## Facts

- After accounting irregularities were disclosed at Cendant Corporation, investors filed numerous securities-fraud class actions that were consolidated in the District of New Jersey.
- Multiple movants sought appointment as lead plaintiff under the Private Securities Litigation Reform Act of 1995 (PSLRA).
- The district court appointed a group of three public pension funds (the “CalPERS Group”) as lead plaintiff, finding it had the largest financial interest and satisfied Rule 23 typicality and adequacy.
- Rather than approve the lead plaintiff’s selected law firms outright, the district court conducted an auction to select lead counsel, while allowing the CalPERS Group’s chosen firms to match the lowest qualified bid; they did so and were appointed.
- The litigation settled for a $3.2 billion recovery package.
- The district court awarded class counsel $262 million in attorneys’ fees, exceeding the maximum fee contemplated by the lead plaintiff’s original retainer agreement with counsel.
- Objecting class members appealed (1) the lead-plaintiff designation, (2) the auction procedure for selecting counsel, and (3) the fee award.

## Issues

1. Whether the district court abused its discretion under the PSLRA by appointing a cohesive group of institutional investors as lead plaintiff based on largest financial interest and Rule 23 typicality and adequacy.
2. Whether, in a PSLRA action, a district court may use an auction to select lead counsel as the initial approach rather than giving substantial weight to the lead plaintiff’s choice.
3. Whether the $262 million fee award was reasonable, including what weight should be given to an ex ante fee agreement negotiated by a sophisticated lead plaintiff and how courts should assess fees in very large settlements.

## Decision

- Affirmed the appointment of the CalPERS Group as lead plaintiff.
- Held the district court abused its discretion by using an auction to select lead counsel as a matter of first resort in a PSLRA case.
- Vacated the $262 million fee award and remanded for reconsideration, directing the district court to account for the ex ante retainer terms and to apply careful reasonableness review.

## Legal Principles

- Under the PSLRA, the presumptively “most adequate plaintiff” is the movant with the largest financial interest who otherwise satisfies Rule 23 typicality and adequacy; the presumption is rebuttable.
- The PSLRA permits appointment of a group as lead plaintiff when the group is sufficiently cohesive, efficient, and capable of supervising counsel and representing the class fairly.
- The PSLRA contemplates that the lead plaintiff, subject to court approval, selects and retains counsel; courts should generally defer to that selection absent inadequacy or clearly unreasonable terms.
- Auctions to select class counsel are not categorically forbidden, but they should not displace the PSLRA’s lead-plaintiff selection-and-retention structure as the default initial mechanism.
- District courts retain an independent duty to ensure class-action fee awards are reasonable, even when negotiated by sophisticated institutional plaintiffs.
- In mega-fund recoveries, the percentage-of-recovery method may be used with a lodestar cross-check, and negotiated ex ante fee agreements are strong evidence of market pricing but do not eliminate judicial review.

## Conclusion

The Third Circuit sustained the PSLRA’s investor-control model by approving a cohesive institutional lead-plaintiff group, limiting court-run counsel auctions as an initial step, and requiring renewed scrutiny of a large fee award in light of market-negotiated retainer terms and reasonableness safeguards for the class.


In re Cendant Corp. Litigation, 264 F.3d 201 (3d Cir. 2001)