Opinion ID: 6342044
Heading Depth: 3
Heading Rank: 1

Heading: Pay-to-Play in Securities Litigation

Text: As the Third Circuit has explained, securities litigation involves unique pay-to-play concerns. See In re AT&T Corp., 455 F.3d 160, 168 (3d Cir. 2006). In securities class actions, especially under the terms of the Private Securities Litigation Reform Act, massive publicly managed pension funds often serve as lead plaintiﬀs. Those circumstances present the risk of “so-called ‘pay-to-play’ arrangements, such as where a law ﬁrm makes campaign contributions to elected oﬃcials who control governmental pension funds and is selected as the fund’s lead counsel.” Id. Such arrangements can distort fair 10Our decision on this point does not affect our earlier statement in note 6, above, that the earlier fee agreement with the Arkansas fund should be disclosed to help the court approximate the results of an ex ante negotiation here. 26 No. 20-2055 fee arrangements for the beneﬁt of the class, for “the adversarial process is often ‘diluted.’” Id. One empirical study found that when pension funds whose managers have received campaign contributions serve as lead plaintiﬀs, they “appear to be less vigorous in negotiating attorney fees.” Stephen J. Choi, Drew T. Johnson-Skinner & A.C. Pritchard, The Price of Pay to Play in Securities Class Actions, 8 J. Empirical Legal Stud. 650, 651 (2011) (analyzing securities class actions ﬁled between 2002 and mid-2007). Accordingly, district courts handling these cases “should be particularly attuned to the risk of pay-to-play.” In re Cendant Corp. Litigation, 264 F.3d 201, 270 n.49 (3d Cir. 2001). At the same time, district courts must also “take care to prevent the use of discovery to harass presumptive lead plaintiﬀs.” Id. We see no reason that logic should not extend to discovery requests at the fee-award stage. Requiring some preliminary evidentiary showing before allowing such discovery is standard practice in both securities litigation, see 15 U.S.C. § 78u-4(a)(3)(B)(iv) (permitting discovery as to whether a class member is the most adequate plaintiﬀ “only if the plaintiﬀ ﬁrst demonstrates a reasonable basis for a ﬁnding that the presumptively most adequate plaintiﬀ is incapable of adequately representing the class”), and class actions more generally. See Fed. R. Civ. P. 23 advisory committee’s notes to 2003 amendment (“If the [fee] motion provides thorough information, the burden should be on the objector to justify discovery to obtain further information.”).