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Tatiana Rodriguez | Bloomberg LawCity of Pontiac General Employees' Ret. Sys. v. Lockheed Martin Corp., No. 11-CV-05026 (S.D.N.Y. Feb. 22, 2012) Judge Jed S. Rakoff of the U.S. District Court for the Southern District of New York recently raised reservations with respect to the appointment of lead plaintiff in a securities class action. While issuing an order reaffirming the appointment of City of Pontiac General Employees Retirement System (Retirement System) as lead plaintiff in its claims against Lockheed Martin Corporation (Lockheed) and three Lockheed executives, Rakoff voiced numerous concerns with respect to their choice of counsel.
Concerns on Counsel's RoleRakoff explained that the Private Securities Litigation Reform Act of 1995 (PSLRA) was adopted to "curtail the champertous vice of 'lawyer-driven' securities litigation." It does so by requiring the courts to appoint the member of a class who will be "'most capable of adequately representing the interests of class members'" as lead plaintiff. Further, the PSLRA creates a rebuttable presumption that the class member with the largest financial loss is the most adequate lead plaintiff. Rakoff questioned whether the actions of Retirement System and its counsel rebutted this presumption. — Monitoring Agreement First, Rakoff raised concern over a "monitoring agreement" between the Retirement System and its counsel Robbins Geller Rudman & Dowd LLP (Robins Geller). Robbins Geller monitored the Retirement System's investments for free, while recommending potential securities class action lawsuits arising from those investments. Hence, in effect, Robbins Geller would be compensated for its monitoring through fees from the securities class action suit filed on the Retirement System's behalf. He questioned whether it impacted "the adequacy of the Retirement System to serve as lead plaintiff and/or the adequacy of Robbins Geller to serve as lead counsel." Rakoff compared the parties' monitoring agreement, to previous monitoring agreements that he reviewed in Iron Workers Local No. 25 Pension Fund v. Credit-Based Asset Servicing & Securitization, LLC. He noted that such an arrangement goes "'far beyond any traditional contingency arrangement'" and "'foster[s] the very tendencies towards lawyer-driven litigation that the PSLRA was designed to curtail.'" In Iron Workers, there were two competing plaintiffs that had varying monitoring agreements, with one hiring many firms to monitor its investments, and the other having solely one firm. Here, the Retirement System had three firms monitoring its investments, and although the law firm that brings a case to its attention would most likely represent it, the Retirement System could also interview other firms for the position. — Meaningful Oversight Seond, Rakoff observed that the Retirement System "appears to exert less meaningful oversight over Robbins Geller and the conduct of this litigation than the PSLRA ideally contemplates"—merely monitoring monthly reports from counsel and presenting them to the Board of Trustees. The Retirement System representative also could not recall a time when she had requested counsel to make a change in a pleading or position taken. Still, Rakoff noted that the Retirement System representative had a greater understanding of the litigation than the representative in Iron Workers. — Procedural Tactics Lastly, Rakoff raised concerns over Robbins Geller's procedural tactics of filing the suit on the last day before the statute of limitations period expired, filing for lead plaintiff status on the last day of the applicable deadline, and filing an amended complaint after other plaintiffs could no longer file for the lead plaintiff position. Rakoff stated that although these may be "self-protective tactics," it also suggested that the litigation was driven by Robbins Geller and not the Retirement System. He also noted that while firms must take an active role in order for investors to detect and prevent fraud, Rakoff found that "such activities become potentially champertous, or even extortionate, when the plaintiff's law firm is, for all practical purposes, the real party in interest." He explained that this leads to "abusive lawsuits that allege 'fraud' every time the stock price drops" and that monitoring arrangements may encourage this.
Order GrantedStill, even with these reservations, Rakoff appointed the Retirement System as lead plaintiff. He explained that, at this point, he was satisfied that the Retirement System's representative had the ability to exercise the lead plaintiff role. Rakoff also found that the amended complaint made specific and detailed allegations which illustrate that the action is not the kind of "strike suit" the PSLRA was intended to curb, and the Retirement System was not subject to any unique defenses that would make it an atypical or inadequate lead plaintiff. DisclaimerThis document and any discussions set forth herein are for informational purposes only, and should not be construed as legal advice, which has to be addressed to particular facts and circumstances involved in any given situation. Review or use of the document and any discussions does not create an attorney-client relationship with the author or publisher. To the extent that this document may contain suggested provisions, they will require modification to suit a particular transaction, jurisdiction or situation. Please consult with an attorney with the appropriate level of experience if you have any questions. Any tax information contained in the document or discussions is not intended to be used, and cannot be used, for purposes of avoiding penalties imposed under the United States Internal Revenue Code. Any opinions expressed are those of the author. The Bureau of National Affairs, Inc. and its affiliated entities do not take responsibility for the content in this document or discussions and do not make any representation or warranty as to their completeness or accuracy.©2014 The Bureau of National Affairs, Inc. All rights reserved. Bloomberg Law Reports ® is a registered trademark and service mark of The Bureau of National Affairs, Inc.
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