class action

["Ian Murray" <seamus2001@xxxxxxxx>]

Wednesday, Sept. 5, 2001

U.S. judges get tough on class action suits

NEW YORK, Sept. 5 (Reuters) -- U.S. judges are taking some of the
class out of securities class action lawsuits.
That's good news for corporate executives and Wall Street firms who
have paid out enormous sums in such cases -- but aggrieved
shareholders who've lost money may find the trend disturbing.

In late August, the U.S. Court of Appeals for the Third Circuit,
terming the size of the award "staggering," set aside $262 million in
fees for class-action lawyers in the Cendant Corp. [CD] securities
fraud litigation.

The month before, the Fifth Circuit, in an unusual step, reversed
certification of a class in litigation against Compaq Computer Corp.
[CPQ] on grounds the district court failed properly to assess whether
plaintiffs were adequately qualified.

And, in a skewering that seems destined for the annals of legal
put-downs, a New York district court judge in his mid-90s last month
dismissed would-be class action complaints against Web analyst Mary
Meeker and her employer, investment bank Morgan Stanley [MWD], for
being, among other things, "in grossly bad taste."

Each of these cases is legally distinct from the others. Together,
however, they may herald greater judicial skepticism toward securities
class actions -- especially in interpreting the Private Securities
Litigation Reform Act of 1995, a federal law designed to curb
perceived abuses in such actions.

This skepticism may make it more difficult for class-action law firms
to bring and win suits alleging securities fraud, such as the
burgeoning number of IPO-related suits.

"Courts have been getting steadily tougher in securities class action
lawsuits," said Alan Bromberg, a law professor at Southern Methodist
University in Dallas.

Congress chipped away at class actions by passing the Reform Act, and
courts are taking notice. The implicit message Congress intended:
"Class actions are bad and we don't think we ought to have them in our
society," Bromberg said.


STOCK DROP TRIGGERS SUITS

Class action suits are often filed when share prices drop and have
been the subject of frequent controversy. Critics charge that the
firms that bring these suits, which seek to bundle the claims of
scattered investors into a "class," unfairly distract management from
doing its job and reap too much from any recoveries.

The Third Circuit's complex Cendant decision is seen as a partial
setback for class-action lawyers, even though the court approved a
huge settlement of $3.2 billion, because of the court's high-profile
rejection of counsels' fee award.

The "Cendant case was sort of a poster child for excessive fees for
lawyers," SMU's Bromberg said. "A fair number of courts have trimmed
fees down, and this is a good precedent for cutting them way down," he
said.

The Fifth Circuit decision in the Compaq case may prove furthest
reaching. The court reversed a presumption courts previously accorded
class action lawyers that plaintiffs in their cases had met the
"adequacy" standard set forth in the Reform Act.

In part, the appellate court's reasoning seems to have been motivated
by disgust at the specifics of the case. In a footnote, the court
quoted at length from a brief submitted by Compaq's lawyers asserting
that plaintiffs' deposition testimony "show(ed) indifference to and
ignorance of key facts (and) a willingness to speculate without
foundation."

Using broad language, though, the court held that in securities cases
governed by the Reform Act, "the adequacy standard must reflect ...
Congress's emphatic command that competent plaintiffs rather than
lawyers, direct such cases."

The holding makes class actions more difficult because it seems to
require that plaintiffs no longer simply have been shareholders in the
targeted company, but rather be well-versed in the factual and legal
underpinnings of the lawsuit.

"Almost all of the recent decisions had said so long as the lawyers
are competent securities lawyers and have no conflict of interest,
then courts are comfortable that the plaintiffs are adequate
representatives," said Phillip Kaplan, a Newport Beach,
California-based lawyer with O'Melveny & Myers LLP, which defends
against class actions.

"This case went beyond that," he said.

The impact of Compaq will become clearer when the pivotal Ninth
Circuit hears a likely proliferation of similar challenges to
plaintiffs' qualifications, Kaplan said. The Compaq case will
encourage the many judges who are already hostile to class actions to
adopt a similar stance, said SMU's Bromberg.

Judge Milton Pollack's opinion in the Meeker/Morgan Stanley class
suits may fan these flames of judicial antipathy toward

 securities class actions.
His ruling, which referred to plaintiffs' complaints as "hopelessly
redundant, argumentative, and (having) much irrelevancy and
inflammatory material," is "vintage Pollack," said Bromberg.

Even so, "I think he's reflecting exactly the view that the most
negative people in Congress" had when it passed the Reform Act, he
said.


NOT DEAD YET

Yet it's too soon to declare class actions finished, legal

 experts caution.
For one, thanks in particular to the boom in IPO litigation, 2001 is
shaping up numerically as a banner year for such suits, according to
O'Melveny's Kaplan.

For another, "very little of the (Reform Act) has been determined by
appellate courts," said Herbert Milstein, a lawyer at Cohen, Milstein,
Hausfeld & Toll, which specializes in shareholder suits.

"Over the course of the next four to five years, there will be more
appellate decisions, some helpful to class actions, some not," he
predicted.