In 2018, a securities class action was filed against Allergan, alleging that the company concealed risks associated with breast implants.  Boston Retirement System was appointed lead plaintiff, and the case survived a motion to dismiss.  The court refused to certify the class, however, because of perceived misconduct by lead counsel Pomerantz.  See In re Allergan PLC Sec. Litig., 2020 WL 5796763 (S.D.N.Y. Sept. 29, 2020).

Specifically, Judge McMahon held that Pomerantz had defied her original order appointing it as lead counsel by taking on another firm – Thornton – as a kind of shadow co-lead counsel.  When Pomerantz was appointed, McMahon specifically rejected its request to name Thornton as co-lead because, in her words, “the involvement of multiple firms tends to inflate legal fees.”  Despite her order, well:

Thornton has not only remained involved in this litigation, albeit under the rubric of “additional counsel,” but that it has effectively played the role of co-lead counsel – to the point that BRS’ corporate representative has testified under oath that Thornton’s responsibilities did not change at all in response to the lead plaintiff order. It is clear that Thornton has been fully involved in every aspect of this case to date. It has duplicated the efforts of Pomerantz by working on the CAC (it signed the pleading, so it has to have worked on it) and the motions to dismiss and for class certification (ditto), by joining in meet and confer sessions with defense counsel, participating in depositions, and by getting (and so obviously reviewing) all correspondence.

Moreover, I have learned, in connection with the prosecution of this motion, that the Pomerantz and Thornton firms have entered into an agreement to split any fee earned from the prosecution of this lawsuit almost down the middle. The agreement calls for the fee earned by lead counsel to be split with 55% going to Pomerantz and 45% to Thornton – a division that is so close to the firms’ original agreement of a 50-50 split, reached at a time when they anticipated being appointed co-lead counsel as to be a rather transparent substitute for co-lead counsel status.  This amended agreement between the two firms was dated six days after BRS designated Pomerantz as lead counsel.  The court was not informed about this arrangement, by BRS or anyone else.

This Court is not fooled by the rebranding of Thornton as “additional counsel.”

So, McMahon refused to allow Pomerantz and Boston Retirement System to continue to represent the class, and she reopened applications for lead plaintiff.

In response, one of the original movants – DeKalb County Pension Fund, represented by Faruqi & Faruqi – renewed its petition, along with several new movants, including Union Asset Management Holding AG represented by BLBG and the General Retirement System of Detroit represented by Abraham, Fruchter & Twersky. 

On December 7, McMahon granted the DeKalb petition – despite the fact that other movants had larger losses, which is the typical requirement for lead plaintiff status – because she believed it would be improper to appoint a plaintiff who had not moved for lead status when the case was originally filed.  And in her order, she specified:

DeKalb’s motion to have Faruqi and Faruqi appointed as lead class counsel is granted, on the condition that the Faruqi firm and none other serve as lead counsel and perform all services for which recompense may some day be sought.

So.

Here’s the thing.

The way McMahon describes it, it does sound like Pomerantz and Thornton defied her original order, and that is certainly a legitimate grounds for refusing to appoint Pomerantz as class counsel.

But the fact is, in securities cases, plaintiffs’ firms always coordinate with other firms.  Not necessarily as co-lead, but to perform tasks like routine discovery, or depositions in other cities, or smaller motion practice.  Plaintiffs’ firms tend to have fewer attorneys than defense firms, and they often don’t have the staff to maximize the value of a large case without getting at least some additional assistance.  And while I won’t deny that these arrangements, like any billing arrangement, may be abused, that isn’t necessarily the case; much of the work is legitimate, and takes some of the burden off the lead firm.  When it comes to co-leads specifically, they may ultimately be valuable – I have no opinion on their general worth – but at least one way they may inflate fees is that every decision has to get approval from partners on both sides, which, while done in good faith, may add to the hours billed.  But that isn’t a concern if additional counsel are brought on to handle discrete tasks.

Point being, even among the best plaintiffs’ firms, a complete bar on enlisting other firms could be burdensome.

Faruqi & Faruqi is … not among the best plaintiffs’ firms.  In the merger context, they’ve been repeatedly accused of filing nuisance cases and settling for immaterial disclosures without engaging in meaningful discovery.  Their recoveries in securities class actions, specifically, are less than spectacular. 

That doesn’t mean they can’t prosecute the Allergan action effectively, but it does suggest they’d derive significant benefit from being able to obtain at least some assistance from other firms.

McMahon’s decision, in other words, may represent an appropriate rebuke to Pomerantz, but it is not in the best interests of the class.

And to me, it all highlights the fallacy of California Public Employees’ Retirement System v. ANZ Secs., Inc (which I blogged about here).  There, the Supreme Court held that the filing of a securities class action does not toll the repose period for subsequently filed individual actions.  Which means that any Allergan class member who trusted Pomerantz, but not Faruqi, to lead the litigation will have to worry about the clock if they want to file their own individual suit.  And down the line, if Faruqi ultimately seeks to settle the action on the class’s behalf, dissatisfied class members can object but by then, they may not have any realistic chance of opting out; they’ll be stuck with whatever deal the court approves – a fact that will be known to both Faruqi and to the Allergan defendants at the outset of negotiations.