As judges push for diverse lead counsel in MDLs and class actions, PSLRA is obstacle

(Reuters) - There’s recently been notable progress toward diversity at the top of the plaintiffs bar, thanks to federal judges using the lead counsel appointment process in class actions and multidistrict litigation to promote women and minority lawyers.

Only eight years ago, when U.S. District Judge Harold Baer of Manhattan came up with the idea of requiring class counsel to include women and lawyers of color on their litigation teams, he was considered a renegade and was chastised by U.S. Supreme Court Justice Samuel Alito.

Now, a leading guide to best practices for MDL and class action judges advises them to “make appointments consistent with the diversity of our society and justice system.” Judges have taken pains in just the last several months to appoint diverse leaders of product liability MDLs involving the pharmaceuticals Zantac and Elmiron and a data breach MDL against the cloud computing company Blackbaud.

But federal securities class actions are another story, thanks to the Private Securities Litigation Reform Act.

The PSLRA, as you know, was intended to shift control of shareholder class actions away from plaintiffs' lawyers and into the hands of institutional investors, like pension funds. Congress created a statutory framework for the selection of lead plaintiffs based on the presumption that class actions should be led by investors with the biggest stake in the outcome of the case. Most judges (with some notable exceptions) then defer to lead plaintiffs to pick their own lead counsel.

That process doesn’t leave much room for judges to demand diversity.

You can see very clearly the dichotomy between federal securities class actions and other kinds of cases in a pair of rulings this week in the MDL against the trading platform Robinhood and other defendants accused of betraying “meme stock” traders in frenzied short-squeeze buying and selling last January.

The MDL is overseen by U.S. District Judge Cecilia Altonaga, who divided the case into four tranches: antitrust claims; state-law claims against Robinhood; state-law claims against other defendants; and federal securities claims.

The judge split the selection of lead counsel for the federal securities claims from the process of appointing plaintiffs firms to head up the other three tranches. Two law firms -- The Rosen Law Firm and Bursor & Fisher -- filed briefs on behalf of investors seeking appointment as lead plaintiffs in the federal securities class action. Neither firm mentioned diversity in their briefs.

Instead, as you would expect, the firms cited the PSLRA and argued that their clients were best qualified to lead the class action because their investment losses gave them the biggest stake in the outcome of the litigation.

Like the two law firms vying for leadership, Altonaga did not mention diversity in her May 17 ruling on the lead plaintiff motions. The judge did not pick either prospective lead plaintiff. Under the PSLRA, she said, investors had not received adequate notice of the prospective class action. The judge ordered The Rosen Law Firm, which had filed the first federal securities suit in the MDL, to publish a new notice with information about the MDL case number.

Contrast that with the lead counsel selection process in the other three tranches of the MDL, in which diversity was a key factor. Altonaga told prospective lead lawyers to be prepared to answer questions about bringing diverse viewpoints to the litigation. Many of the 13 lawyers who applied for a leadership role, including Natalia Salas of The Ferraro Law Firm and Dennis Ellis of Browne George Ross O’Brien Annaguey & Ellis, specifically highlighted their firms’ diverse membership in their briefs. (One firm, Klafter Lesser, preemptively informed the judge that although there are no women in its ranks at the moment, it “is now in the process of rebuilding a diverse group of attorneys.”)

Altonaga ended up appointing 10 lawyers as lead counsel or members of a plaintiffs’ steering committee, including Salas, Ellis and several others who emphasized the importance of diversity in their applications.

I spoke on Thursday to Maya Saxena of Saxena White – one of the few women in the highest ranks of a shareholder firm – about how the PSLRA limits judges’ power to promote diversity in securities class actions. Saxena said there’s “rising recognition" that shareholder class actions should not be "a boys' club." But judges, she said, can’t evade the PSLRA’s statutory framework.

“In many ways, their hands are tied,” Saxena said.

Judges can, of course, use their platforms to encourage diversity among lead counsel candidates in securities class actions. Last November, for instance, U.S. District Judge Algenon Marbley of Columbus, Ohio, directed firms representing competing lead plaintiff candidates in a shareholder case against the utility FirstEnergy Corp to disclose the number of women and minority lawyers they employ.

Ultimately, though, the judge stuck to the PSLRA framework to pick a Los Angeles pension fund and its lawyers at Robbins Geller Rudman & Dowd to head up the case. (He did say he was “impressed” that Robbins Geller promised to include a woman and two minority lawyers on its five-lawyer team.)

Because of the PSLRA, Saxena said, it’s going to be up to institutional investors to assure that shareholder firms push for diverse leadership. The PSLRA puts clients in charge, after all, so clients have to make sure their firms are promoting women and minority lawyers.

The good news, said Saxena, is that a lot of pension funds and other institutional investors are doing just that. As the investment community pays more attention to ESG goals, she said, institutional investors are increasingly likely to ask prospective plaintiffs firms about diversity -- and to give credit to those led by women and minority lawyers.

Saxena said that’s a boon for her shop, which bills itself as the only federally certified female- and minority-owned shareholder firm in the business. More importantly, it’s a boon to shareholders.

Investors aren’t just white men. Their lawyers shouldn’t be either, no matter what the PSLRA says.

READ MORE:

‘The needle is moving’: Another MDL judge cites diversity in lead counsel appointments

Judge pushes diversity in picking lawyers to lead Zantac litigation

Ohio judge calls for diverse counsel to lead First Energy shareholder lawsuit

Opinions expressed here are those of the author. Reuters News, under the Trust Principles, is committed to integrity, independence and freedom from bias.

Our Standards: The Thomson Reuters Trust Principles.