In federal securities litigation, the “Lead Plaintiff” is the person or group of persons that are appointed by the court to direct and oversee the prosecution of claims brought on behalf of a class of shareholders. The Lead Plaintiff has the power to settle and release claims of all class members, subject to court approval. There are numerous benefits and advantages of serving as a Lead Plaintiff in a securities litigation, as well as many myths that have arisen over the years that should be dispelled.
The Benefits of Serving as the Lead Plaintiff
Many shareholders believe that there are no benefits to serving as a Lead Plaintiff, or that the burdens of doing so outweigh any benefit that could be derived. These common misconceptions often cause a would-be Lead Plaintiff candidate to sit on the sidelines allowing a shareholder with a smaller financial interest or incentive to lead the case. The following are just some of the benefits serving as a Lead Plaintiff provides to an investor:
Selection of Lead Counsel
The first, and perhaps the most important, decision a Lead Plaintiff candidate will make is choosing a law firm to represent the Lead Plaintiff and the class—the “Lead Counsel.” Lead Counsel is responsible for litigating the action and, at the same time, keeping the Lead Plaintiff well-informed so that the Lead Plaintiff can effectively monitor all progress and provide comments and suggestions.
Overseeing the Litigation
The main advantage to serving as a Lead Plaintiff is that the Lead Plaintiff is responsible for managing the litigation primarily by overseeing and monitoring the progress of the action and the efforts of Lead Counsel. Specifically, a Lead Plaintiff will review and comment on important filings and other documents pertaining to the prosecution of the action, and the Lead Plaintiff will have direct input into litigation strategy and important decisions such as whether to settle the case and for how much. In coordination with Lead counsel, the Lead Plaintiff will establish a reporting system for effective communications throughout the litigation so that the Lead Plaintiff can remain informed, without feeling overwhelmed.
As referenced in the preceding paragraph, once discussions regarding possible resolution of the case begin, the Lead Plaintiff will have an opportunity to be active in all negotiations relating to whether to accept a settlement proposal, the size of the financial recovery, the makeup of the settlement consideration (for example, accepting all cash or part cash part stock), and the proposed plan of allocation for distribution of the settlement consideration. Indeed, the Lead Plaintiff has a strong voice when negotiating settlements in securities cases, and ultimately it is the Lead Plaintiff that must approve any settlement before it is presented to a court for its approval.
Attorneys’ Fees, Costs, and Expenses
Another advantage to serving as a Lead Plaintiff is that the Lead Plaintiff has a say in how much Lead Counsel may seek as compensation for any recovery. Of course, fees earned as Lead Counsel are contingent upon a successful recovery being obtained in the case. Even if Lead Counsel and the Lead Plaintiff agree on an appropriate fee, all fees must still be approved by the court as fair and reasonable. Indeed, the court will ultimately determine whether a fee is fair and reasonable based on a host of factors including the complexity of the lawsuit, the duration of the litigation, and the quality of work performed. It is important to note that there should be no financial risk in serving as a Lead Plaintiff.
Lead Counsel should advance all costs and expenses incurred in the prosecution of the case and Lead Counsel will seek reimbursement of such costs and expenses only if there is a successful settlement or judgment recovery on behalf of the class. This reimbursement comes from the money recovered on behalf of the class and, thus, there is never a time when the Lead Plaintiff would have to pay anything out of pocket. Finally, unlike many other countries, in U.S. class action cases, the Lead Plaintiff is not responsible for the legal costs or expenses of the defendants in the event that a case does not resolve favorably for the class.
There are several myths about serving as a Lead Plaintiff that we at Johnson Fistel have encountered through the years that should be dispelled as one considers whether to seek appointment as a Lead Plaintiff.
Dispelling the Myths of Being a Lead Plaintiff
Myth #1 – There is an overwhelming time and resource commitment in being a Lead Plaintiff.
Lead Counsel does all of the legal work and advances all of the costs and expenses associated with the litigation. The Lead Plaintiff monitors the progress of the litigation by reviewing important documents. While it is true that the Lead Plaintiff may need to produce documents and be available for a deposition to answer certain questions, the time commitment generally is not significant at all. Indeed, it is one of the jobs of Lead Counsel to manage the amount of time the Lead Plaintiff spends in an efficient manner.
Myth #2 – The Lead Plaintiff may be “on the hook” financially or otherwise if the case is lost.
Unlike certain courts outside the United States, an unsuccessful plaintiff is not responsible for the defendants’ fees, costs, and expenses. Likewise, a plaintiff is not responsible for paying its own counsel fees, costs, or expenses in a contingency matter, regardless of the outcome of the case.
Myth #3 – The Lead Plaintiff will receive unwanted media publicity.
Quick, without using Google, name the lead plaintiff in any securities fraud case. Odds are, you cannot. The reality is that most Lead Plaintiffs have as much or as little publicity as they seek.
Myth #4 – The Lead Plaintiff will have to travel frequently to attend court hearings and other case related proceedings.
The Lead Plaintiff is generally not required to attend most hearings. That said, Lead Plaintiffs are encouraged to attend important hearings if they so desire and such appearances at the hearing can also have a positive impact on the court. There is also the possibility that a Lead Plaintiff will be required to sit for a deposition, but depositions are scheduled at a time and location convenient to the Lead Plaintiff and are typically minimally burdensome. Importantly, all costs and expenses for the litigation, including any travel related expenses, are advanced by Lead Counsel, and are not the responsibility of the Lead Plaintiff.
These are just a few of the “myths” shareholders have about serving as a Lead Plaintiff. While taking on the role of Lead Plaintiff does require careful consideration, it is important to be armed with the facts in order to make a well-informed decision. If you have additional questions about whether you are a potential Lead Plaintiff candidate, or would like more information about an upcoming Lead Plaintiff deadline, please do not hesitate to contact the attorneys at Johnson Fistel.