Raymond Moore, et al.
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
In re: RAYMOND MOORE; et al.,
RAYMOND MOORE; et al.,
UNITED STATES DISTRICT COURT FOR THE
NORTHERN DISTRICT OF CALIFORNIA,
NETWORK ASSOCIATES, INC., et al.,
Real Parties in Interest.
DC# CV-99-1729-WHA, United States District
Court for the Northern District of California
BRIEF OF THE SECURITIES AND EXCHANGE
COMMISSION AS AMICUS CURIAE IN SUPPORT OF REAL
PARTY IN INTEREST VATUONE ON THE ISSUE SPECIFIED
DAVID M. BECKER
JACOB H. STILLMAN
LUIS DE LA TORRE
Securities and Exchange Commission
450 5th Street, N.W.
Washington, D.C. 20549-0606
(202) 942-0813 (de la Torre)
TABLE OF CONTENTS
TABLE OF AUTHORITIES
INTEREST OF THE SECURITIES AND EXCHANGE
COMMISSION AND SUMMARY OF ITS POSITION
STATEMENT OF THE ISSUE
STATEMENT OF FACTS
- The Role of the Lead Plaintiff Is To Select
Lead Counsel With the Approval of the Court and To Actively Oversee the Litigation and
Monitor that Counsel
- The Lead Plaintiff Should Be an Institution,
Individual, or "Group" That Can Perform The
Role of the Lead Plaintiff, and District
Courts Should Make Appropriate Inquiries To
Ensure That This Is the Case
TABLE OF AUTHORITIES
In re Advanced Tissue Sciences Sec. Litig.,
184 F.R.D. 346 (S.D. Cal. 1998)
In re Baan Company Sec. Litig.,
186 F.R.D. 214 (D.D.C. 1999)
Amchem Products, Inc. v. Windsor,
117 S. Ct. 2231 (1997)
Ballan v. Upjohn Co.,
159 F.R.D. 473 (E.D. Mich. 1994)
Bateman Eichler, Hill Richards, Inc. v. Berner,
472 U.S. 299 (1985)
In re California Micro Devices Sec. Litig.,
168 F.R.D. 257 (N.D. Cal. 1996)
In re California Micro Devices Sec. Litig.,
965 F. Supp. 1327 (N.D. Cal. 1997)
In re Cendant Corp. Litig.,
182 F.R.D. 144 (D.N.J. 1998)
Chill v. Green Tree Financial Corp.,
181 F.R.D. 398 (D. Minn. 1998)
In re Donnkenny Inc. Sec. Litig.,
171 F.R.D. 156 (S.D.N.Y. 1997)
East Texas Motor Freight System, Inc. v. Rodriguez,
431 U.S. 395, 405 (1977)
Efros v. Nationwide Corp.,
98 F.R.D. 703 (S.D. Ohio 1983)
Ehlert v. Singer,
185 F.R.D. 674 (M.D. Fla. 1999)
Epifano v. Boardroom Business Products, Inc.,
130 F.R.D. 295 (S.D.N.Y. 1990)
Gluck v. Cellstar Corp.,
976 F. Supp. 542 (N.D. Tex. 1997)
Greebel v. FTP Software, Inc.,
939 F. Supp. 57 (D. Mass. 1996)
In re McKesson HBOC, Inc. Sec. Litig.,
79 F. Supp. 2d 1146 (N.D. Cal. 1999)
Metropolitan Edison Co. v. People Against Nuclear Energy,
460 U.S. 766 (1983)
In re Milestone Scientific Sec Litig.,
183 F.R.D. 404 (D.N.J. 1998)
In re Milestone Scientific Sec Litig.,
187 F.R.D. 165 (D.N.J. 1999)
Mitchell v. Complete Mgmt., Inc.,
1999 WL 728678 (S.D.N.Y. Sept. 17, 1999)
In re Nice Systems Sec. Litig.,
188 F.R.D. 206 (D.N.J. 1999)
In re Oxford Health Plans Sec. Litig.,
182 F.R.D. 42 (S.D.N.Y. 1998)
Parker v. Anderson,
667 F.2d 1204 (5th Cir. 1982)
In re Party City Sec. Litig.,
189 F.R.D. 91 (D.N.J. 1999)
Ravens v. Iftikar,
174 F.R.D. 651 (N.D. Cal. 1997)
Reiger v. Altris Software, Inc.,
1998 U.S. Dist. LEXIS 14705 (S.D. Cal. Sept. 14, 1998)
Robinson v. Shell Oil Co.,
519 U.S. 337 (1997)
Sakhrani v. Brightpoint, Inc.,
78 F. Supp. 2d 845 (S.D. Ind. 1999)
SG Cowen Sec. Corp. v. U.S District Court,
189 F.3d 909 (9th Cir. 1999)
Sherleigh Assocs. LLC v. Windmere-Durable Holdings, Inc.,
184 F.R.D. 688 (S.D. Fla. 1999)
In re Southeast Hotel Properties Limited Partner Investor Litig.,
151 F.R.D. 597 (W.D.N.C. 1993)
Steiner v. Frankino,
1998 U.S. Dist. LEXIS 21804 (N.D. Ohio July 16, 1998)
Switzenbaum v. Orbital Science Corp.,
187 F.R.D. 246 (E.D. Va. 1999)
Takeda v. Turbodyne Technologies, Inc.,
67 F. Supp. 2d 1129 (C.D. Cal. 1999)
In re Telxon Corp. Sec. Litig.,
67 F. Supp. 2d 803 (N.D. Ohio 1999)
United States v. Taylor,
487 U.S. 326 (1988)
Wenderhold v. Cylink Corp.,
188 F.R.D. 577 (N.D. Cal. 1999)
Williams v. Balcor Pension Invs.,
150 F.R.D. 109 (N.D. Ill. 1993)
Wrighten v. Metropolitan Hospitals, Inc.,
726 F.2d 1346 (9th Cir. 1984)
Yousefi v. Lockheed Martin Corp.,
70 F. Supp. 2d 1061 (C.D. Cal. 1999)
STATUTES AND RULES:
Securities Exchange Act of 1934, 15 U.S.C. 78a et seq.
Section 15(c)(8), 15 U.S.C. 78o(c)(8)
Section 21D, 15 U.S.C. 78u-4
Section 21D(a), 15 U.S.C. 78u-4(a)
Section 21D(a)(2), 15 U.S.C. 78u-4(a)(2)
Section 21D(a)(3), 15 U.S.C. 78u-4(a)(3)
Section 21D(a)(3)(A)(i)(II), 15 U.S.C. 78u-4(a)(3)(A)(i)(II)
Section 21D(a)(3)(B), 15 U.S.C. 78u-4(a)(3)(B)
Section 21D(a)(3)(B)(i), 15 U.S.C. 78u-4(a)(3)(B)(i)
Section 21D(a)(3)(B)(ii), 15 U.S.C. 78u-4(a)(3)(B)(ii)
Section 21D(a)(3)(B)(iii), 15 U.S.C. 78u-4(a)(3)(B)(iii)
Section 21D(a)(3)(B)(iii)(I), 15 U.S.C. 78u-4(a)(3)(B)(iii)(I)
Section 21D(a)(3)(B)(v), 15 U.S.C. 78u-4(a)(3)(B)(v)
Section 21D(a)(4), 15 U.S.C. 78u-4(a)(4)
Section 21D(a)(5), 15 U.S.C. 78u-4(a)(5)
Section 21D(a)(6), 15 U.S.C. 78u-4(a)(6)
Section 21D(a)(7), 15 U.S.C. 78u-4(a)(7)
Section 21D(a)(9), 15 U.S.C. 78u-4(a)(9)
Section 21D(c), 15 U.S.C. 78u-4(c)
Fed. R. Civ. P. 23
Conference Report on Securities Litigation Reform, H.R. Conf. Rep. No. 104-369 (1995)
Report on the Common Sense Legal Reform Act of 1995, H.R. Rep. No. 104-50 (1995)
Report on the Private Securities Litigation Reform Act of 1995, S. Rep. No. 104-98 (1995)
141 Cong. Rec. H14038-39 (Dec. 6, 1995)
141 Cong. Rec. H14048 (Dec. 6, 1995)
141 Cong. Rec. H14050 (Dec. 6, 1995)
141 Cong. Rec. S8895 (June 22, 1995)
141 Cong. Rec. S8897 (June 22, 1995)
141 Cong. Rec. S9055 (June 26, 1995)
141 Cong. Rec. S9065 (June 26, 1995)
141 Cong. Rec. S9075-77 (June 26, 1995)
141 Cong. Rec. S9172-73 (June 27, 1995)
141 Cong. Rec. S9212 (June 28, 1995)
141 Cong. Rec. S9321 (June 28, 1995)
141 Cong. Rec. S17934 (Dec. 5, 1995)
141 Cong. Rec. S17956 (Dec. 5, 1995)
141 Cong. Rec. S17967 (Dec. 5, 1995)
141 Cong. Rec. S17969 (Dec. 5, 1995)
141 Cong. Rec. S17980 (Dec. 5, 1995)
141 Cong. Rec. S17982-84 (Dec. 5, 1995)
141 Cong. Rec. S19054 (Dec. 21, 1995)
141 Cong. Rec. S19084 (Dec. 21, 1995)
SEC Office of the General Counsel, Report to the President and the Congress on the First
Year of Practice Under the Private Securities Litigation Reform Act of 1995 (Apr. 1997)
Elliott J. Weiss & John S. Beckerman, Let the Money Do the Monitoring: How Institutional Investors Can Reduce Agency Costs in Securities Class Actions, 104 Yale L.J. 2053 (1995)
INTEREST OF THE SECURITIES AND EXCHANGE
COMMISSION AND SUMMARY OF ITS POSITION
The Securities and Exchange Commission is the agency principally responsible for the administration and enforcement of the federal securities laws. It has long expressed the view that legitimate private actions under these laws serve an important role. Such actions work to compensate investors who have been harmed by securities law violations and, as the Supreme Court has repeatedly recognized, they "provide `a most effective weapon in the enforcement' of the securities laws and are `a necessary supplement to Commission action.'" Bateman Eichler, Hill Richards, Inc. v. Berner, 472 U.S. 299, 310 (1985).
In enacting the Private Securities Litigation Reform Act of 1995 ("Reform Act" or "Act"), Section 21D of the Securities Exchange Act of 1934, 15 U.S.C. 78u-4, Congress affirmed the importance of private securities litigation. Conference Report on Securities Litigation Reform, H.R. Conf. Rep. No. 104-369, at 31 (1995) ("Conf. Rep."). Congress sought through the Reform Act's lead plaintiff provisions, 15 U.S.C. 78u-4(a), to ensure more effective representation of investors' interests in private securities class actions by transferring control of the actions from lawyers to investors. Conf. Rep. 32-35.
This may be the first court of appeals decision to address the lead plaintiff provisions. The Commission wishes to assure that the Court is accurately and completely informed about the meaning and objectives of the provisions, particularly in lightof certain mischaracterizations of those provisions by petitioners Moore, D'Alessandro, and DeNigris.1
The Reform Act contemplates that the lead plaintiff will select and retain counsel with the approval of the court, and will actively oversee the conduct of the litigation and monitor the effectiveness of counsel for the protection of the class. Under the Act, a district court should take care, in appointing the lead plaintiff, that the candidate can perform this function.
Particular concerns arise where the lead plaintiff applicant is a proposed group of individuals. If a group is appointed, it should generally be small in size, usually no more than three to five persons in number. It should provide appropriate, reasonably available information to the court about its members, structure, and intended functioning, to allow the court to determine if such a group will be able to actively oversee the litigation. Such information is relevant not only to determining whether the self-proclaimed "group" is indeed a "group of persons" within the meaning of the Reform Act, but whether the "group" satisfies the Act's minimum requirement that the lead plaintiff be an adequate class representative under Federal Rule of Civil Procedure 23. Additionally, the court should not appoint competing lead plaintiff applicants as "co-lead plaintiffs." The court should likewise inquire into, andactively exercise its discretion to review, proposals for multiple lead counsel.
In contending (Petition at 17) that the district court's December 15, 1999 lead plaintiff decision is "clearly erroneous," petitioners advocate a mistaken view of the lead plaintiff's role under the Reform Act. Despite statutory language, purpose, and history that make that role clear, petitioners contend (id. at 20) that "[a]ll Congress commanded was that the lead plaintiff select adequate lead counsel to prosecute the case."
Petitioners proceed from their faulty premise to erroneously argue (at 21) that in selecting the lead plaintiff the district court must apply "an objective `bright line' test" based on financial interest. According to petitioners (at 3, 18, 21), the court "had no discretion" to make a "subjective" inquiry into "the nature and qualities" of lead plaintiff candidates, such as whether they would attend court proceedings in the case, which petitioners contend is "extraneous," not "relevant as a factor."
The Commission takes no position on whether the petitions should be granted or whether the district court was correct in appointing Real Party in Interest Vatuone, rather than one or more of petitioners, as lead plaintiff. However, the court was entitled to consider, in evaluating petitioners collectively or singly (they offer themselves as lead plaintiff either way), the fact that they had been part of a dysfunctional proposed lead plaintiff "group" of over 1700 random individuals. These persons apparently were drawn into the "group" based on notices the courtfound to be defective, and do not even appear to have known who their fellow "group" members were or who its proposed lead counsel were.
After extensive analysis, the district court rejected that "group," holding that it did not "even come close" to qualifying as lead plaintiff. When petitioners subsequently renewed their lead plaintiff motion, this time seeking appointment as a smaller "group" or individually, their conduct in the litigation to that point was relevant under either a "group of persons" analysis or a Rule 23 adequacy of representation analysis.2
STATEMENT OF THE ISSUE
The Commission addresses the following issue:
Whether, under the Reform Act, a district court should evaluate a proposed lead plaintiff "group" for its ability to actively oversee the conduct of the litigation and monitor the effectiveness of counsel, and should take that information into account in considering a motion to appoint the proposed group or any of its members as lead plaintiff.
STATEMENT OF FACTS
On June 7, 1999, Vatuone moved to be sole lead plaintiff in this case. He claimed losses of approximately $30,000. (See Petitioners' Exhibit 9.)
On the same day, "a group of over 1,725 investors," including the three petitioners, also submitted a lead plaintiff motion (see Pet. Ex. 8 at 1 n.1). These movants asked the district court to take into account their total combined losses of "at least $33,929,308" in deciding the motion (see id. at 2). They indicated that their entire group was fit to be appointed lead plaintiff (see id. at 1 n.1, 14 (stating that all movants "submitted signed certifications" providing information about their stock purchases and information required of a named plaintiff under Reform Act § 21D(a)(2)(A)(i)-(vi) and that "signing [such] a certification" "amply demonstrate[s]" an investor's "adequacy as [a] Class representative")).
These movants expressly "proffered" eleven members of their group -- including petitioners and the Board of Pensions and Retirement of the City of Philadelphia -- for appointment as lead plaintiff (see id. at 1). Petitioners claimed losses of between $250,000 and $400,000 (see Pet. at 8-9). The movants also invited the court to appoint "thirteen additional" of their members as lead plaintiff (see Pet. Ex. 8 at 4 n.4). And, as yet another variation, they proposed these 24 members "together with nineteen" additional members as lead plaintiff (id.).
None of these persons was described other than by name and loss amount; the motion provided no information about whether they knew they had been put forward as lead plaintiff or with whom. Without providing any information about their relationship with counsel, movants sought the appointment of three law firms as "co-lead counsel": Milberg Weiss Bershad Hynes & Lerach; Kirby McInerney & Squire; Barrack Rodos & Bacine (id. at 1, 15).
Around this same time, a second proposed "group," represented by different counsel and numbering approximately 3,400 members, sought appointment as lead plaintiff (Pet. Ex. 7). Its motion is not at issue in the petitions.
By order dated October 13, 1999 (Pet. Ex. 10), the court expressed concern about the proposed "groups." The court asked each "group" to "narrow its candidates" and requested information from them and Vatuone, via a questionnaire, that would enable the court "to evaluate the qualifications of single investors, either institutional investors or individuals, to serve as lead plaintiff." The court also requested their attendance at a November 4, 1999 hearing on the lead plaintiff motions.
Having alternatively offered eleven, 24, 43, and perhaps all 1725 of its members as lead plaintiff, the movant group (or its counsel) now put forward five members, including petitioners and Philadelphia, as lead plaintiff. These candidates submitted questionnaire responses, as did Vatuone (see Pet. Exs. 11-14).
At the November 4 hearing, the court and counsel questioned Vatuone and the 1725-member movant group's five candidates. Eachrepresented that he, she, or it would be able to perform as the lead plaintiff (see Pet. Ex. 15). Nowhere in petitioners' questionnaire responses or hearing testimony, however, did they state that they had been aware that they had been put forward as part of a lead plaintiff "group" of five, eleven, 24, 43, or 1725 persons, who these other persons were, and who and how many counsel were proposed as lead counsel in their name, much less what being a lead plaintiff means.
On November 22, 1999, the court issued a 28-page decision (Pet. Ex. 2) in which it discussed the lead plaintiff motions and appointed Philadelphia as lead plaintiff. The court held (id. at 15) that the 1725-member movant group, in any of its alternative configurations, did not "even come close" to qualifying as lead plaintiff. The court noted (id. at 7, 24) that investors were drawn into the huge "group" through the use of published notices that the court found to be "imperfect" because they constituted "puff pieces steering investors toward registering with counsel and steering them away from independently seeking the role of lead plaintiff." Investors responding to the notices were sent certification forms that "looked too much like claim forms and the recipients could easily have thought that they needed to sign up to participate at all" (id. at 7, 24).
The court further described (id. at 7-8, 11) the process by which the "groups" in the case had been formed:
When the motions to appoint lead counsel are made, as here, [certification] forms are then bound into numerous thick booklets as alleged documentary support for counsel'smotion on behalf of a group of movants, as has been done in this case. Counsel argue that the group as a whole has a large stake in the outcome -- therefore, the group should be the presumptive lead plaintiff.
The only thing the investors have in common, however, is the lawyer. They have no link to each other. They are not organized with any group decisionmaking apparatus. They attended no organized meetings. They have no cohesive identity. They have no name other than one arbitrarily selected by the lawyers. They do not, in all probability, even know they belong to a group or know its name or know how their form is being used. * * * [T]housands of forms are submitted in heavy boxes to the Court * * * . The [1725-person movant group's] volumes are accused of including numerous discrepancies, ranging from unsigned forms, to forms refusing to be a lead plaintiff, to trades that could not have occurred as represented (due to Sunday dates, etc.). These defects are only those that appear on the face of the forms without the benefit of discovery.
* * *
The subgroups [i.e., the alternative forms of the movant group] were simply hand-picked by counsel and dressed up with names. Such unorganized groups of unrelated investors with nothing in common other than the lawyer and with no clear-cut mechanism for making decisions could not "fairly and adequately" carry out the responsibility to protect the interests of the class.
The court commented (id. at 22) that it was "impressed favorably with a number of individual investors," including Vatuone and petitioner Moore, but did not go so far as to say that any of them was an adequate class representative because Philadelphia had the largest financial interest.
The court required Philadelphia, which had been a member of the 1725-member movant group, to provide additional informationand take further actions to demonstrate its fitness to serve as lead plaintiff (see id. at 21, 26-28 (describing this information and these actions; noting that Philadelphia had "lumped itself in the [1725-member] confederation")). Thereafter, Philadelphia withdrew from consideration as lead plaintiff (see Pet. Ex. 17).
By order dated December 3, 1999 (id.), the court solicited further lead plaintiff motions. Vatuone and petitioners renewed their motions, submitting declarations (Pet. Exs. 18-21) again representing that they were fit to serve as lead plaintiff. Petitioners, represented by one of the 1725-member group's counsel, Milberg Weiss, which described itself as "proposed co-lead counsel," sought appointment as a "group" or of any one of them (see id.; Pet. at 4, 18). Petitioners gave no information about how they would function as a "group," whether they had had any contact with each other, or even whether they knew with whom they had been put forward as a "group" (see Pet. Exs. 18-20).
By order dated December 15, 1999 (Pet. Ex. 5), the court appointed Vatuone lead plaintiff, concluding that he "is the most capable of adequately representing the interests of class members." Among the factors the court considered was his ability "to attend hearings and depositions" in the case. It directed Vatuone to select counsel through a competitive bidding process involving various criteria and to advise the court of the process and the choice. After Vatuone did so, the court approved his choice of counsel, Lieff Cabraser Heimann & Bernstein, on January 24, 2000.
UNDER THE REFORM ACT, A DISTRICT COURT SHOULD TAKE STEPS TO ASSURE THAT THE LEAD PLAINTIFF IS ABLE TO ACTIVELY OVERSEE THE CONDUCT OF THE LITIGATION AND MONITOR THE EFFECTIVENESS OF COUNSEL.
A. The Role of the Lead Plaintiff Is To Select Lead Counsel With the Approval of the Court and To Actively Oversee the Litigation and Monitor that Counsel.
The Reform Act prescribed a new mechanism by which courts in securities class actions are to select the lead plaintiff. The Act sets out a procedure and criteria for appointment early in the litigation of "the most adequate plaintiff" as "lead plaintiff." The most adequate plaintiff is the "person or group of persons" that "the court determines to be most capable of adequately representing the interests of class members." 15 U.S.C. 78u-4(a)(3)(B). And, most importantly, the Act established a presumption that this plaintiff is the named plaintiff or movant who (so long as it otherwise satisfies Rule 23 requirements for adequacy of representation and typicality of claims) "has the largest financial interest in the relief sought by the class." 15 U.S.C. 78u-4(a)(3)(B)(iii)(I).
In addition, the Act specifically rejected the prior practice by which the first plaintiff to file suit or counsel themselves could select class counsel. Under the Act, "[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). Other provisions of the Act revealconcerns about conduct of plaintiff's counsel, settlements, and attorney fee awards in securities class actions.3
The role of the lead plaintiff that emerges from the statutory language is also clear from the Act's legislative history. The lead plaintiff and lead counsel provisions arose from Congress' concern, expressed in the House, Senate, and Conference Committee Reports on the bill, that some class action securities litigation had become a "lawyer-driven" enterprise, in which law firms sought to bring cases and then sought out plaintiffs in whose name they could sue.4
Congress sought to "protect investors who join class actions against lawyer-driven lawsuits by giving control of the litigation to lead plaintiffs with substantial holdings of the securities of the issuer." Conf. Rep. 32. It wanted to increase the likelihood that such persons, "whose interests are more strongly aligned with the class of shareholders, will participate in the litigation and exercise control over the selection andactions of plaintiff's counsel." Id.; accord S. Rep. 4 (Congress "intends * * * to empower investors so that they -- not their lawyers -- exercise primary control over private securities litigation"), 6 ("to transfer primary control of private securities litigation from lawyers to investors"), 10 ("The lead plaintiff should actively represent the class[;] * * * the lead plaintiff -- not lawyers -- should drive the litigation."). This concern was expressed repeatedly during the floor debate.5
Congress viewed this problem as stemming from the fact that the lead counsel in the case commonly had a greater financial stake in the litigation than the plaintiffs. S. Rep. 6-7; H. Rep. 17-18. In adopting a presumption that the lead plaintiff would be the class member with the largest financial interest in the litigation, Congress "intended to increase the likelihood that parties with significant holdings in issuers, whose interests are more strongly aligned with the class of shareholders, will participate in the litigation and exercise control over the selection and actions of plaintiff's counsel." Conf. Rep. 32. In Congress' judgment, "[i]nstitutional investors and other 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." Id. at 34.
In particular, Congress wanted to "encourage institutional investors to take a more active role in securities class action lawsuits." Id. Congress "believe[d] that increasing the role of institutional investors in class actions will ultimately benefit shareholders and assist courts by improving the quality of representation in securities class actions." Id.
This objective also is reflected in Congress' decision to give the initial choice of lead counsel to the lead plaintiff. See id. at 35. As a result, Congress "expect[ed] that the plaintiff will choose counsel rather than, as is true today, counsel choosing the plaintiff." Id..6
The meaning of the Reform Act's lead plaintiff provisions has been recognized by numerous courts. In Sherleigh Assocs. LLC v. Windmere-Durable Holdings, Inc., 184 F.R.D. 688, 691 (S.D. Fla. 1999), the court stated that "[t]he underlying rationale [of the lead plaintiff provisions] is the person or group with the largest financial stake can best prosecute the claims" and "is presumed best able to negotiate with and oversee counsel." As the court explained in In re Cendant Corp. Litig., 182 F.R.D. 144, 148-49 (D.N.J. 1998), "plaintiffs with the assets necessary to have made large investments will also be able to negotiate the most advantageous counsel rates to the class" and have "the most to gain from any marginal increase in dollars recovered per share." Congress "sought to eliminate figurehead plaintiffs who exercise no meaningful supervision of litigation." Ravens v. Iftikar, 174 F.R.D. 651, 661 (N.D. Cal. 1997).7
B. The Lead Plaintiff Should Be an Institution, Individual, or "Group" That Can Perform The Role of the Lead Plaintiff, and District Courts Should Make Appropriate Inquiries To Ensure That This Is the Case.
As noted, Congress anticipated that the lead plaintiff would often be an institutional investor. See, e.g., Gluck v. Cellstar Corp., 976 F. Supp. 542, 548 (N.D. Tex. 1997); Greebel v. FTP Software, Inc., 939 F. Supp. 57, 63-64 (D. Mass. 1996) (same).
As explained in a law review article cited in the Reform Act's legislative history as "provid[ing] the basis for the `most adequate plaintiff' provision," S. Rep. 11 n.32, "[i]nstitutions' large stakes give them an incentive to monitor, and institutions have or readily could develop the expertise necessary to assess whether plaintiffs' attorneys are acting as faithful champions for the plaintiff class." Elliott J. Weiss & John S. Beckerman, Let the Money Do the Monitoring: How Institutional Investors Can Reduce Agency Costs in Securities Class Actions, 104 Yale L.J. 2053, 2095 (1995) ("Weiss & Beckerman"). The authors further argue that institutions can obtain more favorable settlements, and should be "in a position to negotiate fee arrangements with plaintiffs' lawyers before class actions are initiated[,] * * * [which] may well * * * differ substantially from the fee structures that courts currently employ." Id. at 2107, 2121.
In In re California Micro Devices Sec. Litig., 168 F.R.D. 257, 275 (N.D. Cal. 1996), a non-Reform Act case, the court noted that institutional investors "will be willing and able to monitor attorney conduct in securities class actions much more rigorously than either figurehead plaintiffs or courts can do." Id.; accord 965 F. Supp. 1327, 1330-32 (N.D. Cal. 1997) (same case). Courts appointing institutions as lead plaintiff under the Reform Act have emphasized this same function. See Switzenbaum v. Orbital Sciences Corp., 187 F.R.D. 246, 251-52 (E.D. Va. 1999); Gluck, 976 F. Supp. at 546, 549.
But nothing in the Act gives an express preference to institutions. There may, moreover, be cases where no institution seeks to be lead plaintiff. The lead plaintiff, accordingly, may be an individual or a group.
While it may be appropriate for the court to appoint a "group of persons" as lead plaintiff,8 the court should exercise great caution in doing so. It is not sufficient for counsel merely to aggregate large numbers of unaffiliated persons into a "group" and, because this assemblage collectively has the largest claimed losses, have it appointed as lead plaintiff. A "group of persons" within the meaning of the Act should, like an institution or single large investor, be able to actively overseethe conduct of the litigation and monitor the effectiveness of counsel. In short, the Act's allowance for a "group of persons" as lead plaintiff must be interpreted by reference to the Act as a whole and to the Act's purposes. See SG Cowen Sec. Corp. v. U.S District Court, 189 F.3d 909, 911-13 (9th Cir. 1999).9
It is particularly unlikely that a proposed group will have this active oversight and monitoring capability where it consists of a large number of previously unaffiliated persons, who have little or no contact with one another, who by and large claim relatively modest individual losses, and who have no demonstrated incentive or ability to work together to actively oversee the litigation. The problem is made worse if the proposed group members have been enlisted to become lead plaintiff by counsel, without understanding the role of lead plaintiff, without themselves having taken the initiative to seek the role or form a proposed group, without any knowledge of the other members, and without any direct relationship with, perhaps even any knowledge of, the law firms that ultimately present themselves to the court as proposed lead counsel. See Nov. 22 Op. at 6-8, 11, 24.10
The Commission believes that ordinarily, in order to ensure adequate monitoring, coordination, and accountability, a group should have no more than three to five members, and in general the fewer the better.11 But even if the proposed group is within this range its members should be evaluated for their incentive and ability to work together to actively oversee the litigation. The court should consider the marginal benefit ofincluding each member in the group as weighed against the further division of decisionmaking authority and the other problems attendant to enlargement of the group, and should not hesitate to pare groups down to the minimum needed size.12
To enable the court to assess whether the proposed group is capable of performing the lead plaintiff function, it should provide appropriate information about its members, structure, and intended functioning. Such information should include descriptions of its members, including any pre-existing relationships among them; an explanation of how it was formed and how its members would function collectively; and a description of the mechanism that its members and the proposed lead counsel have established to communicate with one another about the litigation. If the proposed group fails to explain and justify its composition and structure to the court's satisfaction, its motion should be denied or modified as the court sees fit.
In case after case in which the so-called "aggregation" issue has been litigated or in which courts themselves have addressed it, including this case and many in this Circuit, the courts have refused to appoint large, random assemblages of unrelated persons as lead plaintiff "groups" under the Reform Act. See, e.g., Nov. 22 Op. at 6-15; Sakhrani v. Brightpoint,Inc., 78 F. Supp. 2d 845 (S.D. Ind. 1999); In re McKesson HBOC, Inc. Sec. Litig., 79 F. Supp. 2d 1146 (N.D. Cal. 1999); Yousefi v. Lockheed Martin Corp., 70 F. Supp. 2d 1061, 1067-1071 (C.D. Cal. 1999); In re Telxon Corp. Sec. Litig., 67 F. Supp. 2d 803, 809-16 (N.D. Ohio 1999); Wenderhold v. Cylink Corp., 188 F.R.D. 577, 583-87 (N.D. Cal. 1999).13
In one Reform Act case, a proposed "group" was so confused and disorganized that the court found that it did not even meet minimum standards of adequacy of representation under Rule 23. See Switzenbaum, 187 F.R.D. at 248-51. According to the court, the "group" showed "disorder among its leadership ranks," an "inability to manage itself," was "unable to agree on who its members are," "invit[ed] the Court to select a reconstituted group of managers instead," "alternatively describ[ed] itself to include approximately 200" persons, "more people than could possibly manage the case," and "has never been forthcoming about any of these conflicts at all."
Despite that proposed group's insistence that the lead plaintiff determination was a "`simple mathematical' calculation" based on financial interest,14 the court rejected the entire "group" in favor of a competing movant with less total losses. The court found that that movant's "five members have established mechanisms for making sound collective decisions together" and "can monitor its actions and those of its proposed Lead Counsel."
Moreover, contrary to petitioners' assertion (Pet. at 21) that a proposed lead plaintiff's ability to attend court proceedings is not "relevant as a factor," courts routinelydiscuss participation in the case in deciding adequacy of representation under Rule 23. See, e.g., Parker v. Anderson, 667 F.2d 1204, 1212 (5th Cir. 1982) ("Counsel consulted regularly and frequently with the class representatives throughout the case."); In re Southeast Hotel Properties Limited Partner Investor Litig., 151 F.R.D. 597, 607 (W.D.N.C. 1993) (class representative "was very active in conferring with other class members"); Epifano v Boardroom Business Products, Inc., 130 F.R.D. 295, 299 (S.D.N.Y. 1990) ("active involvement and time spent"); Efros v. Nationwide Corp., 98 F.R.D. 703, 708 (S.D. Ohio 1983) (attendance at hearings). Courts further consider the way in which a party has conducted itself to date in the litigation in determining adequacy. See, e.g., Amchem Products, Inc. v. Windsor, 117 S. Ct. 2231, 2251 (1997) (asking whether class representative "operated under a proper understanding of its representational responsibilities"); East Texas Motor Freight System, Inc. v. Rodriguez, 431 U.S. 395, 405 (1977); Wrighten v. Metropolitan Hospitals, Inc., 726 F.2d 1346, 1351-52 (9th Cir. 1984); Ballan v. Upjohn Co., 159 F.R.D. 473, 488-90 (E.D. Mich. 1994); Williams v. Balcor Pension Invs., 150 F.R.D. 109, 118-20 (N.D. Ill. 1993).
These cases belie the contention that a court cannot consider anything more about lead plaintiff candidates than the minimal information petitioners seem to consider "relevant" under their so-called "objective `bright line' test." The mere fact that one section of the Reform Act, 15 U.S.C. 78u-4(a)(2), requires a plaintiff to provide certain minimum information in acertification attached to a complaint does not preclude the court from requiring additional information where necessary to make a proper lead plaintiff determination. Nor does the statement, made by some plaintiff's counsel in some cases, that the Act contemplates a "tight time frame" for lead plaintiff motions preclude careful inquiry into how a proposed group is constituted. There is no reason why a careful analysis cannot be done within the time frames indicated by the Act.15
And plaintiff's counsel who have argued that an approach of minimal information and nominal "groups" is quicker and simpler forget that the pre-Reform Act "race to the courthouse" to file complaints and selection of counsel on a "first-come, first serve" basis could also be described as "simple" or "swift and inexpensive." Congress disposed of those practices with the Act because it viewed them as harmful in the long run of litigation. See Conf. Rep. 33. Such an approach ignores the long-term benefits, both in terms of effectively run litigation and optimalrecovery, that could result from a properly constituted and functioning lead plaintiff group or individual lead plaintiff.
Furthermore, consistent with the lead plaintiff's active oversight role, the courts should not appoint competing movants as "co-lead plaintiffs." The Commission believes that to do so would be contrary to the language and purposes of the Reform Act.16 Such appointments would dissipate a lead plaintiff's ability to negotiate effective legal retention agreements and to oversee the conduct of the litigation and monitor the effectiveness of counsel for the protection of the class.17
Finally, district courts should actively exercise their traditional discretion to review proposals for multiple lead counsel. See, e.g., In re Baan Co. Sec. Litig., 186 F.R.D. 214 (D.D.C. 1999) (appending SEC amicus memorandum). Although the Reform Act gives the lead plaintiff a large role in the choice oflead counsel, and contemplates that a court would impose additional or different counsel on the lead plaintiff only in very unusual circumstances, the selection of counsel remains "subject to the approval of the court." 15 U.S.C. 78u-4(a)(3)(B)(v). Greater scrutiny is warranted where it appears that the lead plaintiff has not played an active, effective role in choosing counsel.
* * *
In this case, the district court was entitled to consider information about whether petitioners qualify under the Reform Act as a lead plaintiff "group" and as adequate class representatives. If they do not, then they should not be appointed lead plaintiff, together or separately, regardless of their financial interest in the litigation.
In fact, information relevant to "group" and adequacy determinations was before the district court and extensively discussed in its November 22 decision. See pp. 5-9, supra. And the court's December 15 order stating that Vatuone "is the most capable of adequately representing the interests of class members" can be interpreted as reflecting an assessment that petitioners would not be adequate class representatives.
Thus, petitioners err in arguing (Pet. at 3, 21) that the court "had no discretion" to inquire into "the nature and qualities" of lead plaintiff candidates or that such information is "arbitrary" or "extraneous" or not "relevant as a factor."
For the foregoing reasons, the Commission urges the Court to reflect in its resolution of the petitions for writ of mandamus the principles discussed in this brief.
DAVID M. BECKER
JACOB H. STILLMAN
LUIS DE LA TORRE
Securities and Exchange Commission
450 5th Street, N.W.
Washington, D.C. 20549-0606
(202) 942-0813 (de la Torre)
|1|| The Commission does not address KBC Equity Fund's petition, which addresses only the merits of the district court's Rule 23 ruling against it and does not appear to raise larger issues about the interpretation of the Reform Act.
|2|| Indeed, the court's December 15 order, particularly when read in conjunction with its November 22, 1999 decision rejecting the 1700-person "group," can be interpreted as reflecting an assessment that petitioners would not be adequate representatives of the proposed class. The order states that Vatuone, rather than any or all of the petitioners, "is the most capable of adequately representing the interests of class members."
|3|| See, e.g., 15 U.S.C. 78u-4(a)(2) ("Certification Filed With Complaint"), (a)(4) ("Recovery by Plaintiffs"), (a)(5) ("Restrictions on Settlements Under Seal"), (a)(6) ("Restrictions on Payment of Attorneys' Fees and Expenses"), (a)(7) ("Disclosure of Settlement Terms to Class Members"), (a)(9) ("Attorney Conflict of Interest"), and (c) ("Sanctions for Abusive Litigation"); 78o(c)(8) ("Prohibition of Referral Fees").
|4|| Congress was especially concerned that in some such cases lawyers engage in abusive practices and "often receive a disproportionate share of settlement awards." Conf. Rep. 36; accord id. at 31-33; Report on the Private Securities Litigation Reform Act of 1995, S. Rep. No. 104-98, 6-12 (1995) ("S. Rep."); Report on the Common Sense Legal Reform Act of 1995, H.R. Rep. No. 104-50, 14-20 (1995) ("H. Rep.").
|5|| See, e.g., 141 Cong. Rec. S8895 (Sen. D'Amato), S8897 (Sen. Domenici) ("So what we have and what is wrong with this system is very, very fundamental. Lawyers, not clients, control these cases.") (June 22, 1995); 141 Cong. Rec. S9055 (Sen. Frist) ("the lawyer-driven nature of these lawsuits tends to shortchange investors who have truly been defrauded"), S9065 (Sen. Grams), S9075-76, 77 (Sen. Hatch), S9077 (Sen. Murray) ("[investors] have a right to have more of a say in steering the course of litigation") (June 26, 1995); 141 Cong. Rec. S9172 (Sen. Hatfield), S9173 (Sen. Mikulski) (June 27, 1995); 141 Cong. Rec. S9212 (Sen. Domenici), S9321 (Sen. Dodd) (June 28, 1995); 141 Cong. Rec. S17934 (Sen. D'Amato) ("[Bill] will empower real investors, especially pension funds and other institutional investors, to take control of the lawsuit."), S17956 (Sen. Dodd), S17967, S17969 (Sen. Domenici) ("Unlike the current lawyer-driven system, under this new law the investors with the greatest stake in the outcome of the litigation will control the case."), S17980 (Sen. Murray) (under bill, "investors will have more of a say in the outcome of their suit"), S17982 (Sen. Frist), S17983 (Sen. Dole), S17984 (Sen. Moseley-Braun) ("Many investors also support this bill because it gives them, rather than the lawyers who are supposed to be working for them, control of any class action suits filed. It is the client, rather than the attorney, that is supposed to control a lawsuit, and part of the reason this bill is so necessary is that this simple principle has somehow gotten lost in recent years.") (Dec. 5, 1995); 141 Cong. Rec. H14038 (Rep. Cox) ("What we are seeking to do here is to protect investors so that they are in charge of these kind of lawsuits."), H14039 (Rep. Bliley) (bill "puts control of class action lawsuits back in the hands of the real shareholders, where it belongs"), H14048 (Rep. Harman) (bill "ends abusive practices and restoresinvestor control over lawsuits"), H14050 (Rep. Deutsch) (Dec. 6, 1995); 141 Cong. Rec. S19054 (Sen. Hatch), S19084 (Sen. Reid) ("Defrauded investors are not adequately compensated because attorneys, not investors, control these class actions.") (Dec. 21, 1995).
|6|| Congress "d[id] not intend to disturb the court's discretion under existing law to approve or disapprove the lead plaintiff's choice of counsel when necessary to protect the interests of the plaintiff class." Id.; S. Rep. 11.
|7|| Accord, e.g., Gluck v. Cellstar Corp., 976 F. Supp. 542, 549, 550 (N.D. Tex. 1997); In re Baan Company Sec. Litig., 186 F.R.D. 214, 218 (D.D.C. 1999); Ehlert v. Singer, 185 F.R.D. 674, 677 (M.D. Fla. 1999); In re Donnkenny Inc. Sec. Litig., 171 F.R.D. 156, 157 (S.D.N.Y. 1997); Greebel v. FTP Software, Inc., 939 F. Supp. 57, 61 (D. Mass. 1996); Yousefi v. Lockheed Martin Corp., 70 F. Supp. 2d 1061, 1067-1069 (C.D. Cal. 1999); In re Milestone Scientific Sec. Litig., 187 F.R.D. 165, 174-75 (D.N.J. 1999).
|8|| The Act refers to a "group of persons," as an alternative to a "person," in the provision that establishes a presumption that the "most adequate plaintiff" to lead a securities class action is the one with the largest claimed financial loss. 15 U.S.C. 78u-4(a)(3)(B)(iii)(I). The law review article cited in the legislative history as "provid[ing] the basis for the `most adequate plaintiff' provision," S. Rep. at 11 n.32, suggests that Congress used the "group of persons" language because "if several institutions were interested in becoming involved, they could either compete to become lead plaintiff or agree to work together." Weiss & Beckerman, 104 Yale L.J. at 2108. The article also suggests that Congress used this language to encompass associated or affiliated institutions (e.g., different funds from the same mutual fund group), which had filed separate claims in pre-Act class actions. See id. at 2090 n.200.
|9|| See also Robinson v. Shell Oil Co., 519 U.S. 337, 341 (1997); United States v. Taylor, 487 U.S. 326, 333 (1988); Metropolitan Edison Co. v. People Against Nuclear Energy, 460 U.S. 766, 774 (1983); Greebel, 939 F. Supp. at 63-64.
|10|| In its 1997 report on the Act, the Commission's Office of General Counsel stated that some lawyers, "[t]aking advantage of [the Act's] provision" allowing appointment of a "group of persons" as lead plaintiff, have attempted "to recruit investors as additional clients." SEC Office of the General Counsel, Report to the President and the Congress on the First Year of Practice Under the Private SecuritiesLitigation Reform Act of 1995 65 (Apr. 1997). Specifically, some lawyers have "phrased [notices to the class under the Act] in a way more likely to attract clients, rather than competition from investors (and other law firms) independently vying to be named lead plaintiff." Id. at 66. See Sherleigh, 184 F.R.D. at 694 n.4.
The Commission understands from other Reform Act cases in which it has appeared, or been asked to appear, as amicus curiae, that some law firms contacted by investors in response to the notices forward the investors' names on to other law firms, which compile lists of names therefrom, from responses to their own notices, and from other sources. This list is then presented to the court as a lead plaintiff "group," typically with the alternative of a "subgroup" or "steering committee" of fewer but often still numerous names, enough to include clients of multiple law firms. The firms representing the largest or largest number of investors on the list or representing investors who posed a threat of competition for lead plaintiff, present themselves to the court as lead counsel. See, e.g., Baan, 186 F.R.D. at 215, 217; Milestone, 187 F.R.D. at 180; see also Sherleigh, 184 F.R.D. at 692-93 & n.1, 699-701. If competition is encountered, the number of subgroup members and proposed lead counsel may be enlarged to absorb competitors or outstrip their losses. See, e.g., Switzenbaum, 187 F.R.D. at 249-51. The investors' role in this process is unclear.
|11|| There may, of course, be unusual circumstances that warrant departure from these limits. They might include pre-existing relationships among the members or other factors indicating that they have a special capacity to provide able and unified decisionmaking independent of counsel.
|12|| Only the financial interest of the "person or group of persons" that the court "shall appoint as lead plaintiff" is considered in determining the presumptive lead plaintiff. See 15 U.S.C. 78u-4(a)(3)(B)(i) & (iii). Any other approach would be "playing a shell game with the statute." Baan, 186 F.R.D. at 217; accord Switzenbaum, 187 F.R.D. at 250 & n.6.
|13|| See also Takeda v. Turbodyne Technologies, Inc., 67 F. Supp. 2d 1129, 1135-36 (C.D. Cal. 1999); In re Nice Systems Sec. Litig., 188 F.R.D. 206, 214-15, 220-21 (D.N.J. 1999); In re Baan Company Sec. Litig., 186 F.R.D. 214, 216-17 (D.D.C. 1999) (collecting cases); Sherleigh, 184 F.R.D. at 692 & n.1; In re Advanced Tissue Sciences Sec. Litig., 184 F.R.D. 346, 352-53 (S.D. Cal. 1998); In re Oxford Health Plans Sec. Litig, 182 F.R.D. 42, 46 (S.D.N.Y. 1998); Chill v. Green Tree Financial Corp., 181 F.R.D. 398, 409 (D. Minn. 1998); Ravens, 174 F.R.D. at 662-63; Donnkenny, 171 F.R.D. at 157; Mitchell v. Complete Mgmt., Inc., 1999 WL 728678, at *2-4 (S.D.N.Y. Sept. 17, 1999); see generally In re Milestone Scientific Sec. Litig., 183 F.R.D. 404, 417-18 (D.N.J. 1998); In re Party City Sec. Litig., 189 F.R.D. 91, 103-04, 112-14 (D.N.J. 1999).
|14|| Ironically, like the "group" in Switzenbaum, petitioners advocate an "objective and easily-applied standard" for deciding lead plaintiff motions but argue that their financial interest is entitled to some unspecified degree of extra weight in lead plaintiff consideration because it is a larger percentage of their net worth than Vatuone's losses are to his net worth. See Pet. at 6-7.
But the lead plaintiff presumption is framed in terms of "the largest financial interest in the relief sought by the class," not in terms of loss as a percentage of net worth. See Cendant, 182 F.R.D. at 147. As noted above (p. 14, supra), the Cendant court explained the presumption in terms of absolute dollar loss. 182 F.R.D. at 148-49. Moreover, petitioners' "net worth" argument is inconsistent with the fact that when Congress enacted the Reform Act, it was well aware that institutions, which it wanted to be lead plaintiff, have millions or billions of dollars of assets under management and that these amounts easily could dwarf losses in particular cases. See, e.g., Conf. Rep. 34 (noting that "[i]nstitutional investors are America's largest shareholders, with about $9.5 trillion in assets, accounting for 51% of the equity market" and that "pension funds account for $4.5 trillion  or nearly half of institutional assets"); Weiss & Beckerman, 104 Yale L.J. at 2089-91 (study of claims reports for 20 settled class actions shows that institutions sometimes had largest claim with losses of $450,000 to $626,374).
|15|| The Reform Act's "mixed inquisitorial/adversarial model for developing a record to make the Lead Plaintiff decision" is not inconsistent with resolving the motions "with dispatch." See Baan, 186 F.R.D. at 215. The Commission assumes that in evaluating proposed groups courts will make their best judgments based on reasonably available information. Plaintiff's counsel that have objected to providing this information offer no basis for contending that it would be "expensive" or "cost[ly]" or time-consuming to include additional information about proposed groups in their own lead plaintiff motions. Nor do they give any reason to assume that "discovery would frequently be needed" if a proposed group provided appropriate information about itself. Lead plaintiff submissions would establish a record and the arguments, and the court could conduct the inquiry.
|16|| The Act establishes a procedure and criteria for evaluating competing lead plaintiff motions. See 15 U.S.C. 78u-4(a)(3)(B)(iii) ("the person or group of persons" who "filed a complaint or made a motion" and has "the largest financial interest") (emphasis added). The statute speaks in the singular, of the court appointing a "lead plaintiff," not lead plaintiffs. See 15 U.S.C. 78u-4(a)(3) & (a)(3)(A)(i)(II). It provides a mechanism for identifying "the most adequate plaintiff," not the two or more most adequate plaintiffs. 15 U.S.C. 78u-4(a)(3)(B)(i)-(iii). And it refers to a "person or a group of persons," not a combination of multiple groups or multiple persons not part of one group.
|17|| See Advanced Tissue, 184 F.R.D. at 351-52; Cendant, 182 F.R.D. at 147-48; Gluck, 976 F. Supp. at 549-50; Reiger v. Altris Software, Inc., 1998 U.S. Dist. LEXIS 14705, at *16-18 (S.D. Cal. Sept. 14, 1998); Steiner v. Frankino, 1998 U.S. Dist. LEXIS 21804, at *15-16 (N.D. Ohio July 16, 1998); see also Milestone, 183 F.R.D. at 417-18.|