealed the order claiming the Court overstepped it’s authority by substituting its own judgment for that of the lead plaintiff.

The Court of Appeals, relying on In re Cavanaugh, 306 F.3d 726 (9th Cir. 2002), agreed with Mr. Cohen and remanded the issue back to the lower court.

…more on the decision after the jump

Click the quoted text for the full decision:

When a statute speaks with clarity to an issue, courts must apply the clear meaning of the statute. Estate of Cowart v. Nicklos Drilling Co., 505 U.S. 469, 476 (1992). We have already explained that the PSLRA’s provisions on selection of lead plaintiff and lead counsel, although containing many requirements, are “neither overly complex nor ambiguous.” Cavanaugh, 306 F.3d at 729. Here we address only the PSLRA’s mandate that “[t]he most adequate plaintiff 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). This provision clearly identifies the most adequate plaintiff as the actor that “select[s] and retain[s]” class counsel. Although this power is subject to court approval and is therefore not absolute, it plainly belongs to the lead plaintiff. See id.; see also In re Cendant Corp. Litig., 264 F.3d 201, 273, 277 (3d Cir. 2001) (holding that the PSLRA is clear that “the power to ‘select and retain’ lead counsel belongs… to the lead plaintiff, and the court’s role is confined to deciding whether to ‘approve’ that choice” and that should the court disagree with the lead plaintiff’s choice “it should clearly state why… and should direct the lead plaintiff to undertake an acceptable selection process”). 2 The statute expressly provides that lead plaintiff has the power to select lead counsel, suggesting that the identity of the party selecting lead counsel was of substantial importance to Congress. See 15 U.S.C. § 78u-4(a)(3); In re BankAmerica Corp. Secs. Litig., 350 F.3d 747, 751 (8th Cir. 2003); Cendant, 264 F.3d at 273. Nor does the statute, framed in mandatory language, designate any other actor as authorized to select lead counsel or suggest that the district court may appropriate this authority. It would be difficult for the statute to be more clear that it is the lead plaintiff who selects lead counsel, not the district court.

I’m generally in favor of providing clients with wide discretion in their selection of counsel. However, when one class member and his attorney are to act as fiduciaries for the whole (otherwise unrepresented) class, the issues are somewhat different. Thus, the fact that the 9th Circuit’s interpretation of the PSLRA’s selection of counsel provision appears to be quite sensible, is for me an indication that the law is in need of reform.

It is essential that courts have a way to determine not only that the lead plaintiff has selected competent counsel, but to determine the existence of any potential improprieties in the lead plaintiff’s relationship with the selected law firm. Part of the process should also be to ensure the lead plaintiff understands enough about the litigation process to oversee the firm’s representation of the class and to take all reasonable steps to ensure the class is not over-billed for what are essentially commoditized legal services (like document review).

Class action firms routinely pay to play to get themselves retained by public pension funds who happily sign off on an 800% markup on attorney fees for grunt-work performed by temporary employees. The PSLRA ought be modified to prevent such widespread abuse.