A Case for Competitive Bidding for Lead Counsel in Securities Class Actions

Wednesday, January 1st, 2003 at 12:00 am by James L. Tuxbury
James L. Tuxbury, A Case for Competitive Bidding for Lead Counsel in Securities Class Actions, 2003 Colum. Bus. L. Rev. 285

If there’s one thing lawyers seem to hate, it’s competition. Or it would at least seem that way by the array of lawyers who have spoken out against any process of competitive bidding in the selection of lead counsel in securities class actions. This chorus has grown in strength in the face of a recent Third Circuit decision and Ninth Circuit decision. The Third Circuit held that competitive bidding for the position of lead counsel of a securities class action was generally not permitted under the Private Securities Litigation Reform Act of 1995 (‘PSLRA‘). On the heels of that decision, the Ninth Circuit recently decided that the district court erred in appointing class counsel based primarily on a showing of differences in potential attorney fees. The question is, after these decisions, what role, if any, does competitive bidding play in the selection of lead counsel in securities class actions?

This note will argue that competitive bidding should not be relegated to rare situations as the Third Circuit found appropriate under the PSLRA. Rather, an interpretation of the PSLRA that forbids competitive bidding is bad policy, and the PSLRA should be amended to allow the presiding judge to exercise his or her discretion to protect absent class members and insure a meaningful adequate representation test for the lead plaintiff in terms of negotiations with lead counsel. The decision to apply an exacting level of scrutiny to the relationship between the lead plaintiff and lead counsel should not be made in every case. Rather, the court must evaluate the general characteristics of the case, and make a determination as to the complexity of the particular issues. In the ‘ideal‘ cases, described in the next paragraphs, the court must apply a more exacting scrutiny of the adequacy of the lead plaintiff to competitively negotiate with lead counsel, or be willing to step in and perform their own competitive bidding process.

In addition, a modification of the PSLRA, to allow more competitive bidding, would not undercut the ultimate goals of the PSLRA. By careful implementation, a system of competitive bidding can insure the monitoring and reduction in agency costs originally sought by the PSLRA.

The key characteristics of ‘ideal‘ cases are well known to those involved in this debate and have been used by the judges that conducted competitive bidding. In these cases, the defendants have accepted or stipulated liability, there is a great deal of information from a criminal or government investigation (particularly the Securities Exchange Commission (‘SEC‘)), information has been widely dispersed through the public via the media or other institutions, the issues in the case are clearly defined, the defendant is not on the verge or likely to enter bankruptcy, and there is the likelihood of a very large recovery for the class. In addition, the action is frequently a consolidation of numerous suits brought by different counsel to help insure a sufficient number of participants in the competitive bidding process. However, it is not important that the cases exhibit all of these characteristics; rather these criteria should be factors for consideration by the court in assessing the necessity of performing a competitive bidding selection.

This note has three sections. The first section will address some of the major criticisms of competitive bidding. To answer these critiques, that section will begin with a description of competitive bidding. Then, by addressing the costs and benefits of competitive bidding, the section will show that competitive bidding has the potential to become a valuable tool for judges in securities class actions.

To support these arguments, the second section provides an empirical analysis of some of the claims made in the first section. From an examination of three class action samples, this note will show that the market for plaintiff’s counsel in securities class actions is very concentrated, the percentage recovery of attorneys’ fees is systematically lower in competitive bidding cases, and that if current lead counsel selection arrangements are maintained in ‘ideal‘ cases, the lead counsel will receive an excessive risk premium.

In the final section, this note will address the other major criticism of competitive bidding; it is statutorily forbidden under PSLRA, made especially clear by the Third Circuit’s recent In re Cendant Corp. Litigation decision. Since that decision, and the publishing of the Third Circuit Task Force Report on the Selection of Class Counsel, there has been a sense that the end of competitive bidding is near for securities class actions. While under the current statutory regime competitive bidding is severely limited in securities class action, this note will advocate a change to the PSLRA that will broaden the opportunities for competitive bidding. Such an amendment will not undercut the primary goals of the PSLRA’s counsel selection rule and will remain faithful to the congressional intent of the PSLRA in light of the reality of its adoption in the last seven years. In addition, recent proposed amendments to Federal Rules of Civil Procedure (‘FRCP ‘) Rule 23, concerning appointment for class counsel, provide a further basis to implement competitive bidding.

In the end, hopefully this note can convince the reader of the important role of competitive bidding. It is both consistent and appropriate under the purpose and goals of the PSLRA. Competitive bidding is a new phenomenon that has not been highly developed in the courts and to close the door on it now will exasperate many of the problems PSLRA sought to rectify.

Author Information

CLS Student