IN THE UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF ALABAMA SOUTHERN DIVISION KITTIE LAPERRIERE, on behalf ) of herself and all others ) similarly situated, ) ) CIVIL ACTION NO. Plaintiffs ) ) 98-AR-1407-S vs. ) ) VESTA INSURANCE GROUP, INC., ) ET AL., ) ) Defendants ) ) (CAPTION CONTINUED ON NEXT PAGE) MEMORANDUM OF THE SECURITIES AND EXCHANGE COMMISSION, AMICUS CURIAE HARVEY J. GOLDSCHMID General Counsel ERIC SUMMERGRAD Principal Assistant General Counsel LUIS de la TORRE Attorney Of Counsel 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: September 24, 1998 (CAPTION CONTINUED) LEON KUTCHER, on behalf of ) himself and all others ) similarly situated, ) CIVIL ACTION NO. ) Plaintiffs ) 98-P-1413-S ) vs. ) ) VESTA INSURANCE GROUP, INC., ) ET AL., ) ) Defendants ) ) JAMES BRANNON, individually ) and on behalf of all others ) similarly situated, ) CIVIL ACTION NO. ) Plaintiffs ) 98-C-1429-S ) vs. ) ) VESTA INSURANCE GROUP, INC., ) ET AL., ) ) Defendants ) ) ROBIN PITTMAN, individually ) and on behalf of all others ) similarly situated, ) CIVIL ACTION NO. ) Plaintiffs ) 98-N-1440-S ) vs. ) ) VESTA INSURANCE GROUP, INC., ) ET AL., ) ) Defendants ) ) DAVID LABARRE, on behalf of ) himself and all others ) similarly situated, ) CIVIL ACTION NO. ) Plaintiffs ) 98-C-1430-S ) vs. ) ) VESTA INSURANCE GROUP, INC., ) ET AL., ) ) Defendants ) ) RICHARD S. ROCHE, individually ) and on behalf of all others ) similarly situated, ) CIVIL ACTION NO. ) Plaintiffs ) 98-TMP-1444-S ) vs. ) ) VESTA INSURANCE GROUP, INC., ) ET AL., ) ) Defendants ) ) KARL ANDERSON, on behalf of ) himself and all others ) similarly situated, ) CIVIL ACTION NO. ) Plaintiffs ) 98-B-1491-S ) vs. ) ) VESTA INSURANCE GROUP, INC., ) ET AL., ) ) Defendants ) ) JOSEPH E. KOVACS, on behalf of ) himself and all others ) similarly situated, ) CIVIL ACTION NO. ) Plaintiffs ) 98-B-1519-S ) vs. ) ) VESTA INSURANCE GROUP, INC., ) ET AL., ) ) Defendants ) ) BRENT J. SORRENTINO, on his own ) behalf and on behalf of all ) others similarly situated, ) CIVIL ACTION NO. ) Plaintiffs ) 98-P-1553-S ) vs. ) ) VESTA INSURANCE GROUP, INC., ) ET AL., ) ) Defendants ) ) LEON J. FIEGEL, IRA, on behalf ) of himself and all others ) similarly situated, ) CIVIL ACTION NO. ) Plaintiffs ) 98-JEO-1650-S ) vs. ) ) VESTA INSURANCE GROUP, INC., ) ET AL., ) ) Defendants ) ) RICHARD M. SULLIVAN, on behalf ) of himself and all others ) similarly situated, ) CIVIL ACTION NO. ) Plaintiffs ) 98-C-1735-S ) vs. ) ) VESTA INSURANCE GROUP, INC., ) ET AL., ) ) Defendants ) ) RUTH GOLD, on behalf of ) herself and all others ) similarly situated, ) ) CIVIL ACTION NO. Plaintiffs ) ) 98-S-1761-S vs. ) ) VESTA INSURANCE GROUP, INC., ) ET AL., ) ) Defendants ) ) KENSINGTON CAPITAL MANAGEMENT, ) on behalf of itself and all ) others similarly situated, ) CIVIL ACTION NO. ) Plaintiffs ) 98-TMP-1898-S ) vs. ) ) VESTA INSURANCE GROUP, INC., ) 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 order dated August 28, 1998, the Securities and Exchange Commission respectfully submits this memorandum, as amicus curiae, to address, as requested by the order, (a) "whether these thirteen cases, or any portion of them, should be consolidated, and, if consolidated, what limitations on the consolidation, if any, should be imposed" and (b) "which `lead plaintiff' under 15 U.S.C.  78u-4 should be named by the court." In responding to the latter question, the Commission will urge, as permitted by the order, two points set forth in its motion for leave to participate in this case: (1) that, in considering the application of multiple plaintiffs jointly seeking to be appointed lead plaintiff, the Court should limit the proposed lead plaintiff "group" to a small number capable of most effectively managing the litigation and exercising control over counsel; and (2) that the Court should not appoint competing applicants as co-lead plaintiffs. Defendants have filed an unopposed motion to consolidate these cases. The "Vesta Plaintiffs Group," which consists of 29 individuals and three entities, has moved to be appointed lead plaintiff in these cases under the Private Securities Litigation Reform Act of 1995 (the "Litigation Reform Act" or "Act"), codified at Section 21D of the Securities Exchange Act of 1934 ("Exchange Act"), 15 U.S.C. 78u-4. The Vesta Plaintiffs Group has moved, in the alternative, that, first five, and then, nine, of its members with the most losses be appointed lead plaintiff. The Florida State Board of Administration ("Florida Board" or "Board") has separately moved to be appointed lead plaintiff. The Commission has reviewed the consolidation and lead plaintiff motions, the supporting memoranda and exhibits, the responses, and the transcript of the August 28, 1998 hearing at which the Court heard argument on these motions.<(1)> The Commission is aware of no reason that all of the actions should not be consolidated without limitation. The Commission believes that once the Vesta Plaintiffs Group is limited to a size capable of effectively managing the litigation and supervising the lawyers, the Florida Board has the largest financial interest in the litigation and thus, under the terms of the Litigation Reform Act, is presumptively the most adequate plaintiff. Under the Act, that presumption can only be rebutted by "proof" that the Board "will not" be an adequate lead plaintiff. Mere surmises or speculative assumptions about potential conflicts of interest will not suffice. The Commission, however, does not believe that it is in a position, as amicus curiae, to determine if such proof has been adduced here. Finally, regardless of whom the Court appoints as lead plaintiff, the Commission believes that the <(1)> The transcript of the August 28, 1998 hearing is cited herein as "Tr. __"; the August 26, 1998 Joint Memorandum of Law of the LaPerriere and Gold Groups in response to the Commission's motion for leave to appear as amicus as "Jt. Resp. __"; the Florida Board's August 26, 1998 Supplemental Memorandum of Law in support of its lead plaintiff motion as "Bd. Supp. Mem. __"; the August 25, 1998 Joint Memorandum of Law of the LaPerriere and Gold Groups in support of their lead plaintiff motions as "Jt. Mem. __"; the July 31, 1998 LaPerriere Group memorandum of law in support of their lead plaintiff motion as "LaP. Mem." Unpublished cases cited in this memorandum can be found as exhibits either to Bd. Supp. Mem. or Jt. Mem. ======END OF PAGE 2====== Court should not appoint competing lead plaintiff movants as "co-lead plaintiffs." BACKGROUND A. The Litigation Reform Act and Its Lead Plaintiff Provisions 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 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 (1975). In adopting the Litigation Reform Act, Congress affirmed that "[p]rivate securities litigation is an indispensable tool with which defrauded investors can recover their losses" and 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." Conference Report on Securities Litigation Reform, H.R. Rep. No. 104-369, 31 (1995) ("Conf. Rep."). One of the objectives of the lead plaintiff provisions was to ensure the most effective representation of investors' interests in private class actions. E.g., id. at 32-35. In pertinent part, the Litigation Reform Act generally provides that "the court * * * shall appoint as lead plaintiff the member or members of ======END OF PAGE 3====== the purported plaintiff class that the court determines to be most capable of adequately representing the interests of class members (hereafter in this paragraph referred to as the `most adequate plaintiff') in accordance with this subparagraph." The Act then specifies that "the court shall adopt a presumption that the most adequate plaintiff in any private action arising under this title is the person or group of persons that" has filed a complaint or moved to be appointed as lead plaintiff and which meets two other criteria: (1) in the determination of the court, has the largest financial interest in the relief sought by the class; and (2) otherwise satisfies the requirements of Rule 23 of the Federal Rules of Civil Procedure. The presumption "may be rebutted only upon proof by a member of the purported plaintiff class that the presumptively most adequate plaintiff * * * will not fairly and adequately protect the interests of the class * * * or is subject to unique defenses that render such plaintiff incapable of adequately representing the class." 15 U.S.C. 78u-4(a)(3)(B)(i) & (a)(3)(B)(iii).<(2)> B. Legislative History Of The Lead Plaintiff Provisions The Litigation Reform Act was enacted in December 1995 over a presidential veto. See 141 Cong. Rec. H15223-224 (Dec. 20, 1995), S19180 (Dec. 22, 1995). The President, however, had not objected to the Act's lead plaintiff provisions. See 141 Cong. Rec. H15214-215 (Dec. 20, 1995) (Dec. 19, 1995 veto message). <(2)> The Act further 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). ======END OF PAGE 4====== The lead plaintiff provisions arose out of Congress' concern, reflected in the House, Senate, and Conference Committee Reports on the legislation, that some class action securities litigation had become a "lawyer-driven" enterprise, in which law firms sought to bring cases and then sought out plaintiffs in whose name they could sue.<(3)> Congress sought to "protect[] investors who join class actions against lawyer-driven lawsuits by giving control of the litigation to lead plaintiffs with substantial holdings of the securities of the issuer." Conf. Rep. 32; accord S. Rep. 4 (Congress "intends * * * to empower investors so that they -- not their lawyers -- exercise primary control over private securities litigation"), 6 ("to transfer primary control of private securities litigation from lawyers to investors"), 10 ("The lead plaintiff should actively represent the class. The Committee believes that the lead plaintiff -- not lawyers -- should drive the litigation."). This concern also was expressedrepeatedly during floor debate onthe legislation.<(4)> <(3)> Congress was particularly concerned that in some such cases the lawyers engage in abusive practices and "often receive a disproportionate share of settlement awards." Conf. Rep. 36; accord id. at 31-33; Report on the Private Securities Litigation Reform Act of 1995, S. Rep. No. 104-98, 6-12 (1995) ("S. Rep."); Report on the Common Sense Legal Reform Act of 1995, H.R. Rep. No. 104-50, 14-20 (1995) ("H. Rep."). <(4)> See, e.g., 141 Cong. Rec. S8895 (Sen. D'Amato) ("the legislation empowers investors so that they, not their lawyers, have greater control over their class action cases"), S8897 (Sen. Domenici) ("So what we have and what is wrong with this system is very, very fundamental. Lawyers, not clients, control these cases.") (June 22, 1995); 141 Cong. Rec. S9040 (Sen. Domenici), S9055 (Sen. Frist) ("the lawyer-driven nature of these lawsuits tends to shortchange investors who have truly been defrauded"), S9065 (Sen. Grams) ("the plaintiff who is bringing the suit [now] * * * (continued...) ======END OF PAGE 5====== <(4)>(...continued) this is basically the attorney"), S9075-76, 77 (Sen. Hatch) ("the bill contains a number of reforms of securities litigation class actions that are designed to increase participation of the real shareholder plaintiffs and decrease the control of attorneys"), S9077 (Sen. Murray) ("[investors] have a right to have more of a say in steering the course of litigation") (June 26, 1995); 141 Cong. Rec. S9172 (Sen. Hatfield) ("This legislation is about curtailing the abuses in this country's securities litigation system and empowering defrauded investors with greater control over the class action process."), S9173 (Sen. Mikulski) ("with this bill, the court will be able to pick one person -- who has lost a lot of money in a class action suit -- to be the leader. This way the system works for investors instead of against them," as when "lawyers seek out clients just so they can have cases to litigate") (June 27, 1995); 141 Cong. Rec. S9212 (Sen. Domenici) ("[bill] puts investors with real financial interests, not lawyers in charge of the case"), S9321 (Sen. Dodd) ("[bill] empowers investors so that they, not their lawyers, have greater control over their class action cases") (June 28, 1995); 141 Cong. Rec. S17934 (Sen. D'Amato) ("[Bill] will empower real investors, especially pension funds and other institutional investors, to take control of the lawsuit."), S17956 (Sen. Dodd) ("[bill] empowers investors so that they, not their attorneys, have the greater control over the class action cases"), S17967, 17969 (Sen. Domenici) ("[Bill] contains provisions which place investors, not lawyers, in control of the lawsuit. Unlike the current lawyer-driven system, under this new law the investors with the greatest stake in the outcome of the litigation will control the case."), S17980 (Sen. Murray) ("[bill] will reform our securities law so that investors will have more of a say in the outcome of their suit."), S17982 (Sen. Frist), S17983 (Sen. Dole) ("[bill] diminishes the likelihood that these cases will be driven by lawyers, instead of real plaintiffs by allowing the most adequate plaintiff to be the party with the greatest financial interest"), S17984 (Sen. Moseley-Braun) ("Many investors also support this bill because it gives them, rather than the lawyers who are supposed to be working for them, control of any class action suits filed. It is the client, rather than the attorney, that is supposed to control a lawsuit, and part of the reason this bill is so necessary is that this simple (continued...) ======END OF PAGE 6====== Congress viewed this problem as stemming from the fact that the lead counsel in the case commonly had a greater financial stake in the litigation than did the plaintiffs. See, e.g., S. Rep. 6-7. The House Report stated, H. Rep. 17-18: Throughout the process, it is clear that the plaintiff class has difficulty exercising any meaningful direction over the case brought on its behalf. * * * Because class counsels' fees and expenses sometimes amount to one-third or more of recovery, class counsel frequently has a significantly greater interest in the litigation than any individual member of the class. Furthermore, class counsel * * * may have a greater incentive than the members of the class to accept a settlement that provides a significant fee and eliminates any risk of failure to recoup funds already invested in the case. The lead plaintiff provisions were "intended 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. 32. They were "intended to increase the likelihood that parties with significant holdings in issuers, whose <(4)>(...continued) principle has somehow gotten lost in recent years.") (Dec. 5, 1995); 141 Cong. Rec. H14038 (Rep. Cox) ("What we are seeking to do here is to protect investors so that they are in charge of these kind of lawsuits."), H14039 (Rep. Bliley) ("[bill] puts control of class action lawsuits back in the hands of the real shareholders, where it belongs."), H14048 (Rep. Harman) ("[bill] before us ends abusive practices and restores investor control over lawsuits."), H14050 (Rep. Deutsch) ("This bill will restore power to real investors in securities lawsuits, changing the rules so that actual investors, not predatory lawyers call the shots.") (Dec. 6, 1995); 141 Cong. Rec. S19054 (Sen. Hatch), S19084 (Sen. Reid) ("Defrauded investors are not adequately compensated because attorneys, not investors, control these class actions.") (Dec. 21, 1995). ======END OF PAGE 7====== interests are more strongly aligned with the class of shareholders, will participate in the litigation and exercise control over the selection and actions of plaintiff's counsel." Id. In particular, Congress "intend[ed] that the lead plaintiff provision will encourage institutional investors to take a more active role in securities class action lawsuits." Id. at 34. Congress "believe[d] that increasing the role of institutional investors in class actions will ultimately benefit shareholders and assist courts by improving the quality of representation in securities class actions." Id. C. Facts Thirteen class action suits are pending in this Court against Vesta Insurance Group, a Birmingham, Alabama holding company for a group of property/casualty insurance companies, and certain of its officers and directors. The suits were brought by shareholders who purchased Vesta stock during various Class Periods from June 1, 1995 through June 30, 1998. The suits are based upon Vesta's restatement of its earnings by some $65 million dollars due to "accounting irregularities" and "correction" of its accounting methods. Defendants have filed unopposed motions to consolidate the cases before this Court. Four competing members or collections of members of the plaintiff class originally moved to be appointed lead plaintiff in these cases: (a) the Florida Board; (b) the "LaPerriere Group," consisting of 22 individuals and two entities, which sought appointment as lead plaintiff of all of its members, or, in the alternative, of its five members with the most losses; (c) the "Gold Group," consisting of Trust Insurance Company and two individuals; and (d) the "Anderson Group" of three individuals. ======END OF PAGE 8====== In their Joint Memorandum dated August 25, 1998, the LaPerriere Group and the Gold Group informed the Court that they, along with two new individual plaintiffs, had formed the "Vesta Plaintiffs Group." The Vesta Plaintiffs Group sought appointment as lead plaintiff of all of its members or, in the alternative, the nine members with the most losses. During the August 28, 1998 hearing, counsel for the Vesta Plaintiffs Group announced an agreement with counsel for the Anderson Group to the effect that the Anderson Group would join the Vesta Plaintiffs Group. Tr. 41. The Vesta Plaintiffs Group is represented by more than two dozen separate law firms. See Jt. Mem. 1 n.1, 4-8.<(5)> The Commission understands that the Vesta Plaintiffs Group claims losses of over $400,000 and that the Florida Board claims losses of approximately $300,000. See, e.g., Tr. 42.<(6)> ARGUMENT <(5)> The LaPerriere Group originally requested approval of two law firms as "co-lead counsel." LaP. Mem. 14. When it joined the Gold Group, the LaPerriere Group increased, without explanation, the number of proposed "co-lead counsel" to three firms. Jt. Mem. 22. At the August 28 hearing, the new "Group" added the Anderson Group to its ranks without discussing the lead counsel issue. Tr. 41. <(6)> With regard to the largest financial interest requirement, the Commission has used the calculations provided in the August 24, 1998 Affidavit of Michael A. Marek ("Marek Aff."), submitted with Bd. Supp. Mem. and not contested by the Vesta Plaintiffs Group. The Commission understands that the Florida Board intends to file a supplemental affidavit representing that, due to the continued decline in Vesta's stock price, the Board's losses under 15 U.S.C. 78u-4(e) have increased to more than $550,000, compared to the Vesta Plaintiffs Group's losses of $475,000. Because such an affidavit is not yet on file and because the Vesta Plaintiffs Group has not had an opportunity to respond to it, the Commission does not rely on it here. ======END OF PAGE 9====== I. THE COMMISSION IS NOT AWARE OF ANY REASON THE ACTIONS SHOULD NOT BE CONSOLIDATED, NOR OF ANY LIMITATION THAT SHOULD BE PLACED ON CONSOLIDATION. At the outset, the Commission notes that the Litigation Reform Act refers to consolidation only when it provides that if more than one securities fraud action "on behalf of a class asserting substantially the same claim or claims" has been filed, then appointment of the lead plaintiff should await resolution of a motion to consolidate. 15 U.S.C. 78u-4(a)(3)(A)(ii). The Act does not displace the traditional legal standards for consolidation. See Fed. R. Civ. P. 42(a); Hendrix v. Raybestos-Manhattan, Inc., 776 F.2d 1492, 1495-97 (11th Cir. 1985). The Commission understands that none of the parties objects to consolidation of these actions. See Tr. 35-36. The Court stated its belief at the hearing that "all 13 cases are strikingly similar in * * * various material respects." Tr. 25. Neither in the briefing nor at the hearing has any party raised any significant distinguishing characteristics among the actions, such as, for example, the existence of "stock" plaintiffs and "options" plaintiffs, which prompted one magistrate judge to consolidate a number of actions "into two actions, one on behalf of the Stock Plaintiffs, and the other on behalf of the Options Plaintiffs." Chill v. Green Tree Financial Corp., No. 97-2666 (JRT/RLE), 1998 WL 420557, *3-*6 (D. Minn. June 29, 1998). The Commission agrees with the Vesta Plaintiffs Group and the Florida Board that denial of consolidation would not obviate the need to resolve the lead plaintiff motions. See Tr. 15-16, 35-36. The lead plaintiff provisions are designed to bring the existence of a securities class action to the attention of other members of the class and to give them the ======END OF PAGE 10====== opportunity to move to be appointed lead plaintiff even if they did not file the action. See 15 U.S.C. 78u-4(a)(3)(A) ("Early Notice to Class Members") & (a)(3)(B)(iii)(I)(aa) (requirement that lead plaintiff applicant "has either filed the complaint or made a motion in response to a notice") (emphasis added). Thus, even if the Court were to deny consolidation and stay all but the first-filed action (see Tr. 15), the lead plaintiff motions would still need to be decided in the first-filed action. Accordingly, the Commission is not aware of any reason that the actions should not be consolidated or any restrictions that should be placed on consolidation. II. THE COMMISSION BELIEVES THAT THE FLORIDA BOARD PRESUMPTIVELY IS THE MOST ADEQUATE PLAINTIFF, SUBJECT TO REBUTTAL OF THE PRESUMPTION IN ACCORDANCE WITH THE LANGUAGE AND PURPOSES OF THE LITIGATION REFORM ACT. The Litigation Reform Act provides that "the court shall adopt a presumption that the most adequate plaintiff" is the "person or group of persons" that satisfies three requirements: (1) "has either filed a complaint or made a motion [for appointment as lead plaintiff]"; (2) "has the largest financial interest in the relief sought by the class"; and (3) "otherwise satisfies the requirements of Rule 23." 15 U.S.C. 78u- 4(a)(3)(B)(iii)(I). The presumption "may be rebutted only upon proof" that the presumptively most adequate plaintiff "will not fairly and adequately protect the interests of the class" or "is subject to unique defenses that render such plaintiff incapable of adequately representing the class." 15 U.S.C. 78u-4(a)(3)(B)(iii)(II)(aa) & (bb). The Florida Board and the Vesta Plaintiffs Group each claim to have the largest financial interest. Alternatively, each argues that if the other is found to have the largest financial interest, the statutory presumption should not operate in favor ======END OF PAGE 11====== of the other because the other will not fairly and adequately protect the class' interests.<(7)> A. The Florida Board Has the Largest Financial Interest in the Litigation, Once the "Vesta Plaintiffs Group" Is Limited to a Size That Would Enable It To Manage the Litigation and the Lawyers Effectively. The Vesta Plaintiffs Group claims to have the largest financial interest in the litigation. It claims losses of at least $400,000, more than the $300,000 in losses alleged by the Florida Board. The Commission believes, however, that the Court should first determine whether the members of the Vesta Plaintiffs Group are too numerous to manage the litigation effectively. If the Court determines -- as the Commission believes that it should -- to reduce their number to a manageable size, it should only consider, in calculating the financial interest of the "Vesta Plaintiffs Group," the interest of those members that remain. See 15 U.S.C. 78u-4(a)(3)(B)(iii)(I). While the Litigation Reform Act states that the lead plaintiff may be a "group of persons," this does not mean that the Court must accept as a "group" any number and assortment of persons proposed. Yet, that is essentially what the Vesta Plaintiffs Group contends. See Tr. 44 (its counsel asserts that "group" is "clearly intended to be its common, <(7)> This argument appears to be made under two provisions of the Litigation Reform Act: that the lead plaintiff "satisf[y] the requirements of Rule 23 of the Federal Rules of Civil Procedure," and that the presumption as to who should be lead plaintiff can be rebutted by proof that the presumptive lead plaintiff "will not fairly and adequately protect the interests of the class." See 15 U.S.C. 78u-4(a)(3)(B)(iii)(I)(cc) & (a)(3)(B)(iii)(II). ======END OF PAGE 12====== accepted meaning, which is a group of people who have gotten together to aggregate their damages to prosecute the case"). The statutory language "group of persons" appears in the provision of the Litigation Reform Act establishing a presumption that a certain type of plaintiff is the "most adequate plaintiff" to lead a securities fraud class action. 15 U.S.C. 78u-4(a)(3)(B)(iii)(I). As discussed above, Congress intended by that provision to protect plaintiff investors by making securities litigation less of a "lawyer-driven" enterprise. The presumption is intended to give control of the litigation to lead plaintiffs -- and particularly to institutional investors -- who have a substantial stake in the litigation, and thus the ability and incentive to control the lawyers. See, e.g., Gluck v. Cellstar Corp., 976 F. Supp. 542, 548 (N.D. Tex. 1997) ("The legislative history of the Reform Act is replete with statements of Congress' desire to put control of such litigation in the hands of large, institutional investors."); Greebel v. FTP Software, Inc., 939 F. Supp. 57, 63-64 (D. Mass. 1996) (same); Ravens v. Iftikar, 1997 WL 405110, *6 (N.D. Cal. July 16, 1997) ("The Reform Act affords large, sophisticated institutional investors a preferred position in securities class actions. * * * Congress sought to eliminate figurehead plaintiffs who exercise no meaningful supervision of litigation."); Chan v. Orthologic Corp., No. CIV 96-1514 PHX RCB, slip op. at 11 (D. Ariz. Dec. 19, 1996) (Act "was designed to encourage the participation of institutional investors in securities class action litigation"); pp. 4-8, supra. As explained in a law review article cited in the Act's legislative history as "provid[ing] the basis for the `most adequate plaintiff ======END OF PAGE 13====== provision," S. Rep. 11 n.32, "[i]nstitutions' large stakes give them an incentive to monitor, and institutions have or readily could develop the expertise necessary to assess whether plaintiffs' attorneys are acting as faithful champions for the plaintiff class." 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, 2095 (1995) ("Weiss & Beckerman"). The authors further argue that institutions can obtain more favorable settlements, and should be "in a position to negotiate fee arrangements with plaintiffs' lawyers before class actions are initiated[,] * * * [which] may well * * * differ substantially from the fee structures that courts currently employ." Id. at 2107, 2121. As noted in In re California Micro Devices Sec. Litig., 168 F.R.D. 257, 275 (N.D. Cal. 1996), a non-Litigation Reform Act case, institutional investors "will be willing and able to monitor[] attorney conduct in securities class actions much more rigorously than either figurehead plaintiffs or courts can do." The court explained that: Institutional investors have financial interests in the outcome of securities class actions which dwarf the interests of individual plaintiffs, and with this increased financial interest comes an increased incentive to monitor class counsel's conduct of the action. Institutional investors, moreover, are much better situated to conduct such monitoring, both because they have greater resources and because, as repeat players in the securities class actions, they are experienced in the issues which these actions inevitably raise. Id.; see 965 F. Supp. 1327, 1330-32 (N.D. Cal. 1997) (same case); City Nominees, Ltd. v. Macromedia, Inc., No. C97-3521-SC, slip op. at 2 (N.D. Cal. Jan. 23, 1998) ("As courts have noted, large institutional investors have proven to be more efficient plaintiffs than unrelated plaintiffs ======END OF PAGE 14====== grouped together, producing larger recoveries with smaller attorney's fees than individual plaintiffs."). The Commission has noted in other contexts that institutions have skills and expertise that are likely to be very valuable to investors, and are likely to devote substantial time and resources to representing investors in litigation.<(8)> This is not to suggest that an institutional investor must or should always be chosen as lead plaintiff. But it does strongly suggest that if a "group of persons" is to serve as lead plaintiff, the group should have comparable ability to give effect to the statutory objective of client control of the litigation and the lawyers. See Conf. Rep. 34 ("Institutional investors and other class members with large amounts at stake will represent the interests of the plaintiff class more effectively than class members with small amounts at stake."). <(8)> For example, the Commission has advised bankruptcy courts that institutional investors, while serving on creditors' committees, should be allowed to engage in trading in the securities of debtors, subject to certain restrictions designed to prevent trading on material nonpublic information. The Commission has noted that entities such as investment advisers, broker-dealers, pension funds, banks, and insurance companies "have skills and expertise that are likely to be extremely valuable to the [creditors'] committee," and that "[b]ecause such entities frequently have a substantial financial interest in the outcome of bankruptcy proceedings and can thus be expected to devote significant time and resources to the official committee's activities," discouraging participation in the committee by such institutions by totally disallowing trading "would be contrary to the best interests of public investors." Memorandum of Securities and Exchange Commission in Support of Motion for an Order Permitting Securities Trading in Certain Circumstances, filed in In re WRT Energy Corp., No. 96- BK-5012 (Bankr. W.D. La. May 6, 1996) at 2, 4. ======END OF PAGE 15====== The mere fact that a proposed lead plaintiff "group" might have the largest combined financial stake does not guarantee this result. To the contrary, it will ordinarily be the case that a large number of previously unaffiliated persons will be far from able to act collectively to manage the litigation and control the lawyers. If members of the proposed "group" individually have relatively small losses in the case and do not know each other they will tend to lack either the incentive or ability to act in concert. The problem is made worse if the members have been recruited by counsel.<(9)> The net result will be that while the "group" nominally has a large stake in the litigation, the lawyers will dominate decisionmaking. The Commission believes that the term "group of persons" should be construed in light of these statutory purposes, and that the Court generally should only approve a group that is small enough to be capable of effectively managing the litigation and the lawyers. Ordinarily, this should be no more than three to five persons, a number that will facilitate joint decisionmaking and also help to assure that each member of the group has a sufficiently large stake in the litigation. There may, of course, be <(9)> In its report last year on the first year of practice under the Act, the Commission stated that some lawyers, "[t]aking advantage of [the] provision" of the Act allowing the appointment as lead plaintiff of a "group of persons," have attempted in the process of applying for lead plaintiff "to recruit investors as additional clients." 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 65 (Apr. 1997) ("SEC Report"). Specifically, some lawyers have "phrased [notices to the class under the Act] in a way more likely to attract clients, rather than competition from investors (and other law firms) independently vying to be named lead plaintiff." Id. at 65-66. ======END OF PAGE 16====== unusual circumstances that warrant departure from these limits. Such circumstances might include pre-existing relationships among the group members or other factors indicating that they have a special capacity to provide able and unified decisionmaking independent of counsel. Each proposed member of the "group" should be evaluated separately, and the marginal benefit of including another member in the group weighed against the further division of decisionmaking authority and the attendant problems that enlargement of the group entails. In general, except in unusual circumstances, to ensure adequate monitoring, coordination, and accountability, a "group" should have no more than five members, and the fewer the better.<(10)> Several courts have endorsed these principles. In In re Donnkenny Inc. Sec. Litig., 171 F.R.D. 156, 157-58 (S.D.N.Y. 1997), the court rejected a proposed lead plaintiff "group" consisting of "two unrelated institutional investors and four other individual class members." The "group" was formed from two previously competing lead plaintiff movants, and included an institution with nearly $2 million more in losses than any other member. The court found that the movants had not justified appointment of a "group," id. at 158, and appointed as lead plaintiff the "person" -- the institution -- with far and away the largest financial <(10)> The law review article cited in the legislative history as "provid[ing] the basis for the `most adequate plaintiff' provision," S. Rep. at 11 n.32, suggests that Congress used the "group of persons" language because "if several institutions were interested in becoming involved, they could either compete to become lead plaintiff or agree to work together." Weiss & Beckerman, 104 Yale L.J. at 2108. ======END OF PAGE 17====== interest in the litigation. The Donnkenny court explained its rejection of the proposed "group" as follows: To allow an aggregation of unrelated plaintiffs to serve as lead plaintiffs defeats the purpose of choosing a lead plaintiff. One of the principal legislative purposes of the [Litigation Reform Act] was to prevent lawyer-driven litigation. Appointing lead plaintiff on the basis of financial interest * * * was intended to ensure that institutional plaintiffs with expertise in the securities market and real financial interests in the integrity of the market would control the litigation, not lawyers. To allow lawyers to designate unrelated plaintiffs as a "group" and aggregate their financial stakes would allow and encourage lawyers to direct the litigation. Congress hoped that the lead plaintiff would seek the lawyers, rather than having the lawyers seek the lead plaintiff. Id. at 157 (citation omitted). In In re Oxford Health Plans, Inc. Sec. Litig., No. MDL-1222, 1998 WL 400741, *4 (S.D.N.Y. July 15, 1998), the court limited a proposed 30-member lead plaintiff "group" to its three members with the most losses, "each of whom has suffered from two to three million dollars in losses." The court stated that "the limited size of the Vogel Group coupled with the scope of each individual's loss will make the Vogel Group, as reduced by the Court, an effective monitor of its counsels' performance, thereby fulfilling the purpose of the [Litigation Reform Act]." Id. In City Nominees v. Macromedia, No. C97-3521-SC, slip op. at 2, the court noted that "one purpose of the [Act] was to reduce the tremendous influence that the plaintiff's bar had over securities class action lawsuits." According to the court, "the legislative history discusses the need to limit the number of plaintiffs in order to improve the monitoring of the attorneys." Id. at 6. The court held that the "appointment of 36 lead plaintiffs is inconsistent with the goal of restoring the control of ======END OF PAGE 18====== lawsuits to plaintiffs. 36 lead plaintiffs would make the administration of this complex civil action even more complex." Id. at 7. Noting that "counsel has presented no rationale for the breadth of the proposed group," the court accepted an alternative proposal of 6 persons as lead plaintiff as "not the ideal outcome envisioned by the framers of the [Act]," a "permissible, but suboptimal, result." Id. at 6, 7.<(11)> See In re Graham-Field Health Products Litig., No. 98-CV-19:3 (DRH), slip op. at 3, 4 (E.D.N.Y. Aug. 10, 1998) (declining to approve unopposed motion of 50 parties to be appointed lead plaintiff because "there is a significant question as to whether it is appropriate to appoint such a large group as lead plaintiff" and "it may well be that to appoint such a large lead plaintiff group would be to defeat the [Act's] purpose"); In re Informix Corp. Sec. Litig., No. C-97-1289-SBA, slip op. at 6 (N.D. Cal. Oct. 17, 1997) (rejecting a large proposed lead plaintiff "group," stating that it "would not be able to have the type of meaningful participation in the conduct of the litigation which was one of the guiding purposes of the lead plaintiff provisions * * * . Appointment of a select group of investors with significant losses would fulfill the statutory goal of having <(11)> The Macromedia court was troubled by "some tension between the stated purpose of the [Act] and its statutory language." The Commission believes this appearance of "tension" was created by the fact that the court did not pursue its analysis of the language "group of persons" beyond the general observation that the Act permits appointment of more than one person. See slip op. at 6-7. Because the lead plaintiff motion was unopposed, the court did not have the benefit of an adversarial presentation on the issue. ======END OF PAGE 19====== plaintiffs who suffered significant losses control the litigation.").<(12)> Applying these principles to the proposed "Vesta Plaintiffs Group," the Commission notes that three members have alleged losses in excess of $50,000: Randy Seckman & Associates, $87,000; Trust Insurance Company, $64,000; and Mr. Sullivan, $52,000. See LaP. Mem., Ex. 2; Marek Aff., supra n.6. The remaining members have individual losses of $16,000 or less. Id. The Vesta Plaintiffs Group provides no justification under the Litigation Reform Act for enlarging the "group" beyond the three members with the most losses. There appear to be no pre-existing relationships among its members. Indeed, they filed separate actions, separate lead plaintiff motions, and are represented by two dozen separate counsel. The Vesta Plaintiffs Group has not specified the manner in which their "group" was formed; described its members in any detail; or explained how they would function collectively. Nor has it provided any basis for its original proposal of a five-member subgroup, its amended proposal of a nine-member subgroup, or the change from the one to the other. Accordingly, the Commission believes that, at a minimum, the Court should limit the number of persons in the proposed "Vesta Plaintiffs Group" to no more than Randy Seckman & Associates, Trust Insurance Company, and Mr. Sullivan. Once the "Vesta Plaintiffs Group" is limited in this manner, it has combined losses of about $200,000, which is less than the Florida <(12)> In Informix, counsel for the large "group" proposed a nine-person alternative, which the court accepted. The court's analysis of the alternative proposal is not set forth in its opinion, which, because the lead plaintiff motion in that case was unopposed, was rendered without the benefit of an adversarial presentation. ======END OF PAGE 20====== Board's $300,000 in losses. Thus, the Florida Board has "the largest financial interest in the relief sought by the class."<(13)> The Vesta Plaintiffs Group's arguments in favor of its proposed lead plaintiff "group" -- whether based on statutory language, case law, or policy -- do not withstand scrutiny. The Vesta Plaintiffs Group cites the statutory language "group of persons" repeatedly for the proposition that a "group" may be appointed lead plaintiff (Jt. Mem. 4, 6, 7, 9; Jt. Resp. 3), but never provides a meaningful explanation of what a "group" is. It claims that the lead plaintiff provisions do not define "group" and that "[w]hen Congress wants to define the term `group' in some restrictive way, they know how to do so" (Tr. 43). It cites Exchange Act Section 13(d), 15 U.S.C. 78m(d), which, speaking generally, requires disclosure to the market when a "person" acquires more than a specified percentage of certain securities. Section 13(d)(3), 15 U.S.C. 78m(d)(3), specifies that "[w]hen two or more persons act as a partnership, limited partnership, syndicate, or other group for <(13)> In discussing the largest financial interest requirement, some courts have referred to other factors, such as the number of shares purchased by the lead plaintiff applicants. See Bd. Supp. Mem. 12-13. We do not believe that consideration of such factors is generally appropriate given the language and purposes of the Act. The Act requires the Court to look to who has "the largest financial interest in the relief sought by the class," not to who has the largest stake in the defendant. In theory, one plaintiff might have purchased more shares than another, but because they bought or sold at a different time, suffered fewer losses. That person presumptively would be a less appropriate lead plaintiff than a person who bought fewer shares, but who suffered greater losses and who thus has more to recover and a greater incentive to monitor and control the litigation. ======END OF PAGE 21====== the purpose of acquiring, holding, or disposing" of the specified securities, they shall be considered a "person" under the section. But Section 13(d)(3) does not define the word "group"; it merely uses that word in a sentence defining "`person' for the purposes of this subsection." In Section 13(d)(3), as in the lead plaintiff provisions, the meaning of "group" is determined by its context and purpose. The purpose of Section 13(d) is to provide disclosure to the market of certain levels of securities transactions. It makes sense in that context for a "group" to include all persons acting in concert. The statutory objectives that call for limiting a "group" in the context of the lead plaintiff provisions do not exist under Section 13(d). The Vesta Plaintiffs Group also cites cases for the general proposition that "individual plaintiffs may aggregate their losses in order to serve" as a lead plaintiff "group." See LaP. Mem. at 10; see also Jt. Mem. at 4, 6-7. But none of these cases holds that a "group" can be of unlimited size and indiscriminate composition. Most contain little or no analysis of the "aggregation" issue; indeed, the issue does not appear to have been contested, briefed, or argued in the cases, rendering them of little or no precedential value on the issue.<(14)> <(14)> See Greebel v. FTP Software, Inc., 939 F. Supp. 57, 64 (D. Mass. 1996) (granting unopposed motion of three persons to be lead plaintiff without analysis of aggregation issue); Lax v. First Merchants Acceptance Corp., No. 97 C 2715, 1997 WL 461036, *5 (N.D. Ill. Aug. 11, 1997) (appointing as lead plaintiff one coalition of plaintiffs over competing coalition without analysis of aggregation); Zuckerman v. Foxmeyer Health Corp., No. 3:96-CV-2258-T, 1997 WL 314422, *2 (N.D. Tex. Mar. 28, 1997) (appointing 11 persons as lead plaintiff over defendant's objection to appointment of multiple lead counsel; no analysis of (continued...) ======END OF PAGE 22====== The only cases the Vesta Plaintiffs Group cites that contain any extended discussion of the aggregation issue are Magistrate Judge Erickson's rulings in D'Hondt v. Digi Int'l Inc., 1997 WL 405668, *3 (D. Minn. Apr. 3, 1997) and in Chill v. Green Tree Financial Corp., No. 97-2666 (JRT/RLE), 1998 WL 420557 (D. Minn. June 29, 1998). Both cases acknowledge "Congress' goal that the Lead Plaintiffs, and not their counsel, will control the progress and proper disposition of their legal claims" and express the desire "that the will of Congress, as expressed in the [Act], will be effectuated in the conduct of this litigation." Chill, 1998 WL 420557, *12; D'Hondt, 1997 WL 405668, *5. Chill appears to be generally consistent with the result urged here. There, the magistrate judge appointed a six-person "smaller subset" of a proposed lead plaintiff "group," stating, "[w]e do not suggest that either Rule 23, or the [Litigation Reform Act], warrants an arbitrary limit on the number of proposed Lead Plaintiffs, for we only hold that, in a case-by- <(14)>(...continued) aggregation); In re Cephalon Sec. Litig., No. CIV A 96- 0633, 1996 WL 515203 (E.D. Pa. Aug. 27, 1996) (same as Greebel; one-page memorandum and order); In re Ride, Inc. Sec. Litig., Master File No. C97-402WD, Order at 3 (W.D. Wash. Aug. 5, 1997) (same as Lax); Bobrow v. MobileMedia, Inc., No. 96-4715 (D.N.J. Mar. 31, 1997) (letter opinion summarily rejecting one plaintiff coalition's argument that it had larger financial interest than another because it included the person with more shares than anyone else); Chan v. Orthologic Corp., No. CIV 96-1514 PHX RCB, slip op. at 4-5 (D. Ariz. Dec. 19, 1996) (same as Lax); Powers v. Eichen, No. 96-1431-B (AJB) (S.D. Cal. Nov. 15, 1996) (order devoid of analysis). The courts in In re Read-Rite Corp. Sec. Litig., No. C-97-20059 RMW (N.D. Cal. May 28, 1997) and In re Diamond Multimedia Sys., Inc. Sec. Litig., No. C 96-2644 SBA (N.D. Cal. Jan. 13, 1997), discuss the aggregation issue only briefly and without detailed analysis of the lead plaintiff proposals in those cases. ======END OF PAGE 23====== case inquiry, a rule of reason prevails." 1998 WL 420557, *7. The Commission is not suggesting an "arbitrary" limit on the size of the group, but rather an approach that is informed by the language and purposes of the Litigation Reform Act. In D'Hondt, 1997 WL 405668, *3, Magistrate Judge Erickson appointed 21 persons as lead plaintiff over defendants' objections, stating that while it might be argued that a large lead plaintiff coalition would dilute the plaintiffs' control over the action, "an equally cogent assertion can be broached that, when more greatly numbered, the Lead Plaintiffs can more effectively withstand any supposed effort by the class counsel to seize control of the class claims." We respectfully suggest that in ordinary circumstances this will not be true. This is not a contest in which numerosity is an asset. We believe that a small number of well-motivated, financially interested plaintiffs will be far more willing and able to control counsel than will a large, dispersed coalition of persons who each have only a modest stake in the outcome of the litigation. Although the Vesta Plaintiffs Group relies heavily on policy arguments, it fails to come to terms with Congress' clear policy judgment that a lead plaintiff in a securities fraud class action should have effective control of the litigation and the lawyers. See Tr. 45 ("so- called lawyer-driven litigation, whatever that is," the Vesta Plaintiffs Group's counsel remarked). When the Court raised this issue, the Vesta Plaintiffs Group's counsel attempted to define the objectives of the Act in terms of "better filed complaints, better prosecuted cases." Tr. 71. ======END OF PAGE 24====== Counsel neglected to mention that Congress believed that those benefits flow from client control. See pp. 4-8, supra.<(15)> The Vesta Plaintiffs Group instead attempts to justify its lead plaintiff motion on grounds that have no support in the language or history of the lead plaintiff provisions. It asserts that their "group" was formed "in an effort to ensure the broadest * * * representation of the class" (Jt. Mem. 1-2), a "diversified combination" (Jt. Mem. 2), a "diverse group" (Jt. Mem. 2 n.1), a "balanced combination" capable of representing "the diverse interests" of the class (Jt. Mem. 3), a "diverse, balanced group of class members" (Jt. Mem. 10), a "balanced mix of individual and institutional plaintiffs" (Jt. Mem. 11), and a "broader cross section of the Class, provid[ing] fuller representation," than the Florida Board (id.). Asserting that there is "strength in the group" and "in numbers" (Tr. 57, 76), that "one plaintiff may have a defect and another one won't" (Tr. 57), and that the Court should "avoid the danger of appointing a single Lead Plaintiff and Lead Counsel with significant defects" (Jt. Mem. 11), it appears to urge the Court to adopt a presumption in favor of more rather than fewer class representatives. See id. at 11 ("multiple class representative could more easily rebut an argument of lack of typicality or adequacy than a single class representative"), 12. It also urges the Court to choose between competing lead plaintiff movants on the basis of the number of institutional investors claimed by each, regardless of those <(15)> The Vesta Plaintiffs Group also argues that the Litigation Reform Act "was predominantly an attempt to limit participation of `professional plaintiffs.'" Jt. Mem. 20. In fact, Congress enacted separate provisions specifically addressed to the "professional plaintiff" problem. See 15 U.S.C. 78u-4(a)(3)(vi) ("Restrictions on Professional Plaintiffs"). ======END OF PAGE 25====== institutions' respective financial interests in the litigation (Tr. 57). The Vesta Plaintiffs Group further argues that its members' individual losses are greater "[a]s a percentage of their total investment in Vesta" and as a percentage of their total assets than the Florida Board's losses, which it contends are "miniscule." Jt. Mem. 5.<(16)> These arguments ignore the fact that Congress adopted the largest financial interest requirement because it believed that large investors are best able to manage the litigation and the lawyers, that effective client control benefits all class members, and that large investors can adequately represent the interests of small investors. That requirement is framed in terms of the "largest financial interest in the relief sought by the class," not in terms of loss as a percentage of net worth. See In re Cendant Corp., No. 98-CV-1664 (WHW), 1998 WL 598337, *4 (D.N.J. Sept. 8, 1998). The Vesta Plaintiffs Group cites no basis in the statutory language or legislative history for preferring a "group," large or small, to a "person," or for considering "diversity of representation." In fact, in adopting the largest financial interest requirement, Congress rejected the very objections raised by the Vesta Plaintiffs Group that it was unrepresentative of the class. See, e.g., Conf. Rep. 34.<(17)> <(16)> At the hearing, Vesta Plaintiffs Group's counsel suggested other policy rationales that are open-ended, not subject to effective judicial administration, and inconsistent with the policy choices specified by Congress: "What would be fair? What would be efficient? How could the cases get advanced? How could it get resolved? Where can we avoid delaying and where can we avoid court?" Tr. 76. <(17)> In construing the notice provisions of the Litigation Reform Act, the court in Greebel v. FTP Software, Inc., 939 F. Supp. 57, 63-64 (D. Mass. 1996) (citations (continued...) ======END OF PAGE 26====== Finally, as discussed further below, the statutory presumption may be rebutted "only upon proof" that the presumptively most adequate plaintiff "will not" fairly and adequately represent the interests of the class. 15 U.S.C. 78u-4(a)(3)(B)(iii)(II). The Vesta Plaintiffs Group's arguments based on "avoid[ing] the danger" that a court might appoint a lead plaintiff "with significant defects," or that "one plaintiff may have a defect and another one won't," seem to assume, rather than prove, the existence of such defects. B. The Court Should Be Guided by the Language and Purposes of the Litigation Reform Act in Deciding Whether the Vesta Plaintiffs Group Has Met Its Burden of Proving That the Florida Board Will Not Fairly and Adequately Protect the Interests of the Class. The Vesta Plaintiffs Group argues that the Florida Board is not the most adequate plaintiff because it will not adequately represent the class. Jt. Mem. 16-22. The Commission recognizes the importance of the adequacy of representation determination under the Litigation Reform Act to investor <(17)>(...continued) omitted), stated: * * * Congress' purpose was not to ensure notice to the entire class, but merely to those sophisticated and institutional investors that Congress deemed presumptively most adequate to serve as lead plaintiffs in securities class actions. * * * The only contrary piece of legislative history advanced by FTP is an isolated statement made by Senator Boxer on the Senate floor as she argued in favor of the proposed Boxer- Bingaman Amendment * * * [that] would have excised the statutory provisions tilting appointment of a lead plaintiff toward large investors and, in its place, allow the entire class of investors to vote on who should serve as lead plaintiff. The amendment did not carry. ======END OF PAGE 27====== protection. The Commission also recognizes, however, that the determination is fact-intensive, committed to the sound discretion of the court, and not easily addressed by an amicus curiae, which, by its very nature, is not as familiar with, and involved in, the case as are the parties and the court. While we are unable to express an opinion on the ultimate question, the Commission nevertheless respectfully suggests ways in which the language and purposes of the Litigation Reform Act inform the adequacy determination. The Act establishes specific standards for an adequacy challenge. In relevant part, the Act provides that the presumption in favor of the most adequate plaintiff "may be rebutted only upon proof by a member of the purported plaintiff class that the presumptively most adequate plaintiff * * * will not fairly and adequately protect the interests of the class." 15 U.S.C. 78u-4(a)(3)(B)(iii)(II) (emphasis added). Thus, mere speculative allegations of inadequacy are not sufficient. As one court noted, "speculative assertions are insufficient to rebut the presumption that [a lead plaintiff movant] is the most adequate plaintiff. The statute requires the [challenger] to present `proof' of its assertions; or, if it requires discovery to gather such proof, to `demonstrate a reasonable basis' for a finding of inadequacy." Gluck, 976 F. Supp. at 547-48 (citing 15 U.S.C. 78u-4(a)(3)(B)(iii)(II) & (a)(3)(B)(iv)). Furthermore, the standards for an adequacy challenge must be viewed in the context of the lead plaintiff provisions as a whole. See Greebel, 939 F. Supp. at 63-64 (interpreting Reform Act notice provision in conjunction with largest financial interest requirement because a "statutory provision should be read by reference to the whole act"), citing John Hancock Mut. ======END OF PAGE 28====== Life Ins. Co. v. Harris Trust & Sav. Bank, 510 U.S. 86, 94-95 (1993); Ravens, 1997 WL 405110, *6 (same). The largest financial interest requirement was itself designed to ensure more effective representation of investors in securities fraud class actions. Congress sought to encourage large investors, including institutions, to serve as lead plaintiffs, and believed that institutions could and would qualify as lead plaintiffs.<(18)> The Commission believes that the standards for an adequacy challenge must not be read and applied in such a manner that they would nullify the largest financial interest requirement and defeat the purposes of the lead plaintiff provisions. Thus, courts have recognized that generic arguments that would systematically disqualify large investors and institutions from serving as lead plaintiff should not suffice as "proof" under the statute. See, e.g., Gluck v. Cellstar Corp., 976 F. Supp. 542, 547-48 (N.D. Tex. 1997); Chan v. Orthologic Corp., No. CIV 96-1514 PHX RCB, slip op. at 8-12 (D. Ariz. Dec. 19, 1996). The Vesta Plaintiffs Group raises a number of arguments that appear to be of this type. For example, to the extent that it is arguing that the Florida Board is an inadequate representative because the Board's <(18)> The Vesta Plaintiffs Group's argument that the Florida Board "is clearly not the type of lead plaintiff contemplated by Congress" because it has "filed at least 6 additional securities actions in the last 12 months" is not well taken. See Jt. Mem. 20, citing 15 U.S.C. 78u-4(a)(3)(B)(vi) ("Except as the court may otherwise permit, consistent with the purposes of this section, a person may be a lead plaintiff * * * in no more than 5 securities class actions * * * during any 3-year period."). The legislative history makes clear that "[i]nstitutional investors seeking to serve as lead plaintiff may need to exceed this limitation and do not represent the type of professional plaintiff this legislation seeks to restrict." Conf. Rep. 35. ======END OF PAGE 29====== assets far exceed the Board's losses in this case (see, e.g., Tr. 51), Congress was well aware that institutional investors have millions or billions of dollars of assets under management and that these amounts easily could dwarf losses in particular cases. See, e.g., Conf. Rep. 34 (noting that "[i]nstitutional investors are America's largest shareholders, with about $9.5 trillion in assets, accounting for 51% of the equity market" and that "pension funds account[ ] for $4.5 trillion [ ] or nearly half of institutional assets"). Similarly, the Vesta Plaintiffs Group argues that the Board may be placed in an "awkward situation" because Morgan Stanley Dean Witter, a financial advisor to some of the funds administered by the Board, "may become" a defendant in this case. Jt. Mem. 18-19; Tr. 51-52. But the mere fact of a plaintiff's business relationship with a potential defendant does not establish a per se category or suffice as "proof" of inadequacy. The conflicts alleged by the Vesta Plaintiffs Group are further attenuated by the fact that, in contrast to In re Cendant Corp., No. 98-CV- 1664 (WHW), Hrg. Tr. at 16 (D.N.J. Aug. 24, 1998), no plaintiff in this action has named the entities allegedly creating the conflict (Torchmark, Merrill Lynch, Morgan Stanley) as defendants in this action. See Tr. 49, 52 (Vesta Plaintiffs Group's counsel states present intention to name Torchmark and asserts that the others "may become defendants here"); Jt. Mem. 19 ("Morgan Stanley most likely also will be named as a defendant in this litigation."). The asserted conflict may never arise. Cf. Gluck, 976 F. Supp. at 547 (noting that "[t]here is, of course, a marked difference between affirmatively demonstrating that [an institution] is not an adequate representative or is subject to unique defenses and simply ======END OF PAGE 30====== claiming that [it] might be subject to such arguments in the future"). Moreover, the Florida Board has represented to the Court that "it is committed to bring into this litigation defendants against whom [it] [has] viable claims." Tr. 69; accord Tr. 60.<(19)> C. The Court Should Not Appoint "Co-Lead Plaintiffs." The Commission recognizes that neither the Florida Board nor the Vesta Plaintiffs Group has requested appointment as "co-lead plaintiff." See Bd. Supp. Mem. at 22; Jt. Resp. at 3. However, the Vesta Plaintiffs Group already has propounded a number of alternative lead plaintiff proposals, stated a willingness to consider a "unified position" with the Florida Board (Tr. 76), and relied heavily on Oxford, 1998 WL 400741. Because of the possibility that the Vesta Plaintiffs Group may yet seek appointment as "co-lead plaintiff," the Commission wishes briefly to explain its position that such an arrangement is contrary to the language and purposes of the Litigation Reform Act. Congress prescribed specific procedures and criteria in the Act for the determination of the most adequate plaintiff, and singled out large investors as the presumptive most adequate plaintiff. In establishing that <(19)> The Vesta Plaintiffs Group argues that its lawsuit against Vesta in state court is a valid basis for preferring it as lead plaintiff to the Florida Board. See Tr. 53-54. The fact that the Vesta Plaintiffs Group has sued Vesta in state court, however, is not proof that the Florida Board will inadequately represent the class in this action. Moreover, to appoint a lead plaintiff in a federal action based on who is leading a state court action could permit an end run around the lead plaintiff provisions and invite possible gamesmanship. See Janet Cooper Alexander, Do the Merits Matter? A Study of Settlements in Securities Class Actions, 43 Stan. L. Rev. 497, 528-29 n.117 (1991). ======END OF PAGE 31====== presumption, Congress expressed its clear policy judgment that a certain type of investor -- the investor with the largest financial interest in the litigation -- could more effectively lead the securities fraud class action than any other member of the class. The Commission believes that there is no basis in the statute or the legislative history for a court to compel a single movant that satisfies all of the criteria for appointment as lead plaintiff and which objects to divided leadership of the class action to join a faction of competing lead plaintiff movants. The language of the Act strongly indicates that Congress did not intend for there to be multiple lead plaintiffs. The Act speaks in the singular, of the court appointing a "lead plaintiff," not lead plaintiffs. It provides a mechanism for identifying "the most adequate plaintiff," not the two or more most adequate plaintiffs. It specifies that the most adequate plaintiff is presumptively that which "has the largest financial interest" in the case. It seems unlikely that Congress contemplated that in the typical case there could be more than one plaintiff with "the largest" financial interest.<(20)> The mere fact that the lead plaintiff provisions refer to "the member or members of the purported plaintiff class" and "person or group of persons" as lead plaintiff does not mean that there can be multiple lead plaintiffs. Under the statutory presumption, multiple class "members" or "persons" can be appointed lead plaintiff only to the extent that they form <(20)> The Commission takes no position on whether it would ever be appropriate to appoint co-lead plaintiffs in situations not present here, such as where two plaintiffs have virtually the same stake in the litigation, rendering the statutory language ambiguous or uncertain in its application, or where two plaintiffs seek to represent discrete class periods. ======END OF PAGE 32====== a single "group." The statute refers to a "person or a group of persons," not a combination of multiple groups or multiple persons not part of one group. As discussed above, a "group" must serve the same statutory purposes as a "person," which requires it to have unified decisionmaking. There is no indication that Congress intended in specifying detailed criteria for appointment of the lead plaintiff to give plaintiffs a basis for urging courts to exercise wide discretion to combine class members and loss amounts and create coalitions. Were the plaintiff with the largest financial interest to be joined by competing "co-lead plaintiffs," that plaintiff's ability to negotiate effective legal retention agreements, to control the litigation, and to control the conduct of lawyers would be dissipated. See Cendant, 1998 WL 598337, *5. Institutional investors, which are already reluctant to seek lead plaintiff status,<(21)> might be even more reluctant to do so if they could not exercise effective control of the litigation, and instead had to share decisionmaking authority and possibly engage in disputes with "co-lead plaintiffs." See SEC Report, 51-52; D'Hondt, 1997 WL 405668, *4 n.9 (noting that institution "elected not to seek the status of a Lead <(21)> The Commission has reported that "[i]n the 105 cases filed in the first year after passage of the Reform Act, we have found only eight cases in which institutions have moved to become lead plaintiff." SEC Report, 51. More recently, SEC Commissioner Isaac C. Hunt, Jr. testified that as of October 29, 1997, out of 124 federal class actions filed as of that date in 1997, the Commission was aware of only six in which institutions had sought lead plaintiff status. Testimony of Securities and Exchange Commission Concerning S. 1260, the "Securities Litigation Uniform Standards Act of 1997," Before the Subcommittee on Securities, Committee on Banking, Housing, and Urban Affairs, U.S. Senate (Oct. 29, 1997). ======END OF PAGE 33====== Plaintiff" because it "would prefer to separately litigate its claims so as not to impair its autonomy"). Appointing competing lead plaintiff applicants as "co-lead plaintiffs" would dilute their ability to manage the litigation and supervise counsel effectively. Several courts have expressly disapproved the appointment of competing "co-lead plaintiffs." In Gluck v. Cellstar Corp., 976 F. Supp. 542, 549-50 (N.D. Tex. 1997), the court rejected a plaintiff group's request that it be appointed "co-lead plaintiff," along with an institutional investor: The best way for the Court to effectuate the purposes of the Reform Act is to appoint [State of Wisconsin Investment Board, "SWIB"] to serve as sole Lead Plaintiff. 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. It would also reduce the influence and responsibility of SWIB, something Congress clearly did not wish the Court to do. Further, appointing co-Lead Plaintiffs would unnecessarily increase the time and expense spent on preparing and litigating the case, especially if the co-Lead Plaintiffs decided to hire co-Lead Counsel. * * * [W]here the interest of one institutional investor in the litigation far exceeds the interests of other purported plaintiffs, nothing persuades the Court to appoint co-Lead Plaintiffs. [Citations omitted.] Similarly, in Steiner v. Frankino, No. 1:98 CV0264, slip op. at 12 (N.D. Ohio July 16, 1998), the court rejected a movant's proposal that "there be two sets of lead plaintiffs and two lead counsel," one set chosen by it and one set chosen by a competing movant. The court appointed the movant with the largest financial loss, stating that: In enacting the [Litigation Reform Act], Congress realized that a few plaintiffs' lawyers controlled securities litigation and it wanted to vest control with large investors. Previously, plaintiffs' counsel in securities cases were more concerned with their own financial interest rather than those of their clients. ======END OF PAGE 34====== Increasing the number of lead plaintiffs and thus lead counsel would detract from the goal of client control because it would inevitably give more control and responsibility to the lawyers causing the class representatives to be more reliant on the lawyers. It would also increase time and expense spent in preparing and litigating the case. In the present case, each group is represented by several firms. Allowing two sets of counsel would not further the purposes of the [Act]. Id. (citations omitted); accord Cendant, 1998 WL 598337, *3, *5 (denying "all motions for appointment as co-lead plaintiff that do not challenge the [largest stakeholder's] statutory presumption of adequacy," including motions "offer[ing] little more than the general assertion that diversity of representation would benefit the class" or "the argument that additional plaintiffs bring to the litigation other counsel capable of advancing additional funds"). See In re Donnkenny Inc. Sec. Litig., 171 F.R.D. 156, 157-58 (S.D.N.Y. 1997) (rejecting proposed lead plaintiff "group" comprised of two movants); Malin v. Ivax Corp., No. 96-1843, Order at 7 (S.D. Fla. Nov. 1, 1996) (rejecting individual investor's request to serve as "co-lead plaintiff" with movant with "substantially" larger loss). The only decision of which the Commission is aware that has attempted to set forth a rationale for the appointment of "co-lead plaintiffs" is In re Oxford Health Plans, Inc. Sec. Litig., No. MDL-1222, 1998 WL 400741 (S.D.N.Y. July 15, 1998). In Oxford, the court appointed "co-lead plaintiffs" despite the fact it determined that one lead plaintiff movant with a larger financial interest than any of the other competing movants combined met all of the criteria for appointment as lead plaintiff. The Commission disagrees with the Oxford court's reasoning in appointing "co- lead plaintiffs." ======END OF PAGE 35====== Language in the Oxford opinion suggests that the court may have been concerned about adequacy of representation and the resources needed for litigation.<(22)> However, rather than addressing any such concerns within the framework of the Act itself, under an adequacy of representation analysis or through an evaluation of the counsel arrangement proposed by the movant with the largest financial interest, the Oxford court misinterpreted and essentially disregarded the statutory presumption. Moreover, the Oxford court, in substituting its own "principle of providing the class with the most adequate representation" for the statutory presumption of the "most adequate plaintiff," relied on policy considerations such as "diverse representation" that Congress rejected in adopting the Act. See 1998 WL 400741, *8. Rather than erroneously appointing multiple lead plaintiffs, the Oxford court should have exercised its traditional discretion to evaluate counsel and adequacy of resources. As noted in Cendant, 1998 WL 598337, *7, "[i]n contrast to the strictly defined procedures and considerations that prescribe the determination of lead plaintiff * * * the Court's <(22)> See 1998 WL 400741, *5 (expressing concern that an institution that funds the litigation might "become[] conflicted and have to drop out"); *8 ("[t]he rebuttable presumption created by the [Act] which favors the plaintiff with the largest financial interest was not intended to obviate the principle of providing the class with the most adequate representation"; "[i]n light of the magnitude of this case, the Court concludes that the use of three lead plaintiffs * * * allows for broad representation and the sharing of resources and experience to ensure that the litigation will proceed expeditiously against Oxford and the experienced counsel it has retained to represent it"); see also id. at *9 (expressing concern about "potential defenses * * * successfully rebut[ting] a finding of typicality"). ======END OF PAGE 36====== approval [of the proposed lead counsel] is subject to its discretionary judgment that lead plaintiff's choice of representative best suits the needs of the class."<(23)> As noted above, Cendant, id. at *5, rejected "the argument that additional plaintiffs bring to the litigation other counsel capable of advancing additional funds" as a basis for appointing "co-lead plaintiffs." The Oxford court's suggestion that "the lead plaintiff movants are not in fact competing with each other," 1998 WL 400741, *8, ignores the fact that Congress determined that certain members of the class are more effective representatives than others. Regardless of whether the court believes that "each plaintiff [can] control its own chosen counsel," id., competing views among the co-lead plaintiffs will necessarily diminish their ability to control the litigation. Cf. Cendant, 1998 WL 598337, *4 ("representation by a disparate group of plaintiffs * * * could well hamper the force and focus of the litigation"). There is no question that as a general matter the existence of several lead plaintiffs will diminish the bargaining power (e.g., with respect to retention of counsel) of the lead <(23)> The Litigation Reform Act provides that selection and retention of lead counsel by the "most adequate plaintiff" shall be "subject to the approval of the court." 15 U.S.C. 78u-4(a)(3)(B)(v). The legislative history states 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. 35. Courts have exercised that discretion, for example, to review "co- lead counsel" proposals under the Act. See, e.g., Donnkenny, 171 F.R.D. at 158 (allowing lead plaintiff to select 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"); Lax, 1997 WL 461036, *7 (same). ======END OF PAGE 37====== plaintiff with the largest stake in the case and will dilute its ability to control both the litigation and the lawyers. It was argued by certain plaintiffs in Oxford that the Commission's position could exclude institutions that do not have the largest financial interest from participating in class actions as "co-lead plaintiffs." The simple answer is that if the institution does not have the largest financial interest and if the other institution, the individual, or the properly constituted group which has that interest determines that it is not advisable to join forces with the institution, then the institution does not satisfy the largest financial interest requirement and cannot serve as lead plaintiff under the plain language of the Act. See 15 U.S.C. 78u-4(a)(3)(B)(iii)(I)(bb). The Commission's position does not prevent any institution from moving for appointment as lead plaintiff and, if the motion is denied, participating in the case in other important ways. See In re Horizon/CMS Healthcare Corp. Sec. Litig., 3 F. Supp. 2d 1208, 1214 (D.N.M. 1998) (compensating counsel for two institutions that had not sought lead plaintiff status but had persuaded the court to reduce the percentage of class counsel's attorney fees; the institutions produced and reviewed documents, retained economic experts who "conducted a full-scale damage analysis which included extensive document review, consultation * * * and preparation of documents and testimony," prepared briefs, and presented argument). What the Commission's position does ensure is that if an institution qualifies as lead plaintiff it will have the greatest possible control of the litigation. ======END OF PAGE 38====== Finally, the Vesta Plaintiffs Group expresses concern that the Florida Board can "rush[] in" without filing a complaint, seek "to be the * * * only" lead plaintiff, and, if successful, "push [them] out." Tr. 74. The Vesta Plaintiffs Group asserts that "[w]e were the ones that looked into [the case], alleged it, and pursued it." Id. The Commission believes that these are legitimate concerns. Few institutions have initiated securities fraud class actions after passage of the Litigation Reform Act. Even if an institution is accorded exclusive lead plaintiff status in a case, care should be taken not to discourage others from commencing meritorious actions and being appropriately compensated for so doing. Lawyers can perform a useful service in identifying and bringing legitimate class actions. However, these concerns do not relate to the statutory criteria for appointment of lead plaintiff, do not override the provision of the Act specifically authorizing class members who have not filed a complaint to move for appointment as lead plaintiff, and must be addressed in other ways than through lead plaintiff appointments. Although the Litigation Reform Act restricts total payment to counsel to "a reasonable percentage of the amount of any damages and prejudgment interest actually paid to the class," Exchange Act Section 21D(a)(6), 15 U.S.C. 78u-4(a)(6), the court can and should award compensation to law firms, even if not lead counsel, that do work investigating and bringing meritorious securities actions. Congress sought to encourage "thoroughly researched" complaints and "diligence in drafting complaints." Conf. Rep. 33. Moreover, appointment of a sole lead plaintiff and approval of its chosen counsel does not prevent that counsel from "utiliz[ing] the talents and expertise of the various firms who were ======END OF PAGE 39====== retained by other plaintiffs in this action in their position as lead counsel." Malin v. Ivax Corp., No. 96-1843, Order at 8 (S.D. Fla. Nov. 1, 1996). CONCLUSION For the foregoing reasons, the Commission is aware of no reason that the Court should not consolidate all of these actions without limitation. The Commission believes once the Vesta Plaintiffs Group is limited to a size capable of effectively managing the litigation and supervising counsel, the Florida Board has the largest financial interest in the litigation and thus, under the terms of the Litigation Reform Act, is presumptively the most adequate plaintiff. In the factual context of the present case, that presumption can be rebutted only by "proof" that the Florida Board "will not" be an adequate lead plaintiff. Finally, the Commission believes that regardless of whom the Court appoints as lead plaintiff, the Court should not appoint a competing plaintiff as "co-lead plaintiff." Respectfully submitted, ___________________________________ HARVEY J. GOLDSCHMID General Counsel ___________________________________ ERIC SUMMERGRAD Principal Assistant General Counsel ___________________________________ LUIS de la TORRE Attorney Of Counsel PAUL GONSON Securities and Exchange Commission Solicitor 450 5th Street, N.W. (Stop 6-6) ======END OF PAGE 40====== Washington, D.C. 20549 (202) 942-0813 (de la Torre) Dated: September 24, 1998 ======END OF PAGE 41======