Opinion ID: 39709
Heading Depth: 3
Heading Rank: 1

Heading: Hamlin’s effect on New Jersey’s adequacy

Text: Regarding Hamlin, Appellants argue (1) that the district court found New Jersey adequate only because of Hamlin’s involvement, and (2) that New Jersey should not be allowed to rely on Hamlin to establish its adequacy because Hamlin is not New Jersey’s employee, but is instead an independent lawyer engaged by New Jersey and, moreover, because Hamlin’s fees are paid not by New Jersey, but by class counsel. As discussed below, both arguments fail. 1. The district court’s finding of New Jersey’s adequacy The district court found that “New Jersey has proven that it is ‘willing and able to take an active role in and control the litigation and to protect the interests of absentees.’” Certification Order, 226 F.R.D. at 567 (quoting Berger I, 257 F.3d at 479). The district court also noted that “New Jersey, through its representative, Judge Hamlin, is taking an active role in the litigation, affirming its adequacy in protecting the absent class members.” Id. The district court’s choice of the verb “affirming” indicates that it believes that New Jersey had already established that it would fairly and adequately protect the interests of the plaintiff class. The district court also noted that “Hamlin’s 8 presence helps New Jersey prove it has adequate involvement in the litigation and gives New Jersey the legal muscle a class representative should possess to actively and willingly control the litigation, which is exactly what the Private Securities Litigation Reform Act envisions.” Id. at 568 (citing Berger I, 257 F.3d at 483). On this issue, the district court concludes, “In short, the arrangement with Judge Hamlin enhances New Jersey’s ability to control the litigation.” Id. Here again, the district court’s choice of the words “helps” and “enhances” demonstrates that it did not, as appellants claim, find that New Jersey is adequate “solely” due to Hamlin's involvement. In support of their argument, appellants point to the following statement by the district court: “Hamlin allows New Jersey to fill the ‘unoccupied space’ the Fifth Circuit envisions between the two extremes of expecting non-legal personnel to master every legal detail and otherwise legally uninformed plaintiffs deferring every decision to counsel.” Certification Order, 226 F.R.D. at 568 (citing Berger I, 257 F.3d at 483). Appellants equate this statement to a holding that Hamlin, and Hamlin alone, “allows” New Jersey to qualify as adequate and “allows” New Jersey to fulfill its responsibilities. While this statement is somewhat helpful to Appellants’ argument, it cannot carry the weight they place on it, especially as it is immediately followed by the statement identified earlier that “In short, the arrangement with 9 Judge Hamlin enhances New Jersey’s ability to control the litigation.” Certification Order, 226 F.R.D. at 568. Finally, appellants claim that “the District Court found that New Jersey has ‘only generalized knowledge of the case.’” The district court would be surprised to learn of this “finding.” Actually, the district court wrote: “Defendants argue that John McCormac, the Treasurer of New Jersey, Peter Langerman, the Director of the New Jersey Division of Investment, and other high ranking government officials have only generalized knowledge of the case.” Certification Order, 226 F.R.D. at 568. Appellants’ characterization of the district court’s summary of their argument as a finding that their argument is correct is, at best, wholly lacking in merit. Appellants also argue that the record compels a holding that, if New Jersey meets the Rule 23(a)(4) adequacy requirements, it is based solely on Hamlin. Appellants point to testimony in the record that they claim demonstrates the inadequacy of the actual New Jersey employees. For example, appellants rely on deposition testimony by Peter Langerman, New Jersey’s Director of the Division of Investment, that “I do tend to accept at face value what my lawyers tell me. If that’s an [infirmity], I guess that’s a problem. But I do rely on my lawyers.” As we noted in Berger, however, class representatives are entitled to rely to some extent 10 on counsel, although they should “know more than that they were ‘involved in a bad business deal.’” Berger I, 257 F.3d at 483. New Jersey, on the other hand, points to deposition testimony showing that Langerman understood the fraud-on-the-market theory of this case and that the focus of the suit is the improper booking of revenues, pursuant to the POC accounting system, under the NMCI Contract. Unlike the unsophisticated plaintiff in Berger, Langerman is an accountant with significant experience in investing and accounting, so there is no reason to suspect that his knowledge was derived solely from counsel (e.g. that he did not know himself what POC accounting was and why it was improper in this case). There is no abuse of discretion in making the judgment that, given his testimony and expertise, Langerman probably had an understanding of these issues that was not derived solely from counsel. Appellants also point to testimony where they say New Jersey State Treasurer John “McCormac admitted he does not review briefs or know any of the issues regarding class certification.” As with Langerman, however, New Jersey is able to point to testimony reflecting McCormac’s proper understanding of the case (McCormac’s testimony summarizing the complaint: “The allegations are that the company improperly used a method of accounting known as percentage of completion, and as a result, financial results were misrepresented and fraud was perpetrated on the investors of the securities.”). Furthermore, there is evidence that New Jersey 11 exercised control over the litigation. McCormack testified that the class period and the decisions to add potential defendants were made by Hamlin and the Attorney General’s office, and that he had input into those decisions before the suit was filed. Additionally, Hamlin testified that he sends the Attorney General and two other people in his office every pleading filed in the case. Most importantly, the Attorney General’s office would be involved directly in any settlement. In sum, there is evidence in the record to support a determination that New Jersey meets the adequacy requirements even without Hamlin. 2. Can New Jersey rely on Hamlin to establish its adequacy? We turn now to appellants’ argument that New Jersey’s reliance on Hamlin violates the Rule 23(a)(4) guidance we provided in Berger I. Appellants claim that this “class certification ruling patently conflicts with Berger.” We disagree.
Appellants note that Hamlin is an “outside lawyer” for New Jersey, and they claim that his involvement violates Berger I. In discussing the adequacy standards of Rule 23 in Berger I, however, we addressed the relationship between the class representative and the class counsel. We did not address the present situation in which another attorney, not affiliated with class counsel, is engaged by the class representative to assist it in its monitoring 12 of class counsel.3 The guidelines in Berger I do not prevent a proposed class representative from hiring an outside attorney (not affiliated with class counsel) to help the class representative in carrying out its role as such and in overseeing proposed class counsel, as long as that outside attorney has no conflicts with the class.4 While appellants correctly point out that class counsel cannot also serve as the class representative, the cases they cite do not reach the present situation. In Zylstra v. Safeway Stores, Inc., 578 F.2d 102 (5th Cir. 1978), cited by appellants, we emphasized the potential conflicts between the class counsel and the class itself, explaining: “We reach that conclusion because of the conflict of interest which is inherent in such a situation. An attorney whose fees will depend upon the outcome of the case and who is also a class member or closely related to a class member cannot serve the interests of the class with the same unswerving devotion as an attorney who has no interest other than representing the class members.” Id. at 104. 3 Although our opinion in Berger I refers to counsel, lead counsel, their counsel, representatives’ counsel, plaintiffs’ counsel, and lawyers, all of these terms are used as synonyms for class counsel. One modifier for counsel that we did not employ in the Berger I opinion is outside. While Hamlin is admittedly an outside lawyer, he is not class counsel. 4 As the district court here observed, additional outside counsel with no potential conflicts with the class (i.e. counsel whose fees are not contingent upon the outcome of the litigation or on approval of class counsel) can help the class representative. In Berger I we noted that “class representatives need not be legal scholars and are entitled to rely on [class] counsel.” 257 F.3d at 483. However, as we noted in Berger I, there are limits to this position because too much reliance by the class representative on class counsel shifts the balance of power and brings to the fore the potential conflicts of interest between class counsel and the class. As the class representative becomes more competent in legal matters, it becomes less reliant on class counsel. 13 Similarly, in Matassarin v. Lynch, 174 F.3d 549 (5th Cir. 1999), also cited by appellants, we rejected an attorney’s attempt to serve as both class counsel and class representative, noting that “her duty to represent class interests would impermissibly conflict with her chance to gain financially from an award of attorneys’ fees.” 174 F.3d at 559. The principal concern underlying the adequacy guidelines in Berger I is the protection of the due process rights of the absent members of the class. 257 F.3d at 480. In Berger I, as in Zylstra and Matassarin, we sought to avoid any conflict with the interests of the absent class members. Id. (citing Amchem Prods., Inc. v. Windsor, 521 U.S. 591, 625 (1997)). With Hamlin and New Jersey, the district court properly found no potential conflicts with the interests of the absent class members. Certification Order, 226 F.R.D. at 567. b. The fact that Hamlin’s fees are borne by class counsel The district court did “recognize[] that it would be troubling if Judge Hamlin, like outside counsel, was only paid if New Jersey prevailed, but this is not the case.” Id. at 568. The district court reviewed the relevant features of Hamlin’s compensation: “Judge Hamlin was retained by the Attorney General of New Jersey, and it is the Attorney General, not outside counsel, who can terminate his services. His compensation is determined by the Attorney General, not outside counsel. The Attorney General reviews and approves each bill Judge Hamlin submits, and only after the Attorney General reviews and approves the bill does outside counsel transfer payment to Judge Hamlin. . . . 14 Judge Hamlin's compensation is assured for as long as he performs in a manner deemed satisfactory by the Attorney General of New Jersey. Judge Hamlin has great incentive to act objectively in protecting the interests of New Jersey and the class of plaintiffs, and little incentive to take actions adverse to New Jersey's interests.” Id. at 567–68. The evidence supports these findings and appellants do not serously argue otherwise. We agree with the district court’s finding that Hamlin’s pay arrangement does not create a conflict of interest with the class members. Hamlin is not a puppet of class counsel, and he does not answer to class counsel. On the contrary, Hamlin answers to the New Jersey Attorney General. Hamlin’s pay is not contingent on the outcome of the class action, nor is it contingent on any approval thereof by class counsel or on keeping class counsel happy. Hamlin’s interests are fully aligned with those of New Jersey, which are fully aligned with those of the absent members of the class.5 As part of their argument regarding Hamlin’s pay, appellants claim that New Jersey, by requiring class counsel to pay Hamlin’s fees, has established a “pay to play” arrangement in violation of the PSLRA and, therefore, should be deemed an inadequate class representative. For support, appellants point to the PSLRA requirement that the class representative file a sworn 5 Even if these payments reduce New Jersey’s litigation costs, they do not affect New Jersey’s interest in a high settlement. New Jersey has every incentive to recover every penny of its more than $40 million in losses, which translates into a proportionally high recovery for the class. Thus, New Jersey’s interests are aligned with those of the class. 15 certification that “states that the plaintiff will not accept any payment for serving as a representative party on behalf of a class beyond the plaintiff’s pro rata share of any recovery, except as ordered or approved by the court in accordance with paragraph (4).” 15 U.S.C. § 78u-4(a)(2)(A)(vi).6 Although appellants attempt to characterize this arrangement as some sort of bribe to the state by describing it as, in effect, “giving New Jersey thousands of dollars for the right to represent the State,” we find nothing improper about the actual arrangement. In this case, thousands of dollars are not being given to New Jersey, nor are thousands of dollars being given to a state official to influence his or her decision to hire class counsel. Instead, the requirement to pay Hamlin’s compensation was an open part of the general proposal process for all law firms seeking to represent New Jersey in securities class actions. From the beginning, this was an understood uniform, specified cost of undertaking this legal work on a contingency basis. As New Jersey points out, “In contingent fee cases, counsel routinely agree to advance the value of their time and other expenses directly related 6 Section 78u-4(a)(4) provides: “(4) Recovery by plaintiffs The share of any final judgment or of any settlement that is awarded to a representative party serving on behalf of a class shall be equal, on a per share basis, to the portion of the final judgment or settlement awarded to all other members of the class. Nothing in this paragraph shall be construed to limit the award of reasonable costs and expenses (including lost wages) directly relating to the representation of the class to any representative party serving on behalf of a class.” 16 to the litigation.” The payments provided for clearly do not involve New Jersey receiving more than its portion, on a share basis, of any final judgment or settlement of the action so as to violate the first sentence of section 78u-4(a)(4); nor does the court’s approval of the arrangement violate the second sentence of that section (see note 6 supra). The evidence does not establish that this is a “payment for serving as a representative party” such that the PSLRA precludes the district court’s approval of the arrangement and appointment of New Jersey as class representative. B. New Jersey’s alleged conflict with the class due to KPMG Appellants claim that New Jersey’s failure to name KPMG as a defendant in this case, coupled with the fact that KPMG is New Jersey’s auditor, demonstrates a conflict of interest with the class that should disqualify New Jersey from serving as class representative. KPMG was EDS’s outside auditor during the class period. Because plaintiffs allege fraudulent behavior primarily associated with revenue reporting under the NMCI contract, appellants argue that “KPMG is a prime candidate to be a defendant in this case.” Appellants claim that “a class representative who fails to sue a potential defendant with which it has a professional or personal relationship is presumptively inadequate.” Id. We reject appellants’ contentions in this respect. Appellants rely on Paper Systems, Incorporated v. Mitsubishi Corporation, 193 F.R.D. 601 (E.D. Wis. 2000), to support their 17 claim of presumptive inadequacy. In Paper Systems, the proposed class representative, Paper Systems, “caused its largest supplier to be dismissed as a defendant at the behest of Paper Systems’ president, on the ground that he had ‘a good relationship with them.’” Id. at 611. The Paper Systems court began its analysis with the observation that “generally, failure to join all defendants is a strategy choice, and except for a showing of unique circumstances, is probably not a ground for finding inadequacy.” Id. (emphasis added). The court held that “Paper Systems’ conduct in dismissing Appleton can in no way be considered a strategic decision on behalf of the class members it purported to represent. Paper Systems’ actions appear to betray a conflict of interest between named parties and the class they seek to represent.” Id. The court found Paper Systems’ conduct to be proof of the unique circumstances needed for finding that Paper Systems was an inadequate class representative. Id. Appellants’ next authority is Dubin v. Miller, 132 F.R.D. 269 (D. Colo. 1990), where the court found that “Plaintiff's personal relationship with former director Dale Tower casts a further cloud upon plaintiff's suitability to fulfill his fiduciary role. Tower was a director for thirteen months during the class period, yet he has not been named as a defendant. . . . The omission to sue a potential defendant cannot but prejudice the class.” Id. at 272. The Dubin court continued, however, noting that “While the 18 authorities cited by plaintiff do stand for the proposition that a class plaintiff need not join every possible defendant, plaintiff is obligated to supply a persuasive reason for the non-joinder.” Id. at 273. The final authority cited for appellants’ proposition is Kolin v. American Plan Corporation, No. CV-84-3183, 1986 WL 36311 (E.D.N.Y. Apr. 3, 1986), where the court found inadequate a class representative who, due to family ties with potential defendants, was “unable to examine certain potential claims of the class.” Id. at . The Kolin court noted: “The crux of the Rule 23(a)(4) requirement is that plaintiffs and plaintiffs’ counsel not have any interests antagonistic to those of the class.” Id. We essentially agree with the statement in Paper Systems that “generally, failure to join all defendants is a strategy choice, and except for a showing of unique circumstances, is probably not a ground for finding inadequacy.” 193 F.R.D. at 611. Even if these cases do support a presumption of inadequacy against a class representative who fails to sue a potential defendant, it is not a particularly strong presumption, and it is certainly not an irrebuttable one. In this case, any such presumption was rebutted by New Jersey. The district court found that “New Jersey has no self-interest in protecting KPMG,” and “New Jersey has shown its zeal in pursuing class interests, even when those interests conflict with KPMG's interests.” Certification Order, 226 F.R.D. 19 at 570. Moreover, the district court noted that “New Jersey has also stated that it is willing to sue all viable defendants, even KPMG, if the facts lead there; thus far, the facts have not led to suing KPMG.” Id. New Jersey also explains that its “decision not to sue KPMG was not based on any relationship it had with KPMG. Rather, New Jersey’s decision was based on the fact that EDS concealed its fraud from the market and from KPMG.” There are also valid strategic reasons for New Jersey to not name KPMG as a defendant. We agree with the district court’s conclusion on this issue: “New Jersey is only a client of KPMG – not vice versa – so it has no self-interest in appeasing KPMG. . . . New Jersey would not necessarily benefit financially by maintaining a good relationship with KPMG. Thus, the Court does not believe there are unique circumstances here that threaten adequacy.” 226 F.R.D. at 570. C. New Jersey’s alleged conflict with certain class members due to the ERISA class action Appellants claim that New Jersey has a disqualifying conflict of interest with the interests of certain members of the proposed class who are also participants in EDS’s 401(k) plan and, as such, have an ERISA class action pending against the same defendants. The disqualifying conflict with the 401(k) participants, according to appellants, is that “the ERISA case is based on a broader theory of loss causation than the securities case and the two cases involve different measures of damages.” Certification Order, 226 20 F.R.D. at 568 (footnote omitted). Because the theory of loss causation in the ERISA action is broader than the theory of loss causation in this securities case, appellants claim that the 401(k) participants will be judicially estopped from asserting their theory in the ERISA action. We disagree. “Judicial estoppel ‘prevents a party from asserting a position in a legal proceeding that is contrary to a position previously taken in the same or some earlier proceeding.’ The purpose of the doctrine is to prevent litigants ‘from “playing fast and loose” with the courts . . . .’” Hall v. GE Plastic Pacific PTE Ltd., 327 F.3d 391, 396 (5th Cir. 2003) (quoting Ergo Science, Inc. v. Martin, 73 F.3d 595, 600 (5th Cir. 1996)). Before a party can be judicially estopped, however, “it must be shown that ‘the position of the party to be estopped is clearly inconsistent with its previous one; and . . . that party must have convinced the court to accept that previous position.’” Id. (quoting Ahrens v. Perot Systems Corp., 205 F.3d 831, 833 (5th Cir. 2000)). Here, the district court hearing both cases explained how the position of the plaintiffs in the ERISA class is complementary with the position taken by the plaintiffs in the securities class. 226 F.R.D. at 569. Although the theories in each action are different, they are not mutually exclusive. Id. For these reasons, we find that the district court applied the correct legal standard to its Rule 23(a)(4) adequacy determination and it did not abuse its discretion in finding that New Jersey will 21 fairly and adequately protect the interests of the absent class members.