Group Dysfunction: Two Class Certification Denials Reinforce Rule 23 Adequacy Principles While Exposing the Fiction of “Lead Plaintiff Groups”



A decade ago, William S. Lerach, of Milberg Weiss Bershad Hynes & Lerach, infamously declared, “I have the greatest practice of law in the world. . . .  I have no clients.”   One of the principal purposes of the Private Securities Litigation Reform Act of 1995 (the “PSLRA” or “Reform Act”) was to change that:  the requirement that courts appoint a lead plaintiff at the outset of a putative securities class action was part of  “Congress’s emphatic command that competent plaintiffs, rather than lawyers, direct such cases.”   Congress hoped to curtail the pursuit of unmeritorious, lawyer-driven class actions by requiring trial courts to entertain competing motions by prospective lead plaintiffs.  However, the legislative goal that expensive putative class suits be assessed and pursued by the shareholder with the greatest financial stake has frequently failed, as institutional investors have often refrained from seeking lead plaintiff status.  In such circumstances, numerous courts have allowed plaintiffs’ firms to cobble together competing “lead plaintiff groups” through the artificial aggregation of the purported losses of disparate individuals.   Many courts have also held that defendants have no voice whatsoever in challenging this process.   Judicial measures to oversee the fiduciary efforts of these artificial “groups” vary widely from court to court.   Meanwhile, the number of federal securities class actions filed annually has increased to reach numbers exceeding pre-Reform Act levels.

In light of these developments, members of the defense bar have issued “a call to arms for securities litigation defense attorneys” to focus upon the class certification process as an opportunity to defeat lawyer-driven class litigation.   Commentators have noted that, while certification has historically been less contested in the securities fraud context, a challenge to certification and an aggressive pursuit of class-related discovery can reap early rewards for defendants.   The Fifth Circuit’s decision in Berger v. Compaq Computer Corp. in 2001 has sharpened judicial focus on the class certification process, reminding trial courts that Fed. R. Civ. P. 23 analysis is not a rote exercise in which presumptions may be applied and in which proposed class representatives are given the benefit of the doubt.  Two recent decisions from within the Fifth Circuit suggest that district courts are heeding this reminder and that securities defense attorneys should give greater consideration to vigorously contesting class certification.  Further, these decisions suggest that trial courts should reconsider any presumption at the outset of litigation that a group of unconnected shareholders appointed as lead plaintiffs can jointly steer putative class actions in the months or years preceding a certification motion.  Defense counsel facing lead plaintiff appointments in other securities cases may point to these recent findings to demonstrate that such “lead plaintiff groups” – both in theory and reality – are inconsistent with Reform Act principles.

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