UNITED STATES DISTRICT COURT FOR THE DISTRICT OF NEW JERSEY _______________________________________ : IN RE MILESTONE SCIENTIFIC : No. 98-3404 (AJL) SECURITIES LITIGATION : _______________________________________: : VIVIAN BOLLAG, et al., : : Plaintiffs, : : : v. : No. 98-2854 (AJL) : LEONARD OSSER, et al., : : Defendants. : : _______________________________________: MEMORANDUM OF THE SECURITIES AND EXCHANGE COMMISSION, AMICUS CURIAE HARVEY J. GOLDSCHMID (HG 0499) General Counsel ERIC SUMMERGRAD (ES 3628) Principal Assistant General Counsel LUIS de la TORRE (LT 5440) Of Counsel Attorney PAUL GONSON Solicitor Securities and Exchange Commission 450 5th Street, N.W. (Stop 6-6) Washington, D.C. 20549 (202) 942-0813 (de la Torre) Dated: December 3, 1998 ======END OF PAGE 1====== TABLE OF CONTENTS PAGE TABLE OF AUTHORITIES . . . . . . . . . . . . . . . . . . . . . . . . . ii INTRODUCTION AND SUMMARY OF THE COMMISSION'S POSITION . . . . . . . . . 1 BACKGROUND . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 ARGUMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 A. The Litigation Reform Act Contemplates that the Court Will Exercise Control Over the Selection of Lead Counsel. . . . . . . . . . . . . . . . . . . . . . . . . . . 6 B. The Appointment of Multiple Lead Counsel May Allow for the Pooling of Resources and Expertise, But May Also Engender Conflict, Delay, and Inefficiency in Class Action Litigation. . . . . . . . . . . . . . . . . . . . . . . . . . 8 C. The Courts Should Consider at the Outset of the Litigation The Appropriateness of Multiple Counsel. . . . . . . . . . . 14 D. In Evaluating Proposed Lead Counsel, the Court Should Take into Account the Nature of the Litigation, the Counsels' Resources and Expertise, the Circumstances Under Which a Group of Counsel Was Formed, and Conflicts of Interest, but Should Not Use Multiple Counsel as a Means of Assuring Diversity of Representation. . . . . . . . . . . . . . . . . 16 CONCLUSION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 - i - TABLE OF AUTHORITIES CASES PAGE Ballan v. Upjohn Co., 159 F.R.D. 473 (W.D. Mich. 1994) . . . . . . . . . . . . . . . . 11, 12 Bateman Eichler, Hill Richards, Inc. v. Berner, 472 U.S. 299 (1985) . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723 (1975) . . . . . . . . . . . . . . . . . . . . . . . . . . 2 In re Cendant Corp. Litig., 182 F.R.D. 144 (D.N.J. 1998) . . . . . . . . . . . . . . . . . 8, 13, 20 Chill v. Green Tree Financial Corp., 181 F.R.D. 398 (D. Minn. 1998) . . . . . . . . . . . . . . . . . . . 18 In re Donnkenny Inc. Sec. Litig., 171 F.R.D. 156 (S.D.N.Y. 1997) . . . . . . . . . . . . . . . . . . . 13 Fischler v. AmSouth Bancorporation, 1997 WL 118429 (M.D. Fla. Feb. 6, 1997) . . . . . . . . . . . . . . . . 7 Garr v. U.S. Healthcare, Inc., 22 F.3d 1274 (3d Cir. 1994) . . . . . . . . . . . . . . . . . . . . . 22 In re General Motors Corp. Pick-Up Truck Fuel Tank Products Liability Litig., 55 F.3d 768 (3d Cir.), cert. denied, 516 U.S. 824 (1995) . . . . . . . . . . . . . . . . . . 10 Gluck v. Cellstar Corp., 976 F. Supp. 542 (N.D. Tex. 1997) . . . . . . . . . . . . . . . . . . . 7 Horizon/CMS Healthcare Corp. Sec. Litig., 3 F. Supp.2d 1208 (D.N.M. 1998) . . . . . . . . . . . . . . . 10, 15, 19 Housler v. First National Bank of East Islip, 524 F. Supp. 1063 (E.D.N.Y. 1981) . . . . . . . . . . . . . . . . . . 12 J.I. Case Co. v. Borak, 377 U.S. 426 (1964) . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Lax v. First Merchants Acceptance Corp., 1997 WL 461036 (N.D. Ill. Aug. 11, 1997) . . . . . . . . . . . . . . 13 Malin v. Ivax Corp., No. 96-1843, (S.D. Fla. Nov. 1, 1996) . . . . . . . . . . . . . . . . 17 - ii - TABLE OF AUTHORITIES (continued) CASES PAGE Nager v. Websecure, Inc., 1997 WL 773717 (D. Mass. Nov. 26, 1997) . . . . . . . . . . . . . 14, 18 Oxford Health Plans, Inc. Sec. Litig., 182 F.R.D. 42 (S.D.N.Y. 1998) . . . . . . . . . . . . . . . . . 9, 13, 23 Percodani v. Riker-Maxson Corp., 51 F.R.D. 263 (S.D.N.Y. 1970), aff'd, 442 F.2d 457 (2d Cir. 1971) . . . . . . . . . . . . . . . . . 12 Raftery v. Mercury Finance Co., 1997 WL 529553 (N.D. Ill. Aug. 15, 1997) . . . . . . . . . . . . . . 20 Ravens v. Iftikar, 174 F.R.D. 651 (N.D. Cal. 1997) . . . . . . . . . . . . . . . . . . . . 7 Reiger v. Altris Software, Inc., 1998 U.S. Dist. LEXIS 14705 (S.D. Cal. Sept. 11, 1998) . . . . . . . . . . . . . . . . . . . . . 13 In re Reliance Acceptance Group, Inc. Sec. Litig., 1998 WL 388260 (W.D. Tex. June 29, 1998) . . . . . . . . . . . . . . 13 In re Revco Sec. Litig., 142 F.R.D. 659 (N.D. Ohio 1992) . . . . . . . . . . . . . . . . . . . 13 In re Wells Fargo Sec. Litig., 156 F.R.D. 223 (N.D. Cal. 1994) . . . . . . . . . . . . . . . . 9, 13, 17 In re Wells Fargo Sec. Litig., 157 F.R.D. 467 (N.D. Cal. 1995) . . . . . . . . . . . . . . . . . 10, 12 Zuckerman v. FoxMeyer Health Corp., 1997 WL 314422 (N.D. Tex. Mar. 28, 1997) . . . . . . . . . . . . . . 14 STATUTES Securities Exchange Act of 1934, 15 U.S.C. 78a, et. seq. Section 21D, 15 U.S.C. 78u-4 . . . . . . . . . . . . . . . . . . . . 2 Section 21D(a)(3), 15 U.S.C. 78u-4(a)(3) . . . . . . . . . . . . . . 6 Section 21D(a)(3)(B)(v), 15 U.S.C. 78u-4(a)(3)(B)(v) . . . . . . . . . . . . . . . . . 3, 7 28 U.S.C. 1927 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 - iii - TABLE OF AUTHORITIES (continued) LEGISLATIVE HISTORY PAGE Joint Explanatory Statement of the Committee of Conference, Conference Report on Securities Litigation Reform, H.R. Rep. No. 104-369 (1995) . . . . . . . . . . . . . . . . . . 2, 7, 8 passim Report on the Private Securities Litigation Reform Act of 1995, S. Rep. No. 104-98 (1995) . . . . . . . . . . . . . 8 MISCELLANEOUS 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 (1995) . . . . . . . . . . . . . . . . . . . 7, 10, 20 Elliott J. Weiss, The Impact to Date of the Lead Plaintiff Provisions of the Private Securities Litigation Reform Act, 39 Ariz. L. Rev. 561 (1997) . . . . . . . . . . . . . . . . . . . 19, 21 Janet Cooper Alexander, Do the Merits Matter? A Study of Settlements in Securities Class Actions, 43 Stan. L. Rev. 497 (1991) . . . . . . . . . . . . . . . 9, 22 John C. Coffee, Jr., Rescuing the Private Attorney General: Why the Model of the Lawyer as Bounty Hunter Is Not Working, 42 Md. L. Rev. 215 (1983) . . . . . . . . . . . . . . . . . . . . 13, 22 John C. Coffee, Jr., The Regulation of Entrepreneurial Litigation: Balancing Fairness and Efficiency in the Large Class Action, 54 U. Chi. L. Rev. 877 (1987) . . . . . . . . . . . 16, 22 Jonathan R. Macey & Geoffrey P. Miller, The Plaintiffs' Attorney's Role in Class Action and Derivative Litigation: Economic Analysis and Recommendations for Reform, 58 U. Chi. L. Rev. 1 (1991) . . . . . . . . . . . . . . . . . . . . . 15 Report to the President and the Congress on the First Year of Practice Under the Private Securities Litigation Reform Act of 1995 (Apr. 1997) . . . . . . . . . . . . . . . . . . . . . . . . 11 - iv - UNITED STATES DISTRICT COURT FOR THE DISTRICT OF NEW JERSEY _______________________________________ : IN RE MILESTONE SCIENTIFIC : No. 98-3404 (AJL) SECURITIES LITIGATION : _______________________________________: : VIVIAN BOLLAG, et al., : : Plaintiffs, : : : v. : No. 98-2854 (AJL) : LEONARD OSSER, et al., : : Defendants. : : _______________________________________: MEMORANDUM OF THE SECURITIES AND EXCHANGE COMMISSION, AMICUS CURIAE INTRODUCTION AND SUMMARY OF THE COMMISSION'S POSITION Pursuant to the Court's letter and letter opinion dated October 22, 1998, the Securities and Exchange Commission respectfully submits this memorandum, as amicus curiae, to address, as requested by the Court, the issue of "the appropriateness of multiple lead counsel in a securities fraud class action." This issue is of importance because the selection of lead counsel can affect whether private securities litigation is prosecuted in an effective and efficient manner. The Commission has long expressed the view that legitimate private actions under the federal securities laws serve an important role, both because they work to compensate investors who have been harmed by securities law violations and because, as the Supreme Court has repeatedly recognized, they "provide `a most effective weapon in the enforcement' of the securities laws and are `a necessary supplement to Commission action.'" Bateman Eichler, Hill Richards, Inc. v. Berner, 472 - 2 - U.S. 299, 310 (1985), quoting J.I. Case Co. v. Borak, 377 U.S. 426, 432 (1964); see also Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 730 (1975). In adopting the Private Securities Litigation Reform Act of 1995 ("Litigation Reform Act" or "Act"), codified at Section 21D of the Securities Exchange Act of 1934, 15 U.S.C. 78u-4, Congress affirmed that "[p]rivate securities litigation is an indispensable tool with which defrauded investors can recover their losses." It further stated that private lawsuits "promote public and global confidence in our capital markets and help to deter wrongdoing and to guarantee that corporate officers, auditors, directors, lawyers and others properly perform their jobs." Joint Explanatory Statement of the Committee of Conference, Conference Report on Securities Litigation Reform, H.R. Rep. No. 104-369, at 31 (1995) ("Conf. Rep."). One of the objectives of the Litigation Reform Act's provisions for the appointment of lead plaintiff was to ensure more effective representation of investors' interests in private securities class actions by transferring control of securities class actions from lawyers to investors. Conf. Rep. at 32-35. The Act's provision governing the selection and retention of lead counsel is an important part of that effort. Id. at 35. The Act provides that "[t]he most adequate 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 provision gives the lead plaintiff the initial choice of counsel, and ensures that only in very unusual circumstances will the lead plaintiff have to accept counsel that - 3 - it did not choose for itself. The provision otherwise preserves the court's traditional discretion to evaluate the likely effectiveness of proposed class counsel for the protection of the class. The Commission believes that courts generally should defer to the lead plaintiff's choice of counsel (e.g., except in very unusual circumstances, courts should not force a lead plaintiff to retain counsel it has not selected itself). Particular problems may arise from multiple counsel arrangements, however, and courts should actively exercise their discretion to review proposals for such arrangements. Although appointment of more than one counsel may be appropriate in circumstances where a single firm lacks the resources or expertise to manage the litigation, appointment of multiple counsel can raise significant concerns. These include impairment of the lead plaintiff's ability to manage the litigation and supervise counsel effectively, duplication of effort, lack of coordination among counsel, delay of the litigation, and increase in attorneys' fees. The presumptive lead plaintiff should provide the court with full information about the structure and intended functioning of the proposed counsel group and efforts it has made to avoid the potential problems with multiple counsel. A particularly important consideration in evaluating a multiple counsel proposal is that the lead counsel have sufficient resources and flexibility to manage the litigation effectively for the class. Multiple counsel may be justified where the firms provide necessary resources, skill, experience, or expertise. The court should not rely on, or give weight to, generic asserted benefits such as assuring input from more - 4 - rather than fewer class members or lawyers or avoiding disputes among competing lead plaintiff movants and among their counsel. The Commission believes that another important consideration in evaluating the proposal is the possibility of a conflict of interest involving one or more of the chosen counsel. If the circumstances justify particular confidence in the lead plaintiff's independence and ability to make choices, then deference to those choices would be appropriate. Where, however, it appears that the prospective lead plaintiff has not played an active, effective role in choosing counsel or that the relationship between the plaintiff and one or more of its chosen law firms is based on factors other than the merits of the firms, then greater scrutiny is warranted. Finally, the Commission believes that the court should place appropriate conditions on the appointment of multiple counsel and indicate a willingness to revisit the issue. BACKGROUND This is a consolidated class action alleging that Milestone Scientific, which develops, markets, and sells dental products, committed securities fraud in promoting one of its products. A group of members of the purported plaintiff class, claiming losses of approximately $10 million, filed the only motion to be appointed lead plaintiff under the Litigation Reform Act. The group consisted of (1) an individual who is the chairman of the board, chief executive officer, and director of a mutual fund and who is the owner and one of two limited partners of an equity management firm that is the general partner of the mutual fund; (2) his wife; (3) the mutual fund; and (4) the equity management firm. The motion was unopposed, and, - 5 - according to the group, is "supported by plaintiffs in 14 of the 16 pending actions and by additional class members who purchased over 400,000 shares and suffered over $3.8 million in losses." August 17, 1998 Memorandum of Law ("Mem.") at 4. The group sought appointment as lead counsel of an "executive committee" of three law firms, with one of the firms serving as the "chair" of the committee. <(1)> On October 22, 1998, the Court appointed the group as lead plaintiff, <(2)> but determined that "[a]t this stage, the [group] has not demonstrated sufficient need justifying the approval of multiple lead counsel." Opinion at 43. The Court ordered additional briefing from the lead plaintiff "addressing the factual and legal bases for the approval of multiple lead counsel, as proposed." October 22, 1998 letter to Commission; see Opinion at 41-45. ARGUMENT A. The Litigation Reform Act Contemplates that the Court Will Exercise Control Over the Selection of Lead Counsel. Although the Commission takes no position on the whether the specific lead counsel arrangement proposed in this case should be approved, the <(1)> Although the group also sought appointment of a fourth firm as "liaison counsel," the members of the proposed executive committee have since withdrawn the proposal for a liaison counsel. See Letter dated November 11, 1998 from Abbey, Guardy & Squitieri to the Court, with attached proposed order; Memorandum of Law dated November 11, 1998, with attached proposed order, submitted by Cohen, Milstein, Hausfeld & Toll and Schoengold & Sporn. <(2)> The Court states that its opinion is not to be published. The Commission urges the Court to consider publishing its opinion, given the thoroughness of the Court's analysis, and the importance of guidance under the Litigation Reform Act. - 6 - Commission believes that it is proper and, indeed, of critical importance for a court to inquire into the appropriateness of multiple lead counsel in the circumstances of each securities class action in which multiple counsel is proposed. The nature and extent of this inquiry will vary with the circumstances of each case and may take as much or as little time as appropriate. The Litigation Reform Act provides detailed procedures and criteria for the appointment of lead plaintiff, gives a large role in the choice of lead counsel to the lead plaintiff, and ensures that only in very unusual circumstances will that lead plaintiff have to accept counsel that it did not itself choose. However, the Act otherwise preserves the court's traditional discretion to evaluate counsel for the protection of the class. See 15 U.S.C. 78u-4(a)(3). The Act provides that "[t]he most adequate 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). One court has stated that this provision "[g]iv[es] the Lead Plaintiff primary control for the selection of counsel" and "was a critical part of Congress' effort to transfer control of securities class actions from lawyers to investors." Gluck v. Cellstar Corp., 976 F. Supp. 542, 550 (N.D. Tex. 1997). The overall purpose of the lead plaintiff provisions was "to encourage the most capable representatives of the plaintiff class to participate in class action litigation and to exercise supervision and control of the lawyers for the class." Conf. Rep. at 32; see, e.g., Ravens v. Iftikar, 174 F.R.D. 651, 654 (N.D. Cal. 1997) ("The Reform Act affords large, sophisticated institutional investors a preferred position in securities class actions. * * * Congress sought to eliminate figurehead plaintiffs - 7 - who exercise no meaningful supervision of litigation."). Congress sought to eliminate the practice that occurred at times where counsel effectively chose itself as lead counsel by selecting a plaintiff and initiating litigation. <(3)> Although the lead counsel provision gives the lead plaintiff a large role in the choice of lead counsel, and contemplates that a court would impose additional or different counsel on the lead plaintiff only in very unusual circumstances, the selection of counsel remains "subject to the approval of the court." The legislative history of the provision makes clear that Congress "does not intend to disturb the court's discretion under existing law to approve or disapprove the lead plaintiff's choice of counsel when necessary to protect the interests of the plaintiff class." Conf. Rep. at 35. As noted in In re Cendant Corp. Litig., 182 F.R.D. 144, 149-150 (D.N.J. 1998), "[i]n contrast to the strictly defined procedures and considerations that prescribe the determination of lead plaintiff * * * the Court's approval [of the proposed lead counsel] is subject to its <(3)> See Fischler v. AmSouth Bancorporation, 1997 WL 118429, at *1 (M.D. Fla. Feb. 6, 1997); Conf. Rep. at 35 ("[T]his lead plaintiff provision solves the dilemma of who will serve as class counsel[:] * * * the plaintiff will choose counsel rather than, as is true today, counsel choosing the plaintiff."); 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, 2062-63, 2098 (1995) ("Weiss & Beckerman") (before passage of the Litigation Reform Act courts would "generally appoint as lead counsel either the lawyer who files the first complaint or a lawyer elected by all the lawyers who have filed complaints"). Weiss & Beckerman was cited in the legislative history of the Act as "provid[ing] the basis for the `most adequate plaintiff' provision." Report on the Private Securities Litigation Reform Act of 1995, S. Rep. No. 104-98, at 11 n.32 (1995). - 8 - discretionary judgment that lead plaintiff's choice of representative best suits the needs of the class," and "the Court should not rely solely on th[e] [lead plaintiff's] judgment" in that regard. B. The Appointment of Multiple Lead Counsel May Allow for the Pooling of Resources and Expertise, But May Also Engender Conflict, Delay, and Inefficiency in Class Action Litigation. There is no question that the appointment of multiple counsel may at times promote the effective management of class action litigation. A single firm may lack the resources to prosecute the action. For example, in Oxford Health Plans, Inc. Sec. Litig., 182 F.R.D. 42, 46 (S.D.N.Y. 1998), the court was "concerned with the potential costs and expenses of th[e] litigation" and with "the resources of the plaintiffs' counsel in order to support what could prove to be [the] costly and time-consuming litigation." After appointing "co-lead plaintiffs" (a decision with which the Commission disagrees), the court appointed as lead counsel each lead plaintiff's chosen law firm, two of which it described as "small" firms. The court appears to have determined that "[i]n light of the magnitude of this case * * * the sharing of resources and experience" was necessary "to ensure that the litigation will proceed expeditiously against Oxford and the experienced counsel it has retained to represent it." Id. at 49. <(4)> <(4)> See generally In re Wells Fargo Sec. Litig., 156 F.R.D. 223, 226 (N.D. Cal. 1994) (explaining that "plaintiff law firms, which usually take cases on a contingent fee basis, join together to prosecute major complex cases because doing so allows them to leverage their resources and spread the risks of unfavorable outcomes"); Janet Cooper Alexander, Do the Merits Matter? A Study of Settlements in Securities Class Actions, 43 Stan. L. Rev. 497, 546-47 (1991) ("Alexander") ("Plaintiffs' firms are quite small in comparison to defense firms, which frequently have (continued...) - 9 - Additional firms may not only add resources, but may bring particular substantive expertise to a case. For example, a firm may have done extensive pre-filing investigation of a case and filed a well-drafted complaint on behalf of a client that was not selected as lead plaintiff. Such a firm may therefore possess considerable knowledge and experience about the case that would be of benefit in assuring its efficient prosecution. That firm might offer unique advantages "[t]o the extent this experience could be translated into a benefit to the class" and to the extent selection of the firm was otherwise consistent with effective and efficient litigation of the case. In re Wells Fargo Sec. Litig., 157 F.R.D. 467, 470 (N.D. Cal. 1995). <(5)> <(4)>(...continued) hundreds of lawyers. * * * Several plaintiffs' firms are involved in any case, in effect forming an `ad hoc firm' for purposes of the litigation. The firms that specialize in securities class actions * * * maintain a portfolio of such cases at any given time. Securities cases are large, complex and expensive to litigate, and take a long time to resolve. The number of such large cases a small firm can actively litigate at once is limited. * * * For most plaintiffs' firms, taking even one large case to trial could seriously strain the firm's resources.") (footnotes omitted). <(5)> The Commission does not believe that a court should give any weight in evaluating a multiple counsel proposal (or later fee request) to which firm simply filed a complaint first or recruited the most clients in the case. The Commission does believe, however, that the court can and should award appropriate compensation to law firms, whether or not they have been selected as lead counsel, that do significant work investigating and bringing meritorious securities actions. See Conf. Rep. at 33 (Congress sought to encourage "diligence in drafting complaints" and "thoroughly researched" complaints); Weiss & Beckerman, 104 Yale L.J. at 2108-09 (to "counter any hesitation [an attorney] might have about doing the prefiling investigation and other work necessary to prepare a (continued...) - 10 - On the other hand, appointment of multiple class counsel can fail to serve the interests of the class for various reasons. The greater the number of lead counsel, the more difficult it is likely to be for the lead plaintiff to manage the litigation and supervise the lawyers. In one pre- Litigation Reform Act case, for example, the court felt the need to caution that "[a]lthough `[t]he functions of lead counsel may be handled by one person or by several,' still `the number should not be so large as to hamper the unity of direction that is needed.'" See Ballan v. Upjohn Co., 159 F.R.D. 473 (W.D. Mich. 1994) (quoting Manual for Complex Litigation (Second)  20.22 at 16). In "a case with eight law firms and one plaintiff," that court found that the three co-lead counsel had not "satisf[ied] the court that the [lead] plaintiff was willing and able to supervise so many firms." Id. In its report on the first year of practice under the Act, the Commission's staff identified two cases brought after the Act in which lead plaintiffs had selected 30 or 33 law firms as lead counsel, and noted that "even the most active institutional investor may have difficulty controlling thirty or more law firms." Office of the <(5)>(...continued) complaint," if that attorney "is not retained by the lead plaintiff, the court should award her a reasonable fee for her efforts whenever the case results in a recovery for the plaintiff class"); see generally In re General Motors Corp. Pick-Up Truck Fuel Tank Products Liability Litig., 55 F.3d 768, 820 n.39 (3d Cir.) ("The common fund doctrine provides that a private plaintiff, or a 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."), cert. denied, 516 U.S. 824 (1995); Horizon/CMS Healthcare Corp. Sec. Litig., 3 F. Supp.2d 1208, 1214- 15 (D.N.M. 1998) (awarding fees to counsel for institutional investors which successfully objected to amount of lead counsel's fees). - 11 - General Counsel, Securities and Exchange Commission, Report to the President and the Congress on the First Year of Practice Under the Private Securities Litigation Reform Act of 1995 at 51 (Apr. 1997). <(6)> Even prior to the Litigation Reform Act, courts expressed concern that appointing multiple class counsel could cause duplication of effort, increased attorneys' fees, friction or lack of coordination among counsel, and delay of the litigation. <(7)> Additional concerns associated with multiple counsel include unnecessary complication of the litigation, diminished accountability for its conduct, diminished incentives for each firm to make its optimum contribution to the litigation, and a reduction in merits-based competition among firms to represent the lead plaintiff. <(6)> The Report noted that the "phenomenon of multiple law firms representing the class was a familiar pattern prior to the Reform Act." Id. <(7)> See, e.g., Percodani v. Riker-Maxson Corp., 51 F.R.D. 263, 265 (S.D.N.Y. 1970) ("this Court sees no reason to saddle the plaintiff class with the burden of additional counsel fees and the added confusion which the appointment of co-lead counsel would bring"), aff'd, 442 F.2d 457 (2d Cir. 1971); Wells Fargo, 157 F.R.D. at 468 ("Because a well-advised class in this case would seek to avoid unnecessary duplication of effort, the court earlier decided that only one firm should be selected to represent the class."); Ballan, 159 F.R.D. at 491 (court "expect[s] co-lead counsel to satisfy [it] that the remaining plaintiff had determined the class would not be burdened by any unnecessary expenses arising from the presence of a legion of lawyers"); Housler v. First National Bank of East Islip, 524 F. Supp. 1063, 1068 (E.D.N.Y. 1981) (stating that if "the necessity for dual representation" of the class arose the court would inquire into "whether an appropriate understanding with all attorneys could be reached regarding the avoidance of duplication of effort"). - 12 - <(8)> These concerns have continued to be expressed since adoption of the Act. <(9)> <(8)> See, e.g., Wells Fargo, 156 F.R.D. at 226 (the "common practice for plaintiff firms to join together * * * to prosecute big cases * * * effectively extinguishes competition among the plaintiff lawyers and therefore harms the interests of the class"); In re Revco Sec. Litig., 142 F.R.D. 659, 670 (N.D. Ohio 1992) (noting that "the presence of numerous counsel for the various plaintiffs" would "complicate the management of this case and waste judicial resources"); Ballan, 159 F.R.D. at 491 ("[e]ach of the firms designated as `co-lead' counsel was quick to point the finger at someone else [concerning a mistake], and none assumed ultimate accountability"); John C. Coffee, Jr., Rescuing the Private Attorney General: Why the Model of the Lawyer as Bounty Hunter Is Not Working, 42 Md. L. Rev. 215, 260-61 (1983). <(9)> See, e.g., In re Donnkenny Inc. Sec. Litig., 171 F.R.D. 156, 158 (S.D.N.Y. 1997) (allowing lead plaintiff to select two law firms as co-lead counsel "provided that there is no duplication of attorneys' services, and the use of co-lead counsel does not in any way increase attorneys' fees and expenses"); Cendant, 182 F.R.D. at 151 (denying "all motions for appointment of liaison counsel" because "[q]ualified lead counsel will be surely capable of performing these ministerial tasks" and the court "finds no need to involve another law firm in this matter"); Reiger v. Altris Software, Inc., 1998 U.S. Dist. LEXIS 14705, at *15-16, *18 (S.D. Cal. Sept. 11, 1998) (expressing concern that enlarging the number of lead counsel through appointment of "co-lead plaintiffs" could "unnecessarily increase the time and expense spent on preparing and litigating the case," where the presumptive lead plaintiff "already has three co-counsel" and "[a]ppointing [a co-lead plaintiff] would add two more counsel") (citation omitted); Oxford, 182 F.R.D. at 50 (appointing co-lead counsel "with the understanding that there shall be no duplication of attorney's services and that the use of [three] co-lead counsel will not in any way increase attorney's fees and expenses"; stating that "[t]he efforts of the Executive Committee [led by the co-lead counsel] are to be conducted economically and without duplication," delay of the progress of the litigation, or unnecessary enlargement of expenses); In re Reliance Acceptance Group, Inc. Sec. Litig., 1998 WL 388260, at (continued...) - 13 - C. The Courts Should Consider at the Outset of the Litigation The Appropriateness of Multiple Counsel. The Commission believes that it is appropriate and, in general, necessary in terms of the effectiveness of the litigation effort for this Court to address the foregoing concerns at the lead counsel selection stage. Some courts have suggested, however, that these concerns can be dealt with by alternative means. For example, in Nager v. Websecure, Inc., 1997 WL 773717, at *1 (D. Mass. Nov. 26, 1997), the court stated that "[t]here should be no concern that duplicative legal efforts will result in higher legal costs to the class because the statute limits total attorneys' fees to `a reasonable percentage of the amount of any damages and prejudgment interest actually paid to the class.'" In Zuckerman v. FoxMeyer Health Corp., 1997 WL 314422, at *2 (N.D. Tex. Mar. 28, 1997), the court also seemed to disregard concerns about multiple class counsel. It stated that "[a]s in any other litigation conducted in the Northern District of Texas, the attorneys for both sides are under a continuing obligation to comply with [a case establishing standards of litigation conduct to be observed in civil actions in the District] and the local Rules," citing Civil Justice Expense and Delay Reduction Plan and 28 U.S.C. 1927 ("Counsel's liability for excessive costs"). <(9)>(...continued) *5 (W.D. Tex. June 29, 1998) ("Counsel is warned, however, that there should be no duplication of services, and approval of three law firms should not be considered as a license to artificially inflate attorney's fees."); Lax v. First Merchants Acceptance Corp., 1997 WL 461036, at *7 (N.D. Ill. Aug. 11, 1997) (appointing two law firms as co-lead counsel, "provided that there is no duplication of attorneys' services, and the use of co-lead counsel does not in any way increase attorneys' fees and expenses."). - 14 - The Commission believes that the existence of other methods of addressing the issues of cost and delay does not warrant disregarding these issues at the time the court appoints counsel. These other methods of controlling cost, delay, and inefficiency are less effective than an approach that also includes evaluation of lead counsel proposals at the outset. No rule's dictate can completely overcome the inefficiency, added cost, and delay inherent in an inappropriate multiple counsel arrangement. And although, as was true prior to the 1995 Act, courts should review settlements and requests for attorneys' fees with rigor at the end of the litigation, early review will go far to avoid the inherent inefficiency, expense, and delay in an inappropriate counsel arrangement. Post hoc review of a proposed settlement or attorneys' fee award is inevitably difficult and time-consuming, <(10)> and is no substitute for having in place an efficient and effective counsel arrangement in the first place. For these reasons, the Commission agrees with this Court that a prospective lead plaintiff should provide the court with full information about its multiple counsel arrangement. See Opinion at 43-44. The plaintiff should describe the lines of authority among the proposed co- counsel, the responsibilities and duties of each, and efforts it has made to avoid problems such as loss of direction of the litigation, duplication of effort, lack of coordination, and increase in costs. Where, as in this case, proposed lead counsel are described as an "executive committee," the <(10)> See Horizon, 3 F. Supp.2d at 1212-13 (court "reluctant to attempt a detailed, retroactive analysis of the work allocation made by lead counsel"); Jonathan R. Macey & Geoffrey P. Miller, The Plaintiffs' Attorney's Role in Class Action and Derivative Litigation: Economic Analysis and Recommendations for Reform, 58 U. Chi. L. Rev. 1, 44-50 (1991). - 15 - court should inquire about plans for the use of additional counsel and the likely effectiveness of such plans. <(11)> D. In Evaluating Proposed Lead Counsel, the Court Should Take into Account the Nature of the Litigation, the Counsels' Resources and Expertise, the Circumstances Under Which a Group of Counsel Was Formed, and Conflicts of Interest, but Should Not Use Multiple Counsel as a Means of Assuring Diversity of Representation. The court, in exercising its discretion to evaluate the multiple counsel proposal, should carefully consider the nature, magnitude, and likely demands of the case. The lead counsel must have sufficient resources and flexibility to manage the litigation effectively for the class. It would therefore be relevant whether the multiple counsel proposal includes "a large, well-financed firm plainly able to handle the litigation without the assistance of another firm" or instead consists of "two or more firms otherwise too small to take on class counsel responsibilities." See In re Wells Fargo Sec. Litig., 156 F.R.D. 223, 226 (N.D. Cal. 1994). Where the court is less concerned about individual law firms' resources and where a number of plaintiffs' attorneys are available to <(11)> One commentator has argued that courts should "encourage greater hierarchical control" within a committee of class counsel "so that the lead counsel, once selected, does not have to negotiate continuously with various constituencies, or to award them patronage in return for their votes." John C. Coffee, Jr., The Regulation of Entrepreneurial Litigation: Balancing Fairness and Efficiency in the Large Class Action, 54 U. Chi. L. Rev. 877, 909 (1987). According to this view, "[o]nce freed of `political' constraints, the plaintiffs' lead counsel could prune deadwood from the `ad hoc firm' but could also invite in other attorneys and firms in order to achieve efficient risk-sharing." Id. - 16 - provide any necessary assistance to lead counsel, appointment of fewer or a single lead counsel might be warranted. See, e.g., Wells Fargo, 156 F.R.D. at 227 (appointing one law firm as lead counsel and stating that the firm could "farm[] out work on the case to another law firm because of specialized knowledge, geographic proximity to witnesses or evidence or other comparative advantages, or even to spread risk"); Malin v. Ivax Corp., No. 96-1843, Order at 8 (S.D. Fla. Nov. 1, 1996) (appointing two co- lead counsel with the "expect[ation] that counsel retained by the [lead plaintiff] will utilize the talents and expertise of the various firms who were retained by the other plaintiffs in this action in their position as lead counsel"). Of course, lead counsel should be able to explain to the court why and how the use of additional law firms promotes the effective, efficient prosecution of the litigation, rather than serving the interests of the law firms. However, because the Commission agrees with this Court that the Litigation Reform Act is intended to "empower[] a unified force to control the litigation," Opinion at 38, the Commission believes that certain purported rationales for appointing multiple counsel are not valid. In one case, a magistrate judge seemed to suggest using the lead counsel provision as a back-door method of facilitating input from disparate class members that are not the lead plaintiff. See Chill v. Green Tree Financial Corp., 181 F.R.D. 398, 413 (D. Minn. 1998). It might similarly be suggested that the provision be used to avoid disputes over who should be lead plaintiff. The Commission believes that such an approach works at cross-purposes with the provisions for selecting the lead plaintiff. In particular, it risks introducing disunity and dissipating the ability of the lead - 17 - plaintiff to control the litigation. Nor is there cause for it, since the lead plaintiff has, by virtue of the Act's requirements, already been determined by the court to adequately represent the class. This does not mean, however, that lead counsel should not establish some mechanism for communication with members of the class other than the lead plaintiff; it merely means that assuring input or avoiding competition does not justify appointment of additional class members as lead plaintiffs or law firms as lead counsel. The Commission also questions whether "it seems sensible to employ the [lawyer] `committee' approach to minimize the potential for disputes about the direction of the litigation." Nager, 1997 WL 773717, at *1. An important purpose of the Act was to allow the lead plaintiff to direct the litigation. Any disputes over the direction of the litigation should be resolved by the lead plaintiff, and may merely be exacerbated if the lead plaintiff has to deal with disparate and contentious multiple lead counsel. The goals of the Act should not be subordinated to the desire to avoid or minimize disputes among counsel. Indeed, a key goal of the Act was to lessen the influence of counsel in the process of selecting lead plaintiff and lead counsel. Another important consideration in evaluating the multiple counsel proposal is the possibility that a conflict of interest, or other inappropriate factor, may intrude into the choice of counsel. If circumstances justify particular confidence in the lead plaintiff's independence and ability to choose counsel, deference to those choices would be appropriate. - 18 - Where, however, it appears that the prospective lead plaintiff has not played an active, effective role in choosing counsel or the relationship between the plaintiff and one or more of its chosen law firms is based on factors other than the merits of the firms, greater scrutiny is clearly warranted. For example, a law firm conceivably could make large political contributions to a decision maker at a prospective lead plaintiff which thereafter is appointed lead plaintiff; this would clearly warrant scrutiny from the court. See Elliott J. Weiss, The Impact to Date of the Lead Plaintiff Provisions of the Private Securities Litigation Reform Act, 39 Ariz. L. Rev. 561, 572 (1997) ("Weiss"). Thus, while deference to the judgment of the lead plaintiff may be appropriate where it is capable of managing the litigation, and has acted in a manner that best serves the interests of the class, blanket deference is not. <(12)> The court might find it useful in this regard to consider the relationship between each proposed counsel and the lead plaintiff and the circumstances under which that relationship was formed. Absent concerns about litigation skills, experience, or resources, a single law firm or cohesive team of firms representing a single client is likely to provide <(12)> See Horizon, 3 F. Supp.2d at 1211 n.1, 1212 (contrasting "consortium" that "was constructed largely by counsel seeking the lead role in the litigation" with the Litigation Reform Act "model" of "shareholders who possess a sufficient financial interest in the outcome to maintain some supervisory responsibility over both the litigation and their counsel"); Raftery v. Mercury Finance Co., 1997 WL 529553, at *2 (N.D. Ill. Aug. 15, 1997) (expressing concern about lead plaintiff movant's retainer agreement with law firm because "the court suspects that [it] is not the result of hard bargaining," not the product of "a discerning client in an arms length negotiation with well- qualified counsel"). - 19 - more effective representation than an ad hoc collection of firms assembled during the course of the litigation that represent (or represented) separate parties. Where a court has concerns about a multiple counsel arrangement, the court might therefore consider limiting lead counsel to the firm or firms representing the lead plaintiff at the outset of the litigation. This would be consistent with Congress' desire that the class benefit from the ways in which the lead plaintiff chooses, and negotiates with, its own counsel. See Cendant, 182 F.R.D. at 148 ("Indeed, one of the assumptions underlying the Reform Act's presumption of adequacy is that plaintiffs with the assets necessary to have made large investments will also be able to negotiate the most advantageous counsel rates to the class."). <(13)> For example, a number of law firms might come together during the process of applying for, or competing for, lead plaintiff status. In LaPerriere v. Vesta Insurance Group, Inc., No. 98-AR-1407-S (N.D. Ala., Acker, J.), a large proposed lead plaintiff "group" originally requested <(13)> See also Weiss & Beckerman, 104 Yale L.J. at 2058, 2106, 2107 (arguing that having institutions as lead plaintiffs "would allow market forces, not courts, to play a dominant role in determining who served as plaintiffs' lead counsel in class actions, how lead counsel would be compensated, and the settlement terms that counsel for the plaintiff class would be inclined to propose" because "plaintiffs' attorneys frequently would find themselves competing to be retained by institutional investors" and institutions would be "in a position to negotiate fee arrangements with plaintiffs' lawyers before class actions are initiated"); Weiss, 39 Ariz. L. Rev. at 563 (stating that institutions are "likely to negotiate fee arrangements that more closely aligned the interests of plaintiffs' attorneys with those of the plaintiff class than do the fee structures that courts generally employ"). - 20 - approval of two firms as "co-lead counsel." When it joined with a second "group" to compete with an institution to be lead plaintiff, the group increased, without explanation, the number of proposed co-lead counsel to three firms, adding the firm representing the second group. Ultimately, the institution negotiated with three members of the large group a joint lead plaintiff proposal, providing for two firms as lead counsel, which the court accepted. This suggests that unless there has been active, effective client participation in the process, it is possible that the counsel arrangement may simply reflect bargaining among lawyers for their own stake in the case, and not serve the best interests of the class. <(14)> <(14)> Practices described in various cases and commentaries pre-dating the Litigation Reform Act could still be at work in the formation of some "committees" of class counsel and in the allotment of work assignments by those committees. See Garr v. U.S. Healthcare, Inc., 22 F.3d 1274, 1277 (3d Cir. 1994) (noting that "[t]he lead attorney position is coveted as it is likely to bring its occupant the largest share of the fees generated by the litigation" and defense counsel's "expla[nation] that in class actions additional complaints are generated so that the original attorney will have allies when a vote is taken to determine the lead attorney"); Alexander, 43 Stan. L. Rev. at 528-29 n.117 ("Some state court filings appear to be motivated primarily by strategic considerations in the intramural relations between plaintiffs' attorneys. For example, an agreement to stay the state action while the federal action proceeds * * * may depend on whether the lawyers who filed in state court are satisfied with their role in the federal case."); Coffee, The Regulation of Entrepreneurial Litigation, 54 U. Chi. L. Rev. at 908 (selection of class counsel could resemble "the legal equivalent of an unsupervised political convention * * * . Rival slates would form. Competing groups would invite other attorneys into the action in order to secure their vote for lead counsel. Eventually, a political compromise would emerge. The price of such a compromise was often both overstaffing and an acceptance of the free-riding or marginally competent attorney, whose vote gave him leverage that his ability (continued...) - 21 - Finally, if the court determines that it is appropriate under the circumstances to appoint multiple lead counsel, the court should condition their appointment on there being no duplication of attorney services or increase in attorneys' fees and expenses. The court should also reserve the right to alter the counsel structure if it finds that the litigation is being delayed, that expenses are being unnecessarily incurred, or if the structure proves otherwise detrimental to the best interests of the proposed class. The court might also find it useful in appointing a committee of law firms to require the submission of itemized, quarterly reports detailing the services rendered, the costs expended, and the hourly charges reasonably incurred in the litigation. See Oxford, 182 F.R.D. at 50. CONCLUSION For the foregoing reasons, the Commission believes that courts should actively exercise their discretion to review multiple lead counsel proposals for the protection of the class. The Commission believes that courts should conduct that review based on careful attention to the facts of each case and in accordance with the considerations discussed in this memorandum. Respectfully submitted, <(14)>(...continued) did not."); Coffee, Rescuing the Private Attorney General, 42 Md. L. Rev. at 250 ("The centrality of lead counsel's role means that there is often a spirited contest to determine who will occupy this position. In a major case, the process can resemble a political convention: vote-trading occurs, compromises are struck, and promises of favorable work assignments are made in return for support."). - 22 - ___________________________________ HARVEY J. GOLDSCHMID (HG 0499) General Counsel ___________________________________ ERIC SUMMERGRAD (ES 3628) Principal Assistant General Counsel ___________________________________ LUIS de la TORRE (LT 5440) Attorney Of Counsel PAUL GONSON Securities and Exchange Commission Solicitor 450 5th Street, N.W. (Stop 6-6) Washington, D.C. 20549 (202) 942-0813 (de la Torre) Dated: December 3, 1998