Working Hard or Making Work? Plaintiffs’ Attorney Fees in Securities Fraud Class Actions

• DOI: http://doi.org/10.1111/jels.12262
• Published date: 01 September 2020
• Author: Stephen J. Choi,Jessica Erickson,A. C. Pritchard
• Date: 01 September 2020

Journal of Empirical Legal Studies

Volume 17, Issue 3, 438–465, September 2020

Working Hard or Making Work? Plaintiffs’

Attorney Fees in Securities Fraud Class

Actions

Stephen J. Choi, Jessica Erickson*, and A. C. Pritchard

In this article, we study attorney fees awarded in the largest securities class actions: “mega-

settlements.” Consistent with prior work, we find larger fee awards but lower percentages

in these cases. We also find that courts are more likely to reject or modify fee requests

made in connection with the largest settlements. We conjecture that this scrutiny provides

an incentive for law firms to bill more hours, not to advance the case, but to help justify

large fee awards—“make work.” The results of our empirical tests are consistent with plain-

tiffs’ attorneys investing more time in litigation against larger companies, with the largest

potential damages, particularly when there are multiple lead counsel firms. We find a simi-

lar pattern with relative efficiency, with more hours per docket entry for the largest-stake

cases with multiple lead counsel firms. Overall, our results suggest that plaintiffs’ attorneys

are receiving windfall fee awards in at least some mega-settlement cases at shareholders’

expense.

I. Introduction

The role of plaintiffs’ attorneys in securities fraud class actions has been controversial for

decades, with the relationship between plaintiffs’ attorneys and class representatives rais-

ing the most fraught questions. Class counsel typically have a much greater interest in

the outcome of the case—in the form of the fee award by the court if the litigation pro-

duces a settlement for the class—than the representative plaintiff, who typically will

receive only a small percentage of any settlement. Because fee awards are typically taken

out of the settlement amount, class counsel and class members have potentially

*Address correspondence to Jessica Erickson, Professor of Law and Associate Dean for Faculty Development, Uni-

versity of Richmond School of Law, Richmond, VA; email: jerickso@richmond.edu. Choi is Murray and Kathleen

Bring Professor of Law, New York University; Jessica Erickson, Professor of Law and Associate Dean for Faculty

Development, University of Richmond School of Law, Richmond, VA; Pritchard is Frances and George Skestos Pro-

fessor of Law, University of Michigan.

The authors are grateful to participants at workshops at the University of Texas and Vanderbilt University, as

well as the Conference on Empirical Legal Studies and the National Business Law Scholars Conference, for helpful

suggestions on earlier drafts. Pritchard acknowledges the generous financial support of the William W. Cook

Endowment of the University of Michigan Law School.

438

conflicting interests. The representative plaintiff’s relatively modest stake in the settle-

ment, however, means that monitoring of this conflict may be lax. Lax monitoring could

allow plaintiffs’ attorneys to overreach in the fees they request.

The Federal Rules of Civil Procedure attempt to check this potential

overreaching by requiring judicial scrutiny of class action settlements and determina-

tion of the fee award. There are recurring questions, however, about the rigor of court

review. Congress attempted to rein in fee awards when it adopted the Private Securities

Litigation Reform Act of 1995, which limits awards to a “reasonable” percentage of the

settlement. There is evidence that this reform has put downward pressure on the aver-

age fee award, but eye-popping numbers still show up in the largest cases. For example,

in a securities class action filed in 2014 in the Southern District of New York against

the Brazilian state-controlled Petroleo Brasileiro SA, plaintiffs’ attorneys received a fee

award of $186.5 million after working 324,307 hours and obtaining a settlement of $3

billion.

The enormous fee awards seen in cases with the largest settlements—“mega-settle-

ments”—are the focus of this article. Specifically, we investigate whether the fee awards

that accompany mega-settlements compensate plaintiffs’ attorneys for risks they take on

when working on contingency cases. Alternatively, courts may be rewarding attorneys sim-

ply for winning the lead counsel spot in the largest cases—a reward by association—

without regard to the effort needed to prosecute such cases or the actual risk faced by

the plaintiffs’ attorneys. This question has important implications for courts trying to cali-

brate fee awards in securities class actions. It should also matter to policymakers consider-

ing potential reforms to the fee-setting process.

We find evidence of “make work”—hours billed in the largest cases not to advance

the case but to support a big fee award. The results of our empirical tests are consistent

with plaintiffs’ attorneys investing more time in litigation against larger companies, with

the largest potential damages, particularly when there are multiple lead counsel firms.

We find a similar pattern with relative efficiency, with more hours per docket entry for

the largest-stake cases with multiple lead counsel firms.

Overall, our results suggest that plaintiffs’ attorneys are receiving windfall fee

awards in at least some mega-settlement cases at shareholders’ expense. Although there

typically is strong evidence of corporate wrongdoing in cases leading to the mega-settle-

ments, this evidence often comes to light prior to the involvement of plaintiffs’ attorneys

through restatements, SEC and other government investigations, and/or the termination

of top officers. We conjecture that courts are conflating valuable fraud claims with the

incremental value provided by a plaintiffs’ attorney in litigating the case. If the pre-

existing evidence of fraud is strong, plaintiffs’ attorneys face less risk and there is less

need for these attorneys to develop innovative legal theories and uncover evidence.

Knowing that a large settlement is likely, plaintiffs’ attorneys may anticipate a need to jus-

tify a large fee award—leading them to “make work.”

We proceed as follows. Section II reviews the relevant literature and develops our

hypotheses. Section III describes our dataset and variables. Section IV presents our

empirical tests. Section V concludes with a discussion of the potential policy implications

of our findings.

Plaintiffs’ Attorney Fees in Securities Fraud Class Actions 439