District Court off track in selecting lead plaintiff.

• Author: Sanders, Carol McHugh

A federal district court may get to pick the lead plaintiff in a securities class action, but not that plaintiff's counsel, according to a first impression decision from the Ninth Circuit that reversed the lower court's choice of lead plaintiff. The petition for a writ of mandamus drew an amicus curiae brief from the Securities and Exchange Commission, supporting the party appointed lead plaintiff, and an amicus brief from two large institutional investors--the California Public Employees Retirement System and Barclays Global Investors--supporting the district court's position.

The class action before the Ninth Circuit, In re Cavanaugh, 306 F.3d 726 (9th Cir. 2002), was one of more than 20 securities fraud complaints filed in the U.S. District Court for the Northern District of California based on a dramatic drop in late 2000 in the share price of a company in the telecommunications business, Copper Mountain Networks Inc., whose stock price plunged in the fourth quarter of 2000 from $125 to $10 per share after it announced that its revenues and earnings for that quarter had declined, contrary to earlier projections.

The district court announced plans to consolidate the numerous class actions and to appoint a lead plaintiff, as allowed under the Private Securities Litigation Reform Act of 1995 (PSLRA). Scheduling a case management conference, the court interviewed three parties who expressed an interest in becoming lead plaintiff: William A. Chenoweth, an accountant who lost an estimated $295,000 on the stock's decline; Quinn Barton, a self-employed investor who lost about $59,000; and five businessmen, led by David Cavanaugh, who each lost between $462,000 and $943,000 for a collective loss of $3.327 million.

At the case management conference, the district court queried all three candidates about how they chose their attorneys and negotiate their fee agreements. The Cavanaugh group already had retained Milberg, Weiss, Bershad, Hynes & Lerach, arguably the best-known plaintiffs' securities litigation firm in the nation, under a fee agreement that would pay it a percentage of the total recovery, a sum that would increase with the size of the recovery, topping out at just over 30 percent.

The second lead plaintiff candidate, Barton, had retained Beatie & Osborn, a small New York law firm, under a fee agreement that would pay between 10 to 15 percent of the recovery, with an $8 million cap. The third candidate, Chenoweth, had not retained...