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Floor Statement: Introduction of the Securities Litigation Attorney Accountability and Transparency Act
Monday, May 19, 2008
Mr. President, today I am proud to introduce the Securities Litigation Attorney Accountability and Transparency Act. The Bill promotes transparency and court oversight in the selection and compensation of class counsel in securities class action litigation. And, as a result, this legislation helps to ensure that the lawyer for shareholder plaintiffs in securities class action lawsuits truly and faithfully represents the interests of the entire class, and not just their own interests and those of the large investors who are the lead plaintiffs. It has been said that the lead attorney in a class action suit serves a quasi-governmental role in that he seeks to enforce the law on behalf of a broad group of ordinary citizens and the investor community at large. Bringing transparency and accountability to securities class action litigation is important to protect the rights and interests of every American who owns stock.
When a class action lawsuit is brought against a company for defrauding shareholders, one of the first steps is the selection of the lead plaintiff. The lead plaintiff is the shareholder who will actually sit in the courtroom and represent the interests of all of the shareholders in the litigation. The lead plaintiff selects the lawyer who will represent the class in the lawsuit, subject only to approval by the court.
Under the Private Securities Litigation Reform Act of 1995, the lead plaintiff is supposed to be the shareholder “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). The PSLRA creates a presumption that, in general, the lead plaintiff should be the plaintiff with the “largest financial interest in the relief sought by the class.” 15 U.S.C. § 78u-4(a)(3)(B)(iii)(bb). The theory behind this rule is that the party with the most at stake will most vigorously defend the interests of the entire class. In general, this theory has proven true, and the PSLRA is a substantial improvement over the law before the PSLRA, in which the lead plaintiff was generally whoever first filed the lawsuit.
However, as recent events have shown, the PSLRA has itself proven subject to abuse. The Bill that I introduce today has been made necessary by recent scandals in which lawyers entered secret arrangements with lead plaintiffs to keep an unfair amount of the lawsuit’s proceeds between them, while shutting out ordinary investors. Essentially, the lead plaintiff agreed to an unreasonably high attorneys’ fee, with the understanding that the law firm would funnel a portion of that fee back to the lead plaintiff. Thus, the lawyers were overcompensated and the lead plaintiffs received a disproportionate share of the proceeds of the lawsuit. Ordinary investors, who the class action system is designed to protect, bore the costs of these illegal arrangements.
Today, William Lerach, once a name partner at the law firm of Milberg, Weiss, Bershad, Hynes & Lerach LLP, reports to the United States Penitentiary in Lompoc, California, after pleading guilty to entering into this type of illegal kickback arrangement with lead plaintiffs. Next month, his former law partner Melvyn Weiss will be sentenced for the same crime. But there is reason to believe that this criminal activity is not limited to a few bad actors. Indeed, Mr. Lerach, unrepentant about having defrauded thousands of investors out of millions of dollars, has tried to defend himself on the basis that “everybody does it.” “Believe me,” Mr. Lerach told the Wall Street Journal, “it was industry practice.”
There have been many calls for reform to address this potentially widespread criminal practice. Last month, The Washington Post editorialized in response to the Milberg Weiss scandal that “What is needed now is a sober discussion about how best to achieve a fairer, more balanced legal system through comprehensive tort reform. . . . Smart and ethical businesspeople and lawyers—and, yes, there are many who fit the bill—would be wise to start working together to craft such a fix.” This Bill opens that discussion.
The Bill that I introduce today seeks to prevent securities litigation abuse by making two major reforms that directly address the two core problems that have led to this scandal—the potential for back-door arrangements between lead plaintiffs and class counsel, and the resulting risk that lead plaintiffs will enter fee agreements that pay the lawyers more than the market rate.
The Bill would require sworn certifications from lead plaintiffs and their attorneys disclosing: (a) any payments or promises of payment made by the attorney to the plaintiff in connection with the action; (b) any other legal representations of the plaintiff by the attorney; (c) any campaign contributions the attorney has made to any elected official with authority to retain counsel for the plaintiff; and (d) any other conflicts of interest. This disclosure would put an end to secret agreements where plaintiffs’ lawyers pay kickbacks to the lead plaintiffs who retain them. These secret arrangements divorced the interests of both the lawyers and the lead plaintiffs from the interests of the class as a whole. Full disclosure will prevent this situation from recurring.
The Bill would also require courts to employ a competitive bidding process as one of the criteria in the approval of the lead class counsel. In current practice, courts usually defer to the lead plaintiff’s choice of class counsel after reviewing the prospective lead counsel’s prior work on the case, experience, knowledge, and resources. The Bill would require that courts also consider the prospective lead counsel’s fees, and have courts solicit competitive bids so that those fees are based on market rates. The class members deserve to be represented at a reasonable market rate. Money that goes to the lawyers is money that never makes it to the ordinary shareholders who are the victims of securities fraud. Currently, courts review attorneys’ fees for reasonableness before the fees are paid at the conclusion of the case. This provision would allow courts to negotiate a reasonable fee at the threshold of the litigation.
Finally, the Bill would commission a study of the last 5 years of fee awards in securities class actions to determine the average hourly rate for lead counsel. Courts may be able to use this information to better rein-in excessive attorneys’ fees.
It is important that corporations be held accountable through securities fraud litigation when they cheat ordinary shareholders out of their hard-earned money. But it is equally important that attorneys be held accountable when they do the same thing. The recent securities litigation kickback scandals ought to spur Congress to action, especially because, at least according to Mr. Lerach, defrauding shareholders has become “industry practice” for securities plaintiffs’ lawyers. Fortunately, Mr. Lerach and Mr. Weiss have been brought to justice, but their shareholder victims will never see all of the money out of which they were cheated by these attorneys’ crimes. The Securities Litigation Attorney Accountability and Transparency Act will help prevent these crimes against ordinary Americans from being repeated in the future. I urge my Senate colleagues to quickly convene hearings on this very serious problem and move this new legislation forward.
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