McCormac’s affidavit and it must answer fully the questions not

answered earlier.’

ENTER ORDER:

Lb. 0 Buhl

Elaine E. Bucklo
United States District Judge

Dated: March 27, 2003

7 I have not discussed the competing lead plaintiff
application by Market Street. At this stage, as I understand the
PSLRA, I am to determine whether the presumptive lead plaintiff
is adequate without a comparison to other potential plaintiffs.

I note, however, that there would also be issues that would need

to be addressed if Market Street’s application were the one under
consideration.

13



retired judge, C. Judson Hamlin, as a “special master” to oversee
this litigation on behalf of New Jersey. It argues that this
creates various conflicts of interest but I disagree. Nothing in
the materials and declarations presented to me lead me to
conclude that Mr. Hamlin will therefore become the “de facto
class representative” or that his role (really as an attorney
with responsibility for keeping New Jersey’s Attorney General
informed about this case) is improper.

Market Street also argues that the counsel selected by New
Jersey, Milberg Weiss Bershad Hynes & Lerach, has a conflict of
interest because it has represented Market Street in the past and
because it allegedly criticized New Jersey in seeking appointment
as lead counsel in another case. I have read the court document
submitted by Milberg Weiss in the case in which it seeks lead
plaintiff status for its client, and its criticism of New Jersey
as the lead plaintiff in that case concerns the fact that one of
the defendants is an auditor for New Jersey. I find no conflict
between its position there and representation of New Jersey in
this case. Neither does Milberg Weiss’ representation of New
Jersey in this case appear to violate any obligations to its
former client, Market Street. See Rules of the United States
District Court for the Northern District of Illinois, LR83.51.9.

The last argument raised by Market Street concerns the

“secret” contingent fee agreement between Milberg Weiss and New



(N.D. Ill. 1999).* See 1999 WL 46061 (N.D. Ill. 1999); 1998 WL
808986 (N.D. Ill. 1998).* Given Milberg Weiss’ size and general
standing, I have decided that without more this is not enough to
be disqualifying.

The second issue surrounding New Jersey’s choice of counsel
concerns fees. The retainer agreement between New Jersey and
Milberg Weiss provides for a percentage fee recovery depending
upon the amount of recovery and the stage of litigation. The
percentages vary from a low of 12 percent (before trial and on a
settlement greater than $200,000,000) to a high of 20 percent
(after trial has begun and for less than a $100,000,000
recovery). Counsel represented in its letter to the state that
“the aforesaid fee grid not only represents a significant
reduction from the fees typically awarded in a securities fraud
class action litigation of this type, but is fair and reasonable
under the circumstances of this case.” Despite my February order
requiring New Jersey to provide me with the procedures it
followed to negotiate a fee arrangement that promotes the best

interest of the class, it failed to produce any information that

3The case settled immediately following the jury verdict of
$54,000,000, before the submission to the jury of punitive
damages.

4Milberg Weiss’ choice of liaison counsel, Miller Faucher &
Cafferty, has also been subject to criticism, having been found
to be “almost certainly inadequate” as class counsel in Reynolds
v. Beneficial National Bank, 288 F.3d 277, 284 (7** Cir. 2002)

9



Review 689, 765 (2001) (quoting from SEC Amicus brief in In re
Cendant Corp. Litigation, 264 F.3d 201, 279 (3d Cir. 2001).

The response from New Jersey, submitted with the affidavit
of John E. McCormac, Treasurer of the State of New Jersey,
indicates that prior to the time the claims alleged in these
lawsuits arose, but apparently anticipating lawsuits under the
PSLRA, New Jersey issued a formal solicitation for counsel in
securities litigation. That solicitation, made on August 30,
2002, asked for information designed to enable it to select
competent counsel in potential litigation. New Jersey apparently
chose different counsel for different lawsuits. The information
before me does not indicate who the other counsel were or their
potential fee agreements.

Mr. McCormac’s affidavit raises a question that will
undoubtedly be addressed by defendants at some point.* In his
affidavit he seems to indicate that New Jersey decided to solicit
counsel in the summer of 2002 because it believed that a number
of corporations “including Sears” may have violated federal
securities laws and that it “therefore” put out its August 30

solicitation. For purposes of this motion, I am assuming that

2 I permitted the plaintiffs to file the materials
responding to my February 10, 2003 order in camera. The
materials submitted by New Jersey will be placed in the open
court file following this opinion. The submission by Market
Street will remain sealed at least for the time being since it is
not under present consideration.



Jersey. That agreement has been filed with the court and is
publicly available. The question of fees and counsel chosen by
potential lead plaintiff led me to require both parties seeking
lead plaintiff status to provide this court with supplementary
materials addressing issues that the Securities Exchange
Commission suggests should be addressed before designating a lead
plaintiff. These are: (1) What procedures did the plaintiff
follow to identify a reasonable number of counsel with the skill
and ability necessary to represent the class in the pending
matter? (2) What procedures did the plaintiff follow in inviting
competent counsel to compete for the right to represent the
class? (3) What procedures did the plaintiff follow to negotiate
a fee and expense reimbursement arrangement that promotes the
best interests of the class? (4) On what basis can the plaintiff
reasonably conclude that it has canvassed and actively negotiated
with a sufficient number of counsel and obtained the counsel that
is likely to obtain the highest net recovery to the class? (5)
Did the plaintiff make inquiries into the full set of
relationships between proposed lead counsel and the plaintiff and
other members of the class, and did the plaintiff reasonably
conclude either that there are no such relationships or that they
did not adversely affect the exercise of the plaintiff’s or
counsel’s fiduciary obligations to the class? “Third Circuit

Task Force Report on Selection of Class Counsel,” 74 Temple Law


determination of whether the plaintiff should be designated lead
plaintiff. The Ninth Circuit recently held that the issue was
separate, and that unless the lawyer chosen by the presumptive
lead plaintiff is plainly inadequate (a family member, just out
of law school, etc.), this should not be much of a consideration
in deciding whether to appoint the plaintiff with the highest
financial interest in the outcome as lead plaintiff. In re
Cavanaugh, 306 F.3d 726, 732-33 (9° Cir. 2002). In general, the
Third Circuit appears to agree. In re Cendant, 264 F.3d at 266
but see discussion at 275. Various district courts, including
Judge Shadur in this district, have disagreed. £.g., In re
Comdisco Securities Litigation, 141 F. Supp. 2d 951 (N.D. Ill.
2001); 150 F. Supp. 2d 943 (N.D. I11. 2001). The Seventh
Circuit has not yet addressed the question.

In this case there are two questions with respect to New
Jersey’s choice of counsel. The first concerns the firm itself.
While Milberg Weiss is one of the major class action plaintiffs’
firms in this country, it has been criticized in this district
for its conduct in seeking lead plaintiff status in In re
Comdisco, 141 F. Supp. 2d at 953-54, and it paid a $54,000,000
judgment in settlement in a case in another court in this
district following a jury’s finding that it engaged in abuse of
process in naming as a defendant Lexecon, Inc. in another case.

Lexecon, Inc. v. Milberg Weiss Bershad Hynes & Lerach, 92 C 7768



Minute Order Form (06/97)

United States District Court, Northern District of Iinois

Ni f Assigned Jud: i Sitting Judge if Oth
vor Magistrate Judge Elaine E. Bucklo chan Assigned Judge
CASE NUMBER | 02 C 7527 - 02 C 7619, 02 DATE 3/27/2003

7653, 02 C 7659, 02 C 7706, 02

C8074, 02.8311, 02.6 8707, | g
DC 880602 C 9054 & CLG FH

CASE Craig, et al. vs. Sears, et al.
TITLE

{In the following box (a) indicate the party filing the motion, ¢.g,, plaintiff, defendant, 3rd party plaintiff, and (b) state bricfly the nature
of the motion being presented.]

ay)

MOTION:

DOCKET ENTRY:

ql) Qo Filed motion of [ use listing in “Motion” box above.]

(2) o Brief in support of motion due

(3) Oo Answer brief to motion due___. Reply to answer briefdue____.

(4) oO Ruling/Hearing onset for at

(5) Oo Status hearing[held/continued to] [set for/re-set for]on___——sset for at

(6) Oo Pretrial conference[held/continued to} [set for/re-set for]on__——ssetfor_—at__—.

(op) im] Trialfset for/re-set for]on___—at_—

(8) QO [Bench/Jury trial] [Hearing] held/continued to__at

(9) a This case is dismissed [with/without] prejudice and without costs[by/agreement/pursuant to]
OOFRCP4(m) OLocal Rule 41.1 CFRCP41(a)(1)  FRCP41(a)(2).

(10) #1 — [Otherdocketentry] New Jersey has 10 days within which to answer the questions it did not answer

in response to the order of 2/10/03. It may also decide to consider its choice of counsel, or negotiate
further with present counsel. If it chooses to do so, a short additional period for it to submit its choice of
counsel to court will be granted. New Jersey must also explain within the same period of time the
discrepancy discussed in Mr. McCormac’s affidavit. Enter Memorandum Opinion and Order.

a [For further detail see order attached to the original minute order.}

No notices required, advised in open court.
16

No notices required. umber of notices

Notices mailed by judge’s staff,

Notified counsel by telephone. . ray 200

Docketing, to mail notices. ae 4
Mail AO 450 form. ynod L914!si0'S fi [O

docketing depupy initials

Copy to judge/magistrate judge.

ngth Wd LZ UH YU semots

date mailed notice

courtroonr

MPI deputy's ot q3-q3 us -

initials



percentage depends on the amount of recovery as well as the
effort required to obtain a judgment or settlement.

Whether the fee set forth in the retainer agreement
submitted to this court by New Jersey should be of concern beyond
determining whether New Jersey’s choice of counsel would indicate
that it should not be trusted to fairly and adequately represent
the class, see In re Cendant Corp. Litigation, 264 F.3d at 275,
discussing Judge Shadur’s hypothetical situation in In re Bank
One S’holders Class Actions, 96 F. Supp. 2d 780, 784 (N.D. Ill.
2000), depends on the level of review that will be given any
ultimate application for fees. The Ninth Circuit has held that
the agreement between counsel and lead plaintiff is at most a cap
on fees, and that the district court “has wide latitude to go
below the agreed amount in actually awarding fees.” In re
Cavanaugh, 306 F.3d at 733 n.13. On the other hand, the Third
Circuit has concluded that under the PSLRA a court “should accord
a presumption of reasonableness to any fee request submitted
pursuant to a retainer agreement that was entered into between a
properly-selected lead plaintiff and a properly-selected lead
counsel.” In re Cendant, 264 F.3d 201. Under this view, more
scrutiny up front is clearly required.

I cannot predict what interpretation the Seventh Circuit
will give the PSLRA in these circumstances. It seems important

that the inquiry not become so detailed at this stage of the case

11



would lead me to conclude that it engaged in “hard bargaining”
and that the fee agreement is the result of “serious negotiations
between the lead plaintiff and the prospective lead counsel.” [In
re Cendant, 264 F.3d at 276. Accordingly, I do not know whether
New Jersey attempted to or could have engaged Milberg Weiss or
other competent counsel at a more competitive rate.

Some available information would indicate that hard
bargaining would have produced an agreement that would have been
more favorable to the class. The class counsel approved in In re
Comdisco Securities Litigation agreed on an across-the-board 7.5
percent fee. 150 F. Supp. 2d 943.° The fee ultimately agreed
upon in In re Cendant was 1.7 percent (admittedly of a very high
recovery). In his Comdisco opinion, Judge Shadur noted that in
two previous cases in which he had used a bidding procedure as
part of the selection process, the fee award was only 6 percent
of the recovery. In In re Cendant Corp. Prides Litigation, 243
F.3d 722 (3d Cir. 2001), the court remanded a 5.7 percent fee
award that it found was too high. That opinion includes a table
showing other fee awards, indicating very few as high as the fees
stated in the fee agreement between New Jersey and Milberg Weiss.

On the other hand, the reasonableness of a fee in terms of

‘Phat firm, Wolf Haldenstein Adler Freeman & Herz LLC, also
represents Market Street Securities in this case.

10



New Jersey did not then include Sears in its list of potential
defendants because, according to the complaints before me, the
alleged deception continued until the middle of October. Under
that assumption, the wording of the affidavit is simply a
mistake. It may, of course, turn out not to have been mistaken,
and certainly there will be discovery on this question. If it
was not simply a sloppy or mistaken affidavit in that respect,
New Jersey may not be an appropriate class representative at all.
However, given the fact that its alleged losses are so much
higher than those of any other plaintiff, and that I have been
given no reason to believe that New Jersey would have been
contemplating an action against Sears in August, 2002 (thus
making the likelihood of a simple mistake in the affidavit more
likely), I will not disqualify it as lead plaintiff on this basis
at this stage. However, New Jersey will be required to submit,
within ten days, a supplemental affidavit that explains the
apparent contradiction in Mr. McCormac’s affidavit on this
subject.

The second issue raised by the materials submitted by New
Jersey concerns its proposed counsel, Milberg Weiss. The PSLRA
permits the lead plaintiff to “select and retain counsel to
represent the class” “subject to the approval of the court.” 15
U.S.C. sec. 78u-4(a) (3) (B) (v). The courts are divided on the

role of the presumptive lead plaintiff’s choice of counsel in the



Securities, the only other. plaintiff seeking lead plaintiff
status. Market Street Securities’ argues that New Jersey is
nevertheless an inadequate lead plaintiff because of alleged
unique defenses that will be asserted against New Jersey.

Market Street’s principal objection is that New Jersey officials
have previously criticized its own Department of Investment,
blaming it for losses suffered by the State in the falling stock
market of the last two years. The newspaper articles attached to
Market Street’s objection, upon which it bases this statement, do
not specifically refer to the transactions in Sears stock. At
any rate, the theory under which these complaints are brought is
that Sears issued various press releases and filed financial
statements that were materially misleading because they inflated
Sears’ earnings prospects while failing to disclose excessive
customer credit card defaults, thereby engaging in a fraud on the
market. In this respect, New Jersey’s claims are typical of
those of the class, and nothing stated in the referenced
newspaper articles seems likely to lead to a unique defense.

Market Street also argues that New Jersey has designated a

' Defendant Sears has also filed objections. The PSLRA,
however, specifically provides that members of the plaintiff
class may file objections to the designation of a class member as
lead counsel. 15 U.S.C. sec. 78u-4(a) (3) (b) (iii) (II). Apart
from the questionable motives of a defendant objecting to the
inadequacy of a particular plaintiff to lead a class that a
defendant presumably wishes defeated, the statutory language
would seem to preclude a defendant’s objections.

3



Under the Private Securities Litigation Reform Act of 1995
(“PSLRA”), I must appoint a lead plaintiff in these cases. 15
U.S.C. sec. 78u-4(a) (3). Procedurally, as required, plaintiff
Ann Craig (plaintiff in the lowest numbered case) within 20 days
of filing her action published notice to the purported class
informing potential class members of the action and of their
right to file a motion for appointment as lead plaintiff. 15
U.S.C. sec. 78u-4(a) (3) (A) (I). Within 60 days thereafter, the
Department of the Treasury of the State of New Jersey and its
Division of Investment and Market Street Securities, Inc., filed
motions seeking appointment as lead plaintiff. Under the PSLRA,
presumptively, the lead plaintiff shall be the party with the
largest financial interest in the relief sought by the class,
assuming that person otherwise satisfies the requirements of Rule
23, Fed. R. Civ. P. 15 U.S.C. sec. 78u-4(a) (3) (B) (iii) (I). The
presumption may be rebutted by a showing that this party will not
fairly and adequately protect the interests of the class or “is
subject to unique defenses that render such plaintiff incapable
of adequately representing the class.” 15 U.S.C. sec. 78u-4(a)
(3) (B) (424) (II).

In this case, the party with the largest financial interest
is New Jersey, which alleges that its losses in Sears common
stock during the class period were more than $17.6 million, far

more than the alleged losses of $221,970 claimed by Market Street



IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION

Nos. 02 ¢ 7527 DOCKETED

ANN S. CRAIG, on behalf of

) :
herself and all others similarly ) 02 C 7619
situated, et al. ) 02 C 7653 MAR 2 8 2003
) 02 C 7659
Plaintiffs, ) 02 C 7706
) 02 C 8074
v. ) 02 Cc 8311
) 02 C 8707
SEARS ROEBUCK & CO., ALAN LACY, ) 02 Cc 8806
PAUL J. LISKA, GLENN RICHTER, and ) 02 C 9054
THOMAS E. BERGMANN, ) 02 C 9111
) (consolidated)
)

Defendants.

MEMORANDUM OPINION AND ORDER

Various actions have been filed pursuant to the Securities
Exchange Act of 1934, 15 U.S.C. sec. 78j(b) and 78(t) (a) and Rule
10b-5, against Sears, Roebuck & Co. and several individuals,
alleging that Sears falsely represented the health of its
business during the class period, in particular by failing to
disclose that customer defaults on Sears credit cards had risen
dramatically and that the company’s reserves were inadequate to
account for this risk. Plaintiffs say that when accurate
disclosures were made, on October 17, 2002, the price of Sears
stock dropped substantially. The first of eleven related actions
was filed the following day. The various actions have been
consolidated in this court pursuant to 15 U.S.C. sec. 78u-4(a)

(3) (B) (ii).



that discovery and argument become a separate mini-litigation
preceding any discovery or litigation on the merits of the case.
fo avoid that, assuming the Seventh Circuit would agree with the
Third and Ninth Circuits that under the PSLRA the court cannot
utilize a bidding procedure in the selection of counsel for the
class, I think the Ninth Circuit procedure will more efficiently
protect the class.* However, that does not mean I should, or
can, simply accept proposed lead plaintiff’s proffer of a
retainer agreement without the information required to assess
whether New Jersey engaged in appropriate bargaining over its
terms or had other choices in counsel that were clearly more
reasonable.

New Jersey will be given 10 days to fully answer the
questions it did not answer in response to my February 10 order.
It may also decide to consider further its choice of counsel, or
to negotiate further with present counsel. If it chooses to
engage in additional negotiations with present or some other
counsel, I will allow a short additional period for it to submit
its choice of counsel to the court. However, New Jersey must

still explain within this period the discrepancy discussed in Mr.

‘This probably depends on what is meant by the presumption.
In both In re Cendant and In re Cendant Corp. Prides Litigation,
the fees actually awarded ended up less than the negotiated fee
as a result of post fee petition scrutiny.

12