Summary
holding that the court "is charged with ensuring that the class receives quality representation at a fair price and cannot, therefore, simply defer to lead plaintiff's choice of counsel
Summary of this case from In re Zynga Inc. Sec. Litig.Opinion
Addressing the issue of appointment of lead counsel in consolidated securities class actions, the District Court, Walker, J., held that pursuant to competitive bidding process, " lowest" bidder under whose proposal the class stood to recover most, would be appointed class counsel, considering not only highest net recovery to the class, but also qualitative advantages of successful bidder's small size and accounting expertise.
So ordered.
Jules Brody, Stull, Stull & Brody, New York City, Jacob A. Goldberg, Berger & Montague, P.C., Philadelphia, PA, James E. Tullman, Elizabeth P. Lin, Weiss & Yourman, Los Angeles, CA, Michael D. Braun, Stull, Stull & Brody, Los Angeles, CA, Joseph H. Weiss, Weiss & Yourman, New York City, Stephen J. Fearon, Jr., Abbey, Gardy & Squitiere, New York City, James J. Seirmarco, Abbey, Gardy & Squitieli, LLP, San Francisco, CA, Peter H. Rachman, Goodkind, Labaton, Rudoff & Sucharow, LLP, Ft. Lauderdale, FL, for Nancy Wenderhold.
Stephen J. Fearon, Jr., Abbey, Gardy & Squitieri, New York City, James J. Seirmarco, Abbey, Gardy & Squitieli, LLP, San Francisco, CA, for Jonny Alpern.
Boris Feldman, Maura L. Rees, Wilson, Sonsini, Goodrich & Rosati, Robert L. Maines, Bryant, Clohan, Ott, Maines & Barah, Palo Alto, CA, for defendants.
WALKER, District Judge.
This order addresses the issue of appointment of lead counsel in these consolidated securities class actions. On September 3, 1999, the court declined to designate as lead plaintiffs a group of Cylink shareholders and to appoint as lead counsel a consortium of law firms; instead, the court designated an individual investor, Jonny Alpern, as lead plaintiff and initiated a competitive bidding process for selection of class counsel. See Wenderhold v. Cylink Corp., 188 F.R.D. 577 (N.D.Cal.1999). Although seven law firms had sought to participate in the consortium, only one firm-Abbey, Gardy & Squitieri-submitted a bid. See Wenderhold v. Cylink Corp., 189 F.R.D. 570, 571 (N.D.Cal.1999).
The Abbey proposal, however, failed to comply with the court's bid request in that its percentage-of-the-recovery fee schedule did not include litigation expenses. Id. at 572-73. Expenses, according to the proposal, would be assessed separately against any recovery fund. Id. Because this arrangement eliminated the incentive for the firm to choose the optimal mix of attorney and non-attorney inputs, the court rejected the Abbey bid and extended the bidding period. Id. at 573.
In the second round of bidding, the court received proposals from three law firms. Abbey amended its bid to comply with the court's order. Weiss & Yourman, a firm that had participated in the rejected consortium, resurfaced to submit a proposal. The third bid came from Innelli & Molder, a Philadelphia firm that, although it had not previously participated in the litigation and did not represent a Cylink shareholder, correctly interpreted the court's order as seeking bids from any qualified firm.
On January 19, 2000, the court conducted a hearing, ex parte and on the record, to aid its evaluation of the three proposals. The court borrowed this helpful concept from Judge Alsup. See In re Network Associates Securities Litigation, 76 F.Supp.2d 1017 (N.D.Cal.1999). Prior to the hearing, the court disclosed the competing proposals to the bidding firms to provide each an opportunity to argue the relative strengths of its bid and weaknesses of the others. At the outset of the hearing, a representative from the Abbey firm announced that Abbey was withdrawing its bid and would no longer seek appointment as class counsel. The court proceeded to hear argument from Weiss & Yourman and Innelli & Molder with respect to their bids and the qualitative advantages of the respective firms.
Pursuant to Rule 23 of the Federal Rules of Civil Procedure, " the district court must exercise its inherent authority to assure that the amount and mode of payment of attorneys' fees are fair and proper. This duty exists independent of any objection [from a member of the class]." Zucker v. Occidental Petroleum, 192 F.3d 1323, 1328 (9th Cir.1999).
Weiss & Yourman is a 19-attorney firm with offices in Los Angeles and New York. Innelli & Molder is a two-attorney firm based in Philadelphia. Attached as Appendix A is a comparison of the competing fee proposals expressed in terms of net recovery to the class at different stages in the litigation and at various levels of gross recovery from defendants. As an initial matter, the court notes that this method of expressing fee proposals is a useful supplement to the percentage-of-recovery schedule the court has used in previous cases and, indeed, earlier in this litigation. See, for example, Wenderhold v. Cylink, 188 F.R.D. 577. Appendix A focuses attention, quite appropriately, on the amount the class will receive, rather than on the lawyers' take. Under this approach, a law firm commits to delivering a set dollar amount to the class upon recovery. This should minimize ex post haggling over the meaning of percentages.
Percentages still must be examined initially, to determine whether the proposals are in keeping with the twin principles that the ratio of fees and expenses should decline as recovery increases and increase as the litigation progresses. See 189 F.R.D. at 571. The combined fee and expense schedules submitted by Innelli & Molder and Weiss & Yourman, upon which the court's comparison table (Appendix A) is based, are attached as Appendix B and Appendix C to this order, respectively. In computing the comparison table, the court translated the percentages differently for each firm due to the different manner in which the firms interpreted the court's call for bids. As explained at oral argument, Innelli & Molder's fee is calculated by adding the stated percentage for the first $500,000 to the stated percentage for the next $500,000, and so on for each recovery category. To arrive at Weiss & Yourman's fee, on the other hand, one simply locates the amount of recovery at the appropriate spot on the grid and applies the percentage specified. The susceptibility of the court's initial bid schedule to multiple interpretations, though vexing at first, had the fortuitous result of encouraging the bidders to express fees and expenses in terms of net recovery to the class. The firms should be commended for this insight.
As the class recovery comparison shows, Innelli & Molder is the " high" bidder; the class stands to recover more under Innelli's proposal almost across the board. The most significant disparity occurs in the $2 million to $10 million gross recovery range. Of a settlement fund created prior to the motion to dismiss stage, for example, Innelli's proposal results in a 12-14 percent higher net recovery to the class. On the basis of price alone, the Innelli bid is the clear winner.
Of course, as Weiss & Yourman emphasized at the hearing, price is not the sole consideration. And, indeed, the court heartily agrees. See, for example, In re Oracle Securities Litigation, 136 F.R.D. 639, 648 (N.D.Cal.1991)( " Competitive selection does not make price supreme and determinative, but forces the lawyers and courts to deal with the quality of class counsel's services." )(emphasis in original). In support of its argument that " the lowest bid is not always the best bid," Weiss & Yourman claims to offer the following qualitative advantages: (1) prior litigation experience in this circuit, and familiarity with special pleading issues in securities cases; (2) a California presence consisting of ten attorneys in Los Angeles; (3) a well-established working relationship with defense counsel and (4) an in-house accounting expert. In addition, Weiss & Yourman is not new to this particular case and has been retained by Cylink shareholders.
While Innelli & Molder acknowledges that it has not litigated previously in this circuit, it emphasizes its extensive experience in securities class actions in other circuits. In addition, not only does the firm employ an accountant, but one of its partners is a CPA and both have degrees in economics. That Innelli does not currently represent a Cylink shareholder is not of great significance, the firm argues, because in securities cases plaintiffs typically do not possess information about the challenged conduct not publicly available. Finally, Innelli counters that its smaller size benefits the class by reducing overhead and resulting in more focused service.
The court concludes that in addition to offering the best price, Innelli & Molder maintains a qualitative edge. Of particular importance is that, due to the small size of the firm, its principals will direct the litigation and have a unique incentive to succeed. This case presents an opportunity for Innelli & Molder to establish a reputation in a new and important geographic market. To the extent that the firm is less well-established in the west, that is reflected in the price. In addition, the firm's willingness to post a completion bond and obtain malpractice insurance is a significant indication of its high level of commitment. Although the court does not consider insurance and bonding to be requirements, they do provide assurance, especially in the case of a two-member firm, to the court and the class that representation will remain vigorous throughout the course of this litigation.
Innelli's lack of experience in this circuit does not strike the court as problematic; the firm's experience in litigation of securities fraud cases in other federal courts is an adequate substitute. Nor does the court find Innelli's lack of a local office troubling. In fact, in today's business environment there is little difference between litigating a case in San Francisco from a Los Angeles or Philadelphia headquarters. Finally, the court finds that in this case, where the lead plaintiff is an individual shareholder, prior representation is not an important factor. The qualitative advantages of Innelli's size and accounting expertise, in conjunction with the firm's more attractive fee and expense proposal, give it the competitive edge.
The court emphasizes that both firms appear well-qualified to represent the class, and the question of appointment of counsel here is a close one. Furthermore, the price differences between the two proposals are not great. Had Weiss & Yourman offered a significant qualitative advantage, that could have overcome a price disadvantage of the magnitude present here. But Innelli appears to offer both a qualitative advantage and a price advantage, making its selection the appropriate choice.
Based on the arguments of counsel and the fee and expense proposals submitted, the court hereby appoints Innelli & Molder to serve as class counsel in this case. Although the above-captioned cases have been consolidated, for procedural purposes lead counsel is directed to submit a proposed order in compliance with the Model Stipulation and Proposed Consolidation Order for Securities Fraud Class Actions developed by this court. See Commentary to Civ LR 23-1(b); see also proposed order filed November 19, 1999, by Weiss & Yourman. Furthermore, as the court's certification of a class and designation of lead plaintiff in this case was provisional, see Order of Sept. 3, 1999 (Doc. 48), the court will when presented consider a duly noticed motion for final class certification pursuant to FRCP 23.
IT IS SO ORDERED.
APPENDIX A
Class Net Recovery Under Fee Proposals (in $)
Comparison of Inelli & Molder (I & M) and Weiss& Yourman (W & M)
After Motion
After Adjudication
After Trial
From Pleading
to Dismiss
of Summary
Verdict Through
Through
Through
Judgment Through
Final Appellate
Motion to Dismiss
Summary Judgment
Trial Verdict
Determination
Gross
I & M
W & Y
I & M
W & Y
I & M
W & Y
I & M
W & Y
Recovery
500,000
450,000
400,000
375,000
387,500
350,000
375,000
325,000
375,000
1,000,000
900,000
800,000
787,500
775,000
725,000
750,000
675,000
750,000
2,000,000
1,850,000
1,600,000
1,637,500
1,550,000
1,550,000
1,500,000
1,475,000
1,500,000
3,000,000
2,800,000
2,400,000
2,487,500
2,325,000
2,375,000
2,250,000
2,275,000
2,250,000
4,000,000
3,750,000
3,200,000
3,337,500
3,100,000
3,200,000
3,000,000
3,075,000
3,000,000
5,000,000
4,700,000
4,000,000
4,187,500
3,875,000
4,025,000
3,750,000
3,875,000
3,750,000
6,000,000
5,650,000
4,950,000
5,087,500
4,800,000
4,875,000
4,650,000
4,750,000
4,650,000
7,000,000
6,600,000
5,775,000
5,987,500
5,600,000
5,725,000
5,425,000
5,625,000
5,425,000
8,000,000
7,550,000
6,600,000
6,887,500
6,400,000
6,575,000
6,200,000
6,500,000
6,200,000
9,000,000
8,500,000
7,425,000
7,787,500
7,200,000
7,425,000
6,975,000
7,375,000
6,975,000
10,000,000
9,450,000
8,250,000
8,687,500
8,000,000
8,275,000
7,750,000
8,250,000
7,750,000
11,000,000
10,400,000
9,350,000
9,612,500
9,075,000
9,150,000
8,800,000
9,125,000
8,800,000
12,000,000
11,350,000
10,200,000
10,537,500
9,9 00,000
10,025,000
9,600,000
10,000,000
9,600,000
13,000,000
12,300,000
11,050,000
11,462,500
10,725,000
10,900,000
10,400,000
10,875,000
10,400,000
14,000,000
13,250,000
11,900,000
12,387,500
11,550,000
11,775,000
11,200,000
11,750,000
11,200,000
15,000,000
14,200,000
12,750,000
13,312,500
12,375,000
12,650,000
12,000,000
12,625,000
12,000,000
16,000,000
15,150,000
14,000,000
14,262,500
13,600,000
13,550,000
13,200,000
13,525,000
13,200,000
17,000,000
16,100,000
14,875,000
15,212,500
14,450,000
14,450,000
14,025,000
14,425,000
14,025,000
18,000,000
17,050,000
15,750,000
16,162,500
15,300,000
15,350,000
14,850,000
15,325,000
14,850,000
19,000,000
18,000,000
16,625,000
17,112,500
16,150,000
16,250,000
15,675,000
16,225,000
15,675,000
20,000,000
18,950,000
17,500,000
18,062,500
17,000,000
17,150,000
16,500,000
17,125,000
16,500,000
21,000,000
19,900,000
18,900,000
19,037,500
18,375,000
18,100,000
17,850,000
18,025,000
17,850,000
22,000,000
20,850,000
19,800,000
20,012,500
19,250,000
19,050,000
18,700,000
18,925,000
18,700,000
23,000,000
21,800,000
20,700,000
20,987,500
20,125,000
20,000,000
19,550,000
19,825,000
19,550,000
24,000,000
22,750,000
21,600,000
21,962,500
21,000,000
20,950,000
20,400,000
20,725,000
20,400,000
25,000,000
23,700,000
22,500,000
22,937,500
21,875,000
21,900,000
21,250,000
21,625,000
21,250,000
APPENDIX B
Innelli and Molder Application for ClassCounsel Lines
Fees and Expenses as Percentage (%) of Total ClassRecovery *
From Pleading Through Motion to Dismiss
After Motion to Dismiss Through Adjudication of SummaryJudgment
After Adjudication of Summary Judgment Motions ThroughTrial Verdict
After Trial Verdict Through Final AppellateDetermination
First
$500,000
10%
25%
30%
35%
$500,001-
$1,000,000
10%
17.5%
25%
30%
$1,000,001-
$5,000,000
5%
15%
17.5%
20%
$5,000,001-
$10,000,000
5%
10%
15%
12.5%
$10,000,001-
$15,000,000
5%
7.5%
12.5%
12.5%
$15,000,001-
$20,000,000
5%
5%
10%
10%
Over
$20,000,000
5%
2.5%
5%
10%
* The only cost not included is the cost ofadministration of claims submitted in accordance with aCourt approved settlement or a jury award. Theattorneys of Innelli and Molder do not provide thisservice. However, we have used well respected, costefficient, claims administrators in the past and arewilling to put the contract for this service out tobid.
APPENDIX C
WEISS & YOURMAN Lines
Fee and Expense Bid Schedule
Fees and Expenses as Percentage (%) of Total ClassRecovery *
From Pleading Through Motion to Dismiss
After Motion to Dismiss Through Adjudication of SummaryJudgment
After Adjudication of Summary Judgment Motions ThroughTrial Verdict
After Trial Verdict Through Final AppellateDetermination
First
$500,000
20
22.5
25
25
$500,001-
$1,000,000
20
22.5
25
25
$1,000,001-
$5,000,000
20
22.5
25
25
$5,000,001-
$10,000,000
17.5
20
22.5
22.5
$10,000,001-
$15,000,000
15
17.5
20
20
$15,000,001-
$20,000,000
12.5
15
17.5
17.5
Over
$20,000,000
10
12.5
15
15
* Fees and expenses include all costs andexpenses incurred by plaintiff except for the costs ofnotice and administration of the settlement, which istypically borne by defendants.
* Fees proposed are lower than those theFirm would normally request in connection with a feeapplication at the end of a securities litigation andare generally lower than the 25% Ninth CircuitBenchmark. The proposed fees are lower due to ourFirm's concern that the class receive the bestrepresentation possible, which, based on the solerejected submission to date, the class may nototherwise receive. The proposed fees are not anindication of the fees normally requested by the firmeither at the end of the case or in initial bids.