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IN RE COMDISCO SECURITIES LITIGATION

June 27, 2001

IN RE COMDISCO SECURITIES LITIGATION


The opinion of the court was delivered by: Shadur, Judge

MEMORANDUM OPINION AND ORDER*fn1

This Court's Opinion 1 (copy attached) explained the predicate, in conjunction with the necessary determination under 15 U.S.C. § 78u-4 (a)(3)(B)*fn2 of the "most adequate plaintiff" to represent the class in this putative securities class action, for considering the possibility of inviting sealed competitive bids from counsel who seek to act as class counsel (a subject previously addressed by this Court in two earlier actions, one involving antitrust claims (see In re Amino Acid Lysine Antitrust Litig., 918 F. Supp. 1190 (N.D. Ill. 1996)) and the other being another private securities class action (see In re Bank One Shareholders Class Actions, 96 F. Supp.2d 780 (N.D. Ill. 2000). Shortly thereafter Opinion 2 (copy also attached) invited such bids.

With the competitive bids for legal representation now in hand, as well as a further submission having been received from counsel for Peter Moser ("Moser") (discussed hereafter) that relates directly to the "most adequate plaintiff" issue, this Court is now in a position to act on both of those related subjects. This opinion will first deal with the identification of the most adequate plaintiff (alternatively referred to, as the statute does, as "lead plaintiff") and then with the subject of approving class counsel.

Opinion 3 began by stating this tentative view as to the identity of the presumptive lead plaintiff:

Based on the movants' respective representations, it would appear that the Commonwealth of Pennsylvania State Employees' Retirement Systems ("PASERS," treated as a singular noun here) is the presumptive lead plaintiff by a wide margin: Its Ex. B Sch. A to its supporting Memorandum of Law shows that it purchased about 250,000 shares of Comdisco, Inc. common stock during the proposed Class Period described in the Complaint and that it claims losses of some $2.4 million.

But a later submission on behalf of Moser, who has also sought appointment as lead plaintiff, has once again demonstrated the wisdom of Phaedrus' two-millenium — old aphorism that "Things are not always what they seem." It turns out that when the Class Period of January 25 through October 3, 2000 (which is the proper referent) is focused upon, PASERS' claim that it suffered some $2.4 million in losses in connection with its investment in Comdisco common stock is only a mirage created by PASERS' adoption of a FIFO (first-in-first-out) approach to its dealings in the stock. In fact PASERS was an active trader during the Class Period, with 15 separate sales that more than matched its purchases during that time frame: Its Class Period purchases of Comdisco common stock aggregated 213,800 shares, while its sales during the same period totaled 218,400 shares. And when those transactions are properly matched, rather than by the impermissible application of a FIFO methodology (which by definition brings into play PASERS' pre-Class-Period holdings as the purported measure of its claimed loss), PASERS' Class Period sales at inflated prices*fn3 caused it to derive unwitting benefits rather than true losses from the alleged securities fraud — so much so that Moser demonstrates that PACERS derived a net gain of almost $300,000 (rather than any net loss at all) from its purchases and sales during the Class Period.

There are a host of cases, exemplified by In re Olsten Corp. Sec. Litig., 3 F. Supp.2d 286, 295 (E.D. N.Y. 1998), that reject the kind of artificial "loss" that is manufactured by PASERS' attempted FIFO construct in favor of a calculation that properly nets out purchases and sales during the class period and determines gains or losses in those terms. That is all of a piece with the concept of "actual damages" recovery that is uniformly embraced by such cases as Astor Chauffeured Limousine Co. v. Runnfeldt Inv. Corp., 910 F.2d 1540, 1551-52 (7th Cir. 1990) Hence PASERS, despite (or in a sense because of) its' large-volume trading in Comdisco stock during the Class Period, is totally out of the running for designation as lead plaintiff.*fn4

Among the other candidates that have sought appointment as lead plaintiff, Moser himself is the leader (in the relevant sense of out-of-pocket loss) by a substantial margin. Application of the appropriate Olsten approach to his transactions during the Class Period (transactions that also included both ins and outs) discloses that he sustained a net loss of over $140,000.*fn5 Accordingly the answer to the first question posed by the statutory structure is that Moser is presumptively the "most adequate plaintiff."

To turn then to the related subject of class counsel, whom Subsection (a)(3)(B)(v) specifies is to be selected and retained by the most adequate plaintiff "subject to the approval of the court," it is unfortunate that the quantity of bids received from well-qualified and experienced class counsel this time around has been meaningfully smaller than this Court has previously obtained in the Amino Acid Lysine and Bank One actions and that this Court knows, from its active ongoing monitoring of other opinions dealing with the subject, to be typical of other major class actions. Although it is not possible to be precise as to why that should be so,*fn6 it seems very likely that one major factor in this case is Comdisco's continuing financial decline: Last week's financial sections carried a story that its credit rating has been downgraded by Moody's Investors Service for the third time in three months, signaling a strong likelihood that it may soon face a default situation — and unsurprisingly, Comdisco's common stock has spiraled downward to the point where its current market quotations are in the range of $1 per share. Surely the prospect of taking on the handling of a major class action that may end up — even if "successful" — as the equivalent of tapping an empty barrel holds out less attractiveness for experienced law firms that can better spend their time on other matters that hold out greater promise of being productive financially for other plaintiff classes and for the law firms themselves.

There is however an added factor that has emerged here as the unfortunate fallout of a portion of the Third Circuit's recent In re Cendant Corp. PRIDES Litig., 243 F.3d 722, 742-43 (3d Cir. 2001) opinion. One of the substantial active players in the plaintiffs' class action bar — a firm with fine credentials and experience that has handled other major class actions and that has been a responsible bidder in other cases before both this Court and other courts — has written this Court that it would not bid here because it perceived Cendant PRIDES as having placed bidders in a no-win situation, in which if they prove successful in becoming lead counsel the terms of their successful bids would set a ceiling on fees, while on the downside they would be subject to ex post second guessing by the court's utilization of a lodestar comparison as a benchmark.

It need scarcely be emphasized that this Court is in total accord with the basic teaching of the Third Circuit in Cendant PRIDES and other cases that the determination of a reasonable fee in the class action context must ultimately be for the court (in the field of private securities actions, see Subsection (a)(6)). Nor does this Court part company with the bulk of the thoughtful discussion and analysis in Cendant PRIDES on the subject of lawyers' fees that may properly be awarded in the private securities class action context (including the valuable compilation of federal court fee awards during the last 15 years set out at 243 F.3d at 737-38, a table that undercuts severely the all-too-prevalent notion that the "normal" range of such awards is in the area of 25% to 35% of the class recovery).*fn7 Instead the problem identified by the nonbidding law firm in this action, and a concern shared by this Court, lies in the added notion that the lodestar figure and its possible multiplier should regularly play a major role in cross-checking the result that is arrived at by applying the successful competitive bid formulation to the recovery ultimately obtained by the successful bidder.

Fast forward, then, to the time when the same litigation has reached a successful outcome, whether via settlement (the most frequent fate of the "successful" securities or other commercial class action) or by traveling the entire litigation path through trial — and perhaps on appeal as well.*fn9 If counsel has obtained that desired favorable result for the class clients with the expenditure of (say) two-thirds of the number of hours that counsel had initially anticipated in formulating the original bid, it seems entirely unfair to penalize that successful counsel for having done so — that is, to measure the reasonableness of a bid-generated percentage-of-recovery fee against a lodestar benchmark that has been calculated in hindsight in terms of those actually expended hours. After all, if the litigation had instead taken the path under which counsel had to slug the matter out to get that same result, spending (say) 150% or 200% of the originally anticipated hours, counsel would not be allowed to restructure its percentage bid in comparable hindsight terms to get a bigger share of the recovery. Nor is the problem truly alleviated by the possibility of applying a multiplier to the raw lodestar figure, because that does nothing more than to introduce a purely arbitrary factor (untested by market principles) into the mix as a sort of rationalization to support the announced conclusion.*fn10 Again to view the matter through the lens of free market principles, any such ex post reevaluation (with or without a multiplier) is truly unjustified as a matter of logical analysis — and certainly so if it is only a one-way street.*fn11

This Court is of course well aware of the view held by some judges that bidding is inappropriate in the securities class action context (see, e.g., In re Razorfish, Inc. Sec. Litig., No. 00 CV 9474J5R, 2001 WL 476504, at *5 (S.D. N.Y. May 4)), or even more broadly that bidding is not a proper procedure to be employed in the selection of counsel in any class action situation. As to the former view, it ignores the fact that Congress has specifically provided that the selection of class counsel by the "most adequate plaintiff" is made "subject to the approval of the court" (Subsection (a)(3)(v)). That requirement of court approval is expressly served by the court's taking into account the fee arrangement that the proposed class counsel wishes to impose on all other class members as part of the same court's determination whether the presumptive "most adequate plaintiff" is in fact the most adequate. Are we judges merely to serve instead as rubber stamps, thus failing to enforce the fiduciary responsibilities owed by the ...


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