The commentary below by Wayne Schneider, General Counsel for the New York State Teachers' Retirement System, is the first of what I hope will be many "guest posts" here at SLW.  Mr. Schneider writes about the impact that institutional investors are having on securities class action litigation, particularly in the area of attorneys' fees. 

If you have an interesting securities litigation-related article, memo or opinion, please consider sending it to me for possible publication as a "guest post" on this web site.

Thanks,
Bruce Carton

Getting More for Investors
by Wayne Schneider, General Counsel, New York State Teachers' Retirement System*

When considering the impact of the 1996 Reform Act on federal securities class actions, the actual and potential future impact that responsible institutional investors are having on the fees awarded to class counsel in federal securities class actions cannot be stressed enough.  The plaintiffs’ class action bar will routinely argue that class counsel fee awards in federal securities have been, and still are, in the 30% range.  Yet, responsible institutional investors serving as lead plaintiffs under the Reform Act are demonstrating that competent class counsel can be reasonably compensated for their efforts in federal securities class actions by fees which are substantially below the 30% level and, indeed, substantially below 20%.

Everyone is undoubtedly familiar with the fee award in the Cendant litigation which settled in 2000.  The settlement was over $3 billion.  The fee award, however, was only $55 million because of the retainer agreement class counsel had entered into with the New York City Pension Funds, the New York State Common Retirement Fund and the California Public Employees’ Retirement System serving as lead plaintiffs. 

Can there be any doubt as to the magnitude of the benefit which these institutional investors conferred on the class by driving a hard bargain on class counsel fees?  Let’s do the math.  Suppose the fee award had been 30% in line with what the plaintiffs’ class action bar claims is the “standard” for class counsel fees in federal securities class actions.  Had the fee award been 30%, Cendant investors would realized over $845 million less from that settlement than they actually did as a result of the fee deal that was, in fact, negotiated.  Even if the fee award had “only” been 20%, that award would have meant over $545 million less in the pockets of Cendant investors.  The dollar value of the savings on counsel fees undoubtedly realized in the Cendant case by itself dwarfs the settlement amounts in all but a handful of federal securities class actions!

Fortunately, the Cendant case is not an isolated instance but instead only one of the most remarkable examples of the way in which responsible institutional investors may be reshaping forever the perception of what should constitute a reasonable fee for plaintiffs’ class counsel when a federal securities class action finally settles.  Other examples of favorable fee arrangements reached by responsible institutional investors serving as lead plaintiffs include the following:

•  Class counsel agreed to seek a fee award not to exceed 17% of the 2004  settlement having a value of $102 million in the Symbol Technologies Inc. case.  The lead plaintiffs are the Louisiana Municipal Police Employees’ Retirement System, the Louisiana Sheriff’s Pension & Relief Fund and the City of Miami General Employees’ & Sanitation Employees’ Retirement Trust. 

•  Class counsel agreed to seek a fee of 10.5% in the Homestore.com, Inc. case which was settled in 2003 for $13 million in cash and 20 million shares of Homestore.com common stock, for a total reported value of $93 million.  California Teachers’ Retirement System was the lead plaintiff in that case.

•  Class counsel agreed to seek a fee of 17% in the Gemstar-TVGuide International, Inc. case which settled in 2004 for $67.5 million.  The lead plaintiffs in that case are the Teachers’ Retirement System of Louisiana and the General Retirement System of the City of Detroit.  (As it happened, the court awarded a fee equal to approximately 13.6% of the settlement.)  Other claims were settled more recently for $25 million and class counsel is seeking a fee not to exceed 20% of the settlement.

•  Class counsel agreed to seek a fee of 14% in the Providian Financial Corp. case which settled in 2004 for $65 million.  The lead plaintiff was the Retirement Systems of Alabama. 

•  Class counsel agreed to seek a fee of 15% in the Enterasys Networks, Inc. case which settled in 2004 for $50 million in cash and stock.  The Los Angeles County Employees Retirement Association was lead plaintiff in that case.

•  Class counsel agreed to seek a fee of 10.5% in the Critical Path, Inc. case which settled in 2002 settled for $17 million plus 850,000 warrants.  The Florida State Board of Administration was lead plaintiff in that case.

•  More recently, class counsel has agreed to seek a fee of 18% in the OM Group, Inc. case which settled for $92.4 million.  The Policemen & Firemen Retirement System of the City of Detroit is the lead plaintiff in that case.

And then we have this year’s “blockbuster” settlements:

•  In the Bristol-Myers Squibb Securities case which settled for $300 million, the fee originally agreed to by class counsel was 15% but that fee was reduced in subsequent negotiations to 7.5%.  (The court eventually awarded a fee equal to approximately 4% of the settlement.)  The lead plaintiffs were the Teachers’ Retirement System of Louisiana, the Louisiana State Employees’ Retirement System, General Retirement System of the City of Detroit, and Fresno County Employees’ Retirement Association.

•  In the Dynegy case which settled for $473 million, class counsel agreed to seek a fee not to exceed 9% of the settlement.  The Regents of the University of California are the lead plaintiff in that case.

•  In most spectacular case, class counsel in the Worldcom, Inc. cases agreed to accept a fee of only 5.5% of the $3.55 billion in settlements achieved in 2005.  The New York State Common Retirement Fund is the lead plaintiff in that case.

There has been some recognition of the efforts of responsible institutional investors in reducing fee requests.  For example, the court in the Motorola case remarked in 2003 that lead plaintiff New Jersey State Treasurer had entered into retainer agreements providing for fees which are “‛significantly below’” the level of fees often theretofore awarded by courts.  In the academic community, Professor Lisa L. Casey wrote in her 2003 article entitled “Reforming Securities Class Actions from the Bench: Judging Fiduciaries and Fiduciary Judging” in the Brigham Young University Law Review:

“Experience demonstrates that institutions applying for the role of lead plaintiff can and do negotiate fee agreements with putative lead counsel before selecting attorneys for the class.  In the Waste Management megalitigation, for example, lead plaintiff Connecticut Retirement Plans and Trust funds negotiated a contingent fee agreement with lead counsel....The pact included a provision capping attorneys’ fees if the case settled after resolution of motions to dismiss but before a decision on motions for summary judgment.  The court approved the contract fees as reasonable and awarded counsel 7.93% of the case recovered for the class in the megasettlement, or $36.225 million of the $457 million recovery fund.  Acting as lead plaintiff in the megalawsuit arising from the Enron debacle, the University of California Board of Regents also negotiated a contingent fee contract with lead counsel Milberg Weiss calling for a fee below 10% of any recovery--again, substantially lower than the 25% benchmark previously utilized by many courts.”

Even members of the plaintiffs class action bar will, in unguarded moments, acknowledge the impact responsible institutional investors can have in substantially lowering fee requests in federal securities class actions.  For example, in a 2004 newsletter, one plaintiffs’ class action firm stated the following:

“...public fund plaintiffs have sharply reduced the percentage of the settlement pool that goes to the lawyers who represent [investors] in securities class actions.  In cases where individuals act as lead plaintiffs, contingent fees have historically ranged up to 33%.  But institutional investors have the sophistication and the commitment to the class they represent to negotiate significantly lower fees.

“Institutions look for ways to ensure that attorney fees are reasonable and reflect the results obtained, as well as the time and effort expended.  Their fee agreements often include anti-windfall provisions and other incentives that tie the lawyers’ share to the size of the recovery and the length of the proceedings.

“The New York State Common Retirement System last year issued a Request for Proposals in which all responding securities litigation counsel agreed to a fee scale that set fees of 8% to 14% for settlements under $100 million.  Larger settlements are governed by a multi-tier system that lowers the percentage even more.  Other funds have come up with similar formulas to keep legal fees reasonable, providing a valuable service not only to their plan members but also to the wider pool of shareholders entitled to part of the settlement.”

            There is no reason to believe that responsible, properly informed institutional investors serving as lead plaintiffs cannot secure lower fees in federal securities class actions for the benefit of the investor class they are representing.  Counsel for public sector funds, for example, can attest to a highly competitive environment in which plaintiffs class action firms are vigorously competing with each other to represent public sector funds.  Counsel for public sector funds are routinely bombarded with all manner of promotional material from plaintiffs class action firms and invited to lavish conferences and other activities designed to promote the firms’ capabilities in the prosecution of federal securities class actions.  Representatives of plaintiffs class action firms regularly attend meetings of organizations in which public sector funds participate and importune representatives of public sector plans in an effort to drum business.

            Unfortunately, outside the circles of plaintiffs class action firms and public sector funds, the efforts of responsible lead plaintiffs in driving down fees have attracted little attention.  The lack of discussion in the media of the level of fees have been negotiated leaves a considerable opening for class action firms to continue to recruit lead plaintiffs who have no knowledge of what kind of fees can be obtained through obtaining bids from competing law firms and hard negotiation.  Organizations like ISS can perform a genuine service for investors by examining and publicizing the efforts of those lead plaintiffs who truly benefit investors by obtaining substantially reduced fee requests.

*The views expressed in this commentary represent only the views of the author and do not necessarily represent the views of the institution by which he is employed.

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October 5, 2005