(Reuters) - Securities fraud litigation can be a cutthroat business for plaintiffs’ firms. Just look at the newly-released report from NERA Economic Consulting. Despite a spike in the number of securities filings – mostly the result of M&A challenges shifting to federal court from Delaware Chancery Court after Delaware’s crackdown on fees for shareholder lawyers – it’s tougher than ever to win old-school fraud class actions. A record-setting 116 securities fraud cases were dismissed in 2017, according to NERA. Only 80 class actions settled, a near-low – and the average value those settlements, NERA found, was less than $25 million, the lowest in a decade.
Good securities fraud class actions, in other words, are hard to come by. Harder still is winning the right to control the cases as lead counsel. The competition to be named lead counsel in promising securities fraud class actions does not always cast shareholder lawyers in their most flattering light. The latest example - in a class action alleging that the real estate investment trust Omega Healthcare Investors misled shareholders about the deteriorating finances of some of its long-term care facilities - exposes some of the tricks of the shareholder lawyers’ trade.
The most important revelation from the Omega lead plaintiff competition is that investors don’t always know what their lawyers are up to. I know, cynics among you will say that’s not a revelation at all. But rarely will you see facts as these.
Glenn Fausz was an Omega shareholder. He lost nearly $50,000 when the REIT’s share price dipped last fall. In late November, as Fausz explained in a declaration, he signed a retainer agreement with the Law Offices of Howard G. Smith. Then, after signing the retainer and submitting a sworn certification of his losses to Smith, Fausz also signed up with a different plaintiffs’ firm, Faruqi & Faruqi.
That’s understandable. When Congress changed the rules for securities class actions back in 1995, lawmakers wanted to discourage shareholder firms from seizing control of cases by racing to file suits in the name of investors with only a small stake. Under the Private Securities Litigation Reform Act (PSLRA), plaintiffs must issue a notice when they file a securities class action to allow other investors to vie to lead the cases. Nowadays, some law firms specialize in issuing press releases about new securities class actions – even if other firms filed the cases – and screening the investors who respond. In the Omega case, according to a brief filed Tuesday by Robbins Geller Rudman & Dowd, plaintiffs’ firms issued no fewer than 24 press releases inviting Omega investors to contact them.
Though it’s not clear from his declaration, Fausz probably responded to more than one press release, which is how he ended up hiring two different plaintiffs’ firms. Like I said, an understandable development.
But what’s not so understandable is that two different sets of plaintiffs’ lawyers both filed lead plaintiff motions purportedly on Fausz’s behalf.
Pomerantz and Glancy Prongay & Murray asked U.S. District Judge Naomi Reice Buchwald of Manhattan to appoint a group of five Omega shareholders, including Fausz, as lead plaintiffs in the case (with Pomerantz and Glancy Prongay as their lawyers, of course). On the same day, Faruqi & Faruqi moved for Fausz to lead the case on his own.
Pomerantz and Glancy Prongay withdrew their lead plaintiff motion on Jan. 25, but the withdrawal didn’t stop Faruqi and Robbins Geller from questioning how the firms came to claim Fausz as a client. “Pomerantz and Glancy filed (their lead plaintiff) motion in bad faith,” Faruqi said in a Jan. 30 brief. Citing Fausz’s declaration, Faruqi said the investor had no agreement with the Pomerantz or Glancy firm and did not know they planned to include him as part of a group seeking appointment as lead plaintiff. He wasn’t even aware the group existed.
Faruqi said Pomerantz and Glancy had deliberately redacted the name of referring counsel Howard Smith from Fausz’s certification to make it look like Fausz had signed up to be part of their “cobbled-together,” “lawyer-driven” investor group. Robbins Geller’s brief said the Fausz fracas strongly suggested that neither Pomerantz nor Glancy Prongay had actually spoken with their purported client before enlisting him as part of a “menagerie of previously unaffiliated individuals” requesting to be appointed lead plaintiff.
Faruqi and Robbins Geller raised the prospect of undisclosed fee-sharing agreements between Pomerantz, Glancy and Brower Piven, which represents a different lead plaintiff candidate in the Omega case. When Pomerantz and Glancy withdrew their motion, they said Brower Piven’s client seemed to be the best alternative lead plaintiff. Robbins Geller’s brief pointed out that in a different securities class action in Manhattan federal court, DeSmet v. Intercept Pharmaceuticals, the Pomerantz firm recently admitted in response to an order from U.S. District Judge Lewis Kaplan that it had entered into an undisclosed co-counsel agreement with another firm representing a lead plaintiff candidate. “In light of DeSmet,” the Robbins Geller brief told Judge Buchwald, “this court should inquire as to whether any such agreements exist in this case, whether the clients are aware of and consented to the agreements before counsel agreed to them and what the terms of any such agreements are.”
Faruqi’s brief said Judge Buchwald should flat-out refuse to allow Pomerantz or Glancy Prongay to receive any fees from the Omega case. “If the PSLRA’s goal of ending lawyer-driven litigation is to have any hope of succeeding, (Pomerantz and Glancy) should not be permitted to profit from their bad behavior,” the Faruqi brief said, “particularly where the worst of this behavior is outsourced by the firms listed on the papers to a tiny firm whose identity and role is intentionally concealed from the court and other movants.”
For what it’s worth, Faruqi dropped its bid for Fausz to be appointed lead plaintiff so it no longer has a dog in the Omega hunt. Robbins Geller is continuing to push for its client, the Carpenters Pension Fund of Illinois, to be named lead, although its losses appear to be smaller than those of Brower Piven’s client. So it has a motive to throw shade at Brower Piven’s competing candidacy.
In the bigger context, plaintiffs’ lawyers who manipulate the existing system to win lead counsel appointments are contributing to the possible demise of their entire business model. The Trump administration is thinking about allowing corporations to force shareholders to arbitrate their claims instead of suing in class actions. It’s a lot harder to insist investors must have a right to sue when it looks as though plaintiffs’ lawyers are driving cases.
Jeremy Lieberman of Pomerantz declined to comment. Lionel Glancy and Robert Prongay did not respond to an email seeking comment. Howard Smith and David Brower did not respond to my phone messages.