Aggregation, Auctions, and other Developments in the Selection of Lead Counsel Under the PSLRA

JILL E. FISCH [*] I INTRODUCTION The Private Securities Litigation Reform Act of 1995 (the "PSLRA") [1] reflects an innovative congressional effort to refine securities fraud class actions. In adopting the PSLRA, Congress recognized that although the class action is a valuable tool for increasing plaintiff access to the legal system, its structure presents opportunities for abuse. In particular, collective action problems and small claimant stakes limit plaintiff participation in litigation decisions. Decisions are made by entrepreneurial lawyers who effectively control the litigation. Plaintiffs' lawyers have a substantial interest in the litigation--frequently a larger interest than any individual class member. Lawyer control of class actions coupled with the potential divergence between the interests of the lawyers and those of the class creates a risk that litigation decisions will not reflect the best interests of the plaintiff class or society as a whole. Although the entrepreneurial lawyer is central to the functioning of the class action, structural problems raise concerns of litigation malfunction. Courts have been unsuccessful in addressing these problems despite their efforts to oversee litigation decisions and their broad control over the conduct of class actions and the award of attorneys' fees. Accordingly, Congress responded by adopting a mechanism in the PSLRA for the appointment of a statutory lead plaintiff. [2] The statute reflects the expectation that the lead plaintiff, presumptively the investor with the largest financial interest in the litigation, will oversee the conduct of the case and monitor the decisions of class counsel. [3] This enhanced client monitoring has the potential to reduce agency costs and improve litigation decisions. Litigation under the PSLRA has tested the efficacy of the lead plaintiff provision, introducing a number of promising developments. Institutional investors have demonstrated an increasing willingness to seek appointment as lead plaintiff and to play an active role in litigation. In some cases, the participation of institutional investors seems to be having the effects intended by Congress, including active negotiation of fee agreements and quality resolution of lawsuits. In the recent Cendant case, for example, three public pension funds, acting as a lead plaintiff group, oversaw litigation that culminated in the largest securities fraud settlement in history. [4] Substantial uncertainty remains, however, about the operation of the lead plaintiff provision and the appropriate method for selecting lead counsel. Plaintiffs' firms have developed a variety of techniques to secure lead counsel appointments. Some firms assemble large groups of investors to act as lead plaintiff; other firms are developing ongoing relationships with institutional investors who are likely to be repeat players in securities fraud litigation. Courts have varied in their analyses as to how the lead plaintiff should be selected. Decisional uncertainty, coupled with the high stakes involved in the selection of lead counsel, has led to significant collateral litigation. [5] This litigation may deter some investors from seeking lead plaintiff status. The issues raised in the battle over selection of lead plaintiff have also caused some courts to claim for themselves the task of selecting lead counsel. Several courts have gone so far as to auction off the lead counsel position. [6] This article focuses on two of the most problematic developments under the lead plaintiff provision: (1) the use of aggregation to unite large numbers of unrelated investors into a lead plaintiff group; and (2) the appointment of lead counsel through sealed bid auctions conducted by the courts. Both developments weaken the relationship between the statutory lead plaintiff and class counsel. As a result, they reduce the ability of the lead plaintiff to monitor the litigation, potentially frustrating the objectives of the PSLRA. …