Stanford University Law School - Securities Class Action Clearinghouse
UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF NEW JERSEY
DECLARATION OF ELLIOTT J. WEISS
1. I am the Charles E. Ares Professor of Law at the James E. Rogers College of Law, University of Arizona, Tucson, Arizona. A copy of my Curriculum Vitae is attached at Exhibit A. I make this Declaration in support of the New York City Pension Funds' opposition to lead counsel's Petition for an Award of Attorneys' Fees.
2. I have studied and written extensively about, and also teach about, procedural and pleading issues relating to securities class action litigation. An article of which I was the lead co-author, 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) (hereinafter "Let the Money Do the Monitoring"), provided the basis for the lead plaintiff provisions of the Private Securities Litigation Reform Act of 1995 ("PSLRA"), Pub. L. 104-67, 109 Stat. 737 (1995), first proposed by the Senate Committee on Banking, Housing and Urban Affairs. See Sen. Rep. 104-98, 104th Cong., 1st Sess. (1995) at 11, n. 32 (stating that Let the Money Do the Monitoring "provided the basis for the ‘most adequate plaintiff' provision.") The Conference Committee agreed to include the lead plaintiff provisions in the Act and also cited Let the Money Do the Monitoring. See Joint Explanatory Statement of the Committee on Conference, H.R. Conf. Rept. 104-369, 104th Cong., 1st Sess. (1995), at 34, n.3, 35, n.6. The lead plaintiff provisions now are codified as Section 27(a)(3) of the Securities Act of 1933, 15 U.S.C. § 77z-1(a)(3) (1999), and Section 21D(a)(3) of the Securities Act of 1934, 15 U.S.C. § 78u-4(a)(3) (1999).
3. Since 1994, I have devoted most of my research to issues relating to securities class actions. I have closely followed, in particular, developments relating to the lead plaintiff, pleading and discovery stay provisions of the PSLRA, focusing on judicial interpretation of those provisions. I believe that I am familiar with virtually every published judicial decision (including every decision published in Westlaw) that has interpreted the lead plaintiff, pleading or discovery stay provisions of the PSLRA.
4. In 1995, two financial economists and I conducted a comprehensive study of securities class action lawsuits, Willard T. Carleton, Michael S. Weisbach & Elliott J. Weiss, Securities Class-Action Lawsuits: A Descriptive Study, 38 Ariz. L.Rev. 491 (1996). I also completed and published one of the first articles analyzing the pleading provisions of the PSLRA, Elliott J. Weiss, The New Securities Fraud Pleading Requirement: Speed Bump or Road Block?, 38 Ariz. L. Rev. 675 (1996). In 1997, I published an article, Elliott J. Weiss, Comment: The Impact to Date of the Lead Plaintiff Provisions of the Private Securities Litigation Reform Act, 39 Ariz. L. Rev. 561 (1997), that traced developments during the first year that the lead plaintiff provisions were in effect and also analyzed related development in securities class actions filed prior to the effective date of the Reform Act. In 1998, I co-authored another article analyzing the Reform Act's pleading and discovery stay provisions. Elliott J. Weiss & Janet E. Moser, Enter Yossarian: How to Resolve the Procedural Catch-22 that the Private Securities Litigation Reform Act Creates , 76 Wash. U. L.Rev. 457 (1998). Earlier this year, I presented a paper on pleading fraud with particularity at a Duke-Institute for Law and Economic Policy conference on "Complex Litigation," and I currently am completing an article on that subject for publication in a symposium issue of Law and Contemporary Problems. I also am collaborating with Professor Joseph Grundfest of Stanford Law School on a study of the duties of lead plaintiffs and the appointment and compensation of lead counsel in securities class actions.
5. In addition, a major unit of the Securities Regulation course I teach annually is devoted to private securities litigation and, in the semester just ended I taught a seminar devoted exclusively to corporate derivative and securities class action litigation. I also served as a consultant to the General Counsel of the U.S. Securities and Exchange Commission ("SEC") in 1997 on issues relating to the PSLRA in general and the lead plaintiff provisions in particular and I continue to be consulted informally by members of the SEC's Office of General Counsel on those issues. I am one of three regular academic participants in the Stanford Institutional Investors' Forum, a semi-annual meeting at which major institutional investors gather to discuss matters of common concern, including matters relating to lead plaintiff and lead counsel selection in federal class action securities fraud litigation and I regularly engage in conversations and correspondence with representatives of institutional investors, attorneys and federal judges concerning the operation and impact of the lead plaintiff, pleading and discovery stay provisions of the PSLRA.
6. In connection with the above-captioned action, I have reviewed numerous documents relating to Cendant; Cendant's alleged securities fraud; the claims made against Cendant; the relationship between the three public pension funds (the "Lead Plaintiffs") that the Court appointed to serve as lead plaintiff in this action and the two law firms, Bernstein, Litowitz, Berger & Grossman LLP ("BLBG") and Barrack, Rodos & Bacine ("BRB") (collectively referred to herein as "Lead Counsel") that the Court appointed to serve as lead counsel for the plaintiff class; the process by which Lead Counsel were selected by Lead Plaintiffs and appointed by the Court; the settlement of the Prides action and the Court's award of attorneys' fees therein; the proposed settlement of this action; and Lead Counsel's Petition for an Award of Attorneys' Fees and the attachments thereto.
7. The New York City Pension Funds ("City Pension Funds"), a lead plaintiff in this action, has requested my opinion on issues relating to Lead Counsel's Petition for an Award of Attorneys' Fees. Lead Counsel are seeking a fee equal to the maximum fee payable under the grid selected by the Court as the "lowest qualified bid." As I explain below, it is my opinion that:
A. Lead Plaintiffs' Fiduciary Obligations to the Class
8. The PSLRA requires that the court "appoint as lead plaintiff the member or members of the purported plaintiff class that the court determines to be most capable of adequately representing the interests of the class." 15 U.S.C. §§ 77Z-1(a)(3)(B)(i) and 78a-4(a)(3)(B)(i). The legislative history makes clear that the lead plaintiff provisions "are intended to empower investors so that they, not their lawyers, control securities litigation." Sen. Rep. No. 104-98 at 6 (1995). The investors Congress hoped to empower were sophisticated institutions. Thus, the Conference Report states:
The Conference Committee seeks to increase the likelihood that institutional investors will serve as lead plaintiffs by requiring courts to presume that the member of the purported class with the largest financial stake in the relief sought is the "most adequate plaintiff."
* * *
The Conference Committee believes 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.
Joint Explanatory Statement of the Committee of Conference, H.R. Conf. Rep. No. 104-369, 104th Cong. 1st Sess. at 34.
9. Let the Money Do the Monitoring suggests that sophisticated institutional plaintiffs are capable of selecting and negotiating fee arrangements with counsel that are more advantageous to the class than the fee arrangements under which self-selected plaintiffs' attorneys typically operate. Our article also suggests that institutional investors are capable of effectively monitoring counsel's conduct of complex securities class action litigation and of playing an active role in strategy decisions and settlement negotiations. See id. at 2105-2107, 2121-2123. Congress clearly incorporated these suggestions into its thinking when it enacted the lead plaintiff provisions of the PSLRA.
10. Well established authority establishes beyond doubt that an institutional investor appointed to serve as lead plaintiff also owes fiduciary obligations to the plaintiff class. See Cohen v. Beneficial Indus. Loan Corp., 337 U.S. 541, 549 (1949) (class representative is volunteer who assumes position of fiduciary nature); Kline v. Wolf, 88 F.R.D. 696, 700 (S.D.N.Y. 1981), aff'd 702 F.2d 400 (2d Cir. 1983) (class representative serves as fiduciary to advance and protect interests of those whom he purports to represent); In re Network Associates, Inc., Sec. Litig., 76 F.Supp.2d 1017, 1032 (N.D.Cal. 1999) (Lead plaintiff "owes a fiduciary duty to all members of the proposed class to provide fair and adequate representation and actively to work with class counsel to obtain the largest recovery for the proposed class consistent with good faith and meritorious advocacy.")
11. A lead plaintiff's fiduciary obligations begin with its selection of counsel and negotiation of fee arrangements. As this Court stated, the lead plaintiff's obligation is to obtain the "most qualified representation at the lowest cost." In re Cendant Sec. Litig., 182 F.R.D. 144, 149 (1998). See also Network Associates, 76 F.Supp.2d at 1033 ("The lead plaintiff owes a fiduciary duty to obtain the highest quality representation at the lowest price.")
12. A lead plaintiff's fiduciary duties also include: (a) monitoring counsel's prosecution of the class action; (b) conducting, supervising or overseeing settlement negotiations with defendants; (c) advising the court of lead plaintiff's views on the fairness of any proposed settlement; and (d) recommending to the court an award of attorney fees, where the action results in a monetary recovery for the class.
B. Lead Plaintiffs' Performance of Their Fiduciary Duties
13. In the instant action, Lead Plaintiffs performed in an exemplary fashion and more than met their fiduciary obligations to the plaintiff class in all respects. However, the focus of this Declaration is on Lead Plaintiffs' selection and retention of Lead Counsel.
14. The Declaration of Roger Pugh, ¶¶ 3-10, details the process by which Lead Plaintiffs sought to obtain the highest quality representation at a reasonable cost. As Mr. Pugh points out, Max Berger, co-lead counsel, confirmed to the Court that the Retainer Agreement negotiated by Lead Plaintiffs "should show your Honor, in no uncertain terms, that these three public funds drove the hardest bargain ever driven in a securities class action fraud case." Id., ¶ 8.
15. Mr. Pugh also notes that when the City Pension Funds negotiated the Retainer Agreement, they believed that this action would result in a substantial monetary recovery for the class, but that considerable uncertainty existed as to the amount the class would be able to recover. Id., ¶ 12. That uncertainty no doubt related, in large part, to questions concerning the liability under § 11 of the Securities Act of 1933 of defendants other than Cendant and to Cendant and other defendants' potential liability under section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5.
16. The Retainer Agreement negotiated by Lead Plaintiffs embodied a flexible response to these uncertainties.
17. Lead Plaintiffs, through their counsel, thereafter filed a motion to be named lead plaintiff and to have their selection of Lead Counsel approved by the Court. In that motion, Lead Counsel state:
Motion of California Public Employees' Retirement System, New York State Common Retirement Fund and New York City Pension Funds for Appointment as Lead Plaintiffs, and Approval of Their Selection of Lead Counsel, Pursuant to Section 21D(a)(3)(B) of the Securities Exchange Act of 1934 and Section 27(a)(3)(B) of the Securities Act of 1933, at 3 (citation omitted; emphasis added).
18. It is my understanding, based on the Declaration of Roger Pugh and representations made to me by attorneys for City Pension Funds, that following their appointment as lead plaintiff, Lead Plaintiffs actively monitored Lead Counsel's prosecution of this action; participated in the decision to employ Lazard Freres to advise Lead Plaintiffs and Lead Counsel as to how large a settlement Cendant could afford to pay and to help structure a settlement that Cendant would find financially viable; and both monitored and participated in the negotiation of the proposed settlement of this action. Thus, through the negotiation of the proposed settlement, I believe that Lead Plaintiffs have more than met their fiduciary obligations to the plaintiff class.
19. It is further my understanding, based on the Declaration of Lorna Goodman and representations made to me by attorneys for City Pension Funds, that subsequent to the negotiation of the proposed settlement, Lead Counsel have not engaged in any meaningful discussions with Lead Plaintiffs of the attorneys' fee to be awarded in this action and that Lead Counsel submitted its Petition for an Award of Attorneys' Fees without obtaining the prior approval of Lead Plaintiffs.
C. The Court's Auction
20. The Court held a hearing on August 4, 1998, at which it announced its designation of the three public funds as Lead Plaintiffs in this action for all but the Prides class and its intent to select lead counsel through a process of competitive bidding. In the course of that hearing, the Court also advised all interested parties that, regardless of the results of the proposed auction, "at the end of the case I will still determine, using the yardstick of reasonableness, the question of counsel fees." (Tr. 25-26)
21. On August 17, 1998, Lead Plaintiffs sent a letter to the Court (a copy of which is attached at Exhibit E) expressing their concerns about the proposed auction. Lead Plaintiffs pointed out that determining which bid is the lowest would be likely to turn on the damages ultimately recovered, which was "not predictable with certainty" at that time. Lead Plaintiffs also recommended to the Court, consistent with their view of their fiduciary responsibility and the terms of the Retainer Agreement, "that any numbers/percentages in the grid be established as fee caps only, with the actual fee subject to approval by Lead Plaintiffs before submission to the Court." (Emphasis added.)
22. The Court, in an opinion dated September 8, 1998, explained that one reason to hold an auction was its concern about its ability "‘to divine the reasonable value of the services rendered'" by lead counsel at the conclusion of a class action. In re Cendant Corp. Litigation, 182 F.R.D. 144, 150 (D. N.J. 1998) (quoting Raftery v. Mercury Finance Co., 1997 WL 529553 (N.D.Ill. Aug. 15, 1997), at *2). The Court also acknowledged that its "expertise is rarely at its most formidable in the evaluation of counsel fees; judges rarely retain counsel." 182 F.R.D. at 150. The Court said that an auction at least would provide it with data concerning the fees attorneys engaged in marketplace competition would charge to represent the class, which would place the Court in a better position, at the end of this action, to meet its obligations to the plaintiff class.
23. The Court also clarified two other aspects of the proposed auction. First, the lowest qualified bidder would not be assured appointment as lead counsel. Rather, the Court announced, counsel chosen by Lead Plaintiffs, if they were not the lowest bidder and "if otherwise qualified, will have the opportunity to agree to the terms of what the Court has found to be the lowest qualified bid." Id. Moreover, the Court reiterated, "[t]he auction will not obviate the Court's final review of fees and costs . . . if this matter is ultimately resolved in favor of the putative class. During the requisite post-resolution evaluation, the results of the auction will serve as a benchmark of reasonableness." Id.
24. There are other factors, not discussed in the Court's September 8 opinion, that one could view as arguing in favor of an auction. The most significant of these was that, shortly after Lead Plaintiffs signed the Retainer Agreement and moved to be named lead plaintiff, Cendant made a series of damning additional disclosures. First, Cendant disclosed that it had discovered "a continuing program of false entries [at CUC] which misrepresented the financial performance and condition of that company" at least since 1995. See Cendant Press Release dated July 14, 1998, attached at Exhibit F. This disclosure reduced many of the uncertainties, as to damages and scienter, that existed at the time the Retainer Agreement was negotiated. It also suggested that the damages attributable to Cendant's fraud were likely to be much larger than suggested by Cendant's earlier public statements.
25. On August 27, 1998, Cendant further reduced the uncertainties relating to its and other defendants' liability, and also made it apparent that defendants' total liabilities were likely to greatly exceed the amounts previously anticipated, by releasing the report of its Audit Committee and filing a copy of that report with the SEC. See Cendant Press Release dated August 27, 1998, attached at Exhibit G. The Committee's report disclosed that one-third of CUC's income during 1995-1997 "was deliberately and fictionally manufactured.," that the former CFO and former Controller of CUC "directed accounting irregularities to be entered," and that the former CEO and COO of CUC "are among those who must bear responsibility for what occurred at CUC."
26. In sum, by the time the Court ordered a competitive bidding process, it should have been obvious to experienced and sophisticated plaintiffs' attorneys that (i) the §11 claims against Cendant were virtually sure to succeed and that statutory damages under those claims would amount to several billion dollars; (ii) many defendants would have difficulty establishing due diligence defenses to the § 11 claims made against them; (iii) plaintiffs probably would find it relatively simple to establish that Cendant and at least certain CUC defendants had acted with scienter; and (iv) potential damages were likely to be much larger than previously anticipated. These factors made it virtually certain that qualified attorneys would bid to represent the class for fees considerably lower than the maximum percentages negotiated by Lead Plaintiffs and Lead Counsel at a time prior to Cendant's disclosure of these facts.
27. The Court's decision to conduct a competitive bidding process, although undoubtedly undertaken in good faith, nonetheless strikes me as misguided. I reach this conclusion for several reasons.
28. In any event, as noted above, the Court has placed all bidders on notice that it would not be bound by the results of the auction but would treat those results "as a benchmark of reasonableness." Moreover, the Court did not bind itself to award the maximum fee allowable under the winning bid in the Order it signed appointing BLBG and BRB as lead counsel. Neither did the Court formally take the position that, by agreeing to accept the terms of the winning bid, Lead Counsel were relieved of their contractual obligations to Lead Plaintiffs under the Retainer Agreement
29. In addition, Lead Counsel did not advise Lead Plaintiffs that they wished to be, or believed they would be, relieved of those obligations if they agreed to accept the terms of the winning bid. Had they done so, Lead Plaintiffs might well have reconsidered their recommendation that the Court appoint BLBG and BRB as lead counsel.
30. In light of the above, it is my opinion that, following the Court's appointment of BLBG and BRB as Lead Counsel, those firms were bound both by the terms of the winning bid, with which they had agreed to comply, and by their contractual obligations to Lead Plaintiffs under the Retainer Agreement. Thus, if less than $1.263 billion was recovered in this action, Lead Counsel were bound by their agreement with the Court not to seek a fee in excess of that allowable under Bidder 9's bid. If more than $1.263 billion was recovered, Lead Counsel were bound not to seek a fee in excess of that allowable under the caps in the Retainer Agreement. In addition, whatever the amount recovered, Lead Counsel were bound not to submit an application for attorney fees without first securing the approval of Lead Plaintiffs, which approval Lead Plaintiffs could not unreasonably withhold. In addition, Lead Counsel were on notice that the Court retained discretion to limit their fee to an amount that it believed was fair and reasonable under the circumstances.
D. Recommended Course of Action
31. As pointed out above, Congress' central goal in enacting the lead plaintiff provisions of the PSLRA was to shift control of securities class actions from plaintiffs' attorneys to institutional investors, who Congress hoped would be able to more effectively protect class members' interests.
32. As noted in ¶ 19 above, it is my understanding that Lead Counsel did not obtain the approval of Lead Plaintiffs before petitioning the Court for an award of attorneys' fees, nor have they engaged in any meaningful discussions with Lead Plaintiffs of their fee request.
33. The Securities and Exchange Commission ("SEC") recently had occasion to express its views concerning how the lead plaintiff provisions of the PSLRA should affect a court's review of a proposed settlement or request for attorneys' fees where lead counsel has not allowed a lead plaintiff to perform its fiduciary function. The SEC said: "Where the lead plaintiff has not performed its role, or not been allowed to do so by counsel, the district court should subject any proposed settlement and fee award to especially rigorous scrutiny." Brief of the Securities Exchange Commission as Amicus Curiae in Support of Appellant on the Issue Specified, Chalmers v. Digital Lightwave, Inc., No. 99-11293-FF (11th Cir. Aug. 1999), at 17 (attached at Exhibit J).
34. Had Lead Counsel met their contractual obligation to obtain Lead Plaintiffs' approval for their fee request, it is my opinion that Lead Plaintiffs, as fiduciaries for the class, would have been obliged to consider at least the following factors before deciding whether to endorse a proposed fee request.
35. Lead Plaintiffs also no doubt would feel obliged to consider relevant Third Circuit case law. That court's recent decisions deal with attorney fee awards in consumer class actions, but do not limit the principles stated therein to such actions. In In re General Motors Corporation Pick-Up Truck Liability Litigation, 55 F 3d 768 (3rd Cir.), cert. denied, 516 U.S. 824 (1995), the court questioned the district court's award of a fee equal to 2.5 to 3 times counsel's lodestar and instructed the district court, on remand, to "use the lodestar method to assure that the precise percentage awarded does not create an unreasonable hourly fee." Id. at 822. In In re Prudential Insurance Co. of America Sales Practices Litigation, 148 F3d. 283, (3d Cir. 1998), cert. denied, 525 U.S. 1114 (1999), the court directed the district court to reconsider its award of attorneys fees of $90 million, an amount that Prudential had agreed to pay on top of the payments it had agreed to make to the plaintiff class. The Third Circuit questioned the extent to which the settlement was the product of the attorneys' efforts and whether it was reasonable to award a fee equal to 6.7 percent of the more than $1 billion recovered for the class. Id. at 338-341. The Third Circuit also noted that the district court properly had used the attorneys' lodestar to cross-check the reasonableness of the percentage fee, citing In re General Motors, supra, but questioned whether the facts of the case justified a fee equal to 5.1 times lodestar. Id. at 341-342.
36. Retaining and compensating attorneys in these circumstances is not within my expertise, nor do I have sufficient knowledge of all the relevant facts to be able to express an opinion as to what fee or range of fees Lead Plaintiffs reasonably could endorse. However, it does seem clear to me, in light of the factors listed in ¶¶ 33-34 above, that Lead Plaintiffs would have reasonable grounds to refuse to consent to the fee request Lead Counsel has filed with the Court and also would have reasonable grounds to refuse to consent to a request for the maximum fee allowable under the fee caps in the Retainer Agreement.
37. The most important issue at this stage of this action, in my opinion, is not what fee the Court should award, but how the Court should respond to Lead Counsel's Petition for an Award of Attorneys' Fees. That Petition, in my view, represents an effort by Lead Counsel to short circuit Lead Plaintiffs' rightful participation in the process of formulating a request for attorneys' fees.
38. The Court, in its earlier decisions in this action, recognized the importance of encouraging institutional investors such as Lead Plaintiffs to become active participants in securities class action and of according considerable deference to such institutions' preferences with regard to the selection and retention of lead counsel. The course of action most consistent with those decisions, in my view, would be for the Court to decline to rule on Lead Counsel's Petition for an Award of Attorneys' Fees at the June 28 hearing. Rather, the Court should instruct Lead Counsel, as required by the Retainer Agreement, to withdraw its motion and seek the consent of Lead Plaintiffs before filing a motion requesting an award of attorneys' fees.
39. Such action by the Court, I believe, would promote an appropriate degree of participation by Lead Plaintiffs in the fee award process. It holds out the promise that Lead Plaintiffs and Lead Counsel will be able to agree on a joint recommendation concerning the attorneys' fee the Court should award. Were the Court to receive such a recommendation, it would, of course, retain the authority to determine whether the fee requested was reasonable. Moreover, even if Lead Plaintiffs and Lead Counsel are not able to reach agreement, Lead Plaintiffs and Lead Counsel will be better able to explain their positions and Court will be in a better position to make a fully informed decision on the attorneys' fee issue. The Court, by following this course of action, also would continue to promote Congress' goal of encouraging sophisticated institutional investors to play a meaningful role, as lead plaintiffs, in all important aspects of securities class action litigation.