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Easterbrook on Lead Plaintiffs

In Asher v. Baxter Int’l Inc., Judge Frank Easterbrook tracks the travails experienced in one case involving the lead plaintiff provisions of the 1995 Private Securities Litigation Reform Act:

“Lead plaintiffs” are supposed to counteract the dominance of lawyers over class-action suits; the district judge should select a representative with a financial stake large enough to make monitoring of counsel worthwhile, and with the time and skills needed to make monitoring productive. The idea is that securities suits then will proceed in the interest of investors rather than the lawyers who appoint themselves to prosecute these actions. In this case, however, the district court eventually held that none of the persons proposed as lead plaintiffs is satisfactory and that the suit therefore cannot proceed as a class action.

Although the case was ultimately decided on other grounds, Easterbrook continued in re the lead plaintiffs:

The district court denied a motion for class certification in November 2005 after concluding that James and Heidi Hill, who had been selected as lead plaintiffs in 2002, had misrepresented their ownership of Baxter’s stock. Their motion for selection said that they owned 2,663 shares [PB: That’s two thousand six hundred sixty three]; discovery revealed that they owned only 2.663 shares [that’s two point six six three]. (Their lawyer, who has since been indicted for fraud in conducting other class-action suits, called the misrepresentation an “administrative error.”) The Hills also disclosed that they had not sought lead plaintiffs status (they thought the form they returned was an application to share in any recovery) and had never attempted to monitor counsel’s work on behalf of the class.

... counsel proposed two other lead plaintiffs. Cauley Bowman Carney & Williams PLLC proposed Tommy Newman, who had purchased 900 shares, and Milberg Weiss LLP (as it is now known) proposed Elizabeth G. Sherry, who owned 300 shares of Baxter’s stock. Discovery revealed that neither Newman nor Sherry wants to supervise the work of counsel in a complex securities case, or would be good at that task. Newman had been recruited by the law firm and, the district judge determined, is its tool; Sherry, like the Hills, had returned a form thinking it essential to receive any recovery and had no desire to play an active role.

... One can’t help thinking that the unwillingness of any substantial shareholder to step forward as a representative suggests that the suit may not be in investors’ interest.

Is it okay under the PSLRA and legal ethics rules for a lawyer to have a “tool” so long as the tool goes unpaid? (HT: Lattman)