One of a series of articles designed to help institutional investors understand the ins and outs of securities litigation and identify steps they can take to address securities fraud.
U.S. District Judge Jed S. Rakoff caused a bit of a stir last year when he raised concerns about the portfolio monitoring services that law firms like ours typically provide to pension fund clients free of charge.
(See: Iron Workers Local No. 25 Pension Fund, et al. v. Credit-Based Asset Servicing & Securitization LLC, et al., 616 F. Supp. 2d 461, (S.D.N.Y. 2009))
The judge denied lead plaintiff status to a union pension fund with a single monitoring law firm, citing what he believed was a conflict of interest. According to Judge Rakoff’s thinking, a law firm has an incentive to discover “fraud” in the investments it monitors because the subsequent lawsuit could lead to contingency fees. That conflict is especially acute, Judge Rakoff argues, if the law firm doing the monitoring is also the only one approved to represent the fund in litigation.
Judge Rakoff’s view is unusual; most courts have consistently recognized the strong merits of portfolio monitoring services. (See sidebar on page 4.) Nonetheless, his controversial ruling has reinforced what was already a recognized best practice in securities litigation: the idea of hiring more than one law firm to monitor an investment portfolio.
By now it is well known that monitoring for investment losses due to fraud and settlement eligibility is an important aspect of an institutional investor’s fiduciary duties. By identifying major potential losses in a timely manner, a fund can weigh appropriate legal options – everything from actively pursuing a case as lead plaintiff to simply tracking a case for settlement purposes. Indeed, the Government Finance Officers Association recommends monitoring for fraud-related losses.
There are other, less obvious reasons for hiring monitoring counsel. At Berman DeValerio, we believe that funds considering filing a lead plaintiff motion should be familiar with their attorneys’ work before retaining them to file a case. The ongoing monitoring relationship – one in which pension fund staff interacts with attorneys and reviews detailed case analyses – offers an excellent way to assess a law firm’s expertise and the quality of its attorneys’ work product.
Likewise, there are compelling reasons to have at least two law firms monitor your portfolio. For starters, the client can benefit from the recommendations of two firms. For another, one firm may uncover evidence (either supporting a finding of fraud or lack thereof) through its in-house investigators and forensic accountants, which the other firm did not know. There’s also a possibility that one firm might be unable to represent a fund in a particular case due to its work for another client.
*In August 2017, our firm name changed to Berman Tabacco. Case references and content published before that date may refer to the firm under our prior name, Berman DeValerio.