Title: An Economic Analysis of the Private Securities Litigation Reform Act: Auctions as an Efficient Alternative to Judicial Intervention
Abstract: INTRODUCTION In 2001, Third Circuit affirmed a district court's approval of a $3.2 billion settlement in a securities class action brought principally against Cendant Corporation. (1) The district court selected lead counsel in this mega case through an auction (2)--a new, innovative tool for class action litigation. (3) Although Court of Appeals for Third Circuit ultimately held that lower court erred in conducting an auction to determine who would represent class, (4) use of court ordered auctions in securities litigation is on rise. The law firms who represented class in this received a court-approved $262 million in fees and an additional $14.6 million in expenses. (5) With realistic possibility of billions of dollars at stake, it is imperative that individual investors, institutional investors, and law firms that anticipate representing potential classes know and understand implications of Private Securities Litigation Reform Act (PSLRA) (6) and, specifically, role court-ordered auctions could play in securities litigation. The PSLRA was designed to combat perceived failures in class action securities litigation. The legislative history behind PSLRA, passed in 1995, reveals that Congress intended to reduce abuse in private securities lawsuits, especially the manipulation by class action lawyers of clients whom they purportedly represent. (7) Through PSLRA, Congress tried to correct typical scenario of lawyers seeking clients instead of clients seeking lawyers. (8) To further this goal, PSLRA provides increased access to litigation system to more savvy and involved potential plaintiffs. (9) Lead plaintiffs under PSLRA are now chosen not based on timeliness of their filing, but upon stake that they have in litigation. (10) These plaintiffs, given an increased ability to control their own fate, began to participate with greater frequency in class action process. (11) Congress wished to provide whole class, instead of a select few, with best, most efficient litigation tools and measures. In every class action litigation, plaintiff class is comprised of lead plaintiff, who has single largest stake in litigation, and other nonparticipatory parties. To ensure that rights of nonactive parties are represented, Congress has provided some limitations on power vested in lead plaintiffs. The PSLRA provides that, upon appointment of lead plaintiff, she shall, subject to approval of court, select and retain counsel to represent class[,] (12) thereby explicitly involving court in process of deciding who will represent class. A qualified lead plaintiffs power to select counsel for class is thus far from absolute. Early interpretations of PSLRA gave a broad range of freedom to lead plaintiffs in selecting and retaining counsel. (13) The only perceived limitation was that counsel chosen withstand judicial approval. Still, fact that courts maintain authority to approve or reject a lead plaintiff's selection indicates that power of lead plaintiff to choose legal counsel for class is not absolute. Instead, lead counsel must be qualified to best represent class in eyes of court. The PSLRA still has wrinkles. The potential for corruption in choosing and retaining counsel still exists. Infirmities such as overbilling, inadequate representation of class, and improper focus on needs of lead plaintiff are problems still remaining, even after enactment and enforcement of PSLRA. These problems arise, not because of inherent nature of PSLRA, but because language of Act allows self-interested lead plaintiffs to ignore interests of rest of class. A competitive bidding system for determination of lead counsel is most effective way to close gaps left open by PSLRA. …
Publication Year: 2002
Publication Date: 2002-12-01
Language: en
Type: article
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