Lead Plaintiffs in Securities Class Actions
In a securities class action, a Lead Plaintiff is most often a group or single shareholder that is selected by the court to represent the class and is usually the party with the most stake in the financial outcome sought by the class as a whole. Whether an individual, group of individuals, or institutional investor, the Lead Plaintiff is responsible for selecting counsel for the class and for overseeing counsel and the lawsuit in general.
How to Become a Lead PlaintiffPursuant to the Private Securities Ligation Reform Act of 1995 (PSLRA), the plaintiff who files a securities class action lawsuit is required, within 20 days, to publish a widely-circulated national business-oriented publication which must include a notice of the filing of the lawsuit and a notice of the 60-day deadline for class members to file a motion requesting to be designated as lead plaintiff. No later than 90 days after the notice is published, the court must consider any motions requesting appointment as lead plaintiff.
The PSLRA establishes a rebuttable presumption that the movant or movant group with the largest financial interest shall be the Lead Plaintiff. The presumptive Lead Plaintiff must have also timely filed a motion, meet the typicality and adequacy requirements of Rule 23(a)(3)-(4), and be otherwise sufficient to represent the putative class. The presumption may only be rebutted upon proof by a member of the purported class that the presumptive plaintiff will not fairly and adequately represent the class or has unique defenses making it incapable of adequately representing the class.
The Responsibilities of the Lead PlaintiffOnce the Lead Plaintiff is appointed by the court, they may select and retain counsel of their choosing to represent the class which importantly includes negotiating the contingent fees Lead Counsel will receive in the event of a settlement or judgment. The Lead Plaintiff is encouraged to have both oversight over, and input into, the litigation of a securities class action beyond that of other class members. Responsibilities of the Lead Plaintiff include being responsible for managing the litigation principally by overseeing and monitoring the progress of the action and the efforts of Lead Counsel. A Lead Plaintiff will review, comment, and make suggestions on important court filings and other related documents pertaining to the prosecution of the class action.
The Lead Plaintiff will also participate in discovery, including gathering information that may involve answering interrogatories, producing documents and other evidence, and their sworn deposition taken before a court reporter. The Lead Plaintiff also attends hearings, trials, and other court proceedings. Perhaps the most important role of the Lead Plaintiff is to consult with the Lead Counsel about any possible settlements. Once settlement discussions began, the Lead Plaintiff will have an opportunity to be active in all negotiations. This may include attending mediations and being active in all aspects of the settlement, including the amount of the financial recovery, the makeup of the consideration, the proposed plan of allocation for distribution of the recovery to the class, and any corporate governance demands aimed at deterring similar future conduct that may be detrimental to shareholders. The Lead Plaintiff must approve any settlement before it is presented to a court.
The Benefits of Serving as the Lead PlaintiffServing as a Lead Plaintiff has several advantages and important benefits. First, a Lead Plaintiff is able to negotiate more competitive attorney fees and reduce other litigation costs by actively monitoring the class counsel. Second, Lead Plaintiff has the benefit of being able to manage the litigation primarily by overseeing and monitoring the progress of the action and the efforts of counsel, and being able to review and comment on important filings and other documents pertaining to the prosecution of the action. Third, is no financial risk in serving as a Lead Plaintiff because Lead Counsel advances all costs and expenses incurred int the prosecution of the case and will be reimbursed only if there is a successful settlement or judgment recovery on behalf of the class. Fourth, Lead Plaintiff has the benefit involved and active in all negotiations relating to any settlement. Finally, Lead Plaintiffs that continue owning the stock of the defendant will enjoy the long-term benefits from governance reform resulting from the litigation. Successful lawsuits with large punishments might have a stronger disciplining effect on a defendant*s management and raise awareness of the importance of corporate governance.