Court Opinion

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Opinions of the United
2005 Decisions                                                                                                             States Court of Appeals
                                                                                                                              for the Third Circuit

4-11-2005

In Re Cendant Corp
Precedential or Non-Precedential: Precedential

Docket No. 03-3603

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Recommended Citation
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http://digitalcommons.law.villanova.edu/thirdcircuit_2005/1284

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                                           PRECEDENTIAL

        UNITED STATES COURT OF APPEALS
             FOR THE THIRD CIRCUIT

             Nos. 03-3603, 03-3604, 03-3648

           IN RE: CENDANT CORPORATION
                SECURITIES LITIGATION

       DEBORAH LEWIS, JEFF MATHIS and WOLF
                HALDENSTEIN
          ADLER FREEMAN AND HERZ LLP,

                       Appellants in No. 03-3603

                 ALAN CASNOFF;
        MILLER FAUCHER AND CAFFERTY LLP,

                       Appellants in No. 03-3604

                  ALFRED WISE;
       FINKELSTEIN, THOMPSON & LOUGHRAN,

                        Appellants in No. 03-3648

      On Appeal from the United States District Court
               for the District of New Jersey
                  (D.C. No. 98-cv-01664)
       District Judge: Honorable William H. Walls

             Argued: December 14, 2004
Before: NYGAARD, ROSENN, and BECKER, Circuit Judges.

                  (Filed April 11, 2005)
DANIEL W. KRASNER (ARGUED)
Wolf, Haldenstein, Adler, Freeman & Herz
270 Madison Avenue
New York, NY 10016
Attorney for Appellants Lewis et al.

ELLEN MERIWETHER (ARGUED)
Miller, Faucher and Cafferty
18th & Cherry Streets
One Logan Square, 17th Floor
Philadelphia, PA 19103
Attorney for Appellants Casnoff et al.

BURTON H. FINKELSTEIN (ARGUED)
Finkelstein, Thompson & Loughran
1050 30th Street, N.W.
Washington, DC 20007
Attorney for Appellants Wise et al.

MAX W. BERGER
DANIEL L. BERGER
JEFFREY N. LEIBELL
Bernstein Litowitz Berger & Grossmann LLP
1285 Avenue of the Americas
New York, NY 10019
LEONARD BARRACK

GERALD J. RODOS
JEFFREY W. GOLAN (ARGUED)
Barrack, Rodos & Bacine
3300 Two Commerce Square
2001 Market Street
Philadelphia, PA 19103
Attorneys for Appellees
                         _____

                    OPINION OF THE COURT

BECKER, Circuit Judge.

                                2
I. Introduction and Overview . . . . . . . . . . . . . . . . . . . . . . . . . 4

II. Facts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
       A. The Suit, Settlement, and Initial Fee Award . . . . . . . . 8
       B. The Excluded Firms . . . . . . . . . . . . . . . . . . . . . . . . . . 9
       C. The Post-April 15 Purchasers . . . . . . . . . . . . . . . . . 10
       D. The Plan of Allocation . . . . . . . . . . . . . . . . . . . . . . . 12

III. Jurisdiction and Standard of Review . . . . . . . . . . . . . . 13

IV. Legal Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
      A. The Common Fund Doctrine . . . . . . . . . . . . . . . . . . 15
             1. The Role of the Courts in Common Fund Case1s5
             2. Awarding Fees Under the Common Fund
                    Doctrine . . . . . . . . . . . . . . . . . . . . . . . . . 19
      B. The PSLRA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
             1. The PSLRA Lead Plaintiff . . . . . . . . . . . . . . 22
             2. The Choice of Lead Counsel . . . . . . . . . . . . . 23

V. The Common Fund Doctrine After the PSLRA
       ...........................................                                           24
      A. Before Appointment of Lead Plaintiff . . . . . . . . . . . .                        25
             1. Pre-Appointment Work Generally . . . . . . . . .                             27
             2. Compensation for Filing Complaints
                     ................................                                        28
      B. After Appointment of Lead Plaintiff . . . . . . . . . . . . .                       32
             1. In General . . . . . . . . . . . . . . . . . . . . . . . . . . .             32
             2. Representation of Individual Class Members                                   38
             3. Representation of Uncertified Subclasses
                     ................................                                        38

VI. The Finkelstein, Thompson & Loughran Appeal
        . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41

VII. The Miller Faucher and Wolf Haldenstein Appeals . .                                     43
      A. Filing Stub-Period Complaints . . . . . . . . . . . . . . . .                       43
      B. Improving the Pleading of Stub-Period Allegations
              ......................................                                         46
             1. Wolf Haldenstein . . . . . . . . . . . . . . . . . . . . . .                 47

                                               3
               2. Miller Faucher . . . . . . . . . . . . . . . . . . . . . . . .     48
         C. Monitoring the Settlement Allocation . . . . . . . . . . .               50
               1. The Uncertified Subclass . . . . . . . . . . . . . . . .           51
               2. Was Wolf Haldenstein’s Work Gratuitous? .                          52
               3. Did Wolf Haldenstein’s Actions Increase the
                      Recovery? . . . . . . . . . . . . . . . . . . . . . . . .      54

VIII. Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54

                       I. Introduction and Overview

        This is another set of appeals arising out of the $3.2 billion
settlement of the shareholders’ securities class action brought
against the Cendant Corporation. This litigation has previously
provided us with the opportunity to examine the effect of the
Private Securities Litigation Reform Act of 1995 (PSLRA) on the
selection and compensation of class counsel. See In re Cendant
Corp. Litig., 264 F.3d 201 (3d Cir. 2001) (Cendant I).1 The present
appeals require us to examine the effect of the PSLRA on non-class
counsel.
        Appellants are three law firms who represented members of
the victorious class of Cendant plaintiffs. These firms were not
selected by the District Court to serve as lead counsel for the class
and were not compensated out of the $55 million in fees ultimately
awarded to the appointed lead counsel. However, they claim that
the work that they performed during the litigation and negotiation
of this suit benefited the plaintiff class, and that they are therefore
entitled to compensation from the class’s recovery. The firms’
alleged right to fees stems from a longstanding equitable doctrine
that allows parties or attorneys who create or maintain a common
fund for the benefit of others to claim compensation from that
fund.
        As we explained in Cendant I, however, the PSLRA has

         1
         While this was not the first appeal taken in this lengthy
litigation, see, e.g., Semerenko v. Cendant Corp., 223 F.3d 165 (3d Cir.
2000); In re Cendant Corp., 260 F.3d 183 (3d Cir. 2001), it was the first
to address counsel fees, and will therefore be denominated Cendant I for
convenience.

                                           4
significantly altered the landscape of attorneys’ fee awards in
securities class actions. The historic common fund doctrine, which
has traditionally governed the compensation of lead counsel in all
class actions, has yielded, in PSLRA cases, to a paradigm in which
the plaintiff with the largest stake in the case, usually a large and
sophisticated institution, is accorded the status of lead plaintiff and
assigned the right to appoint and duty to monitor lead counsel for
the class. In Cendant I, we recognized that this paradigm
necessarily entails deferring to the lead plaintiff in decisions about
lead counsel’s compensation. Accordingly, we rejected the District
Court’s use of an auction mechanism to select and compensate lead
counsel, and remanded for a determination of attorneys’ fees in
accordance with the agreement between lead plaintiffs and their
chosen lead counsel.
        In the instant appeal we extend the analysis of Cendant I to
the fee applications of firms that were not designated as lead
counsel. The Cendant lead plaintiffs, and their lead counsel, act as
appellees here. They argue that, just as PSLRA lead plaintiffs are
entitled to significant discretion in selecting and compensating lead
counsel, so too are they entitled to similar discretion in determining
whether other firms have benefited the class, and whether and to
what extent to compensate such firms.
        We find the lead plaintiffs’ arguments convincing. A careful
reading of the PSLRA, and of Cendant I, reveals that the new
paradigm of securities litigation significantly restricts the ability of
plaintiffs’ attorneys to interpose themselves as representatives of
a class and expect compensation for their work on behalf of that
class. The PSLRA lead plaintiff is now the driving force behind the
class’s counsel decisions, and the lead plaintiff’s refusal to
compensate non-lead counsel will generally be entitled to a
presumption of correctness.
        Of course, much work will be done before the lead plaintiff
is appointed, when no single class member controls the litigation.
Thus the court will retain the primary responsibility for
compensating counsel who do work on behalf of the class prior to
appointment of the lead plaintiff, though courts may take into
account the views of the lead plaintiff in awarding such
compensation. The traditional common fund doctrine will remain
the touchstone of this analysis, and non-lead counsel will have to
demonstrate that their work actually benefited the class. In

                                   5
particular, the filing of multiple complaints each alleging the same
facts and legal theories will not result in fee awards for each firm
that files a complaint: such copycat complaints do not benefit the
class, and are merely entrepreneurial efforts taken by firms
attempting to secure lead counsel status. This conclusion disposes
of the appeal of Finkelstein, Thompson & Loughran, one of the
appellant firms, which did nothing more than file a complaint that
was substantially identical to dozens of other complaints filed in
this litigation.
         After the lead plaintiff is appointed, however, the PSLRA
grants that lead plaintiff primary responsibility for selecting and
supervising the attorneys who work on behalf of the class. We
conclude that this mandate should be put into effect by granting a
presumption of correctness to the lead plaintiff’s decision not to
compensate non-lead counsel for work done after the appointment
of the lead plaintiff. Non-lead counsel may refute the presumption
of correctness only by showing that lead plaintiff violated its
fiduciary duties by refusing compensation, or by clearly
demonstrating that counsel reasonably performed work that
independently increased the recovery of the class.
         After setting out the general standards, we turn to several
specific issues that arise in this case. First of all, we conclude that
representation of individual class members—and, in particular,
monitoring of the progress of the litigation on behalf of those
members—is not compensable out of the class’s common recovery.
All of the appellant firms here claim that they monitored the class
action, but none can show that this monitoring independently
increased the recovery of the class.
         Next, we examine a broader issue. Two of the appellant
firms, Miller, Faucher and Cafferty and Wolf, Haldenstein, Adler,
Freeman & Herz, claim that they represented what was in effect an
uncertified subclass of Cendant plaintiffs, which we will refer to as
the “stub plaintiffs.” These firms asked the District Court to clarify
the class definition so as to create a subclass consisting of
claimants who purchased shares after a misleading partial
disclosure of the fraud at Cendant, but the District Court refused,
finding that the lead counsel in this case could adequately represent
the interests of these claimants as part of the certified class.
         Our review of the purposes of subclass certification
convinces us that lawyers who claim to represent an uncertified

                                  6
putative subclass generally have no more right to a fee awarded out
of the common recovery—whether that recovery is defined as the
subclass’s recovery or the recovery of the class as a whole—than
do any other non-lead counsel. Simply claiming to do work on
behalf of a specific group, which the court has declined to certify
as a subclass, does not refute the presumption of correctness that
attaches to lead plaintiff’s decision not to compensate a firm. Thus,
the two appellant firms cannot claim fees for representing the stub
plaintiffs in this litigation.
        Finally, we turn to the more specific claims of the appellant
firms. In particular, we examine claims made by Miller Faucher
and Wolf Haldenstein that their work was conducted at the request
of lead counsel, and that it benefited the class as a whole. If true,
these claims would serve to refute the presumption of correctness,
as they would demonstrate that the appellant firms did their work
with an expectation of compensation and that it independently
benefited the class. However, our review of the facts leads us to
conclude that these appellant firms undertook their work without
the approval of lead plaintiffs, and that their work did not
measurably contribute to the class’s recovery.
        We therefore hold that the presumption of correctness that
attaches to the lead plaintiff’s decision has not been refuted in this
case. We thus find that appellant firms are not entitled to any fees
in this litigation, and will affirm the order of the District Court.

                              II. Facts

        On April 15, 1998, Cendant Corporation announced that it
had discovered “accounting irregularities” in some of its business
units, and that it expected to restate its 1997 financial statements.
The next day, Cendant’s stock fell by 47%. On July 14, 1998,
Cendant announced that it would also restate its 1995 and 1996
financials; its stock fell by another 9%. And on August 28, 1998,
the company disclosed the results of an internal investigation,
revealing that it would restate its 1995-1997 financials by some
$500 million. Cendant stock fell by another 11%. Overall, the stock
fell from $35 5/8 per share on April 15 to $11 5/8 on August 31, a
loss of over $20 billion in market capitalization, or some 67% of its
initial value.

                                  7
          A. The Suit, Settlement, and Initial Fee Award
       This drop in value, accompanied by clear evidence—and,
indeed, admissions—of fraud, engendered numerous shareholder
lawsuits. Between April and August 1998, at least sixty-four suits
were filed under Exchange Act § 10(b) and Securities Act § 11,
naming as defendants Cendant, various officers and directors, and
Ernst & Young, the company’s outside auditors. Pursuant to an
order of the Judicial Panel on Multidistrict Litigation, these cases
were consolidated in the District of New Jersey, before District
Judge William H. Walls.
       Pursuant to provisions of the PSLRA, see 15 U.S.C. § 78u-
4(a)(3), the District Court appointed as Lead Plaintiffs a
consortium of three large public pension funds (the California
Public Employees’ Retirement System (CalPERS), the New York
City Pension Funds, and the New York State Common Retirement
Fund).2 This appointment came on September 4, 1998. The Lead
Plaintiffs retained two law firms, Barrack, Rodos & Bacine and
Bernstein Litowitz Berger & Grossman, to serve as Lead Counsel.
The District Court ultimately approved the Lead Counsel after an
open auction among law firms seeking to serve as class counsel,
and appointed them as counsel for the putative class on October 9,
1998.
       Lead Counsel then filed an Amended Complaint on behalf
of the class, dated December 14, 1998, while also pursuing
settlement talks. The District Court certified the class on January
27, 1999, and denied most of the defendants’ motions to dismiss on
July 27, 1999. In re Cendant Corp. Litig., 60 F. Supp. 2d 354
(D.N.J. 1999). However, it granted Ernst & Young’s motion to
dismiss with regard to charges that it violated the securities laws
after April 15, 1998. Id. at 376. On December 17, 1999, the parties
reached a proposed settlement involving a payout of approximately
$3.2 billion of Cendant and Ernst & Young money; as part of the
settlement, Cendant also agreed to make certain corporate
governance changes. The District Court approved the settlement,
and, pursuant to the terms of the winning auction bid, awarded

       2
         Technically, the PSLRA provides for a single lead plaintiff, and
the CalPERS consortium is considered a single plaintiff made up of three
constituent funds. We find it easier, however, to refer to the three funds
in the plural, as “Lead Plaintiffs.”

                                    8
$262 million in attorneys’ fees to the Lead Counsel.
        On appeal, this Court upheld the settlement, but reversed the
award of attorneys’ fees as unreasonable. In re Cendant Corp.
Litig., 264 F.3d 201 (3d Cir. 2001) (Cendant I). We found that the
District Court had abused its discretion in holding an auction and
remanded for a new fee determination pursuant to the Lead
Plaintiffs’ original retainer agreement with Lead Counsel. We also
strongly suggested that fees in the $200 million range would likely
be excessive, as the case was relatively simple and such fees would
constitute an “extraordinarily high” lodestar multiplier of 25 to 45.3
264 F.3d at 285.
        On remand, Lead Plaintiffs and Lead Counsel agreed to a
$55 million fee award, which was approved as reasonable. In re
Cendant Corp. Litig., 243 F. Supp. 2d 166 (D.N.J. 2003). The
District Court noted that this fee represented just 1.7% of the $3.2
billion settlement, and that Lead Counsel had spent some 35,000
hours prosecuting the case. Id. at 172-73.4

                        B. The Excluded Firms
        In preparing the fee application, Lead Counsel wrote to all
the other firms involved in the Cendant case, asking them for their
time and expenses incurred in the case. Ultimately, however, Lead
Counsel shared the $55 million fee with just twelve other law
firms. The Lead Plaintiff pension funds filed a declaration in
connection with Lead Counsel’s application for attorneys fees, in
which they stated that they had authorized twelve firms to assist
Lead Counsel, and that the work of those twelve firms had been
considered in computing the fee application. Lead Plaintiffs noted
that forty-five other law firms represented individual plaintiffs, but
took the position that those firms had not conferred any benefit on
the class, and had not been authorized by Lead Plaintiffs or Lead

       3
        The “lodestar” is determined by multiplying the number of hours
that counsel reasonably worked by the reasonable hourly rate for those
services. See 264 F.3d at 255. The original $262 million fee in Cendant
I would thus have represented a fee over 45 times as large as a
reasonable hourly rate. Id. at 285.
       4
        While the District Court did not perform a lodestar cross-check,
this number would appear to lead to a multiplier in the mid-single digits.

                                    9
Counsel to do any work on behalf of the class. Lead Plaintiffs
therefore declined to include these firms in their fee request.
        Of the forty-five excluded firms and attorneys, fourteen
objected and requested attorneys’ fees. The District Court held a
hearing on the record regarding these fee applications on July 28,
2003, and rejected all the applications at the close of that hearing.
        Three firms have appealed from the rejection of their
petitions. One appellant firm, Finkelstein, Thompson & Loughran
(“FTL”), represented Alfred Wise, who bought 500 shares of
Cendant stock at about $37 on February 4, 1998, before any
announcement of wrongdoing. FTL filed a complaint on Wise’s
behalf on July 6, 1998; this was the fifty-fifth such complaint filed
against Cendant. FTL was not selected to serve as, or assist, Lead
Counsel, and does not allege that it performed any work on behalf
of the class after filing its complaint. Instead, it argues that its work
in investigating the fraud at Cendant, and preparing and filing its
complaint, should be compensated out of the class’s recovery. FTL
seeks fees of $44,252.50, which represent its lodestar, as well as
expenses of $713.94.

                  C. The Post-April 15 Purchasers
        The other two appellant firms, Wolf Haldenstein Adler
Freeman & Herz LLP (“Wolf Haldenstein”) and Miller Faucher &
Cafferty LLP (“Miller Faucher”), claimed to represent a subgroup
of plaintiffs who purchased Cendant stock after the initial April 15,
1998, disclosure of wrongdoing, but before Cendant’s July 14
announcement of further financial troubles. Wolf Haldenstein
designates this group the “stub plaintiffs”; Miller Faucher calls
them the “partial disclosure period purchasers.” While the latter
designation, unlike the former, has the advantage of clarity, we opt
for brevity and refer to this group as the “stub plaintiffs” or “stub
purchasers.”
        The first fifty-two complaints against Cendant were filed
shortly after the April 1998 disclosures, and were consolidated into
one action on June 1, 1998. These complaints alleged a class period
that ended on April 15, 1998, the date of the first round of
disclosures. On July 16, 1998, Wolf Haldenstein filed a class-
action complaint on behalf of Dr. Deborah Lewis, who had
purchased seventy-five Cendant shares on July 10, 1998 for $22
1/16 per share. This complaint alleged that the April 15 disclosure

                                   10
was itself a false and misleading statement in violation of § 10(b),
and sought to represent a stub class, separate from the main class,
consisting of those who had purchased Cendant shares between the
April 15 and July 14 disclosures. Wolf Haldenstein’s complaint on
behalf of Dr. Lewis was the first such stub-class complaint.5 Four
days later, on July 20, Miller Faucher filed its own complaint on
behalf of putative stub-class representative Alan Casnoff, who had
purchased 300 Cendant shares on April 20 at $23 9/16. The parties
agree that these were the only stub-class complaints filed by any
law firm.
        Wolf Haldenstein and Miller Faucher then moved (on behalf
of Lewis and Casnoff, respectively) to “clarify” the District Court’s
earlier order consolidating the class’s claims into one action. In
effect, the firms asked the court to designate a separate class for the
stub-period claimants, with separate lead plaintiffs and lead
counsel. In an order dated November 4, 1998, the District Court
denied this motion and allowed the case to go forward as one
unitary class.6 In re Cendant Corp. Litig., 182 F.R.D. 476 (D.N.J.
1998). The court acknowledged that the stub plaintiffs had alleged
additional misstatements not raised in the earlier complaints, but
determined that the already-designated Lead Plaintiffs could and
would litigate the stub claims as part of a continuing pattern of
wrongdoing at Cendant.
        As noted above, Lead Counsel proceeded to file an
Amended Complaint on December 14, 1998. The Amended
Complaint asserted a class period running from May 31, 1995,
through August 28, 1998, the date of Cendant’s final curative
disclosure. The class covered by the Amended Complaint thus

        5
       Wolf Haldenstein later added Jeff Mathis, another stub-period
purchaser, as a plaintiff.
        6
         The District Court did create one separate class of plaintiffs,
finding that the interests of holders of Cendant “Feline PRIDES” hybrid
securities were distinct from those of the rest of the class, and certifying
PRIDES holders as a separate class with separate lead counsel. The
PRIDES class eventually agreed to a settlement with a stated value of
some $340 million. See In re Cendant Corp. PRIDES Litig., 243 F.3d
722, 725 (3d Cir. 2001) (Cendant PRIDES). The firms involved in this
appeal had no involvement in the PRIDES litigation.

                                    11
included (a) the pre-April class covered by the initial fifty-two
complaints, (b) the stub class covered by the Lewis and Casnoff
complaints, and (c) a further class of plaintiffs who bought after the
July 14 disclosure but before the final August 28 disclosure.
        In early December, shortly before filing the Amended
Complaint, Lead Counsel circulated a draft to counsel for all class
members, asking them if their clients wished to be named in the
consolidated complaint. On reviewing this draft complaint, Miller
Faucher called Lead Counsel to suggest that the complaint should
allege that the April 15 disclosure was materially false and
misleading. Lead Counsel revised the Amended Complaint to make
this allegation.

                      D. The Plan of Allocation
        The settlement reached between the class and Cendant
involved payment to all three types of plaintiff—pre-April 15, post-
April 15, and post-July 14—on identical terms, with one exception:
under the settlement, plaintiffs who bought after April 15 were not
entitled to share in any of the $335 million from Ernst & Young,
because claims against the auditors arising after April 15 had been
dismissed. On learning of the proposed settlement, in December
1999, Wolf Haldenstein communicated with Lead Counsel to
advocate for the stub plaintiffs. In January 2000, Wolf Haldenstein
suggested that the stub plaintiffs’ claims were legally stronger than
those of pre-April 15 purchasers, and that they should therefore
receive at least 50% more on their claims than did other class
members. And in March 2000, after reviewing the draft Plan of
Allocation, Wolf Haldenstein wrote to Lead Counsel again to argue
that the stub plaintiffs should share in the Ernst & Young money.
In its review of the plan of allocation, Wolf Haldenstein retained
John Hammerslough, a forensic damages expert. Lead Counsel
rejected both of Wolf Haldenstein’s suggested modifications to the
settlement and ultimately convinced Wolf Haldenstein that the
proposed settlement was fair to all class members.
        Like FTL and the other non-authorized firms, Wolf
Haldenstein and Miller Faucher were shut out of Lead Counsel’s
$55 million fee. Thus they petitioned the court for their own fees.
Wolf Haldenstein requests $500,000 in fees and $30,859.27 in
expenses; it claims 592.6 hours of work, for a lodestar of
$242,893.50 and a multiplier of 2.06. Miller Faucher requests

                                 12
$102,857.75 in fees and $4,113.08 in expenses. This is its lodestar.

           III. Jurisdiction and Standard of Review

         The District Court had jurisdiction over this matter under
Securities Act § 22(a), 15 U.S.C. § 77v(a); Exchange Act § 27, 15
U.S.C. § 78aa; and 28 U.S.C. §§ 1331 & 1337. We have appellate
jurisdiction under 28 U.S.C. § 1291, as the fee order was a final
decision. We review the District Court’s decision not to award
attorney fees for abuse of discretion. See In re Prudential Ins. Co.
of Am. Sales Practices Litig., 148 F.3d 283, 333 (3d Cir. 1998)
(Prudential). An abuse of discretion “can occur ‘if the judge fails
to apply the proper legal standard or to follow proper procedures
in making the determination, or bases an award upon findings of
fact that are clearly erroneous.’” Zolfo, Cooper & Co. v. Sunbeam-
Oster Co., 50 F.3d 253, 257 (3d Cir. 1995) (quoting Electro-Wire
Prods., Inc. v. Sirote & Permutt, P.C. (In re Prince), 40 F.3d 356,
359 (11th Cir. 1994)).
         Some of the parties appear to be concerned that we might
review the District Court’s February 5, 2003, fee award to Lead
Counsel. Such review would be clearly inappropriate; to appeal
from that fee award, an objector would have had to file a Notice of
Appeal within 30 days, or by March 2003. See Fed. R. App. P.
4(a)(1)(A). The appellant firms here never filed a Notice of Appeal
from the February award to Lead Counsel; rather, they appeal only
from the District Court’s July 28, 2003, oral order denying them
attorneys’ fees.
         The February 2003 fee award was based on the work that
Lead Counsel and their designated assisting counsel performed.
Their fee application included lodestar information for the work of
the twelve authorized assisting firms, but disclaimed any work
performed by the other forty-five firms. Thus it seems appropriate
that, if we were to find that the appellant firms provided any
benefit to the class, then their fees would be paid out of the class’s
$3.2 billion recovery, and not out of the $55 million fee already
awarded to Lead Counsel. Lead Counsel argue for this result in
their briefs, and at least one appellant firm, Miller Faucher, agreed
to it at oral argument. There is thus no prospect of overturning the
February 2003 fee award to Lead Counsel; the current appeal
concerns additional fees, not a modification of the $55 million

                                 13
already awarded.

                      IV. Legal Background

        As it did in Cendant I, our analysis begins with the
traditional attorney-client relationship. At its core, this relationship
involves an attorney with an ethical obligation to serve only the
client’s interests, and a client with the right and ability to select,
monitor, and compensate his attorney:

       The power to select counsel lets clients choose
       lawyers with whom they are comfortable and in
       whose ability and integrity they have confidence.
       The power to negotiate the terms under which
       counsel is retained confers upon clients the ability to
       craft fee agreements that promise to hold down
       lawyers’ fees and that work to align their lawyers’
       economic interests with their own. And the power to
       monitor lawyers’ performance and to communicate
       concerns allows clients to police their lawyers’
       conduct and thus prevent shirking.

Cendant I, 264 F.3d at 254.
        Attorneys who represent large classes of plaintiffs, rather
than individual clients, have no less of an obligation to put their
clients’ interests ahead of their own. But members of such a class,
unlike the active and involved individual clients of the traditional
paradigm, frequently have little or no opportunity or incentive to
monitor their attorneys’ fidelity and zeal. Without such monitoring,
class counsel may well give in to the temptation to shirk, to
overcharge, or to prosecute or settle the case in a way that
maximizes their own fees rather than the class’s recovery. See
Cendant I, 264 F.3d at 255; see also Alon Harel & Alex Stein,
Auctioning for Loyalty: Selection and Monitoring of Class
Counsel, 22 Yale L. & Pol’y Rev. 69, 71 (2004); Elliott J. Weiss &
John S. Beckerman, Let the Money Do the Monitoring: How
Institutional Investors Can Reduce Agency Costs in Securities
Class Actions, 104 Yale L.J. 2053, 2064-66 (1995). The problem
is particularly acute in securities class actions, in which thousands
of small shareholders will have a modest financial interest in the

                                  14
outcome of a suit which can involve damages in the billions. Such
small shareholders are unable or unlikely to carefully monitor class
counsel.

                   A. The Common Fund Doctrine
        Shareholders’ class action cases present an additional
problem, in that few or no individual shareholders will have much
financial incentive to hire an attorney to prosecute their claims in
the first place, but, in the aggregate, those claims are worth
pursuing.
        The “common fund doctrine” supplies one imperfect
solution to this dilemma. The doctrine “provides that a private
plaintiff, or plaintiff’s attorney, whose efforts create, discover,
increase, or preserve a fund to which others also have a claim, is
entitled to recover from the fund the costs of his litigation,
including attorneys’ fees.” In re General Motors Corp. Pick-Up
Truck Fuel Tank Prods. Liab. Litig., 55 F.3d 768, 820 n.39 (3d Cir.
1995) (GMC); see also Boeing Co. v. Van Gemert, 444 U.S. 472,
478-79 (1980). Such fees are generally set by the court, upon
application by counsel.
        Thus the common fund doctrine, in combination with the
class-action mechanism, see Fed. R. Civ. P. 23, makes it
economically feasible for securities plaintiffs to receive redress for
corporate fraud. See Harel & Stein, supra, at 81. These
mechanisms depend upon plaintiffs’ attorneys to be the prime
mover behind securities class actions: while individual plaintiffs
generally have little reason to sue, their attorneys stand to earn
huge fees if they succeed in winning a trial or settlement on behalf
of the class. See generally id. at 81-82; Stephen A. Saltzburg et al.,
Third Circuit Task Force Report on Selection of Class Counsel, 74
Temp. L. Rev. 689, 690-92 (2001) (hereinafter “Task Force
Report”).

        1. The Role of the Courts in Common Fund Cases
        The common fund doctrine is essentially a matter of equity,
Boeing, 444 U.S. at 478, and gives courts significant flexibility in
setting attorneys’ fees. For the doctrine to function, it is essential
that the court supervise class counsel’s performance and carefully
scrutinize its fee applications. See GMC, 55 F.3d at 819. The
court’s scrutiny is, in essence, a substitute for active client

                                 15
involvement, which is so often difficult to obtain in class actions.
In traditional common fund cases, the court acts almost as a
fiduciary for the class, performing some of the roles—i.e.,
monitoring and compensating class counsel—that clients in
individual suits normally take on themselves. See In re Rite Aid
Corp. Sec. Litig., 396 F.3d 294, 307-08 (3d Cir. 2005) (Rite Aid);
GMC, 55 F.3d at 784 (“[T]he court plays the important role of
protector of the absentees’ interests, in a sort of fiduciary capacity,
by approving appropriate representative plaintiffs and class
counsel.”); In re Oracle Sec. Litig., 131 F.R.D. 688, 691 (N.D.
Cal. 1990) (Walker, J.) (Oracle) (“[T]he court bears fiduciary
responsibilities to the class.”).
        In Cendant I, we reviewed in some depth the two traditional
methods for setting class-action attorneys’ fees. See 264 F.3d at
255-257. In the lodestar method, the court multiplies the number of
hours that lead counsel reasonably worked by the reasonable hourly
rate for that work to determine the counsel’s lodestar, which may
be multiplied by a factor intended to compensate the attorneys for
the risks they faced and any other special circumstances. See Task
Force Report, supra, at 706-07. The second method, now dominant
in common fund cases, is the percentage-of-recovery approach.7
See, e.g., Prudential, 148 F.3d at 333. Under this method, counsel
are awarded a fee that is a percentage of the class’s total recovery;
the court determines the appropriate percentage based on a seven-
factor test set out in Gunter v. Ridgewood Energy Corp., 223 F.3d
190, 195 n.1 (3d Cir. 2000).8 Our jurisprudence also urges a

       7
         In particular, the PSLRA has made percentage-of-recovery the
standard for determining whether attorneys’ fees are reasonable. See 15
U.S.C. § 78u-4(a)(6) (“Total attorneys’ fees and expenses awarded by
the court to counsel for the plaintiff class shall not exceed a reasonable
percentage of the amount of any damages and prejudgment interest
actually paid to the class.”); see also Rite Aid, 396 F.3d at 300.
       8
           The relevant factors are:

       (1) the size of the fund created and the number of persons
       benefited; (2) the presence or absence of substantial
       objections by members of the class to the settlement
       terms and/or fees requested by counsel; (3) the skill and
       efficiency of the attorneys involved; (4) the complexity

                                       16
“lodestar cross-check” to ensure that the percentage approach does
not lead to a fee that represents an extraordinary lodestar multiple.
See Cendant PRIDES, 243 F.3d at 742; Gunter, 223 F.3d at 195
n.1; Rite Aid, 396 F.3d at 305-07.
        Both of these approaches have been subject to significant
criticism. See Task Force Report, supra, at 706-07. Each leaves the
court to make a fee determination with little concrete guidance. See
Oracle, 131 F.R.D. at 696. Courts are dependent upon counsel for
information about the quality and quantity of the attorneys’ work,
and must make their judgments of the appropriate lodestar multiple
or percentage of recovery “after the fact and on the basis of
imperfect information.” Weiss & Beckerman, supra, at 2072 &
n.95.
        Several courts have therefore experimented with an auction
approach to setting class counsel’s fees in advance of litigation.9

       and duration of the litigation; (5) the risk of nonpayment;
       (6) the amount of time devoted to the case by plaintiffs’
       counsel; and (7) the awards in similar cases.

Gunter, 223 F.3d at 195 n.1.
       9
         This approach was pioneered by Judge Vaughn Walker of the
Northern District of California in the Oracle securities litigation. See
Oracle, supra, 131 F.R.D. 688; see also In re Oracle Sec. Litig., 136
F.R.D. 639 (N.D. Cal. 1991); 132 F.R.D. 538 (N.D. Cal. 1990). Judge
Walker asked each firm to submit an application detailing its
qualifications and the percentage of any recovery that it would charge as
its fee, 131 F.R.D. at 697, most firms proposed a fee schedule under
which the percentage would decline as the recovery increased, see 132
F.R.D. at 543, and Judge Walker thereafter chose the firm whose bid
“conform[ed] to the fee structure associated with a competitive market,”
id. at 547.
         While the auction approach has been criticized from several
corners, see, e.g., Cendant I, 264 F.3d at 277-79; John C. Coffee, Jr., The
Unfaithful Champion: The Plaintiff as Monitor in Shareholder
Litigation, Law & Contemp. Probs., Summer 1985, at 5, 77; Harel &
Stein, supra, at 94-95; Samuel Issacharoff, Governance and Legitimacy
in the Law of Class Actions, 1999 Sup. Ct. Rev. 337, 375 n.134, it has
also been widely followed. Numerous federal district courts have used
some form of auction to appoint lead counsel in securities and other class
actions. See, e.g., In re Bank One S’holders Class Actions, 96 F. Supp.
17
Indeed, the District Court in this litigation initially used the auction
approach. See In re Cendant Corp. Litig., 182 F.R.D. 144 (D.N.J.
1998). In our review of that decision in Cendant I, we discussed the
auction method at length, but ultimately held that the District Court
had abused its discretion in auctioning off the right to represent the
class. We found that the PSLRA creates an exclusive mechanism
for appointing and compensating class counsel in securities class
actions, and does not permit auctions in the ordinary case.10 See
264 F.3d at 273-80. We return to the PSLRA in Part IV.B, infra; at

2d 780, 784 (N.D. Ill. 2001) (Shadur, J.) (Bank One); In re Auction
Houses Antitrust Litig., 197 F.R.D. 71 (S.D.N.Y. 2000) (Kaplan, J.); In
re Lucent Techs., Inc. Sec. Litig., 194 F.R.D. 137 (D.N.J. 2000)
(Lechner, J.); In re Quintus Sec. Litig., 201 F.R.D. 475 (N.D. Cal. 2001)
(Walker, J.). Several courts, e.g., Auction Houses, 197 F.R.D. at 82-85,
and academic commentators, e.g., Harel & Stein, supra, at 107-21, have
proposed modifications to the original Oracle formula in order to more
closely mirror market conditions or to better align the interests of lead
counsel and the class.
        Our Court has been wary of the auction approach. The Third
Circuit Task Force on the Selection of Class Counsel concluded that
“auctions generally fail in their basic stated purpose of replicating the
private market for legal services.” Task Force Report, supra, at 737. It
therefore recommended that auctions be used only “in certain limited
situations,” id. at 741, and listed a number of factors for a court to
consider in deciding whether or not to conduct an auction, id. at 742-45.
In particular, the existence of a sophisticated lead plaintiff is a factor
counting against the auction approach: “There is no need for a court to
be heavily involved in creating a market through an artificial structure if
an experienced plaintiff with substantial resources is capable and willing
to enter into a competitive search for, and fee negotiation with, qualified
counsel.” Id. at 744.
       10
          The auction employed by the District Court in this case gave
Lead Plaintiffs’ chosen law firms the right to match the lowest bid in the
auction. The chosen firms exercised that right, and were named Lead
Counsel. We therefore found the District Court’s error in holding the
auction harmless insofar as it affected counsel selection, because the
counsel selected by auction were the same as those selected by the Lead
Plaintiffs. Cendant I, 264 F.3d at 280. We reversed, however, for a
redetermination of counsel fees in accordance with the original retainer
agreement, rather than the auction fee schedule. See id. at 285.

                                    18
this juncture, it will be useful to review the recent common fund
jurisprudence to see how courts conduct the inquiry into whether
and how counsel benefited the common fund.

       2. Awarding Fees Under the Common Fund Doctrine
        The lodestar and percentage-of-recovery methods both
address the problem of determining how large a fee to award to
successful lead counsel. But the instant appeal raises a different
problem. Here, the first question is not how large a fee to award,
but who has properly earned a fee for representing the class. Lead
Counsel argue that only they and their designated assisting firms
did work that led to the favorable settlement, while appellant firms
claim that their work also conferred benefits on the class and
should be compensated.
        Arguably the most closely analogous precedent is Gottlieb
v. Barry, 43 F.3d 474 (10th Cir. 1994), a pre-PSLRA case with
facts similar to those here. After MiniScribe Corporation collapsed,
a number of shareholders brought securities actions; these were all
consolidated into one class action, and not all of the plaintiffs’
attorneys were designated as class counsel. After the class action
settled, all of the attorneys requested fees, and a special master was
appointed. He found that the work of the many attorneys who filed
their own suits was duplicative, but

       nonetheless recommended an award of ten percent of
       the total fee to Non-Designated Counsel [i.e.,
       attorneys who were not chosen as class counsel], on
       the ground that the duplication of work was largely
       “unavoidable,” permitting Non-Designated Counsel
       to recover some of their fees encourages
       enforcement of the securities laws, and the
       multiplicity of law suits initially filed enhances the
       possibility that at least one named plaintiff will be an
       appropriate class representative.

Id. at 484.
        The district court disagreed, and reversed the award of fees
to non-designated counsel. On appeal, the Tenth Circuit again
reversed, and reinstated the special master’s fee award. The court
found that “numerous actions were initially filed, and counsel

                                 19
vigorously pursued those cases for sixteen months before class
counsel was designated.” Id. at 488. The district court had
encouraged nondesignated counsel to coordinate their efforts, and
the Tenth Circuit found that those attorneys had vigorously
prosecuted their cases. Id. at 489. In fact, lead counsel recognized
nondesignated counsel’s efforts, and requested submission of any
work product that might be useful to the class, upon its
appointment as class counsel. Id.
      The court continued:

       Moreover, it seems implausible that all of sixteen
       months of work, pursued on multiple fronts by
       multiple counsel, suddenly becomes worthless upon
       the selection of a few counsel to serve as class
       counsel. . . . And while there obviously was some
       duplication in the work of all counsel simultaneously
       pursuing many actions, we fail to see why the work
       of counsel later designated as class counsel should
       be fully compensated, while the work of counsel
       who were not later designated class counsel, but on
       whose shoulders class counsel admittedly stood,
       should be wholly uncompensated.

Id. The Tenth Circuit also dismissed the district court’s conclusion
that “entrepreneurial” plaintiffs’ firms necessarily take the risk that
they will not be selected as class counsel:

       The motivations of the lawyers filing such actions
       are irrelevant to the value, if any, of their services.
       Whether motivated by altruism, greed, or
       entrepreneurial zeal, the quality of the attorneys’
       legal services should be objectively ascertainable. If
       they have indeed conferred a benefit on the class, as
       here, they should receive some compensation.

Id.
       Gottlieb thus stands for a quite permissive interpretation of
the common fund doctrine, compensating “copycat” plaintiffs’
firms for their investigation and prosecution of the claims largely
on the basis of the quality of their work. Nonetheless, even under

                                  20
this permissive standard, mere diligent and competent work is not
sufficient to earn compensation: the work must actually benefit the
class in order to be rewarded out of the common fund.
        While Gottlieb represents one plausible view, we note that
our Court has taken a more stringent view of the common fund
doctrine. For example, in rejecting a fee award to class counsel in
a case in which state government lawyers also performed much of
the investigation and negotiation, we criticized the district court for
“not attempt[ing] to distinguish between those benefits created by
the [state attorneys] and those created by class counsel.”
Prudential, supra, 148 F.3d at 338. While the Prudential panel did
not specifically address the issue of duplicative work, it did focus
on the independent creation of benefits, not merely on
compensating attorneys for work on behalf of the class (whether or
not that work resulted in benefits).
        Judge Lewis Kaplan of the United States District Court for
the Southern District of New York, another important innovator in
the auction mechanism for choosing class counsel, see note 9,
supra, has also adopted an approach that is less generous to
common fund claimants than is the approach of Gottlieb. See In re
Auction Houses Antitrust Litig., No. 00 Civ. 0648, 2001 WL
210697 (S.D.N.Y. Feb. 26, 2001) (Kaplan, J.) (Auction Houses).
Auction Houses was a common fund case in which Judge Kaplan
denied legal fees to most firms who were not appointed lead
counsel (or interim lead counsel) by the court. In particular, he
refused to reward work done by non-lead counsel that was
duplicative of the efforts of lead counsel, holding that most of such
counsel’s “entrepreneurial” work should not be compensated out
of the class’s recovery, and that counsel’s “monitoring” of the
action on behalf of their individual class-member clients was
similarly not compensable. 2001 WL 210697, at *4.
        In Part V, infra, we will discuss the effect of the PSLRA on
a court’s decision to compensate counsel. For now, we simply note
that the common fund doctrine itself imposes boundaries on that
decision independent of the PSLRA. The cases are unanimous that
simply doing work on behalf of the class does not create a right to
compensation; the focus is on whether that work provided a benefit
to the class. In the ordinary case, most work that lead counsel does
will typically advance the class’s interests, but the inquiry into non-
lead counsel’s work must be more detailed. Non-lead counsel will

                                  21
have to demonstrate that their work conferred a benefit on the class
beyond that conferred by lead counsel. Work that is duplicative of
the efforts of lead counsel—e.g., where non-lead counsel is merely
monitoring appointed lead counsel’s representation of the class, or
where multiple firms, in their efforts to become lead counsel, filed
complaints and otherwise prosecuted the early stages of
litigation—will not normally be compensated.

                          B. The PSLRA
        To respond to the difficulties that securities plaintiffs face
in monitoring class counsel, as well as to reduce the frequency of
meritless securities-fraud lawsuits, Congress enacted the Private
Securities Litigation Reform Act of 1995, Pub. L. No. 104-67, 109
Stat. 737 (codified as amended at 15 U.S.C. § 74u-4) (PSLRA).
Two aspects of the PSLRA are relevant to our discussion here: its
deference to the court-appointed lead plaintiff, and its mechanism
for selecting class counsel.

                   1. The PSLRA Lead Plaintiff
        In Cendant I, we explained that the PSLRA’s attorney-
selection provisions had their genesis in Elliot J. Weiss and John S.
Beckerman’s article, Let the Money Do the Monitoring: How
Institutional Investors Can Reduce Agency Costs in Securities
Class Actions, 104 Yale L.J. 2053 (1995). See 264 F.3d at 261-62.
Weiss and Beckerman began from the premise that “attorneys
operating on a contingent fee basis initiate most [securities] suits
in the names of ‘figurehead’ plaintiffs with little at stake.” Weiss
& Beckerman, supra, at 2054. Such figurehead plaintiffs are
unlikely to monitor attorneys to ensure faithful service to the class.
See id. at 2088; see also Bell Atlantic Corp. v. Bolger, 2 F.3d 1304,
1309 n.9 (3d Cir. 1993) (“Generally, the costs of monitoring will
exceed the pro rata benefit to any single shareholder even though
they may be lower than the benefits to all.”).
        But Weiss and Beckerman pointed out a possible solution:
appoint institutional investors, who own a majority of the stock of
public corporations and typically account for a majority of the
dollar value of claims in securities class actions, as lead plaintiffs.
Weiss & Beckerman, supra, at 2056. Such investors might have
multimillion-dollar interests in securities class actions, and so
would have every incentive to make sure that class counsel are

                                  22
doing a good job prosecuting their claims. This insight formed the
basis of the PSLRA’s provisions requiring courts to appoint as lead
plaintiff the “member or members of the purported class that the
court determines to be most capable of adequately representing the
interests of class members,” 15 U.S.C. § 78u-4(a)(3)(B)(i), and
creating a rebuttable presumption that this “most adequate
plaintiff” is the plaintiff who otherwise satisfies the requirements
of Rule 23 and has the “largest financial interest in the relief sought
by the class,” 15 U.S.C. § 78u-4(a)(3)(B)(iii)(I).
        While the PSLRA focuses on plaintiffs’ financial stake in
the suit, Weiss and Beckerman point out that large claimants are
typically institutional investors, Weiss & Beckerman, supra, at
2088-93, and that such institutions, as sophisticated businesses and
repeat players in the class-action business, “have or readily could
develop the expertise necessary” to monitor shareholder suits, id.
at 2095; see also id. at 2106. As we noted in Cendant I, “the goal
of the Reform Act’s lead plaintiff provision is to locate a person or
entity whose sophistication and interest in the litigation are
sufficient to permit that person or entity to function as an active
agent for the class.” 264 F.3d at 266.
        Thus the PSLRA strives to ensure that the lead plaintiff will
have both the incentive and the capability to supervise its counsel
in the best interests of the class. We noted in Cendant I that the
PSLRA’s “detailed procedures for choosing the lead plaintiff . . .
indicat[e] that Congress attached great importance to ensuring that
the right person or group is selected.” 264 F.3d at 273. From this
fact, we inferred that Congress meant to give the lead plaintiff
significant responsibility in controlling the litigation. But, as we
noted, this responsibility was formally manifested in only one area:
“The only powers expressly given to the lead plaintiff . . . are to
‘select and retain’ counsel.” Id.

                  2. The Choice of Lead Counsel
        The PSLRA is explicit that the power to select counsel
resides in the lead plaintiff: that plaintiff “shall, subject to the
approval of the court, select and retain counsel to represent the
class.” 15 U.S.C. § 78u-4(a)(3)(B)(v). This is a sea change from the
prior race-to-the-courthouse system, where “lead counsel have
historically chosen the lead plaintiff rather than vice versa.”
Cendant I, 264 F.3d at 274. It is also at odds with the auction

                                  23
approach favored by many courts in non-PSLRA class actions.
Auctioning the lead counsel position leaves the selection and
monitoring of counsel firmly in the hands of the court, rather than
the lead plaintiff. In Cendant I we determined that this is generally
incompatible with the purposes of the PSLRA and its “underlying
assumption that, at least in the typical case, a properly-selected lead
plaintiff is likely to do as good or better [a] job than the court at
these tasks.” 264 F.3d at 276. We thus reversed the District Court’s
use of an auction in this case, and concluded that the Lead
Plaintiffs’ original choice of Lead Counsel should have been
confirmed.
        The court may appoint lead counsel in PSLRA cases, by
auction or otherwise, only in the unusual situation in which no
sophisticated lead plaintiff can be trusted to fulfill its duties to the
class under the PSLRA. Id. at 277; see also In re Quintus Sec.
Litig., 201 F.R.D. 475, 486 (N.D. Cal. 2001) (employing an
auction, but noting that “the court would be hesitant to employ
competitive bidding if an institutional investor had come forward
and negotiated a fee arrangement that appeared reasonable”); cf. In
re Cavanaugh, 306 F.3d 726, 732-33 (9th Cir. 2002) (following
Cendant I and reversing a district court’s choice of a lead plaintiff
who was not the PSLRA “most adequate plaintiff” but who
proposed a more favorable fee structure than did the most adequate
plaintiff).
        While the auction approach is meant to mimic the pricing
function of a competitive market for legal services, see Oracle, 131
F.R.D. at 693, the PSLRA attempts to implement a market
approach by leaving the selection of counsel in the hands of a
unitary, experienced, and sophisticated consumer. Sophisticated
consumers of legal services can evaluate prospective counsel based
both on skill and cost, and can negotiate fee structures that will
keep costs reasonable while providing counsel with incentives to
perform excellent work.

      V. The Common Fund Doctrine After the PSLRA

       No federal court of appeals has directly addressed the
questions whether and to what extent the common fund doctrine
survives the enactment of the PSLRA; most courts seem to have
assumed that it survives intact, at least for the purposes of

                                  24
analyzing lead counsel’s fee requests. See, e.g., Powers v. Eichen,
229 F.3d 1249 (9th Cir. 2000); Wininger v. SI Management L.P.,
301 F.3d 1115 (9th Cir. 2002); In re Bristol-Myers Squibb Sec.
Litig., No. 02 Civ. 2251, 2005 WL 447189 (S.D.N.Y. Feb. 24,
2005); In re Global Crossing Sec. & ERISA Litig., 225 F.R.D. 436
(S.D.N.Y. 2004). In contrast, we note at the outset that the PSLRA
and the common fund doctrine are in significant tension. In
Cendant I we were emphatic that the PSLRA vests authority over
counsel selection and compensation in the lead plaintiff—not in the
court, and certainly not in entrepreneurial counsel who attempt to
appoint themselves as representatives of the class. We should
therefore not be surprised if, under the PSLRA, counsel who
perform work on behalf of a class, without the approval of the
court or the lead plaintiff, are shut out of any fee award. The
PSLRA has shifted the balance of power away from plaintiffs’
attorneys, who traditionally controlled common fund cases, to the
institutional plaintiffs who now supervise securities class actions.

            A. Before Appointment of Lead Plaintiff
       The common fund doctrine survives most robustly in the
period running from the accrual of the cause of action to the
appointment of lead plaintiff.11 This period can be of significant

        11
           The PSLRA requires plaintiffs who file securities class actions
to publish, within 20 days of filing the complaint, a notice of the
pendency of the class action to solicit prospective lead plaintiffs. 15
U.S.C. § 78u-4(a)(3)(A)(i). Putative class members may move to be
considered as lead plaintiffs for 60 days after publication of the notice,
§ 78u-4(a)(3)(A)(i)(II), and the court must appoint a lead plaintiff within
90 days of that publication, § 78u-4(a)(3)(B)(i). The PSLRA thus
contemplates a window of almost four months between filing of the first
class complaints and appointment of a lead plaintiff; here, due to the
numerous complaints filed between April and August 1998, and the need
to consolidate those complaints, the window was closer to five months
(from mid-April through early September 1998). Counsel may also
perform investigative and preparatory work on behalf of a prospective
class in advance of filing a complaint, though we are aware that many
securities class actions are filed within days of the stock-price drops that
inspire them. See Weiss & Beckerman, supra, at 2061-62.
        We define this period as ending with the appointment of the lead
plaintiff, not lead counsel. Here, Lead Counsel were appointed over a

                                    25
importance: before lead plaintiff is appointed, counsel may
discover possible fraud at the issuer, investigate that possible fraud,
determine whether it warrants filing of a complaint, make strategic
decisions about the form and content of the complaint, draft the
complaint, file it, issue notice to class members, and navigate the
PSLRA’s lead-plaintiff selection procedures. These actions will
often constitute a considerable fraction of the work that goes into
the litigation.
        At the same time, we are not blind to the realities of many
securities class actions. Weiss and Beckerman give a particularly
cynical view of the race to the courthouse:

        Any lawyer with access to a computer and financial
        databases can monitor the securities markets and
        wire services for major stock price moves tied to
        significant corporate announcements or events that
        may signal potential securities law claims. Upon
        discovering such a situation, an attorney can quickly
        download all of the subject company’s public
        statements relevant to that announcement or event,
        together with additional information pertinent to a
        possible claim of securities fraud, such as whether
        the company made a public offering or whether

month after Lead Plaintiffs, although this delay was due mostly to the
District Court’s decision to hold an auction, a decision which we rejected
in Cendant I. In the normal PSLRA case, lead plaintiff will likely have
already retained counsel upon its appointment, and so the appointment
of lead plaintiff and lead counsel will occur contemporaneously. This is
not, however, an inevitability: lead plaintiff may take its time in
choosing its counsel. We expect that a lead plaintiff would not be unduly
dilatory in appointing counsel, but also that attorneys who do not expect
to be favored by the lead plaintiff will not continue to work on behalf of
the class with little prospect of reward. Moreover, a law firm that seeks
compensation for doing work on behalf of a named lead plaintiff,
without being retained by that lead plaintiff, comes perilously close to
demanding compensation for working for an individual client who did
not hire it. If such a firm does continue to work on behalf of the class, its
contribution to the class should be evaluated under the standard set forth
in Part V.B.1, infra, under which the court grants significantly greater
deference to the decisions of the lead plaintiff.

                                     26
       insiders bought or sold stock during the period in
       which the firm may have suppressed or
       misrepresented material information. If the attorney
       decides there are grounds on which to file a
       complaint, she or her staff can use computers to
       incorporate quickly all such information into a
       complaint alleging securities fraud.

Weiss & Beckerman, supra, at 2061-2062 (footnotes omitted). The
dominant paradigm in securities class actions is probably not
careful investigation to discover hidden abuses, but rapid filing in
response to abuses publicized by regulators, the media, or the issuer
itself. See, e.g., Auction Houses, 2001 WL 210697, at *3-4.

                1. Pre-Appointment Work Generally
        Nonetheless, one or more attorneys or firms will often
perform substantial work on behalf of the class during the period
prior to appointment of a lead plaintiff. Throughout this time,
counsel will have no guarantee that their client will be appointed
lead plaintiff, or that the lead plaintiff ultimately appointed will
select them as lead counsel. To allow compensation of work done
during this period to depend solely on the whim of the lead plaintiff
could well lead to unfair and arbitrary fee decisions.
        We therefore conclude that the court’s involvement in the
fee decision will be at its height when the fee request is for work
performed before the appointment of the lead plaintiff. If an
attorney creates a substantial benefit for the class in this
period—by, for example, discovering wrongdoing through his or
her own investigation, or by developing legal theories that are
ultimately used by lead counsel in prosecuting the class
action—then he or she will be entitled to compensation whether or
not chosen as lead counsel. The court, not the lead plaintiff, must
decide for itself what firms deserve compensation for work done
on behalf of the class prior to the appointment of the lead plaintiff.
        This is not to say that the court may not give substantial
deference to the lead plaintiff’s decision about what work
conferred such benefits. Lead plaintiff will presumably have
reviewed the fee requests of all attorneys who worked on behalf of
the class, and may well have a better sense of what early work was
useful than will the court. The court may place significant weight

                                 27
on lead plaintiff’s findings, but must also consider any objections
proferred by those counsel left out in the cold. The approach
utilized in Bank One has much to recommend it. Judge Shadur
appointed lead counsel under the PSLRA (albeit after employing
an auction), but noted that another firm had prepared the
consolidated class action complaint prior to the designation of the
lead plaintiff. He went on:

       It would obviously be unfair to impose that as a
       labor of love on the part of lawyers who thus served
       the common weal by providing services that
       benefited all of the prospective class representatives.
       Accordingly, if the lead plaintiffs were to elect not to
       make further use of the services of [that firm]
       (though the [lead counsel] is free to reach an
       understanding for their further involvement), it is
       expected that they will be fully compensated,
       whether out of any recovery or from plaintiffs
       collectively, for their services that antedated the
       designations of the lead plaintiffs and of class
       counsel.

Bank One, 96 F. Supp. 2d at 790 n.13. This approach puts the
primary responsibility for compensating non-designated firms on
the lead plaintiffs, but preserves the independent involvement of
the court in evaluating the pre-appointment contributions of non-
lead counsel.

               2. Compensation for Filing Complaints
        We think that the district courts, with the assistance of lead
plaintiffs, are well equipped to decide what work during the pre-
designation period actually contributed to the class’s recovery. But
there will always be a bone of contention as to whether non-lead
counsel deserve any compensation for filing complaints. Appellant
firms, and particularly FTL, cite a public policy in favor of
vigorous prosecution of securities class actions. It is widely
believed that such suits deter wrongdoing and promote the integrity
and efficiency of the capital markets. See H.R. Conf. Rep. No.
104-369, at 31 (1995), reprinted in 1995 U.S.C.C.A.N. 730, 730.
FTL argues that, were we to rule that non-lead counsel could not

                                 28
be compensated for filing complaints, we would chill the salutary
private enforcement of the securities laws.
        We are considerably more sanguine about the future of
securities class actions than is FTL. Given the relative ease with
which plaintiffs’ attorneys can learn of potential securities fraud,
and the speed with which they can translate that information into
a complaint, we think that attorneys will vigorously prosecute such
complaints even without a guarantee of compensation. Instead, we
think that the best approach is to view such complaints as
entrepreneurial efforts: each firm’s complaint is the price of
admission to a lottery that might result in it being named lead
counsel. If a firm wins that lottery, it stands to make significant
fees at multiples of its lodestar. Compensating a firm for filing a
complaint and not being named lead counsel would offer free
tickets to the lead-counsel lottery, and would thus create incentives
for redundant filings.
        There is also little reason to believe that the mere filing of
complaints in a securities class action ordinarily confers much
benefit on the class. Such complaints are as often spurred by news
reports or press releases disclosing wrongdoing—or by reports that
other firms have filed complaints—as by independent
investigation. Confronting a similar situation in Auction Houses,
Judge Kaplan noted that the national media had reported on the
price-fixing scandal at Christie’s and Sotheby’s, and dismissed the
idea that the work involved in filing these complaints was
compensable:

       Certainly the mere filing of complaints did not
       benefit the class. None of those counsel who simply
       jumped on the band wagon made any significant
       contribution to the conduct of the litigation, let alone
       the recovery. Each no doubt saw The New York
       Times or subsequent articles and, rather than simply
       advising his or her client to participate in the class
       action, filed an entirely duplicative complaint that
       served no real purpose. . . . There is no reason to
       compensate such piling on, much less create an
       economic incentive to repeat it.

2001 WL 210697, at *4.

                                 29
        We share Judge Kaplan’s skepticism of copycat filings.
While we agree with FTL that proper enforcement of the securities
laws requires some incentive to file a complaint, we think that the
possibility of being appointed lead counsel provides that incentive.
Compensating every non-lead counsel for filing complaints would
overincentivize such filing, and encourage the redundant “piling
on” found in Auction Houses—and in this case, in which some
sixty-two complaints were filed on behalf of the class.
        The PSLRA also militates against compensating such
complaints. The legislative history indicates that the PSLRA was
a reaction against a race-to-the-courthouse model of securities
litigation in which attorneys appointed themselves class
representatives and chose their own figurehead plaintiffs who had
no power to select or oversee “their” lawyers. See S. Rep. No. 104-
98 (1995), at 11, reprinted in 1995 U.S.C.C.A.N. 679, 690 (“Since
no deference is given to the most thoroughly researched complaint,
the lawyers spend minimal time preparing complaints in securities
class actions.”). Allowing an attorney to generate a fee for himself
simply by finding a plaintiff and filing a complaint would
eviscerate the PSLRA’s reforms.
        In sum, we do not think that attorneys can simply
manufacture fees for themselves by filing a complaint in a
securities class action.12 On the other hand, attorneys who alone
discover grounds for a suit, based on their own investigation rather
than on public reports, legitimately create a benefit for the class,
and comport with the purposes of the securities laws. Such
attorneys should generally be compensated out of the class’s
recovery, even if the lead plaintiff does not choose them to
represent the class. More generally, attorneys whose complaints
contain factual research or legal theories that lead counsel did not
discover, and upon which lead counsel later rely, will have a claim
on a share of the class’s recovery. In most cases, as in Bank One,

       12
           To be clear, we do not suggest that lead counsel and its
designated assisting firms should not be compensated for the work that
they put into filing the complaint. Such work is part and parcel of the
effort that will eventually, in cases where the plaintiffs are victorious,
result in a benefit to the class. We merely find it improper to compensate
every firm that files a complaint, without regard to whether they
contribute anything further to the class action.

                                   30
we expect that lead plaintiffs who make use of earlier attorneys’
legal or investigative work will request compensation for such
attorneys. In the unlikely case that lead plaintiffs appropriate that
work and attempt to deny compensation, we expect that the court
will nonetheless reward the earlier attorney’s work on behalf of the
class.
        We emphasize that, in determining who is entitled to
attorneys’ fees for pre-appointment work, the court’s only
consideration must be whether or not the attorney’s work provided
benefits to the class. The mere fact that a non-designated counsel
worked diligently and competently with the goal of benefiting the
class is not sufficient to merit compensation. Instead, only
attorneys “whose efforts create, discover, increase, or preserve” the
class’s ultimate recovery will merit compensation from that
recovery. GMC, 55 F.3d at 820 n.39. To the extent that the Tenth
Circuit’s pre-PSLRA decision in Gottlieb v. Barry, 43 F.3d 474
(10th Cir. 1994), is in tension with this holding, we reject
Gottlieb’s suggestion that duplicative but useful work will always
be compensable, and that “the quality of the attorneys’ legal
services” will be somehow dispositive. See 43 F.3d at 489; see also
supra Part IV.A.2.
        If a hundred lawyers each perform admirable but identical
work on behalf of a class before the appointment of the lead
plaintiff, the court should not award fees to each of the lawyers, as
this would overincentivize duplicative work. Instead, while all of
lead counsel’s work will likely be compensable, see supra note 12,
other attorneys who merely duplicated that work—however noble
their intentions, however diligent their efforts, and however
outstanding their product—will not be entitled to compensation.
Only those who confer an independent benefit upon the class will
merit compensation.
        To summarize, responsibility for determining fees for the
work of non-lead counsel performed before the appointment of the
lead plaintiff will rest, in the first instance, with the district court,
though that court may ask the lead plaintiff for guidance in
evaluating claims for fees. Only work that actually confers a
benefit on the class will be compensable; in the ordinary case,
simply filing a complaint that is substantially identical to other
complaints will not by itself warrant compensation.

                                   31
               B. After Appointment of Lead Plaintiff
        After a lead plaintiff is appointed, however, the primary
responsibility for compensation shifts from the court to that lead
plaintiff, subject of course to ultimate court approval. The PSLRA
lead plaintiff is the decisionmaker for the class, deciding which
lawyers will represent the class and how they will be paid.

                              1. In General
         The PSLRA lead plaintiff chooses the class’s lawyer: “The
most adequate [i.e., lead] plaintiff shall, subject to the approval of
the court, select and retain counsel to represent the class.” 15
U.S.C. § 78u-4(a)(3)(B)(v). From the point of view of the PSLRA,
the lead plaintiff is the client, and the attorney-client relationship
is, in the first instance, the relationship between lead counsel and
lead plaintiff.
         The PSLRA’s legislative history also demonstrates that it
was intended to create something akin to a traditional attorney-
client relationship in the securities class action context. See S. Rep.
No. 104-98, at 10 (1995) (“[T]he lead plaintiff—not
lawyers—should drive the litigation. As one witness testified: ‘One
way of addressing this problem is to restore lawyers and clients to
their traditional roles by making it harder for lawyers to invent a
suit and then attach a plaintiff.’”) (quoting testimony of Mark E.
Lackritz), reprinted in 1995 U.S.C.C.A.N. 679, 689; see also Weiss
& Beckerman, supra, at 2105-07; Harel & Stein, supra, at 103-04.
Under this traditional model, the lead plaintiff is treated like any
other private plaintiff, and is free to select lead counsel, negotiate
a compensation structure, monitor counsel’s efforts, and make
decisions about “the objectives of representation,” particularly
settlement decisions. Model Rules of Prof’l Conduct R. 1.2(a)
(1983).
         Viewed from this perspective, non-lead-counsel’s claims to
recover under the common fund doctrine may appear untoward. In
normal circumstances, an individual client is free to select his own
counsel, and another lawyer, not retained by the client, could not
manufacture a fee for himself by claiming to work on behalf of the
client. Such an officious intermeddler would be laughed out of
court if he asked the client for compensation for work never

                                  32
requested by that client.13
        On the other hand, while the PSLRA certainly represents a
shift toward the traditional attorney-client relationship, it has not
wholly adopted that paradigm. Securities class actions are still class
actions, and the court retains the power to award fees. See Fed. R.
Civ. P. 23(h) (“In an action certified as a class action, the court
may award reasonable attorney fees . . . .”). And courts would be
remiss if they abdicated all responsibility to the lead plaintiffs. The
lead plaintiff is not the sole client in a PSLRA class action; instead,
the lead plaintiff serves as a fiduciary for the entire class. A court
must therefore retain oversight over lead plaintiff’s compensation
decisions in order to ensure that the lead plaintiff has fulfilled its
fiduciary duties.
        Furthermore, the lead plaintiff, and indeed the entire class,
has an incentive to deny compensation to non-lead counsel. Any
such compensation will normally come directly out of the class’s
recovery, and the PSLRA ensures that the lead plaintiff has a large
stake in that recovery. Any compensation paid to non-lead counsel
may substantially reduce the recovery of the lead plaintiffs.14 Thus
the lead plaintiff will have a direct financial interest in keeping
down the fees of non-lead counsel. On the other hand, we think
those incentives will be kept in check by the fact that lead plaintiffs

        13
          Cf. Cosgrove v. Bartolotta, 150 F.3d 729, 734 (7th Cir. 1998)
(“When one person confers a benefit on another in circumstances in
which the benefactor reasonably believes that he will be paid—that is,
when the benefit is not rendered gratuitously, as by an officious
intermeddler, or donatively, as by an altruist or friend or relative—then
he is entitled to demand the restitution of the market value of the benefit
if the recipient refuses to pay.”). An attorney could not reasonably
believe that a client who had not retained him would pay him for his
efforts; he would be a mere intermeddler.
        14
          In their examination of twenty settled securities class actions,
Weiss and Beckerman found that the single largest claimant held
between 3.1% and 34.0% of the total claims in each suit. Weiss &
Beckerman, supra, at 2089-90 tbl.2. Assuming that plaintiffs recover in
proportion to their losses, and that counsel fees come out of all plaintiffs’
recovery pro rata, this means that a dollar in counsel fees would have
cost the single lead plaintiffs in those cases anywhere from three to
thirty-four cents.

                                     33
and lead counsel are likely to be repeat players in the securities
class action business. They will therefore want to develop a
reputation for fair dealing—especially since lead counsel in one
class action are likely to be non-lead counsel in another, and will
therefore want to maintain good relations with the rest of the
securities plaintiffs’ bar. Similarly, CalPERS will have an incentive
to appropriately compensate any work done by Miller Faucher that
increased its recovery in this case, because it will want to be able
to rely on Miller Faucher to represent its interests in the next case
in which Miller Faucher is lead counsel. In short, the PSLRA’s
focus on putting the power over securities lawsuits in the hands of
repeat players will provide incentives for all concerned to play fair.
        We believe that Cendant I can be adapted to provide the
appropriate standard for the court to use in evaluating fee requests
by non-lead counsel. In Cendant I, we held that

       courts 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. . . . This presumption will
       ensure that the lead plaintiff, not the court, functions
       as the class’s primary agent vis-à-vis its lawyers.
264 F.3d at 282. The paramount goal, here as in Cendant I, is to
give the lead plaintiff, not the court, authority over class counsel.
This goal is served by according an equivalent presumption of
correctness to lead plaintiff’s decision that non-lead counsel’s
work, not pursuant to a retainer agreement between counsel and the
lead plaintiff, is not entitled to any fees paid out of the class’s
recovery. We thus conclude that any attorney who wishes to be
compensated out of the plaintiff class’s recovery in a class action
governed by the PSLRA must submit his fee requests to the
PSLRA lead plaintiff, and that the district court should accord a
presumption of correctness to lead plaintiff’s decision that such an
attorney is not entitled to fees.
       Of course, “[s]aying that there is a presumption necessarily
assumes that it can be overcome in some cases.” Cendant I, 264
F.3d at 282. In Cendant I, we noted several factors that might rebut
the presumption that fees agreed to by lead counsel pursuant to a

                                 34
retainer agreement are reasonable. If “the assumptions underlying
the original retainer agreement had been materially altered” by
unforeseeable developments, or if a prima facie case was made by
objectors that the agreed-to fee was “clearly excessive” under a
modified Gunter inquiry, then the presumption of reasonableness
would be rebutted, and the court would have to “review the fee
request using the traditional standards.” 264 F.3d at 282-83.
         These rebuttal factors do not seem particularly relevant in
the case of a lead plaintiff’s denial of fees to non-lead counsel.
With no retainer agreement, there can be no real evidence of the
initial assumptions underlying the litigation, and an excessiveness
inquiry will be irrelevant to the question whether non-lead counsel
deserve any fees in the first place. Instead, we think that the
presumption of correctness afforded to lead plaintiff’s denial of
fees to non-lead counsel can be refuted in one of two general ways.
         First, non-lead counsel can refute the presumption by
affirmatively demonstrating some failure in lead plaintiff’s
fiduciary representation of the class. A fiduciary traditionally owes
a duty of loyalty and a duty of care. See, e.g., Air Line Pilots Ass’n,
Int’l v. O’Neill, 499 U.S. 65, 75 (1991). Non-lead counsel might
thus refute the presumption by demonstrating a defect in either
duty, i.e., by showing that (1) lead plaintiff’s denial of fees was
motivated by some factor other than the best interests of the class,
or (2) lead plaintiff did not carefully consider and reasonably
investigate non-lead counsel’s request for fees. If non-lead counsel
could demonstrate either of these failures, then a court could
conclude that lead plaintiff has not performed its fiduciary duties
as mandated by the PSLRA and is not entitled to any deference in
the determination of counsel fees. At this point, of course, non-lead
counsel will still need to demonstrate to the court’s satisfaction that
its work did benefit the class, under traditional common fund
standards.
         Second, non-lead counsel can refute the presumption, even
in cases where lead plaintiff has faithfully discharged its fiduciary
duties, simply by demonstrating that lead plaintiff’s denial of fees
was erroneous—that is, by clearly proving that non-lead counsel
reasonably performed work that independently benefited the class.
But, given our stated deference to lead plaintiff’s managerial
decisions, the standard for such a demonstration will be high. Non-
lead counsel will need to prove by clear evidence that (1) they

                                  35
performed work on behalf of the class, (2) they did so with some
reasonable expectation of being compensated out of the class’s
common-fund recovery, and (3) their work led to identifiable
benefits to the class that would not have been obtained by the work
of lead counsel.
        The first factor will normally be demonstrated simply
enough, by a showing that counsel devoted hours to a prosecution
of the claim. But mere quantity of work—and, indeed, quality of
work—will not be enough for compensation; the other two factors
must also be met. The second factor is designed to distinguish
deserving firms from officious intermeddlers, and can be met most
easily by some proof that lead plaintiff (or lead counsel) requested
the assistance of the non-lead counsel firm.15 On the other hand,
even in cases where no such proof is forthcoming, non-lead
counsel may be able to show a reasonable expectation of
compensation due to a lead counsel’s, or the court’s, acquiescence
in its efforts.16
        The third factor is related to the traditional common fund
test: did counsel’s efforts confer a benefit upon the class? Here,
however, counsel’s proof must be specific: it must show what its
efforts were, how they created a benefit, and why that benefit
would not have been created absent its efforts. If both lead counsel
and the fee-requesting non-lead counsel performed work in
parallel, non-lead counsel will not be able to carry this third factor
merely by demonstrating that its work was in some subjective way
better. Only if it can demonstrate that its work alone was
responsible for some demonstrably improved probability of victory,
or some identifiable portion of the class’s recovery, can non-lead

       15
         Of course, counsel must demonstrate that they had a reasonable
expectation to be compensated out of the class’s recovery. The fact that
an individual client requested their assistance indicates no more than a
possible expectation that that client would compensate them.
       16
         The extent of proof required on the second factor may vary
inversely with the extent of the benefit conferred under the third factor.
Indeed, it is conceivable that a pure intermeddler may be entitled to
compensation if it can convincingly prove that its efforts were solely
responsible for a large recovery for the class, although we expect that
such cases will be rare.

                                   36
counsel claim a right to fees from the common fund.
        We think that this rebuttable presumption in favor of lead
plaintiff’s decision not to compensate non-lead counsel will serve
for the majority of cases.17 However, we turn to a few situations

        17
          Our conclusions about the role of lead plaintiff in compensating
non-lead counsel may seem to be in some tension with our precedents on
the compensation of objectors’ counsel. In Cendant PRIDES, we stated
the standard for evaluating fee requests from objectors’ counsel: the
district court has “broad discretion” in deciding what fees to award,
based on its own evaluation of whether the objector “assisted the court
and enhanced the [class’s] recovery.” 243 F.3d at 743 (quoting White v.
Auerbach, 500 F.2d 822, 828 (2d Cir. 1974)). That standard differs from
the standard, set forth in the text, applicable to fee requests from counsel
for non-objecting class members. We briefly explain why the two
standards differ.
         First, a court can usually determine whether an objector has
improved the class’s recovery, and can often measure the amount of that
improvement. If the objection is meritorious, it will usually lead to an
increase in the settlement, a reallocation of the award among different
plaintiffs, or a decrease in the fees paid to lead counsel. The court will
thus be able to measure the dollar value of the objector’s contribution to
the class’s net recovery. Furthermore, because the objector makes his
objection to the court, rather than merely negotiating with lead counsel,
the court can easily evaluate not only the quality of the objector’s work
but also the impact it had on the court’s ultimate decision. On the other
hand, a district court will not easily be able to determine how much non-
lead counsel’s efforts, as opposed to lead counsel’s independent work,
contributed to the final work product, and it will be even harder pressed
to attach a dollar value to that contribution. Lead plaintiffs, in
consultation with lead counsel, will be much better equipped to evaluate
these questions. See In re Ampicillin Antitrust Litig., 81 F.R.D. 395, 400
(D.D.C. 1978) (“[I]t is virtually impossible for the Court to determine as
accurately as can the attorneys themselves the internal distribution of
work, responsibility and risk.”).
         Second, if we applied the standard developed above to objectors,
a lead plaintiff would have significant incentives to deny fees to even
deserving objectors’ counsel. A successful objection will often reduce
lead plaintiff’s share of the settlement, or lead counsel’s fee award. Lead
plaintiff and lead counsel would thus have an incentive to punish
successful objectors by withholding fees. In contrast, lead plaintiffs and
lead counsel will want, at least ex ante, to encourage counsel for other

                                    37
that require special attention.

         2. Representation of Individual Class Members
       First and foremost, non-lead counsel cannot expect to be
compensated out of the class’s recovery for “monitoring” the work
of lead counsel on behalf of individual clients. If, in the course of
such “monitoring,” counsel discover new facts or legal theories that
might help the class, they can present their discoveries to lead
counsel and may be eligible for compensation if their work in fact
improves the class’s recovery. But we cannot see how the
monitoring itself benefits the class as a whole, as opposed to the
attorney’s individual client. We are thus in complete agreement
with Judge Kaplan in Auction Houses:

       Nor is there any reason for the class as a whole to
       compensate large numbers of lawyers for individual
       class members for keeping abreast of the case on
       behalf of their individual clients, keeping their
       individual clients informed, or duplicating the efforts
       of lead counsel. If individual class members wished
       to have the services of additional counsel in addition
       to class counsel, they should bear the expense
       themselves.

2001 WL 210697, at *4.

           3. Representation of Uncertified Subclasses
       A similar but somewhat more complex issue arises when
non-designated counsel act on behalf not of an individual client (or
an identifiable group of clients), but of a putative but uncertified
subclass. Here, the attorney claims to represent not only an
individual client (who is free to pay counsel fees himself), but a
subgroup whose share of the class’s total recovery may be said to
constitute a common fund in itself.
       A district court hearing a class action has the discretion to

class members to assist their efforts and increase the class’s recovery.
They will thus have incentives to evaluate non-lead counsel’s assistive
work fairly, and to compensate that work when it actually contributes to
the class’s recovery.

                                  38
divide the class into subclasses and certify each subclass separately.
See Fed. R. Civ. P. 23(c)(4)(B). This option is designed to prevent
conflicts of interest in class representation: a lead counsel might
have difficult representing, for example, a class comprising both
ordinary shareholders and large shareholders who also serve as
directors. Indeed, in this case the District Court created a subclass
of Cendant Feline PRIDES purchasers because those purchasers’
interests in the suit conflicted with the interests of Cendant equity
purchasers. See Cendant PRIDES, 243 F.3d at 725.
       While subclasses can be useful in preventing conflicts of
interest, they have their drawbacks. One leading expert writes:

       [I]f subclassing is required for each material legal or
       economic difference that distinguishes class
       members, the Balkanization of the class action is
       threatened. Such a fragmented class might be
       unmanageable, certainly would reduce the economic
       incentives for legal entrepreneurs to act as private
       attorneys general, and could be extremely difficult to
       settle if each subclass (and its attorney) had an
       incentive to hold out for more.

John C. Coffee Jr., Class Action Accountability: Reconciling Exit,
Voice, and Loyalty in Representative Litigation, 100 Colum. L.
Rev. 370, 398 (2000). In short, a class action containing a
multitude of subclasses loses many of the benefits of the class
action format.
       Recognizing that the decision whether to certify a subclass
requires a balancing of costs and benefits that can best be
performed by a district judge who is familiar with the management
of the case, we have held that “the district court has considerable
discretion in utilizing subclasses under rule 23(c)(4)(B).”
Alexander v. Gino’s, Inc., 621 F.2d 71, 75 (3d Cir. 1980); see also
Eisen v. Carlisle & Jacquelin, 417 U.S. 156, 184-185 (1974)
(Douglas, J., dissenting); Diaz v. Romer, 961 F.2d 1508, 1511
(10th Cir. 1992). Where the district court has declined to certify a
subclass, we will ordinarily defer to its decision unless it
constituted an abuse of discretion.
       Furthermore, the PSLRA provides additional reasons to use
subclassification sparingly. As the District Court noted in an ealier

                                 39
phase of this case, overuse of subclasses

       would injure the purpose of the PSLRA by
       fragmenting the plaintiff class and decreasing client
       control. . . . “Increasing the number of Lead
       Plaintiffs would detract from the Reform Act’s
       fundamental goal of client control as it would
       inevitably delegate more control and responsibility to
       the lawyers for the class and make the class
       representatives more reliant on the lawyers.”

In re Cendant Corp. Litig., 182 F.R.D. 476, 480 (D.N.J.,1998)
(quoting Gluck v. Cellstar Corp., 976 F. Supp. 542, 549 (N.D. Tex.
1997)). This case provides a good illustration of the difficulties:
while the PSLRA “most adequate plaintiff” for the main purchaser
class was a consortium of the country’s largest pension funds, the
putative lead plaintiffs for the stub-purchaser subclass were two
individuals (Lewis and Casnoff) with a combined holding of 375
shares of Cendant stock, purchased for a total of about $9,000.
Appointing such small-stakes claimants as lead plaintiffs, merely
because their lawyers have carved out a subclass for them, might
defeat much of the purpose of the PSLRA.
        At all events, once a court has declined to certify a putative
subclass, it should look upon an attorney’s claims to represent that
subclass with skepticism. As we have developed above, the PSLRA
limits an attorney’s ability to claim fees under the common fund
doctrine for work done on behalf of a plaintiff class for which he
or she is not the designated lead counsel. It would be strange if
such an attorney could avoid those restrictions by appointing
himself the protector of a putative subclass that the court has not
certified. Once a lead plaintiff has been appointed, that plaintiff
should be deemed to speak for the entire class—as, indeed, the lead
plaintiff has a fiduciary duty to represent all class members fairly.
        We therefore conclude that non-lead counsel deserve no
special consideration for advocating for the interests of an
uncertified subclass of a PSLRA plaintiff class. We expect the lead
plaintiff to properly represent the entire class, and the presumption
of correctness that we award to its decision not to compensate an
attorney will also extend to a decision not to compensate purported
counsel for an uncertified subclass. That said, however, the

                                 40
presumption remains rebuttable. If the non-lead counsel can prove
that the lead plaintiff violated its fiduciary duties by unfairly
favoring some class members over others, then of course counsel
will be entitled to compensation for representing the interests of the
disfavored group, though we expect that such proof will be rare.
        In the less egregious case, however, in which non-lead
counsel’s advocacy on behalf of the uncertified subclass improves
that subclass’s recovery (quite possibly at the expense of other
members of the broader class), we do not think that the attorney
will automatically be entitled to compensation from the subclass on
a common fund theory. The attorney has not been hired by anyone,
or appointed by the court, to represent the subclass. If he increases
the subclass’s recovery, he does so only as an officious
intermeddler. He may well be entitled to compensation from his
own individual client for his work on the allocation of the recovery,
but, given the PSLRA’s strict and formalized process for
appointing class (and thus subclass) counsel, we do not think that
a self-appointed representative of an uncertified subclass should
have any claim on that subclass’s recovery.
        On the other hand, if such an attorney succeeds in effecting
a significant change in the allocation of damages, this may
constitute some evidence that the lead plaintiff’s initial allocation
was not fair to all class members, and may thus serve to rebut the
presumption that the lead plaintiff properly represented the entire
class. The result will depend on the facts—an attorney who
improves a group’s share of the recovery by pestering or
threatening the lead plaintiff cannot point to his accomplishment to
rebut the presumption, while an attorney who improves his group’s
share by pointing out to the court the unfairness of the lead
plaintiff’s initial allocation may very well overcome the
presumption.

     VI. The Finkelstein, Thompson & Loughran Appeal

        The standards set forth above quickly dispose of FTL’s
request for fees. FTL confesses in its brief that its “role in this
litigation was confined almost entirely to pre-filing investigation
and drafting, monitoring and client communications.” These
activities are not compensable.
        Insofar as FTL requests compensation for its investigation

                                 41
and drafting of a complaint on behalf of Alfred Wise, its claims are
foreclosed by our analysis in Part V.A.2, supra. FTL’s complaint
was the fifty-fifth purported class complaint filed in this action. We
do not question the time that FTL put into preparing its filings; nor
do we doubt the quality and legal sophistication of its thorough
complaint. Our review of the FTL complaint, however, leads us to
the conclusion that its factual allegations were similar to those of
the other fifty-plus complaints filed in this case, and were based
essentially on Cendant’s own public announcements. FTL does not
claim to have taken any investigative action prior to Cendant’s
April 15, 1998, disclosure of its accounting irregularities. As Judge
Kaplan said in similar circumstances:

       [T]his was not [a] . . . violation ferreted out by
       industrious counsel who invested substantial time
       and effort against a chance of success. This was
       much more like finding a pot of gold in the middle
       of the sidewalk.

Auction Houses, 2001 WL 210697, at *3.
        Similarly, FTL does not allege, and we do not find, that the
legal theories advanced in its complaint were substantially different
from those advanced in other complaints, or that FTL’s legal
theories in any way influenced Lead Counsel’s handling of the
case. Thus, there is no reason to find that FTL increased the class’s
recovery by investigating, drafting, and filing its complaint. This
work was therefore not compensable.
        Conversely, insofar as FTL claims compensation for
monitoring the progress of the suit on behalf of its client, Mr. Wise,
it cannot recover under our analysis in Part V.B.2, supra. Such
monitoring was consistent with FTL’s obligations to Mr. Wise, see
Model Rules of Prof’l Conduct R. 1.4(a)(3) (1983), and we have no
doubt that FTL ably represented his interests. FTL might therefore
be entitled to compensation from him.18 But FTL can point to no

       18
         We have no information regarding FTL’s retainer agreement
with Mr. Wise, and so we of course take no position on whether FTL is
actually entitled to a fee from Mr. Wise. We note, however, that Mr.
Wise’s interest in this litigation was necessarily limited to the some
$18,500 that he had invested in Cendant stock; we doubt that anyone

                                 42
specific benefit that its monitoring activities conferred on the
plaintiff class as a whole, and therefore cannot expect to be
compensated out of the class’s recovery.
        We recognize that FTL put significant time and effort into
preparing its complaint. We think it clear, however, that it did so
as an entrepreneurial effort, hoping to get at least some share of the
lead-counsel work on behalf of the class. There is nothing
unseemly about this, but there is simply no evidence that it
benefited the class. FTL can thus have no expectation of receiving
attorneys’ fees out of the class’s recovery.

   VII. The Miller Faucher and Wolf Haldenstein Appeals

        Miller Faucher and Wolf Haldenstein present more difficult
issues. The complaints that they filed were not mere piling-on; they
were the first (and only) firms to file initial complaints on behalf of
“stub period” plaintiffs. Furthermore, unlike FTL, they were
involved in the Cendant litigation beyond the initial filing of the
complaint, as they consistently advocated for their individual
clients and, allegedly, for the uncertified subclass of stub-period
claimants.

                  A. Filing Stub-Period Complaints
        Like FTL, Wolf Haldenstein and Miller Faucher argue that
they should be compensated for filing initial complaints in the
Cendant litigation. Also like FTL, these firms came late to the
table: their complaints were filed in July 1998, over a month after
the first fifty-two Cendant complaints had been consolidated into
a single class action. But the complaints filed by Wolf Haldenstein
and Miller Faucher did not allege facts and legal theories identical
to those alleged in the previous complaints. Rather, these firms
purported to represent the “stub purchasers” who bought Cendant
stock after the company’s initial April 15, 1998, disclosure of
wrongdoing. The stub plaintiffs alleged that this initial disclosure
was itself materially misleading, and was therefore a separate
securities fraud.
        As we have explained, the mere fact of filing a class-action

expects him to pay FTL’s claimed $45,000 fee out of his modest
recovery in the underlying lawsuit.

                                  43
complaint will not necessarily entitle a firm to PSLRA attorneys’
fees. See supra Part V.A.2. Nonetheless, we agree with the long
line of common fund cases that hold that attorneys “whose efforts
create, discover, increase, or preserve a [common] fund,” GMC, 55
F.3d at 820 n.39, are entitled to compensation. Thus, an attorney
who discovers a valid claim on behalf of a class, and makes use of
his findings in a complaint that ultimately enhances the class’s
recovery, will be entitled to compensation out of that recovery.
        Wolf Haldenstein and Miller Faucher argue that they
identified the stub class and introduced it into the litigation. Wolf
Haldenstein, in particular, stresses that it was the first firm to file
a stub-period class claim; in a sense, it might be said that Wolf
Haldenstein “discovered” the stub-period claim. Wolf Haldenstein
argues that it is therefore entitled to common-fund fees.
        We think that this argument misunderstands the requirement
that an attorney discover or create the common fund. Such
“discovery” is only compensable if it is a true discovery: if the
attorney’s investigation uncovers facts, or leads to legal theories,
that benefit the class independently of work done by other counsel.
Simply being the first to allege facts that appear in the newspapers,
or to advance a legal theory that is apparent to all lawyers involved,
will not in itself be enough to warrant compensation.
        In this case, discovering that the April disclosure was
misleading—and thus that Cendant shareholders who bought after
April 15 but before July 14 would have a § 10(b) cause of
action—required no more effort or ingenuity than reading the Wall
Street Journal. Given the July 14 disclosure, it is virtually
inconceivable that the previously filed class actions would not
eventually have been amended to include the April-to-July period.
Wolf Haldenstein’s complaint—filed on July 16, 1998, two days
after Cendant’s second disclosure—was the first to make claims for
the April-to-July purchasers, and Miller Faucher’s was the second
(filed July 20), but it would be totally implausible to therefore
conclude that Wolf Haldenstein and Miller Faucher were the only
firms to think of making such claims. Similarly, we cannot infer
that the appellant firms’ initial complaints had any influence on the
Amended Complaint ultimately filed by Lead Counsel.
        Daniel Berger, of Lead Counsel firm Bernstein Litowitz,
argued as much before the District Court. Berger noted that the
initial complaints were filed in April 1998, and that the time

                                  44
between April and October was taken up by procedural motions,
motions to consolidate, and applications for appointment as lead
counsel. Therefore, no amended complaint was filed during that
time, because no firm yet represented the class. But Lead Counsel’s
institutional clients had made post-April 15 purchases, and
therefore had an interest in bringing stub-period claims.
Furthermore, the July 14 disclosure also turned out to be
incomplete, and the Cendant fraud was only fully revealed on
August 28—thus creating a third class period, for July-to-August
purchasers, that Wolf Haldenstein and Miller Faucher did not
identify, but that Lead Counsel also litigated. Lead Counsel’s
Amended Complaint was not filed until December; that complaint
included all purchases (including the stub-period claims) extending
through August 28.
        The District Court accepted Berger’s argument and found
that Wolf Haldenstein’s and Miller Faucher’s complaints did not
constitute a discovery of a new cause of action. In denying fees to
Miller Faucher, that Court noted:

               Frankly the matter was in flux. . . . [T]he
       Court determined also that the amended complaint
       . . . should abide until December. Officially things
       were in flux and as Mr. Berger points out the
       pleadings were in flux.
               The class period eventually was May 1995 to
       August 28, 1998. The amended complaint was filed
       incorporating those claims about which Mr. Faucher
       has concern. The Court had concern and indicated in
       its appointment of lead counsel in denying the
       attempt to have a separate class, that lead counsel
       was well qualified to handle any and all claims of
       that nature [i.e. stub claims], particularly since, as
       pointed out by Mr. Berger, the lead plaintiffs
       themselves had claims of that nature.

We find no error in this determination. Appellant firms’ suggestion
that, without their complaints, no one would have discovered and
filed the stub-plaintiff claims is simply unpersuasive. Cf. Silberman
v. Bogle, 683 F.2d 62, 65 (3d Cir. 1982) (rejecting fee award for
attorneys’ intervention in an SEC action, because the attorneys

                                 45
“have not shown that the SEC decision would have been less
favorable to the fund but for their participation”). Lead Counsel
were clearly aware of the stub claims, and prosecuted them
vigorously and successfully.
       As Miller Faucher and Wolf Haldenstein’s initial complaints
did not truly create or discover a cause of action, they can have no
claim for compensation under the common fund doctrine for the
work that they conducted prior to the appointment of Lead
Plaintiffs for for the class.

      B. Improving the Pleading of Stub-Period Allegations
        The stub-period appellant firms also argue that they
corresponded with Lead Counsel after the appointment of Lead
Plaintiffs, and that this correspondence led to improvements in the
pleadings that benefited the class. As we have explained, see supra
Part V.B.1, we presume that a lead plaintiff will correctly
determine compensation for lawyers who perform work on behalf
of the class after its appointment. Here, the CalPERS funds were
appointed Lead Plaintiffs on September 4, 1998, and we grant
considerable deference to their decisions on compensation for work
done after that date. The Lead Plaintiff funds did not compensate
appellant firms, and filed a declaration, signed by their respective
general counsels, stating that those firms’ work was neither
requested by Lead Plaintiffs nor beneficial to the class as a whole.
        Thus, appellant firms face a difficult task in proving that
they deserve fees for improving the pleadings. As explained above,
see supra Part V.B.1, they must either (1) demonstrate that Lead
Plaintiffs’ denial of fees was a breach of its fiduciary duties to the
class, or (2) prove that they did work on behalf of the class, with a
reasonable expectation that they would be compensated, that
increased the class’s recovery beyond that obtained through the
efforts of Lead Counsel. As no one has alleged any fiduciary
breach by Lead Plaintiffs, and as we are satisfied that Lead
Plaintiffs carefully reviewed all fee applications and awarded fees
to those firms whose work they believe to have benefited the class,
we focus on the second prong of our test, and ask whether
appellant firms have proven that they reasonably did work that
caused a demonstrable improvement in the class’s recovery.

                        1. Wolf Haldenstein

                                 46
         On October 30, 1998, Lead Counsel wrote to counsel for all
class members—including appellant firms, who continued to
represent their individual clients after the appointment of the Lead
Plaintiffs—asking if their clients wished to be named in the
consolidated complaint. Wolf Haldenstein’s response was a two-
page letter, dated November 18, 1998, that mentioned “a couple of
pleading issues that need to be worked out vis-a-vis the stub
period.” Wolf Haldenstein suggested that different methods of
pleading—alleging a unitary class period versus alleging distinct
subclasses—might lead to different damages calculations. It also
suggested “pleading scienter as to officers who had presided over
the underlying fraud going back to 1995 [to] make[] the stub period
claim somewhat more palatable.”
         Lead Counsel does not seem to have responded to these
suggestions. On December 8, 1998, Lead Counsel circulated a
preliminary draft of the Amended Complaint to counsel for all
class members. Lead Counsel’s letter accompanying this draft
stated that the complaint was enclosed “for your and your client’s
review,” though it did not actually request comments.
         Wolf Haldenstein alleges that Lead Counsel’s two letters
were intended to solicit its suggestions for improvements to the
pleadings. This is a fairly charitable way of reading the letters; at
all events, Wolf Haldenstein does not detail what comments it
offered. It does not seem to have marked up the Amended
Complaint, and its only response to the circulating complaint in the
record is a December 11, 1998, letter certifying its client Jeff
Mathis as a named plaintiff.
         Lead Counsel deny requesting suggestions from Wolf
Haldenstein, and represent that they did not receive any comments
or suggestions regarding the circulating Amended Complaint. Wolf
Haldenstein’s sketchy allegation that it improved the pleadings, and
the vague and unasked-for special-interest suggestions of its
November 18 letter, are not enough to overcome the presumption
of correctness that we grant to Lead Plaintiffs’ decisions about
counsel fees. Wolf Haldenstein has not pointed to any particular
suggestions that were accepted by Lead Counsel and that improved
the Amended Complaint, and it certainly has done nothing to prove
that its suggestions increased the class’s recovery. While we accept
that Wolf Haldenstein did work on behalf of the class, we find no
indication that the firm had any reasonable expectation of

                                 47
compensation, or that its efforts independently benefited the class.
We therefore find no reason to disagree with the Lead Plaintiffs’
refusal to compensate Wolf Haldenstein for its suggestions.

                        2. Miller Faucher
       Miller Faucher’s contributions give us more pause. Like
Wolf Haldenstein, Miller Faucher received the circulating
Amended Complaint on December 8, 1998. Unlike Wolf
Haldenstein, however, Miller Faucher replied with two comments
that were included in the final Amended Complaint filed with the
District Court. These comments were incorporated in a December
11, 1998, letter from Miller Faucher partner J. Dennis Faucher to
Lead Counsel partner Daniel Berger. Faucher’s letter read, in
pertinent part:

               Your draft of the amended and consolidated
       complaint does not adequately assert the claim of
       class members who purchased after April 15, 1998.
       Specifically, the problem areas are as follows:
               1. Paragraph 8 should specify the drop that
       occurred after the July 14, 1998 disclosure. My
       recollection is that the drop was approximately 20
       percent.
               2. Paragraph 48 and section B (paragraphs 83-
       85). I could not find any allegation that the April 15
       disclosure was materially false and misleading nor
       an explanation of what should have been disclosed.

Faucher added that Berger should read Miller Faucher’s and Wolf
Haldenstein’s complaints “[f]or inspiration” in redrafting the
Amended Complaint.
          Lead Counsel apparently did take some inspiration from this
letter, as the Amended Complaint filed on December 14 alleged
that the April 15, 1998, disclosure contained materially false and
misleading assertions. Lead Counsel concede that Faucher
proposed some “word changes . . . in the consolidated complaint
. . . that we thought were beneficial” and therefore adopted. But the
changes to the complaint do not appear to have been great—the
April 15 disclosure is mentioned only in a string of other allegedly
misleading press releases, and, in our review of the 152-page

                                 48
Amended Complaint, we have not discovered any other mention of
that disclosure, any specification of the share-price drop following
the July 14 disclosure, or any explanation of what should have been
disclosed in April.
        Furthermore, as Lead Counsel noted at oral argument, these
issues were more fully fleshed out in response to defendants’
motions to dismiss. The District Court initially concluded (in a
decision taken prior to appointment of the Lead Plaintiffs) that
purchasers could not reasonably have relied on any
misrepresentations in the April 15, 1998, disclosures, thus
preventing any recovery for stub-period purchasers. P. Schoenfeld
Asset Mgmt. LLC v. Cendant Corp., 47 F. Supp. 2d 546, 556
(D.N.J. 1999). When the District Court modified that conclusion
and allowed the stub-period claims to go forward, see In re
Cendant Corp. Litig., 60 F. Supp. 2d 354, 374-76 (D.N.J. 1999), its
modification was influenced by supplemental briefs filed by Lead
Counsel and by counsel for the Cendant PRIDES plaintiffs, see id.
at 374-75, and appellant firms were not significantly involved.19
Miller Faucher’s suggested improvements to the Amended
Complaint thus do not seem to have had much of an effect on the
actual progress of the litigation; the heavy lifting involved in
prosecuting those claims occurred later, and was performed by
Lead Counsel.
        Turning to our tripartite test set out above, see supra Part
V.B.1, we conclude that Miller Faucher clearly performed work on
behalf of the class. We also think that Miller Faucher probably had

       19
          Miller Faucher partner J. Dennis Faucher did allege that, “when
the briefing occurred on Defendants’ Motions to Dismiss, I again called
and wrote lead counsel to discuss revisions to the draft relating to
treatment of these claims. Various revisions were made, which again, in
my view, advanced both the claims of the partial disclosure period
purchasers, and the claims of the class as a whole.” Miller Faucher has,
however, submitted no evidence of the character and extent of its
suggestions that would clearly demonstrate that the suggestions benefited
the class. At oral argument, Lead Counsel strongly suggested that its own
work, not Miller Faucher’s, led to the successful opposition to the
motions to dismiss, and Miller Faucher relied mainly on its suggested
improvements to the complaint. We do not find Faucher’s declaration a
convincing reason to reject the District Court’s finding that the
significant work was done by Lead Counsel.

                                   49
some reasonable expectation of compensation: while Lead Counsel
does not appear actually to have solicited its comments, those
comments were reasonably made in response to the circulating
complaint, and Lead Counsel did accept at least one of those
comments and incorporate it into the draft submitted to the court.
        Nonetheless, Miller Faucher’s appeal founders on the third
part of our test: the firm has not demonstrated, and in our view
cannot demonstrate, that its efforts independently benefited the
class. It seems certain that Miller Faucher’s minor edits to the
Amended Complaint had little effect on the final form of that
Complaint and none whatsoever on the final settlement in this case.
Instead, it was Lead Counsel’s enormous efforts, both in its initial
Amended Complaint on behalf of the entire class and in its later
opposition to the motions to dismiss, which preserved the recovery
of the post-April 15 plaintiffs, that created the benefits to the class.
        The District Court found that

       there was gratuitous activity, but there is nothing to
       indicate that such activity was sought by lead
       plaintiff, nor is there and I do not find that lead
       plaintiff nor lead counsel needed the legal assistance
       of this claimant [Miller Faucher]. Lead counsel was
       eminently qualified to handle this matter.

We agree. Lead Counsel’s handling of the case was thorough,
expert, and extraordinarily successful. Their work was not perfect,
and Miller Faucher improved it slightly. But this improvement was
immaterial in the overall context of the case. Lead Counsel’s
efforts, not the addition of the April 15 press release to the
Amended Complaint’s list of misleading statements, led to the
plaintiff class’s gigantic recovery.
        Lead Plaintiffs’ decision not to award fees to Miller Faucher
for its work on the Amended Complaint, although perhaps open to
debate, was not clearly wrong. Miller Faucher has not refuted the
presumption in favor of Lead Plaintiffs’ decision, and so we cannot
order the District Court to grant it fees.

            C. Monitoring the Settlement Allocation
      Finally, Miller Faucher and Wolf Haldenstein argue that
they monitored the settlement of the case, and took steps to

                                  50
increase the stub plaintiffs’ allocative share of the settlement. They
claim that even if they did not increase the recovery of the class as
a whole, at the least they improved the position of the stub
plaintiffs. Presumably, then, they believe that they should be
compensated out of the common fund consisting of those plaintiffs’
recovery.
        Miller Faucher’s claimed involvement in the settlement did
not extend beyond general “monitoring” activities on behalf of its
individual client. Such efforts cannot be compensated out of the
common fund. See supra Parts V.B.2 & VI. Wolf Haldenstein, on
the other hand, took a variety of steps to represent the interests of
the stub-period plaintiffs, including hiring a damages expert to
calculate a fair compensation scheme. These steps require a more
detailed analysis.

                     1. The Uncertified Subclass
        While Wolf Haldenstein purported to represent a subclass
of April-15-to-July-14 purchasers, that subclass was never an
official part of this litigation. In response to Miller Faucher’s and
Wolf Haldenstein’s motions to “clarify” the consolidation order,
the District Court specifically refused to certify the stub subclass.
It found that the stub plaintiffs named the same defendants as the
rest of the plaintiffs, and that they alleged the same legal theories
and the same facts as the rest of the class, except for the fact that
they added an allegation that the April 15 statement was
misleading. See 182 F.R.D. at 479. Given the overwhelming
similarities between the two groups, the District Court saw no need
to define a separate stub-period subclass. No one now directly
questions the District Court’s refusal to create a subclass, and we
think that that decision was clearly justified.
        The District Court characterized Wolf Haldenstein’s request
for fees as an attempt to reargue the motion to create a separate
subclass with a separate lead plaintiff. This comment was not off
the mark. Wolf Haldenstein viewed itself as lead counsel for a
subclass of stub-period plaintiffs, and attempted to represent the
interests of that subclass in the debates over the allocation of the
class settlement. We have no doubt that the firm’s motives were
pure: its (individual) clients were stub-period purchasers, and Wolf
Haldenstein zealously protected those clients’ interests. Even so,
for us to award the firm compensation out of the stub plaintiffs’

                                 51
recovery would encourage future attorneys to attempt to win fees
for themselves by claiming to represent putative but uncertified
subclasses—thus undermining the basic purposes of the PSLRA.
See supra Part V.B.3.

            2. Was Wolf Haldenstein’s Work Gratuitous?
         Wolf Haldenstein also attempts to characterize its settlement
monitoring as work performed on behalf of the entire class and at
the request of Lead Counsel. It alleges that, after it learned of the
proposed settlement in December 1999, it communicated with Lead
Counsel—including via a January 18, 2000, letter proposing that
the post-April 15 purchasers should receive more from the
settlement than other purchasers—and was ultimately “invited to
review and comment on the proposed plan of allocation and to
analyze whether that plan was fair to post-April 15, 1998
purchasers of Cendant securities.” Wolf Haldenstein argued that its
independent review of the allocation would reduce the settlement’s
vulnerability to objection from dissatisfied class members. The
firm alleges that Lead Counsel agreed with this assessment, and
that Wolf Haldenstein therefore hired John Hammerslough, a
forensic damages expert, to review the settlement.
         Hammerslough produced a report, dated February 21, 2000,
which argued that the stub plaintiffs should receive “full
recognition” of their losses. Meanwhile, on February 29, 2000,
Daniel Berger of Lead Counsel wrote to Wolf Haldenstein,
attaching the draft Plan of Allocation of the settlement and asking
it to contact him with any comments. Wolf Haldenstein responded
to this letter with two objections. Both objections related to the fact
that post-April 15 claimants were not given a share in any recovery
against Ernst & Young, because post-April 15 claims against the
auditors had been dismissed. Wolf Haldenstein discussed these
objections with Berger on March 16, 2000, but ultimately acceded
to Lead Counsel’s allocation.
         Lead Counsel strenuously dispute Wolf Haldenstein’s
assessment of its role. Daniel Berger, of Lead Counsel firm
Bernstein Litowitz, submitted a declaration characterizing Wolf
Haldenstein’s involvement in the settlement as unhelpful meddling
rather than requested assistance. Lead Counsel gave Wolf
Haldenstein the opportunity to comment on the settlement, and
discussed its concerns (in part because Wolf Haldenstein

                                  52
threatened to make confirmation of the settlement difficult), but did
not ask Wolf Haldenstein to take part in settlement decisions or
retain a damages expert. Furthermore, Berger stated that the only
two suggestions that Wolf Haldenstein made regarding the plan, to
increase stub purchasers’ recovery and to allow them to share in the
Ernst & Young settlement, were “rejected out-of-hand as patently
absurd.”
        The District Court specifically credited Berger’s factual
allegations rather than those of Wolf Haldenstein partner Daniel
Krasner. Far from finding clear error in this factual determination,
we think that it was compelled by the documentary record. The
correspondence between Berger and Krasner paints a very clear
picture: Krasner was interfering in Lead Counsel’s efforts, not
because anyone asked him to, but because he hoped to get a better
deal for his clients. We cannot fault such zealous advocacy, but it
can hardly be characterized as work on behalf of the class, and
Lead Counsel’s decision to reject Wolf Haldenstein’s suggestions
was surely not unfair to the class as a whole. We therefore
conclude that Wolf Haldenstein’s efforts to improve the position of
the stub purchasers were gratuitous and so not compensable.20

       20
         Wolf Haldenstein also makes much of the fact that Lead
Counsel requested its time information when preparing the request for
fees. We do not think that this request for time sheets has any bearing on
Wolf Haldenstein’s entitlement to counsel fees. Lead Counsel note that
they requested time records from every firm that performed any work
related to the action—including, presumably, attorneys for every
individual client—to enable Lead Plaintiffs to evaluate whether that
work benefited the class and therefore deserved compensation. Lead
Counsel never submitted a fee request for Wolf Haldenstein, or included
Wolf Haldenstein’s time records in its own fee requests. We think that
Lead Counsel were exactly right in following this procedure. Under
Cendant I, the responsibility for approving fee requests in the first
instance did belong to the CalPERS group, and so Lead Plaintiffs had the
right and indeed the obligation to consider whether any individual class
member’s firm conferred a benefit on the class. That does not, however,
mean that Lead Counsel’s request for time and expenses should be read
as an acknowledgment that Wolf Haldenstein’s efforts were requested
by Lead Counsel, that the firm had any reasonable expectations of
compensation, or that its work benefited the class.

                                   53
    3. Did Wolf Haldenstein’s Actions Increase the Recovery?
        Furthermore, Wolf Haldenstein’s efforts on behalf of the
stub plaintiffs did not in fact lead to any benefit for the stub
purchasers or the class as a whole. The firm concedes that it was
unable to convince anyone to modify the settlement allocation.
Wolf Haldenstein’s allegation that it served as an independent
monitor of the fairness of the settlement, thus smoothing its path to
approval, is insupportable: the same could be said about any
individual class member’s lawyer who read the settlement and
allocation and decided not to object because he or she concluded
that it was fair. The fact that Wolf Haldenstein, on its own
initiative, paid thousands of dollars to have a damages expert
review the settlement does not transform the firm into an impartial
advocate for the fairness of the settlement. Wolf Haldenstein has
not demonstrated that it did anything for the class beyond consume
the time of the class’s Lead Counsel.
        The efficacy of Wolf Haldenstein’s efforts might be relevant
to our evaluation of Lead Plaintiffs’ good faith. If Wolf
Haldenstein’s letters to Lead Counsel had in fact led to a
significant change in the allocation of the settlement, then we
might draw some parallels between its situation and that of an
objector, see supra note 17. If Wolf Haldenstein’s efforts had
increased the stub plaintiffs’ recovery at the expense of Lead
Plaintiffs, then we might have reason to doubt both the initial
fairness of Lead Counsel’s allocation and Lead Plaintiffs’ good
faith in denying compensation to Wolf Haldenstein.
        On the facts presented here, however, Lead Counsel
dismissed Wolf Haldenstein’s suggestions as meritless special
pleading on behalf of its clients. Wolf Haldenstein was persuaded
by Lead Counsel’s explanations, and did not press any objections
to the settlement before the District Court. Having reviewed the
correspondence, we find Lead Counsel’s rejection of Krasner’s
complaints perfectly reasonable, and are therefore satisfied that
Lead Plaintiffs acted in good faith in denying compensation to
Wolf Haldenstein.

                         VIII. Conclusion

       For the reasons set forth above, the judgment of the
District Court will be affirmed in all respects.

                                 54