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IN RE WORLDCOM

United States District Court, S.D. New York


November 10, 2004.

IN RE WORLDCOM, INC. SECURITIES LITIGATION. This Document Relates to: ALL ACTIONS.

The opinion of the court was delivered by: DENISE COTE, District Judge

OPINION AND ORDER

In an attempt to secure compensation for its services, Liaison Counsel for the plaintiffs who have filed individual as opposed to class actions ("Individual Actions") in this consolidated multi-district securities litigation has submitted an application for an award of attorney's fees and expenses from the class action's settlement fund, as well as a set-aside fund consisting of part of all future payments made by defendants in satisfaction of Individual Action settlements or judgments. For the following reasons, the application for an award of attorney's fees and expenses from the class action's settlement fund is denied, and the application for a set-aside fund consisting of one percent (1%) of all future payments made by defendants in satisfaction of Individual Action settlements or judgments is granted.

BACKGROUND

  Civil actions arising from investments in the securities of WorldCom, Inc. ("WorldCom") were assigned to this Court either when they were filed in this district or by the Judicial Panel on Multi-District Litigation. These actions include both class actions and Individual Actions. The class actions were consolidated on August 15, 2002, and two law firms — Bernstein Litowitz Berger & Grossmann LLP and Barrack Rodos & Bacine — were selected as co-Lead Counsel ("Lead Counsel").

  On December 23, 2002, the Individual Actions were consolidated with the class actions for pretrial proceedings because they involve common questions of law and fact. In re WorldCom, Inc. Sec. Litig., No. 02 Civ. 3288, 2002 WL 31867720 (S.D.N.Y. Dec. 23, 2002). The consolidated class and Individual Actions are collectively referred to as the Securities Litigation. More than seventy Individual Actions, involving over four hundred plaintiffs and twenty-two law firms, have been pending before this Court at one point or another in the intervening months. At present, almost forty are pending.

  On May 22, 2003, and at the suggestion of plaintiffs' counsel in the Individual Actions, Lowey Dannenberg Bemporad & Selinger, P.C. ("LDBS") was appointed Liaison Counsel for the Individual Actions in order to avoid wasteful inefficiencies associated with managing over seventy individual litigations with substantially similar facts and claims. The Court had rejected the proposal that five law firms form a "steering committee" for the Individual Actions. In re WorldCom, Inc. Sec. Litig., No. 02 Civ. 3288, 2003 WL 21219037, at *5 n. 7 (S.D.N.Y. May 22, 2003). The responsibilities of Liaison Counsel were set forth in an Order of May 29, 2003. In re WorldCom, Inc. Sec. Litig., No. 02 Civ. 3288, 2003 WL 21242882, at *4 (S.D.N.Y. May 29, 2003). From that point on, LDBS functioned as an information clearinghouse for the Individual Actions, distributing information from the Court to all plaintiffs' counsel in the Individual Actions, and collecting viewpoints from those counsel on particular issues and communicating those views to the Court and other parties in the Securities Litigation. LDBS, and in particular Neil Selinger of that firm, has worked tirelessly to promote harmony and efficiency in this sprawling litigation, a litigation that is teeming with experienced and outspoken counsel anxious to be heard and to press their point of view. On May 7, 2004, Lead Counsel in the consolidated WorldCom securities class action achieved a partial settlement that provides for a payment of up to $2.65 billion to the class. On September 24, LDBS filed this application for an award of attorney's fees and expenses from the class action's settlement fund, as well as a set-aside fund consisting of part of all future payments made by defendants in satisfaction of Individual Action settlements or judgments. The Court approved the partial settlement at a fairness hearing held on November 5. A separate Opinion issued today describes the reasons for that approval.

  DISCUSSION

  In complex multi-party litigation, attorneys designated with responsibilities for actions beyond those in which they are retained may be compensated for their work not only by their own clients, but also by those other parties on whose behalf the work is performed and on whom a benefit has been conferred. See Smiley v. Sincoff, 958 F.2d 498, 501 (2d Cir 1992). See also Manual for Complex Litigation, Third, § 20.223 (1995). A court "may award fees to lead counsel, liaison counsel, and other attorneys designated to perform tasks on behalf of a group of litigants." Id. § 24.11 (emphasis supplied). District courts are vested with "broad discretion in determining the amount and distribution" of such fees. Smiley, 958 F.2d at 501.

  In Smiley, a committee of plaintiffs' counsel from three law firms was authorized to conduct discovery on behalf of all plaintiffs in the nearly three hundred actions that had been filed to litigate the death and injury claims from an airline crash. Id. at 499. Plaintiffs whose counsel were not members of the committee were required to contribute eight percent of their recoveries toward a fund to compensate the committee for the work done on their behalf. Id. at 500.

  In this case, Liaison Counsel seeks compensation not only from Individual Action plaintiffs, as in Smiley, but from class members as well. Liaison Counsel, however, has not shown that it is entitled to be paid from the fund created by the partial settlement with the class. Lead Counsel opposes any such payment.

  Here there are two distinct sets of plaintiffs: class action plaintiffs, and Individual Action plaintiffs. LDBS was assigned to be Liaison Counsel for the Individual Action plaintiffs — who elected not to be a part of the class action — in order to reduce the administrative burden associated with managing a large number of Individual Actions pertaining to the same subject matter. Therefore, LDBS, in its capacity as Liaison Counsel, is acting on behalf of the Individual Action plaintiffs, not the class action plaintiffs. Indeed, the only reason a Liaison Counsel is required here is because the Individual Action plaintiffs have elected to pursue their claims outside the class action framework. Although plaintiffs are entitled to pursue their claims outside the class action framework if they so choose, "there is no reason to compensate" plaintiffs that elect to do so by requiring members of the class action to subsidize the administrative costs and extra expenses associated with pursuing Individual Actions. In re Auction Houses Antitrust Litig., No. 00 Civ. 0648, 2001 WL 210697, at *4 (S.D.N.Y. Feb. 26, 2001) (denying application by absent class members to reimburse their individual counsel's expenses). Moreover, there is certainly no reason to establish a policy that encourages plaintiffs to pursue individual actions instead of participating in class actions by using the proceeds from the class action to support the administrative expenses of those who choose not to participate in the class. See id.

  Additionally, the vast majority of functions that LDBS mentions in support of its application for fees are functions that run to the benefit of Individual Action plaintiffs, not class members. For example, LDBS created a secure website with WorldCom document postings that is accessible only to Individual Action plaintiffs' counsel; assisted Individual Action plaintiffs' counsel on an almost daily basis in locating documents; notified Individual Action plaintiffs' counsel of all Court orders or pleadings specifically relating to their cases; acted as the spokesperson for Individual Action plaintiffs' counsel on matters of significance to the Individual Action cases; held frequent conference calls among Individual Action plaintiffs' counsel to discuss the issues that have arisen in the Securities Litigation; and undertook tasks to assist Individual Action plaintiffs' counsel, such as filing briefs and coordinating document production and depositions.

  In contrast, the few functions that LDBS describes which mention Lead Counsel or the class action are described only in general terms, or are predicated on relieving the administrative burden that the Individual Actions place on Lead Counsel. For example, Liaison Counsel has acted as the conduit for substantive communications between Lead Counsel and Individual Action plaintiffs' counsel on discovery and litigation strategy, and has fielded "incessant phone calls and e-mails" from Individual Action plaintiffs' counsel which otherwise would have been directed to Lead Counsel, thus allowing Lead Counsel "to focus virtually 100% of its time to the prosecution of the claims of its clients." This "benefit" to the class is not really a benefit at all, because the "incessant" telephone calls would not exist but for the presence of scores of Individual Actions that demand extra time and energy of all parties and the Court. Consequently, the important question is on whose behalf LDBS is working as Liaison Counsel, and the answer is on the behalf of the Individual Action plaintiffs. Therefore, allowing any contribution from the class action settlement to be made to Liaison Counsel for the Individual Actions would be inappropriate.

  Liaison Counsel has shown that it is entitled to a set-aside fund created by recoveries in the Individual Actions. LDBS has done a superb job in its role as Liaison Counsel, conducting itself with professionalism and efficiency, and has conferred a tangible benefit upon the Individual Action plaintiffs through its administrative and organizational efforts. The Individual Action plaintiffs will therefore be required to contribute to a fund from which Liaison Counsel may apply for reimbursement of its fees and expenses that are associated with its work as Liaison Counsel. As of November 5, 2004, Liaison Counsel estimated those costs to be $775,000.

  Several of the Individual Action plaintiffs object to the establishment of such a fund. Cotchett, Pitre, Simon & McCarthy on behalf of the Regents of the University of California had objected, inter alia, that a set-aside order would interfere with the attorney-client relationship or rules of professional conduct. It has withdrawn its objection.

  Lerach Coughlin Stoia Rudman & Robbins LLP ("the Lerach firm"), which represents many Individual Actions ("Lerach Actions"),*fn1 argues that its substantive work in the Securities Litigation provided a common benefit to all plaintiffs. This argument is essentially irrelevant to the question of whether to establish a common fund to pay Liaison Counsel. The useful work that any other firm may have performed does not take away from the common benefit provided by court-appointed Liaison Counsel performing administrative duties on behalf of a group of plaintiffs, and does not alter the need to provide a mechanism for designated counsel to receive compensation for its common benefit work.

  The Lerach firm also argues that any "tax" on the Individual Actions to pay Liaison Counsel should be allocated equally among the law firms representing the plaintiffs in those actions, as opposed to equally among the Individual Actions that obtain recoveries in the Securities Litigation. It estimates that there are currently eight law firms in addition to LDBS representing plaintiffs in Individual Actions. Not surprisingly, there is opposition to this proposal among those firms. The Lerach firm has filed many Individual Actions; most of the other law firms have filed a single Individual Action.

  The allocation shall be made among Individual Actions, not among law firms. The administrative burden imposed by the Lerach Actions on the Securities Litigation has been substantial. That burden is more fairly approximated by the number of Individual Actions the firm has filed and would be grossly underrepresented by requiring its many clients to pay collectively only one-eighth of Liaison Counsel's fees and expenses. Moreover, if Liaison Counsel's fees are allocated equitably among all of the Individual Action plaintiffs, the amount paid by any individual plaintiff will likely be de minimus in relation to its recovery. In any event, the Lerach firm provides no principled basis to allocate the cost per law firm as opposed to Individual Actions. The remaining objection by the Lerach firm misunderstands the mechanism proposed by Liaison Counsel. The Lerach firm fears the set-aside fund will penalize "early settlers." It will not. All Individual Actions will be required to contribute one percent from any settlements or judgments. To the extent that the fees and expenses awarded to Liaison Counsel from the fund leave monies to be returned to Individual Action plaintiffs, plaintiffs shall be given an opportunity to be heard so that the funds are distributed equitably among all Individual Action plaintiffs who contributed to the fund.

  The final objection is filed by Grant & Eisenhofer on behalf of the Public Employees' Retirement System of Ohio.*fn2 It argues that this issue is not ripe for adjudication since the contribution of Liaison Counsel to this litigation cannot be measured without a settlement or judgment. It is important to establish a set-aside fund immediately. Without the entry of a set-aside order in advance of Individual Action settlements or judgments, Individual Actions could be dismissed after settlement or a judgment, requiring Liaison Counsel to pursue separate compensation claims in any number of jurisdictions around the country. Consequently, the question of whether to enter a set-aside order should be resolved at this point in the litigation in order to create a res and establish this Court's jurisdiction over the res. Nor is it premature to find that all Individual Action plaintiffs have benefitted enormously from the work already performed by LDBS, and to predict that they will continue to so benefit.

  CONCLUSION

  The LDBS application for an award of attorney's fees and expenses from the class action's settlement fund is denied. Its application for a set-aside fund consisting of one percent (1%) of all future payments made by defendants in satisfaction of Individual Action settlements or judgments is granted.

  SO ORDERED.


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