In Re: Cendant Corp., (Formerly Known as Cuc International, Inc.) Cendant Capital I Lester A. Goldstein, on Behalf of Himself and All Others Similarly Situated Welch & Forbes Inc., an Institutional Investment Manager, Individually and on Behalf of All Others Similarly Situated v. Walter A. Forbes Cosmo Corigliano Anne M. Pember Merrill Lynch & Co. Chase Securities Inc. Henry R. Silverman v. Ernst & Young Cendant Membership Services, Inc. Casper Sabatino Steven P. Speaks Kevin T. Kearney Mary Sattler Howard Sirota
Docket: 99-5485
Court: Court of Appeals for the Third Circuit; August 17, 2001; Federal Appellate Court
The appeal concerns the selection of lead counsel in the Cendant Corporation securities litigation, specifically focusing on the District Court's use of sealed bids during the bidding process for lead counsel. The District Court had imposed a confidentiality order that sealed the bids from public view, allowing access only to plaintiffs' attorneys. This order followed an in camera hearing. A key issue arose when Howard Sirota, an unsuccessful bidder, disclosed information about the bidding process to a reporter, resulting in a $1,000 fine imposed by the District Court for violating the confidentiality order. Sirota appealed the sanction.
The appellate court found that the District Court had not provided adequate justification for the confidentiality order and determined that Sirota did not violate it. Consequently, the appellate court vacated the sanction against Sirota. Background context includes Cendant Corporation's announcement of significant accounting irregularities in April 1998, which led to a drop in stock value and the filing of approximately 64 lawsuits, primarily class actions. The District Court established a process for appointing lead counsel, applying a statutory presumption favoring the plaintiff with the largest financial interest. However, Sirota and his co-counsel were not appointed as lead plaintiffs.
The District Court implemented a competitive bidding system to select lead counsel for class representation, believing this would yield reasonable attorney fees through marketplace competition. Attorneys were required to submit sealed bids detailing their qualifications and fee arrangements. All bids are currently sealed. On October 2, 1998, separate lead counsel were chosen for non-PRIDES and PRIDES claims, excluding Sirota and his co-counsel. The Court emphasized confidentiality, conducting an in camera hearing for only the applicants, and issued a confidentiality order to keep bidders' identities and proposals secret until the case's conclusion, citing the importance of maintaining adversarial integrity.
Subsequently, on November 30, 1998, the District Court separated the PRIDES claims from the broader Cendant case. On March 18, 1999, it preliminarily approved a proposed settlement for the PRIDES case, where Cendant would provide class members with 'Rights' valued at $11.71 each, totaling a theoretical value of $341.5 million. The order also approved the notice to class members, which stated that lead counsel would seek attorneys' fees up to 10% of the settlement's theoretical value. The notice highlighted the court-mandated bidding process, designed to maximize recovery for class members while minimizing fees taken by lead counsel.
The March 18, 1999 order required class members to file written objections to the settlement or lead counsel's fee application. On May 4, 1999, Sirota and co-counsel filed objections for Aboff, arguing that the $34 million fee sought by lead counsel significantly exceeded the agreed-upon fee from a prior bidding auction. A New York Times article on May 14, 1999, cited Sirota's calculations regarding lead counsel's fee, prompting the District Court to issue an order for Sirota to show cause for potential contempt and sanctions for violating a confidentiality order from October 2, 1998. During a May 19, 1999 hearing, Sirota defended himself by stating he only informed the reporter about his objection and had not provided substantive comments, believing that his statements were authorized by the March 18 order. He argued that the purpose of confidentiality had diminished due to the court-approved notice indicating lead counsel's belief that fees would be lower than the bid. The District Court acknowledged that Sirota's arguments in court were valid but distinguished that speaking to the press constituted a breach of confidentiality. Ultimately, the court found no grounds for contempt but sanctioned Sirota for the violation, emphasizing that as a seasoned attorney, he should have verified whether his comments would breach the confidentiality order before discussing the matter with the media.
Lead counsel's failure to adequately inform the Court of an objection related to a confidentiality order is criticized, as such professional obligations do not extend to public statements in media. Following a violation of the confidentiality order, the District Court fined Sirota $1,000 on May 20, 1999, leading to Sirota's appeal regarding the sanction. The appeal falls under the final order doctrine of 28 U.S.C. § 1291, which includes attorney disciplinary matters. The core issue on appeal questions whether the District Court erred in sanctioning Sirota for his disclosure to the New York Times, which hinges on whether the confidentiality order itself was valid. The court asserts that it must first evaluate the appropriateness of the confidentiality order before addressing the sanctions.
The legal standard for issuing confidentiality orders is subject to plenary review, with inherent supervisory powers to clarify rules governing such orders. The District Court's decision to seal bids was found improper, as bids are considered judicial records that are generally subject to a common law presumption of public access. The court asserts that the District Court failed to provide necessary findings to justify overriding this presumption. It emphasizes the established public right of access to judicial proceedings and records, which serves to enhance public confidence in the judiciary, reduce the potential for injustice, and foster a better understanding of the judicial system.
The public right of access applies to the in camera hearing conducted by the District Court, classifying it as a judicial proceeding. This right also extends to the bids for lead counsel, as their status as 'judicial records' is determined by whether they have been filed with the court or incorporated into adjudicatory proceedings. Filing a document establishes its judicial record status, but a document may still be considered a judicial record if the court interprets or enforces it, or if it is submitted under seal. The case of Leucadia confirms a presumptive right of public access to pretrial motions and related materials. In this instance, the District Court's auction procedure rendered the bids judicial records, as the court utilized the PSLRA to require plaintiffs' attorneys to submit bids for lead counsel selection. The bids, although not explicitly labeled as motions, served that function, and the District Court ultimately issued an Order appointing counsel based on those bids. This Order, which included a summary of the bids, was a public document. Therefore, at the time of the confidentiality order, the bids qualified as judicial documents subject to the common law right of access. This right is particularly significant in class actions, enhancing public confidence in the judicial process and reducing the risk of injustice or fraud against class members. Public access ensures that class members, who are stakeholders in the litigation, gain a comprehensive understanding of the class action process and perceive it as fair. The sealed information was crucial for the administration of the case, directly pertaining to the lead counsel selection.
In class actions, lead attorneys exert significant control over case information, while class members have limited involvement, primarily restricted to selecting class counsel. Secrecy in this selection process restricts class members' ability to influence litigation outcomes. There is a strong presumption for transparency in the selection of class counsel, which should include public access to bids and proceedings, as established in case law (Littlejohn, 851 F.2d at 678). This presumption counters the routine sealing of judicial records (Miller v. Indiana Hosp. 16 F.3d 549, 551).
While the common law right to public access is well-established, it is not absolute. Courts can rebut the presumption of access if the party seeking closure demonstrates that the information is protectable and that disclosure would cause significant harm. Specificity in outlining potential injury is crucial; vague claims are inadequate (Publicker, 733 F.2d at 1071). When balancing interests, the burden lies with the party opposing access to prove that the need for confidentiality outweighs the presumption of openness (Leucadia, 998 F.2d at 165).
In class actions, where public members are also parties, a stricter standard for overriding access rights is warranted due to the critical nature of lead counsel selection. Courts must provide compelling reasons for sealing records, make specific findings regarding disclosure impacts, and allow third-party participation before sealing any records (Miller, 16 F.3d at 551).
A 'compelling countervailing interests' standard is deemed appropriate, necessitating specific findings, which may or may not require a hearing. The focus is on the District Court's denial of public access to bids and proceedings related to the sealed bid auction for selecting lead counsel. The decision does not evaluate the general propriety of bid auctions, as this issue is not presented in the current appeal. In re Oracle Sec. Litig. is referenced as an early case addressing competitive bids for lead counsel and sealing such bids. While Oracle's rationale for competitive selection raises concerns, the appropriateness of competitive bidding is left for future cases.
Critically, the ruling that the bidding auction should be sealed is rejected, aligning with Oracle's stance against sealing bids, which emphasized that transparency benefits the class members who cannot negotiate or monitor their counsel's actions. The opinion cites an example from General Motors litigation, highlighting potential agency issues where lead counsel's fees far exceeded class plaintiffs' recoveries. Ultimately, disclosure of bids is seen as promoting oversight of lead counsel and aligning with the Model Rules of Professional Conduct, particularly the requirement for attorneys to communicate fee structures to clients. The 1985 Third Circuit Task Force Report supports these principles, advocating for open negotiations regarding class counsel's fees to ensure fair compensation for clients.
District courts must recognize the strong presumption of public access and regularly assess whether the reasons for sealing documents have diminished, prompting them to unseal materials when appropriate. Even if a sealing order was justified initially, it should be lifted as soon as the rationale for sealing is no longer valid. Continued sealing requires current evidence demonstrating potential competitive harm from public disclosure. This approach is intended to standardize practices across district courts, particularly concerning class action cases.
The Private Securities Litigation Reform Act (PSLRA) establishes clear protocols for lead plaintiff selection and emphasizes that class members, rather than their attorneys, should control litigation. Legislative history indicates that the PSLRA aims to encourage corporate transparency, empower investors, and ensure that plaintiffs' attorneys focus on valid claims rather than their financial interests. This is underscored by findings that attorneys often prioritize their payment over clients' interests.
The PSLRA mandates that the most adequate plaintiff selects legal counsel with court approval, reversing the previous norm where attorneys dictated client selection. In the case at hand, the sealing of bids for lead counsel contradicts the PSLRA's purpose by preventing class members from exercising their rights in selecting counsel and allowing attorneys to prioritize their compensation without ensuring adequate client representation. The District Court's sealed bidding process obstructs class plaintiffs' ability to choose lead counsel, undermining the legislative intent of the PSLRA.
The district court has discretion to seal documents, but this discretion must be exercised with a clear analytical process that considers the common law right to public access. In this case, the court abused its discretion by sealing bids without providing specific reasons or recognizing the presumption of access. The absence of a balancing process to weigh the need for confidentiality against public access led to the conclusion that the confidentiality order issued on October 2, 1998, was invalid.
Additionally, the court found that attorney Sirota violated the confidentiality order, resulting in a $1,000 sanction. However, this finding was also deemed erroneous. Sirota argued that the sanction for speaking to a reporter was an abuse of discretion, as it was based on an incorrect interpretation of the law and evidence. Although the district court had the authority to impose sanctions under its inherent power and local rules, the lack of a justifiable basis for the sanctions raised concerns, especially as the matter gained public attention and led to inquiries by disciplinary authorities in New York.
Federal courts possess inherent authority to impose financial sanctions on attorneys for both contempt and non-contemptuous conduct, as established in Eash v. Riggins. This power is derived from the courts' need to manage their affairs effectively to ensure the orderly resolution of cases. The Supreme Court has affirmed that this inherent authority is essential for maintaining judicial process and is not limited by formal rules or statutes. Courts must, however, exercise this power with restraint and discretion, ensuring that sanctions are appropriate and tailored to the misconduct.
In the case involving Sirota, the District Court initially charged him with violating a confidentiality order after he spoke to the New York Times. Sirota claimed that he only indicated the existence of a filed brief without revealing substantive information, a statement the court did not challenge. Instead, the court criticized Sirota's actions as lacking professionalism. Ultimately, the court found that there was insufficient factual basis to justify exercising its inherent authority to impose sanctions on Sirota.
Sirota did not violate the confidentiality order by communicating with the media, as he had a professional obligation to ensure compliance before discussing the case. The record indicates no breach occurred, despite amicus counsel's claims that Sirota's brief impliedly identified bidders for the lead counsel position. The brief was publicly available and did not explicitly reveal any identities, serving merely as a response to the court's order for class members to file objections. The District Court acknowledged that Sirota could present his brief's material in court without issue, affirming the public's right to access judicial records. Though Sirota's contact with the media was questioned, the court could not substantiate any improper statements that would warrant sanctions. Consequently, the court found no violation of the confidentiality order and vacated the District Court's sanction, directing the unsealing of all relevant bids and documents.
The order from the court initiated a show cause hearing against Howard B. Sirota for potential contempt related to breaches of a confidentiality order issued on October 2, 1998, which were reported by the New York Times. Sirota argued that Kirby's proposed fee of $34 million was approximately 10% of the total settlement fund, claiming it exceeded a previously submitted confidential bid. The hearing was scheduled for May 19, 1999. On June 25, 1999, the District Court approved a settlement in the Cendant PRIDES case, certifying the judgment under Federal Rule of Civil Procedure 54(b). Sirota's appeal against the sanctions order would be considered timely following the final judgment in this case. The document references the Pansy case, which determined that certain agreements not filed with the court were not judicial records, noting that those records in the current case were submitted at the court's request. It also highlights the limited use of lead counsel auctions in federal courts, with only a few instances in securities and antitrust cases, along with an acknowledgment of mixed approaches to the bidding process among different district courts. Additionally, one court rejected the use of bid auctions, asserting they violated the PSLRA.
The District Court applied the Private Securities Litigation Reform Act (PSLRA) multiple times during the Cendant litigation, but not in the context of selecting lead counsel. Key applications of the PSLRA included barring contribution claims, awarding attorneys' fees, and requiring a showing of scienter in securities fraud actions. The PSLRA mandates that a court appoint the most capable lead plaintiff to adequately represent the interests of the class. In this case, the District Court allowed lead plaintiffs' counsel the opportunity to match the best bid to become lead counsel.
Additionally, the Third Circuit recognizes both a common law and a First Amendment right of access to civil trials, with the latter being independent of the former. The rationale for public access is to promote informed participation in governmental affairs. To restrict access under the First Amendment, a higher standard is required, necessitating a demonstration that the denial of access serves an important governmental interest without less restrictive alternatives. The District Court's confidentiality order did not meet the requirements for limiting even the common law right of access, leading to the conclusion that the constitutional questions surrounding the First Amendment right of access need not be addressed, as a non-constitutional basis for decision was available.
