In Lending Club securities case, judge defies convention for picking class counsel

August 16, 2016

(Reuters) – U.S. District Judge William Alsup of San Francisco refuses to bow to orthodoxy when it comes to selecting plaintiffs’ firms to lead securities class actions.

A few years back, you may remember, the judge was in charge of a case against Diamond Foods. After some nasty briefing between two competing pension funds, he appointed a Mississippi state employees’ fund as lead plaintiff – but didn’t immediately appoint the fund’s chosen lawyers as lead counsel. Instead, Judge Alsup ordered the fund to conduct a separate due diligence investigation of prospective lead counsel and pick the one that offered “the overall best deal for the class.” (As it happened, the fund selected two of the firms that had represented it in the lead plaintiff fight.)

In May, Judge Alsup was assigned a securities class action against Lending Club, the online marketplace connecting borrowers to investors. This time, he made clear from the beginning that he intended to separate the processes of picking a lead plaintiff and picking a shareholder law firm to represent the class. In an order in June, the judge set a schedule (and separately provided a questionnaire) for investors to apply to be appointed lead plaintiff. He explicitly said he would “defer” picking lead counsel until he appointed a plaintiff.

Alsup was as good as his word. On Monday, he issued an order selecting the death and disability fund for Los Angeles water and power workers as the lead plaintiff. Six other plaintiffs, including three other institutional investors, had submitted leadership motions, but all of them either withdrew their motions or assented to the Los Angeles fund’s leadership after its lawyers at Robbins Geller Rudman & Dowd disclosed the fund’s nearly $13 million loss in Lending Club shares. (Shareholders accuse the online platform of hiding the company’s investment, as well as its former CEO’s investment, in a third-party fund that allegedly purchased notes sold in the Lending Club marketplace.)

In the order appointing the lead plaintiff, the judge elaborated the lead counsel selection process, which he called the most important fiduciary duty of the lead plaintiff. Alsup instructed lead counsel candidates to send applications to the Los Angeles fund’s chief investment officer, detailing “their fee proposal, their track record, the particular lawyers assigned to the case, their ability and willingness to finance the case and their proposals for the prosecution of the case.” The fund and the L.A. City Attorney’s Office, which is advising it, have until the middle of September to make a choice, which they must explain to Judge Alsup via sealed declarations explaining the due diligence process and “why the counsel selected was favored over other potential candidates.”

The judge said the Los Angeles fund is welcome to consider its current lawyers at Robbins Geller but may not favor the firm when it comes to a final selection. Kirby McInerney, which represented the U.S. Equity Fund in a competing lead counsel motion in the Lending Club class action, argued that Robbins Geller was conflicted because it represented an investor in a parallel suit against Lending Club board members in California state court. Robbins Geller and its client in that case, a union pension fund, subsequently withdrew from the state litigation.

So who’s a candidate for lead counsel in the class action before Judge Alsup? I emailed the firms that filed lead plaintiff motions on behalf of Lending Club investors. In addition to Robbins Geller and Kirby McInerney, they include Bernstein Litowitz Berger & Grossmann, Lieff Cabraser Heimann & Bernstein, Pomerantz and Chimicles & Tikellis. Jerry Silk at Bernstein Litowitz and Kimberly Donaldson Smith at Chimicles said they are considering whether to apply to be lead counsel. The other firms did not get back to me.

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