Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

Tuesday, May 20, 2008

Senator Cornyn Introduces Bill to Address Kickback Arrangements in Private Securities Litigation

Senator John Cornyn (R-Tex.) recently introduced the Securities Litigation Attorney Accountability and Transparency Act in response to the recent scandals involving kickback arrangements by plaintiffs' counsel.  According to the Senator's Floor Statement,

Today, William Lerach, once a name partner at the law firm of Milberg, Weiss, Bershad, Hynes & Lerach LLP, reports to the United States Penitentiary in Lompoc, California, after pleading guilty to entering into this type of illegal kickback arrangement with lead plaintiffs. Next month, his former law partner Melvyn Weiss will be sentenced for the same crime. But there is reason to believe that this criminal activity is not limited to a few bad actors. Indeed, Mr. Lerach, unrepentant about having defrauded thousands of investors out of millions of dollars, has tried to defend himself on the basis that “everybody does it.” “Believe me,” Mr. Lerach told the Wall Street Journal, “it was industry practice.”

The Bill proposes reforms to address the the potential for private arrangements between lead plaintiffs and class counsel and the risk that lead plaintiffs will enter fee agreements that pay the lawyers more than the market rate.  Again according to the Floor Statement,

The Bill would require sworn certifications from lead plaintiffs and their attorneys disclosing: (a) any payments or promises of payment made by the attorney to the plaintiff in connection with the action; (b) any other legal representations of the plaintiff by the attorney; (c) any campaign contributions the attorney has made to any elected official with authority to retain counsel for the plaintiff; and (d) any other conflicts of interest. This disclosure would put an end to secret agreements where plaintiffs’ lawyers pay kickbacks to the lead plaintiffs who retain them. These secret arrangements divorced the interests of both the lawyers and the lead plaintiffs from the interests of the class as a whole. Full disclosure will prevent this situation from recurring.

The Bill would also require courts to employ a competitive bidding process as one of the criteria in the approval of the lead class counsel. In current practice, courts usually defer to the lead plaintiff’s choice of class counsel after reviewing the prospective lead counsel’s prior work on the case, experience, knowledge, and resources. The Bill would require that courts also consider the prospective lead counsel’s fees, and have courts solicit competitive bids so that those fees are based on market rates. The class members deserve to be represented at a reasonable market rate. Money that goes to the lawyers is money that never makes it to the ordinary shareholders who are the victims of securities fraud. Currently, courts review attorneys’ fees for reasonableness before the fees are paid at the conclusion of the case. This provision would allow courts to negotiate a reasonable fee at the threshold of the litigation.

Finally, the Bill would commission a study of the last 5 years of fee awards in securities class actions to determine the average hourly rate for lead counsel. Courts may be able to use this information to better rein-in excessive attorneys’ fees.

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