Thursday, July 22, 2021

SEB Investment Management AB v. Symantec Corp.:  The Clash of Two Class Action Titans

Last year, Anthony Rickey and I published a paper highlighting potential conflicts of interest that can arise between securities class action plaintiffs, their counsel, and the class.  Our article suggested that courts could discourage troublesome practices by requiring law firms to disclose past findings of misconduct when they apply for lead counsel appointments.  The idea is to make sure that future judges know what happened in past cases so they can protect the class.

Recently, Judge Alsup of the Northern District of California issued this type of order after two of the country’s largest plaintiff-side securities litigation firms hurled allegations of misconduct back and forth.  The fallout from this decision demonstrates a potential shortcoming of mandatory disclosure orders:  they are not self-enforcing.

The Case:  SEB Investment Management AB v. Symantec Corp., et al., No. 3:18-cv-02902-WHA (N.D. Cal.)

Judge Alsup’s April 20, 2021 order briefly summarizes the troublesome facts of a securities class action involving Symantec Corporation.  When SEB Investment Management AB (“SEB”) became lead plaintiff in 2018, the court ordered SEB to interview law firms to serve as class counsel.  SEB selected Bernstein, Litowitz, Berger & Grossman, LLP (“BLBG”), its original counsel, to lead the litigation “even though BLBG asked for a richer fee proposal than others.”

The litigation ran over two years.  Then, in late 2020, a Norfolk County pension fund represented by Robbins, Geller, Rudman & Dowd, LLP (“RGRD”) filed a “Notice of Potential Conflict of Interest” informing the Court that Hans Ek, the staff member at SEB selected to oversee the case, had left SEB and joined BLBG.

This development concerned the court because it opened the door to the “allegation that [BLBG] engaged in play to pay, which means, ‘you hire me as counsel, and I’ll make it up to you down the road.’”  Judge Alsup explained that this kind of deal, if it existed, is “adverse to the interests of the class because class counsel should be selected as the best lawyer for the class.”

At a hearing on January 22, 2021, Judge Alsup designated a special counsel from RGRD to report after taking discovery from SEB and BLBG.  The following conflict between two class action titans is required reading for anyone seeking to understand potential conflicts of interest between class plaintiffs and their counsel.

The special counsel alleged that BLBG’s arrangement with Ek would result in tens of thousands of dollars paid to SEB as offsets to Ek’s severance package.  The report described this as a “side benefit” from BLBG to SEB, lowering its compensation expenses.  (Our article pointed to similar indirect benefits given to institutional plaintiffs, such as when a local counsel agreed not to raise its monthly retainer after the firm received a share of the national counsel’s class action award.)  BLBG argued that this setoff was a standard provision not particular to BLBG.  Given that Ek was employed by other entities as well as BLBG, and could have gained employment elsewhere, BLBG denied that its payments constituted a conflict of interest.

Counterattacking, BLBG described the conflict as stemming “from a contentious relationship between [BLBG] and Robbins Geller” or “a personal vendetta being pursued by senior named partner Darren Robbins—who felt slighted because he believed his firm’s checkered past of Rule 11 violations precluded it from seeking a leadership position.”  In an earlier letter to the court, BLBG had described RGRD as “seek[ing] revenge for its not being appointed Lead Counsel in this Action.”  BLBG noted that RGRD had not responded to SEB’s request for proposal to become lead counsel, and suggested it abstained because it did not want to disclose a history of sanctions from federal courts.[1]  In later filings, BLBG accused RGRD of likewise employing former employees of lead plaintiffs that it has represented as lead counsel and David J. Hoffa, grandson of James R. Hoffa of Teamsters fame.  RGRD responded that it had employed one former employee of a plaintiff over a decade after she left employment, and that Mr. Hoffa had never worked for an organizational lead plaintiff.  And RGRD shot back with references to payments allegedly made by BLBG to the Kwame Kilpatrick Civic Fund and allegations of pay-to-play made in Bernstein v. Bernstein Litowitz Berger & Grossman LLP, unsealed by the Second Circuit back in 2016.

This summary does not do justice to the dispute between BLBG and RGRD.  In most class actions, the adequacy of representation element amounts to formalistic box-ticking, with plaintiff’s counsel insisting on their own excellence and defendants holding their tongue.  One can’t settle with an inadequately-represented class, after all.  The papers in this case show what two major law firms can dig up after even minimal discovery.  Policymakers and academics should look closely at this case for examples of where the class action system may be failing and for where to look to get another angle on what Professor Coffee described as a hidden market for access to and influence with institutional investors capable of serving as lead plaintiffs.

In the end, Judge Alsop’s order largely looked past the pointed barbs flying back and forth.  The court found itself “unable to determine whether the move of Mr. Ek to BLBG was coincidental versus culpable,” although it noted that “[t]he appearance alone raises eyebrows, arched eyebrows.”  However, rather than replacing SEB or BLBG, the court ordered further notice be provided to the class members, who received a new opportunity to opt out.  (The revised notice is available on the settlement website.)  The order then required that:

[I]n future cases, both SEB in seeking appointment as a lead plaintiff and BLBG in seeking appointment as class counsel shall bring this order to the attention of the assigned judge and the decision-maker for the lead plaintiff who is to select counsel.  This disclosure requirement shall last for three years from the date of this order.

Disclosure Requirements and Conflicts of Interest

The SEB decision highlights the need for increased efforts to address conflicts of interest in class action cases.  Our article proposed two reforms related to candor.  First, we recommend that candor should be made an explicit component of adequacy of representation, such that plaintiffs who fail to disclose conflicts should be removed from the case.  Second, courts should issue what could be called “firmwide disclosure orders,” such as the SEB ruling above, requiring firms to disclose negative findings to other courts in other cases.  SEB suggests that both reforms are necessary, while the latter is insufficient on its own.

As always, the non-adversarial nature of the settlement approval process limits the effect of potential reforms.  A firmwide disclosure order is neither self-interpreting nor self-executing.  For instance, does the SEB order’s reference to “future cases” mean “future instances in which a firm seeks approval as class counsel?”  Affected law firms have every reason to limit the requirement to “cases filed after April 20, 2021.”  As a practical matter, class counsel’s interpretation will control unless the court issuing the firmwide disclosure order takes up the burden of continually monitoring the law firm.

To test this aspect of the SEB order, we first looked for examples of class settlements approved by the Delaware Court of Chancery after April 20, 2021.  We focus on the Court of Chancery for two reasons:  many securities class actions can also be brought as fiduciary actions in Delaware courts, and the File&ServeXpress docket system is more expensive, and thus less transparent, than PACER.  Simply put, Chancery is the court where non-disclosure of the SEB order would be least likely to be observed.

We found one settlement:  Weiss v. Burke, et al., C.A. No. 2020-0364-PAF.  The Court of Chancery preliminarily approved BLBG as class counsel on April 19, 2021, one day before the SEB order.  The plaintiff then moved for final approval of class certification and the settlement.  Reviewing the dockets and the transcript of the settlement hearing, we find no sign that the SEB order was ever provided to the Court of Chancery or the class.  On June 15, 2021, the Court of Chancery awarded attorneys’ fees of $3.45 million, although it is impossible to know how much BLBG received.

On the other hand, BLBG did disclose the SEB order in a footnote to their opening brief in support of a motion for consolidation and appointment as lead counsel in ISZO Capital LP v. MHR Fund Management LLC, et al., C.A. No. 2021-0497-JRS, a case filed on June 8, 2021.  (This raises another interpretation issue:  does a footnote satisfy the requirement to bring something to the attention of a court?) What influence, if any, the SEB order will have on the Court of Chancery remains to be seen.  However, Weiss and ISZO Capital are consistent with a narrow interpretation of the SEB order.  Although nationwide electronic document searches are far from reliable, we found no example of the order being provided to any court in a case filed before April 20, 2021.

While it is still early days, we suspect that the SEB order, and firmwide disclosure orders, will have limited effect on the incentives of class counsel.  As we noted in our article, issues related to conflicts of interest rarely surface through nonadversarial settlement review processes.  Just as Milberg Weiss’s malfeasance came to light after a former client agreed to testify against the firm, and issues with the Arkansas Teacher Retirement System emerged only after a Boston Globe investigation, the SEB court remained unaware of Ek’s hiring until another stockholder provided notice.  Such intervention is rare.  (And notably, neither BLBG nor RGRD investigated the kind of conflict discussed in our article and highlighted by the ATRS v. State Street case:  the ability of counsel to benefit their clients indirectly by sharing fees with local counsel.) Without stringent consequences for failing to reveal potential conflicts—consequences that go to a firm’s bottom line—class counsel have little incentive to change course.

More certain or severe penalties will be necessary to deter bad conduct.  The best solution would be for courts (or Congress) to affirmatively require disclosure as a component of adequacy of representation, such that firms that do not inform courts of potential conflicts risk being removed as class counsel.  Alternatively, less severe sanctions would be necessary if it were more likely that bad conduct would come to light.  Thus, our article recommended that courts routinely appoint class guardians to conduct the type of discovery that RGRD’s special counsel did in SEB.  Counsel facing the prospect of routine scrutiny of their claims would be more likely to voluntarily disclose potential conflicts of interest.

This post was co-authored with Anthony Rickey of Margrave Law LLC

 

[1]           From BLBG’s February 10, 2021 letter: “Apparently, given its history as a repeat offender under Federal Rule 11, Robbins Geller believed that it could not even respond to the RFP. If it had, Robbins Geller knew it would have to disclose, including to this Court, that it has been repeatedly sanctioned by numerous federal courts. For example, Robbins Geller was sanctioned in City of Livonia Employees’ Retirement System v. Boeing Co. for engaging in ‘repeated misconduct’ in the litigation and ‘ma[king] fundamental misrepresentations to the court.’ 306 F.R.D. 175, 182-83 (N.D. Ill. 2014). In Boca Raton Firefighters’ & Police Pension Fund v. Devry Inc., Robbins Geller was sanctioned for filing a ‘frivolous’ complaint and allegations that ‘prolonged a strike suit.’ 2014 WL 1847833, at *8 (N.D. Ill. May 8, 2014). And, in Plumbers Union Local No. 12 Pension Fund v. Ambassadors Group, the court sanctioned a former Robbins Geller partner for misrepresenting the firm’s expenses in connection with a securities class action settlement. 2012 WL 1906384, at *3-4 (E.D. Wash. May 25, 2012). There, the court only refrained from also sanctioning the firm itself because Robbins Geller committed to ensuring that it would not make such ‘misleading statements’ to a tribunal again—an obligation it apparently disregarded by engaging in the conduct that resulted in Robbins Geller being sanctioned in Devry and Boeing. See Ambassadors, No. CV-09-0214-JLQ, ECF No. 230 at 5.”

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