Public pension funds that act as lead plaintiff continue to see statistical evidence that their activism makes a difference.
The latest support comes courtesy of Michael A. Perino, a professor at St. John’s University School of Law and an expert on securities regulation and litigation. In a paper released in December, Perino found that attorney fee requests and awards dropped significantly when public pension funds took the lead role in securities class actions.
Previous studies have found that cases with an institutional lead plaintiff settle for significantly higher sums than others. Bigger settlements plus lower fees; together, they make a compelling argument for greater institutional involvement.
Perino analyzed some 230 settlements between April 1997 and May 2005. According to his research, the mean attorneys’ fee was approximately 20% of the total recovery pool in cases with a public pension fund lead plaintiff. That compared to 27% in cases with other lead plaintiffs.
Those figures, however, only reflect the average fees in cases with and without public pension funds, and do not control for other drivers, such as settlement size. Institutions tend to get involved in the larger cases.
A better example, Perino said, is a hypothetical $25 million settlement. Without a public pension fund, his research shows that the expected fee would be about 24.7%. With a public pension fund, the predicted fee is approximately 20.8%. That translates into a savings of about $1 million in attorneys’ fees.
Union fund lead plaintiffs, meanwhile, negotiated fees that averaged 22%, according to Perino’s paper, “Markets and Monitors: The Impact of Competition and Experience on Attorneys’ Fees in Securities Class Actions.” When controlling for settlement size and other relevant factors, however, union pension funds had no statistically significant impact on fees.
“The findings with respect to public pension funds were consistent with what I anticipated,” Perino told the Monitor. “The public pension funds that have gotten involved in these cases have consistently sought to reduce fees and their efforts seem to be paying off.”
Public pension funds often negotiate with plaintiffs’ counsel for fee reductions, thanks largely to the competitive bidding process by which funds typically choose their litigators – one of their chief duties under the Private Securities Litigation Reform Act of 1995 (PSLRA). Historically, individual lead plaintiffs did not wield the clout to obtain lower fees.
Moreover, institutions that take a more active role in securities litigation – Perino calls them “repeat players” – become experts at designing and negotiating lower fees with counsel, the study said.
According to Perino’s research, public pension funds have also reduced fee awards, albeit in a small number of actions, by filing objections in cases where they were not lead plaintiffs. Institutions objected in only 3% of the cases Perino examined, but their impact was statistically significant. The fee for those cases averaged 18.4%, versus 26% in other cases.
Perino said he expects more institutional investors will file objections. “The institutions I have spoken to view objecting as a viable strategy, a result these findings confirm,” he said. “It is also a much lower cost one than participating as lead plaintiff, so I expect to see more of it in the future.”
Institutions have been finding that law firms are willing to negotiate fees.
“There is considerable debate among institutions over how best to structure fees to align the interests of class and counsel. We work with our clients to negotiate a fee agreement that will best serve the lead plaintiff and the class it represents,” said Michael J. Pucillo, a partner at Berman DeValerio. “In some instances, we have agreed to voluntarily reduce our fees when the recovery was greater than expected.”
Perino also studied the influence of the courts on attorneys’ fees. Judges, who must approve any fee award, have expressed frustration that fee determinations are inherently imprecise because “there is no readily ascertainable market rate for the services of plaintiffs’ attorneys in class actions,” Perino noted in his study.
Perino found that courts that have more experience handling securities cases typically award lower fees than those with less familiarity. And contrary to several previous studies, the professor found that busier courts do not award higher fees.
Perino said his findings could be used to shape litigation policy. Among his recommendations:
- Compensate public pension funds for lead plaintiff involvement. While other academics have proposed allowing lead plaintiffs to recover indirect costs as a way to encourage participation, Perino’s proposal goes one step further: permitting public pension lead plaintiffs to capture more than their proportionate share of a settlement. The goal, he said, would be to encourage institutions to design more cost effective fee arrangements that ultimately benefit the entire class. His proposal, however, would require Congressional action because the PSLRA prohibits giving a lead plaintiff a greater interest in the common fund than the class members.
- Urge courts to encourage institutions to file fee objections, particularly in smaller cases in which public pension funds are unlikely to be the lead plaintiffs. “Some courts are reluctant to award attorneys’ fees to objectors because they worry that this will only encourage professional objectors to lodge frivolous or generic complaints to try to get a piece of the settlement,” Perino said. “But that shouldn’t be a concern when it comes to the objections that public pension funds make.”
- Encourage courts with little experience in securities class actions to seek guidance from more experienced courts when awarding fees. This sharing of knowledge could go a long way toward reducing judges’ frustration in seeking a benchmark for fees, Perino said.
- Continue the experiment of auctioning the role of lead counsel. This would most likely occur in cases where there is no public pension fund lead plaintiff, and where the lead plaintiffs did not choose their counsel by a competitive process.
*In August 2017, our firm name changed to Berman Tabacco. Case references and content published before that date may refer to the firm under our prior name, Berman DeValerio.