Aggregation, Auctions, and other Developments in the Selection of Lead Counsel Under the PSLRA

The Private Securities Litigation Reform Act of 1995 (the “PSLRA”) reflects an innovative congressional effort to refine securities fraud class actions. In adopting the PSLRA, Congress recognized that although the class action is a valuable tool for increasing plaintiff access to the legal system, its structure presents opportunities for abuse. In particular, collective action problems and small claimant stakes limit plaintiff participation in litigation decisions. Decisions are made by entrepreneurial lawyers who effectively control the litigation. Plaintiffs’ lawyers have a substantial interest in the litigation—frequently a larger interest than any individual class member. Lawyer control of class actions coupled with the potential divergence between the interests of the lawyers and those of the class creates a risk that litigation decisions will not reflect the best interests of the plaintiff class or society as a whole. Although the entrepreneurial lawyer is central to the functioning of the class action, structural problems raise concerns of litigation malfunction. Courts have been unsuccessful in addressing these problems despite their efforts to oversee litigation decisions and their broad control over the conduct of class actions and the award of attorneys’ fees. Accordingly, Congress responded by adopting a mechanism in the PSLRA for the appointment of a statutory lead plaintiff. The statute reflects the expectation that the lead plaintiff, presumptively the investor with the largest financial interest in the litigation, will oversee the conduct of the case and monitor the decisions of class counsel. This enhanced client monitoring has the potential to reduce agency costs and improve litigation decisions.