Who Gets Paid in Securities Cases?

Rejecting an appeal brought by three law firms that demanded portions of the $55 million in attorney fees awarded in the $3.2 billion settlement of the Cendant Corp. securities litigation, the 3rd U.S. Circuit Court of Appeals has ruled that the lawyers who were named to lead the case have the power to say who gets paid.

In its 54-page opinion in In re Cendant Corp. Securities Litigation, a unanimous three-judge panel found that the Private Securities Litigation Reform Act of 1995 established a “new paradigm” for securities litigation in which the lead plaintiffs and their lawyers call all the shots.

“The PSLRA lead plaintiff is now the driving force behind the class's counsel decisions, and the lead plaintiff's refusal to compensate non-lead counsel will generally be entitled to a presumption of correctness,” Senior U.S. Circuit Judge Edward R. Becker wrote.

“The new paradigm of securities litigation significantly restricts the ability of plaintiffs' attorneys to interpose themselves as representatives of a class and expect compensation for their work on behalf of that class,” Becker wrote in an opinion joined by U.S. Circuit Judges Richard L. Nygaard and Max Rosenn.

The ruling is a setback for three firms ' Wolf Haldenstein Adler Freeman & Herz in New York; Miller Faucher & Cafferty in Philadelphia; and Finkelstein Thompson & Loughran in Washington, DC.

Wolf Haldenstein had asked for more than $530,000 in fees and costs, Miller Faucher had requested about $107,000 and Finkelstein Thompson was seeking about $45,000.

In a prior appeal, the 3rd Circuit had reversed an award of $262 million to the plaintiffs' lawyers after finding that U.S. District Judge William Walls of the District of New Jersey had erred when he held an auction to select the lead lawyers in the case.

Since Walls ultimately allowed the lawyers who were retained by the lead plaintiff to match the low bid, the 3rd Circuit found the error of holding the auction was harmless on the issue of choosing lead counsel.

However, since the auction resulted in a fee agreement that differed from the $187 million cap that was placed on the fees in the original retainer, the court held that Walls erred when he awarded a larger fee.

On remand, the lead plaintiffs and their lawyers ' Leonard Barrack, Gerald J. Rodos and Jeffrey W. Golan of Barrack Rodos & Bacine in Philadelphia, and Max W. Berger, Daniel L. Berger and Jeffrey N. Leibell of Bernstein Litowitz Berger & Grossmann in New York ' agreed to a $55 million fee award.

Walls approved the fee as reasonable, noting that it represented just 1.7% of the $3.2 billion settlement, and that the lead lawyers had logged about 35,000 hours prosecuting the case.

But a new dispute arose when the two firms appointed to serve as co-lead counsel decided to share the fees with just 12 other firms that had been authorized by them to perform work on the case, and refused to pay anything to 45 other firms.

Now, in rejecting appeals brought by three of those firms, the 3rd Circuit has held that the decision by the lead lawyers as to whether to pay fees to any non-lead firm is entitled to a “presumption of correctness.”

Under the PSLRA, Becker said, “non-lead counsel will have to demonstrate that their work actually benefited the class.”

Becker found that the appeal by Finkelstein Thompson was easy to reject because it “did nothing more than file a complaint that was substantially identical to dozens of other complaints filed in this litigation.”

Such “copycat complaints,” Becker said, “do not benefit the class, and are merely entrepreneurial efforts taken by firms attempting to secure lead counsel status.”

The appeals by the other two firms were more complex, Becker found, because they claimed to have logged considerable hours on the case.

But Becker found that the PSLRA sets a strict test for winning fees and that neither firm was able to satisfy the test.

“The PSLRA grants … lead plaintiff primary responsibility for selecting and supervising the attorneys who work on behalf of the class. We conclude that this mandate should be put into effect by granting a presumption of correctness to the lead plaintiff's decision not to compensate non-lead counsel for work done after the appointment of the lead plaintiff,” Becker wrote.

Non-lead counsel may refute the presumption of correctness, Becker said, “only by showing that lead plaintiff violated its fiduciary duties by refusing compensation, or by clearly demonstrating that counsel reasonably performed work that independently increased the recovery of the class.”

But Becker found that representation of individual class members ' and specifically monitoring the progress of the litigation on behalf of those members ' is “not compensable out of the class's common recovery.”

The three firms that appealed all claimed that they monitored the class action, Becker said, “but none can show that this monitoring independently increased the recovery of the class.”

Becker also rejected the arguments of Miller Faucher and Wolf Haldenstein, that they had effectively represented an uncertified subclass of Cendant plaintiffs.

The two firms had asked Walls to clarify the class definition to create a subclass consisting of claimants who purchased shares after a misleading partial disclosure of the fraud at Cendant, but Walls refused, finding that the lead counsel had adequately represented the interests of the entire class.

Becker found that since the subclass was never certified, the two firms had no rights to fees for work on its behalf.

“Lawyers who claim to represent an uncertified putative subclass generally have no more right to a fee awarded out of the common recovery – whether that recovery is defined as the subclass's recovery or the recovery of the class as a whole – than do any other non-lead counsel,” Becker wrote.

“Simply claiming to do work on behalf of a specific group, which the court has declined to certify as a subclass, does not refute the presumption of correctness that attaches to lead plaintiff's decision not to compensate a firm,” Becker wrote.

Becker also rejected claims by the two firms that their work was conducted at the request of lead counsel, and that it benefited the class as a whole.

“If true, these claims would serve to refute the presumption of correctness, as they would demonstrate that the appellant firms did their work with an expectation of compensation and that it independently benefited the class,” Becker wrote.

“However, our review of the facts leads us to conclude that these appellant firms undertook their work without the approval of lead plaintiffs, and that their work did not measurably contribute to the class's recovery.”

Rejecting an appeal brought by three law firms that demanded portions of the $55 million in attorney fees awarded in the $3.2 billion settlement of the Cendant Corp. securities litigation, the 3rd U.S. Circuit Court of Appeals has ruled that the lawyers who were named to lead the case have the power to say who gets paid.

In its 54-page opinion in In re Cendant Corp. Securities Litigation, a unanimous three-judge panel found that the Private Securities Litigation Reform Act of 1995 established a “new paradigm” for securities litigation in which the lead plaintiffs and their lawyers call all the shots.

“The PSLRA lead plaintiff is now the driving force behind the class's counsel decisions, and the lead plaintiff's refusal to compensate non-lead counsel will generally be entitled to a presumption of correctness,” Senior U.S. Circuit Judge Edward R. Becker wrote.

“The new paradigm of securities litigation significantly restricts the ability of plaintiffs' attorneys to interpose themselves as representatives of a class and expect compensation for their work on behalf of that class,” Becker wrote in an opinion joined by U.S. Circuit Judges Richard L. Nygaard and Max Rosenn.

The ruling is a setback for three firms ' Wolf Haldenstein Adler Freeman & Herz in New York; Miller Faucher & Cafferty in Philadelphia; and Finkelstein Thompson & Loughran in Washington, DC.

Wolf Haldenstein had asked for more than $530,000 in fees and costs, Miller Faucher had requested about $107,000 and Finkelstein Thompson was seeking about $45,000.

In a prior appeal, the 3rd Circuit had reversed an award of $262 million to the plaintiffs' lawyers after finding that U.S. District Judge William Walls of the District of New Jersey had erred when he held an auction to select the lead lawyers in the case.

Since Walls ultimately allowed the lawyers who were retained by the lead plaintiff to match the low bid, the 3rd Circuit found the error of holding the auction was harmless on the issue of choosing lead counsel.

However, since the auction resulted in a fee agreement that differed from the $187 million cap that was placed on the fees in the original retainer, the court held that Walls erred when he awarded a larger fee.

On remand, the lead plaintiffs and their lawyers ' Leonard Barrack, Gerald J. Rodos and Jeffrey W. Golan of Barrack Rodos & Bacine in Philadelphia, and Max W. Berger, Daniel L. Berger and Jeffrey N. Leibell of Bernstein Litowitz Berger & Grossmann in New York ' agreed to a $55 million fee award.

Walls approved the fee as reasonable, noting that it represented just 1.7% of the $3.2 billion settlement, and that the lead lawyers had logged about 35,000 hours prosecuting the case.

But a new dispute arose when the two firms appointed to serve as co-lead counsel decided to share the fees with just 12 other firms that had been authorized by them to perform work on the case, and refused to pay anything to 45 other firms.

Now, in rejecting appeals brought by three of those firms, the 3rd Circuit has held that the decision by the lead lawyers as to whether to pay fees to any non-lead firm is entitled to a “presumption of correctness.”

Under the PSLRA, Becker said, “non-lead counsel will have to demonstrate that their work actually benefited the class.”

Becker found that the appeal by Finkelstein Thompson was easy to reject because it “did nothing more than file a complaint that was substantially identical to dozens of other complaints filed in this litigation.”

Such “copycat complaints,” Becker said, “do not benefit the class, and are merely entrepreneurial efforts taken by firms attempting to secure lead counsel status.”

The appeals by the other two firms were more complex, Becker found, because they claimed to have logged considerable hours on the case.

But Becker found that the PSLRA sets a strict test for winning fees and that neither firm was able to satisfy the test.

“The PSLRA grants … lead plaintiff primary responsibility for selecting and supervising the attorneys who work on behalf of the class. We conclude that this mandate should be put into effect by granting a presumption of correctness to the lead plaintiff's decision not to compensate non-lead counsel for work done after the appointment of the lead plaintiff,” Becker wrote.

Non-lead counsel may refute the presumption of correctness, Becker said, “only by showing that lead plaintiff violated its fiduciary duties by refusing compensation, or by clearly demonstrating that counsel reasonably performed work that independently increased the recovery of the class.”

But Becker found that representation of individual class members ' and specifically monitoring the progress of the litigation on behalf of those members ' is “not compensable out of the class's common recovery.”

The three firms that appealed all claimed that they monitored the class action, Becker said, “but none can show that this monitoring independently increased the recovery of the class.”

Becker also rejected the arguments of Miller Faucher and Wolf Haldenstein, that they had effectively represented an uncertified subclass of Cendant plaintiffs.

The two firms had asked Walls to clarify the class definition to create a subclass consisting of claimants who purchased shares after a misleading partial disclosure of the fraud at Cendant, but Walls refused, finding that the lead counsel had adequately represented the interests of the entire class.

Becker found that since the subclass was never certified, the two firms had no rights to fees for work on its behalf.

“Lawyers who claim to represent an uncertified putative subclass generally have no more right to a fee awarded out of the common recovery – whether that recovery is defined as the subclass's recovery or the recovery of the class as a whole – than do any other non-lead counsel,” Becker wrote.

“Simply claiming to do work on behalf of a specific group, which the court has declined to certify as a subclass, does not refute the presumption of correctness that attaches to lead plaintiff's decision not to compensate a firm,” Becker wrote.

Becker also rejected claims by the two firms that their work was conducted at the request of lead counsel, and that it benefited the class as a whole.

“If true, these claims would serve to refute the presumption of correctness, as they would demonstrate that the appellant firms did their work with an expectation of compensation and that it independently benefited the class,” Becker wrote.

“However, our review of the facts leads us to conclude that these appellant firms undertook their work without the approval of lead plaintiffs, and that their work did not measurably contribute to the class's recovery.”