‘Pay-to-Play’ Objections Won’t Tank Class Action

     SAN FRANCISCO (CN) – Diamond Foods failed to show that two law firms made secret political donations to become class counsel in a securities fraud class action, a federal judge ruled.
     Shareholders have accused Diamond of deliberately underestimating the price of walnuts and inflating its share prices by improperly accounting for payments to walnut growers, motivated by its desire to buy the potato chip brand Pringles from Procter & Gamble Co. The deal fell through in Feb. 15, 2012, allegedly after the fraud was discovered.
     Diamond initially faced a number of securities fraud class actions, but the cases were eventually consolidated and the Mississippi retirement fund was appointed lead plaintiff.
     After a federal judge dismissed the claims against Diamond’s outside auditor, Deloitte & Touche, the plaintiffs moved for class certification.
     In one of its arguments against certification, Diamond said Mississippi Attorney General Jim Hood had selected Chitwood Harley Harnes and Lieff Cabraser Heimann & Bernstein as counsel for the plaintiff as part of a “pay-to-play” agreement by which he recognized law firms that had contributed to his political campaign.
     U.S. District Judge William Alsup dismissed this and other arguments to certify the class Monday.
     He noted that the attorney-selection issue cannot be said to have made the action frivolous since the claims already survived a motion to dismiss.
     “This order must focus on the issue of whether MSPERS’ choice of counsel in this case has betrayed the class in some way,” Alsup wrote, abbreviating Mississippi Public Employees’ Retirement System.
     Though Diamond produced evidence that Chitwood and Lieff Cabraser contributed to Hood, the judge found it telling that neither “the law firms or their individual attorneys made contributions to Attorney General Hood after counsel were approved by the court in June 2012.”
     Alsup seemed more concerned with contributions that the firms made to the Democratic Attorneys General Association.
     “In this case, it is true, the court has been concerned that MSPERS is a figurehead and that Attorney General Hood has really controlled it and has used this case as a reward for campaign contributions,” Alsup wrote. “Due to that concern, the court made special inquiries at two stages: the first was at the time of selection of the lead plaintiff and its counsel and the second was on the instant motion.”
     Though the shareholders argued that DAGA contributions cannot be earmarked for specific candidates, Alsup noted “a sufficient possibility that at least a portion of these contributions … might eventually be provided to Attorney General Hood’s political campaigns,” Alsup wrote.
     Noting that “DAGA provided $850,000 to Hood’s 2007 campaign and $550,000 to his 2011 campaign,” Alsup said he had the plaintiff firms itemize all contributions, and communications about such contributions, that they or their attorneys made to DAGA January 2012 to the present.
     “Having reviewed the law firms’ submissions, it does not appear that there was any communication between the law firms and Attorney General Hood, or his office, regarding any expectation that the law firms contribute to DAGA or that such contributions would eventually make their way to Attorney General Hood,” Alsup wrote.
     As such, “the court is satisfied that class counsel will adequately and vigorously represent absent class members,” the ruling states.
     Alsup also rejected Diamond’s argument that the pension fund could not prove they were harmed by the alleged fraud because they had allowed a private consultant to manage their trading strategy. “Perhaps a jury will buy this argument, but it is not enough to defeat class certification,” he wrote.

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