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In re Cendant Corporation Securities Litigation

April 11, 2005

IN RE: CENDANT CORPORATION SECURITIES LITIGATION
DEBORAH LEWIS, JEFF MATHIS AND WOLF HALDENSTEIN ADLER FREEMAN AND HERZ LLP, APPELLANTS IN NO. 03-3603
ALAN CASNOFF; MILLER FAUCHER AND CAFFERTY LLP, APPELLANTS IN NO. 03-3604
ALFRED WISE; FINKELSTEIN, THOMPSON & LOUGHRAN, APPELLANTS IN NO. 03-3648



On Appeal from the United States District Court for the District of New Jersey (D.C. No. 98-cv-01664) District Judge: Honorable William H. Walls

The opinion of the court was delivered by: Becker, Circuit Judge

PRECEDENTIAL

Argued: December 14, 2004

Before: NYGAARD, ROSENN, and BECKER, Circuit Judges.

OPINION OF THE COURT

I. Introduction and Overview

This is another set of appeals arising out of the $3.2 billion settlement of the shareholders' securities class action brought against the Cendant Corporation. This litigation has previously provided us with the opportunity to examine the effect of the Private Securities Litigation Reform Act of 1995 (PSLRA) on the selection and compensation of class counsel. See In re Cendant Corp. Litig., 264 F.3d 201 (3d Cir. 2001) ( Cendant I ). *fn1 The present appeals require us to examine the effect of the PSLRA on non-class counsel.

Appellants are three law firms who represented members of the victorious class of Cendant plaintiffs. These firms were not selected by the District Court to serve as lead counsel for the class and were not compensated out of the $55 million in fees ultimately awarded to the appointed lead counsel. However, they claim that the work that they performed during the litigation and negotiation of this suit benefited the plaintiff class, and that they are therefore entitled to compensation from the class's recovery. The firms' alleged right to fees stems from a longstanding equitable doctrine that allows parties or attorneys who create or maintain a common fund for the benefit of others to claim compensation from that fund.

As we explained in Cendant I, however, the PSLRA has significantly altered the landscape of attorneys' fee awards in securities class actions. The historic common fund doctrine, which has traditionally governed the compensation of lead counsel in all class actions, has yielded, in PSLRA cases, to a paradigm in which the plaintiff with the largest stake in the case, usually a large and sophisticated institution, is accorded the status of lead plaintiff and assigned the right to appoint and duty to monitor lead counsel for the class. In Cendant I, we recognized that this paradigm necessarily entails deferring to the lead plaintiff in decisions about lead counsel's compensation. Accordingly, we rejected the District Court's use of an auction mechanism to select and compensate lead counsel, and remanded for a determination of attorneys' fees in accordance with the agreement between lead plaintiffs and their chosen lead counsel.

In the instant appeal we extend the analysis of Cendant I to the fee applications of firms that were not designated as lead counsel. The Cendant lead plaintiffs, and their lead counsel, act as appellees here. They argue that, just as PSLRA lead plaintiffs are entitled to significant discretion in selecting and compensating lead counsel, so too are they entitled to similar discretion in determining whether other firms have benefited the class, and whether and to what extent to compensate such firms.

We find the lead plaintiffs' arguments convincing. A careful reading of the PSLRA, and of Cendant I, reveals that the new paradigm of securities litigation significantly restricts the ability of plaintiffs' attorneys to interpose themselves as representatives of a class and expect compensation for their work on behalf of that class. The PSLRA lead plaintiff is now the driving force behind the class's counsel decisions, and the lead plaintiff's refusal to compensate non-lead counsel will generally be entitled to a presumption of correctness.

Of course, much work will be done before the lead plaintiff is appointed, when no single class member controls the litigation. Thus the court will retain the primary responsibility for compensating counsel who do work on behalf of the class prior to appointment of the lead plaintiff, though courts may take into account the views of the lead plaintiff in awarding such compensation. The traditional common fund doctrine will remain the touchstone of this analysis, and non-lead counsel will have to demonstrate that their work actually benefited the class. In particular, the filing of multiple complaints each alleging the same facts and legal theories will not result in fee awards for each firm that files a complaint: such copycat complaints do not benefit the class, and are merely entrepreneurial efforts taken by firms attempting to secure lead counsel status. This conclusion disposes of the appeal of Finkelstein, Thompson & Loughran, one of the appellant firms, which did nothing more than file a complaint that was substantially identical to dozens of other complaints filed in this litigation.

After the lead plaintiff is appointed, however, the PSLRA grants that lead plaintiff primary responsibility for selecting and supervising the attorneys who work on behalf of the class. We conclude that this mandate should be put into effect by granting a presumption of correctness to the lead plaintiff's decision not to compensate non-lead counsel for work done after the appointment of the lead plaintiff. Non-lead counsel may refute the presumption of correctness only by showing that lead plaintiff violated its fiduciary duties by refusing compensation, or by clearly demonstrating that counsel reasonably performed work that independently increased the recovery of the class.

After setting out the general standards, we turn to several specific issues that arise in this case. First of all, we conclude that representation of individual class members—and, in particular, monitoring of the progress of the litigation on behalf of those members—is not compensable out of the class's common recovery. All of the appellant firms here claim that they monitored the class action, but none can show that this monitoring independently increased the recovery of the class.

Next, we examine a broader issue. Two of the appellant firms, Miller, Faucher and Cafferty and Wolf, Haldenstein, Adler, Freeman & Herz, claim that they represented what was in effect an uncertified subclass of Cendant plaintiffs, which we will refer to as the "stub plaintiffs." These firms asked the District Court to clarify the class definition so as to create a subclass consisting of claimants who purchased shares after a misleading partial disclosure of the fraud at Cendant, but the District Court refused, finding that the lead counsel in this case could adequately represent the interests of these claimants as part of the certified class.

Our review of the purposes of subclass certification convinces us that lawyers who claim to represent an uncertified putative subclass generally have no more right to a fee awarded out of the common recovery—whether that recovery is defined as the subclass's recovery or the recovery of the class as a whole—than do any other non-lead counsel. Simply claiming to do work on behalf of a specific group, which the court has declined to certify as a subclass, does not refute the presumption of correctness that attaches to lead plaintiff's decision not to compensate a firm. Thus, the two appellant firms cannot claim fees for representing the stub plaintiffs in this litigation.

Finally, we turn to the more specific claims of the appellant firms. In particular, we examine claims made by Miller Faucher and Wolf Haldenstein that their work was conducted at the request of lead counsel, and that it benefited the class as a whole. If true, these claims would serve to refute the presumption of correctness, as they would demonstrate that the appellant firms did their work with an expectation of compensation and that it independently benefited the class. However, our review of the facts leads us to conclude that these appellant firms undertook their work without the approval of lead plaintiffs, and that their work did not measurably contribute to the class's recovery.

We therefore hold that the presumption of correctness that attaches to the lead plaintiff's decision has not been refuted in this case. We thus find that appellant firms are not entitled to any fees in this litigation, and will affirm the order of the District Court.

II. Facts

On April 15, 1998, Cendant Corporation announced that it had discovered "accounting irregularities" in some of its business units, and that it expected to restate its 1997 financial statements. The next day, Cendant's stock fell by 47%. On July 14, 1998, Cendant announced that it would also restate its 1995 and 1996 financials; its stock fell by another 9%. And on August 28, 1998, the company disclosed the results of an internal investigation, revealing that it would restate its 1995-1997 financials by some $500 million. Cendant stock fell by another 11%. Overall, the stock fell from $35 5/8 per share on April 15 to $11 5/8 on August 31, a loss of over $20 billion in market capitalization, or some 67% of its initial value.

A. The Suit, Settlement, and Initial Fee Award

This drop in value, accompanied by clear evidence—and, indeed, admissions—of fraud, engendered numerous shareholder lawsuits. Between April and August 1998, at least sixty-four suits were filed under Exchange Act § 10(b) and Securities Act § 11, naming as defendants Cendant, various officers and directors, and Ernst & Young, the company's outside auditors. Pursuant to an order of the Judicial Panel on Multidistrict Litigation, these cases were consolidated in the District of New Jersey, before District Judge William H. Walls.

Pursuant to provisions of the PSLRA, see 15 U.S.C. § 78u-4(a)(3), the District Court appointed as Lead Plaintiffs a consortium of three large public pension funds (the California Public Employees' Retirement System (CalPERS), the New York City Pension Funds, and the New York State Common Retirement Fund). *fn2 This appointment came on September 4, 1998. The Lead Plaintiffs retained two law firms, Barrack, Rodos & Bacine and Bernstein Litowitz Berger & Grossman, to serve as Lead Counsel. The District Court ultimately approved the Lead Counsel after an open auction among law firms seeking to serve as class counsel, and appointed them as counsel for the putative class on October 9, 1998.

Lead Counsel then filed an Amended Complaint on behalf of the class, dated December 14, 1998, while also pursuing settlement talks. The District Court certified the class on January 27, 1999, and denied most of the defendants' motions to dismiss on July 27, 1999. In re Cendant Corp. Litig., 60 F. Supp. 2d 354 (D.N.J. 1999). However, it granted Ernst & Young's motion to dismiss with regard to charges that it violated the securities laws after April 15, 1998. Id. at 376. On December 17, 1999, the parties reached a proposed settlement involving a payout of approximately $3.2 billion of Cendant and Ernst & Young money; as part of the settlement, Cendant also agreed to make certain corporate governance changes. The District Court approved the settlement, and, pursuant to the terms of the winning auction bid, awarded $262 million in attorneys' fees to the Lead Counsel.

On appeal, this Court upheld the settlement, but reversed the award of attorneys' fees as unreasonable. In re Cendant Corp. Litig., 264 F.3d 201 (3d Cir. 2001) ( Cendant I ). We found that the District Court had abused its discretion in holding an auction and remanded for a new fee determination pursuant to the Lead Plaintiffs' original retainer agreement with Lead Counsel. We also strongly suggested that fees in the $200 million range would likely be excessive, as the case was relatively simple and such fees would constitute an "extraordinarily high" lodestar multiplier of 25 to 45.*fn3 264 F.3d at 285.

On remand, Lead Plaintiffs and Lead Counsel agreed to a $55 million fee award, which was approved as reasonable. In re Cendant Corp. Litig., 243 F. Supp. 2d 166 (D.N.J. 2003). The District Court noted that this fee represented just 1.7% of the $3.2 billion settlement, and that Lead Counsel had spent some 35,000 hours prosecuting the case. Id. at 172-73.*fn4

B. The Excluded Firms

In preparing the fee application, Lead Counsel wrote to all the other firms involved in the Cendant case, asking them for their time and expenses incurred in the case. Ultimately, however, Lead Counsel shared the $55 million fee with just twelve other law firms. The Lead Plaintiff pension funds filed a declaration in connection with Lead Counsel's application for attorneys fees, in which they stated that they had authorized twelve firms to assist Lead Counsel, and that the work of those twelve firms had been considered in computing the fee application. Lead Plaintiffs noted that forty-five other law firms represented individual plaintiffs, but took the position that those firms had not conferred any benefit on the class, and had not been authorized by Lead Plaintiffs or Lead Counsel to do any work on behalf of the class. Lead Plaintiffs therefore declined to include these firms in their fee request.

Of the forty-five excluded firms and attorneys, fourteen objected and requested attorneys' fees. The District Court held a hearing on the record regarding these fee applications on July 28, 2003, and rejected all the applications at the close of that hearing.

Three firms have appealed from the rejection of their petitions. One appellant firm, Finkelstein, Thompson & Loughran ("FTL"), represented Alfred Wise, who bought 500 shares of Cendant stock at about $37 on February 4, 1998, before any announcement of wrongdoing. FTL filed a complaint on Wise's behalf on July 6, 1998; this was the fifty-fifth such complaint filed against Cendant. FTL was not selected to serve as, or assist, Lead Counsel, and does not allege that it performed any work on behalf of the class after filing its complaint. Instead, it argues that its work in investigating the fraud at Cendant, and preparing and filing its complaint, should be compensated out of the class's recovery. FTL seeks fees of $44,252.50, which represent its lodestar, as well as expenses of $713.94.

C. The Post-April 15 Purchasers

The other two appellant firms, Wolf Haldenstein Adler Freeman & Herz LLP ("Wolf Haldenstein") and Miller Faucher & Cafferty LLP ("Miller Faucher"), claimed to represent a subgroup of plaintiffs who purchased Cendant stock after the initial April 15, 1998, disclosure of wrongdoing, but before Cendant's July 14 announcement of further financial troubles. Wolf Haldenstein designates this group the "stub plaintiffs"; Miller Faucher calls them the "partial disclosure period purchasers." While the latter designation, unlike the former, has the advantage of clarity, we opt for brevity and refer to this group as the "stub plaintiffs" or "stub purchasers."

The first fifty-two complaints against Cendant were filed shortly after the April 1998 disclosures, and were consolidated into one action on June 1, 1998. These complaints alleged a class period that ended on April 15, 1998, the date of the first round of disclosures. On July 16, 1998, Wolf Haldenstein filed a classaction complaint on behalf of Dr. Deborah Lewis, who had purchased seventy-five Cendant shares on July 10, 1998 for $22 1/16 per share. This complaint alleged that the April 15 disclosure was itself a false and misleading statement in violation of § 10(b), and sought to represent a stub class, separate from the main class, consisting of those who had purchased Cendant shares between the April 15 and July 14 disclosures. Wolf Haldenstein's complaint on behalf of Dr. Lewis was the first such stub-class complaint. *fn5 Four days later, on July 20, Miller Faucher filed its own complaint on behalf of putative stub-class representative Alan Casnoff, who had purchased 300 Cendant shares on April 20 at $23 9/16. The parties agree that these were the only stub-class complaints filed by any law firm.

Wolf Haldenstein and Miller Faucher then moved (on behalf of Lewis and Casnoff, respectively) to "clarify" the District Court's earlier order consolidating the class's claims into one action. In effect, the firms asked the court to designate a separate class for the stub-period claimants, with separate lead plaintiffs and lead counsel. In an order dated November 4, 1998, the District Court denied this motion and allowed the case to go forward as one unitary class. *fn6 In re Cendant Corp. Litig., 182 F.R.D. 476 (D.N.J. 1998). The court acknowledged that the stub plaintiffs had alleged additional misstatements not raised in the earlier complaints, but determined that the already-designated Lead Plaintiffs could and would litigate the stub claims as part of a continuing pattern of wrongdoing at Cendant.

As noted above, Lead Counsel proceeded to file an Amended Complaint on December 14, 1998. The Amended Complaint asserted a class period running from May 31, 1995, through August 28, 1998, the date of Cendant's final curative disclosure. The class covered by the Amended Complaint thus included (a) the pre-April class covered by the initial fifty-two complaints, (b) the stub class covered by the Lewis and Casnoff complaints, and (c) a further class of plaintiffs who bought after the July 14 disclosure but before the final August 28 disclosure.

In early December, shortly before filing the Amended Complaint, Lead Counsel circulated a draft to counsel for all class members, asking them if their clients wished to be named in the consolidated complaint. On reviewing this draft complaint, Miller Faucher called Lead Counsel to suggest that the complaint should allege that the April 15 disclosure was materially false and misleading. Lead Counsel revised the Amended Complaint to make this allegation.

D. The Plan of Allocation

The settlement reached between the class and Cendant involved payment to all three types of plaintiff—pre-April 15, post-April 15, and post-July 14—on identical terms, with one exception: under the settlement, plaintiffs who bought after April 15 were not entitled to share in any of the $335 million from Ernst & Young, because claims against the auditors arising after April 15 had been dismissed. On learning of the proposed settlement, in December 1999, Wolf Haldenstein communicated with Lead Counsel to advocate for the stub plaintiffs. In January 2000, Wolf Haldenstein suggested that the stub plaintiffs' claims were legally stronger than those of pre-April 15 purchasers, and that they should therefore receive at least 50% more on their claims than did other class members. And in March 2000, after reviewing the draft Plan of Allocation, Wolf Haldenstein wrote to Lead Counsel again to argue that the stub plaintiffs should share in the Ernst & Young money. In its review of the plan of allocation, Wolf Haldenstein retained John Hammerslough, a forensic damages expert. Lead Counsel rejected both of Wolf Haldenstein's suggested modifications to the settlement and ultimately convinced Wolf Haldenstein that the proposed settlement was fair to all class members.

Like FTL and the other non-authorized firms, Wolf Haldenstein and Miller Faucher were shut out of Lead Counsel's $55 million fee. Thus they petitioned the court for their own fees. Wolf Haldenstein requests $500,000 in fees and $30,859.27 in expenses; it claims 592.6 hours of work, for a lodestar of $242,893.50 and a multiplier of 2.06. Miller Faucher requests $102,857.75 in fees and $4,113.08 in expenses. This is its lodestar.

III. Jurisdiction and Standard of Review

The District Court had jurisdiction over this matter under Securities Act § 22(a), 15 U.S.C. § 77v(a); Exchange Act § 27, 15 U.S.C. § 78aa; and 28 U.S.C. §§ 1331 & 1337. We have appellate jurisdiction under 28 U.S.C. § 1291, as the fee order was a final decision. We review the District Court's decision not to award attorney fees for abuse of discretion. See In re Prudential Ins. Co. of Am. Sales Practices Litig., 148 F.3d 283, 333 (3d Cir. 1998) ( Prudential ). An abuse of discretion "can occur 'if the judge fails to apply the proper legal standard or to follow proper procedures in making the determination, or bases an award upon findings of fact that are clearly erroneous.'" Zolfo, Cooper & Co. v. Sunbeam-Oster Co., 50 F.3d 253, 257 (3d Cir. 1995) (quoting Electro-Wire Prods., Inc. v. Sirote & Permutt, P.C. (In re Prince), 40 F.3d 356, 359 (11th Cir. 1994)).

Some of the parties appear to be concerned that we might review the District Court's February 5, 2003, fee award to Lead Counsel. Such review would be clearly inappropriate; to appeal from that fee award, an objector would have had to file a Notice of Appeal within 30 days, or by March 2003. See Fed. R. App. P. 4(a)(1)(A). The appellant firms here never filed a Notice of Appeal from the February award to Lead Counsel; rather, they appeal only from the District Court's July 28, 2003, oral order denying them attorneys' fees.

The February 2003 fee award was based on the work that Lead Counsel and their designated assisting counsel performed. Their fee application included lodestar information for the work of the twelve authorized assisting firms, but disclaimed any work performed by the other forty-five firms. Thus it seems appropriate that, if we were to find that the appellant firms provided any benefit to the class, then their fees would be paid out of the class's $3.2 billion recovery, and not out of the $55 million fee already awarded to Lead Counsel. Lead Counsel argue for this result in their briefs, and at least one appellant firm, Miller Faucher, agreed to it at oral argument. There is thus no prospect of overturning the February 2003 fee award to Lead Counsel; the current appeal concerns additional fees, not a modification of the $55 million already awarded.

IV. Legal Background

As it did in Cendant I, our analysis begins with the traditional attorney-client relationship. At its core, this relationship involves an attorney with an ethical obligation to serve only the client's interests, and a client with the right and ability to select, monitor, and compensate his attorney:

The power to select counsel lets clients choose lawyers with whom they are comfortable and in whose ability and integrity they have confidence. The power to negotiate the terms under which counsel is retained confers upon clients the ability to craft fee agreements that promise to hold down lawyers' fees and that work to align their lawyers' economic interests with their own. And the power to monitor lawyers' performance and to communicate concerns allows clients to police their lawyers' conduct and thus prevent shirking.

Cendant I, 264 F.3d at 254.

Attorneys who represent large classes of plaintiffs, rather than individual clients, have no less of an obligation to put their clients' interests ahead of their own. But members of such a class, unlike the active and involved individual clients of the traditional paradigm, frequently have little or no opportunity or incentive to monitor their attorneys' fidelity and zeal. Without such monitoring, class counsel may well give in to the temptation to shirk, to overcharge, or to prosecute or settle the case in a way that maximizes their own fees rather than the class's recovery. See Cendant I, 264 F.3d at 255; see also Alon Harel & Alex Stein, Auctioning for Loyalty: Selection and Monitoring of Class Counsel, 22 Yale L. & Pol'y Rev. 69, 71 (2004); Elliott J. Weiss & John S. Beckerman, Let the Money Do the Monitoring: How Institutional Investors Can Reduce Agency Costs in Securities Class Actions, 104 Yale L.J. 2053, 2064-66 (1995). The problem is particularly acute in securities class actions, in which thousands of small shareholders will have a modest financial interest in the outcome of a suit which can involve damages in the billions. Such small shareholders are unable or unlikely to carefully monitor class counsel.

A. The Common Fund Doctrine

Shareholders' class action cases present an additional problem, in that few or no individual shareholders will have much financial incentive to hire an attorney to prosecute their claims in the first place, but, in the aggregate, those claims are worth pursuing.

The "common fund doctrine" supplies one imperfect solution to this dilemma. The doctrine "provides that a private plaintiff, or plaintiff's attorney, whose efforts create, discover, increase, or preserve a fund to which others also have a claim, is entitled to recover from the fund the costs of his litigation, including attorneys' fees." In re General Motors Corp. Pick-Up Truck Fuel Tank Prods. Liab. Litig., 55 F.3d 768, 820 n.39 (3d Cir. 1995) ( GMC ); see also Boeing Co. v. Van Gemert, 444 U.S. 472, 478-79 (1980). Such fees are generally set by the court, upon application by counsel.

Thus the common fund doctrine, in combination with the class-action mechanism, see Fed. R. Civ. P. 23, makes it economically feasible for securities plaintiffs to receive redress for corporate fraud. See Harel & Stein, supra, at 81. These mechanisms depend upon plaintiffs' attorneys to be the prime mover behind securities class actions: while individual plaintiffs generally have little reason to sue, their attorneys stand to earn huge fees if they succeed in winning a trial or settlement on behalf of the class. See generally id. at 81-82; Stephen A. Saltzburg et al., Third Circuit Task Force Report on Selection of Class Counsel, 74 Temp. L. Rev. 689, 690-92 (2001) (hereinafter "Task Force Report").

1. The Role of the Courts in Common Fund Cases

The common fund doctrine is essentially a matter of equity, Boeing, 444 U.S. at 478, and gives courts significant flexibility in setting attorneys' fees. For the doctrine to function, it is essential that the court supervise class counsel's performance and carefully scrutinize its fee applications. See GMC, 55 F.3d at 819. The court's scrutiny is, in essence, a substitute for active client involvement, which is so often difficult to obtain in class actions. In traditional common fund cases, the court acts almost as a fiduciary for the class, performing some of the roles—i.e., monitoring and compensating class counsel—that clients in individual suits normally take on themselves. See In re Rite Aid Corp. Sec. Litig., 396 F.3d 294, 307-08 (3d Cir. 2005) ( Rite Aid ); GMC, 55 F.3d at 784 ("[T]he court plays the important role of protector of the absentees' interests, in a sort of fiduciary capacity, by approving appropriate representative plaintiffs and class counsel."); In re Oracle Sec. Litig., 131 F.R.D. 688, 691 (N.D. Cal. 1990) (Walker, J.) ( Oracle ) ("[T]he court bears fiduciary responsibilities to the class.").

In Cendant I, we reviewed in some depth the two traditional methods for setting class-action attorneys' fees. See 264 F.3d at 255-257. In the lodestar method, the court multiplies the number of hours that lead counsel reasonably worked by the reasonable hourly rate for that work to determine the counsel's lodestar, which may be multiplied by a factor intended to compensate the attorneys for the risks they faced and any other special circumstances. See Task Force Report, supra, at 706-07. The second method, now dominant in common fund cases, is the percentage-of-recovery approach.*fn7 See, e.g., Prudential, 148 F.3d at 333. Under this method, counsel are awarded a fee that is a percentage of the class's total recovery; the court determines the appropriate percentage based on a sevenfactor test set out in Gunter v. Ridgewood Energy Corp., 223 F.3d 190, 195 n.1 (3d Cir. 2000). *fn8 Our jurisprudence also urges a "lodestar cross-check" to ensure that the percentage approach does not lead to a fee that represents an extraordinary lodestar multiple. See Cendant PRIDES, 243 F.3d at 742; Gunter, 223 F.3d at 195 n.1; Rite Aid, 396 F.3d at 305-07.

Both of these approaches have been subject to significant criticism. See Task Force Report, supra, at 706-07. Each leaves the court to make a fee determination with little concrete guidance. See Oracle, 131 F.R.D. at 696. Courts are dependent upon counsel for information about the quality and quantity of the attorneys' work, and must make their judgments of the appropriate lodestar multiple or percentage of recovery "after the fact and on the basis of imperfect information." Weiss & Beckerman, supra, at 2072 & n.95.

Several courts have therefore experimented with an auction approach to setting class counsel's fees in advance of litigation.*fn9

Indeed, the District Court in this litigation initially used the auction approach. See In re Cendant Corp. Litig., 182 F.R.D. 144 (D.N.J. 1998). In our review of that decision in Cendant I, we discussed the auction method at length, but ultimately held that the District Court had abused its discretion in auctioning off the right to represent the class. We found that the PSLRA creates an exclusive mechanism for appointing and compensating class counsel in securities class actions, and does not permit auctions in the ordinary case. *fn10 See 264 F.3d at 273-80. We return to the PSLRA in Part IV.B, infra; at this juncture, it will be useful to review the recent common fund jurisprudence to see how courts conduct the inquiry into whether and how counsel benefited the common fund.

2. Awarding Fees Under the Common Fund Doctrine

The lodestar and percentage-of-recovery methods both address the problem of determining how large a fee to award to successful lead counsel. But the instant appeal raises a different problem. Here, the first question is not how large a fee to award, but who has properly earned a fee for representing the class. Lead Counsel argue that only they and their designated assisting firms did work that led to the favorable settlement, while appellant firms claim that their work also conferred benefits on the class and should be compensated.

Arguably the most closely analogous precedent is Gottlieb v. Barry, 43 F.3d 474 (10th Cir. 1994), a pre-PSLRA case with facts similar to those here. After MiniScribe Corporation collapsed, a number of shareholders brought securities actions; these were all consolidated into one class action, and not all of the plaintiffs' attorneys were designated as class counsel. After the class action settled, all of the attorneys requested fees, and a special ...


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