In Iron Workers Local No. 25 Pension Fund v. Credit-Based Asset Servicing and Securitization, LLC, No. 08 Civ. 10842(JSR), 2009 WL 1444400 (S.D.N.Y. May 26, 2009), the United States District Court was presented with competing lead plaintiff motions filed by two institutional investors, each represented by two different prominent securities fraud plaintiffs’ firms: Bernstein Litowitz Berger & Grossman LLP (“Bernstein Litowitz”) and Coughlin Stoia Geller Rudman & Robbins LLP (“Coughlin Stoia”). 2009 WL 1444400, at *1-*2. In ruling in favor of appointing Bernstein Litowitz as lead counsel, the Court denounced one of Coughlin Stoia’s recruitment practices for potential clients and reiterated that certain provisions of the Private Securities Litigation Reform Act (the “Reform Act”) were intended to “curtail the vice of ‘lawyer-driven’ litigation . . . .” Id. at *1.
The Public Employee’s Retirement System of Mississippi (“MissPERS”) and Iron Workers Local No. 25 Pension Fund (“Iron Workers Fund”) each applied to serve as the lead plaintiff representing a putative class of investors who purchased subprime-mortgage-backed certificates from Merrill Lynch & Co. (“Merrill Lynch”). Id. Both lead plaintiff candidates alleged that Merrill Lynch should have made disclosures reflecting the true riskiness of these investments. Id. MissPERS was represented by Bernstein Litowitz, while Iron Workers Fund was represented by Coughlin Stoia. Id.
The Court’s decision centered on a contractual agreement between Coughlin Stoia and the Iron Workers Fund. Under the agreement, Coughlin Stoia monitored the Fund’s investments at no monetary cost to the Fund, in return for the Fund’s commitment that, “if Coughlin Stoia recommended bringing a securities class action and the Fund approved doing so, Coughlin Stoia would be retained, on a contingent fee basis, to represent the Fund.” Id. at *2. The Court observed that this arrangement allowed Coughlin Stoia to get paid only if a lawsuit was initiated, thereby “creat[ing] a clear incentive for Coughlin Stoia to discover ‘fraud’ in the investments it monitors and to recommend to the Fund’s non-lawyer administrator . . . that the Fund, at no cost to itself, bring a class action lawsuit [and] foster[ing] the very tendencies toward lawyer-driven litigation that the PSLRA was designed to curtail.” Id.
The Court rejected Coughlin Stoia’s contention that such arrangements were used by other plaintiffs’ law firms as well and that other courts had not questioned these contractual agreements. Id. at *2-*3. The Court further rejected an expert declaration submitted by a law school professor asserting that both plaintiffs’ lawyers and claimants share a common interest in that they are incentivized to proceed with contingency fee cases only if they are based on a “reasonably viable” claim. Id. at *3. The Court deemed the expert’s inferences to be conclusory, insufficiently specific, and contrary to Congress’ perceptions about abusive securities litigation when it enacted the Reform Act. Id. Moreover, the Court denounced the lack of sophistication of the Iron Workers Fund’s administrator, concluding that his lack of awareness would further exacerbate the dangers of lawyer driven litigation if the Iron Workers Fund was selected as the lead plaintiff. Id. at *4.
The Court also noted candidly that it was presented with “a choice between two less-than-perfect plaintiffs.” Id. at *1. MissPERS was involved in fifteen securities fraud cases, more than the maximum set forth in the Reform Act. Id. at *5. Although MissPERS also had contractual monitoring agreements with several plaintiff’s firms, it was not committed to select a particular firm for a particular suit, which presumably facilitated some competition among the firms. Id. at *4. In addition, any lawsuit recommendations to MissPERS were decided by lawyers in the Mississippi Attorney General’s Office, who had expertise and awareness of the relevant claims and procedures. Id. The Court deemed that these circumstances “render[ed] it more likely that MissPERS [could] adequately oversee [the] litigation . . . .” Id. MissPERS’ involvement in fifteen cases was also discounted by the Court, given that MissPERS was an institutional investor and the fact that a state agency is often involved in multiple suits on a regular basis.
In addition, the Court felt compelled to follow the Reform Act’s mandate that the lead plaintiff must be the one that is “most capable of adequately representing the interest of class members.” Id. at *1 (quoting 15 U.S.C. § 77z-1(a)(3)(B)(i)). Although MissPERS had not purchased an interest in one of the classes of certificates at issue in the case, whereas, the Iron Workers Fund had, the Court dismissed this difference, noting that the allegations did not vary from certificate class to certificate class.
In summary, the Court’s assessment of the two lead plaintiff candidates relied on the language and intent of the Reform Act which had as one of its primary goals to curb lawsuits that “were initiated and controlled by the lawyers and appeared to be litigated more for their benefit than for the benefit of the shareholders they ostensibly represented.” Id. at *1. Such domination by plaintiffs’ lawyers of securities fraud claims had resulted in substantial abusive litigation, which led to the Reform Act’s passage several years ago.