Aggregation, Auctions, and other Developments in the Selection of Lead Counsel Under the PSLRA

This article focuses on aggregation and auctions, two key litigation developments in the selection of counsel under the Private Securities Litigation Reform Act of 1995. After reviewing some of the background concerns, including collective action problems presented by the class action structure and issues regarding the award of attorneys fees, the article explains how the lead plaintiff provision, adopted by Congress, addresses these concerns through a model of client empowerment. The article then explains two recent trends: the use of lead counsel groups, in which courts appoint multiple investors and aggregate their holdings, and the use of an auction procedure to select lead counsel and determine counsel fees. The trends deal with facially separate issues, yet they are disturbing for the same reasons. First, both aggregation and lead counsel auctions weaken the relationship between the lead plaintiff and class counsel and specifically reduce the ability of the lead plaintiff to exert control over litigation decisionmaking. Second, both trends lead to serious problems in implementing the lead plaintiff provision. Finally, the trends maintain an active judicial role in supervising the conduct of the litigation. The article challenges the propriety of aggregation and auctions under the PSLRA, arguing that neither development is supported by the statutory text or legislative history. The article further argues that these approaches are inconsistent with and likely to frustrate the objectives of the PSLRA. Courts that appoint groups of unrelated investors as lead plaintiffs will face difficult questions of appropriate group size and composition. Lead plaintiff groups are unlikely to function in accordance with the statutory design; in particular, they are unlikely to select or monitor class counsel effectively. Selection of lead counsel by auction is not an attractive alternative. Lead counsel auctions present substantial issues in design and implementation, and there is little reason to believe that a judicially conducted auction can replicate the market process or result in a selection decision and fee award more appropriate than the decisions made by a suitable lead plaintiff. Finally, the article argues that both developments are based on the mistaken perception that class action abuses can be addressed through judicial oversight. In adopting the lead plaintiff provision, however, Congress expressly rejected this premise. The effect of both aggregation and lead counsel auctions is to maintain judicial empowerment at the expense of client control. This approach undermines the potential for client empowerment to achieve meaningful litigation reform.