A Case for Competitive Bidding for Lead Counsel in Securities Class Actions

Abstract

If there’s one thing lawyers seem to hate, it’s competition. Or it would at least seem that way by the array of lawyers who have spoken out against any process of competitive bidding in the selection of lead counsel in securities class actions. This chorus has grown in strength in the face of a recent Third Circuit decision and Ninth Circuit decision. The Third Circuit held that competitive bidding for the position of lead counsel of a securities class action was generally not permitted under the Private Securities Litigation Reform Act of 1995 (‘PSLRA‘). On the heels of that decision, the Ninth Circuit recently decided that the district court erred in appointing class counsel based primarily on a showing of differences in potential attorney fees. The question is, after these decisions, what role, if any, does competitive bidding play in the selection of lead counsel in securities class actions?

This note will argue that competitive bidding should not be relegated to rare situations as the Third Circuit found appropriate under the PSLRA. Rather, an interpretation of the PSLRA that forbids competitive bidding is bad policy, and the PSLRA should be amended to allow the presiding judge to exercise his or her discretion to protect absent class members and insure a meaningful adequate representation test for the lead plaintiff in terms of negotiations with lead counsel. The decision to apply an exacting level of scrutiny to the relationship between the lead plaintiff and lead counsel should not be made in every case. Rather, the court must evaluate the general characteristics of the case, and make a determination as to the complexity of the particular issues. In the ‘ideal‘ cases, described in the next paragraphs, the court must apply a more exacting scrutiny of the adequacy of the lead plaintiff to competitively negotiate with lead counsel, or be willing to step in and perform their own competitive bidding process.