In Re: Cendant Corp.

Opinions of the United
2001 Decisions States Court of Appeals
for the Third Circuit

8-28-2001

In Re: Cendant Corp.
Precedential or Non-Precedential:

Docket 00-2520

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Recommended Citation
"In Re: Cendant Corp." (2001). 2001 Decisions. Paper 196.
http://digitalcommons.law.villanova.edu/thirdcircuit_2001/196

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Volume 1 of 3

Filed August 28, 2001

UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT

Nos. 00-2520, 00-2683, 00-2708, 00-2709, 00-2733,
00-2734, 00-2769, 00-3653

IN RE: CENDANT CORPORATION LITIGATION

JOANNE A. ABOFF FAMILY TRUST,
U/A DATED 2/11/92,
Appellant in No. 00-2520

BETTY DUNCAN,
Appellant in No. 00-2683

TERE THROENLE,
Appellant in No. 00-2708

JANICE G. DAVIDSON; ROBERT M. DAVIDSON, in his
capacity as trustee of Robert M. Davidson Charitable
Remainder Unitrust, and as co-trustee of Elizabeth A.
Davidson Irrevocable Trust, Emilie A. Davidson Irrevocable
Trust, John R. Davidson Irrevocable Trust, Emilie A.
Davidson Charitable Remainder Unitrust and John R.
Davidson Charitable Remainder Unitrust,
Appellants in No. 00-2709

FAYE SCHONBRUNN,
Appellant in No. 00-2733

ANN MARK,
Appellant in No. 00-2734

NEW YORK CITY PENSION FUNDS,
Appellant in No. 00-2769

NEW YORK CITY PENSION FUNDS,
Appellant in No. 00-3653
On Appeal From the United States District Court
For the District of New Jersey
(D.C. Civ. No. 98-cv-01664)
District Judge: Honorable William H. Walls

Argued: May 22, 2001

Before: BECKER, Chief Judge, SLOVITER and
AMBRO, Circuit Judges.

(Filed: August 28, 2001)

HOWARD B. SIROTA, ESQUIRE
(ARGUED)
Sirota & Sirota
110 Wall Street
New York, NY 10005

Counsel for Appellant
Joanne A. Aboff Family Trust

EDWARD W. COCHRAN, ESQUIRE
(ARGUED)
Cochran & Cochran
2872 Broxton Road
Shaker Heights, OH 44120

FRANK H. TOMLINSON, ESQUIRE
Pritchard, McCall & Jones
505 North 20th Street, Suite 800
Birmingham, AL 35203

PAUL S. ROTHSTEIN, ESQUIRE
626 Northeast First Street
Gainesville, FL 32601

Counsel for Appellant Betty Duncan

2
C. BENJAMIN NUTLEY, ESQUIRE
(ARGUED)
Kendrick & Nutley
468 North Camden Drive, Suite 200
Beverly Hills, CA 90210

RICHARD GALEX, ESQUIRE
Galex, Tortoreti & Tomes
150 Tices Lane
East Brunswick, NJ 08816

Counsel for Appellant Tere Throenle

GERALD W. PALMER, ESQUIRE
(ARGUED)
RICKY L. SHACKELFORD, ESQUIRE
EUGENIA L. CASTRUCCIO,
ESQUIRE
Jones, Day, Reavis & Pogue
555 West Fifth Street, Suite 4600
Los Angeles, CA 90013

Counsel for Appellants
Robert and Janice Davidson

LAWRENCE W. SCHONBRUN,
ESQUIRE (ARGUED)
Law Office of Lawrence W.
Schonbrun
86 Eucalyptus Road
Berkeley, CA 94705

Counsel for Appellant
Faye Schonbrunn

3
JOHN HALEBIAN, ESQUIRE
(ARGUED)
Wechsler, Harwood, Halebian &
Feffer
488 Madison Avenue, 8th Floor
New York, NY 10022

KENNETH A. ELAN, ESQUIRE
Law Offices of Kenneth A. Elan
217 Broadway
New York, NY 10007

Counsel for Appellant Ann Mark

MICHAEL D. HESS, ESQUIRE
LEONARD J. KOERNER, ESQUIRE
LORNA B. GOODMAN, ESQUIRE
ELIZABETH S. NATRELLA, ESQUIRE
(ARGUED)
LESLIE CONASON, ESQUIRE
Corporation Counsel of the
City of New York
New York City Law Department
100 Church Street
New York, NY 10007

Counsel for Appellants
New York City Pension Funds

MAX W. BERGER, ESQUIRE
DANIEL L. BERGER, ESQUIRE
(ARGUED)
JEFFREY N. LEIBELL, ESQUIRE
Bernstein, Litowitz, Berger, &
Grossman, LLP
1285 Avenue of the Americas,
33rd Floor
New York, NY 10019

4
LEONARD BARRACK, ESQUIRE
GERALD J. RODOS, ESQUIRE
JEFFREY W. GOLAN, ESQUIRE
Barrack, Rodos, & Bacine
3300 Two Commerce Square
2001 Market Street
Philadelphia, PA 19103

Counsel for Appellees
California Public Employees'
Retirement System, New York State
Common Retirement Fund and The
New York City Pension Funds

ARTHUR R. MILLER, ESQUIRE
(ARGUED)
228 Harvard Law School
Langdell West
Areeda Hall 225
1565 Massachusetts Avenue
Cambridge, MA 02138

Counsel for Appellees Barrack,
Rodos, & Bacine and Bernstein,
Litowitz, Berger & Grossmann, LLP

ALAN N. SALPETER, ESQUIRE
(ARGUED)
MICHELE ODORIZZI, ESQUIRE
CARYN L. JACOBS, ESQUIRE
Mayer, Brown & Platt
190 South LaSalle Street
Chicago, IL 60603-3441

DOUGLAS S. EAKLEY, ESQUIRE
PETER L. SKOLNIK, ESQUIRE
Lowenstein, Sandler, PC
65 Livingston Avenue
Roseland, NJ 07068

5
KATHRYN A. OBERLY, ESQUIRE
ROBERT G. COHEN, ESQUIRE
WILLIAM P. HAMMER, JR.,
ESQUIRE
Ernst & Young, LLP
787 Seventh Avenue
New York, NY 10019-6018

Counsel for Appellee
Ernst & Young, LLP

CARL GREENBERG, ESQUIRE
MICHAEL M. ROSENBAUM,
ESQUIRE
Budd, Larner, Gross, Rosenbaum,
Greenberg & Sade
150 John F. Kennedy Parkway
CN 1000
Short Hills, NJ 07078-0999

SAMUEL KADET, ESQUIRE
Skadden, Arps, Slate, Meagher &
Flom
Four Times Square
New York, NY 10036

Counsel for Appellee
Cendant Corporation

HERBERT J. STERN, ESQUIRE
Stern, Greenberg & Kilcullen
75 Livingston Avenue
Roseland, NH 07068

Counsel for Appellee
James E. Buckman

6
DAVID M. BECKER, ESQUIRE
General Counsel
MEYER EISENBERG, ESQUIRE
Deputy General Counsel
ERIC SUMMERGRAD, ESQUIRE
Deputy Solicitor
LUIS DE LA TORRE, ESQUIRE
(ARGUED)
Special Counsel
NATHAN A. FORRESTER, ESQUIRE
Senior Counsel
Securities and Exchange
Commission
450 Fifth Street, N.W.
Washington, DC 20549-0606

Counsel for Amicus Curiae
Securities and Exchange Commission

JOSEPH A. GRUNDFEST, ESQUIRE
The William A. Franke Professor of
Law and Business
Stanford Law School
Crown Quadrangle
559 Nathan Abbott Way
Stanford, CA 94305-8610

MELANIE M. PIECH, ESQUIRE
Lieff, Cabraser, Heimann &
Bernstein, LLP
275 Battery Street, 30th Floor
San Francisco, CA 94111

Counsel for Amicus Curiae
Barclays Global Investors, N.A.,
Franklin Resources, Inc., New
Hampshire Retirement System and
Public Employees' Retirement
Association of Colorado

7
OPINION OF THE COURT

BECKER, Chief Judge.

I. INTRODUCTION & SUMMARY 9

II. FACTS & PROCEDURAL H ISTORY 15
A. Background 15
B. The Appointment of Lead Plaintiff and
Lead Counsel 17
C. Class Certification, the Filing of the Amended
Complaint, and the Reaching of a Settlement 22
D. The Terms of the Settlement and the
Plan of Allocation 24
E. Preliminary Settlement Approval, the Se ttlement
Notice, and the Fairness Hearing 27
F. The Appeals and the Issues Presented by
Each Appeal 29

III. THE FAIRNESS OF THE SETTLEMENT AND THE
PLAN OF ALLOCATION 32
A. Approval of the Settlement: The Applica tion
of the Girsh Factors 32
1. The First Girsh Factor: Complex ity & Likely
Duration of Litigation 35
2. The Second Girsh Factor: The Re action
of the Class 37
3. The Third Girsh Factor: The Sta ge
of Proceedings 39
4. The Fourth Girsh Factor: The Ri sks of
Establishing Liability 41
5. The Fifth Girsh Factor: The Ris ks of
Establishing Damages 44
6. The Sixth Girsh Factor: The Ris ks of
Maintaining the Class Action Through Trial 45
7. The Seventh Girsh Factor: The A bility of the
Defendants
to Withstand a Greater Judgment 46
8. The Final Girsh Factors: The Ra nge of
Reasonableness of Settlement Fund in Light of the
Best Possible Recovery & in Light of

8
 Litigation Risks 49
9. Summing Up the Girsh Factors 52
B. Intra-class Conflicts 53
1. Throenle's Arguments 53
a. The Lead Plaintiff 's Allege d Conflicts
of Interest 53
b. The Corporate Governance Change s 57
2. Mark's Arguments 61
C. The Davidsons' Objections 66
1. Class Certification Findings 67
2. Notice of the Settlement 67
3. Intra-Class Conflicts
68
4. Alleged Flaws in the Plan of Allocation 70

IV. COUNSEL SELECTION AND COUNSEL FEES 71
A. Introduction: Attorney-Client Tension i n the Class
Action Context 71
1. The Problem With Class Actions 71
2. The Evolution of Judicial Review of Cou nsel
Fees In Class Actions 73
3. The PSLRA 82
B. The Reform Act's Procedures; Selection of the
CalPERS Group As Lead Plaintiff 84
1. Legal Standards 84
a. Identifying the Presumptive Lea d Plaintiff 84
b. Determining Whether the Presump tion
Has Been Rebutted 93
2. Application of the Standards Here 96
C. The Auction 100
1. May NYCPF Validly Object to the Auction ? 100
2. Does the Reform Act Ever Permit
an Auction? 103
3. Was the Auction in this Case Permissibl e? 111
D. Counsel Fees 114

V. CONCLUSION 12
4

I. INTRODUCTION & SUMMARY

These are consolidated appeals from the District Court's
approval of a $3.2 billion settlement of a securities fraud
class action brought against Cendant Corporation and its
auditors, Ernst & Young, and the Court's award of $262

9
million in fees to counsel for the plaintiff class. Both the
settlement and the fee award are challenged in these
appeals. The enormous size of both the settlement and the
fee award presages a new generation of "mega cases" that
will test our previously developed jurisprudence.

This case is governed by the Private Securities Litigation
Reform Act of 1995 (PSLRA or Reform Act). Under the
Reform Act, one of a district court's first tasks is to select
a lead plaintiff. Once the lead plaintiff has been appointed,
the statute provides that the lead plaintiff "shall, subject to
the approval of the court, select and retain counsel to
represent the class." The District Court, after appointing a
lead plaintiff, declined to approve its choice of counsel,
instead choosing to select lead counsel by means of an
auction. The most important question presented by these
appeals is whether this decision was compatible with the
PSLRA. Closely intertwined, and also of great importance,
are issues involving the proper procedures for selecting a
lead plaintiff and for awarding counsel fees in cases
governed by the Reform Act.

Before we can reach these issues, however, we must
decide whether the District Court abused its discretion in
approving the settlement and the plan for allocation of
damages, to which objections were interposed. Some
objectors argue forcefully that the settlement was
inadequate under the nine-factor test that this Court
developed for reviewing the fairness, reasonableness, and
adequacy of class action settlements in Girsh v. Jepson,
521 F.2d 153 (3d Cir. 1975). Noting that the class's case
was exceptionally strong because Cendant (the main
defendant) virtually conceded liability and because some of
the plaintiffs' claims (i.e., those presented underS 11 of the
Securities Act of 1933) were strict liability claims, these
objectors contend that, notwithstanding the threat of
bankruptcy if the settlement was too high, a considerably
higher figure could have been extracted under these
favorable liability circumstances without running the risk
that Cendant would seek bankruptcy protection. In their
submission, the class should have received a fuller recovery
of its alleged $8.8 billion loss.

10
These objections are weighty, but other Girsh factors
counsel strongly in favor of approving the Cendant
settlement--the reaction of the class, the stage of the
proceedings, the risk of establishing damages, the range of
reasonableness in light of the possible recovery and the
litigation risks, and, though to a lesser degree, the
complexity of the litigation. Although we think that the
question of the fairness of the settlement under the Girsh
factors is closer than the District Court made it out to be,
our application of those factors supports the conclusion
that the District Court did not abuse its discretion in
approving the Cendant settlement.

The issue is even clearer with respect to the settlement
between the class and Ernst & Young (E&Y), against which
the case was far more difficult. As with Cendant's
settlement, the reaction of the class, the risk of establishing
damages, and the range of reasonableness of the recovery
weigh in favor of approving the E&Y settlement. These
factors are augmented by two other Girsh factors that weigh
strongly in favor of the E&Y settlement: the complexity of
litigation and the risk of establishing liability. Because the
ability to withstand a greater judgment is the only Girsh
factor that cuts against approving the E&Y settlement, we
conclude that the District Court did not abuse its discretion
in approving it.

One objector also argues that the District Court should
not have approved the settlement because the entities that
comprise the lead plaintiff were too conflicted to represent
the class adequately. The bases for this claim are two-fold.
First, the institutional investors that make up the lead
plaintiff continued to hold Cendant stock during the
litigation and settlement process, and thus, the objector
submits, had very different motives from other investors
who had sold their stock. Second, the lead plaintiff
negotiated as part of the settlement certain corporate
governance changes that will benefit only those class
members that continue to hold Cendant stock. We are
unpersuaded by the first argument because it is clear that
Congress, in passing the PSLRA, for better or for worse,
anticipated and implicitly approved the notion that entities
that continued to hold stock in the defendant corporation

11
would serve as lead plaintiffs notwithstanding the existence
of many class members who did not. With respect to the
second argument, there is no evidence that the lead
plaintiff gave up anything of value to the class members to
induce Cendant to agree to the corporate governance
changes. We therefore hold that the District Court did not
abuse its discretion in approving the settlement.

We then turn to the objections regarding the allocation of
the settlement fund. One objector contends that the claims
under S 11 of the Securities Act of 1933, which only a
subset of the class possesses, are legally stronger than the
other claims held by class members, i.e., claims under
S 10(b) of the Securities Exchange Act of 1934. Based on
this disparity, the objector argues that the S 11 claimants
should receive a larger share of the settlement proceeds. We
conclude, however, that the S 11 claims here are not
necessarily legally stronger than the S 10(b) claims, and
that, at any rate, the basis for measuring the different legal
strengths of the claims involved is too speculative to
support the objector's contention. We thus hold that the
District Court did not abuse its discretion in approving a
settlement allocation that treated all claims more or less
equally.

Having determined that the settlement may stand, we
must examine the District Court's award of counsel fees.
Because the Reform Act establishes a detailed and
integrated process for choosing a lead plaintiff, selecting
lead counsel, and approving counsel's fee, we discuss these
issues sequentially. In this case, the District Court selected
as lead plaintiff a group made up of three pension funds
(the CalPERS Group or Lead Plaintiff). Following the
dictates of the Reform Act, the court first identified that
Group, which is made up of three huge government pension
funds, as being the movant with the largest financial
interest in the relief sought by the class. The court then
made a preliminary determination that the CalPERS Group
satisfied Federal Rule of Civil Procedure 23's typicality and
adequacy requirements, which, under the PSLRA, made it
the presumptive lead plaintiff. The District Court ultimately
appointed the CalPERS Group as lead plaintiff because it
determined that no member of the plaintiff class had

12
succeeded in rebutting the statutory presumption. We find
no fault with the court's decisions on this score.

The Lead Plaintiff then asked the District Court to
appoint as lead counsel two firms with which it had
previously negotiated a Retainer Agreement, Bernstein,
Litowitz, Berger, & Grossmann of New York City, and
Barrack, Rodos & Bacine of Philadelphia. The court
declined initially to approve the Lead Plaintiff 's choice,
deciding instead to select lead counsel via an auction, but
giving the CalPERS Group's chosen counsel the option to
match what the court determined to be the lowest qualified
bid. Those firms exercised this option and were appointed
as lead counsel. Following the settlement of the case, and
consonant with the results of the auction, Lead Counsel
petitioned for and was awarded a sum of $262 million in
counsel fees, even though that amount was at least $76
million higher than that provided for under the Retainer
Agreement.

We conclude that the court's decision to hold an auction
to select lead counsel was inconsistent with the Reform Act,
which is designed to infuse lead plaintiffs with the
responsibility (and motivation) to drive a hard bargain with
prospective lead counsel and to give deference to their
stewardship. Although we believe that there are situations
under which the PSLRA would permit a court to employ the
auction technique, this was not one of them. Here,
inasmuch as the Lead Plaintiff conducted its counsel
search with faithful observance to the letter and spirit of
the Reform Act, it was improper for the District Court to
supplant the CalPERS Group's statutorily-conferred right to
select and retain lead counsel by deciding to hold an
auction. In sum, we hold that the District Court erred in
using an auction to appoint lead counsel; rather it should
have done so pursuant to the terms of the Retainer
Agreement.

Because the District Court's process resulted in the firms
chosen by the Lead Plaintiff being appointed lead counsel
anyway, this error was harmless (with regard to the
selection of lead counsel). However, because the terms of
the Retainer Agreement required the prior approval of the
pension funds comprising the CalPERS Group, and that

13
prior approval was not obtained, the fee request here was
improper. The fee award must therefore be set aside and
this matter remanded to the District Court with
instructions to dismiss the fee application and to decline to
accept any further applications that are submitted without
the prior approval of the Funds.

It goes without saying that the principal focus after
remand will be the counsel fee application which will be
resubmitted. The parties have extensively briefed and
argued the fee award issue, understanding that if the
award is set aside the District Court will need guidance on
remand. Having this need in mind--along with the fact that
this case, in its various facets, has been before this Court
seven times now--we will set forth the standards that the
court should follow in evaluating a properly-submitted fee
request in Reform Act cases so as to help bring this now
protracted matter to a close. Although in general the court
should use the same seven-factor test that our cases have
developed for reviewing fee requests in other class action
contexts, review in PSLRA cases must be modified to take
into account the changes wrought by the Reform Act. The
biggest change, we believe, is that courts should afford a
presumption of reasonableness to fee requests submitted
pursuant to an agreement between a properly-selected lead
plaintiff and properly-selected lead counsel.

This is not to say, however, that this presumption cannot
be overcome. There is an arguable tension between the
general schema of the PSLRA on the one hand and its
overarching provision that requires the court to insure that
counsel fees not exceed a reasonable amount, see 15 U.S.C.
S 78u-4(a)(6), on the other. We hold that the presumption
will be rebutted when a district court finds the fee to be
(prima facie) clearly excessive.

For the past decade, counsel fees in securities litigation
have generally been fixed on a percentage basis rather than
by the so-called lodestar method. Consistent with that
approach, we have held that, when the percentage fee is
challenged, the Court's obligation to award a reasonable fee
will be best exercised by application of the factors described
in Gunter v. Ridgewood Energy Corp., 223 F.3d 190 (3d Cir.
2000). Gunter itself allows for the possibility of a lodestar

14
cross-check, see id. at 200, even though the lodestar
approach is no longer favored. We conclude that, in
determining whether the retainer agreement between the
Lead Plaintiff and Lead Counsel is clearly excessive, the
court should first use the Gunter factors to evaluate it, for
the lodestar cross-check is quite time consuming. But if the
court cannot otherwise come to a resolution, it can consider
a lodestar cross-check.

In determining whether the presumption of
reasonableness of a properly submitted fee request has
been rebutted here, the District Court will have to consider
the powerful arguments of the objectors that: (1) this was
a simple case in terms of liability; (2) the settlement was
achieved without a great deal of work by lead counsel; and
(3) both the fee award of $262 million under the auction
and (potentially up to) $187 million under the Retainer
Agreement are staggering in their size, and, on the basis of
the evidence in the record, may represent compensation at
an astonishing hourly rate (as well as an extraordinarily
high lodestar "multiplier").

We conclude by explaining that, if the court's
deliberations were to confirm that the fee agreed to by a
lead plaintiff and lead counsel was clearly excessive, the
court will need to set a reasonable fee according to the
standards our previous cases have set down for class
actions not governed by the PSLRA.

II. FACTS & PROCEDURAL HISTORY

A. Background

Cendant Corporation, the main defendant, was formed by
a December 17, 1997 merger of CUC International, Inc.
(CUC) and HFS Incorporated (HFS). Pursuant to a
Registration Statement and Joint Proxy
Statement/Prospectus, HFS shareholders tendered their
shares in exchange for CUC shares. HFS was then merged
into CUC and the combined company was renamed
Cendant. Cendant is currently one of the world's largest
consumer and business service companies; among its more
well-known businesses are Avis, Century 21, and the
Ramada and Howard Johnson hotel franchise chains.

15
On March 31, 1998, Cendant filed its Form 10-K Annual
Report with the SEC, which included the company's 1997
financial statements. Two weeks later, after the close of
trading on April 15, 1998, Cendant announced that it had
discovered "accounting irregularities" in certain units of the
former CUC. The notice stated that Cendant expected to
restate its annual and quarterly financial statements for
1997 and possibly for earlier periods as well; it also stated
that Cendant had retained the law firm Willkie Farr &
Gallagher (Willkie Farr) to conduct an investigation into its
past financial statements and the allegations of fraud made
by some Cendant employees. The next day, Cendant's stock
fell 47%, from $35-5/8 to $19-1/16 per share, triggering
several class action lawsuits on behalf of investors who
purchased CUC or Cendant stock during 1997.

On July 14, 1998, Cendant announced that it would also
restate CUC's annual and quarterly financial statements for
1995 and 1996. Following this announcement, Cendant's
stock fell by another 9%, to $15-11/16 per share. On
August 28, 1998, Cendant filed Willkie Farr's report of its
investigation, with the SEC. The report revealed that
Cendant would restate its 1995, 1996, and 1997 financial
statements by approximately $500 million. On August 31,
1998, the first trading day after Cendant's disclosure of the
Willkie Farr report, Cendant's stock fell another 11%, to
$11-5/8. The disclosure of the report triggered several more
lawsuits arising from purchases of CUC securities during
the broader period of alleged fraud. All told, Cendant
shareholders lost more than $20 billion in market
capitalization.

Between April and August 1998, at least sixty-four
putative securities fraud class action lawsuits were filed
nationwide as a result of the above disclosures. Generally
speaking, the lawsuits alleged that, from 1995 to 1998,
CUC/Cendant had issued a series of materially false and
misleading statements in the form of quarterly reports,
annual reports, registration statements, prospectuses, and
press releases, and that these statements artificially
inflated CUC/Cendant's stock price. The lawsuits named as
defendants Cendant, its officers and directors, and other
parties--including E&Y, which had acted as CUC's

16
independent public accountant from 1983 until the time of
the creation of Cendant. E&Y had also performed a post-
merger audit of the financial statements of Cendant
Membership Services, a wholly-owned subsidiary of
Cendant, for the year ending December 31, 1997. The
lawsuits alleged that E&Y had issued unqualified reviews
and audit opinions certifying CUC's quarterly and annual
reports, and that E&Y had failed to adhere to Generally
Accepted Auditing Standards and thus lacked any
reasonable basis for its opinions and reports.

Cendant eventually filed a cross-claim against E&Y,
detailing allegations that E&Y became aware of the fraud
long before it was made public but chose to conceal and
facilitate it, thereby continuing to garner millions of dollars
in fees. Alternatively, Cendant alleged that E&Y was
negligent in failing to discover the fraud earlier. E&Y
strenuously denied all the allegations made in the amended
cross-claim, pointing out that Cendant had not provided
any evidence or documentation to back up the allegations.

By order of the Judicial Panel on Multidistrict Litigation,
all cases relating to Cendant's accounting irregularities
were transferred to the United States District Court for the
District of New Jersey. On May 29, 1998, the District Court
consolidated all of them under the caption In re Cendant
Corporation Litigation.

B. The Appointment of Lead Plaintiff and Lead
Counsel

After consolidation, two of the District Court's first
responsibilities were to appoint a lead plaintiff and lead
counsel to represent the putative class. The PSLRA lays out
detailed procedures for courts to follow in making these
decisions, directing them to appoint "the most adequate
plaintiff " as the lead plaintiff, and instructing them to
"adopt a presumption" that the most adequate plaintiff is
the movant that "has the largest financial interest in the
relief sought by the class" and "otherwise satisfies the
requirements of Rule 23 of the Federal Rules of Civil
Procedure." 15 U.S.C. S 78u-4(a)(3)(B)(i) & (iii)(I).1 The
_________________________________________________________________

1. The Reform Act inserted identical amendments into the Securities Act
of 1933 and the Securities Exchange Act of 1934. All citations are to the
Exchange Act provisions.

17
presumption "may be rebutted only upon proof by a
member of the purported plaintiff class that the
presumptively most adequate plaintiff will not fairly and
adequately protect the interests of the class or is subject to
unique defenses that render such plaintiff incapable of
adequately representing the class." Id.S 78u-
4(a)(3)(B)(iii)(II). With regard to the selection of lead counsel,
the statute provides that "[t]he most adequate plaintiff
shall, subject to the approval of the court, select and retain
counsel to represent the class." Id. S 78u-4(a)(3)(B)(v).

Fifteen individuals and groups filed motions to serve as
lead plaintiff, and the District Court held a hearing on
August 4, 1998. It soon became clear that the CalPERS
Group--a consortium of the three largest publicly-managed
pension funds in the United States: the California Public
Employees' Retirement System (CalPERS), the New York
City Pension Funds (NYCPF), and the New York State
Common Retirement Fund (NYSCRF)--had, by far,"the
largest financial interest in the relief sought by the class."
According to the District Court, the members of the
CalPERS Group alleged combined losses in excess of $89
million, while the largest amount alleged by any other
movant was $10.6 million. See In re Cendant Corp. Litig.,
182 F.R.D. 144, 147 (D.N.J. 1998). This fact, in conjunction
with the District Court's express finding that it satisfied
Rule 23's "adequacy" and "typicality" requirements, see id.
at 147-48, rendered the CalPERS Group the presumptive
lead plaintiff.

Two competing movants, the Joanne A. Aboff Family
Trust (Aboff) and Douglas Wilson, offered three reasons why
the presumption had been rebutted, but the District Court
rejected their claims. Aboff and Wilson: (1) contended that
they were better suited to be lead plaintiff than the
CalPERS Group because they had negotiated a lower fee
schedule with their lawyers; (2) argued that the CalPERS
Group could not fairly and adequately protect the interests
of the class because one of the Group's chosen counsel had
made substantial campaign contributions to the sole
trustee of one of the funds that make up the CalPERS
Group, thereby creating an appearance of impropriety; and
(3) suggested that the District Court should select lead

18
plaintiff "through a process of competitive bidding." Id. at
148-49. The District Court concluded that the CalPERS
Group could not fairly and adequately represent the
interests of the holders of convertible Cendant derivative
securities known as PRIDES, see id. at 149-50, and severed
the PRIDES claims from the main action.2 The court
eventually appointed the CalPERS Group as lead plaintiff of
the main Cendant action. See id. at 149.3

The court then turned to selection of lead counsel. The
CalPERS Group had filed a motion seeking to have Barrack,
Rodos & Bacine (BRB) and Bernstein Litowitz Berger &
Grossman LLP (BLBG) appointed lead counsel pursuant to
a Retainer Agreement that it had negotiated with them,
which dictated not only the formula for determining
attorneys fees but also included a Plan for Monitoring
Litigation, a section outlining a Theory of Recovery, and a
part captioned Consultation Regarding Settlement
Negotiations.4 The District Court, however, decided to select
(Text continued on page 21)
_________________________________________________________________

2. The court based this conclusion on the fact that all members of the
CalPERS Group had sizeable holdings in Merrill Lynch, a defendant with
respect to the claims involving PRIDES. See id. at 149. The court
eventually appointed a different lead plaintiff and lead counsel in the
PRIDES action. See id. at 149-50.

3. Although the District Court and some of the parties refer to members
of the CalPERS Group as "co-Lead Plaintiffs," we agree with the
Securities and Exchange Commission that "[t]here is one lead plaintiff
under the Reform Act: an individual, an institution or a properly-
constituted group." Brief for the Securities and Exchange Commission as
Amicus Curiae, at 11 n.8 (emphasis added). The statute always speaks
of the lead plaintiff in the singular, requiring that the court appoint
"as
lead plaintiff the member or members of the purported plaintiff class that
the court determines to be most capable of adequately representing the
interests of class members" and stating that the presumptively "most
adequate plaintiff . . . is the person or group of persons" that satisfies
the statute's three threshold requirements. 15 U.S.C. S 78u-4(a)(3)(B)(i)
&
(iii) (emphasis added). The biggest consequence of this distinction is
that
only one "entity" is entitled to speak for the class: the lead plaintiff.
In
cases where a group serves as lead plaintiff, it is for the group's
members to decide how the group will make decisions, but it is the
group--not its constituent members--that speaks for the class. A fortiori,
we use the singular "Lead Plaintiff " throughout this opinion.
4. The Retainer Agreement declares that the members of the CalPERS
Group "have agreed to proceed together to seek a Co-Lead Plaintiff
19
position," and states that the funds, if selected as Lead Plaintiff, will
"seek the appointment of BRB and BLBG as Co-Lead Counsel to the
Class." The Agreement provides that Lead Counsel will "receive fees, as
awarded by the Court, from the proceeds of any judgment or settlement,"
and that Lead Counsel "will advance all costs and out-of-pocket
expenses."

The Retainer Agreement contains four sections set off by roman
numerals. The first deals with attorneys fees, providing:

I. Attorneys Fees. The fee will be a function of both the timing
and
size of the recovery but, unless agreed to by the Funds, will, in
no event exceed the following:

A. Initiation of action through to commencement of discovery:
1. Recovery of $0 to $400 million - fee of 5%;
2. Additional recoveries above $400 million - fee of 3%.
B. Commencement of discovery through to conclusion of all fact
and expert discovery:
1. Recovery of $0 to $100 million - fee of 17.5%;
2. Additional recoveries of above $100 million to $300
million - fee of 10%;
3. Additional recoveries of above $300 million to $500
million - fee of 7.5%;
4. Additional recoveries of above $500 million- fee of 5%.
C. Proceedings after conclusion of all discovery, including
motions for summary judgment, if any, through and
including trial and post-trial proceedings:
1. Recovery of $0 to $150 million - fee of 20%;
2. Additional recoveries above $150 million to $400 million
- fee of 12.5%;
3. Additional recoveries above $400 million - fee of 7.5%

In any event, we [i.e., BRB and BLBG] will not submit any fee
application to the Court without the prior approval of The Funds,
and all fee applications would, of course, be subject to final
approval
of the Court. Travel, meals and lodging expenses shall be
reasonable
and subject to the approval of Co-Lead Plaintiffs prior to
reimbursement.

Section II is captioned "Plan for Monitoring Litigation," and requires
Lead
Counsel to: (1) provide the CalPERS Group with "all significant
pleadings" at least 24 hours before filing; (2) make monthly status
reports, including statements as to time expended and expenses
incurred; (3) promptly advise the CalPERS Group of"any significant
developments in the case, including settlement discussions"; and (4)

20
lead counsel via auction. The court acknowledged that the
PSLRA provides that "[t]he most adequate plaintiff shall,
subject to the approval of the court, select and retain
counsel to represent the class." 15 U.S.C. S 78u-
4(a)(3)(B)(v); see Cendant Corp. Litig., 182 F.R.D. at 150
(quoting this language from the Reform Act). But it
reasoned that "the Court's approval is subject to its
discretionary judgment that lead plaintiff 's choice of
representative best suits the needs of the class," and
concluded that "mechanisms" other than the lead plaintiff 's
choice were available to assist the court in making that
determination. Id. at 150. The court pointed to the
"emerging trend" of using auctions "to simulate the free
market in the selection of class counsel," and stated that it
would hold an auction to select lead counsel and to
determine its fee. Id. at 150-51. Recognizing that the
Reform Act confers upon the Lead Plaintiff the
"opportunity" to "select and retain" lead counsel, the
District Court ruled that counsel chosen by the CalPERS
Group would have the chance to match what the court
determined to be the lowest qualified bid. Id. at 151. Later,
the District Court made clear that any winning bidder
would have to agree to comply with all provisions of the
Retainer Agreement that the CalPERS Group had
negotiated with its chosen counsel (except, of course, the
fee grid).

The District Court solicited input about how the auction
should be conducted and held a hearing on August 19,
1998. The court eventually required that bids be submitted
_________________________________________________________________

schedule periodic meetings to discuss "case developments" and "joint
strategies in the prosecution of the case." Section III is captioned
"Theory
of Recovery," and declares that the goal of the case was "to maximize the
recovery obtained from sources outside the corporation . . . without
unduly penalizing Cendant or its long-term shareholders." Lead Counsel
agreed "to vigorously represent your collective interests, and the
interests
of the Class, to maximize the recovery for the Class of Cendant securities
purchasers in this case, while being cognizant of the interests of the
long-term holders of Cendant securities." Section IV is captioned
"Consultation Regarding Settlement Negotiations," and it requires Lead
Counsel to "consult with" and obtain approval from the CalPERS Group
before entering into a final settlement agreement.

21
pursuant to a grid it had designed,5 and received nine bids
to serve as lead counsel in the main Cendant action.6 The
District Court rejected the bid by counsel for appellant
Aboff, which would have generated fees of 1-2% of the total
settlement depending on the size of the settlement and the
timing of the recovery, characterizing it as unrealistic and
"quasi-philanthropic," and stating that "[u]nless the
eventual monetary recovery in this case is in the billions,
such an apparently `cheap' fee does not make professional
sense."7 In contrast, the court expressly found that counsel
proposed by the Lead Plaintiff was qualified and that its
proposed fee scale was "realistic," but also concluded that
another qualified bidder had submitted a lower "realistic"
bid. Counsel chosen by the Lead Plaintiff exercised its
power to meet this lower bid, and was thus appointed lead
counsel.

C. Class Certification, the Filing of the Amended
Complaint, and the Reaching of a Settlement

After a case management conference, the newly-
appointed Lead Plaintiff filed its Amended and Consolidated
_________________________________________________________________

5. The grid for the main Cendant action required that counsel submit a
fee in terms of a percentage of the total class recovery. Movants were
directed to propose fees depending on the phase at which the litigation
was resolved (the horizontal axis) and the size of the eventual recovery
(the vertical axis). The phases of litigation listed on the grid were:
from
pleadings through adjudication of any motion to dismiss; during
discovery through adjudication of a summary judgment motion; after
adjudication through a trial verdict; and post-trial. The sizes of
recovery
listed on the grid were: first 100 million; second 100 million; third 100
million; next 50 million; next 50 million; next 50 million; next 50
million;
and over 500 million.

6. The court required that the bids be submitted under seal. This Court
recently held that the District Court abused its discretion by imposing
such a confidentiality order. See In re Cendant Corp., No. 99-5485, at 23
(3d Cir. Aug. 8, 2001).

7. The case did, of course, settle for an amount well into the billions,
reflecting the perspicacity of Mr. Sirota, Aboff 's counsel. We need not
decide whether Mr. Sirota could have negotiated such a large settlement
because we are satisfied that, from the perspective of the District Court
at the time, its decision in selecting counsel was not an abuse of
discretion.

22
Class Action Complaint (the Complaint or Amended
Complaint) along with a motion for class certification on
December 14, 1998. The Complaint defined the class
represented as

[a]ll persons and entities who purchased or otherwise
acquired publicly traded securities . . . either of
Cendant or CUC during the period beginning May 31,
1995 through and including August 28, 1998 and who
were injured thereby, including all persons or entities
who exchanged shares of HFS common stock for
shares of CUC stock pursuant to the Registration
Statement . . . . Excluded from the Class are: (i)
defendants; (ii) members of the family of each
individual defendant; (iii) any entity in which any
defendant has a controlling interest; (iv) officers and
directors of Cendant and its subsidiaries and affiliates;
and (iv) [sic] the legal representatives, heirs, successors
or assigns of any such excluded party.

The Amended Complaint alleged claims under bothS 10(b)
of the Securities Exchange Act of 1934 [hereinafter "S 10(b)
claims"] and S 11 of the Securities Act of 1933 [hereinafter
"S 11 claims"], as well as numerous other claims that are
not relevant for the purposes of our discussion and
decision. The Complaint set out S 10(b) claims for all class
members, but presented S 11 claims only for those class
members who received Cendant stock via the HFS merger.
CUC, however, acquired via merger fourteen other
companies during the class period. As with the HFS
merger, these other mergers involved the filing of
registration statements with the SEC during the class
period, and thus these mergers also gave rise toS 11 claims
(as well as claims under S 12 of the Securities Act of 1933)
for those who received CUC stock via these mergers.

On January 27, 1999, the District Court granted Lead
Plaintiff 's motion for class certification, defining the
certified class as including "all purchasers or acquirers of
Cendant Corporation or CUC International, Inc. publicly
traded securities between May 31, 1995 and August 28,
1998 who were injured thereby." Several of the defendants
then filed motions to dismiss. In an order issued July 27,
1999, the District Court denied all of them except E&Y's

23
motion to dismiss S 10(b) claims against it that were related
to stock purchases made after April 15, 1998. See In re
Cendant Corp. Litig., 60 F. Supp. 2d 354 (D.N.J. 1999). On
August 6, 1999, the court approved the form of the notice
of the class action to be sent to potential class members
and ordered its dissemination. The District Court required
Lead Plaintiff to mail notice to all record holders of Cendant
and CUC stock and to all brokers in the transfer records,
and to publish notice of the class action on three different
days in The Wall Street Journal, The New York Times
(National Edition), and the Dow Jones Business Newswire.
In all, the Class Administrator sent 261,224 notices.

Both the individually mailed and published notices
included the definition of the Class as stated in the
Complaint, and warned potential class members that if they
failed to follow the specific procedures for opting out of the
Class, they would be deemed class members and would be
bound by any settlement or judgment. The notice stated
that any class member who wanted to opt out had to file a
written request for exclusion postmarked by December 27,
1999, which served as the final opt-out date.

On December 7, 1999, almost three weeks before the
final opt-out date, Cendant announced a proposed
settlement that would require it to pay $2.85 billion to the
class members, and ten days later the parties announced
that a proposed settlement had been reached between E&Y
and the Lead Plaintiff (collectively, "the Settlement"). On
December 27, 1999, the opt-out period closed pursuant to
the class notice. Out of over 100,000 class members, only
234 opted out before the deadline. See In re Cendant Corp.
Sec. Litig., 109 F. Supp. 2d 235, 257 (D.N.J. 2000). On
March 17, 2000, Cendant and the Lead Plaintiff submitted
settlement documents to the District Court, including a
Plan of Allocation for the distribution of settlement proceeds
among class members.

D. The Terms of the Settlement and the Plan of
Allocation

The defendants' obligations under the Settlement consist
of three primary elements:

24
 1) Cash Payment: Cendant agreed to pay
$2,851,500,000 and E&Y agreed to pay $335,000,000
into the settlement pool, which brings the total
settlement money to approximately $3.2 billion.
Interest will accrue on this money until it is paid out
to the Class.

2) 50% of any recovery from E&Y: Cendant and the
individual defendants from HFS Inc. are currently
suing E&Y over E&Y's role in the fraud. Fifty percent of
any net recovery from this action will go to the Class.

3) Corporate governance changes: Cendant will
institute corporate governance changes, including
putting a majority of independent directors on its
Board of Directors; placing only independent directors
on the Board's Audit, Nominating, and Compensation
Committees; de-classifying the Board and providing for
the annual election of all directors; and precluding the
repricing of any employee stock option after its grant,
except with the approval of a majority of voting
shareholders.

In exchange for these undertakings, the Class has agreed
to release Cendant, E&Y, the HFS individual defendants,
and the CUC individual defendants from all claims that "are
based upon, are related to, arise from or are connected with
any facts, circumstances, statements, omissions, events or
other matters raised or referred to in the pleadings in the
Litigation or which could have been asserted against
Cendant, the HFS Individual Defendants and the other
Released Parties by the Lead Plaintiffs and any Class
Member." Stipulation of Settlement with Cendant Corp. and
Certain Other Defs. at 12.

The Settlement also contains a Plan of Allocation, which
will be used to allocate the settlement money among the
class members. The specifics of the Plan of Allocation are
somewhat complex because it involves calculating the"true
value" of Cendant/CUC stock for any given day during the
class period. To get the "true value" of Cendant stock on
any given day, one has to remove from the actual price the
artificial inflation that Cendant's fraud caused in the price,
a process made trickier by the fact that, unlike many other

25
frauds, the fraudulent statements made by Cendant were
not in the form of a surprising announcement that caused
the stock to rise a certain amount which would provide a
fair indication of how much the fraud affected the price.
Instead, Cendant's fraud consisted of releasing financial
statements that met the market's expectations, while the
truth was that Cendant was falling far short of these
expectations.

Cendant did, however, make several announcements
revealing the fraud that caused the price of its stock to
plummet, namely, the three announcements made on April
15, July 14, and August 28, 1998. The Plan of Allocation
works backwards from these price drops to develop an
equation for determining the true, non-artificially-inflated
value of Cendant stock for any day during the class period.
This "true value" is then compared to the actual price of
Cendant/CUC stock on that day to determine how much
that day's purchasers of Cendant/CUC stock overspent.
The Plan uses this amount of overpayment to determine the
class members' damages.

The Plan of Allocation also allows class members who
had received their stock in CUC's merger with HFS to
receive as damages the greater of (1) their damages
calculated under S 10(b) as determined by the Plan, or (2)
their damages as calculated under S 11, which would give
them the difference between what they paid for the Cendant
stock (i.e., the value of the HFS securities that they traded
in to get the Cendant stock) and the value of the Cendant
stock as of the day the lawsuit was brought (April 16, 1998,
the date the first lawsuit was filed). This S 11 provision
draws upon the text of the 1933 Act, described in the margin.8
_________________________________________________________________

8. Title 15 U.S.C. S 77k (the codification of S 11 of the 1933 Act)
actually
provides for three ways of determining S 11 damages: (1) the difference
between the amount paid for the stock and the stock's price the day the
lawsuit was brought (the method used above); (2) the difference between
the amount paid for the stock and the amount received for it when it
was sold, if it was sold before the lawsuit was brought; and (3) the
difference between the amount paid for the stock and the amount
received for it when it was sold, if it was sold after the lawsuit was
brought but before judgment, only if such damages are less than the

26
Lead Plaintiff 's damages expert used the Plan of
Allocation's damage determination method to calculate the
total damages suffered by the Class from the Cendant fraud
as $8.8 billion. At oral argument on this appeal and in a
supplemental affidavit, Lead Plaintiff represented that the
Claims Administrator had received over 118,000 proofs of
claim from class members, for a total of $4.9 billion claimed
losses. The $3.185 billion cash payment in the Settlement
thus represents approximately a 36% recovery rate on the
Class's total losses and a 64% recovery rate on the actually
claimed losses. Of the $4.9 billion claimed losses,
approximately $2.1 billion are losses claimed by class
members who acquired Cendant stock in the HFS merger
deal.

E. Preliminary Settlement Approval, the Settlement
Notice, the Attorneys Fees Request, and the
Fairness Hearing

On March 29, 2000, the District Court granted
preliminary approval to the proposed settlement and
enjoined all actions or claims that were contemplated by it.
In early April, pursuant to the order containing the
settlement approval, the Class Administrator mailed
478,000 notices of the Settlement and proof of claim form
packages [hereinafter "the Settlement Notice"] to potential
class members, and also published notices in The Wall
Street Journal and The New York Times. The Settlement
Notice summarized the course of the litigation and the
terms of the Settlement, including Lead Plaintiff 's Plan of
Allocation of the settlement funds. It also informed the
_________________________________________________________________

damages as calculated under (1). See 15 U.S.C. S 77k(e). Only (1) is
relevant to this case, however. Regarding option (2), if the class members
sold their stock before April 16, 1998 (the day the lawsuit was brought)
they would have no damages--the fraud was not revealed until after
trading ended on April 15, 1998, so the stock price before April 16 was
at least as artificially inflated by the fraud at the sale of the stock as
it
was at the purchase. Regarding option (3), because the price of Cendant
stock continued to decline after the day the lawsuit was filed as more
fraud was revealed, this option would result in greater damages than
those calculated under (1) and thus cannot be used under the provisions
of 15 U.S.C. S 77k(e).

27
class members that Lead Counsel intended to submit an
application for attorneys fees totaling 8.275% of the total
settlement fund and for reimbursement of expenses in the
amount of $15,855,000. The Notice stated that the District
Court would conduct a fairness hearing on June 28, 2000,
and contained information about how class members could
go about objecting to the Settlement. It provided that any
class member could appear at the fairness hearing to object
to the Settlement. Class members were also allowed simply
to state an objection to the Settlement in writing, although,
as we discuss below in Part III.A.2, there is some dispute
over how clear the Settlement Notice was on this point.

Prior to the fairness hearing, Lead Counsel petitioned the
District Court for an award of $262,468,857 in attorneys
fees and $14,623,806 in expenses. Lead Counsel noted that
its fee request "adhere[d] precisely to the parameters in the
lowest qualified bid proposal" established by the court's
auction.9 At the hearing on the request to approve the
Settlement and for counsel fees, six parties raised
objections to the substantive provisions of the Settlement.
Three were class members (Betty Duncan, Ann Mark, and
Tere Throenle); two were not class members (Martin
Deutch, a derivative plaintiff, and the State Board of
Administration of Florida, which opted out of the Class);
and one was a party whose class status is unclear (the
Davidsons).10 Four class members filed objections to the fee
_________________________________________________________________

9. In contrast, had the District Court not held the auction and appointed
Lead Counsel pursuant to the Retainer Agreement that it had negotiated
with the CalPERS Group, see supra n.4 and accompanying text, the
maximum allowable fee--"unless agreed to by The Funds"-- would have
been approximately $187 million.

10. Janice and Robert Davidson, for themselves and as trustees of trusts
for the benefit of their children (collectively, the Davidsons), have
participated in this appeal as objectors to the Settlement. The procedural
history of their claims presents a special situation. On June 20, 2000,
in response to a motion by the Davidsons for clarification of the class
definition specifying that they were not class members or, in the
alternative, an extension of time for them to opt out of the Class, the
District Court issued an order that: (1) ruled that the Davidsons were
covered by the class definition and thus were included in the Class; (2)
refused the Davidsons' request for an extension of time to opt out of the

28
request: NYCPF (a member of the CalPERS Group); Aboff;
Faye Schonbrunn; and Throenle.

August 15, 2000, the District Court formally approved
the Settlement, entering two opinions and orders approving
the Settlement and Plan of Allocation and rejecting all of
the objectors' objections. See In re Cendant Corp. Sec. Litig.,
109 F. Supp. 2d 235 (D.N.J. 2000); In re Cendant Corp. Sec.
Litig., 109 F. Supp. 2d 273 (D.N.J. 2000). On August 16,
2000, the District Court filed an opinion and order
awarding Lead Counsel approximately $262 million in
attorneys fees pursuant to the schedule that had been pre-
set via the auction. See In re Cendant Corp. Sec. Litig., 109
F. Supp. 2d 285 (D.N.J. 2000). Several of the objectors
appealed these rulings.

F. The Appeals and the Issues Presented by Each
Appeal

This opinion addresses three appeals from the District
Court's approval of the Settlement and the Plan of
Allocation, and four appeals from its award of counsel fees.11
_________________________________________________________________

Class; and (3) enjoined the Davidsons from arbitrating their claims in
California, an action which they had initiated on December 17, 1998.
See In re Cendant Corp. Sec. Litig., 194 F.R.D. 158 (D.N.J. 2000). The
Davidsons appealed this order. On May 9, 2001, two weeks before oral
argument in the present appeal, a panel of this Court filed an opinion
affirming in part and reversing in part the District Court's June 20, 2000
Order. In particular, the panel majority generally affirmed the court's
Order but left the extent of the scope of the matters to be arbitrated to
the arbitrator. However, the full Court has since voted to rehear the
Davidsons' appeal en banc, thereby vacating the panel opinion, so at this
time it is not clear whether the Davidsons will be held to be class
members, whether they will be given an extended time to opt out of the
Class, or whether they will be permitted to pursue their claims in
arbitration. If any of these possibilities comes to pass, the Davidsons'
objections in this appeal will be mooted. However, for reasons set forth
infra at Part III.C, we will take up the Davidsons' objections in this
opinion.

11. This is the seventh appeal from this case that this Court has heard
so far. The preceding six are: In re Cendant Corp., No. 99-5485 (3d Cir.
Aug. 8, 2001); In re Cendant Corp. Litigation , 2001 WL 487903, No. 00-
2185, (3d Cir. May 9, 2001) (this is the Davidsons' appeal that gave rise

29
These appeals were consolidated for argument. On appeal,
the objectors to the Settlement and the Plan of Allocation
are:

Tere Throenle (00-2708): Throenle challenges the
overall fairness to the Class of the Cendant part of the
Settlement, and contends that the Lead Plaintiff
suffered from a conflict of interest that prevented it
from fairly representing all class members because it
continued to hold Cendant stock during and after the
settlement negotiations.12

Betty Duncan (00-2683): Duncan challenges the
overall fairness to the Class of the E&Y part of the
Settlement.13

Ann Mark (00-2734): Mark claims that the proposed
allocation of the settlement money among the Class is
unfair because class members with S 11 claims should
have received more than class members with S 10(b)
claims.14

The Davidsons (00-2709): The Davidsons contend that
the District Court erred by not making explicit
Fed.R.Civ.P. 23 findings when certifying the Class; that
the notice given to the Class was insufficient; that
there are intra-class conflicts arising from the
disparate treatment of class members under the terms
_________________________________________________________________

to the since-vacated opinion and is now pending an en banc hearing, see
supra n.10); In re Cendant Corp. PRIDES Litigation, 243 F.3d 722 (3d Cir.
2001); In re Cendant Corp. PRIDES Litigation, 235 F.3d 176 (3d Cir.
2000); In re Cendant Corp. PRIDES Litigation, 234 F.3d 166 (3d Cir.
2000); In re Cendant Corp. PRIDES Litigation, 233 F.3d 188 (3d Cir.
2000).

12. Throenle purchased 100 shares of Cendant stock during the class
period and lost approximately $600.

13. Duncan bought an unspecified number of CUC notes and claims a
loss of $1,294.

14. Mark exchanged 100 shares of HFS for 240 shares of CUC in the
HFS merger and also purchased 400 Cendant shares in the open market
during the class period.

30
 of the Settlement; and that the Plan of Allocation is
flawed.15

Objector Deutch's contentions are addressed in a
separate opinion by this panel. See In re Cendant Corp. Sec.
Litig. (Deutch), No. 00-2684 (3d Cir. Aug. 28, 2001).
Objector State Board of Administration of Florida did not
appeal.

The objectors to the court's award of counsel fees are:

NYCPF (00-2769; 00-3653): NYCPF argues that the
District Court's decision to select lead counsel by
means of an auction was inconsistent with the PSLRA,
and contends that the Retainer Agreement negotiated
between the Lead Plaintiff and Lead Counsel remains
in effect. It also contends that the fee award approved
by the District Court constitutes an excessively high
percentage of the recovery given the circumstances.

Aboff (00-2520): Aboff argues that the fee award was
"grossly excessive," and also claims that the notices
that were sent to class members did not contain
sufficient information so as to allow them to evaluate
the reasonableness of the fee request.

Throenle (00-2708): Throenle contends that the fee
request was improper and excessive.

Faye Schonbrunn (00-2733): Schonbrunn argues that
the District Court ignored this Court's jurisprudence
governing fee requests, and claims that the court's
award was excessive.16

Securities and Exchange Commission (SEC): The
SEC appears as amicus curiae, contending that
auctions are generally not consistent with the Reform
Act.
_________________________________________________________________

15. The Davidsons held a substantial amount of CUC stock stemming
from the merger of their company into CUC, although it is not clear from
the record or the briefs exactly how many shares they held or how large
their losses were.

16. For the most part, Schronbrunn's arguments are duplicative of, or
subsumed by, those made by other objectors. Accordingly, we will not
identify them separately.

31
 Barclays Global Investors, N.A. et al (the Barclays
Group): The Barclays Group appears as amicus curiae,
arguing that the auction in this case was improper
because there was no reason to believe that the Lead
Plaintiff lacked the capacity or willingness to negotiate
vigorously in the counsel selection and retention
process.

The District Court had jurisdiction pursuant to 15 U.S.C.
SS 77v & 78aa and 28 U.S.C. S 1331, and we have
jurisdiction under 28 U.S.C. S 1291.

III. THE FAIRNESS OF THE SETTLEMENT
AND THE PLAN OF ALLOCATION

The objectors' arguments as to the fairness and adequacy
of the Settlement fit into two basic categories. First, they
argue that the District Court erred in applying the nine-
factor test that we developed in Girsh v. Jepson , 521 F.2d
153 (3d Cir. 1975), for determining whether a settlement is
fair, reasonable, and adequate under Federal Rule of Civil
Procedure 23(e). Second, they contend that the District
Court erred in approving the Settlement because there were
serious intra-class conflicts that caused the Lead Plaintiff
to represent the Class inadequately in negotiating the
Settlement. See, e.g., Amchem Prods., Inc. v. Windsor, 521
U.S. 591 (1997). We review the District Court's approval of
a class action settlement, including its determination that
the settlement was fair, reasonable, and adequate, for
abuse of discretion. See In re General Motors Corp. Pick-Up
Truck Fuel Tank Prods. Liability Litig., 55 F.3d 768, 782 (3d
Cir. 1995) [hereinafter "GM Trucks"].

A. Approval of the Settlement: The Application of
the Girsh factors

Rule 23(e) sets out the basic charter for a court's analysis
of the fairness of a class action settlement. It provides: "A
class action shall not be dismissed or compromised without
the approval of the court, and notice of the proposed
dismissal or compromise shall be given to all members of
the class in such manner as the court directs." We have
interpreted this rule to require courts to " `independently
and objectively analyze the evidence and circumstances

32
before it in order to determine whether the settlement is in
the best interest of those whose claims will be
extinguished.' " GM Trucks, 55 F.3d at 785 (quoting 2
Herbert Newberg & Alba Conte, Newberg on Class Actions
S 11.41). Under Rule 23(e), the District Court acts as a
fiduciary guarding the rights of absent class members and
must determine that the proffered settlement is"fair,
reasonable, and adequate." Id.

In approving the Settlement, the District Court applied
the nine-factor test this Court developed in Girsh, which
provides the analytic structure for determining whether a
class action settlement is fair, reasonable, and adequate
under Rule 23(e). See id. The nine Girsh factors are:

(1) the complexity, expense and likely duration of the
litigation;

(2) the reaction of the class to the settlement;

(3) the stage of the proceedings and the amount of
discovery completed;

(4) the risks of establishing liability;

(5) the risks of establishing damages;

(6) the risks of maintaining the class action through
the trial;

(7) the ability of the defendants to withstand a greater
judgment;

(8) the range of reasonableness of the settlement fund
in light of the best possible recovery; and

(9) the range of reasonableness of the settlement fund
in light of all the attendant risks of litigation.

See Girsh, 521 F.2d at 157. The proponents of a settlement
bear the burden of proving that these factors weigh in favor
of approval. See GM Trucks, 55 F.3d at 785.

Objectors Throenle and Duncan submit that the District
Court abused its discretion in its application of the Girsh
test to this settlement. In particular, Throenle argues that
a correct application of the Girsh factors weighed against
the settlement with Cendant, and Duncan raises a similar

33
argument as to the settlement with E&Y.17 Because there is
substantial overlap between Throenle's and Duncan's
arguments, we will consider these arguments together,
noting any differences where relevant.18 In our review of the
_________________________________________________________________

17. Throenle does raise some points against the settlement with E&Y as
well, but the bulk of her argument centers on the Cendant settlement.

18. Duncan raises another argument that we dispose of summarily. GM
Trucks held that a district court reviewing a proposed class action
settlement should make a preliminary determination, under which a
presumption of fairness for the settlement is established if the court
finds that: (1) the negotiations occurred at arms length; (2) there was
sufficient discovery; (3) the proponents of the settlement are experienced
in similar litigation; and (4) only a small fraction of the class
objected.
See GM Trucks, 55 F.3d at 785. Duncan contends that the District Court
should not have accorded the Settlement a threshold presumption of
fairness because there was insufficient discovery directed to uncovering
E&Y's involvement in the fraud, which, she submits, compels the
conclusion that the Lead Plaintiff 's negotiations with E&Y were not at
arms-length. More specifically, Duncan argues that there is a strong
possibility that three Cendant former employees who have pled guilty to
federal criminal charges arising from this fraud may eventually give
testimony implicating E&Y more fully in this fraud. (The three former
employees are Cosmo Corigliano, the former chief financial officer; Anne
Pember, a former senior vice president and controller; and Casper
Sabatino, a former vice president of accounting and financial reporting.
Duncan refers to these three as "the three felons.") Duncan asserts that
"this Court can reasonably conclude that the testimony of the three
felons will ultimately establish the fraudulent intent by E&Y." Duncan's
Opening Br. at 40.

We reject this argument for two reasons. First, Duncan uses the wrong
standard of review. She says that this Court "can reasonably conclude"
that more discovery will lead to more information against E&Y; the
question, however, is not what this Court can reasonably conclude, but
whether the District Court abused its discretion in finding otherwise. See
GM Trucks, 55 F.3d at 782, 785. Second, E&Y points out in its brief that
Sabatino told investigators that he and others at Cendant took steps to
deceive E&Y as to the existence of the fraud. This is corroborated by the
Willkie Farr Report on the Cendant fraud, which states that Cendant
officials tried to conceal the fraud from E&Y. Indeed, the SEC also filed
a complaint against Corigliano, Pember, and Sabatino on the date of
their guilty pleas which accused them of lying to E&Y and of withholding
material information from E&Y. These factors support the conclusion
that E&Y was not an active participant in the fraud but was itself

34
District Court's application of the Girsh factors, we will first
consider the strength of each side's arguments on each
factor, and then, based on the totality of the factors,
determine whether the District Court abused its discretion
in finding overall that the Girsh factors weighed in favor of
the Settlement.

1. The First Girsh Factor: Complexity, Expense &
Likely Duration of Litigation

This factor captures "the probable costs, in both time and
money, of continued litigation." GM Trucks , 55 F.3d at 812
(internal quotation marks and citation omitted). The
District Court found that this case would involve complex
and protracted discovery, extensive trial preparation, and
difficult legal and factual issues, and that this factor
therefore weighed in favor of approval of the Settlement.
The court focused on a number of specific variables that
increased the case's complexity: the number of defendants;
the complex accounting issues involved with respect to
damages; the need for expert review and testimony; the fact
that Cendant and E&Y were blaming each other for the
accounting errors; and the possibility of unknown novel
legal issues raised by the PSLRA. The court also found that
litigation would likely be drawn out, with an extended
discovery period necessary and a trial date that would likely
not occur until 2002. See In re Cendant Corp. Sec. Litig.,
109 F. Supp. 2d at 256-57.
_________________________________________________________________

deceived by Cendant officials, rendering Duncan's contentions that the
Corigliano, Pember, and Sabatino testimony will reveal E&Y's fraud an
exercise in optimism.

In sum, Duncan's arguments here are built on pure speculation that
relies almost exclusively on the naked allegations made in Cendant's
complaint against E&Y. See supra Part II.A. Moreover, Duncan's "wait
and see" approach to the E&Y settlement (i.e., waiting for further
discovery to develop) would likely mean a substantial delay to the Class
in receiving settlement money even though there is no evidence that,
given time, more information implicating E&Y would come to light.
Therefore, we reject Duncan's arguments that there was insufficient
discovery regarding E&Y's involvement, and we thus conclude that it was
not an abuse of discretion for the District Court to give an initial
presumption of fairness to the Settlement.

35
The objectors counter with a number of arguments.
Throenle's best argument is that the liability aspect of the
case against Cendant is simple--Cendant basically admits
that its employees had the requisite scienter forS 10(b)
liability, and there is strict liability for Cendant on the S 11
claims--so that the only truly contested issue is damages.
She adds that the District Court's denial of the defendants'
motions to dismiss means that the plaintiffs have
surmounted the most formidable barrier posed by the
PSLRA, namely, the heightened pleading standards put in
place by the Act. As to the complexity of the case against
E&Y, Duncan argues that we will not know enough about
this issue until the parties engage in more discovery to
determine E&Y's involvement. She asserts that if the three
Cendant employees who pled guilty to fraud implicate E&Y
in their testimony, see supra n.18, the plaintiffs' case
against E&Y will be uncomplicated.

We find Throenle's objections with respect to the Cendant
portion of the Settlement to have considerable merit. We
agree with Throenle's contention that Cendant's basic
liability does not present a difficult or complex issue.
Cendant has indicated that, insofar as liability is
concerned, it would argue at trial that it is not responsible
for any illegal actions taken by its employees because these
acts were not done to benefit Cendant. However, because
(as we explain below) we are skeptical of the viability of this
defense for Cendant, see infra Part III.A.4, the fact that
Cendant would likely raise it increases only minimally the
complexity and likely duration of the litigation. We are thus
dubious that this case, insofar as it involves Cendant's
liability, presents numerous complex legal and factual
issues that would result in substantial costs of time and
money. But this does not necessarily militate against an
attractive settlement, a point we address later.

The issue of damages against Cendant is different in
character, for it involves technical accounting issues and
hence can be quite complex. Thus, we agree that this factor
weighs in favor of settlement insofar as the damages
determination is concerned. We note in this regard that the
damages determination formula developed by the Lead
Plaintiff 's damages expert is complicated and difficult to

36
follow; if Cendant constructed its own damages
determination formula (as we presume it would), the
damages issue could appreciably lengthen and complicate
this litigation. Still, we think that, compared to a case in
which basic liability is contested, the damages issues
involved here would increase only moderately the time and
expense required to litigate.

Regarding Duncan's arguments on the complexity of
determining E&Y's liability, we note that E&Y has
consistently and strenuously denied any fault for this
fraud, and as we have explained, see supra n.18, there
does not seem to be good reason to think that the three
convicted Cendant employees will implicate E&Y. E&Y
points out that the fraud was perpetrated at Cendant
facilities by Cendant employees, and no evidence has
surfaced in the investigations following the fraud that E&Y
employees participated in or even knew about the fraud.
E&Y also emphasizes the fact that the Willkie Farr report
describes numerous instances in which Cendant employees
admitted concealing or falsifying information to prevent
E&Y from discovering the truth. We agree with E&Y that
establishing liability and damages against it would involve
fairly complex and protracted litigation.

In sum, while the complexity and duration of litigation
factor does not weigh as heavily in favor of settlement as
the District Court concluded, we do think it does weigh
somewhat in favor of the Cendant part of the Settlement,
and strongly in favor of the E&Y part of the Settlement.

2. The Second Girsh Factor: The Reaction of the Class

The District Court found that this factor cut strongly in
favor of the Settlement, as the number of objectors was
quite small in light of the number of notices sent and
claims filed. The claims administrator sent 478,000 notices
of the Settlement to potential class members, and also
published notices in The Wall Street Journal and The New
York Times. Over 30,000 settlement claims were filed as of
June 12, 2000 (more than two weeks before the fairness
hearing), and almost 120,000 claims were filed by May 15,
2001. Yet only four class members objected to the
Settlement (Throenle, Duncan, the Davidsons, and Mark,

37
who objected only to the Plan of Allocation), and only two
non-class members objected as well (Deutch and the State
Board Administration of Florida). As the District Court
noted, none of the objectors was an institutional investor
(although the Davidsons had very large holdings), and only
234 class members opted out of the Class; the court took
the latter number "as an extremely favorable indicator of
class reaction." 109 F. Supp. 2d at 257.

Throenle argues that the low number of objectors is
attributable to the confusing notice to the Class; she
contends that the notice implied that objectors had to
appear personally before the court to lodge objections.
Throenle also asserts that she had difficulty obtaining
relevant documents from the clerk's office before the
objection deadline, and that "[s]uch a fundamental
deprivation of due process very likely hindered[other]
objectors." Throenle Br. at 47. Duncan submits that the
number of objectors and opt-outs is "meaningless" because
the opt-out and objection-filing deadlines occurred before
the three arrested Cendant employees pled guilty.

The District Court correctly found that this factor
weighed strongly in favor of the Settlement. The vast
disparity between the number of potential class members
who received notice of the Settlement and the number of
objectors creates a strong presumption that this factor
weighs in favor of the Settlement, and the objectors'
arguments otherwise are not convincing. Although it is true
that the Settlement Notice could have been clearer on how
to object to the Settlement, the District Court pointed out
that the notice provided the address and phone numbers
for Lead Plaintiff 's counsel in the event that class members
had questions about any matter in the notice. See 109 F.
Supp. 2d at 255. A confused class member who wanted to
make an objection could have easily called class counsel
and clarified the process by which to make it. Throenle's
assertion about her difficulty in obtaining documents from
the clerk's office is troubling, but the fact is that she did
receive the relevant documents in time and no other class
member has complained of this problem. Furthermore,
Duncan's contention that more people would have objected
had the objection deadline date occurred after the three

38
Cendant employees pled guilty to fraud is purely
speculative; nothing in these employees' statements to
investigators implicates E&Y, and in fact the statements
reflect that they tried to conceal the fraud from E&Y. We
therefore conclude that this factor cuts strongly in favor of
the Settlement.

3. The Third Girsh Factor: The Stage of Proceedings

This factor "captures the degree of case development that
class counsel have accomplished prior to settlement.
Through this lens, courts can determine whether counsel
had an adequate appreciation of the merits of the case
before negotiating." GM Trucks, 55 F.3d at 813. In
considering this factor, the District Court took note of the
formal and informal discovery in which Lead Counsel had
engaged, and then concluded that "[t]he record reveals, and
the Court finds, that the parties understood the merits of
the class action and could fairly, safely and appropriately
decide to settle the action with Cendant and E&Y. Counsel
conducted extensive discovery, retained and used experts,
and litigated pre-trial motions." 109 F. Supp. 2d at 259
(internal quotation marks and citation omitted). The court
then described in detail the "extensive discovery"
undertaken by the Lead Counsel, which included analysis
of Cendant's public filings, review of the Willkie Farr
Report, review of various documents produced by Cendant
during informal and formal discovery, and interviews with
various Cendant and E&Y employees. See id. at 258-59.
The court also noted that, in preparation for settlement
negotiations, Lead Plaintiff had retained the investment
firm Lazard Freres and damages expert Forensic
Economics, Inc., to assist it in determining damages. See
id. at 258.

Both Throenle and Duncan argue that there was
insufficient discovery. In particular, they point to the fact
that no depositions were taken and that Lead Counsel
mainly engaged in only informal discovery. Duncan in
particular argues that the early stage of discovery means
that the Settlement was not negotiated "under a real and
credible threat of litigation." Duncan's Opening Br. at 52.

The objectors are correct that the Settlement was reached
early in the litigation, with discovery itself at an early stage.

39
However, the merits of the liability case against Cendant
were fairly clear. With respect to the S 11 claims, Cendant
has admitted that its financial statements contained
materially false information, and Cendant has strict liability
for its registration statements that incorporated these
financial statements. As for the S 10(b) claims, Cendant
employees have basically admitted committing fraud, so
Cendant was going to be on the hook for a substantial
amount, if not all, of the Class's S 10(b) damages at all
events. In its argument on the fourth Girsh factor (the risk
of establishing liability), Lead Plaintiff relies on the fact that
Cendant has advanced the defense that it should not be
held liable for the Class's damages that were caused by the
illegal acts of its various officers, because these acts were
not done for the benefit of the corporation. As we explain
below, see infra Part III.A.4, on the record before us we do
not think that Cendant would have much chance of
success with this defense. While it is not clear whether
Lead Plaintiff had an "adequate appreciation" of the merit of
this defense, its viability turns more on legal considerations
than on factual development, see id., so it does not
substantially affect Throenle and Duncan's claim that more
discovery was needed.

Given the foregoing, it is unclear what depositions and
interrogatories (with the requisite motions to compel) would
have added to the liability considerations. It is true that the
extent of the Class's damages was not clear-cut, but Lead
Plaintiff retained its own damages expert to calculate the
Class's damages and also reviewed a damages report
prepared by the National Economic Research Association,
Inc., which Cendant hired as its damages expert. The issue
of damages appears to have been headed for resolution as
a battle of the experts at trial. While Federal Rule of Civil
Procedure 26 expert witness discovery might have been
helpful on the damages issue, it is not clear what it would
have added to the settlement calculus.

Therefore, although this litigation was settled at an early
stage, because of the nature of the case Lead Plaintiff had
an excellent idea of the merits of its case against Cendant
insofar as liability was concerned at the time of the
Settlement. Lead Plaintiff also underwent a sufficient

40
process for determining the Class's damages before the
Settlement. Because of this, Lead Plaintiff was able to form
an "adequate appreciation of the merits of the case [against
Cendant] before negotiating." GM Trucks , 55 F.3d at 813.
We thus conclude that this factor cuts strongly in favor of
the settlement with Cendant.

Because the case against E&Y was strongly contested
and much more complex, it is correspondingly more
difficult to ascertain the merits of the case against E&Y
because of the early settlement. However, Duncan's
conjecture about what evidence of E&Y's involvement in the
fraud may turn up from further discovery is undermined by
the results of the investigation of the three former Cendant
employees charged with criminal fraud, which indicates
that they concealed the fraud from E&Y. See supra n.18.
Therefore, although we note the possibility that further
discovery might have illuminated the merits of the case
against E&Y, we temper this with the observation that it
seems unlikely that evidence of E&Y's further involvement
in the fraud would come to light. For these reasons, we
conclude that the stage of proceedings factor is neutral as
to the settlement with E&Y.

4. The Fourth Girsh Factor: The Risks of Establishing
Liability

A court considers this factor in order to "examine what
the potential rewards (or downside) of litigation might have
been had class counsel decided to litigate the claims rather
than settle them." GM Trucks, 55 F.3d at 814. The District
Court concluded that the risks of establishing liability
varied with the particular defendant. As to Cendant, the
court concluded that liability was easily established, but
that things got more complex for the S 10(b) claims when
the proportionality of liability was considered:"the jury
might have found that Cendant bore only a small
proportion of the responsibility for the damages suffered by
the Class." 109 F. Supp. 2d at 260 (internal quotation
marks omitted) (citing the PSLRA's provisions on
proportionate liability, which provide that a defendant is
jointly and severally liable on a S 10(b) claim only if the
defendant knowingly committed the fraud; otherwise the
defendant is only liable for the percentage of his

41
responsibility for the fraud, see S15 U.S.C. 78u- 4(f)19).
Proportionality of liability is only an issue as to the S 10(b)
claims; if Cendant were to lose on the S 11 claims at trial,
it would be jointly and severally liable on these claims. See
15 U.S.C. S 77k(f).

As to E&Y, the court reasoned that the level of scienter
required by S 10(b), E&Y's potential due diligence defenses
under Section 11, and the fact that there was no evidence
that E&Y knew about the fraud while it was being
committed meant that Lead Plaintiff faced significant
obstacles in establishing E&Y's liability. The court
concluded that this factor weighed strongly in favor of
settlement in E&Y's case, less so for Cendant, and"overall
[this factor] weighs in favor of settlement." 109 F. Supp. 2d
at 261.

Throenle concentrates her argument on the District
Court's conclusion that the risk of establishing liability with
Cendant increases when the PSLRA's proportionate liability
_________________________________________________________________

19. 15 U.S.C. S 78u-4(f) provides, in pertinent part:

(f) Proportionate liability

(2) Liability for damages

(A) Joint and several liability

Any covered person against whom a final judgment is entered
in a private action shall be liable for damages jointly and
severally only if the trier of fact specifically determines that
such covered person knowingly committed a violation of the
securities laws.

(B) Proportionate liability

(i) In general

Except as provided in subparagraph (A), a covered person
against whom a final judgment is entered in a private action
shall be liable solely for the portion of the judgment that
corresponds to the percentage of responsibility of that covered
person, as determined under paragraph (3).

Paragraph 3 of S 78u-4(f) provides in pertinent part that the factfinder
should make findings as to "the percentage of responsibility of [the
defendant], measured as a percentage of the total fault of all persons
who caused or contributed to the loss incurred by the plaintiff."

42
provisions are factored into the equation. She counters
that, although the PSLRA limited defendants' joint and
several liability in S 10(b) actions, defendants who are found
to have knowingly committed S 10(b) violations are still
jointly and severally liable for the fraud damages under the
PSLRA. See 15 U.S.C. S 78u-4(f)(2). She thus argues that,
because Cendant would be charged with knowing whatever
its employees knew and its employees knowingly committed
the fraud, Cendant would be jointly and severally liable, not
proportionately liable, on the S 10(b) claims. On this basis,
Throenle submits that the proportionate liability provisions
of the PSLRA really do not pose a risk to establishing
Cendant's liability.20

Lead Plaintiff counters Throenle's argument by pointing
to Rochez Brothers, Inc. v. Rhoades, 527 F.2d 880 (3d Cir.
1975), in which we set out a two-part test for determining
when the fraud of an officer of a corporation is imputed to
the corporation: the fraud is imputed "when the officer's
fraudulent conduct was (1) in the course of his
employment, and (2) for the benefit of the corporation." Id.
at 884. Lead Plaintiff notes that Cendant argued in the
District Court that it was not liable for the illegal acts of its
officers because these acts were not for Cendant's benefit,
and that Cendant used just this defense to defeat a
summary judgment motion on S 10(b) claims by an opt-out
plaintiff in this very case. See In re Cendant Corp. Sec.
Litig., 109 F. Supp. 2d 225, 232-34 (D.N.J. 2000)
[hereinafter "Yeager v. Cendant" or"Yeager"]. The court
denied the plaintiff 's summary judgment motion in Yeager
because of the possibility that "a reasonable trier of fact
could conclude that the true motive of the wrongdoers was
the preservation of their employment, salaries, emoluments,
and reputations, as well as their liberty, at the expense of
the corporation's well-being." Id. at 233 (internal quotation
marks and brackets omitted). Lead Plaintiff contends that
the possibility that Cendant could establish this defense to
_________________________________________________________________

20. Duncan's argument on this factor is that further discovery would
turn up evidence establishing E&Y's liability. As we have noted above,
this claim is not only speculative, but also undermined by the evidence
in the record. Thus, we agree with the District Court's conclusion that
the risk of establishing E&Y's liability is substantial.

43
limit its liability posed a risk of establishing liability, so that
the District Court correctly concluded that this factor
weighed in favor of the Settlement.

We do not agree with the District Court that there was a
significant risk of establishing joint and several liability
against Cendant in this case. Rochez Brothers makes clear
that a corporate officer's fraud is imputed to the
corporation "even if the officer's conduct was unauthorized,
effected for his own benefit but clothed with apparent
authority of the corporation, or contrary to instructions."
527 F.2d at 884. The reason for this is that "a corporation
can speak and act only through its agents and so must be
accountable for any acts committed by one of its agents
within his actual or apparent scope of authority and while
transacting corporate business." Id. Based on the record
before us, it would not seem difficult for the plaintiffs to
establish that the high-ranking CUC officers who published
the false financial statements in CUC's name were acting
within the apparent scope of their authority and were
transacting corporate business, whether or not they were
feathering their own nest.

In sum, we agree that there would be little risk in
establishing Cendant's joint and several liability on the
S 10(b) claims. As to the risk of establishing E&Y's liability,
we agree with the District Court's analysis that a number
of factors make this factor weigh strongly in favor of
approval of the E&Y portion of the Settlement: the lack of
any evidence that E&Y knew about the fraud; E&Y's due
diligence defenses on the S 11 claims; the complexity of the
case against E&Y; and the prospect of fierce litigation.
Overall, then, the risks of establishing liability factor cuts
substantially in favor of approval of the E&Y portion of the
Settlement, but cuts against approval of the Cendant
portion of the Settlement.

5. The Fifth Girsh Factor: The Risks of Establishing
Damages

Like the fourth factor, "this inquiry attempts to measure
the expected value of litigating the action rather than
settling it at the current time." GM Trucks , 55 F.3d at 816.
Lead Plaintiff presented evidence to the District Court that

44
the total amount of damages to class members ranges
between $8.5 and $8.8 billion. Lead Plaintiff cautioned,
however, that establishing damages at trial would lead to a
"battle of experts," with each side presenting its figures to
the jury and with no guarantee whom the jury would
believe. The District Court accepted this argument, as well
as E&Y's statement that it was prepared to prove at trial
that the decline in Cendant's stock following the
announcements of the fraud was largely due to factors and
conduct in which E&Y was not involved. The court thus
found that this factor weighed in favor of settlement.

Throenle and Duncan do not offer persuasive arguments
regarding this factor, and we find the District Court's
reasoning on this factor sound. As we set forth in the
margin, the damages determination proffered by Lead
Plaintiff 's expert is complex and hard to follow, freighted
with involved calculations and conceptually difficult issues.21
Were a jury confronted with competing expert opinions of
corresponding complexity, there is no compelling reason to
think that it would accept Lead Plaintiff 's determination
rather than Cendant's, which would posit a much lower
figure for the Class's damages. This risk in establishing
damages means that this factor weighs in favor of approval
of the Settlement.

6. The Sixth Girsh Factor: The Risks of Maintaining
the Class Action Through Trial

The District Court found that this factor slightly weighed
in favor of settlement because, "[u]nder Federal Rule of Civil
Procedure 23(a), a district court `may decertify or modify a
class at any time during the litigation if it proves to be
unmanageable,' " and proceeding to trial would always
entail the risk, even if slight, of decertification. In re
Cendant Corp. Sec. Litig., 109 F. Supp. 2d at 262 (quoting
In re Prudential Ins. Co. of Am. Sales Practices Litig., 148
_________________________________________________________________

21. For example, as we stated in the Facts & Procedural History section,
the damages determination involves calculating the"true value" of
Cendant/CUC stock for any given day during the class period, i.e., the
value that the stock would have had if the fraud had not been
committed, which requires a complex and conceptually difficult damages
determination.

45
F.3d 283, 321 (3d Cir. 1998)). The objectors argue that this
factor is really neutral. In our view the risk of
decertification appears to be extremely slight; hence we
agree with the objectors.

7. The Seventh Girsh Factor: The Ability of the
Defendants to Withstand a Greater Judgment

There is a dispute among the parties as to what this
factor means, i.e., whether it concerns the ability of the
defendants to withstand a judgment for the $8.8 billion
maximum damages sought by the Class, as Lead Plaintiff
and E&Y argue, or whether it focuses on the ability of the
defendants to withstand a settlement or a judgment for any
amount higher than the $3.2 billion for which they are
settling, as the objectors contend. The District Court took
note of this dispute, but appears not to have taken a
position on it, as it found that there was insufficient
financial data to determine what the defendants could
afford to pay.

Lead Plaintiff and E&Y reason that the use of the term
"judgment" rather than "settlement" in the formulation of
this Girsh factor supports their contention that it concerns
only the possible judgment at trial for the full amount of
damages sought rather than other possible larger
settlements. This reasoning is not terribly persuasive,
because Girsh uses the phrase "the ability of the
defendants to withstand a greater judgment," 521 F.2d at
157 (emphasis supplied), and the comparative term
"greater" implies a comparison with the current settlement.
If this factor was intended to reference the ability of the
defendants to withstand a judgment for what the plaintiffs
claim as their damages, then it would presumably be stated
in those terms (e.g., "the ability of the defendants to
withstand a judgment for what the plaintiffs claim") rather
than as "the ability of the defendants to withstand a greater
judgment." Furthermore, because both a settlement and a
judgment take money out of Cendant's pocket,
distinguishing the two in the context of this factor makes
little sense from a practical point of view.

We think a better interpretation of this factor is that it is
concerned with whether the defendants could withstand a

46
judgment for an amount significantly greater than the
Settlement. Our case law supports this view. See In re
Prudential, 148 F.3d at 321-22 (finding no error in the
district court's analysis of this factor that considered
whether the defendant could withstand a judgment for an
amount greater than the proposed settlement); GM Trucks,
55 F.3d at 818 (same). Thus, our consideration here is
whether Cendant could withstand a judgment for an
amount significantly greater than $2.85 billion, and
whether E&Y could withstand a judgment for an amount
significantly greater than $335 million. The District Court
concluded that, although the defendants failed to produce
financial information that showed that they could not pay
a judgment greater than what the Settlement provided, this
was not enough to reject the Settlement because the other
factors cut clearly in favor of settlement. However, the
District Court went on to find that

at least as far as Cendant is concerned, objective
benchmarks support Lead Counsel and Cendant's
stance that sustaining a larger judgment, and possibly
even a larger settlement, might prove fatal. Particularly,
the significant percentage of Cendant's market
capitalization that will be paid to the class--
approximately 25-30%. Even more striking is that Lead
Plaintiffs' total damages calculation [i.e. the $8.8
billion] represents approximately 80-95% of [Cendant's]
market capitalization (depending on market close)--a
figure difficult for this Court to imagine Cendant
paying without seeking shelter in our bankruptcy laws.

109 F. Supp. 2d at 263.

Thus, while the District Court did not find that Cendant
could not pay more than the $2.85 billion it contributed to
the Settlement, it did find that if this case went to trial and
Cendant was held liable for an amount close to $8.8 billion,
it would probably declare bankruptcy. Regarding E&Y's
ability to withstand a greater judgment, the court did not
have any of E&Y's financial information before it, so it
could not ascertain whether E&Y could pay more than its
$335 million share of the Settlement. The court then
determined that, because of the lack of financial

47
information, this factor weighed neither for nor against the
Settlement.

Throenle and Duncan argue that the District Court erred
when it found that this factor was neutral, because both
Cendant and E&Y are able to pay greater amounts than
they would under the Settlement. Throenle contends that
Cendant's announcement after the Settlement was reached
that it was resuming its share repurchasing activity shows
that Cendant has the ability to pay significantly more than
$2.85 billion. Duncan points to E&Y's post-settlement sale
of its consulting business to Cap Gemini for $11 billion as
evidence of the need to get more information as to E&Y's
ability to pay more.

We agree with the objectors' contentions that the
defendants could afford to pay more than they did under
the Settlement. This does not end our analysis of this
factor, however. The District Court was surely right that
somewhere between Cendant's settlement payout ($2.85
billion) and the potential judgment ($8.8 billion), Cendant
would likely be tipped into declaring bankruptcy. It is not
clear on the record where this point would occur--it is
probably not clear even to Cendant's directors at this point
--but it is very likely that bankruptcy would have been a
risk if Cendant were faced with a substantially higher
judgment. There is inevitably a measure of speculation
involved in this determination, especially given the lack of
record development on this issue, so even though we think
that it is likely that both Cendant and E&Y could have paid
substantially more than they did under the Settlement, we
must remain cognizant that the possibility of bankruptcy is
quite real when the settlement or judgment numbers
sufficiently increase. At the same time, the proponents of a
settlement bear the burden of proving that the Girsh factors
weigh in favor of approval. See GM Trucks, 55 F.3d at 785.

Given these observations, we disagree with the District
Court that the ability to withstand a greater judgment
factor is neutral with regard to the Settlement. Rather, we
think that this factor cuts against approval of the
Settlement, albeit only moderately, because of the built-in
limitations of this kind of analysis and the lurking

48
possibility of bankruptcy for Cendant (and perhaps E&Y as
well) if faced with a judgment near $8.8 billion.

8. The Final Girsh Factors: The Range of
Reasonableness of the Settlement Fund in Light of
the Best Possible Recovery & in Light of Litigation
Risks

The District Court began its analysis of these factors by
noting that the maximum amount of total damages against
all defendants is approximately $8.5 billion (later amended
to $8.8 billion), so that the total settlement amount of
nearly $3.2 billion from all defendants represents a 36-37%
recovery rate by the plaintiff Class. "This far exceeds
recovery rates of any case cited by the parties." In re
Cendant Corp. Sec. Litig., 109 F. Supp. 2d at 263 (citing
cases and a volume describing a range of recoveries from
1.6% to 14% for securities class action settlements 22).
Because Cendant paid the bulk of the $3.2 billion
settlement, the court considered the proportionate fairness
of the E&Y settlement separately. E&Y was only potentially
liable for $6.2 billion in damages (i.e., the damages
sustained by pre-April 15, 1998 purchasers), and, if E&Y
and Cendant bear equal responsibility for these damages,23
then E&Y's settlement payment of $335 million represented
9.25% of the damages for which it was responsible. The
court found that this was in line with the range of
recoveries referenced above, and that it was well above the
norm for recoveries against accounting firms in securities
litigation.
_________________________________________________________________

22. The District Court cited the following: Denise Martin et al., National
Economic Research Association, Inc., Recent Trends IV: What Explains
Filings and Settlements in Shareholder Class Actions 10-11 (1996)
(securities settlements range from 9%-14% of claimed damages); In re
Prudential Sec., Inc. L.P. Litig., MDL No. 1005, 1995 WL 798907 (S.D.N.Y.
Nov. 20, 1995) (approving settlement of between 1.6% and 5% of claimed
damages); In re Crazy Eddie Sec. Litig., 824 F. Supp. 320 (E.D.N.Y. 1993)
(settlement of between 6% and 10% of damages); In re Michael Milken &
Assocs. Sec. Litig., 150 F.R.D. 57 (S.D.N.Y. 1993) (7.5%).

23. This is of course a highly questionable proposition insofar as the
S 10(b) claims were concerned, as it appears from the record that
Cendant would likely bear a much higher proportionate responsibility
than E&Y for the fraud.

49
The objectors' arguments about these factors challenge
the District Court's calculations, contending that the
Class's damages were $13 to 20 billion rather than $8.8
billion, so that the recovery rate for the Settlement would
be much lower than the District Court concluded. These
arguments are flawed, however, because they calculate the
Class's damages by using the drop in Cendant's market
capitalization after the fraud was revealed. A stock's drop in
market capitalization is not a proper measure of damages
in securities cases under the statutory scheme laid out in
S 10(b) or S 11. See 15 U.S.C.S 77k(e) (S 11 damages) &
S 78u-4(e) (S 10(b) damages). Thus, the objectors' arguments
are unavailing.24

Furthermore, we find the District Court's conclusion that
these factors weigh in favor of the Settlement to be
persuasive. The fact that the recovery rate for the Class
here apparently exceeds the recovery rates in other
securities class action settlements tends to support the
reasonableness of the Settlement even though the Class
faced low litigation risks in its claims against Cendant
(because of the relative ease of establishing Cendant's
liability). The lower recovery rate of E&Y's portion of the
Settlement is justified by the greater litigation risks the
Class faced in establishing E&Y's liability. For these
reasons, we conclude that these factors weigh in favor of
approval of the Settlement.
_________________________________________________________________

24. The reason why a drop in market capitalization is an inaccurate
determiner of damages can be clarified by the following example.
Suppose that Samantha Shareholder bought one share of Cendant stock
at $20. The stock then rose to $25, but when the fraud was announced
it dropped to $15, whereupon Shareholder sold. Shareholder's damages
are $5 because that is the difference between what she paid for the stock
and what she sold it for after the fraud was revealed ($20 - $15); these
are her "out-of-pocket" damages. See Sowell v. Butcher & Singer, Inc.,
926 F.2d 289, 297 (3d Cir. 1991) ("The proper measure of damages to
reflect the loss proximately caused by the defendants' deceit is the out-
of-pocket rule. That rule is the traditional measure of damages in a Rule
10b-5 action.") (internal quotation marks and citation omitted). If we
used the drop in market capitalization to determine Shareholder's
damages, however, we would conclude that she had damages of $10 ($25
- $15), which is greater than her out-of-pocket loss and is thus not a
proper measure of her damages.

50
Volume 2 of 3

51
9. Summing Up the Girsh Factors

Insofar as the Cendant portion of the Settlement is
concerned, we conclude that the second (reaction of the
class), third (stage of the proceedings), fifth (risk of
establishing damages), eighth and ninth (range of
reasonableness in light of the best possible recovery and of
litigation risks) Girsh factors all weigh strongly in favor of
approval of the settlement with Cendant. The first factor
(complexity of litigation) weighs moderately in favor of
approval, while the seventh factor (ability to withstand a
greater judgment) weighs moderately against approval and
the fourth factor (risk of establishing liability) weighs more
heavily against approval of the settlement with Cendant.
Finally, the sixth factor (risk of maintaining the class
action) is effectively neutral.

As to the E&Y portion of the Settlement, we conclude
that the first (complexity of litigation), second (reaction of
the class), fourth (risk of establishing liability), fifth (risk of
establishing damages), eighth and ninth (range of
reasonableness in light of the best possible recovery and of
litigation risks) Girsh factors all weigh strongly in favor of
approval of the Settlement. The third factor (stage of the
proceedings) and the sixth factor (risk of maintaining the
class action) are neutral, while the seventh factor (ability to
withstand a greater judgment) weighs moderately against
the E&Y portion of the Settlement.

Given this analysis, we conclude that the District Court
did not abuse its discretion in finding that the Girsh factors

52
overall weighed in favor of approving the Settlement and
that therefore the Settlement was fair, reasonable, and
adequate. As should be clear from our analysis, we think
that this question with respect to the Cendant portion of
the Settlement is closer than the District Court made it out
to be. In particular, the lack of any serious risk of
establishing Cendant's liability and its probable ability to
pay substantially more in settlement raise concerns in our
minds concerning the fairness and adequacy of this
Settlement. However, a quick reference to the preceding
discussion of the Girsh factors makes clear that the balance
clearly weighed in favor of approval of the Cendant
settlement. As to E&Y, there can be no question as to the
propriety of the approval. Furthermore, under our standard
of review applicable here we accord deference to the District
Court's exercise of discretion, and can set aside its decision
only if there was an abuse of that discretion, which is
absent here. For these reasons, we hold that the District
Court did not abuse its discretion in concluding that the
Settlement was fair, reasonable, and adequate based on its
application of the Girsh factors.

B. Intra-class Conflicts

Throenle and Mark have presented objections to the
Settlement that fall under the general rubric of intra-class
conflicts. Throenle presents two related arguments for
setting aside the District Court's order approving the
Settlement, while Mark attacks the Plan of Allocation.

1. Throenle's Arguments

a. The Lead Plaintiff 's Alleged Conflicts of Interest

Throenle first argues that the members of the CalPERS
Group (who comprise Lead Plaintiff) were too conflicted to
serve adequately in that capacity because they continued to
hold huge amounts of Cendant stock during the Settlement
negotiations, rendering them more concerned with
protecting their interests in Cendant's future prospects
than with achieving maximum recovery for the Class from
Cendant. Throenle's argument is based on the general
assertion that a lead plaintiff who retains a substantial
investment in a defendant corporation cannot adequately
represent a class in a lawsuit against that corporation

53
because this lead plaintiff will naturally be conflicted
between trying to get maximum recovery for the class and
trying to protect its ongoing investment in the corporation,
e.g., by settling cheap or by securing corporate governance
changes in lieu of cash, both of which are alleged here.
Because of this, she argues that we should set aside the
Settlement.

Throenle's thesis is attractive. The problem with it is that
Congress seems to have rejected it when it enacted the lead
plaintiff provisions of the PSLRA. The Reform Act
establishes a presumption that the class member"most
capable of adequately representing the interests of class
members" is the shareholder with the largest financial
stake in the recovery sought by the class. 15 U.S.C.S 78u-
4(a)(3)(B)(i) & (iii)(I). The plaintiff with the largest stake in a
given securities class action will almost invariably be a
large institutional investor, and the PSLRA's legislative
history expressly states that Congress anticipated and
intended that such investors would serve as lead plaintiffs.
See S. Rep. No. 104-98, at 11 (1995), reprinted in 1995
U.S.C.C.A.N. 679, 690 ("The Committee intends to increase
the likelihood that institutional investors will serve as lead
plaintiffs by requiring the court to presume that the
member of the purported class with the largest financial
stake in the relief is the `most adequate plaintiff.' "). We
presume that Congress was aware that an institutional
investor with enormous stakes in a company is highly
unlikely to divest all of its holdings in that company, even
after a securities class action is filed in which it is a class
member.

By establishing a preference in favor of having such
investors serve as lead plaintiffs, Congress must have
thought that the situation present here does not inherently
create an unacceptable conflict of interest. See id. ("The
Committee believes that an institutional investor acting as
lead plaintiff can, consistent with its fiduciary obligations,
balance the interests of the class with the long-term
interests of the company and its public investors."). For this
reason, the simple fact that the institutional investors who
comprise Lead Plaintiff retained Cendant stock while the
Settlement was negotiated is not nearly enough, standing

54
alone, to support Throenle's claim that Lead Plaintiff was so
conflicted that the Settlement should be overturned. 25
_________________________________________________________________

25. Although we have held that the fact that the members of the
CalPERS Group continued to hold Cendant stock does not warrant
overturning the Settlement, we call attention to an issue of potential
intra-class conflicts with which district courts will need to grapple in
future cases at the class certification stage. See In re Party City
Securities
Litigation, 189 F.R.D. 91, 108-10 (D.N.J. 1999) (noting the possibility of
a significant conflict in many securities class actions between the
interests of individuals and institutions that purchased and then sold
stock in the defendant firm--"Sell Plaintiffs"--and those who bought and
continue to hold such stock--"Hold Plaintiffs").

In economic terms, the potential conflict may be demonstrated as
follows. The motivation of a rational Sell Plaintiff is simple: he wants
to
secure the largest possible recovery. The rational Hold Plaintiff,
however,
is in a more complicated situation; her goal is to reach a settlement that
will maximize the combined value of her share of the settlement and the
stock that she continues to hold in the defendant firm. Consequently,
though a rational Sell Plaintiff would be perfectly willing to push the
defendant firm one dollar short of declaring bankruptcy, a rational Hold
Plaintiff rarely would be so willing because the increased value of her
share of the settlement fund would almost certainly be offset by a
corresponding decrease in the value of her stock. Thus, there will often
be a significant conflict between the interests of Sell Plaintiffs and
Hold
Plaintiffs, particularly in cases where the class's expected damages are
very large. We acknowledge that settlements among market participants
are not always a function of rational behavior, as economists assume.
Indeed, most settlements are probably based on intuition--although
market factors doubtless inform the exercise of the parties' judgment.

What is important to realize, however, is that this issue is one of class
configuration. It is not merely a problem with the identity of the lead
plaintiff, because it is equally problematic to have a Sell Plaintiff
represent a class that includes Hold Plaintiffs as it is to have a Hold
Plaintiff represent a class that includes Sell Plaintiffs. Properly
understood, the issue is whether the conflict between the interests of
Sell Plaintiffs and Hold Plaintiffs in a particular case is sufficiently
severe
so as to prevent a putative class from satisfying Rule 23's requirements
for class certification, regardless whether the problem is seen as one of
commonality, see Fed. R. Civ. P. 23(a)(2) (providing that a class action
may be maintained only if "there are questions of law or fact common to
the class"), typicality, see Fed. R. Civ. P. 23(a)(3) (permitting class
certification only if "the claims or defenses of the representative
parties
are typical of the claims or defenses of the class"), adequacy of

55
Throenle appears implicitly to acknowledge this point,
because she also argues that there is specific evidence that
Lead Plaintiff did not adequately represent the Class's
interests in this case, and that this evidence rebuts the
PSLRA's presumption that the CalPERS Group was the
most adequate plaintiff. See 15 U.S.C. S 78u-4(a)(3)(B)(iii)(II)
(providing that the presumption that the largest
shareholder is the most adequate plaintiff "may be rebutted
only upon proof by a member of the purported plaintiff
class that the presumptively most adequate plaintiff. . .
will not fairly and adequately protect the interests of the
class"). Throenle points to two factors as evidence that Lead
Plaintiff did not adequately protect the Class's interests.
The first is that while some people originally placed the
Class's total damages at $13-20 billion, Cendant only paid
$2.85 billion, which is too low a percentage of the Class's
total damages. Her second piece of evidence is that Liberty
Media Co. agreed to invest $400 million in Cendant soon
after the announcement of the Settlement; because Lead
Plaintiff must have known about this impending deal"[t]his
obviously gave the Lead Plaintiffs--to the extent they
retained substantial Cendant holdings--a tremendous
incentive to settle cheap." Throenle's Opening Br. at 31.

Throenle does not clearly explain how she concluded that
the Class's damages were $13-20 billion; apparently it is
derived from Cendant's loss of market capitalization caused
by the announcement of the fraud. As we noted above in
_________________________________________________________________

representation, see Fed. R. Civ. P. 23(a)(4) (stating that a class may be
certified only if "the representative parties will fairly and adequately
protect the interests of the class"), or predominance, see Fed. R. Civ. P.
23(b)(3) (allowing for class certification if "the court finds that the
questions of law or fact common to the members of the class
predominate over any questions affecting only individual members").
Because here no party on appeal objects to class certification based on
conflicts between Sell Plaintiffs and Hold Plaintiffs, we need not decide
whether this matter should have been certified as two separate classes
or as a single class with sub-classes. We do, however, call these issues
to the attention of district courts for future cases, and note that the
use
of separate classes or sub-classes is not inconsistent with the Reform
Act because that statute deals with the identification of a lead
plaintiff,
and not with the proper means for defining a class in the first place.

56
our Girsh factor analysis, however, loss in market
capitalization is not a proper measure of damages inS 10(b)
or S 11 cases. See 15 U.S.C. S 78u-4(e) (S 10(b) damages) &
S 77k(e) (S 11 damages); supra Part III.A.8. Thus, Throenle's
argument based on this $13-20 billion figure has no
legitimate basis and we reject it for that reason.

Similarly, Throenle's accusations about the Cendant-
Liberty Media deal are based upon speculation; she offers
no evidence that Lead Plaintiff knew about this impending
deal or that it affected the settlement calculations, except
for the fact that the deal was announced soon after the
Settlement was announced (nine days later). Furthermore,
even if this speculation were correct, Throenle's argument
on its own is not persuasive. It is unclear how this
impending deal, if Lead Plaintiff knew of it, "obviously gave
Lead Plaintiff . . . a tremendous incentive to settle cheap,"
as Throenle contends. Why would an upcoming infusion of
cash investment in Cendant impel Lead Plaintiff to settle
this litigation cheaply? Lead Plaintiff would have such an
incentive only if: (1) Liberty Media made the deal contingent
upon Cendant achieving a favorable settlement of this case;
(2) Lead Plaintiff became aware that Liberty Media had
taken this position; and (3) Lead Plaintiff determined that
the Liberty Media deal was worth more to it (as a current
shareholder of Cendant) than a larger settlement was worth
to it (as a class member). As with her other charges,
Throenle offers no evidence that any of these suppositions
are true. For these reasons, we reject Throenle's assertion
that Lead Plaintiff was in conflict with the interests of the
class members so that the Settlement should be
overturned.

b. The Corporate Governance Changes

Throenle also argues that the corporate governance
changes that Lead Plaintiff obtained from Cendant as part
of the Settlement benefitted only institutional investors who
continued to hold large blocks of Cendant stock, and not
the Class as a whole, so that the District Court abused its
discretion in approving a settlement that provided an
individual benefit to certain class members at the expense
of more recovery for the Class overall.

57
The corporate governance changes that Lead Plaintiff
negotiated include Cendant's agreement to: (1) ensure that
a majority of its Board of Directors would be independent
directors; (2) place only independent directors on the
Board's Audit, Nominating, and Compensation Committees;
(3) de-classify the Board and provide for the annual election
of all directors; and (4) preclude the repricing of any
employee stock option after its grant, except with the
approval of a majority of voting shareholders. Although
these corporate governance changes were not negotiated
until after the monetary portion of the Settlement was
agreed upon, Lead Plaintiff did make it known to Cendant
at the beginning of the negotiation process that it was going
to ask for corporate governance changes. Obviously, these
changes benefit only current and future Cendant
shareholders, as they are meant to reduce the chance of
future fraud by limiting the control of Cendant's internal
officers and directors. The Lead Plaintiff, however, was
appointed to represent the interests of the Class, which is
defined as all persons who purchased Cendant stock
between May 31, 1995 and August 28, 1998, many of
whom have long since sold their shares.

On the basis of these facts, which are essentially
undisputed, Throenle argues that the inclusion of the
corporate governance changes in the Settlement warrants
overturning the Settlement. She acknowledges that she has
no evidence that Lead Plaintiff gave up something in the
negotiations (presumably up-front dollars) in order to get
the corporate governance changes. Throenle's argument is
thus based upon the common sense premise that "you
don't get something for nothing." Throenle contends that
the only thing of value that Lead Plaintiff had to offer
Cendant for the governance changes was its acceptance of
less money for the Class. Therefore, Throenle maintains,
Lead Plaintiff sold out the interests of the class members
(by accepting less money than it could have gotten) in order
to get something of value for itself and for other current
and future Cendant shareholders. Under this view, Lead
Plaintiff breached its duty to the Class in negotiating these
corporate governance changes, and the District Court
abused its discretion in approving the Settlement given this
conflict.

58
Throenle's argument here has an intuitive pull, but
ultimately it is unpersuasive for two reasons. First, the
received wisdom of the street does not necessarily have
force in this Court as a matter of law. The truth of the
maxim "you don't get something for nothing" is not
something that we can judicially notice. We need evidence,
and there is no affirmative evidence backing up Throenle's
claims, although there is some evidence against them. Lead
Plaintiff strenuously denies that it took any less monetary
recovery to get the corporate governance changes.
Apparently, the corporate governance changes were not
negotiated until after the monetary recovery was
determined, and Lead Counsel who negotiated the
Settlement made declarations to the District Court stating
that Cendant was explicitly told that the money it paid into
the Settlement would not be decreased in any way as an
exchange for implementing the corporate governance
changes.

Cendant's general counsel confirmed this declaration,
and stated that Cendant did not request or receive any
concessions, economic or otherwise, in exchange for
adopting the corporate governance changes. Thus, Lead
Plaintiff submits that we should leave intact the District
Court's factual finding that "Throenle's objection regarding
the corporate governance changes has no substance. There
has not been the slightest indication that the cash portion
of the settlement was related to, dependent upon, or
intertwined with the governance proposals." 109 F. Supp.
2d at 252.

Second, Cendant had another possible motivation for
agreeing to the corporate governance changes: corporations
that have admitted to fraudulent activity can have a hard
time attracting and keeping investors unless they make
some affirmative efforts to ensure that such fraud will not
occur again. It is entirely plausible that Cendant agreed to
the corporate governance changes as a way to show
investors that it was addressing the situation that allowed
the fraud to occur in the first place, thus trying to make
itself more attractive. This possibility counters Throenle's
"you don't get something for nothing" argument, because,
under this scenario, Cendant gave up the corporate

59
changes in order to encourage continued investment,
particularly from institutional investors.
In sum, the lawyers involved in negotiating the
Settlement have provided affidavits and declarations to the
effect that there was no settlement-money-for-
corporate-governance-changes exchange, and Throenle
offers no evidence otherwise. We are satisfied that the
District Court's factual finding that there was no evidence
of such an exchange is not clearly erroneous, and we reject
Throenle's arguments based on the supposed existence of
such an exchange. For all the foregoing reasons, we
conclude that Throenle's conflict of interest arguments are
not a sufficient basis for concluding that the District Court
abused its discretion in approving the Settlement. 26
_________________________________________________________________

26. Throenle makes two other arguments which can be dealt with
summarily. First, she argues that the Settlement Notice was inadequate
because it omitted information that the PSLRA requires in such notices,
in 15 U.S.C. S 78u-4(a)(7)(B)(ii). That statute provides, in relevant
part:
"Disagreement on amount of damages: If the parties do not agree on the
average amount of damages per share that would be recoverable if the
plaintiff prevailed on each claim alleged under this chapter, a statement
from each settling party concerning the issue or issues on which the
parties disagree" must be included in the notice of a settlement. Throenle
appears to interpret this as a requirement that, if the parties do not
agree on damages, the notice of a settlement must include a statement
from each settling party concerning every issue on which the parties
disagree. The District Court rejected this argument, holding that
(7)(B)(ii)
clearly only requires a statement on the damages issues on which the
parties disagree. The District Court was correct. Quite obviously, the
phrase "the issue or issues on which the parties disagree" in (7)(B)(ii)
refers only to damages issues, not to every disputed issue involved in the
class action. The court found that the Settlement Notice contained a
statement of the damages issues on which the parties disagree and that
this statement was sufficient; this finding was supported. Throenle also
argues that several of the statements contained in the Settlement Notice
were misleading or incomplete; these arguments are patently without
merit and we reject them without further discussion.

Second, Throenle argues that the District Court erred in approving the
part of the Settlement in which "Lead Plaintiffs have traded their solid
case against E&Y" for a 50% interest in any recovery that Cendant gets
in its cross-claim against E&Y, because: (1) "Lead Plaintiffs cannot cede
their responsibility for prosecuting a class action against one defendant

60
2. Mark's Arguments

Mark attacks the Settlement's Plan of Allocation, arguing
that class members who had S 11 claims under the
Amended Complaint (i.e., class members who received
Cendant stock via the HFS merger) should be allocated
higher settlement payments than class members with only
S 10(b) claims, because S 11 claims and damages are far
easier to prove than S 10(b) claims and damages. She then
asserts that Lead Plaintiff did not press for a greater
recovery for S 11 claimants because it used the greater
strength of the S 11 claims to recover more for the Class's
S 10(b) claims.27 Mark therefore argues that the District
_________________________________________________________________

in a case to another defendant in the case," as this violates the "spirit"
of Rule 23; and (2) "Cendant's case against E&Y is much weaker than
the case brought against E&Y by the class." Throenle's Opening Br. at
57-58. Throenle's argument here involves a mischaracterization of the
terms of the Settlement. Under the Settlement, E&Y paid the Class $335
million in return for the Class releasing its claims against E&Y; this is
the extent of what the Class is getting from E&Y. Independent of any of
the Class's claims, Cendant has asserted certain cross-claims against
E&Y. In addition to its $2.85 billion payment, Cendant agreed to give
50% of any recovery of these claims against E&Y to the Class. Cendant
is prosecuting not the Class's claims against E&Y but its own cross-
claims, so Cendant is not in any way taking over the role of Lead
Plaintiff. Consequently, the relative strength of Cendant's claims against
E&Y as compared to the Class's claims against E&Y is immaterial to the
fairness of this settlement provision; the Class did not give up any part
of its claims against E&Y for this 50% of Cendant's recovery, but only
gave up some portion of its claims against Cendant in return for this
50% from Cendant (and given that Cendant paid the Class $2.85 billion,
it is not clear that the Class gave up very much for this 50% recovery).
Therefore, we reject Throenle's argument that the District Court abused
its discretion in approving this portion of the Settlement.

27. As we noted above, the Plan of Allocation allowed class members with
S 11 claims to calculate their damages either under a statutory S 11
calculation or under the plan's S 10(b) calculation, whichever was higher.
This is because any S 11 claim can also be treated as a S 10(b) claim, so
anyone with a S 11 claim also has a S 10(b) claim (of course, the converse
is not true). However, certain class members had both a S 11 claim and
an independent S 10(b) claim; that is, they received shares in the HFS
merger (the S 11 claim), and they also bought shares on the open market
(the S 10(b) claim). The Lead Plaintiff had both S 11 claims and
independent S 10(b) claims, as did Mark.

61
Court abused its discretion in approving the Plan of
Allocation, and she asks us to vacate that part of the
Settlement. She also asks us to appoint her lead plaintiff,
and her counsel as lead counsel, for a subclass composed
of the class members with S 11 claims.

Mark cites three basic legal differences betweenS 10(b)
and S 11 claims that affect their relative legal difficulty.
First, S 11 claims are strict liability claims (all one needs to
establish on the part of the defendant is an untrue
statement of material fact in a registration statement) while
S 10(b) claims require proof of scienter on the part of the
defendant. Second, this difference in the required mental
state means that S 11 claims are less fact intensive than
S 10(b) claims, with the result that a S 11 claim is much
more likely to survive a defendant's motion for summary
judgment. Third, there is no proportionate liability under
S 11 claims, while there is under S 10(b) if the defendant
acted only with recklessness, not knowledge. According to
Mark, these three differences make the plaintiff 's task of
proving her case easier with a S 11 claim than with a
S 10(b) claim, thus making the former a more valuable type
of claim.

Mark contends that the conflict between the class
members with S 11 claims and those without such claims
was exacerbated here because Lead Plaintiff used the
stronger S 11 claims as leverage to get more recovery for the
S 10(b) claims. More specifically, Mark points to the fact
that, early in the litigation, Lead Plaintiff agreed to defer a
motion for partial summary judgment on its S 11 claims in
return for Cendant's agreement to permit informal
discovery on the S 10(b) claims. Thus, Mark argues that, in
return for benefit for the S 10(b) claims (discovery), Lead
Plaintiff sacrificed leverage for the S 11 claims--the
summary judgment motion--which she submits could have
resulted in an early determination of liability against
Cendant.

Finally, Mark points to two other Cendant cases as
evidence that S 11 claims against Cendant are easier to
prevail on and thus should result in a higher recovery
percentage than the 36% this Settlement provides: the
PRIDES settlement, In re Cendant Corp. PRIDES Litig., 51 F.

62
Supp. 2d 537 (D.N.J. 1999), and the Yeager litigation,
Yeager v. Cendant, 109 F. Supp. 2d 225 (D.N.J. 2000).
Mark contends that these cases show that "an unconflicted
Plaintiff with a particularly strong S 11 Claim" against
Cendant can recover close to 100% of her damages, much
higher than the 36% return this Settlement garnered.
Under the terms of the PRIDES settlement, members of the
class received almost 100% of their damages claims. In
Yeager, the district court granted partial summary
judgment in favor of the plaintiff on the issue of liability on
his S 11 claims, while denying summary judgment on
S 10(b) liability because there was a genuine issue of
material fact as to Cendant's scienter.

Mark's arguments are not without force. However, there
are several considerations that convince us that the District
Court did not abuse its discretion in approving the Plan of
Allocation. First, the difference in the liability standards
between S 11 and S 10(b) claims ultimately does not make
a substantial difference in this case, as it is basically
undisputed that Cendant's employees committed fraud, so
the necessary scienter for the S 10(b) claims has been
admitted. It is true that there is a possible issue of
proportionate liability that arises with the S 10(b) claims,
because Cendant has stated that it would raise the defense
that the scienter of its employees cannot be attributed to
Cendant itself. However, as we noted previously, see supra
Part III.A.4, based on the record before us we think that
Cendant would have a very difficult time making out this
defense.

Second, the real difficulty in the trial of this case would
have been establishing damages, a process which both
S 10(b) and S 11 claimants would have to undergo equally
and which almost certainly would devolve into a"battle of
the experts." Although S 11 claimants could at the outset
calculate their damages rather simply (by subtracting the
price of the stock at the time the lawsuit was brought from
the amount that they paid for the stock, see 15 U.S.C.
S 77k(e)), the defendant can counter this calculation by
showing that any or all of this difference in stock price was
caused by something other than the fraud, see id . Thus, on
a S 11 claim there would still be a "battle of the damage

63
experts;" the only difference between a S 11 and a S 10(b)
damage determination in this case is that, on aS 11 claim,
the defendant would bear the burden of disproving the
plaintiff 's straightforward subtraction calculation. In fact,
in Yeager, the district court denied Yeager summary
judgment on his S 11 claim in part because the court found
that there was a genuine issue of material fact as to the
amount of Yeager's S 11 damages. See Yeager, 109 F. Supp.
2d at 229. Furthermore, the informal discovery that Lead
Plaintiff obtained in return for deferring the summary
judgment motion produced information relevant to
determining the Class's damages, which was beneficial to
both the S 11 and S 10(b) claims.

Finally, it is also important to note that the S 10(b)
damages available to the class members in this case are
generally greater than the S 11 damages available, so that
in this respect the S 10(b) claims are potentially stronger
than the S 11 claims.28 At all events and for all these
reasons, we are chary of holding that the respective legal
strengths of the S 10(b) and S 11 claims involved here
should have been factored into the fairness of the
settlement determination. This would be a speculative
enterprise at best, and the differences in strength of these
_________________________________________________________________

28. The reason for this is that S 11 damages and S 10(b) damages are
calculated under the Plan of Allocation using different days as the
"selling date," i.e., the date on which the class member is deemed to
have sold her Cendant stock for damage determination purposes. As we
described, supra n.8, S 11 damages are determined by using as a selling
date the date lawsuits were first filed (April 16, 1998). Section 10(b)
damages, however, are determined using the earlier of (1) the date the
class member actually sold her stock or (2) the last day of the class
period, i.e., August 28, 1998. Thus, because a class member would have
no damages if she sold before April 16, 1998 (the fraud was not revealed
until after trading on April 15, 1998, so sales before then got the full
benefit of the fraudulently inflated price of Cendant's stock), damages on
the S 10(b) claims are determined using a date between April 16, 1998
and August 28, 1998. Because Cendant stock declined steadily between
April 16 and August 28, 1998, the calculations ofS 10(b) damages under
the Plan of Allocation (which may use a post-April 16 date as the selling
date) are generally more than S 11 damage calculations under the plan
(using April 16 as the selling date).

64
claims are not so great as to make the outcome of this
process clear.

Furthermore, the PRIDES settlement and the Yeager
litigation are distinguishable. The PRIDES settlement
involved a paper payout rather than a cash payout (i.e., the
plaintiffs got new Cendant stock for their old stock), see
Cendant PRIDES, 51 F. Supp. 2d at 540, while the case at
bar involves a cash payout.29 Second, PRIDES was a "claims
made" settlement, with unclaimed settlement funds
reverting back to Cendant, see id. at 541; here all the
settlement cash (and interest) will go to the Class. This
point is important because it means that unmade claims in
this Settlement will increase the percentage return for each
class member, while unmade claims in the PRIDES
settlement did not increase each class member's return but
instead decreased the amount that Cendant had to pay out.
Put another way, giving 36% recovery to 100% of the class
in a standard settlement like the case at bar is equivalent
(in terms of money paid out by the defendant) to giving
100% recovery in a claims made settlement if only 36% of
the class actually makes claims (assuming that each claim
is for the same amount).

Thus, the "claims made" nature of the PRIDES settlement
meant that Cendant could agree to a settlement in that
case that gave a much higher percentage recovery to all
potential class members, because it knew that it only had
_________________________________________________________________

29. Mark argues that, although the PRIDES settlement involved a "paper
for paper" exchange, a PRIDES plaintiff who sold her new Cendant stock
within the first ten days that she was able to received almost 100% of
her damages claimed, so that the PRIDES settlement effectively involved
a nearly 100% cash payout. However, at the time when the PRIDES
settlement was reached, there was no guarantee that the class members
would garner such a steadily high return over the first few days during
which they would be able to sell their stock. There was about a nine-
month delay between the settlement approval and the date when the
class members could sell their new shares in the market, and much
could have happened to Cendant and its stock during that interim that
could have affected the amount of return that the PRIDES plaintiffs
received. Thus, the PRIDES "paper for paper" exchange involved a
sizeable risk, at the time the settlement was entered into, of a payout
substantially less than 100% of the class's damages.

65
to pay out to those class members who actually made
claims, which was certain to be a subset of the entire class.
Not only does this mean that PRIDES is not"really" a
settlement for 100% recovery (because less than 100% of
the potential claimants will make a claim, thus lowering the
amount Cendant must pay out), it also means that the
settlement in this case is not "really" a settlement for 36%
recovery (because less than 100% of the potential claimants
will make a claim, thus raising the amount each claimant
will receive). More specifically, at the time of oral argument
in this case, $4.962 billion in claims had been submitted to
the Claims Administrator, which translates into a 67%
recovery for each class member--almost double the original
36% recovery figure.30

As for Yeager, that case was not a class action (the
plaintiff had opted out of this Class) and was for far less in
damages, so any comparisons between Yeager and this
case are flawed at best. Furthermore, as we note above, the
district court partially denied Yeager summary judgment on
his S 11 claims because there was a genuine issue of
material fact as to the amount of damages.

For the foregoing reasons, we reject Mark's arguments
and conclude that the District Court did not abuse its
discretion by approving a settlement that treatedS 10(b)
and S 11 claims more or less equally.

C. The Davidsons' Objections

For the reasons set forth supra at note 10, it is not clear
at this juncture whether the Davidsons are members of the
Class. If this Court, in its en banc sitting in November,
2001, decides that the Davidsons are included in the Class,
we would be required to pass on the issues they raise in
this appeal. Given the proliferation of appeals in this case
(this being the seventh appeal in the Cendant proceedings
see supra n.11), and the importance of bringing this matter
to a close as soon as the issues presently unsettled are
resolved, we think it prudent to address those issues now.
Because these objections do not warrant extensive
treatment, we will dispose of them in relatively short order.
_________________________________________________________________

30. The deadline to submit claims to the Claims Administrator was
October 31, 2000.

66
1. Class Certification Findings

The Davidsons first argue that the District Court erred by
failing to make explicit findings that all of Federal Rule of
Civil Procedure 23's requirements were met when certifying
the Class. They argue further that the court erred by not
making those findings again at the settlement stage. In the
Davidsons' submission, if the court had made the Rule 23
findings, it never would have certified the Class as it now
stands; rather it would have at least certified a subclass for
merger claimants like them. In particular, the Davidsons
argue that, if it had done its job properly, the court would
have (or should have) found that Rule 23(a)'s requirements
of typicality and adequate representation were not met by
the Class as it was defined and by the Lead Plaintiffs'
representation. In their Reply Brief, the Davidsons add the
argument that Rule 23(a)'s commonality requirement was
not met as well.

However, the Davidsons neglected to raise these
arguments in a timely fashion, failing to raise them until
the settlement approval stage. We thus conclude that they
waived these arguments by not raising them earlier. See
Joel A. v. Giuliani, 218 F.3d 132, 140 (2d Cir. 2000)
(holding that objectors to a class action settlement who
argued, at the settlement approval stage, that the Rule 23
requirements were not met for them in their subclass were
untimely with their objection, and thus the objection was
waived).

2. Notice of the Settlement

The Davidsons contend that the Settlement Notice given
to the class members was insufficient, in that it did not give
them sufficient information to make an informed decision
whether to opt out before the opt-out deadline. They argue
that the relevant terms of the Settlement Agreement--the
Plan of Allocation and the scope of the claims against
Cendant that were released--were not disclosed before the
opt-out period ended. This defect, they assert, made the
notice that was sent to the Class insufficient. The
Davidsons submit that the court either should have sent
out another notice with this particular information about
the terms of the Settlement before the opt-out deadline, or

67
should have extended the opt-out deadline (or provided for
a new opt-out period) beyond the time that the terms of the
Settlement were released. The Davidsons argue that the
reaching of a settlement in effect made this class action a
settlement class action, so that the notice requirements for
a settlement class action set forth in GM Trucks , 55 F.3d
768, 792 (3d Cir. 1995), apply here. We disagree.

This was not a settlement class action but a previously
certified class action that settled. The Davidsons have
provided no authority for their contention that if settlement
is reached before the opt-out period has run the specific
terms of the settlement must be sent to the class before the
end of the opt-out period, or that reaching a settlement
requires a new opt-out period. We do not think the
requirements of Rule 23 mandate these measures, and
thus reject the Davidsons' arguments.

3. Intra-Class Conflicts

The Davidsons press an interesting argument based on
the conflicts that allegedly arose within the Class when the
Settlement precluded the S 11 claims and 1933 Act S 12
claims31 [hereinafter "S 12 claims"] of class members who
acquired CUC shares via non-HFS mergers with CUC, even
though the Settlement did not provide any recovery for
these S 11 and S 12 claims. The Davidsons contend that the
District Court abused its discretion and that the Lead
Plaintiff breached its duty to the Class when they accepted
and approved a settlement with such terms. Relatedly, the
Davidsons contend that an intra-class conflict arose
because the Settlement gave HFS merger claimants a
choice between calculating their recoveries as S 10(b) or
S 11 damages, while non-HFS merger claimants were given
no such choice.

As we understand it, the premises of the Davidsons'
argument are that:
_________________________________________________________________

31. Section 12 of the Securities Act of 1933 provides for civil liability
for
anyone who offers or sells a security "by means of a prospectus or oral
communication, which includes an untrue statement of material fact or
omits to state a material fact necessary in order to make the statements,
in light of the circumstances under which they were made, not
misleading . . . ." 15 U.S.C. S 77l.

68
 (1) The Amended Complaint did not include any S 11
and S 12 claims against Cendant for class members
who received Cendant stock from any merger other
than the HFS merger;

(2) The Davidsons and other merger partners of
Cendant/CUC during the class period have potential
S 11 and S 12 claims against Cendant;

(3) These potential S 11 and S 12 claims against
Cendant could produce greater damages than a
corresponding S 10(b) claim against Cendant;

(4) The Settlement does not allow the Davidsons or
other non-HFS merger class members to recover on
their S 11 or S 12 claims; under the Plan of Allocation,
they are limited to recovering under S 10(b) for their
losses; and

(5) The Settlement precludes non-HFS merger class
members like the Davidsons from bringing their S 11
and S 12 claims against Cendant in the future.

On the basis of the foregoing, the Davidsons reason that
the Settlement was unfair because: (i) it prevented non-HFS
merger class members from recovering on their S 11 and
S 12 claims while precluding these class members from
bringing those claims in the future, and (ii) it treated the
HFS merger claimants specially, by allowing them to
recover the higher of their damages calculated underS 10(b)
and under S 11, while denying the non-HFS merger class
members the same opportunity.

Again, we disagree. If the Davidsons are arguing that
their S 11 and S 12 claims should have been included in the
Amended Complaint in the first place, they waived this
claim by not bringing it earlier. See Joel A. v. Giuliani, 218
F.3d 132, 140 (2d Cir. 2000). Furthermore, regarding the
claim that an intra-class conflict arose from the special
treatment given the HFS claimants, we reject a
fundamental premise of the Davidsons' above argument,
namely (3): that the Davidsons' S 11 claims could produce
greater damages than their corresponding S 10(b) claims.
The Davidsons' S 11 claims would have to be determined
under the relevant section of the 1933 Securities Act by

69
using the date of the filing of this lawsuit. See supra n.8.
However, using that date, the Davidsons' potentialS 11
damages as we calculate them are less than the S 10(b)
damages that they are allotted under the Plan of Allocation.
Thus, the Davidsons are not prejudiced by being limited to
only S 10(b) damages under the terms of the Settlement--
those damages are greater than any S 11 damages they
would have received under the Plan of Allocation--so there
is no unfairness or intra-class conflict here.

4. Alleged Flaws in the Plan of Allocation

The Davidsons submit that the District Court abused its
discretion in approving the Settlement's Plan of Allocation
because the Plan "was based upon clearly erroneous
premises." They contend that the Plan does not correctly
determine out-of-pocket damages for the S 10(b) claims
because it does not correctly define the "true value" of
Cendant stock when it was purchased by the class
members, as it uses figures that "pool" Cendant's finances
with companies that Cendant merged with. Concomitantly,
the Davidsons argue that the Lead Plaintiff did not
establish a proper evidentiary basis for the Plan's method of
determining damages.

It is clear from the record that the District Court was
faced with competing expert opinions on the proper way to
determine and allocate damages. The record shows that the
court carefully considered the expert advice, and then
chose to accept the plan submitted by the Lead Plaintiff 's
damages expert over the plan submitted by the Davidsons'
expert. This kind of decision is intensely fact-based, falling
within the purview of the District Court's discretion. The
District Court properly based its decision on evidence
offered by the Lead Plaintiff, which provided more than a
sufficient evidentiary basis for its decision. See, e.g.,
Bradford Cornell & R. Gregory Morgan, Using Finance
Theory to Measure Damages in Fraud on the Market Cases,
37 U.C.L.A. L. Rev. 883 (1990) (presenting the damages
study on which the Plan of Allocation was based); In re
California Micro Devices Securities Litig., 965 F. Supp. 1327
(N.D. Cal. 1997) (using the same method of allocating
maximum artificial inflation over the class period,
developed by David L. Ross of Lexicon, Inc., as was used

70
here). We therefore find no abuse of the court's discretion
in its decision to accept the Plan of Allocation.

Accordingly, the Davidsons' objections are rejected.

IV. COUNSEL SELECTION AND COUNSEL FEES

We turn to the issues involving the selection of lead
counsel and the determination of its fee. The Reform Act
establishes detailed and interrelated procedures for
choosing a lead plaintiff and selecting lead counsel. We first
address the District Court's appointment of the CalPERS
Group as lead plaintiff, and then its choice to use an
auction to select lead counsel. With respect to legal
questions--including whether the District Court applied the
correct standards in selecting the lead plaintiff and when,
if ever, a court may hold an auction to select lead counsel
in cases governed by the PSLRA--we review de novo. See
Brytus v. Spang & Co., 203 F.3d 238, 244 (3d Cir. 2000).
If the court committed no legal errors, we review its award
of attorneys fees for abuse of discretion. See id.

A. Introduction: Attorney-Client Tension in the Class
Action Context

Lawyers operate under ethical rules that require them to
serve only their clients' interests. When a representation
involves a single client, the ability to select, retain, and
monitor counsel gives clients reason to be confident that
their lawyers will live up to this obligation. The power to
select counsel lets clients choose lawyers with whom they
are comfortable and in whose ability and integrity they have
confidence. The power to negotiate the terms under which
counsel is retained confers upon clients the ability to craft
fee agreements that promise to hold down lawyers' fees and
that work to align their lawyers' economic interests with
their own. And the power to monitor lawyers' performance
and to communicate concerns allows clients to police their
lawyers' conduct and thus prevent shirking. This regime
has served the American legal system well for a very long
time.

1. The Problem With Class Actions

Most of the safeguards we have described vanish in the
class action context, where "the client" is a sizeable, often

71
far-flung, group. Logistical and coordination problems
invariably preclude class members from meeting and
agreeing on anything, and, at all events, most class
members generally lack the economic incentive or
sophistication to take an active role. There is simply no way
for "the class" to select, retain, or monitor counsel.

Although class counsel has an ethical duty of undivided
loyalty to the interests of the class, reason for concern
remains. This is in large measure because a rational, self-
interested client seeks to maximize net recovery; he or she
wants the representation to terminate when his or her
gross recovery minus his or her counsel's fee is largest. In
contrast, at least in theory and often in practice, a rational,
self-interested lawyer looks to maximize his or her net fee,
and thus wants the representation to end at the moment
where the difference between his or her fees and costs--
which include not only the money that the lawyer spends in
advancing his or her client's cause but also the
opportunities for other work that the lawyer gives up by
pursuing it--is greatest. These two points rarely converge.
As a result, there is often a conflict between the economic
interests of clients and their lawyers, and this fact creates
reason to fear that class counsel will be highly imperfect
agents for the class.

Because of this conflict (and because "the class" cannot
counteract its effects via counsel selection, retention, and
monitoring), an agent must be located to oversee the
relationship between the class and its lawyers.
Traditionally, that agent has been the court. Although some
courts have played an active role with regard to selecting
lead counsel in securities cases, most have traditionally
appointed the person who filed the first suit as lead
plaintiff, and generally selected that person's lawyer to
serve as lead counsel (assuming, of course, that the lawyer
possessed sufficient competence and experience). See, e.g.,
H.R. Conf. Rep. 104-369, at 33 (1995), reprinted in 1995
U.S.C.C.A.N. 730, 732. In addition, time and institutional
constraints have generally prevented courts from actively
monitoring the performance of lead counsel during the
pendency of litigation.

72
Under such a regime, it was essential for courts to
scrutinize fee requests to protect the interests of absent
class members. Lead plaintiffs were often unsophisticated
investors who held small claims, and, according to some
reports, they were sometimes paid "bounties" by lead
counsel in exchange for their "services." See id. In such
situations, it was unlikely that the lead plaintiff had
undertaken a meaningful counsel selection process; indeed
it was suspected that lead counsel generally selected the
lead plaintiff rather than vice versa. See id. at 32-33,
reprinted in 1995 U.S.C.C.A.N. 730, 731-32; S. Rep. No.
104-98, at 6 (1995), reprinted in 1995 U.S.C.C.A.N. 679,
685. Moreover, there was generally little reason to believe
that the lead plaintiff had the incentive or inclination to
engage in aggressive or effective bargaining over lead
counsel's fee, or that a typical lead plaintiff could be
counted on to engage in meaningful monitoring of lead
counsel's performance.

2. The Evolution of Judicial Review of Counsel Fees In
Class Actions

Courts have developed several means of reviewing the
reasonableness of fee requests. At the dawn of the class
action era, the most frequently used device was the lodestar
method, which was developed by this Court in Lindy
Brothers Builders, Inc. of Philadelphia v. American Radiator
& Standard Sanitary Corp., 487 F.2d 161 (3d Cir. 1973).
Under that approach, the court assesses the number of
hours that lead counsel reasonably worked, decides the
reasonable hourly rate for the lawyers' services, and
determines counsel's fee by multiplying the number of
hours reasonably worked by the reasonable hourly rate.
The Supreme Court has developed an elaborate
jurisprudence covering the proper application of the
lodestar method, which remains the governing approach for
cases governed by fee-shifting statutes. See, e.g., Hensley v.
Eckerhart, 461 U.S. 424 (1983); Blum v. Stenson, 465 U.S.
886 (1984); Webb v. Board of Educ. of Dyer County, 471
U.S. 234 (1985); City of Riverside v. Rivera, 477 U.S. 561
(1986); Pennsylvania v. Delaware Valley Citizens' Counsel
for Clean Air, 483 U.S. 711 (1987); Blanchard v. Bergeron,
489 U.S. 87 (1989); Farrar v. Hobby, 506 U.S. 103 (1992).

73
Over time, criticism mounted against using the lodestar
method, especially in "common fund" cases such as this
one. The "common-fund doctrine . . . allows a person who
maintains a lawsuit that results in the creation,
preservation, or increase of a fund in which others have a
common interest[ ] to be reimbursed from that fund for
litigation expenses incurred." Report of the Third Circuit
Task Force, Court Awarded Attorney Fees, 108 F.R.D. 237,
241 (1985) [hereinafter "1985 Task Force Report"]. In
common fund cases the fees paid to class counsel come
directly out of the recovery of the class, as opposed to
statutory fee-shifting cases where the plaintiffs' recovery
and counsel's fees are distinct. In those situations, every
additional dollar given to class counsel means one less
dollar for the class, regardless how a total settlement
package is formally structured. Cf. GM Trucks , 55 F.3d at
821 ("[P]rivate agreements to structure artificially separated
fee and settlement arrangements cannot transform what is
in economic reality a common fund situation into a
statutory fee shifting case.")

As the 1985 Task Force Report recognized, using the
lodestar method in the common fund context creates
numerous problems. First, because the lodestar
compensates lawyers based on hours worked rather than
results achieved, there is a risk that it will cause lawyers to
work excessive hours, inflate their hourly rate, or decline
beneficial settlement offers that are made early in litigation.
See 1985 Task Force Report, 108 F.R.D. at 247-48. Second,
requiring courts to decide how many hours a lawyer
"reasonably" worked in pursuing a given matter requires an
enormous investment of judicial time. See id. at 246. Third,
though creating the illusion of mathematical precision, the
lodestar method can be quite subjective and can produce
wildly varying awards in otherwise similar cases. See id. at
246-47.

In light of these criticisms, the 1985 Task Force Report
recommended a different device for setting attorneys fees in
common fund class actions: the percentage-of-recovery
method. See id. at 255. This Court has generally accepted
that recommendation. See, e.g., In re Prudential Ins. Co. of
Am. Sales Practices Litig., 148 F.3d 283, 333-34 (3d Cir.

74
1998). Under the percentage-of-recovery approach, a court
charged with determining whether a particular fee is
"reasonable" first calculates the percentage of the total
recovery that the proposal would allocate to attorneys fees
by dividing the amount of the requested fee by the total
amount paid out by the defendant; it then inquires whether
that percentage is appropriate based on the circumstances
of the case. In making that decision, this Court has
directed district courts to consider numerous factors, as
well as recommending that they employ a lodestar"cross-
check." See, e.g., In re Cendant Corp. PRIDES Litig., 243
F.3d 722, 733-35 (3d Cir. 2001).32

The 1985 Task Force Report also identified another
problem with the traditional approach: the fact that fees
and their method of calculation were generally not set until
the conclusion of litigation. This reality was troubling for a
several reasons. First, it required the court to assess the
reasonableness and efficacy of counsel's efforts in
hindsight, with all of the risks of distortion and bias
_________________________________________________________________

32. For a sampling of the literature assessing the desirability and
efficacy
of using the percentage-of-recovery method in common fund cases, see,
for example, Reagan W. Silber & Frank E. Goodrich, Common Funds and
Common Problems: Fee Objections and Class Counsel's Response, 17
Rev. Litig. 525 (1998) (arguing in favor of the use of the percentage-of-
recovery method in common fund cases, and contending that the
percentage allocated to counsel fees should not decrease simply because
the size of the fund increases); William J. Lynk, The Courts and the
Plaintiffs' Bar: Awarding the Attorney's Fees in Class Action Litigation,
23
J. Legal Stud. 185 (1994) (employing economic analysis to consider the
similarities and differences between the lodestar and percentage-of-
recovery methods, and surveying case law in an effort to determine
which method better explains the actual size of class counsel fee
awards); Jonathan R. Macey & Geoffrey P. Miller, The Plaintiffs'
Attorney's Role in Class Action and Derivative Litigation: Economic
Analysis and Recommendations for Reform, 58 U. Chi. L. Rev. 1, 48-61
(1991) (analyzing and critiquing both methods, arguing that the
percentage-of-recovery method, though preferable to the lodestar, is
deeply flawed as well); Monique LaPointe, Note, Attorney's Fees in
Common Fund Actions, 59 Fordham L. Rev. 843 (1991) (assessing both
methods and arguing that the most important thing for courts to do is
to pick one or the other in order to facilitate case management and
promote predictability).

75
associated with this kind of decision-making. Second, it
meant that attorneys had to litigate an entire case before
finding out what hours or actions the court would consider
"reasonable." Third, waiting until the end to set fee terms
eliminated any potential for those terms to align the
incentives of the class and its lawyers during the pendency
of the litigation. The Task Force Report recommended that
courts "attempt to establish a percentage fee arrangement
agreeable to the Bench and to plaintiff 's counsel . . . at the
earliest practicable moment." 108 F.R.D. at 255. 33

The 1985 Task Force Report recognized that it would be
problematic to have the presiding judge set a fee award at
the outset of a case. See id. at 256. One cannot develop a
fee scale without making an assessment of the likelihood of
success and the size of the recovery. But requiring the
court to make (and act upon) an assessment of the strength
of a plaintiff class's case early in litigation was thought to
be in tension with the need for judges to be objective.
Although the Task Force Report proposed a process for up-
front fee negotiation through a court-appointed, non-
judicial representative, it does not appear to have been
taken up by any court.34
_________________________________________________________________

33. The Task Force members disagreed among themselves as to how
early was appropriate. Some pushed for as early a time as possible,
suggesting after the pleadings have been filed but before discovery was
significantly underway. Other (judicial) members of the Task Force
preferred a later point to allow them to have a"feel" for how the case had
developed. See id. at 255 n.62. The members of the Task Force also
disagreed as to whether a "time limit should be imposed on the court's
ability to shift from one fee regime to another." Id. at 257. Some of the
judicial members of the Task Force thought that no such limit should
apply so as to preserve the court's ability to protect the best interests
of
the class. See id. Other members of the Task Force believed that giving
the court that degree of discretion would "destroy[ ] the predictability"
that advance negotiation is intended to achieve. Id.

34. The Task Force Report recommended that "the court appoint a non-
judicial representative--who typically will be an attorney--for the then
putative fund beneficiaries, who will negotiate the agreement in the
usual marketplace manner and submit the proposal for the court's
approval." Id. The Report contemplated that the court's review of the
agreement negotiated between court-appointed intermediary and counsel

76
The Task Force Report's recommendations contained no
suggestions for changes in the areas of counsel selection
and counsel monitoring. The first major attempt to address
counsel selection as well as fees came in Judge Vaughn R.
Walker's application of the auction technique in In re Oracle
Securities Litigation, 131 F.R.D. 688 (N.D. Cal. 1990), which
has since been used in a number of cases that are listed in
the margin.35 The basic concept is simple: the judge solicits
bids from law firms to serve as lead counsel and selects the
lowest bidder that the court determines will adequately
represent the class. In theory, an auction will mimic a
market transaction and result in reasonable quality, low-
cost representation for the class.36
_________________________________________________________________

would be "completely independent and thorough," and that the court
would have the power to "accept, reject, or revise the arrangement, either
providing exact terms or merely establishing ranges and retaining the
ultimate authority to revise the agreement if later circumstances
warrant." Id. at 257.

35. We have located eleven cases besides this one and Oracle where a
district court selected class counsel by means of an auction. Two were
antitrust cases. See In re Amino Acid Lysine Antitrust Litig., 918 F.
Supp.
1190 (N.D. Ill. 1996) (Shadur, J.); In re Auction Houses Antitrust Litig.,
197 F.R.D. 71 (S.D.N.Y. 2000) (Kaplan, J.). One was a securities class
action not governed by the PSLRA. See In re Wells Fargo Sec. Litig., 156
F.R.D. 223 (N.D. Cal. 1994) (Walker, J.). And eight were securities class
actions governed by the Reform Act. See Raftery v. Mercury Fin. Co., No.
97 C 624, 1997 WL 529553 (N.D. Ill. 1997) (Lefkow, J.); Sherleigh Assoc.
LLC v. Windmere-Durable Holdings, Inc., 184 F.R.D. 688 (S.D. Fla. 1999)
(Lenard, J.); Wenderhold v. Cylink Corp., 188 F.R.D. 577 (N.D. Cal. 1999)
(Walker, J.); In re Lucent Tech., Inc. Sec. Litig., 194 F.R.D. 137 (D.N.J.
2000) (Lechner, J.); In re Bank One S'holders Class Actions, 96 F. Supp.
2d 780 (N.D. Ill. 2000) (Shadur, J.); In re Comdisco Sec. Litig., 141 F.
Supp. 2d 951 (N.D. Ill. 2001) (Shadur, J.); In re Quintus Sec. Litig., No.
C-00-4263 (N.D. Cal., April 12, 2001) (Walker, J.); see also In re
Network
Assocs., Inc. Sec. Litig., 76 F. Supp. 2d 1017 (N.D. Cal. 1999) (Alsup,
J.)
(directing the lead plaintiff to undertake an auction process).

36. On January 30, 2001, the opinion author, acting as Chief Circuit
Judge and Presiding Officer of the Third Circuit Judicial Council,
announced the formation of a Task Force on the Selection of Class
Counsel whose primary duty is to assess the propriety and efficacy of the

77
The auction method offers several potential advantages.
First, unlike all of the methods previously discussed, it
deals with counsel selection in addition to counsel
retention. When an auction is used, counsel are no longer
"selected" by the race-to-the-courthouse method, and this
means that courts can exercise greater control over counsel
quality. Second, auctions may lead to lower-priced
representation. Under the traditional method, lead counsel
(who has already been appointed) tries to get as much as it
can from the court in terms of fees. Under the auction
method, in contrast, prospective lead counsel compete to
submit the lowest reasonable bid.37 Third, assuming a
_________________________________________________________________

use of the auction method in its various applications, and to
formulate recommendations for the bench, bar, and public. The
Press Release containing this announcement is available at:
http://www.ca3.uscourts.gov/classcounsel/taskforce.pdf. Other press
releases relating to the 2001 Task Force, a list of questions that it is
addressing, witness statements, and transcripts of the proceedings so far
are all available at: http://www.ca3.uscourts.gov/classcounsel/
public.htm. The 2001 Task Force's preliminary report will be made
public in October 2001, and its final report is scheduled for release
sometime during the Spring of 2002.

Judge Ambro, named in January as a member of the 2001 Task Force,
later became a member of this panel through the Court's random
assignment process. Judge Becker informed counsel for all parties of this
fact during a conference call that was held prior to oral argument, and
no party objected to Judge Ambro's continued involvement in this
matter. During this call, Judge Becker also "explained that everything
that is before the Task Force -- written presentations, case law, and
transcripts of oral presentations, et alia, ha[d] been placed on the Third
Circuit website (www.ca3.uscourts.gov), available through a link entitled
`Class Counsel Information.' " In re Cendant Corp. Litig., No. 00-2520 (3d
Cir., May 15, 2001) (unpublished order). Lastly, Judge Becker stressed
that "the function of the Task Force is limited to making general
recommendations to the bench and bar at large (throughout the nation)"
and that its recommendations would have "no precedential effect in any
circuit." Id.

37. See, e.g., Proceedings of the 2001 Third Circuit Task Force on the
Selection of Class Counsel [hereinafter "2001 Task Force Proceedings"],
Statement of the Committee on Federal Courts of the Association
of the Bar of the City of New York, at 4-5, available at

78
sufficiently large number of bidders, an auction will likely
better approximate a market transaction than having a
judge set attorneys fees after the fact. Fourth, auctions may
provide a way for new firms to enter the market for
plaintiff-side securities class action lawyers, thus rendering
the overall market more competitive.38 Fifth, the auction
method may require a smaller investment of judicial time
than the time-consuming lodestar method, and could
minimize the dangers of hindsight biases associated with
the traditional, after-the-fact approach to determining fees.
This Court has recognized the potential benefits of the
auction method, commending it to district courts in this
circuit for their consideration as one potential approach to
the problems in this area. See Gunter v. Ridgewood Energy
Corp., 223 F.3d 190, 201 n.6 (3d Cir. 2000). 39

Auctions may not be a panacea, however. One persistent
criticism is that courts generally identify the"lowest" bid
submitted by an "adequate" bidder and appoint that bidder
as lead counsel, without performing the cost/quality
_________________________________________________________________

http://www.ca3.uscourts.gov/classcounsel/Witness%20Statements/
struve.pdf [hereinafter "NYC Bar Association"]; 2001 Task Force
Proceedings, Statement of John C. Coffee, Jr., at 2, available at
http://www.ca3.uscourts.gov/classcounsel/Witness%20Statements/
johncoffee.pdf [hereinafter "Coffee"]; 2001 Task Force Proceedings,
Statement of Richard B. Drubel, at 4-5, available at
http://www.ca3.uscourts.gov/classcounsel/Witness%20Statements/
Richard_Drubel.pdf [hereinafter "Drubel"]; see also discussion, infra at
n.44 (describing Judge Milton I. Shadur's belief that his use of the
auction technique has saved class members in cases before him millions
of dollars in counsel fees).

38. See, e.g., Coffee at 2.

39. In Gunter this Court noted the auction technique "appears to have
worked well," and identified the decision now here on review, among
others, as cases where it had been used. See id. at 201 n.6. Gunter was
an antitrust case, hence questions involving the compatibility of the
auction procedure with the Reform Act were not before the Court.
Moreover, this type of citation to a district court opinion, offered to
open
eyes to a range of possibilities, was not even dicta, and, at all events,
does not preclude a subsequent panel from reviewing the merits of a
district court's decision.

79
weighing in the way that a real client would.40 Another fear
is that because auctions do not reward the attorneys who
discover legal violations, they may reduce lawyers'
incentives to seek out and disclose illegality (because
unless they are selected as lead counsel, they may not be
compensated for the time they spent doing so).41 Moreover,
bids in large, potentially high-recovery, cases are likely to
be quite complex and it may be difficult for courts to assess
their relative costs to the class. This risk is especially
strong in cases where the bids consist of a complicated set
of alternate fees that vary depending on the size of the
recovery and the stage of the proceedings at which the
recovery is obtained. In such situations, a court cannot
assess which bid is the cheapest without first assessing the
likely amount of recovery.42 Additionally, if there are too few
bidders, the degree to which an auction will actually
simulate the market is questionable.43 Finally, there is a
risk that auctions could result in a "winner's curse,"
systematically selecting bidders who overestimate the odds
or amount of a likely recovery. Such a "winning" bidder
might then find itself litigating an unprofitable case, which
may then give it an incentive to settle early and cheaply.44
No consensus has yet emerged about the relative efficacy of
the auction technique, although Judge Walker and Judge
Milton I. Shadur of the United States District Court for the
_________________________________________________________________

40. See, e.g., 2001 Task Force Proceedings, Statement of Lucian
Ayre Bebchuk, at 6-8, available at http://www.ca3.uscourts.gov/
classcounsel/Witness%20Statements/Bebchuk.Statement.pdf
[hereinafter "Bebchuk"]; Task Force Proceedings, Statement of Jill E.
Fisch, at 3-4, available at http://www.ca3.uscourts.gov/classcounsel/
Witness%20Statements/fisch.pdf. [hereinafter"Fisch"].

41. See, e.g., Fisch at 7; NYC Bar Association at 3; Coffee at 3. But see
In re Bank One S'holders Class Actions, 96 F. Supp. 2d 780, 789 n.13
(N.D. Ill. 2000) (ordering a lead plaintiff to ensure that the lawyers who
prepared the consolidated class action complaint--but were not selected
as lead counsel via a court-ordered auction--were compensated for their
time).

42. See, e.g., Fisch at 2; NYC Bar Association at 5.

43. See, e.g., Coffee at 3; Fisch at 6-7.

44. See, e.g., Coffee at 3.

80
Northern District of Illinois have made a powerful case for
it, both in terms of policy and tangible (fee-saving) results.45
_________________________________________________________________

45. Along with Judge Walker (who, as we noted in the text, originated the
use of the auction method in federal court), Judge Shadur has been a
leading proponent of the auction method. Judge Shadur held one of the
first lead counsel auctions in In re Amino Acid Lysine Antitrust
Litigation,
918 F. Supp. 1190 (N.D. Ill. 1996), and has since used the technique in
two other cases as well. See In re Bank One S'holders Class Actions, 96
F. Supp. 2d 780 (N.D. Ill. 2000); In re Comdisco Sec. Litig., 141 F. Supp.
2d 951 (N.D. Ill., Apr. 12, 2001). In these opinions, Judge Shadur
cogently explains why courts have a basic obligation to protect the
pecuniary interests of absent class members, persuasively outlines why
courts cannot fulfill this duty by relying on decisions made by lead
plaintiffs, and powerfully argues in favor of the auction method as the
only way to minimize the agency costs that plague relationships between
absent class members and class counsel. Judge Shadur believes that his
use of the auction technique has saved class members in cases before
him millions of dollars in counsel fees. See, e.g., Bank One, 96 F. Supp.
2d at 785 n.5 (claiming that the Lysine auction saved the class between
$5 and 10 million in attorneys fees). In his recent opinion in In re
Comdisco Sec. Litig., No. 01 C2110, 01 C 874, 2001 WL 722097 (N.D. Ill.
June 27, 2001), Judge Shadur noted that the two prior cases in which
he has used the auction technique resulted in attorneys fees of
approximately 6% of the class's total recovery, and he contrasted this
with a recent case from the Eastern District of Pennsylvania in which
counsel was awarded 25% of the total recovery. See id. at *5. Based on
this, Judge Shadur calculated that his use of the auction method saved
plaintiff class members $10 million or more in counsel fees in each of
the cases where he has employed it. See id. Although Judge Shadur's
analysis seems quite persuasive, some have argued that his auctions
have resulted in lower overall recoveries as well as lower counsel fees
and have thus cost rather than saved class members money, see, e.g.,
John C. Coffee, Jr., Securities: Class Actions , Nat'l L.J., Sept. 14,
1998,
at B6 (criticizing the Lysine auction on this basis).

We need not engage in a dialogue with Judge Walker and Judge
Shadur over the merits and demerits of the auction method in class
actions generally at this time, however, because before us is a question
of statutory interpretation (of the Reform Act) rather than one of
judicial
policy. As we explain infra at Part IV.C, we think that lead counsel
auctions are generally (and that the auction in this case was)
inconsistent with the statutory scheme embodied in the Reform Act. It
will be left to later opinions of this Court, to the 2001 Task Force, and
perhaps to the Congress, to wrestle with the forceful policy arguments in
favor of the auction method that Judge Walker and Judge Shadur have
advanced.
81
Despite significant differences, it is critical to realize that
the traditional approach, the procedure suggested by the
1985 Task Force Report, and the auction method all share
two critical traits. First, none of them addresses the
inability of the class, a typical lead plaintiff, or the court to
monitor lead counsel in an adequate manner. Second, and
perhaps more significantly, all three methods rely on the
court (or an agent hand-picked by the court) to serve as the
class's agent vis-a-vis its counsel. This is less true under
the auction method, but even then the court must decide
which bidders are "qualified," assess which bids are
"adequate," and determine which of the adequate bids
submitted by qualified bidders is the "lowest." Another
option would be to assign responsibility to a different type
of agent. In 1995, two scholars recommended that
Congress do just that.

3. The PSLRA

In Let the Money Do the Monitoring: How Institutional
Investors Can Reduce Agency Costs in Securities Class
Actions, Professors Elliott J. Weiss and John S. Beckerman
argued that institutional investors are well suited to select,
retain, and monitor lead counsel in securities class actions.
See 104 Yale L.J. 2053 (1995). Their article explained how
then-current practices deterred institutional investors from
taking a more active role, and recommended legislation to
encourage them to serve as lead plaintiffs.

The Weiss and Beckerman proposal had three parts.
First, to ensure that institutional investors found out about
pending class actions, they argued that courts should
require that meaningful notices be sent out soon after the
filing of a complaint. See id. at 2108. Second, "because the
named plaintiff or group of plaintiffs with the largest
financial stake in the outcome of an action has the greatest
economic incentive to monitor class counsel's performance
effectively," Weiss and Beckerman suggested that courts
"adopt a presumption that that plaintiff or group will `most
adequately' represent class members' interests." Id. at
2105. They recommended that "[c]ourts . . . provide other
putative plaintiffs with an opportunity to rebut this
presumption, but should allow them to do so only by
demonstrating that the presumptively `most adequate'

82
plaintiff has a significant disqualifying conflict of interest or
is subject to unique defenses that would render it incapable
of adequately representing the class." Id. at 2105-06. Weiss
and Beckerman further suggested that only putative class
members should be permitted to file adequacy and
typicality objections against the presumptive lead plaintiff,
and recommended that even those parties be entitled to
discovery "only where they can demonstrate some
reasonable basis for believing that a presumptively
adequate plaintiff would not be capable of representing the
class adequately." Id. at 2109.

Third, once such a lead plaintiff was selected, Weiss and
Beckerman submitted that courts should "[a]ppoint as lead
counsel the attorney for the `most adequate plaintiff ' " and
should defer to that plaintiff 's discretion in setting
attorneys fees, noting that institutional investors are
"experienced and sophisticated consumers of legal
services." Id. at 2105-06. Weiss and Beckerman speculated
that if institutional investors frequently served as lead
plaintiffs, plaintiff-side securities law firms would grow
increasingly concerned about their long-term reputations
with such investors and thus might have less incentive to
shirk in particular cases. See id. at 2106-07. The authors
acknowledged that fee structures negotiated by institutional
lead plaintiffs might "differ substantially from the fee
structure that courts currently employ," but suggested that
courts "might well feel confident in assuming that a fee
arrangement an institutional investor had negotiated with
its lawyers before initiating a class action maximized those
lawyers' incentives to represent diligently the class's
interests, reflected the deal a fully informed client would
negotiate, and thus presumptively was reasonable." Id. at
2105.

Soon after Weiss and Beckerman's article was published,
Congress enacted the PSLRA. The statute establishes a
detailed and integrated procedure for selecting a lead
plaintiff and for choosing and retaining lead counsel in
securities class actions that is unquestionably based on
Weiss and Beckerman's proposal. Compare 15 U.S.C.
S 78u-4(a)(3), with Weiss & Beckerman, 104 Yale L.J. at
2105-09. See generally S. Rep. No. 104-98, at 11 n.32

83
(1995), reprinted in 1995 U.S.C.C.A.N. 679, 690 n.32
(stating that Weiss and Beckerman's article "provided the
basis for the `most adequate Plaintiff ' provision").

B. The Reform Act's Procedures; Selection of the
CalPERS Group As Lead Plaintiff

The Reform Act establishes a two-step process for
appointing a lead plaintiff: the court first identifies the
presumptive lead plaintiff, and then determines whether
any member of the putative class has rebutted the
presumption. See 15 U.S.C. S 78u-4(a)(3)(B)(iii)(I) & (II). We
begin by describing the manner in which courts charged
with appointing a lead plaintiff should proceed under the
PSLRA. We then measure the actions taken by the District
Court against these standards.

1. Legal Standards

a. Identifying the Presumptive Lead Plaintiff

In appointing a lead plaintiff, the court's first duty is to
identify the movant that is presumptively entitled to that
status. The process begins with the identification of the
movant with "the largest financial interest in the relief
sought by the class." 15 U.S.C. S 78u-4(a)(3)(B)(iii)(I)(bb). In
many cases (such as this one, see supra Part II.B), this
determination will be relatively easy, but in others it may
prove difficult. The Reform Act provides no formula for
courts to follow in making this assessment, but we agree
with the many district courts that have held that courts
should consider, among other things: (1) the number of
shares that the movant purchased during the putative class
period; (2) the total net funds expended by the plaintiffs
during the class period; and (3) the approximate losses
suffered by the plaintiffs. See Lax v. First Merch. Acceptance
Corp., No. 97 C 2715, 1997 WL 461036, at *5 (N.D. Ill. Aug.
11, 1997); see also In re Nice Sys. Sec. Litig. , 188 F.R.D.
206, 217 (D.N.J. 1999) (citing Lax for this proposition); In
re Olsten Corp. Sec. Litig., 3 F. Supp. 2d 286, 295 (E.D.N.Y.
1998) (same).

Any time the question appears genuinely contestable, we
think that a district court would be well within its
discretion in requiring that competing movants submit

84
documentation as to their holdings in the defendant
company or companies and in seeking further information
if it deems the original submissions to be an inadequate
basis for an informed decision. Once the court has
identified the movant with "the largest financial interest in
the relief sought by the class," it should then turn to the
question whether that movant "otherwise satisfies the
requirements of Rule 23 of the Federal Rules of Civil
Procedure," and is thus the presumptively most adequate
plaintiff. 15 U.S.C. S 78u-4(a)(3)(B)(iii)(I)(cc). This latter
requirement casts into stark relief a serious ambiguity
contained in the Reform Act's mechanism for selecting a
lead plaintiff.

The section of the PSLRA that governs the appointment
of the lead plaintiff is captioned "Rebuttable Presumption."
The first subsection, captioned "[i]n general," provides that
"the court shall adopt a presumption that the most
adequate plaintiff . . . is the person or group of persons
that": (1) filed the complaint or made a motion to serve as
the lead plaintiff; (2) "in the determination of the court, has
the largest financial interest in the relief sought by the
class;" and (3) "otherwise satisfies the requirements of Rule
23 of the Federal Rules of Civil Procedure." Id. S 78u-
4(a)(3)(B)(iii)(I). The next subsection, captioned"[r]ebuttal
evidence," declares that the presumption established by the
previous subsection "may be rebutted only upon proof by a
member of the purported plaintiff class that the
presumptively most adequate plaintiff -- (aa) will not fairly
and adequately protect the interests of the class; or (bb) is
subject to unique defenses that render such plaintiff
incapable of adequately representing the class." Id. S 78u-
4(a)(3)(B)(iii)(II).

The draftmanship of this section is inartful and hence
problematic. The first subsection states that a movant is
not entitled to the lead plaintiff presumption unless it
"otherwise satisfies" Rule 23. The two provisions of that
Rule that are relevant to this issue are 23(a)(3) and 23(a)(4).
The former requires that a party seeking to represent a
class have "claims or defenses [that] are typical of the
claims or defenses of the class" [hereinafter"the typicality
requirement"]. The latter mandates that a representative

85
party be able to "fairly and adequately protect the interests
of the class" [hereinafter "the adequacy requirement"]. Read
in isolation, the provision of the Reform Act that deals with
triggering the presumption (i.e., 15 U.S.C. S 78u-
4(a)(3)(B)(iii)(I)(cc)) seems quite clear that a court must
ensure that a movant satisfies both the typicality and
adequacy requirements of Rule 23 before conferring upon
that movant the status of presumptive lead plaintiff.

This conclusion, however, is in some tension with the
second subsection (i.e., 15 U.S.C. S 78u-4(a)(3)(B)(iii)(II)),
which seems to establish that the only way to rebut the
presumption is to show that the presumptive lead plaintiff
does not satisfy the typicality and/or adequacy
requirements. The statute thus simultaneously appears to
make "typicality" and "adequacy" both part of the threshold
identification of the presumptive lead plaintiff and the sole
means of rebutting the lead plaintiff presumption. Put
another way, if the requirements of the first subsection are
met, the statute can be read to say that the requirements
of the second subsection are moot. To say the least, it is
difficult to believe that Congress intended such an
incongruity.

The overall structure and legislative history of the statute
suggest that in appointing a lead plaintiff a district court
should engage in the following analysis. The initial inquiry
(i.e., the determination of whether the movant with the
largest interest in the case "otherwise satisfies" Rule 23)
should be confined to determining whether the movant has
made a prima facie showing of typicality and adequacy. The
initial clause of the statute, which governs triggering the
presumption, refers to determinations made by "the court,"
15 U.S.C. S 78u-4(a)(3)(B)(iii)(I), but the second, which deals
with rebutting it, speaks of "proof by a member of the
purported plaintiff class," id. S 78u-4(a)(3)(B)(iii)(II). This
phrasing suggests that the threshold determination of
whether the movant with the largest financial losses
satisfies the typicality and adequacy requirements should
be a product of the court's independent judgment, and that
arguments by members of the purported plaintiff class as to
why it does not should be considered only in the context of
assessing whether the presumption has been rebutted.

86
Moreover, both the statutory structure and the legislative
history suggest that the court's initial inquiry as to whether
the movant with the largest losses satisfies the typicality
and adequacy requirements need not be extensive. The first
subsection (the one that deals with triggering the lead
plaintiff presumption) requires that a movant "otherwise
satisf[y]" Rule 23, but the second (which covers rebutting it)
requires "proof " that the presumptively most adequate
plaintiff does not. The provision as a whole would make
little sense if we interpreted the first subsection as
requiring that a movant "prove" that it satisfied Rule 23 in
order to get the benefit of the lead plaintiff presumption,
because that would create a situation in which the only
way to rebut the presumption would be to "disprove"
something that the presumptively most adequate plaintiff
had already "proved." But if, in contrast, the first
subsection requires only a prima facie showing that the
movant with the largest losses satisfies Rule 23, the two
subsections are reasonably harmonious.

Lastly, this reading is consistent with the legislative
history. In explaining why institutional investors would
make desirable lead plaintiffs, the Conference Committee
Report opines that "[i]nstitutional investors and other class
members with large amounts at stake will represent the
interests of the plaintiff class more effectively than class
members with small amounts at stake. The claims of both
types of class members generally will be typical." H.R. Conf.
Rep. 104-327, at 34 (1995), reprinted in 1995 U.S.C.C.A.N.
730, 737. The terms of this language reflect the view that
institutional investors and others with large losses will,
more often than not, satisfy the typicality and adequacy
requirements. Thus, although the language of the first
subsection does not permit courts simply to "presume" that
the movant with "the largest financial interest in the relief
sought by the class" satisfies the typicality and adequacy
requirements, both the structure of the section as a whole
and the legislative history support the view that the court's
initial inquiry should be confined to determining whether
such movants have stated a prima facie case of typicality
and adequacy. See, e.g., Gluck v. Cellstar Corp. , 976 F.
Supp. 542, 546 (N.D. Tex. 1997) (stating that in
determining whether a movant is entitled to presumptive

87
lead status, "[a] comprehensive reading of the statute
reveals that [the movant] need only make a preliminary
showing that it satisfies [the typicality and adequacy]
requirements"); In re Olsten Corp. Sec. Litig., 3 F. Supp. 2d
286, 296 (E.D.N.Y. 1998) (same); In re Advanced Tissue Sci.
Sec. Litig., 184 F.R.D. 346, 349 (S.D. Cal. 1998) (same); In
re Milestone Sci. Sec. Litig., 183 F.R.D. 404, 414 (D.N.J.
1998) (same).

In conducting the initial inquiry as to whether the
movant with the largest losses satisfies the typicality and
adequacy requirements, the court may and should consider
the pleadings that have been filed, the movant's
application, and any other information that the court
requires to be submitted. In keeping with the statutory text,
however, the court generally will not consider at this stage
any arguments by other members of the putative class;
rather, such allegations should be dealt with in terms of
assessing whether the lead plaintiff presumption has been
rebutted rather than in terms of deciding whether it has
been triggered.

When making these determinations, courts should apply
traditional Rule 23 principles. Thus, in inquiring whether
the movant has preliminarily satisfied the typicality
requirement, they should consider whether the
circumstances of the movant with the largest losses"are
markedly different or the legal theory upon which the
claims [of that movant] are based differ[ ] from that upon
which the claims of other class members will perforce be
based." Hassine v. Jeffes, 846 F.2d 169, 177 (3d Cir. 1988)
(internal quotation marks and citation omitted); see also
Georgine v. Windsor, 83 F.3d 610, 631 (3d Cir. 1996)
(same).

In assessing whether the movant satisfies Rule 23's
adequacy requirement, courts should consider whether it
"has the ability and incentive to represent the claims of the
class vigorously, [whether it] has obtained adequate
counsel, and [whether] there is [a] conflict between [the
movant's] claims and those asserted on behalf of the class."
Hassine, 846 F.2d at 179; see also Georgine, 83 F.3d at
630 (stating that the adequacy of representation inquiry
involves consideration of both whether "the interests of the

88
named plaintiffs [are] sufficiently aligned with those of the
absentees" and whether "class counsel [is] qualified and
[will] serve the interests of the entire class"); GM Trucks, 55
F.3d at 800 (same).

In making the initial adequacy assessment in this
context, courts should also consider two additional factors.
Because one of a lead plaintiff 's most important functions
is to "select and retain" lead counsel, see 15 U.S.C. S 78u-
4(a)(3)(B)(v), one of the best ways for a court to ensure that
it will fairly and adequately represent the interests of the
class is to inquire whether the movant has demonstrated a
willingness and ability to select competent class counsel
and to negotiate a reasonable retainer agreement with that
counsel, see, e.g., In re Quintus Sec. Litig. , No. C-00-4263,
slip op. at 9 (N.D. Cal. Apr. 12, 2001).46 Thus, a court might
_________________________________________________________________

46. In Quintus, Judge Walker found that a movant for the lead plaintiff
position did not otherwise satisfy Rule 23 because he had not
"demonstrated that he is able effectively to select and retain lead
counsel." Id. at 30. In a sworn declaration, the movant stated that he
had made his choice of counsel "based on his broker's advice and after
conversations with lawyers at the firm," that he had "discussed and
considered a variety of fee structures with his counsel and ha[d]
developed an understanding of how fees are customarily charged in
litigation of this type," and that he had "negotiated an agreement with
counsel . . . that [he] believe[d] [would] maximize recovery for the
class."
Id. Judge Walker found this insufficient to support a conclusion that the
movant satisfied Rule 23's adequacy requirement, noting that the
declaration gave "no specifics" about the process by which the movant
had selected and negotiated with his chosen counsel. Judge Walker was
most concerned about a statement that one of the movant's chosen
lawyers had made at the hearing held to consider the appointment of
lead plaintiff. The lawyer had informed the court"that the fee negotiated
by [the movant] paid expenses out of the class's recovery, rather than
out of counsel's portion of the recovery," but then explained that
"counsel, of their own accord, had decided to sweeten the terms of the
agreement and allow expenses to be deducted from counsel's share of
the recovery; pending approval by [the movant] who did not know about
this concession." Id. at 31. Though finding "counsel's benevolence
towards the class . . . commendable," Judge Walker could not "conclude
that [the movant] negotiated anything close to a competitive fee in light
of counsel's willingness to modify the fee, without being asked, to
require
counsel to pay all litigation expenses." Id. "Benevolence of counsel,"
Judge Walker wrote, "is no substitute for hard bargaining." Id.

89
conclude that the movant with the largest losses could not
surmount the threshold adequacy inquiry if it lacked legal
experience or sophistication, intended to select as lead
counsel a firm that was plainly incapable of undertaking
the representation, or had negotiated a clearly
unreasonable fee agreement with its chosen counsel, see,
e.g., Raftery v. Mercury Fin. Co., No. 97 C 624, 1997 WL
529553, at *2 (N.D. Ill. Aug. 15, 1997) (refusing to recognize
a movant as the presumptive lead plaintiff because the
court was of the view that the retainer agreement between
it and its chosen counsel, which "capped" counsel's fees at
33 1/3% of the class's total recovery, was "not the result of
hard bargaining").47 We stress, however, that the question
at this stage is not whether the court would"approve" that
movant's choice of counsel or the terms of its retainer
agreement or whether another movant may have chosen
better lawyers or negotiated a better fee agreement; rather,
the question is whether the choices made by the movant
with the largest losses are so deficient as to demonstrate
that it will not fairly and adequately represent the interests
of the class, thus disqualifying it from serving as lead
plaintiff at all.

The second additional factor that the court should
consider in making the threshold adequacy determination
will arise only when the movant with the largest interest in
the relief sought by the class is a group rather than an
individual person or entity. The PSLRA explicitly permits a
"group of persons" to serve as lead plaintiff. See 15 U.S.C.
S 78u-4(a)(3)(B)(iii)(I); see also id.S 78u-4(a)(3)(B)(i)
(providing that the court "shall appoint as lead plaintiff the
member or members of the purported plaintiff class that the
court determines to be the most capable of adequately
representing the interests of class members") (emphasis
added). But the goal of the Reform Act's lead plaintiff
provision is to locate a person or entity whose
_________________________________________________________________

47. After its disqualification of the movant with the largest financial
interest on the grounds outlined above, the court decided to select the
lead plaintiff and lead counsel by means of an auction. See id. at *3. We
do not ally ourselves with this latter decision, which, for reasons stated
infra at Part IV.C.2, we think would be inappropriate in the typical
Reform Act case.

90
sophistication and interest in the litigation are sufficient to
permit that person or entity to function as an active agent
for the class, see, e.g., H.R. Conf. Rep. No. 104-369, at 32
(1995) reprinted in 1995 U.S.C.C.A.N. 730, 731; S. Rep. No.
104-98, at 10 (1995), reprinted in 1995 U.S.C.C.A.N. 679,
689; Weiss & Beckerman, 104 Yale L.J. at 2105--06, and
a group is not entitled to presumptive lead plaintiff status
unless it "otherwise satisfies" Rule 23, which in turn
requires that it be able to "fairly and adequately protect the
interests of the class." If the court determines that the way
in which a group seeking to become lead plaintiff was
formed or the manner in which it is constituted would
preclude it from fulfilling the tasks assigned to a lead
plaintiff, the court should disqualify that movant on the
grounds that it will not fairly and adequately represent the
interests of the class.

We note at this juncture that we disagree with those
courts that have held that the statute invariably precludes
a group of "unrelated individuals" from serving as a lead
plaintiff. See, e.g., Sakhrani v. Brightpoint, Inc., 78 F. Supp.
2d 845, 853 (S.D. Ind. 1999); In re Telxon Corp. Sec. Litig.,
67 F. Supp. 2d 803, 811-16 (N.D. Ohio 1999); In re
Donnkenny Inc. Sec. Litig., 171 F.R.D. 156, 157-58
(S.D.N.Y. 1997). The statute contains no requirement
mandating that the members of a proper group be"related"
in some manner; it requires only that any such group
"fairly and adequately protect the interests of the class." We
do not intimate that the extent of the prior relationships
and/or connection between the members of a movant group
should not properly enter into the calculus of whether that
group would "fairly and adequately protect the interests of
the class," but it is this test, not one of relatedness, with
which courts should be concerned.

If, for example, a court were to determine that the
movant "group" with the largest losses had been created by
the efforts of lawyers hoping to ensure their eventual
appointment as lead counsel, it could well conclude, based
on this history, that the members of that "group" could not
be counted on to monitor counsel in a sufficient manner.
See, e.g., In re Razorfish, Inc. Sec. Litig., No. 00 CV 9474
JSR, 2001 WL 476504, at *3 (S.D.N.Y. May 4, 2001)

91
(refusing to appoint as lead plaintiff a group that, in the
court's view, was "simply an artifice cobbled together by
cooperating counsel for the obvious purpose of creating a
large enough grouping of investors to qualify as`lead
plaintiff,' which can then select the equally artificial
grouping of counsel as `lead counsel' ").

Courts must also inquire whether a movant group is too
large to represent the class in an adequate manner. At
some point, a group becomes too large for its members to
operate effectively as a single unit. See, e.g., Chill v. Green
Tree Fin. Corp., 181 F.R.D. 398, 408-09 (D. Minn. 1998)
("[T]he larger [the size of a proposed lead plaintiff group],
the greater the dilution of the control that [the members of
that group] can maintain over the conduct of the putative
class action.") (internal quotation marks and citation
omitted). When that happens, the PSLRA's goal of having
an engaged lead plaintiff actively supervise the conduct of
the litigation and the actions of class counsel will be
impossible to achieve, and the court should conclude that
such a movant does not satisfy the adequacy requirement.
See, e.g., In re Advanced Tissue Sci. Sec. Litig. , 184 F.R.D.
346, 352 (S.D. Cal. 1998) (refusing to appoint a group
consisting of "over 250 unrelated investors" because of the
court's determination that doing so would be "inconsistent
with the goal of restoring control over lawsuits to plaintiffs
instead of counsel"); Chill, 181 F.R.D. at 408 (declining to
confer presumptive lead plaintiff status upon a"group" with
almost 300 members because doing so "would threaten the
interests of the class, would subvert the intent of Congress,
and would be too unwieldy to allow for the just, speedy and
inexpensive determination of this action").

Like many of the district courts that have considered this
question, we do not establish a hard-and-fast rule; instead,
we note only that a kind of "rule of reason prevails." See,
e.g., Advanced Tissue, 184 F.R.D. at 352; Chill, 181 F.R.D.
at 409. We do, however, agree with the Securities and
Exchange Commission that courts should generally
presume that groups with more than five members are too
large to work effectively. See Brief for the Securities and
Exchange Commission as Amicus Curiae at 17 n.13.

92
We do not intimate that other reasons could not justify a
court's decision that the Rule 23's adequacy of
representation requirement is not satisfied. If (for any
reason) the court determines that the movant with the
largest losses cannot make a threshold showing of typicality
or adequacy, then the court should explain its reasoning on
the record (so that appellate courts will have an adequate
basis for review) and disqualify that movant from serving as
lead plaintiff. The court should then identify the movant
with the next largest loss, consider whether that movant
satisfies Rule 23's requirements, and repeat this process
until a presumptive lead plaintiff is identified. See, e.g.,
Raftery, 1997 WL 529553, at *2-4, 7 (identifying a
presumptive lead plaintiff after disqualifying two movants
with larger losses, one on grounds of atypicality and one on
grounds of inadequacy).

b. Determining Whether the Presumption Has Been
Rebutted

Once a presumptive lead plaintiff is located, the court
should then turn to the question whether the presumption
has been rebutted. The Reform Act is quite specific on this
point, providing that the presumption "may be rebutted
only upon proof by a member of the purported plaintiff class
that the presumptively most adequate plaintiff -- (aa) will
not fairly and adequately protect the interests of the class;
or (bb) is subject to unique defenses that render such
plaintiff incapable of adequately representing the class." 15
U.S.C. S 78u-4(a)(3)(B)(iii)(II) (emphasis added). This
language makes two things clear. First, only class members
may seek to rebut the presumption, and the court should
not permit or consider any arguments by defendants or
non-class members. See, e.g., Gluck v. Cellstar Corp., 976
F. Supp. 542, 550 (N.D. Tex. 1997) ("The statute is clear
that only potential plaintiffs may be heard regarding the
appointment of a Lead Plaintiff."). Second, once the
presumption is triggered, the question is not whether
another movant might do a better job of protecting the
interests of the class than the presumptive lead plaintiff;
instead, the question is whether anyone can prove that the
presumptive lead plaintiff will not do a "fair[ ] and
adequate[ ]" job. We do not suggest that this is a low

93
standard, but merely stress that the inquiry is not a relative
one.

If no class member succeeds in rebutting the
presumption, then the district court should appoint the
presumptive lead plaintiff as the lead plaintiff. If the
presumption has been rebutted, the court must begin the
process anew (i.e., identifying which of the remaining
movants has the highest financial interest in the class's
recovery, assessing whether that movant satisfies the
threshold typicality and adequacy requirements, and
determining whether the presumption has been rebutted)
until a lead plaintiff is selected.

94
Volume 3 of 3
95
2. Application of the Standards Here

Under these standards, we believe that the District Court
correctly identified the CalPERS Group as the
presumptively most adequate plaintiff. The Group filed a
motion to serve as lead plaintiff, and no party has
questioned that of all the movants it has the largest
financial interest in the relief sought by the Class. The
District Court expressly found that the CalPERS Group
satisfied Rule 23(a)'s typicality requirement. See In re
Cendant Corp. Litig., 182 F.R.D. 144, 149-50 (D.N.J. 1998).
Although we have expressed concerns about certain
potential conflicts of interest that might have undermined
the CalPERS Group's position, we have concluded that they
do not carry the day. See supra Part III.B.1(a).

The District Court also found no obvious reason to doubt
that a group composed of the three largest pension funds in
the United States could adequately protect the class's
interests. The CalPERS Group's members are legally
sophisticated entities, their chosen counsel are well-
qualified, and the Retainer Agreement that they negotiated
was not plainly unreasonable. Moreover, although it is a
group, there is no indication that the CalPERS Group was
artificially created by its lawyers, and the fact that it
contains three members offers no obvious reason to doubt
that its members could operate effectively as a single unit.
We therefore find no abuse of discretion in the District
Court's determination that the CalPERS Group was the
presumptive lead plaintiff.

96
We also conclude that the District Court was correct in
holding that the CalPERS Group's presumptive lead
plaintiff status had not been rebutted. Appellant Aboff and
Douglas Wilson (who is not before us on appeal) offered
three reasons why the statutory presumption in favor of the
CalPERS Group had been rebutted. First, Aboff and Wilson
represented that "they had negotiated a reduced fee
schedule with their attorneys." Id. at 148. As we stressed
above, the question at this stage is not whether Aboff and
Wilson would have done a better job of securing high-
quality, low-cost counsel than the CalPERS Group; the
question is whether the former have put forward"proof "
that the latter would "not fairly and adequately represent
the class." Had Aboff and Wilson shown that: (1) their fee
agreement was substantially lower than that negotiated by
the CalPERS Group; (2) their chosen counsel were as
qualified or more qualified than those chosen by the
presumptive lead plaintiff; and (3) the CalPERS Group had
no adequate explanation for why it made the choice that it
did, then the presumption may have been rebutted. But
this would only happen if the facts suggested that the
CalPERS Group had performed inadequately in an objective
sense. But Aboff and Wilson did not make this showing
simply by alleging that they negotiated a lower fee; hence
we hold that the District Court did not abuse its discretion
in rejecting this argument.

Aboff and Wilson's second contention was that the
presumption had been rebutted because "considerations
other than the interests of the class might have influenced
the CalPERS group when it retained its attorneys." Id. at
148. Specifically, they alleged that "counsel for the CalPERS
group had made substantial contributions to the campaign
of the New York State Comptroller, who, as sole trustee of
the [NYS]CRF [a member of the CalPERS Group], has
substantial influence over the decisions of the fund," and
they argued that this "created an appearance of impropriety
because the contributions may have played a role in the
selection of the group's counsel--a practice known as `pay-
to-play.' " Id. at 148-49. We likewise find no abuse of
discretion in the District Court's decision to reject this
argument.

97
Lest we be misunderstood, we observe that actual proof
of pay-to-play would constitute strong (and, quite probably,
dispositive) evidence that the presumption had been
rebutted. A movant that was willing to base its choice of
class counsel on political contributions instead of
professional considerations would, it seems to us, have
quite clearly demonstrated that it would "not fairly and
adequately protect the interests of the class." Thus, had
Aboff and Wilson backed up their claims, the District Court
would have likely been justified in holding that the
presumption had been rebutted and disqualifying the
CalPERS Group from serving as lead plaintiff.

The problem for Aboff and Wilson is that the District
Court expressly found that they had not provided evidence
in support of their pay-to-play allegations, see id. at 149,
and we have no basis upon which to disagree. When
pressed by the District Court, Aboff and Wilson admitted
that they had no evidence that the contributions,
themselves legal, had influenced the CalPERS Group's
selection process.48 Allegations of impropriety are not proof
of wrongdoing. If they were, then any class member (or
lawyer seeking to be appointed lead counsel) could disable
any presumptive lead plaintiff by making unsupported
allegations of impropriety. We therefore hold that the
District Court did not abuse its discretion in rejecting Aboff
and Wilson's pay-to-play arguments.49
_________________________________________________________________

48. At oral argument before this Court, Aboff argued that it had been
unable to back up its allegations because the District Court had denied
it discovery. The Reform Act is quite clear on this score: an objecting
class member is entitled to discovery "only if the plaintiff first
demonstrates a reasonable basis for a finding that the presumptively
most adequate plaintiff is incapable of adequately representing the
class." 15 U.S.C. S 78u-4(a)(3)(B)(iv). Under this standard, it is
doubtful
that Aboff would have been entitled to discovery (if indeed it asked).

49. Although we have held that the District Court was correct to reject
Aboff and Wilson's pay-to-play allegations based on a lack of evidence
and to appoint the CalPERS Group as lead plaintiff, we call attention to
a situation that Congress may not have contemplated when it enacted
the PSLRA. Congress clearly anticipated that pension funds would seek
to serve as lead plaintiffs; indeed, that likelihood was seen as a
specific
benefit of the legislation. See H.R. Conf. Rep. No. 104-369, at 34 (1995),

98
Aboff and Wilson's last submission was that the court
"should select lead plaintiff through a process of
_________________________________________________________________

reprinted in 1995 U.S.C.C.A.N. 730, 733. What is unclear, however, is
whether Congress considered a particular risk that seems unique to
publicly-managed pension funds. The concern is that an informal quid
pro quo could develop in which law firms specializing in securities class
actions would contribute to the campaign coffers of the elected officials
who oversee those funds, and that, in exchange (and in the hopes of
getting more contributions), those officials would use their control over
the funds to select those firms to serve as lead counsel for cases in
which the funds are the lead plaintiff. In such a situation, there would
also be reason to fear that the lead plaintiff would be complacent and
unwilling to object to an excessive fee request, thus defeating the Reform
Act's goal of lead plaintiff-controlled, rather than lead counsel-
controlled,
litigation. Were such a scenario to occur, the elected official's conduct-
-
besides representing a breach of fiduciary duty to the pensioners--would
threaten the best interests of the class members. Though we stress that
there is no evidence of such impropriety in this case, Congress does not
appear to have considered this risk when it enacted the Reform Act and
may wish to revise the PSLRA to account for it.

In the absence of any such amendment, district courts should be
particularly attuned to the risk of pay-to-play. In cases where a court
determines that a publicly-managed fund is the presumptively most
adequate plaintiff, the court could properly require that the fund
disclose
any campaign contributions by the fund's choice of counsel to any
elected officials possessing direct oversight and authority over the fund.
If any such contributions have been made, the court could also require
that the fund submit a sworn declaration describing the process by
which it selected counsel and attesting to the degree to which the
selection process was or was not influenced by any elected officials.

Courts must also, however, take care to prevent the use of discovery
to harass presumptive lead plaintiffs, something that the Reform Act was
meant to guard against. The statute is clear that"discovery relating to
whether a member . . . of the purported plaintiff class is the most
adequate plaintiff may be conducted by a plaintiff only if the plaintiff
[seeking discovery] first demonstrates a reasonable basis for finding that
the presumptively most adequate plaintiff is incapable of adequately
representing the class." 15 U.S.C. S 78u-4(a)(3)(B)(iv) (emphasis added).
We reiterate that evidence of campaign contributions, standing alone,
does not create "a reasonable basis" sufficient to justify party-conducted
discovery, though it would certainly (as noted earlier) be enough for the
court, on its own initiative, to seek further information from the
presumptive lead plaintiff.

99
competitive bidding." Id. at 149. The District Court refused,
noting that "the PSLRA permits no such thing." Id. We
agree. See supra Part IV.B.1 (discussing the procedures
that the Reform Act establishes for selecting a lead
plaintiff). We therefore hold that the District Court was
correct to appoint the CalPERS Group as lead plaintiff.

C. The Auction

We turn now to NYCPF 's objection to the District Court's
decision to employ an auction to select lead counsel. We
first address Lead Counsel's argument that NYCPF is not
entitled to object to the auction. Concluding that it is, we
then consider whether the PSLRA ever permits a district
court to select lead counsel via competitive bidding. Finding
that it does (though only under very specific
circumstances), we analyze whether the District Court's
decision to hold an auction here was justified.

1. May NYCPF Validly Object to the Auction?

The only party that objects to the District Court's
decision to select lead counsel via an auction is NYCPF; the
other two members of the CalPERS Group, CalPERS and
NYSCRF, have not appeared before us to argue this issue.
Lead Counsel offers a litany of related reasons why NYCPF
may not validly press its arguments before us, but, at
bottom, its submissions reduce to two claims: (1) NYCPF
lacks standing; and (2) NYCPF has waived the right to
object to the auction.

Lead Counsel's first contention appears to be that NYCPF
lacks standing to object to the auction in its capacity as a
member of the CalPERS Group. Lead Counsel notes that in
the Retainer Agreement executed between them and lead
counsel, the members of the CalPERS Group "agree[d] to
prosecute this litigation together and on an equal basis."
Lead Counsel submits that the Retainer Agreement is
governed by New Jersey law and contends that, under that
law, the language quoted above establishes the CalPERS
Group as a joint venture. See Lead Counsel's Opening Br.
at 47. And, asserts Lead Counsel, because New Jersey's
default partnership rules provide that decisions of a
partnership are made by majority vote, NYCPF cannot

100
object on behalf of the CalPERS Group without the
approval of at least one of its partners.

We disagree. We do not decide whether Lead Counsel is
correct about the legal effect of the Retainer Agreement,
though we note that NYCPF vigorously contests Lead
Counsel's submissions. See NYCPF 's Reply Br. at 14.
Instead, we conclude that NYCPF has standing to challenge
the District Court's decision to hold an auction in its
capacity as a class member. The Reform Act's lead plaintiff
provisions are intended to benefit the plaintiff class. It
follows that a district court's deviation from the PSLRA
model has the potential to harm every member of the class.
We therefore hold that, regardless of whether it may object
as a member of the CalPERS Group (a question that we do
not decide), NYCPF has standing to object in its capacity as
a class member.

Lead Counsel's second contention is that NYCPF has
waived any right to object to the auction. There is no
question that NYCPF raised these arguments before the
District Court, see In re Cendant Corp. Sec. Litig., 109 F.
Supp. 2d 285, 303-04 (D.N.J. 2000)--the dispute is
whether it did so too late. The District Court announced
that it would conduct an auction on August 4, 1998, but
NYCPF did not object at that time. On August 17, 1998, the
CalPERS Group sent a letter to the court about the
upcoming auction, and although the letter stated that the
CalPERS Group had the right to "select" lead counsel, it
never expressly contested the District Court's decision to
hold an auction. The District Court held a hearing on
August 19, 1998 for the purpose of soliciting input as to
how the auction should be conducted, but, although a
representative for NYCPF attended that hearing, it did not
object to the auction at that time either. In fact, there does
not appear to be any evidence that NYCPF objected to the
District Court's decision to hold an auction until after the
Settlement had been reached and it was clear that the
court-ordered grid would produce a higher fee award than
the Retainer Agreement. See id. at 304. 50 Based on this
_________________________________________________________________

50. Under the Retainer Agreement (and absent the express consent of the
CalPERS Group), the maximum counsel fee would have been
approximately $187 million--over $76 million dollars less than that
produced by the court-ordered auction grid. See supra nn.4 & 9.

101
delay, Lead Counsel suggests that we deem NYCPF 's
objections to have been waived.

This argument has a certain appeal, but we conclude
that it is foreclosed by In re Cendant Corp. PRIDES
Litigation, 243 F.3d 722 (3d Cir. 2001), in which we held
that certain class members had standing to object to an
attorneys fees award. At least in theory, the PRIDES
settlement fund was large enough to provide a 100%
recovery to all class members, and the attorneys fees award
was not to come out of that fund. Moreover, the settlement
was structured so that any unclaimed portions of the
settlement or reduction in fees would revert to Cendant,
rather than be distributed to the class members. As a
result, lead counsel argued that the objecting class
members lacked standing to object to the fee award
because they could not show that they were "aggrieved" by
it. Despite the force of this argument, we held that the
objectors possessed standing. See id. at 728.

Our reasoning in Cendant PRIDES was twofold. First, we
observed that the agency problems inherent in the class
action fee awards context counseled in favor of construing
standing extremely broadly. See id. at 728-29. And even in
cases like Cendant PRIDES where the fee award did not
directly reduce the class's recovery, we suggested that lead
counsel who seek an "excessive" fee may have breached
their fiduciary duties to the class, thus entitling the class to
recover any excess from its lawyers. See id. at 729.

Second, we emphasized the critical importance of
searching judicial review of fee awards in class actions,
because of the inherent conflict of interest between lead
counsel and the class and because judges have an
independent obligation to avoid "potential public
misunderstandings" over the size of fee awards. Id. (internal
quotation marks and citation omitted). And in so stating,
we stressed that "[o]ur interest and supervisory role is
pervasive and extends not only to the final fee award but
also to the manner by which class counsel is selected and
the manner by which attorneys fee conditions are
established." Id. at 731 (emphasis added). "Because of the
possible injury to [the objector] and other class members
from the fee award . . . , and, more importantly, because of

102
our overarching interest in class action fee awards," we
held that the objector had standing to appeal the fee award.
Id. at 732.

Cendant PRIDES strongly counsels against declining to
hear NYCPF 's objections to the auction. In that case we
were willing to employ a quite broad conception of standing
--a fundamental and non-waivable prerequisite for a federal
court even to have jurisdiction, see, e.g., Lujan v. Defenders
of Wildlife, 504 U.S. 555, 560 (1992)--to ensure that we
would be able to consider the propriety of a class action fee
award in view of the public interest and perception issues.
Here, in contrast, Lead Counsel does not submit that
NYCPF has failed to allege a constitutionally sufficient
"injury in fact"; instead, it contends that we should employ
the equitable doctrine of waiver to decline to consider its
claim. It would be incongruous indeed if the vital
importance of searching judicial review of class action fee
awards were sufficient to warrant an expansive conception
of standing, but insufficient for a court to decline to invoke
its equitable power not to consider certain claims. For that
reason, we reject Lead Counsel's argument that we should
not consider NYCPF 's objections to the auction, and turn to
the question whether the District Court's decision to hold
an auction was consistent with the PSLRA.

2. Does the Reform Act Ever Permit an Auction?

The statutory section most directly on point provides that
"[t]he most adequate plaintiff shall, subject to the approval
of the court, select and retain counsel to represent the
class." 15 U.S.C. S 78u-4(a)(3)(B)(v). This language makes
two things clear. First, the lead plaintiff 's right to select
and retain counsel is not absolute--the court retains the
power and the duty to supervise counsel selection and
counsel retention. But second, and just as importantly, the
power to "select and retain" lead counsel belongs, at least
in the first instance, to the lead plaintiff, and the court's
role is confined to deciding whether to "approv[e]" that
choice. Because a court-ordered auction involves the court
rather than the lead plaintiff choosing lead counsel and
determining the financial terms of its retention, this latter
determination strongly implies that an auction is not

103
generally permissible in a Reform Act case, at least as a
matter of first resort.

This conclusion gains support when we examine the
overall structure of the PSLRA's lead plaintiff section. The
Reform Act contains detailed procedures for choosing the
lead plaintiff, see supra Part IV.B.1, indicating that
Congress attached great importance to ensuring that the
right person or group is selected. The only powers expressly
given to the lead plaintiff, however, are to "select and
retain" counsel. If those powers are seriously limited, it
would seem odd for Congress to have established such a
specific means for choosing the lead plaintiff. But if the
powers to "select and retain" lead counsel carry a great deal
of discretion and responsibility, it makes perfect sense that
Congress attached great significance to the identity of the
person or group that would be making those choices.

Adding support to our view that auctions are not
generally permitted is the fact that the Reform Act's lead
plaintiff provisions were clearly modeled after the Weiss and
Beckerman proposal. The statutory language is almost
identical to that suggested in Weiss and Beckerman's
article, compare 15 U.S.C. S 78u-4(a)(3), with Weiss &
Beckerman, 104 Yale L.J. at 2105-09, and this view is
confirmed by the Senate Report, see S. Rep. No. 104-98, at
11 n.32 (1995), reprinted in 1995 U.S.C.C.A.N. 679, 690
n.32. The entire thrust of Weiss and Beckerman's argument
was that large investors would do a better job at counsel
selection, retention, and monitoring than judges have
traditionally done, and their proposal sought to encourage
such investors to serve as lead plaintiff for that purpose.
This goal would be significantly undermined were we to
interpret the Reform Act as permitting courts to take
decisions involving counsel selection and retention away
from the lead plaintiff by ordering an auction.

Lastly, our belief that the PSLRA does not allow an
auction in the ordinary case is well supported in the
Reform Act's legislative history. Both the Conference
Committee Report and the Senate Report state that the
purpose of the legislation was to encourage institutional
investors to serve as lead plaintiff, predicting that their
involvement would significantly benefit absent class

104
members. See H.R. Conf. Rep. No. 104-369, at 34 (1995),
reprinted in 1995 U.S.C.C.A.N. 730, 733; S. Rep. No. 104-
98, at 11 (1995), reprinted in 1995 U.S.C.C.A.N. 679, 690.
Both Reports begin by acknowledging that lead counsel
have historically chosen the lead plaintiff rather than vice
versa, and by outlining the significant problems created by
that phenomenon. See H.R. Conf. Rep. No. 104-369, at 32-
33 (1995), reprinted in 1995 U.S.C.C.A.N. 730, 731-32; S.
Rep. No. 104-98, at 11 (1995), reprinted in 1995
U.S.C.C.A.N. 679, 690. Later, both Reports contain a brief
discussion of the lead plaintiff 's power to choose lead
counsel:

[The] lead plaintiff provision solves the dilemma of who
will serve as class counsel. Subject to court approval,
the most adequate plaintiff retains class counsel. As a
result, the Conference Committee expects that the
plaintiff will choose counsel rather than, as is true
today, counsel choosing the plaintiff. The Conference
Committee does not intend to disturb the court's
discretion under existing law to approve or disapprove
lead plaintiff 's choice of counsel when necessary to
protect the interests of the plaintiff class.

H.R. Conf. Rep. No. 104-369, at 35 (1995), reprinted in
1995 U.S.C.C.A.N. 730, 734; S. Rep. No. 104-98, at 11-12
(1995), reprinted in 1995 U.S.C.C.A.N. 679, 690.

The second sentence of the above-quoted language
emphasizes that the choice belongs to the lead plaintiff, and
the third is significant for two reasons. First, it confirms
that the court's role is generally limited to "approv[ing] or
disapprov[ing] lead plaintiff 's choice of counsel;" and that it
is not the court's responsibility to make that choice itself.
Second, it indicates that the court should generally employ
a deferential standard in reviewing the lead plaintiff 's
choices. It is not enough that the lead plaintiff selected
counsel or negotiated a retainer agreement that is different
than what the court would have done; the question is
whether judicial intervention is "necessary to protect the
interests of the plaintiff class."

We respect the arguments advanced by Judge Shadur--a
jurist of extraordinary distinction, who, as we noted supra

105
n.44, is one of the primary judicial advocates in favor of the
auction method--as to why auctions are not inconsistent
with the Reform Act, but we ultimately find them
unpersuasive. Judge Shadur notes that the PSLRA provides
that a movant's status as presumptive lead plaintiff may be
overcome if it can be shown that the movant will not fairly
and adequately represent the class, and observes that the
statute makes the lead plaintiff 's right to select and retain
counsel "subject to the approval of the court." See In re
Bank One S'holders Class Actions, 96 F. Supp. 2d 780, 784
(N.D. Ill. 2000) (quoting 15 U.S.C. S 78u-4(a)(3)(B)(iii)(II)(aa)
& (B)(v)); see also In re Comdisco Sec. Litig. , 141 F. Supp.
2d 951, 953 (N.D. Ill. 2000) (quoting this discussion from
Bank One). Based on these two provisions, Judge Shadur
writes:

Suppose for instance a plaintiff in such a
presumptive status has agreed that its own lawyers, if
acting as class counsel, are to receive one-third of any
class recovery. Suppose further that another highly
reputable law firm that has appeared of record for
another putative plaintiff or plaintiffs, having
demonstrated excellent credentials in earlier securities
class action litigation and being clearly capable of
handling the complexities of the current lawsuit, is
willing to handle the case for half of that percentage fee
--or to provide even a greater contrast, is willing to
work for that lesser percentage and also to impose a
cap on the firm's total fee payment. In that
circumstance the presumptive lead plaintiff could
certainly bind itself contractually to pay one-third of its
share of the class recovery to its own lawyer, but any
court would be remiss if it were to foist that one-third
contingency arrangement on all of the other class
members who had not themselves chosen that law firm
to be their advocate. . . .

In this Court's view, if the presumptive lead plaintiffs
were to insist on their class counsel handling the
action on the hypothesized materially less favorable
contractual basis, that insistence would effectively
rebut the presumption that the putative class
representatives, despite the amounts that they have at

106
 stake personally, were indeed the "most adequate
plaintiffs"--that is, the class members "most capable of
adequately representing the interests of class
members" (Subsection (a)(3)(B)(i)). If on the other hand
the presumptive class representative were willing to be
represented by the most favorable qualified bidder
among the lawyers submitting bids, with that bidder
either supplanting the presumptive lead plaintiff 's
original choice of counsel or working together with that
original counsel (but with the total lawyers' fees to be
circumscribed by the low bidder's proposal), the
presumption would clearly remain unrebutted and the
presumptive most adequate plaintiffs would properly be
appointed as lead plaintiffs.

Bank One, 96 F. Supp. 2d at 784.

As should be clear from our discussion of the proper
means of appointing a lead plaintiff, see supra Part IV.B.1,
we concur with the first portion of Judge Shadur's analysis.
In a situation like the one he describes, we think it quite
clear that the presumptive lead plaintiff 's actions
(especially if it could offer no persuasive reason for
preferring the first, more expensive firm, to the second,
equally-qualified but less expensive one) would demonstrate
that it would not fairly and adequately represent the
interests of the class. This, of course, would require the
court to disqualify that movant from serving as the lead
plaintiff and to locate another movant that could serve in
that capacity. It would not, in our view, require the court to
appoint the movant whose lawyer had offered to work for
half as much as the lawyers for the first movant.

As the foregoing makes clear, we part company with
Judge Shadur insofar as he argues that his hypothetical
shows that the Reform Act necessarily permits an auction.
Judge Shadur's view appears to be that any movant who is
unwilling to be represented by the firm or firms that a court
determines to be the lowest qualified bidder in a court-
conducted auction has necessarily shown that it will not
fairly and adequately represent the interests of the class.
We disagree for two reasons. First, this approach is in
considerable tension with the text of the PSLRA. As we
explained above, the Reform Act makes clear that it is the

107
lead plaintiff 's job to "select and retain" lead counsel and it
is the court's duty to decide whether to "approve" that
choice. But under Judge Shadur's approach, a presumptive
lead plaintiff 's only option is to assent to the counsel and
the fee terms that were chosen by the court via a court-
ordered auction (because otherwise the movant will be
disqualified from serving as lead plaintiff on the grounds
that it will not fairly and adequately represent the interests
of the class). Judge Shadur's reading of the statute in effect
confers upon the court the right to "select and retain"
counsel and limits the lead plaintiff to deciding whether to
acquiesce in those choices, thus eliminating any discretion
on the part of the lead plaintiff. We simply do not think that
such a result is consistent with the statutory text.

Moreover, we do not agree that the fact that a
presumptive lead plaintiff refuses to accede to the counsel
or fee terms set via an auction demonstrates that it will not
fairly and adequately represent the interests of the absent
class members. As we explained earlier, the Reform Act's
lead plaintiff provisions (which include the section that
confers on the lead plaintiff the rights to select and retain
lead counsel) were based on Weiss and Beckerman's article.
A central thrust of Weiss and Beckerman's argument was
that institutional investors would likely do a better job than
courts at selecting, retaining, and monitoring counsel than
courts have traditionally done. See 104 Yale L.J. at 2105-
07. Whether we (or Judge Shadur) would agree with this
proposition is irrelevant; what is clear is that Congress did.
And if institutional investors are as good or better than
courts at balancing quality and cost in selecting class
counsel, then it follows that the fact that those investors
may choose different lawyers and negotiate different fee
arrangements than the court does not demonstrate that
those investors will not fairly and adequately represent the
interests of the class. We therefore respectfully disagree
with Judge Shadur that the use of court-ordered auctions
can be squared with the PSLRA in the ordinary case.

Instead, we think that the Reform Act evidences a strong
presumption in favor of approving a properly-selected lead
plaintiff 's decisions as to counsel selection and counsel
retention. When a properly-appointed lead plaintiff asks the

108
court to approve its choice of lead counsel and of a retainer
agreement, the question is not whether the court believes
that the lead plaintiff could have made a better choice or
gotten a better deal. Such a standard would eviscerate the
Reform Act's underlying assumption that, at least in the
typical case, a properly-selected lead plaintiff is likely to do
as good or better job than the court at these tasks. Because
of this, we think that the court's inquiry is appropriately
limited to whether the lead plaintiff 's selection and
agreement with counsel are reasonable on their own terms.

In making this determination, courts should consider: (1)
the quantum of legal experience and sophistication
possessed by the lead plaintiff; (2) the manner in which the
lead plaintiff chose what law firms to consider; (3) the
process by which the lead plaintiff selected its final choice;
(4) the qualifications and experience of counsel selected by
the lead plaintiff; and (5) the evidence that the retainer
agreement negotiated by the lead plaintiff was (or was not)
the product of serious negotiations between the lead
plaintiff and the prospective lead counsel. See, e.g., In re
Nice Sys. Sec. Litig., 188 F.R.D. 206, 223 (D.N.J. 1999)
("Not only should the proposed counsel fees be the result of
hard-bargaining, but the initial selection of counsel should
be the result of independent decision-making by the lead
plaintiff.").

We do not mean for this list to be exhaustive, or to
intimate that district courts are required to give each of
these factors equal weight in a particular case; at bottom,
the ultimate inquiry is always whether the lead plaintiff 's
choices were the result of a good faith selection and
negotiation process and were arrived at via meaningful
arms-length bargaining. Whenever it is shown that they
were not, it is the court's obligation to disapprove the lead
plaintiff 's choices. See, e.g., Sherleigh Assocs. LLC v.
Widmere-Durable Holdings, Inc., 184 F.R.D. 688, 692-93 &
n.1 (S.D. Fla. 1999) (rejecting a lead plaintiff 's choice of a
"consortium of ten law firms" on the grounds that it was
"not in the best interests of the class members").

Although we think, for reasons explained above, that an
auction is impermissible in most Reform Act cases, we do
not rule out the possibility that it could be validly used. If

109
the court determines that the lead plaintiff 's initial choice
of counsel or negotiation of a retainer agreement is
inadequate, it should clearly state why (for both the benefit
of the lead plaintiff and for the record) and should direct
the lead plaintiff to undertake an acceptable selection
process. If the lead plaintiff 's response demonstrates that it
is unwilling or unable to do so, then the court will, of
necessity, be required to take a more active role.

At that point, a court will have several options. If a
litigant were to have repeatedly undertaken a flawed
process of selecting and retaining lead counsel, that may be
enough to show that it will not fairly and adequately protect
the interests of the class. In such a situation, the court
would be justified in disqualifying that litigant from serving
as lead plaintiff, selecting a new lead plaintiff, and directing
that newly-appointed lead plaintiff to undertake an
acceptable search.

On the other hand, it is possible that the court could
conclude that, perhaps due to the nature of the case at
hand, none of the possible lead plaintiffs is capable of
fulfilling the model contemplated by the Reform Act, i.e., a
sophisticated investor who has suffered sizeable losses and
can be counted on to serve the interests of the class in an
aggressive manner. In such a situation, it would be
permissible for a court to conclude that its obligation to
protect the interests of the plaintiff class makes it
necessary for the court to assume direct control over
counsel selection and counsel retention, and, were the
court to so conclude, an auction would be one permissible
means by which the court could select and retain counsel
on behalf of the class.51 We stress, however, that it is not
sufficient justification for an auction in a case governed by
the Reform Act that the court prefers a process of counsel
selection or counsel retention that it, rather than the lead
plaintiff, controls, nor is it enough that the court thinks
that an auction is an inherently superior mechanism for
determining a reasonable fee.
_________________________________________________________________

51. Our position here is in substantial accord with that advanced by the
Securities and Exchange Commission. See Brief for the Securities and
Exchange Commission as Amicus Curiae at 20-23.

110
3. Was the Auction in this Case Permissible?

We now analyze whether, under these precepts, the
District Court's decision to conduct an auction was
justified. We begin by rejecting the contention that the
court's willingness to permit counsel chosen by Lead
Plaintiff to match what the District Court determined to be
the lowest qualified bid fully protected the CalPERS Group's
right to "select and retain" lead counsel. First, because the
court's order gave the matching power to the Group's
choice of counsel rather than to the Group itself, this
approach did not, in fact, preserve the Group's ability to
"select" lead counsel. Moreover, because the court's order
meant that Lead Plaintiff 's choice would be honored only if
it was made pursuant to fee terms set by the District Court,
the court's approach also undermined the CalPERS Group's
ability to "retain" counsel.

In its written opinion, the District Court gave several
reasons for holding an auction. First, it noted that the
PSLRA makes Lead Plaintiff 's decision "subject to the
approval of the court." The court stressed that"given the
opportunity, absent class members would try to secure the
most qualified representation at the lowest cost," and then
observed that, at the end of the case, it would be required
to ensure that the "[t]otal attorneys's fees and expenses"
that it awarded to lead counsel did "not exceed a
reasonable percentage of the amount of any damages and
prejudgment interest actually paid to the class." In re
Cendant Corp. Litig., 182 F.R.D. 144, 150 (D.N.J. 1998).
The court concluded that holding an auction would aid it in
making this determination and in protecting the class's
interests because it would simulate the market, thus
providing a "benchmark of reasonableness." Id. at 150-52.
Second, the District Court stated that holding an auction
would have the "salutary" effect of "remov[ing] any
speculative doubt" about Aboff and Wilson's pay-to-play
allegations. Id. at 152.

These reasons are not sufficient justification for holding
an auction. The first (i.e., a generalized desire to hold down
costs by "simulating" the market) would apply in every
case, and thus cannot be enough to justify a procedure that
we have concluded may only be used rarely. Further, there

111
is no need to "simulate" the market in cases where a
properly-selected lead plaintiff conducts a good-faith
counsel selection process because in such cases--at least
under the theory supporting the PSLRA--the fee agreed to
by the lead plaintiff is the market fee.

Nor do we think that the laudable desire to dispel mere
allegations of impropriety as to one member of the CalPERS
Group is enough to justify holding an auction. Were it
sufficient, then any disgruntled class member (or lawyer
seeking to be appointed lead counsel) could disable the lead
plaintiff from exercising its statutorily-conferred power by
making unsupported allegations of impropriety.

It could also be argued that two of the District Court's
statements during the August 4 and August 19, 1998,
hearings support its decision to hold an auction. To begin
with, we doubt that any of these musings could properly be
seen as "findings" sufficient to justify the court's actions.
But even if they could, we find these proffered reasons
simply inadequate. During the August 4 hearing, the
District Court suggested that institutional investors may
not do a good job of selecting lead counsel because"at
times familiarity or a long time association between a client
and a lawyer . . . may limit arms length bargaining." These
"concerns" cannot justify the court's decision to hold an
auction because there was simply no evidence of
"familiarity or a long time association" between any member
of the CalPERS Group and either of the firms that the
Group proposed retaining, nor was there any evidence of or
finding by the District Court that arms-length bargaining
had not, in fact, taken place.

We are similarly unable to conclude that the auction was
justified based on the District Court's statement during the
August 19 hearing that "one can make the argument. . .
that because of [their] economic power that at times [large
investors] get a little complacent economically and therefore
. . . they are not as cost effective as they should be." First,
as a generic supposition, this intuition is directly at odds
with the principles that animated the Reform Act. Second,
the court never made findings that the CalPERS Group had
been "complacent economically" or had demonstrated that
it would not be "as cost effective as [it] should be."

112
At oral argument before this Court, Lead Counsel offered
two additional arguments in favor of the District Court's
decision to conduct an auction. Lead Counsel's first
contention was that at the time of its decision to hold an
auction on August 4, the court knew nothing about the
process by which the CalPERS Group had selected and
retained its choice of counsel. As a consequence, Lead
Counsel submits that the District Court could not be
confident at that time that Lead Plaintiff had conducted a
thorough and good faith counsel search, and argues that
this uncertainty (combined with Aboff 's and Wilson's pay-
to-play allegations) justified the court's decision to hold an
auction. Lead Counsel's second argument was that the
entire litigation landscape had changed between the time
Lead Plaintiff and Lead Counsel entered into the Retainer
Agreement and the time of the August 4 hearing. This is
because on July 14, 1998, shortly after the Retainer
Agreement became effective on June 23, Cendant
announced that it would be restating three years of CUC's
financial statements instead of just one. Lead Counsel
submits that Cendant's July 14 announcement
fundamentally altered the dynamics of this case, and
contends that this development justified the Court's August
4 decision to hold an auction.

We find these arguments unpersuasive. First, we note
that the District Court never gave them as reasons for
holding an auction. Second, though Lead Plaintiff does not
appear to have submitted much information about the
thoroughness and integrity of the process by which it
selected and retained counsel prior to the District Court's
decision to conduct an auction (although Lead Counsel did
describe it to the court as "the best fee ever negotiated in
advance" and "the hardest bargain ever driven in a
securities class action case," 109 F. Supp. 2d at 291-93), it
is also true that the District Court did not order Lead
Plaintiff to provide such information or give any indication
that it was concerned about the process by which Lead
Plaintiff selected counsel and negotiated the Retainer
Agreement. Although we have no doubt that a court may
(and should) require that a lead plaintiff provide
information about the process it used to select and retain
counsel before deciding whether to "approv[e]" that choice,

113
see 15 U.S.C. S 78u-4(a)(3)(B)(v), Lead Plaintiff cannot be
faulted for not producing the information that the statute
does not expressly require and that the court did not seek.
Cf. Laborers Local 1298 Pension Fund v. Campbell Soup Co.,
No. CIV.A. 00-152 (JEI), 2000 WL 486956, at *4 (D.N.J.
Apr. 24, 2000) (giving the lead plaintiff advance notice of
the questions the court will want answered before deciding
whether to approve its choice of lead counsel); Proceedings
of the 2001 Third Circuit Task Force on the Selection of
Class Counsel, Statement of Vaughn R. Walker, at 22
(Appendix A), available at http://www.ca3.uscourts.gov/
classcounsel/Witness%20Statements/vwalker.pdf
(providing questionnaire that Judge Walker has distributed
to lead plaintiff candidates regarding their method of
selecting and retaining their chosen counsel).

Third, although a fundamental and unexpected change in
the litigation landscape would probably be the sort of thing
that would justify a district court's decision to decline to
approve a proposed retainer agreement (or to order that a
previously approved retainer agreement be renegotiated),
the proper remedy would be to instruct the lead plaintiff to
renegotiate an adequate agreement rather than to order an
auction immediately.

For the foregoing reasons, we hold that the District Court
abused its discretion by conducting an auction because its
decision to do so was founded upon an erroneous
understanding of the legal standards undergirding the
propriety of conducting an auction under the PSLRA. With
regard to counsel selection, however, this error was
harmless because the counsel selected via the auction
process were the same as those whom the Lead Plaintiff
sought to have appointed in the first place.

D. Counsel Fees

Having determined that the District Court should not
have held an auction, we face the question of what happens
next. The fact that BRB and BLBG were appointed Lead
Counsel after exercising their option to meet what the court
determined to be the lowest reasonable auction bid makes
our task considerably easier than it would have been had
the District Court appointed different firms to serve as lead

114
counsel. Cognizant of the unusual situation in which we
find ourselves, we conclude that the District Court was
correct to appoint BRB and BLBG as Lead Counsel, but
hold that it should have done so pursuant to the Retainer
Agreement negotiated between them and Lead Plaintiff. In
appointing BRB and BLBG Lead Counsel (albeit for reasons
that we have found to be erroneous) the District Court
obviously determined that the firms were qualified to serve
as counsel for the class. To our knowledge, no one has
questioned that conclusion, and it is difficult to see how
anyone could do so.

The matter of the Retainer Agreement is somewhat more
complicated, but we think it should be deemed to be in
force. That the District Court would have approved all of its
provisions except for its fee provisions is evidenced by the
fact that the court required that all bidders consent to
those provisions as a condition precedent to participating in
the auction. And the fact that the court would have found
the Retainer Agreement's fee provisions to be reasonable
had it employed the correct legal standard is attested to by
the fact that the court deemed the bid that BRB and BLBG
submitted in connection with the auction to have been
"realistic in the context of likely results." Although this bid
was not the same as the fee provisions contained in the
Retainer Agreement, see In re Cendant Corp. Sec. Litig., 109
F. Supp. 2d 285, 291 n.3 (D.N.J. 2000), Lead Counsel has
represented to us that it contained only "minor
modifications," which were made "because the litigation
`milestones' of the court's fee grid did not precisely match
the `milestones' of the agreement." Lead Counsel's Br. at 17
n.7.

Besides Aboff 's and Wilson's pay-to-play allegations
(which the District Court rejected based on insufficient
proof--a finding with which we have no quarrel), no party
has come forward with supportable allegations that Lead
Plaintiff did not select and retain BRB and BLBG through
a sufficiently sophisticated and sincere search. We therefore
hold that the District Court should have appointed BRB
and BLBG Lead Counsel pursuant to the Retainer
Agreement, and we also conclude that that Agreement is
currently in force.

115
In light of this conclusion, we think that the District
Court erred in considering and ruling upon Lead Counsel's
fee application. The Retainer Agreement states that Lead
Counsel "will not submit any fee application to the Court
without the prior approval of The Funds," but there is
insufficient evidence that either CalPERS or NYSCRF gave
their "prior approval."52 Lead Counsel originally relied on
the fact that neither CalPERS nor NYSCRF objected to its
fee request, but acquiescence (which is the most that a
failure to object shows) is not the same thing as"prior
approval."

Lead Counsel also points to an off-the-record conference
conducted by the District Court on May 22, 2001, which
was apparently attended by representatives for Lead
Counsel, NYCPF, and NYSCRF. NYSCRF was represented
by its General Counsel, Randall Treece, and Lead Plaintiff
asserts that Treece had been given CalPERS's proxy by its
General Counsel, Kayla Gillan. Lead Counsel maintains
that at the May 22 conference, the court "made clear that
. . . the result of the auction process had superseded the
fee provisions of the retainer agreement, and that class
counsel had a right to rely on the fee grid set by the court
and was entitled to seek a fee in that amount." At this
point, according to Lead Counsel, Treece "thanked the
court for its guidance and stated that [NYS]CRF and
CalPERS would accept the court's view."

We need not decide whether this version of events, if
true, would demonstrate that NYSCRF and CalPERS gave
their "prior approval" to Lead Counsel's fee request. The
facts remain that NYCPF disputes Lead Counsel's account;
neither Treece nor anyone else from NYSCRF or CalPERS
has confirmed it or stated that Lead Counsel has accurately
stated their views; and the fact that this conference was
held off the record makes it impossible for us to assess
what really happened.53 Because Lead Counsel has
_________________________________________________________________

52. As noted earlier, we need not and do not decide whether "prior
approval of The Funds" means all of the Funds or a majority of the
Funds. See supra Part IV.C.1.

53. Moreover, it is unclear whether a failure to object just after the
court
emphatically stated what it was going to do would even qualify as
acquiescence, much less "approval."

116
submitted insufficient evidence that its fee request was
submitted with "the prior approval of The Funds" and
because the fee request was submitted pursuant to the fee
grid arrived at via the auction rather than that contained in
the Retainer Agreement, we hold that the request was
improper under the Retainer Agreement and that the
District Court should not have considered it. We will
therefore set aside the District Court's fee award and
remand this case with instructions to dismiss the fee
application and to decline to accept any further
applications that are submitted without the prior approval
of the Funds.54

Our conclusion that the current fee request is improper
under the Retainer Agreement makes it unnecessary for us
to engage in a substantive review of the fee award approved
by the District Court. But this is the seventh appeal in the
Cendant proceedings, see supra n.11, and, with others still
in progress, we think it necessary to say a few words about
the standards that should guide the District Court's
discretion in considering fee requests under the PSLRA that
will be the principal focus on remand so as to help bring
this now protracted matter to a close.

The Reform Act confers on the lead plaintiff the power to
"retain" lead counsel, 15 U.S.C. S 78u-4(a)(3)(B)(v), but it
also requires that the court ensure that the "[t]otal
attorneys' fees and expenses awarded . . . to counsel for the
plaintiff class . . . not exceed a reasonable percentage of the
amount of any damages and prejudgment interest actually
paid to the class." Id. S 78u-4(a)(6). This latter provision
makes clear that the court has an independent obligation to
ensure the reasonableness of any fee request. The issue is
the scope of this obligation.

Federal Rule of Civil Procedure 23(e) provides that no
class action "shall . . . be dismissed or compromised
without the approval of the court," but the detailed
_________________________________________________________________

54. This disposition makes it technically unnecessary for us to decide
whether Aboff is correct that the Settlement Notice was defective with
regard to Lead Counsel's request for attorneys fees or whether Throenle
is correct that the fee request was improper as matter of law. At all
events, we conclude that both arguments are meritless.

117
standards set forth for reviewing attorneys fees in this
Court's earlier cases are not contained in any statute or
rule. Rather, they were developed because of recognition
that in the class action context there is no way for"the
class" to select, retain, or monitor its lawyers in the way
that an individual client would, and because of doubts that
a typical lead plaintiff in the non-PSLRA context is a
terribly good agent for the class. In the ordinary case, the
court is the only disinterested agent capable of protecting
the class from its lawyers and its primary means of doing
so is by scrutinizing the lawyers' proposed fee. In such a
context, searching judicial review of fee requests is both
necessary and appropriate to ensure that the interests of
absent class members are not compromised. See supra Part
IV.A.1 & 2.

The Reform Act shifts the underpinnings of our class
action attorneys fees jurisprudence in the securities area.
As a preliminary matter, the PSLRA sets out a detailed
procedure for choosing lead plaintiffs, the whole point of
this process being to locate a lead plaintiff that will be an
effective agent for the class. The properly-selected lead
plaintiff is then charged with selecting and retaining lead
counsel (subject to court approval). This regime is far
different from the traditional case in which counsel is often
"selected" and "retained" based on the fact that it filed the
first suit. Consequently, courts have far more reason at the
outset to think that counsel selection and retention were
done in the best interests of the class in a typical Reform
Act case than they do in other class action contexts, at
least when the procedures of counsel selection employed by
the lead plaintiff were adequate.

The same holds true of the monitoring of class counsel.
In the typical class action, there is little reason to think
that the lead plaintiff has the incentive or ability to monitor
lead counsel's performance, but there is good reason to
think that a lead plaintiff that has been properly selected
under the PSLRA would possess both. In this context, the
lead plaintiff is in the best position, under the PSLRA's
scheme, to determine (at least initially) what its lead
counsel's fee should be. Our jurisprudence must take
account of that change.

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We therefore believe that, under the PSLRA, courts
should accord a presumption of reasonableness to any fee
request submitted pursuant to a retainer agreement that
was entered into between a properly-selected lead plaintiff
and a properly-selected lead counsel. See Weiss &
Beckerman, 104 Yale L.J. at 2105 ("[A] court might well feel
confident in assuming that a fee arrangement an
institutional investor had negotiated with its lawyers before
initiating a class action maximized those lawyers' incentives
to represent diligently the class's interests, reflected the
deal a fully informed client would negotiate, and thus
presumptively was reasonable."). This presumption will
ensure that the lead plaintiff, not the court, functions as
the class's primary agent vis-a-vis its lawyers. Further, by
rendering ex ante fee agreements more reliable, it will assist
those agreements in aligning the interests of the class and
its lawyers during the pendency of the litigation.

Saying that there is a presumption necessarily assumes
that it can be overcome in some cases, however. First, the
presumption of reasonableness would likely be abrogated
entirely were the court to find that the assumptions
underlying the original retainer agreement had been
materially altered by significant and unusual factual
and/or legal developments that could not reasonably have
been foreseen at the time of the original agreement. If such
developments occurred early enough in the litigation, the
court might wish to inform the lead plaintiff and lead
counsel of its concerns and direct them to renegotiate the
fee agreement. If, however, the changes were to come to
light late in the day, and if the lead plaintiff and the lead
counsel were unable to agree to a revised fee schedule to
account for that change, the court could be justified in
holding that the presumption of reasonableness had been
abrogated and to review the fee request using the
traditional standards.

We stress, however, that not just any factual or legal
development would suffice to justify a court's decision that
the presumption of reasonableness had been rebutted on
grounds of changed circumstances. Uncertainties are part
of any ex ante negotiation and it should be presumed that
the lead plaintiff and the lead counsel took the possibility

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of uncertainty into account in negotiating their agreement.
Thus, only unusual and unforeseeable changes, i.e., those
that could not have been adequately taken into account in
the negotiations, could justify a court's decision to find the
presumption abrogated.

Even if the presumption of reasonableness is not
undermined by changed circumstances, however, courts
must still consider whether it has been rebutted. As we
have noted above, there is an arguable tension between the
presumption of reasonableness accorded the arrangement
between the Lead Plaintiff and properly selected counsel
and the duty imposed on the Court by the Reform Act, 18
U.S.C. S 78u-4, to insure "[t]hat total attorneys' fees and
expenses awarded by the court to counsel for the plaintiff
class shall not exceed a reasonable percentage of the
amount of any damages and prejudgment interest actually
paid to the class." We resolve this tension by holding that
the presumption may be rebutted by a prima facie showing
that the (properly submitted) retained agreement fee is
clearly excessive. In terms of the policy of the Reform Act,
we do not believe that candidates for lead plaintiff
designation will be deterred by the understanding that their
retainer fee arrangement with Lead Counsel will be subject
to judicial review for clear excessiveness.

In making this clear excessiveness inquiry, district courts
should be primarily guided by the factors set forth in
Gunter v. Ridgewood Energy Corp., 223 F.3d 190, 195 n.1
(3d Cir. 2000), in which we set forth standards for
evaluating whether the percentage fee, which essentially
had supplanted the lodestar on our class action counsel fee
jurisprudence, was excessive. Under Gunter, the Court
should examine:

(1) the size of the fund created and the number of
persons benefitted; (2) the presence or absence of
substantial objections by members of the class to the
settlement terms and/or fees requested by counsel; (3)
the skill and efficiency of the attorneys involved; (4) the
complexity and duration of the litigation; (5) the risk of
nonpayment; (6) the amount of time devoted to the
case by plaintiffs' counsel; and (7) the awards in
similar cases.

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Gunter v. Ridgewood Energy Corp., 223 F.3d 190, 195 n.1
(3d Cir. 2000). But, as our cases have recognized, factors
(1), (3), and (7) "should receive less weight" in mega-fund
cases such as this one. See, e.g., In re Prudential Ins. Co. of
Am. Sales Practices Litig., 148 F.3d 283, 339 (3d Cir. 1998).55

Gunter review will, however, need to be modified to take
into account some of the changed circumstances brought
about by the PSLRA. First, the aim in this context is not to
assess whether the fee request is reasonable; instead, the
goal is to determine whether the presumption of
reasonableness has been rebutted. As a consequence, the
discussions of these factors that have appeared in our prior
cases will not necessarily apply in cases governed by the
Reform Act. Second, courts should employ a deferential
standard of review in assessing factor (3) ("the skill and
efficiency of the attorneys") because the PSLRA assumes
that properly-selected lead plaintiffs are at least as able to
answer those questions as courts. Lastly, factor (7) ("the
_________________________________________________________________

55. Following the lead of the 1985 Task Force Report, several of this
Court's cases have stated that, ordinarily, the percentage of a recovery
devoted to attorneys fees should decrease as the size of the overall
settlement or recovery increases. See 1985 Task Force Report, 108
F.R.D. at 256; Prudential, 148 F.3d at 339; In re Cendant Corp. PRIDES
Litig., 243 F.3d 722, 736 (3d Cir. 2001). In Prudential, we explained that
"[t]he basis for this inverse relationship is the belief that in many
instances the increase in recovery is merely a factor of the size of the
class and has no direct relationship to the efforts of counsel." 148 F.3d
at 339 (internal quotation marks and citation omitted). This position,
however, has been criticized by respected courts and commentators, who
contend that such a fee scale often gives counsel an incentive to settle
cases too early and too cheaply. See, e.g., In re Auction Houses Antitrust
Litig., 197 F.R.D. 71, 80-81, 84 n.55 (S.D.N.Y. 2000) (outlining the
advantages and problems with the use of decreasing and increasing fee
scales, and ultimately concluding that an increasing fee scale was more
appropriate in that particular case); 2001 Task Force Proceedings,
Statement of Samuel Issacharoff, at 7, available at
http://www.ca3.uscourts.gov/classcounsel/Witness%20Statements/
samissac.pdf (arguing that a decreasing percentage scale simply gives
counsel an incentive to settle cheap). We need not decide at this time
whether the deference that courts owe to fee scales negotiated by a
properly-selected lead plaintiff would mandate deference to that
plaintiff 's decision to employ a rising-percentage fee scale in a
particular
case.

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awards in similar cases") may be of limited use, at least in
the first generation of Reform Act cases. As we have
explained, the PSLRA shifts the entire backdrop against
which our fee jurisprudence has developed, and, as a
consequence, non-PSLRA cases may not be sufficiently
"similar" to provide a meaningful basis for comparison.56

Gunter acknowledges a possible role for the lodestar in
this calculus, by noting the possible utility of a lodestar
cross-check. See 223 F.3d at 200. We note in this regard
that the Reform Act does not rule out the use of the
lodestar. The Conference Committee Report states:

The Conference Committee limits the award of
attorney's fees and costs to counsel for a class in new
section 27(a)(6) of the 1933 Act and new section
21D(a)(6) of the 1934 Act to a reasonable percentage of
the amount of recovery awarded to the class. By not
fixing the percentage of fees and costs counsel may
receive, the Conference Committee intends to give the
court flexibility in determining what is reasonable on a
case-by-case basis. The Conference Committee does
not intend to prohibit use of the lodestar approach as
a means of calculating attorney's fees. The provision
focuses on the final amount of fees awarded, not the
means by which such fees are calculated. H.R. Conf.
Rep. 104-369, *36.

Several of our cases have "recommended" that district
courts compare the results at which they arrive via the
_________________________________________________________________

56. In re Cendant Corp. PRIDES Litig., 243 F.3d 722 (3d Cir. 2001), is not
to the contrary. That case, like this one, was governed by the PSLRA, but
we nevertheless applied full-strength Gunter review rather than the
version we have described here. In Cendant PRIDES, as here, the district
court had employed an auction to select and retain lead counsel, see id.
at 735 n.18, but that decision was not challenged on appeal in Cendant
PRIDES. Once the use of an auction was accepted, Cendant PRIDES
ceased to be a typical PSLRA case because the assumptions underlying
the Reform Act model that we outlined above had broken down. As we
have explained, see supra Part IV.A.2, the auction method, like the
traditional approach, relies on the court to serve as the class's agent
with regard to selecting and retaining lead counsel. In such a context,
the full Gunter review that we mandated in Cendant PRIDES makes
sense.

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percentage-of-recovery method with an abbreviated
calculation of the lodestar amount. See, e.g., GM Trucks, 55
F.3d at 822; Prudential, 148 F.3d at 333; Gunter, 223 F.3d
at 199; Cendant PRIDES, 243 F.3d at 742. 57 The goal of this
practice is to ensure that the proposed fee award does not
result in counsel being paid a rate vastly in excess of what
any lawyer could reasonably charge per hour, thus avoiding
a "windfall" to lead counsel. The lodestar cross-check,
however, is very time consuming. Thus, while the Court
should in the first instance test the presumption, if
challenged, by the Gunter factors, it may, if necessary,
utilize the lodestar cross-check.58

Although the foregoing discussion suggests that, in view
of a presumption, whatever fee is re-submitted by Lead
Counsel pursuant to the Retainer Agreement on remand
has a "leg up" for approval, we cannot blind ourselves to
the reality that both the fee award of $262 million under
the auction and (potentially up to) $187 million under the
Retainer Agreement are staggering in their size, and, on the
basis of the evidence in the record, may represent
compensation at an astonishing hourly rate (as well as an
extraordinarily high lodestar "multiplier," see supra n.57).
Objectors contend that the lodestar figure is approximately
$8,000,000, which would mean that the multiplier would
be 45.75 if lead counsel were to receive the court awarded
fee, and approximately 24 if it were to receive the
negotiated fee. Lead counsel counter that the $8,000,000
figure was preliminary and that the final figure will be
_________________________________________________________________

57. Arguably Cendant PRIDES, which, as noted above, see supra, n. 56,
was not decided as a Reform Act case, may have, by implication, elevated
the lodestar cross-check from being a "recommendation" to a
requirement. There the District Court had not performed a lodestar
cross-check, and by our calculations the fees that it ultimately awarded
were between 7 and 10 times the lodestar amount. See 243 F.3d at 742.
We wrote that "[i]n allowing such a high multiplier . . . without even
calculating it, much less explaining how it [was] justified, the District
Court strayed from all responsible discretionary parameters" in granting
the fee award. Id.

58. We note that even PSLRA sponsored fee agreements between Lead
Plaintiff and Lead Counsel will typically require an accounting of hours
spent, as the agreement in the present case does.

123
much higher, from 50% to 100%. Even so, the multiplier
would still be extremely high.

At all events, this was a simple case in terms of liability
with respect to Cendant, and the case was settled at a very
early stage, after little formal discovery. Thus the possibility
of rebuttal of the presumption of reasonableness must be
seriously considered by the District Court on remand. If the
Gunter factors (and possible lodestar cross-check) were to
confirm that the fee agreed to by a lead plaintiff and lead
counsel was clearly excessive, the court would need to set
a reasonable fee according to the standards our previous
cases have set down for class actions not governed by the
PSLRA. If the District Court does consider the lodestar, it
might think of it as a floor and the fee under the retainer
agreement as a ceiling. In such event, it should explain on
the record its reasons for selecting a fee award at or
between these two figures.

V. CONCLUSION

For the reasons stated above, the District Court's orders
approving the Settlement and the Plan of Allocation will be
affirmed. We hold that the District Court was correct to
appoint the CalPERS Group as lead plaintiff but that it
erred in holding an auction to select and retain lead
counsel. The latter error was harmless with respect to the
identity of Lead Counsel, but not with respect to the
determination of its fee. Because we believe that, absent the
error, the court would have properly appointed BRB and
BLBG as lead counsel pursuant to the Retainer Agreement
entered into between the firms and the CalPERS Group, we
hold that the Agreement remains in force. Consequently,
the fee award will be vacated and the case remanded with
instructions to the District Court to dismiss the fee request
as improper under the Retainer Agreement and to decline
to consider any further fee requests that are not submitted
with the "prior approval of the Funds." In considering any
such fee requests, the Court will be guided by our
discussion herein. Parties to bear their own costs.

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A True Copy:
Teste:

Clerk of the United States Court of Appeals
for the Third Circuit

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