Sunday, April 17, 2005
An article in the New York Times (here) discusses the role of N.Y. Comptroller Alan Hevesi, whose responsibilities include being the sole fiduciary responsible for the New York Common Retirement Fund, which has assets of $120 billion, as the lead plaintiff in securities class action law suits. The Common Retirement Fund was the lead plaintiff in the WorldCom litigation that resulted in settlements of over $6 billion and is currently in trial against Arthur Andersen, the last remaining defendant (see earlier post here). Hevesi is an elected official, and as the article points out, one source of campaign contributions for him was the large plaintiffs securities law firms, including contributions from partners at Bernstein Litowitz, the plaintiff's counsel in the WorldCom litigation. It's important to note that Bernstein Litowitz had already been appointed lead counsel by Hevesi's predecessor, H. Carl McCall, before the election, so the campaign contributions could not affect that firm's appointment in the WorldCom litigation. It seems, though, that the relationship between the lead plaintiffs and law firms could trigger issues of "pay-to-play" when an elected official is responsible for the determining which law firm will be appointed as lead counsel.
The genesis of this situation is the Private Securities Litigation Reform Act, adopted in 1995 as part of the so-called Contract With America proposed by Newt Gingrich in the 1994 elections. The PSLRA was designed to deter frivolous securities lawsuits, and one means to achieve that result was to make it more difficult for the plaintiffs law firms (particularly the old Milberg Weiss firm) to control the litigation by having courts appoint the "most adequate plaintiff" to serve as the named representative of the class. In choosing the lead plaintiff, the district court looks to the party that "has the largest financial interest in the relief sought by the class . . . " 15 U.S.C. Sec. 78u-4(a)(3)(B)(iii)(I)(bb) [Is everyone following along with that cite? If not, it's right here]. This provision clearly favors the large institutional investors, such as CalPERS and Hevesi's fund, whose billions in assets means they have large investments in many companies. Once the "most adequate plaintiff" is determined, then that party "shall, subject to the approval of the court, select and retain counsel to represent the class." 15 U.S.C. Sec. 21D(a)(3)(B)(v). A party can only serve as the lead plaintiff in five cases in any three year period, so the role gets passed around, but a number of the plaintiffs have been the large public pension funds.
The use of institutional investors as the representative plaintiff has resulted in lower attorneys fees, and Hevesi has worked to keep fees down, including a 5% cap in the WorldCom case. But 5% of $6 billion is still a lot of money, and even with lower fees there is still a powerful financial incentive to be named as lead counsel. Campaign contributions are a necessary part (or evil) of the political system, and so elected officials who will make the decision on appointment of counsel in securities cases naturally will look to interested constituencies, including plaintiffs securities law firms, for contributions. In the municipal securities area, efforts have been made to limit "pay-to-play" through rules barring contributors from doing bond work for the government, but those rules have not been entirely effective. Campaign contributions will work their way to candidates who can make decisions that affect the donor, and the PSLRA may have opened up a new avenue for those contributions to flow from plaintiffs securities firms to elected officials in positions like Hevesi's who will choose the lawyers for the large securities fraud claims. (ph)