"Go pick a client"-and other tales of woe resulting from the selection of class counsel by court-ordered competitive bidding

Fordham Journal of Corporate & Financial Law, 2003 by Burnside, Fred B

INTRODUCTION

The Board of Pensioners of the City of Philadelphia smelled a rat. After investing more than $3 million in Network Associates Inc., the company's stock suddenly plummeted from $67 to $13 per share.1 The Board carefully selected an experienced law firm it had used successfully to prosecute securities-fraud claims in the past, and directed its lawyers to investigate Network Associates.2 This investigation confirmed the Board's suspicions of impropriety; the rat it smelled was a scheme by the officers and directors to commit accounting fraud and insider trading.3 With a successful record of prosecuting securities class actions, and as one of the nation's largest institutional investors, the Board stepped forward to protect itself and similarly situated investors by filing a securities class-action suit against Network Associates.4 Because the Board was the investor before the court with the largest financial interest at stake, the court-following the express language of the Private Securities Litigation Reform Act of 1995 ("PSLRA")5-quickly appointed it to serve as the "lead plaintiff."6 Consequently, the Board was responsible for selecting and retaining counsel, and generally overseeing the prosecution of the suit.7

Then something strange happened. The court informed the Board that it could stay and prosecute the suit, but its lawyers might have to go.8 The court severed the existing attorney-client relationship and informed the Board that if it wished to prosecute this litigation it would have to "re-open its consideration of counsel; promptly publicize a request for written proposals from counsel; evaluate the proposals; and interview counsel as appropriate . . . ."9 Unhappy with the prospect of a shotgun-marriage with strangers, the Board balked, and wrote a letter to the judge explaining why it was withdrawing as lead plaintiff:

"The board is not equipped to engage in the process envisioned by the court, nor do we believe such a process is required to accomplish what the board understands [as] the court's purpose: to obtain the highest quality representation at the most effective price . . . . Moreover, because the selection process called for in the order includes the subjective evaluations of counsel unknown to us, while at the same time includes some objective criteria, we are concerned, as a public entity, that a disgruntled applicant could make unfounded allegations that they were treated unfairly, and thus require the board to expend additional resources defending itself against such allegations."

When another institutional investor stepped forward to assume the lead-plaintiff role and also refused to comply with the court-ordered bidding procedure, it too was removed as lead plaintiff.11 Having driven out the two largest institutional investors, the judge was forced to select an individual investor with losses of approximately $24,000 to serve as lead plaintiff in this potentially billion-dollar litigation.12 Thus, the court-ordered bidding process drove away the two investors with millions of dollars in losses and installed an investor with less than $24,000 at stake to oversee the lawsuit.

This result is not what Congress intended. It drafted the PSLRA to encourage the participation of large, sophisticated investors in securities class actions.13 But because a few courts persist in using bidding systems to select lead counsel-and because the Third Circuit recently created a task force to evaluate the propriety of such bidding-an analysis of competitive bidding under the PSLRA is relevant, timely, and instructive.14

This Article evaluates the use of a competitive-bidding, auction-style selection method for appointing lead counsel in securities class actions.15 Part I examines competitive bidding as a means to select lead counsel through a summary of the case that spawned the practice and is generally cited as authority for its use. Part II analyzes the PSLRA provisions governing the selection of lead plaintiff and lead counsel. Part III addresses the Reform Act's legislative history and considers why courts have rejected bidding in light of the PSLRA's objectives. Further, Part III discusses additional reasons why courts should continue to reject competitive bidding. Part IV questions the marginal results that have arisen in cases where competitive bidding has been used. This Article concludes that competitive bidding for the selection of lead counsel is neither beneficial to the class members nor warranted under the PSLRA.

I. COMPETITIVE BIDDING-JUDGE WALKER'S ORACLE DECISION

Before the PSLRA's enactment in 1995, some judges, attorneys, and scholars believed reform was needed in the federal securities laws.16 Five years earlier, espousing his belief that the current method of attorney-fee calculation and selection of counsel failed to provide sufficient monitoring of the lawyers representing the class, Judge Vaughn Walker "call[ed] for future courts to rely on new methods of determining attorney compensation in common fund securities litigation" by adopting a novel idea: competitive bidding for the selection of lead counsel.17 Judge Walker's aptly titled Oracle18 decision defied the practice of determining fees at the end of the litigation-and arguably Ninth Circuit precedent19-instead selecting lead counsel by ordering all interested firms to submit price bids for the position.20 In the five-year interim between Oracle and the PSLRA, no published decision followed Judge Walker's competitive-bidding system. But since the passage of the PSLRA in 1995, a few courts have experimented with this alternative-selection scheme.21