THE PSLRA AND SECURITIES CLASS ACTIONS

The appointment of a lead plaintiff in securities matters is governed by the Private Securities Litigation Reform Act (PSLRA). Both the structure of the PSLRA and its legislative history show that Congress designed it to achieve two interrelated objectives: (1) to encourage institutional investors to become lead plaintiffs and (2) to reduce the amount of control attorneys wielded over securities fraud litigation. Before Congress passed the Private Securities Litigation Reform Act (PSLRA) in 1995, most courts appointed the first plaintiff to file a complaint as the lead plaintiff. The lead plaintiff was responsible for certifying the class and conducting any pre-certification settlement negotiations. If the case did not settle before the certification hearing, and the lead plaintiff survived the defendant's challenges on the question of whether he satisfied the requirements of Federal Rule of Civil Procedure 23, then the lead plaintiff became the class representative of the certified class and his attorney conducted the trial. Some plaintiff's law firms used "professional plaintiffs," people who owned a few shares of stock in each of a large number of companies and who were willing to have their names attached to complaints. Such plaintiffs had long-standing relationships with particular firms and exercised little control over the attorneys who were, theoretically, acting on their behalf.

The PSLRA's lead plaintiff provision fundamentally changed the way lead plaintiffs are appointed. Among other things, the PSLRA directs the Court to "appoint as lead plaintiff the member or members of the purported plaintiff class that the court determines to be most capable of adequately representing the interests of the class." 15 U.S.C. § 78u-4(a)(3)(B)(i). The Act creates a "rebuttable presumption ... that the most adequate plaintiff ... is the person or group of persons that (aa) has either filed the complaint or made a motion in response to a notice ... (bb) in the determination of the court, has the largest financial interest in the relief sought by the class; and (cc) otherwise satisfies the requirements of Rule 23 of the Federal Rules of Civil Procedure." Id. § 78u-4(a)(3)(B)(iii)(I). The presumption may be rebutted "only upon proof by a member of the purported plaintiff class that the presumptively most adequate plaintiff??(aa) will not fairly and adequately represent the interests of the class; or (bb) is subject to unique defenses that render such plaintiff incapable of adequately representing the class." Id. § 78u-4(a)(3)(B)(iii)(II). Finally, the PSLRA states that "[t]he most adequate plaintiff shall, subject to the approval of the court, select and retain counsel to represent the class." Id. § 78u-4(a)(3)(B)(v).

Although the text of the PSLRA does not expressly state that courts should prefer institutional investors as lead plaintiffs, the legislative history and the case law that has followed demonstrates that this was the goal Congress had in mind. Congress favored institutional investors as lead plaintiffs as evidenced by Senate and House Conference Reports which state that Congress sought and intended "to increase the likelihood that institutional investors will serve as lead plaintiffs." PSLRA, § Rep. No. 104-98, 104th Cong., 1st Sess. 1, 11 (1995); HR Conf. Rep. No. 104-369, 104th Cong., 1st Sess. 21, 33 (1995). This is because, unlike individual investors who often stand to recover only small amounts from securities fraud litigation, institutions are likely to have suffered large losses from any fraud. Elliot J. Weiss and John S. Beckman, Let the Money Do the Monitoring: How Institutional Investors Can Reduce Agency Costs in Securities Class Actions, 104 Yale L. J. 2053 (1995). This potential for significant recovery also gives an institutional investor a greater incentive to monitor its lawyers and ensure that the attorneys' actions promote the best interest of the class. Id. at 2095. Given the great amounts of investments controlled by institutions, the statutory presumption that the plaintiff with the largest financial interest in the litigation is the lead plaintiff shows that Congress intended to aid institutions in being appointed as lead plaintiff. Moreover, to encourage institutional investors to become lead plaintiffs, the Committee included a rebuttable presumption in the PSLRA that would require courts to assume that the member of the purported class with the largest financial stake in the relief sought is the "most adequate plaintiff."

Indeed, case law demonstrates the preference for and importance of the leadership of institutional investors in securities class actions. In In re Cendant Corporation Litigation, 182 F.R.D. 144 (D. N.J. 1988), the court appointed lead plaintiffs for the class were the California Public Employees' Retirement System, the New York State Common Retirement Fund and the New York City Pension Funds. The total of the settlements ultimately reached in that case was at least $3,167,500,000, the largest cash settlement ever achieved in a securities class action. The active participation of institutional investors surely enhanced the value of the settlements. In In re Conseco, Inc. Securities Litigation, 120 F. Supp.2d 729 (S.D. Ind. 2000), the court certified an institutional investor as lead plaintiff over an individual investor who had sustained a slightly greater loss. In doing so, the court reasoned that the individual failed to provide sufficient information regarding his ability to represent the class and control class counsel. Id. at 733-734. The court in Conseco also noted the expressed preference of congress for institutional investors to be appointed lead plaintiff. Id. at 734. Many other cases echo this desire to have institutional investors as lead plaintiffs. See In re Razorfish Inc. Securities Litigation, 2001 WL 476504 (S.D.N.Y. May 4, 2001) (appointing financial institution as lead plaintiff in securities fraud action under PSLRA); In re Microstrategy Inc. Securities Litigation, 110 F.Supp.2d 427 (E.D. Va. 2000) (appointing two-person family and union pension fund as lead plaintiffs in securities fraud action under PSLRA); Yousefi v. Lockheed Martin Corporation, 70 F. Supp. 2d 1061, 1066 (C.D. Cal. 1999) ("Ideally, courts will appoint institutional investors with large holdings in the stock as lead plaintiff."); In re Network Associates, Inc., Securities Litigation, 76 F. Supp. 2d 1017, 1020 (N.D. Cal. 1999) ("Congress expected that the lead plaintiff would normally be an institutional investor with a large stake in the outcome."); In re Lucent Technologies, Inc. Securities Litigation, 2000 WL 628805, at *15 (D.N.J. Apr. 26, 2000)("The provisional appointment of the Pension Trust Fund appears to meet one of the most important goals of the PSLRA - the appointment of an institutional investor to serve as lead plaintiff in securities class actions.").