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November 22, 1999


The opinion of the court was delivered by: Alsup, District Judge.





For two-thirds of a century, the federal securities laws have protected the integrity of the capital markets in America, in part through the policing effect of private securities class actions. Due to perceived abuses in such litigation, however, Congress enacted the Private Securities Litigation Reform Act of 1995 ("PSLRA"). One of its central provisions calls for the district court to appoint a "lead plaintiff" in such cases. This provision, and its proper application, are at issue in three competing motions for such appointment in this case. One of the pivotal legal issues is whether a "group" of unrelated investors with no decisionmaking structure and no connection other than counsel can qualify as a candidate for lead plaintiff under the PSLRA. For the reasons set forth below, the Court holds that such artificial "groups" may not so qualify.


This set of consolidated actions arose out of a series of declines in the price of the common stock of Network Associates, Inc., earlier this year.*fn1 The complaints allege accounting fraud and insider trading. The fraud supposedly began in January 1998 and continued until April 1999 when the truth, it is said, finally came out. During the alleged fraud, the common stock price rose as high as $67. At the end of the ride, the price dropped to the $13 to $16 range. Twenty-five suits promptly followed, nineteen of which were brought as class actions. Three motions to appoint lead counsel emerged.

On April 7, 1999, the law firms of Milberg Weiss Bershad Hynes & Lerach LLP and the Law Offices of Steven E. Cauley, P.A. (of Little Rock, Arkansas), filed Action No. C-99-1729 on behalf of Frank W. Knisley and Joel Harmon, individuals who invested about $3000. Through a process described below, the Milberg firm has joined forces with Kirby, McInerny & Squire, LLP, and Barrack, Rodos & Bacine, and they now claim to represent over 1725 investors who acquired Network securities from January 20, 1998, through April 19, 1999, and who collectively lost at least $33,929,308. Designating all 1725 (or more) as "movants," these law firms seek to appoint a smaller group of ten investors as lead plaintiff in these consolidated actions, calling these ten unrelated investors "The Network Associates Lead Plaintiff Group." The ten investors lost a combined total of at least $10,213,115, according to counsel. The ten consist of two equity funds, a city, six individuals and a family trust. In short, although the motion purports speak for over 1725 movants, it seeks the appointment of ten unrelated investors as lead plaintiff.

Also on April 17, 1999, the law firms of Weiss & Yourman and Stull, Stull & Brody filed Action No. 99-1731 on behalf of Philip E. Wetzel, an individual, who also lost about $3000. Through the process described below, these law firms now claim to represent over 100 institutions and thousands of individuals that acquired Network securities and lost over $120 million during the same class period described above. One institution represented by these firms allegedly suffered the single largest loss of any investor, although the claimed amount has proved to be a moving target, roaming from as high as $24 million to, after scrutiny, considerably less. The law firms call their long list of purported clients the "Network Institutional Group." They move on behalf of that group to appoint it as lead plaintiff. For "administration and efficiency," however, the motion proposes nine different investors with losses allegedly ranging from $3348 to over $24 million to serve as "representative lead plaintiffs."

The law firms of Ruby & Schofield and Manis Faulkner & Morgan, both of San Jose, represent Robert A. Vatuone, an individual, and seek his appointment as lead plaintiff. Mr. Vatuone is the named plaintiff in Action No. C99-2686. He lost at least $23,500. He does not advance any "group" and seeks the post in a solo capacity.

Since the filing of these actions, a vitriolic competition has been waged between the Weiss faction and the Milberg faction. Both published (and repeatedly republished) notices of the suit and sought to accumulate as many investor forms as possible so as to claim to represent the larger total of aggregate losses. Both have accused the other of unethical, avaricious, illegal and mean-spirited wrongdoing. Each say the other is unworthy to represent a class. To the extent relevant, this history is discussed below.


Aggregation of Claims Into Groups

In place of that practice — a practice wherein the class lawyer selected the class plaintiff — Congress sought to substitute a new model, one that reversed the roles. Under the new model, the court would appoint the lead plaintiff who, in turn, would select and direct class counsel. Congress expected that the lead plaintiff would normally be an institutional investor with a large stake in the outcome. The lead plaintiff would then monitor, manage and control the litigation, making, as is the case in ordinary cases, litigation decisions on resource allocation and settlement, with, of course, the advice of, but not the prerogative of, class counsel.

Under the heading of "Method For Determining The Most Adequate Plaintiff," the Conference Committee stated the perceived problem and its solution in these terms:

  The Conference Committee was also troubled by the
  plaintiffs' lawyers "race to the courthouse" to be
  the first to file a securities class action
  complaint. This race has caused plaintiffs' attorneys
  to become fleet of foot and sleight of hand. Most
  often speed has replaced diligence in drafting
  complaints. The Conference Committee believes two
  incentives have driven plaintiffs' lawyers to be the
  first to file. First, courts traditionally appoint
  counsel in class action lawsuits on a "first come,
  first serve" basis. Courts often afford insufficient
  consideration to the most thoroughly researched, but
  later filed, complaint. The second incentive involves
  the court's decision as to who will become lead
  plaintiff. Generally, the first lawsuit filed also
  determines the lead plaintiff.
  The current system often works to prevent
  institutional investors from selecting counsel or
  serving as lead plaintiff in class actions [footnote
  omitted]. The Conference Committee seeks to increase
  the likelihood that institutional investors will
  serve as lead plaintiffs by requiring courts to
  presume that the member of the purported class with
  the largest financial stake in the relief sought is
  the "most adequate plaintiff."
  The Conference Committee believes that increasing the
  role of institutional investors in class actions will
  ultimately benefit shareholders and assist courts by
  improving the quality of representation in securities
  class actions. Institutional investors are America's
  largest shareholders, with about $9.5 trillion in
  assets, accounting for 51% of the equity market.
  According to one representative of institutional
  investors: "As the largest shareholders in most
  companies, we are the ones who have the most to gain
  from meritorious securities litigation."
  Finally, this lead plaintiff provision solves the
  dilemma of who will serve as class counsel. Subject
  to court approval, the most adequate plaintiff
  retains class counsel. As a result, the Conference
  Committee expects that the plaintiff will choose
  counsel rather than, as is true today, counsel
  choosing the plaintiff. The Conference Committee does
  not intend to disturb the court's discretion

  under existing law to approve or disapprove the lead
  plaintiff's choice of counsel when necessary to
  protect the interests of the plaintiff class.

House Conf. Rep. 104-369, 104 Cong., 1st Sess., 33-35 (1995), U.S.Code Cong. & Admin. News, 104 Cong. 1st Sess. 732-34 (1995).

To effect these ends, the PSLRA now requires the plaintiff in the first-filed action to publish a notice advising of the pendency of the action and advising that any member of the proposed class can come forward and move to serve as lead plaintiff. In other words, the first plaintiff to file is no longer the presumptive lead plaintiff. There is no need to file first because any investor can apply for the job of lead plaintiff. Once all timely applications are made, the PSLRA requires the court to appoint as the lead plaintiff the member or a group of members of the purported class that the court determines to be most capable of adequately representing the interests of the class.

To encourage the selection of an institutional investor as the lead, the PSLRA also creates a rebuttable presumption concerning which class member is most capable of adequately representing the interests of class members. The court must apply the rebuttable presumption to the person or group of persons that, (1) "has either filed the complaint or made a motion in response to a notice" of the action, (2) "has the largest financial interest in the relief sought by the class," and (3) "otherwise satisfies the requirements of Rule 23 of the Federal Rules of Civil Procedure." 15 U.S.C. § 78u-4(a)(3)(B)(iii)(I). The presumption may be rebutted "only upon proof by a member of the purported plaintiff class that the presumptively most adequate plaintiff" (1) "will not fairly and adequately protect the interests of the class" or (2) "is subject to unique defenses that render such plaintiff incapable of adequately representing the class." 15 U.S.C. § 78u-4(a)(3)(B)(iii)(II).

Since 1995 when the PSLRA was approved, there have, in fact, been some instances of large institutional investors advancing themselves and being selected as lead plaintiffs. E.g., Gluck v. Cellstar Corporation, 976 F. Supp. 542 (N.D.Tex. 1997) (appointing State of Wisconsin Investment Board). For the most part, however, a different pattern altogether has developed, one that remarkably resembles the old regime. As was true before the PSLRA, in the wake of a substantial drop in any publically-traded stock, dozens of class suits are typically filed. Unlike before, however, the PSLRA requires the plaintiff in the first-filed suit to publish the statutory initial notice to invite lead plaintiff candidates to step forward. Although this notice was expected by Congress to be published once and to encourage uninvolved investors to come forward and to compete for the lead role, the notices in practice extol the lawyer filing suit, and invite the investor to fill out a form and return it to the lawyer. Each lawyer competes to accumulate as many forms as possible in order to amass the largest "group" possible. Not only does the first counsel to file give notice but so do many other lawyers filing suit, not once but over and again, all in an effort to compile the largest portfolio of investor names. The race to the courthouse has been replaced by a race to both the courthouse and thence to the publisher.

The PSLRA did not authorize or contemplate such a process. Instead, it called for notice to affected investors so they could decide whether to seek the role of lead plaintiff on their own. In practice, however, the real purpose and effect of the forms is to steer investors away from seeking the lead role on their own and to steer them toward registering with a lawyer who already has a lead plaintiff candidate. One of the forms used in this case, for example, states in part that the investor has reviewed the complaint and "If necessary, I authorize the filing of a similar complaint on my behalf. * * * I am willing to serve as a representative party on behalf of the class, including providing testimony at deposition and trial, if necessary." The form does not specifically state that the investor wishes to take on the responsibility for being the lead plaintiff, nor does it specifically authorize and retain any particular counsel to seek such a responsibility on their behalf. To the extent an investor truly seeks the role of lead, a legitimate question arises whether one law firm (or single set of law firms) could represent all of them without irreconcilable conflicts, given that not every candidate could be advanced and counsel would have to dash the hopes of one or more seeking the job. The forms make no disclosure of this problem. Nor do they include a waiver of any conflict.

This form-submitting process bears a resemblance to the claim-submitting process that traditionally has occurred at the end of class litigation. The only information required to be written in by the investor in the form mentioned was the name of the investor and the number of shares purchased or sold, the price, and the date. The rest is boilerplate. In this connection, one class counsel candidate herein accuses another of disguising its notices so as to cause investors to believe that returning the form is a prerequisite to participation in any ultimate recovery — when it plainly is not under the law. No doubt, many send in the forms thinking they need to in order to participate in any recovery.

When the motions to appoint lead counsel are made, as here, these forms are then bound into numerous thick booklets as alleged documentary support for counsel's motion on behalf of a group of movants, as has been done in this case. Counsel argue that the group as a whole has a large stake in the outcome — therefore, the group should be the presumptive lead plaintiff.

The only thing the investors in any group have in common, however, is the lawyer. They have no link to each other. They are not organized with any group decisionmaking apparatus. They attended no organizing meetings. They have no cohesive identity. They have no name other than one arbitrarily selected by the lawyers. They do not, in all probability, even know they belong to a group or know its name or know how their form is being used. The group name is not on the published notice, nor in the form returned to counsel. The name is invented after the fact by counsel. In the present case, in the process of challenging each other's group, one side herein obtained declarations from several institutions recanting their forms, saying they were misled by opposing counsel. With thousands of forms submitted in heavy boxes to the Court, and with no discovery conducted as to the bona fides of any, the truth is that there is no way to check the accuracy of the forms or the accuracy of the claimed totals. Indeed, the Milberg volumes are accused of including numerous discrepancies, ranging from unsigned forms, to forms refusing to be a lead plaintiff, to trades that could not have occurred as represented (due to Sunday dates, etc.). These defects are only those that appear on the face of the forms without the benefit of discovery.

Counsel invariably insert the word "group" into the title of the ensemble, as in "Network Institutional Group" or the "Network Associates Lead Plaintiff Group." This usage lends an appearance of tying into the statutory wording that the lead plaintiff may be a "person or group of persons," a phrase to be discussed momentarily. Counsel then urge, as here, that the group with the largest aggregate losses should dictate the selection of lead plaintiff. The threshold issue for decision is whether to permit such aggregation.

In no case has a court actually designated such an aggregation as the lead plaintiff. That would be tantamount, given the hundreds or thousands involved, to letting the class represent itself. And, there is no way such an assembly could control and manage counsel. The decisions have flat-out refused to appoint "large amalgamations of unrelated persons as lead plaintiff." In re Advanced Tissue Sciences Securities Litig., 184 F.R.D. 346, 352 (S.D.Cal. 1998).

Nonetheless, although the decisions do not always say so directly, the larger group's tally has been influential, and in some cases controlling, in determining which "group" will be allowed to advance a "subgroup" as the lead. E.g., In re Informix Corp. Securities Litig., C-97-1289-SBA (N.D.Cal. Oct. 17, 1997); In re Read-Rite Corp. Securities Litig., C-97-20059 RMW, slip op. 4 (N.D.Cal. May 27, 1997); City Nominees, Ltd. v. Macromedia, No. C97-3521 SC (N.D.Cal. Jan.23, 1997).*fn2 The subgroup is a smaller number of investors, also chosen by the lawyers. For example, in the present case the Milberg motion is on behalf of 1725 (or more, the exact number being too large to ascertain) investors but seeks the appointment of ten investors called "The Network Associates Lead Plaintiff Group." As with the larger mass, the subgroup has no organized decisionmaking apparatus, no coherency, no common ground other than the lawyer. They too are simply disparate, unlinked, and unrelated investors. Although the PSLRA authorizes an investor to seek the lead for itself, it does not authorize investors to seek the lead for someone else. Nonetheless, some courts have acquiesced in allowing the largest group to install a subgroup, reading the phrase "persons or group of persons" to so authorize. Once the subgroup is installed, the larger group is not heard from again.

Not all courts have gone along with aggregation. In one of the first decisions on point, Judge Cedarbaum of the Southern District of New York rejected a group appointment when the group consisted of unrelated investors:

  To allow an aggregation of unrelated plaintiffs to
  serve as lead plaintiffs defeats the purpose of
  choosing a lead plaintiff. One of the principal
  legislative purposes of the PSLRA was to prevent
  lawyer-driven litigation. Appointing lead plaintiff
  on the basis of financial interest, rather than on a
  "first come, first serve" basis, was intended to
  ensure that institutional plaintiffs with expertise
  in the securities market and real financial interests
  in the integrity of the market would control the
  litigation, not lawyers. See H.R. Conf Rep. No.
  104-369, at 31-35 (1995), reprinted in
  1995 U.S.C.C.A.N. 679, 730, 730-34. To allow lawyers to
  designate unrelated plaintiffs as a "group" and
  aggregate their financial stakes would allow and
  encourage lawyers to direct the litigation. Congress
  hoped that the lead plaintiff would seek the lawyers,
  rather than having the lawyers seek the lead
  plaintiff. Id. at 35.
  Counsel have not offered any reason for appointing an
  aggregation of unrelated institutional and individual
  investors as lead plaintiffs other than the argument
  that the language of the statute does not expressly
  forbid such a result.

In Re Donnkenny Inc. Securities Litigation, 171 F.R.D. 156, 157-158 (S.D.N.Y. 1997). Instead, Judge Cedarbaum appointed a single investor. The two most recent decisions in this district have followed Judge Cedarbaum and refused to allow aggregation. Wenderhold v. Cylink Corp., 188 F.R.D. 577 (N.D.Cal. 1999); In re McKesson HBOC, Inc., Securities Litig., slip. op., C99-20743 RMW (N.D.Cal. Oct. 29, 1999). The undersigned agrees with Judge Cedarbaum's approach. After a review of the statute and its legislative history, the Court is convinced that such aggregation is improper. Because of the currency of the problem, an explanation is in order.

Section 78u-4(a)(3)(A) provides that the early notice to class members must advise that "any member of the purported class may move the court to serve as lead plaintiff."*fn3 Section 78u-4(a)(3)(B) imposes a ninety-day deadline for consideration of any motion made by the lead plaintiff candidate. It states that the court "shall 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. . . ." Where consolidation of multiple cases has occurred, the same provision requires the court to "appoint the most adequate plaintiff as lead plaintiff for the consolidated actions. . . ." The court is required to "adopt a presumption that the most adequate plaintiff in any private action . . . is the person or group of persons" that, among other things, `has the largest financial interest in the relief sought by the class'" and otherwise satisfies the requirements of Rule 23 of the FRCP. (Once again, this is the passage wherein the word "group" appears and the only such passage.) The presumption may be rebutted only upon proof by a member that "the presumptively most adequate plaintiff" will not fairly and adequately protect the interests of the class or is subject to unique defenses. Discovery relating to adequacy may be conducted in certain circumstances.

To be sure, the PSLRA thus contemplates that a "group of persons" may qualify as the lead. The PSLRA, however, equally contemplates that the court will select "the most adequate plaintiff" as the lead. The whole point of the reform was to install a lead plaintiff with substantive decisionmaking ability and authority. For example, a group of mutual funds managed by a single organization might qualify. It would have an internal coherency and would be capable of acting as a unified decisionmaker. A mass of unrelated investors could not do so. Were it otherwise, then a qualified institutional investor with the single largest loss could be trumped by a collage of individual investors with greater aggregate losses but no ability to manage the case. Congress plainly rejected that proposition.

Too, an incoherent group with no decisionmaking apparatus would be far too unwieldy to satisfy Rule 23. In the present case, for example, the competing groups did not even vote on the memberships of the subgroups suggested for reasons of "administration and efficiency." The subgroups were simply hand-picked by counsel and dressed up with names. Such unorganized groups of unrelated investors with nothing in common other than the lawyer and with no clear-cut mechanism for making decisions could not "fairly and adequately" carry out the responsibility to protect the interests of the class.

The Court has tried to trace the origin of the word "group" in the legislative history. The phrase a "person or group of persons" was in the bill as passed by the Senate. (It had not been in the House version.) The language went to the conference and then back to both houses, there approved. The Senate Report repeatedly referred to "the lead plaintiff," "the member of the purported class with the largest financial stake," "the most adequate plaintiff" and "the lead plaintiff's choice of counsel," among other phrases — all couched in the singular tense. Sen. Rep. No. 104-98, 104th Cong., 1st Sess., 11-12 (1995). Not once was any reference made to the possibility of the lead plaintiff being an amalgam of unrelated class members. The Conference Report, even more so, referred in the singular tense to "the lead plaintiff," "the member of the purported class with the largest financial stake," "the presumptively most adequate plaintiff," and "the plaintiff" — a total of at least twelve such references, all in the singular, including the heading "Method for Determining the `Most Adequate Plaintiff.'" House Conf. Rep. No. 104-369, 104th Cong., 2d Sess., 33-35 (1995). It seems clear that Congress intended a single, strong lead plaintiff to control counsel and the litigation. No reference whatsoever was made in the reports to multiple, unrelated individuals at the helm.

The SEC has reached the same conclusion. In a memorandum filed by the SEC in In re Oxford Health Plans, Inc., 182 F.R.D. 42 (S.D.N.Y. 1998), the SEC stated:

  The language and purpose of the Act make clear that
  Congress believed that the compensation and
  protection of investors would best be served if only
  one lead plaintiff, that with the largest financial
  interest in the litigation, were to be appointed. The
  Act speaks in terms of a single lead plaintiff being
  named and lead counsel being chosen by that
  plaintiff. Although at times courts applying the Act
  have appointed voluntarily formed groups to serve
  collectively as lead plaintiff, no case of which we
  are aware has allowed the appointment of two
  competing groups of plaintiffs with separate counsel
  as co-lead plaintiffs.
  It is not clear whether the Vogel Plaintiffs are
  contending that the Association would, under these
  criteria, be an inadequate representative of the
  class's interests. While we are not aware of any
  reason the Association would not satisfy the
  statutory criteria, the Commission takes no position
  on that issue. But if the Court determines that the
  Association meets the requirements of the Act for
  appointment as lead plaintiff, the Court should
  appoint the Association as sole lead plaintiff.
  It is true that the Act uses the plural when it
  specifies that the lead plaintiff may be "the member
  or members of the purported plaintiff class" most
  capable of representing the class, and that the lead
  plaintiff may be a "person or group of persons." But
  that is consistent with the view that while there can
  only be one lead plaintiff, that plaintiff need not
  be a single person or entity, but rather might be a
  group of persons who have joined forces. On the other
  hand, reading the language to allow the appointment
  of competing movants as co-lead plaintiffs would
  appear inconsistent with the language in the Act,
  quoted above, which looks toward appointment of a
  single lead plaintiff. The language of the Act, taken
  as a whole, warrants the appointment of only a single
  lead plaintiff.

In a more recent SEC memorandum filed in In re Baan Co. Securities Litig., 186 F.R.D. 214, 218-35 (D.D.C. 1999), the SEC expounded on the meaning of "group of persons" as used in the PSLRA. According to the memorandum, a district court need not accept as lead plaintiff any proffered group of investors. The SEC explained that the "most adequate plaintiff" requirement was intended to place responsibility for managing securities class action litigation in the hands of institutions. Such investors, the memorandum continued, possess the sophistication, expertise and resources to manage securities litigation efficiently. The SEC noted that the PSLRA did not go so far as to require that the lead plaintiff always be an institutional investor. Nevertheless, it concluded that any other group selected as lead plaintiff "should have comparable ability to control the litigation and the lawyers." Id. at 224.

In a footnote, the memorandum noted that some lawyers had taken advantage of the PSLRA by recruiting individual clients and then packaging them together as a "group." Quoting a report by the SEC Office of General Counsel, the footnote explained, in a passage this case illustrates in vivid hues, that some attorneys had resorted to "phras[ing] [notices to the class under the Act] in a way more likely to attract clients, rather than competition from investors (and other law firms) independently vying to be named lead plaintiff." Id. at 224 n. 13, quoting Office of the General Counsel, Securities and Exchange Commission, Report to the President and the Congress on the First Year of Practice Under the Private Securities Litigation Reform Act of 1995 (Apr. 1997). The SEC urged that district courts who select as lead plaintiff a "group of persons" choose only those groups small enough to "effectively manage the litigation and the lawyers." Id. at 224.

Another recent amicus brief by the SEC is in accord. In an appeal to the Eleventh Circuit concerning the validity of a class settlement, the SEC noted that a member of a "group" of ten plaintiffs did not know of or approve the settlement in advance, this oversight being yet another vice of the aggregation approach. The SEC stated:

  It is not sufficient for counsel merely to aggregate
  large numbers of unaffiliated persons into a "group"
  and, because this assemblage collectively has the
  largest claimed losses, have it appointed as lead
  plaintiff. A "group of persons" within the meaning of
  the Act should, like an institution or single large
  investor, be able to actively oversee the conduct of
  the litigation and monitor the effectiveness of
  counsel. In short, the Act's allowance for a "group
  of persons" as lead plaintiff must be interpreted by
  reference to the Act as a whole and to the Act's
  To enable the court to assess whether the proposed
  group is capable of performing the lead plaintiff
  function, it should provide appropriate information
  about its members, structure, and intended
  functioning. Such information should include
  descriptions of its members, including any
  pre-existing relationships among them; an explanation
  of how it was formed and how its members would
  function collectively; and a description of the
  mechanism that its members and the proposed lead
  counsel have established to communicate with one
  another about the litigation. If the proposed group
  fails to explain and justify its composition and
  structure to the court's satisfaction, its motion
  should be denied or modified as the court sees fit.

Amicus Brief of SEC in Parnes, et al., v. Digital Lightwave, Inc., at 12, 15, No. 99-11293 (11th Cir. Aug. 25, 1999). In response to this Court's invitation to address another issue discussed below, the SEC repeated these same conclusions in an amicus brief filed herein. As the agency charged with enforcement of the legislation, the SEC's construction is entitled to considerable deference. Chevron, U.S.A., Inc. v. Natural Resources Defense Council, 467 U.S. 837, 842, 104 S.Ct. 2778, 81 L.Ed.2d 694 (1984).

Identifying the Presumptive Lead Plaintiff

The Court requested that the groups tendered be broken down and that investors therein with the largest stakes submit responses to a court-devised questionnaire. The Court also requested that each candidate appear at a hearing on November 4, 1999, to respond to the Court's questions. Before the hearing, the Milberg group sought discovery from the Weiss group. The Court allowed a four-hour deposition of each of the other's main institutional candidate. These were KBC Equity Funds ("KBC") and ING Investment Management ("ING"), both located in Europe. Although the Court was reluctant to grant the discovery, these short depositions have proven illuminating. On November 4, the Court held a hearing on all lead-candidate motions. All candidates appeared except KBC and ING. Each candidate was interviewed by the Court as was its counsel. Limited questioning by other counsel was permitted, which proved useful as well. Altogether eight candidates were considered, including KBC and ING in absentia. The hearing lasted from 4:00 p.m. to 8:00 p.m. As to certain issues that arose, supplemental submissions were allowed to be filed by November 10.

Based on the foregoing, the Court must now proceed to identify "the presumptively most adequate plaintiff." The PSLRA requires as follows:

  Subject to subclause (II), for purposes of clause (i)
  the court shall adopt a presumption that the most
  adequate plaintiff in any private action arising
  under this chapter is the person or group of persons
  that —
  (aa) has either filed the complaint or made a motion
  in response to a notice under subparagraph (A)(i);
  (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)(iii)(I).

With respect to which candidate has the largest financial interest in the relief sought, i.e., the potential recovery, the first step is to subtract the number of shares sold by a candidate from those purchased during the class period. The result provides net numbers for comparison among the candidates. At least as a first approximation, the candidate with the most net shares purchased will normally have the largest potential damage recovery. This approach gets into trouble only if the amount of the "fraud premium" varied over the course of the class period. In that case, the problem would be that some transactions resulted in greater losses than others and thus not all transactions were equal. At this stage, however, it is impossible to determine such variations. The best that can be done is to assume a constant fraud premium per share throughout the class period. It really does not matter what size premium is used, for all shares would have been inflated to the same extent. The test simply reduces to the net number of shares bought and sold during the class period.

The Weiss firm argues that "ING Investment Management" has the largest stake. There is, really, no such entity. The actual name of the company is ING Insurance Verseiking NV. It is located in the Netherlands. ING Investment Management is merely an unincorporated business unit. It manages a number of separate funds, each fund being the actual owner of the shares. These funds are separate legal entities with their own directors. The funds were the entities that actually bought and sold the Network securities. ING Fund Management is the business unit that by contract provides administrative support to the funds. This candidate is, thus, a group of investment funds (or investors). It would qualify as a "group" within the meaning of the PSLRA. Its membership is small; it pre-exists the lawyers; and it had a pre-existing structure for making decisions.

The Milberg faction argues that "KBC Equity Fund" has the largest stake. KBC Bank & Holding Company, located in Belgium, owns KBC Bank (Belgium) and Kredietbank Luxembourg (also referred to as KB Luxembourg). By contract, KBC Bank Belgium provides administrative services to a series of KBC Funds, such as a "Technology" fund and a "US Small Caps" fund and so on. As with ING, these funds are the actual owners of the Network shares. Once again, they too could be properly treated as a group, for the reasons stated above.

Before the November 4 hearing and following, the Court received many submissions from the two sets of counsel, each declaring its institutional candidate to have the larger financial stake. Virtually all of these numerical submissions have been confusing and laced with errors and unspoken assumptions. The Court has labored over them, trying to reverse engineer the numbers. In the end, however, it is unnecessary to master the accounting gymnastics, for it seems clear that neither KBC or ING could satisfy the requirements of Rule 23 and neither would fairly and adequately protect the interests of the class. In other words, neither can qualify as the presumptive lead plaintiff and, if even they could, they have been proven unfit under Section 78u-4(a)(3)(B)(iii)(II).

With respect to ING, Weiss proposes that a young in-house lawyer at ING Investment Management named Eric Vrij would be the ING point person for this litigation. He graduated from law school three years ago and now works in the legal department. He has no litigation experience. In his deposition, Mr. Vrij admitted that an ING fund director signed off on ING's participation as a lead plaintiff before Vrij even briefed the fund directors on the issues in the case (Vrij Dep. 55-57). When asked whether the ING funds would be willing to provide testimony (a statutory requirement), he testified that it "depends" and that he did not "think the funds are willing to spend a lot of time on this at all" (Dep.58-59, 66, 77). Mr. Vrij suggested that ING also would draw lines in terms of participating in depositions (Dep.59) and producing documents (Dep.65). ING's decision to participate, he said, was subject to change "if the burden would reach a certain level" (Dep.80, 87). To travel to San Francisco for this case would be a burden (Dep.59, 88). In this connection, Mr. Vrij found it inconvenient to travel to San Francisco for the hearing to select a lead plaintiff even though the Court's order dated October 13, 1999, advised all candidates to be present. At his deposition, Mr. Vrij seemed confused regarding the state of this litigation and the importance of choosing a lead plaintiff. When asked whether he understood that the Weiss firm had filed a lead plaintiff motion on ING's behalf, Mr. Vrij responded, "What I know is, on the basis of the forms we have submitted, they must have made some filing to the court" (Dep.89-90). Later Mr. Vrij sent a fax to the Court stating, "The court session on the 4th November is essentially a competition between law firms striving to be appointed Lead Counsel. . . ." This remark fundamentally misapprehends the role of the lead plaintiff and the purpose of the hearing, which was to choose a lead plaintiff.

Mr. Vrij selected Weiss & Yourman merely because he received its massmailed form. He sent it in erroneously thinking it was necessary to do so to participate in any recovery (Dep.16-17). He has no experience in selecting litigation counsel and did not consider any other counsel candidates. He had no prior experience with Weiss & Yourman. He did not know that Weiss & Yourman's co-counsel (Stull, Stull & Brody) was already suing an ING affiliate in a different securities case (Dep.63). ING has no experience in U.S. litigation or securities litigation (Dep.69, 96). The Court concludes that ING lacks the experience and commitment to this case to represent the class fairly and adequately.

KBC has at least two major negatives. First, the record indicates that the two sister banks (the one in Luxembourg and the one in Belgium) are under investigation for criminal fraud violations of the laws in Belgium, that the authorities have conducted "raids" on the Belgium bank as part of its criminal fraud investigation, and that the CEO of KB Luxembourg has already been arrested for tax evasion, fraud, money laundering, conspiracy and consorting with criminal elements (Lema Dep. 69-71, 75). Even if this evidence were excluded at trial in this case (and it probably would be), the Court is unwilling to install an enterprise under such a cloud in a position of trust and confidence. KBC is otherwise preoccupied with its own legal problems.

Second, the lion's share of KBC's acquisition of Network securities was not in open-market transactions but via a merger. Two KBC funds owned shares of Dr. Solomon Group PLC ("Dr.Solomon"), which Network acquired during the class period. The exchange rate of shares would normally have been negotiated after a period of due diligence in which the leadership of Dr. Solomon would normally have had access to information not generally known to the investing public. The Milberg lawyers make this very point in challenging Candidate Julian Yates ("Yates") (sponsored by the Weiss firm), who acquired his Network stock "as the result of an acquisition rather than through an open market purchase" (Br.5).*fn4 The Milberg complaint itself, moreover, prominently portrays Network's accounting for the Dr. Solomon acquisition as a centerpiece of the fraud. The SEC-induced adjustments announced in April 1999 apparently focused on improper accounting treatment of Dr. Solomon's in process R & D (Compl., ¶¶ 29-53). It is entirely plausible that Network's supposed fraudulent bookkeeping allowed it to pay more for Dr. Solomon. All modern securities cases are premised on the fraud-on-the-market presumption adopted by a plurality in Basic, Inc., v. Levinson, 485 U.S. 224, 108 S.Ct. 978, 99 L.Ed.2d 194 (1988), a presumption that will not be applied when the efficient-market assumption is inapplicable. The theory is that investors rely on the integrity of the market and its ability to reflect in the stock price the effect of all publicly known information. Non-public information, however, is not reflected in the market price. KBC, unfortunately, would be encumbered with the unique question whether it acquired its Network shares on better terms than the investing public and not fully in reliance on the market price. Hanon v. Dataproducts Corp., 976 F.2d 497, 508 (9th Cir. 1992).*fn5

Finally, both ING and KBC are foreign organizations. They are distant. They were the only candidates not to attend the lead plaintiff hearing even though the Court requested all candidates to do so by order dated October 13, 1999. The distances involved and some differences in business culture would impede their ability to manage and to control American lawyers conducting litigation in California. At trial, the representative plaintiff would normally testify and attend. In a long trial, it would be obviously difficult for ING or KBC to attend in its entirety. The Court certainly does not say that a foreign investor could never qualify. But these factors, when added to the others set forth above, reinforce the Court's conclusion that neither KBC nor ING can fairly and adequately represent the class.

The candidate with the next greatest loss is the Board of Pensions And Retirement of the City of Philadelphia (Pennsylvania) ("Board"). During the class period, it purchased more than three million dollars worth of Network Securities (and sold none until after the class period), all open-market transactions. The Board claims to have a track record of successful prosecution of securities suits on behalf of class members. A representative of the Board appeared at the hearing.

One serious question about the Board's candidacy arises from the following PSLRA restriction:

  Except as the court may otherwise permit, consistent
  with the purposes of this section, a person may be a
  lead plaintiff, or an officer, director, or fiduciary
  of a lead plaintiff, in no more than 5 securities
  class actions brought as plaintiff class actions
  pursuant to the Federal Rules of Civil Procedure
  during any 3-year period.

15 U.S.C. § 78u-4(a)(3)(B)(vi).

The Conference Report, however, made clear that an institutional investor like the Board may be granted special leave to serve beyond the limit:

  The Conference Report seeks to restrict professional
  plaintiffs from serving as lead plaintiff by limiting
  a person from serving in that capacity more than five
  times in three years. Institutional investors seeking
  to serve as lead plaintiff may need to exceed this
  limitation and do not represent the type of
  professional plaintiff this legislation seeks to
  restrict. As a result, the Conference Committee
  grants courts discretion to avoid the unintended
  consequence of disqualifying institutional investors
  from serving more than five times in three years. The
  Conference Committee does not intend for this
  provision to operate at cross purposes with the "most
  adequate plaintiff" provision.

H.R. Conf. Rep. No. 104-369, at 35. As the Ninth Circuit recently observed, apart from the statute itself, the Conference Report for the PSLRA represents "the most reliable evidence of congressional intent." In re Silicon Graphics Sec. Litig., 183 F.3d 970, 977 (9th Cir. 1999). The Court is inclined to permit the Board to exceed the limit, as the PSLRA authorizes the Court to do.

A second negative is that the Board did not seek competitive bids from prospective counsel. In re Cendant Corp. Litig., 182 F.R.D. 144, 150 (D.N.J. 1998); Wenderhold v. Cylink Corp., 188 F.R.D. 577 (N.D.Cal. 1999). In fairness, however, the Board had allied itself with the NALPG. It may have felt there was no point in seeking bids, especially since the Board had used various counsel in the past and felt Barrack, its own firm in the alliance, had shown itself worthy in the past. Because the Board did not have a clear-cut opportunity to select counsel, the Court will require the Board, if it accepts the role of lead plaintiff, to interview multiple firms and to solicit competitive fee arrangements, as set forth below.

Accordingly, the Court finds that the Board is the presumptive lead plaintiff and finds that the presumption has not been rebutted. Subject to the Board's execution of the undertaking described hereafter, the Board of Pensions And Retirement of the City of Philadelphia will be appointed as the lead plaintiff.*fn6

The Question of a Co-lead Plaintiff

The Court is impressed favorably with a number of individual investors, such as Robert Vatuone and Raymond Moore, to name only two, several of whom traveled great distances (admittedly at counsel's expense) to attend the hearing. An argument could be made that an investor who lost a large share of his or her net worth has a larger financial interest, percentage-wise, than an investor with larger absolute dollars lost but for whom the loss is only a small fraction of its overall portfolio. It is tempting to add a single individual investor to co-lead the class. An individual would provide a different perspective and would temper the management prerogative of an institutional investor. Too, an individual investor would help tell the story to the jury in human terms (although such investors need not be lead plaintiffs to be presented at trial). The SEC, however, has urged that such co-leads not be appointed. The SEC urges that the fiduciary responsibility not be diluted. The Court will, for now, honor that view and appoint the Board as the sole lead plaintiff.

Cross Attacks on Counsel And Their Notice Process

Relentlessly, the Milberg and Weiss firms have traded inflammatory charges of fraud, incompetence, and solicitation — even allegations of criminal conduct. Each is unfit, the other says, to represent a class in this case. The Court has carefully read all the submissions and will not burden an already lengthy memorandum except to address these points.

First, the Milberg alliance contends that the Weiss firm committed criminal violations of the securities laws by reimbursing broker/dealers for the nominal costs to circulate a Weiss letter to Network investors known to them.*fn7 Judge Armstrong, the undersigned's predecessor in this case, agreed with half of Milberg's argument, finding that acceptance by broker/dealers of reimbursement for mailing costs violated Section 78o(c)(8). Judge Armstrong held, however, that the Weiss firm did not violate any law in making the reimbursements. The Milberg firm moved for reconsideration, claiming it was criminal aiding and abetting to make such payments to the broker/dealer. 18 U.S.C. § 2. The undersigned then asked the SEC for its views. In its excellent amicus submission, the SEC concludes that Section 78o(c)(8) prohibits payment for the value of referring potential clients but not for merely reimbursing for reasonable expenses. The SEC notes that "the effect of mailings could be to encourage additional investors to come forward, negotiate with and retain counsel [of their own] and move to be lead plaintiff, thereby enhancing competition for lead plaintiff and lead counsel" (Br.31). The Court agrees. Like the SEC, however, the Court does not bless the particular mailings used in this case, as explained below. Because of the importance of the issue, the Commission's amicus brief is appended to this opinion.

Second, the Weiss firm reminds us that the Milberg firm was singled out by Congress as emblematic of the old regime (Br.2, 10):

  A direct target of Congress, singled out for much of
  the criticism of lawyers who manipulate the
  securities laws to serve their own interest, was
  Milberg Weiss Bershad Hynes & Lerach ("Milberg"),
  whose name partner, William Lerach, known as the
  "King of Strike Suits," had boasted, "I have the
  greatest practice in the world because I have no
  clients. I bring the case. I hire the plaintiff. I do
  not have some client telling me what to do. I decide
  what to do."

The Court rejects this argument. It is true that Congress singled out the Milberg firm to illustrate what was wrong with the old regime. But the PSLRA was not a bill of attainder. The Milberg firm has as much right as anyone else to seek the role of class counsel under the PSLRA.

Third, the Weiss firm takes offense at the Milberg firm having tested the bona fides of the Weiss firm's investor forms (Br.4, 11), claiming these attempts interfered with its "clients," violated ethical rules and constituted "discovery" forbidden by Judge Armstrong's order. The Court disagrees. The Weiss forms were not engagements or retention letters and did not come close to establishing attorney-client relationships. Accordingly, there was no ethical bar to calling the investors to check the bona fides of the form. Many of them, in fact, recanted and sent in declarations (via the Milberg firm) explaining how they had been misled by the form. This self-help was not "discovery" within the meaning of the PSLRA.*fn8

Finally, and of importance, the Court finds the initial notices published by all parties to have been imperfect. While arguably the published notices literally covered the statutory requirements, the notices were expanded into puff pieces steering investors toward registering with counsel and steering them away from independently seeking the role of lead plaintiff, as the PSLRA intended. As for the forms, they looked too much like claim forms and the recipients could easily have thought that they needed to sign up to participate at all. In the future, all such notices should (i) make clear that investors may apply for the role of lead plaintiff through their own counsel and need not necessarily apply through counsel publishing the notice and (ii) make clear that filling out a form or contacting counsel at the initial stage is not a prerequisite to participation in any class recovery.

Duties of Lead Plaintiff

The PSLRA seeks to place the lead plaintiff in charge of conduct of the litigation on behalf of the class. The lead plaintiff owes a fiduciary duty to all members of the proposed class to provide fair and adequate representation and actively to work with class counsel to obtain the largest recovery for the proposed class consistent with good faith and meritorious advocacy. In this case, the lead plaintiff shall take affirmative steps to keep itself fully informed at all times on the progress and status of the case, the strengths and weaknesses of the case, the prospects for settlement, and the resources invested in the suit or proposed to be invested. With respect to each major litigation event, such as important motions, settlement discussions, trial and trial preparation, the lead plaintiff shall actively inform itself in advance and shall have the authority and responsibility to direct counsel, after, of course, receiving the advice of counsel. To minimize reduction from recovery for attorneys' fees, the lead plaintiff shall consult with counsel in advance to determine whether major tasks proposed by counsel are likely to add more value to the case than would be incurred in time and expense. In this connection, the lead plaintiff shall review monthly time and expense records prepared by class counsel. The lead plaintiff shall meet in person with counsel at least quarterly to review the progress and status of the case, shall attend all major hearings and shall attend all sessions of the trial, at a minimum, where the jury is present. Reasonable travel, telephone and business expenses incurred as a result of the lead plaintiff duties, if detailed and itemized, may be reimbursed as expenses from any recovery. The lead plaintiff shall recommend class counsel after completing the steps set forth below. To carry out its responsibilities, the lead plaintiff shall identify a single officer or internal counsel with experience in managing litigation to be primarily responsible for carrying out the duties set forth herein.

Selection of Counsel to Represent the Class

Section 78u-4(a)(3)(v) provides:

  The most adequate plaintiff shall, subject to the
  approval of the court, select and retain counsel to
  represent the class.

Subject to this Court's approval, the Board proposes the firm of Barrack, Rodos & Bacine, including one of its members, Sheldon L. Albert, Esq., to represent it in this action. This firm has an office in San Diego and its main office in Philadelphia. The firm is experienced in securities class actions. Mr. Albert appeared at the hearing and set forth the experience and track record of his law firm. The firm and Mr. Albert have the requisite experience.

The Digital Lightwave imbroglio involving the Barrack firm is a concern, however. The Board did not investigate this matter prior to its recommendation. The court-approved settlement in that case is now being challenged on appeal. Class counsel (the Barrack firm and two others) failed to obtain lead plaintiff approval of the settlement in advance from one of ten lead plaintiffs. Ari Parnes v. Digital Lightwave, Inc., Action No. 98-152-CIV-T-24E (M.D.Fla.). The SEC's brief on appeal states in part "the lead plaintiff group in this case did not and was not allowed to perform its plaintiff role" because at least one of the members of the group "was not even apprised that he had been named as a group member until well after a settlement in the case was agreed to and submitted to the court for approval" (SEC Br. at 3). At the November 4 hearing, Mr. Albert of the Barrack firm gave a plausible explanation for the failure to communicate with that client. The SEC points out that the root of the problem lay in the district court being erroneously led to appoint as lead plaintiff a group (or subgroup) of ten investors with no coherency for decisionmaking. As a result, when the time came for the most important decision of all — the terms of settlement — they were not presented to or approved by all lead plaintiffs. It also appears that the multiplicity of law firms for the plaintiff class contributed to the snafu. By contrast, in the present case, no such amorphous group will be appointed. One lead will be appointed. Nor will there be a multiplicity of law firms. One firm shall serve.

The lead plaintiff owes a fiduciary duty to obtain the highest quality representation at the lowest price. A submission by Professor Joseph Grundfest of the Stanford Law School in the McKesson case demonstrates that competitive bidding for the lead counsel role tends to reduce substantially the amount of fees awarded and tends to increase the amount of recovery to the class. Declaration of Joseph Grundfest Regarding Procedures Employed in the Selection of Lead Plaintiff and Lead Counsel Pursuant to the Private Securities Litigation Reform Act of 1995, dated Oct. 7, 1999, In re McKesson HBOC Securities Litig., Action No. 99-20743 RMW (N.D.Cal.). Because the Board lumped itself in the NALPG confederation, it did not have a clear opportunity to conduct such competitive bidding.

Accordingly, the Board must re-open its consideration of counsel; promptly publicize a request for written proposals from counsel; evaluate the proposals; and interview candidates as appropriate — all to obtain the highest quality representation at the lowest price. The Board must then recommend a single law firm and provide under seal to the Court a full description of the Board's selection process, its conclusion, and its reasons. All of the proposals received should also be submitted under seal to the Court by the Board. The Board may still, after full consideration of all candidates, recommend the Barrack firm, but it should do so only after an honest effort to select the highest quality counsel at the most efficient price. The Board should also identify the single law firm which would be its second choice and should state its reasons, all under seal. The Board shall make its sealed recommendations to the Court by December 17, 1999.

Each law firm proposal shall at least include (i) the firm's experience in securities class actions and, by case as practicable, its track record in results achieved (in terms of net dollars to the class); (ii) the securities and trial experience of the proposed individual to be lead counsel, the second chair and a commitment that the lead or the second chair shall conduct all important depositions, court hearings and settlement negotiations, and that the lead shall conduct the trial; (iii) a complete disclosure of any conflicts and contributions made to Board or City officials within the last three years; (iv) two fee proposals, one based on percentage of recovery and the other based on hourly rates (lodestar method). Joint proposals by two or more law firms will not be ...

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