On The Case

Want to get your shareholder class certified? Don’t be ‘utterly disingenuous’ with the judge

(Reuters) - My eyeballs are aflame from U.S. District Judge Colleen McMahon’s scorching decision (2020 WL 5796763) denying class certification in a securities fraud suit against the pharmaceutical company Allergan. How often do you read an opinion in which a judge accuses a lead plaintiff and its lawyers of engaging in a “secret workaround” and making “hollow” and “disingenuous” promises to the court?

The problem was not the substance of the shareholder class action. Judge McMahon said that the case, which alleges that Allergan’s share price was artificially inflated by the company’s failure to warn investors adequately about the safety of certain of its breast implants, should “absolutely” proceed as a class action. (Allergan’s lawyers did not respond to my email; the company has denied that it deceived investors.) “It is a garden-variety securities fraud suit, a type of action particularly well suited to class treatment,” the Manhattan judge wrote. It’s so straightforward a case, Judge McMahon said, that a single plaintiffs’ firm could easily shoulder the burden of the litigation.

And therein was the problem for the lead plaintiff in the Allergan case, the Boston Retirement System, and its two law firms, Pomerantz and the Thornton Law Firm.

Yes, two law firms. The Boston pension fund, which Judge McMahon appointed as lead plaintiff in March 2019, was represented by two law firms on the Allergan case. Pomerantz signed pleadings and letters to the court as lead counsel for BRS. Thorton appeared as “additional counsel.”

Now, you may well be thinking that lead plaintiffs in securities class actions often split work between two or even more plaintiffs’ firms. What’s the big deal if BRS wanted Pomerantz and Thornton to divide the labor?

The big deal was that Judge McMahon specifically told BRS in her lead plaintiff order not to use more than one law firm. Both Pomerantz and Thornton had signed the Boston fund’s briefs backing its bid to serve as lead plaintiff. Judge McMahon said she would not appoint both firms as lead counsel to avert inflated legal fees for the class. The very next day, Pomerantz informed the judge in a letter that it was BRS’ choice for lead counsel.

I’ll pause here to say that Jeremy Lieberman of Pomerantz told me on Wednesday that his firm, Thornton and their client never intended to mislead Judge McMahon. Nor did the shareholder firms duplicate one another’s work. As I mentioned, Pomerantz did not hide Thornton’s involvement: Thornton lawyers’ names appeared on BRS’ amended complaint and briefs opposing Allergan’s motion to toss the case.

Judge McMahon, by her own subsequent admission, did not pay much attention to the signature blocks on BRS’ subsequent pleadings. The case moved along. In September 2019, the judge partially denied (2019 WL 4686445) Allergan’s motion to dismiss the class action, ruling that shareholders could proceed with their claim that the company falsely implied that its implants were no more linked to cancer risk than other implants on the market. BRS moved to certify the shareholder class last January.

Then came a bombshell motion from Allergan’s lawyers at Cleary Gottlieb Steen & Hamilton. Allergan raised standard arguments about shareholders’ failure to show that its alleged misrepresentations impacted the company’s share price. But it also argued that BRS was not an adequate representative of the class – not just because of the pension fund’s unique trading patterns but also because it had “defied the court’s order that it select a single law firm.” Notwithstanding Pomerantz’s letter assuring Judge McMahon that it was BRS’ lead counsel, the Allergan motion said, Thornton was in fact continuing to serve as co-lead counsel. The lead plaintiff, Allergan argued, was not serving the class by allowing two firms to run up fees on the case, especially after Judge McMahon’s order prohibiting just such an arrangement.

In a reply brief, Pomerantz and Thornton said they’d been transparent about Thornton’s continued role in the case, with the firm appearing as “additional counsel” on all of BRS’ filings. “Defendants now seek to transform this into a negative with baseless innuendo that the firms’ fee-sharing agreement will increase attorneys’ fees,” the shareholder firms said. “They are wrong … There is nothing inappropriate about the fee-sharing agreement among counsel.”

Judge McMahon thought otherwise, to say the least. The specifics of the fee-sharing agreement between Pomerantz and Thornton were redacted from both sides’ briefs. But the judge revealed it: Pomerantz was due to receive 55%, Thornton 45%. Judge McMahon said in Tuesday’s opinion that the near-equal split gave the lie to representations that Pomerantz was sole lead. So did testimony from a BRS official who said under oath that Thornton’s responsibilities did not change after Pomerantz was designated lead counsel, the judge said.

“This court is not fooled by the rebranding of Thornton as ‘additional counsel,’” wrote Judge McMahon, who conceded that she “probably should have noticed Thornton’s name on the (amended complaint) and called plaintiff’s counsel out at that point.” (The judge said she would be on the lookout in future shareholder class actions.) But the fault, she said, was not hers. BRS and its lawyers, she said, had violated both the letter and spirit of her order appointing the fund to serve as lead plaintiff.

“Full transparency required advising the court that, despite its ruling, two law firms intended to continue working on this matter, and had entered into a fee-sharing arrangement,” the judge wrote. “It required notifying the court that Thornton’s role in the conduct of this lawsuit had not changed one iota as a result of my order directing that there not be two lead counsel … It is undisputed that the court was not notified of any of this by BRS, or by Pomerantz, or by Thornton. That is unacceptable.”

Pomerantz’s Lieberman reiterated that the shareholder firms disclosed Thornton’s role in BRS’ filings. “In hindsight, we could have done better, but I don’t think you can credibly say we were trying to hide the ball,” Lieberman said. “You go in with a perception of what is acceptable. I didn’t know this was not acceptable.” Thornton lawyers Guillaume Buell, Krista Rosen and Madeline Korber didn’t respond to my email.

Judge McMahon did not hold oral argument on the class certification motion, Lieberman said, which meant that the shareholder firms didn’t have a chance to explain themselves. He said that Pomerantz did “the majority of work,” but that the shareholder firms should have told Judge McMahon more transparently that even with Pomerantz as lead, Thornton would still “play a substantial role.”

Judge McMahon’s decision invited other Allergan investors to move to take over leadership of the class action. The Boston pension fund’s biggest competitor during lead plaintiff briefing was the DeKalb County Pension Fund. I reached out to Faruqi & Faruqi, which represented DeKalb as a lead plaintiff candidate, to ask if the fund would seek appointment now that BRS is out. I didn’t hear back.

I asked Lieberman if he would seek fees in the event of a settlement with Allergan. He didn’t rule it out. “We certainly have benefitted the class,” he said.