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May 3, 2001


The opinion of the court was delivered by: Jed S. Rakoff, U.S.D.J.


These 13 consolidated securities fraud actions allege — in complaints transparently copied from one another*fn1 — that defendant Razorfish, Inc. and several of its officers and former officers made false and misleading statements concerning the company's operations that artificially inflated the price of its stock over the period February 15, 2000 through October 5, 2000. After the complaints were filed and timely notice given to the putative class, three competing motions were brought under the relevant provision of the Private Securities Litigation and Reform Act of 1995 ("the Reform Act"), 15 U.S.C. § 78u-4 (a)(3), seeking to have the respective movant(s) appointed as lead plaintiff, and their respective counsel appointed as lead counsel, to conduct the consolidated class litigation.

In one such motion, the law firm of Wolf Haldenstein Adler Freeman & Herz LLP ("Wolf Haldenstein") moved for the appointment as lead plaintiff of Beth Cowan Pressel, an individual shareholder whose loss as a result of the alleged fraud was originally estimated at $4.9 million. The motion also sought the appointment of Wolf Haldenstein as lead counsel. In a second motion, the law firms of Milberg Weiss Bershad Hynes & Lerach LLP ("Milberg Weiss"), Schiffrin & Barroway LLP, Bernstein Liebhard & Lifshitz LLP, Scott & Scott LLC, and Cohen, Milstein, Hausfeld & Toll PLC moved for the appointment as lead plaintiff of a group of investors they termed the "Azimut Group," consisting of a large financial institution, Fahnestock Asset Management ("Fahnestock"), with an estimated loss of $2.6 million, two smaller "day-trading" companies, Azimut SGR and Bridgeport DPM, with estimated losses of $1.1 million and $1.9 million respectively, and an individual investor, Deborah Root, with an estimated loss of $700,000. The motion also sought the appointment of three firms — Milberg Weiss, Schiffrin & Barroway, and Bernstein Liebhard & Lifshitz — as lead counsel, with the remaining two firms, Scott & Scott and Cohen, Milstein, Hausfeld & Toll, to serve on the "Executive Committee." Finally, in the third motion, the law firm of Beatie & Osborn LLP moved for the appointment as lead plaintiff of an individual investor, Dominick Pigno, whose estimated loss was something under $40,000. This motion further argued that regardless of who was selected as lead plaintiff, lead counsel should be selected by means of an auction.

Following briefing and oral argument, the court declined to grant any of the motions in the form submitted but instead designated Fahnestock as lead plaintiff and its two counsel, Milberg Weiss and Schiffrin & Barroway, as lead counsel. See Order, February 22, 2001. This Opinion sets forth the reasons for that Order.

A frequent accompaniment to the use of the securities class action device is lawyer-driven litigation, by which counsel for the putative class seek to realize substantial recoveries for themselves. Prior to the Reform Act, the courts were obliged to scrutinize class counsel's fees, as best they could, at the end of the case, when, typically, the case had settled and no party was challenging the fees. In such circumstances, all parties, including the Court, had a vested interest in not "rocking the boat," and the evaluation of counsel's fees was often superficial. See In re Continental Illinois Sec. Litig., 962 F.2d 566, 572-73 (7th Cir. 1992). As a result, plaintiffs' counsel sometimes reaped excessive fees at the expense of their own clients.

To try to remedy this and related problems, Congress, as part of the Reform Act, provided that the Court would appoint as lead plaintiff the "most adequate plaintiff," which was presumed (rebuttably) to be:

the person or group of persons that — (aa) has either filed a complaint or made motion in response to [the initial class] 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.

15 U.S.C. § 78u-4 (a)(3)(B). Once selected, the most adequate plaintiff would, "subject to the approval of the court, select and retain counsel to represent the class." Id. The theory of these provisions was that if an investor with a large financial stake in the litigation was made lead plaintiff, such a plaintiff — frequently a large institution or otherwise sophisticated investor — would be motivated to act like a "real" client, carefully choosing counsel and monitoring counsel's performance to make sure that adequate representation was delivered at a reasonable price. See, e.g., 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, 2089 (1995).

As the instant case illustrates, however, securities class litigation continues to be lawyer-driven in material respects and the reforms Congress contemplated in the Reform Act can be achieved, if at all, only with some help from the courts. Here, as in many other such cases, most of the counsel who filed the original complaints attempted before filing the instant motions to reach a private agreement as to who would be put forth as lead plaintiff and lead counsel and how fees would be divided among all such counsel. See transcript of hearing on these motions on February 21, 2001 ("Tr."), at 11-12. The result — presented as an attempt to avoid wasting judicial resources, See, e.g., Tr. 11, 13, but arguably also motivated by a desire to obtain oligopolistic profits, see Tr. 12, 16 — was the proffer of a makeshift "lead plaintiff," the "Azimut Group," consisting of unrelated entities having no prior contact with each other and little or no prior contact with their counsel, see, e.g., Tr. 7-14.

The only reason this attempt at presenting a "package deal" fell through, according to the Wolf Haldenstein partner representing Ms. Pressel, was that "when Ms. Pressel [belatedly] contacted my firm and we became aware of the magnitude of her losses, we called the Milberg Weiss firm to tell them that we had a very large plaintiff and to see if there was any interest in putting together a group with us [but we] were told that it was really too late in the day." Tr. 19. Further still, a third law firm, Beatie & Osborn, not party to the proposed arrangement and representing a client with a relatively small stake, nonetheless entered the fray by moving to have lead counsel selected on the basis of whichever firm would take on the matter most cheaply (which it doubtless believed would be it).

For example, even though Wolf Haldenstein, as counsel for moving plaintiff Beth Cowan Pressel, initially represented that her loss from the fraud alleged in the class complaint was $4.9 million, by the time of oral argument counsel had reduced the estimate of the putative loss to $3.9 million and admitted some doubt as to the accuracy of even this reduced figure. See Tr. 28. Furthermore, it emerged that Ms. Pressel acquired her shares of Razorfish not through an ordinary purchase but pursuant to a court order ancillary to her divorce from one of the founders of a company, i-Cube, the extent of whose "integration" into Razorfish is the central disputed issue in this case. See Consolidated and Amended Complaint ¶¶ 24-53. n such circumstances, Ms. Pressel cannot possibly merit appointment as lead plaintiff, since she neither meets the typicality and other requirements of Rule 23, Fed. R. Civ. P., nor its free from being confronted with defenses unique to her — including a challenge to her standing, see Tr. 24-26 — that may well compromise her representation of the class. See 15 U.S.C. §, 78u-4(a)(3)(B) (iii) (I) (cc) and (II) (bb).

The tenuous connection and inadequate communication between counsel and client also infects, in a different way, the motion brought by the collection of counsel purporting to represent what they term the "Azimut Group," an ad hoc combination of a large financial institution, two smaller "day-trading" companies, and an individual investor, that have no prior connection with each other or with each other's counsel.

To be sure, the Reform Act does not require that the lead plaintiff be a single person or entity. See, e.g., Weltz v. Lee, 2001 WL 228412, at *4 (S.D.N.Y. Mar. 7, 2001); In re Oxford Health Plans, Inc. Sec. Litig., 182 F.R.D. 42, 45 (S.D.N Y 1998). On the contrary, the Act 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 class members," 15 U.S.C. ยง 78u-4 (a) (3)(B)(i) (emphasis added), and further provides that "the court shall adopt a presumption that the most adequate plaintiff . . . is the person or group of persons that . . . ...

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