Thursday, April 18, 2019
Anthony Rickey and I recently posted a new paper focusing on the settlement approval process in securities class and stockholder derivative actions. These settlements are a fascinating world. In most instances, plaintiffs’ counsel urge a judge to find that a settlement is reasonable, and defendants either stay silent or join in supporting the deal. At this stage, plaintiff and defense interests often align. The defendant wants to get out of the case at the negotiated price. Plaintiff’s counsel want to get paid.
In many instances the settlement will be perfectly reasonable and a court should just approve it. But there will also be times when a court should not approve a settlement or should do a bit more digging before deciding whether to approve the settlement and how to apportion the recovery between the class and its counsel.
How do courts identify these instances? Courts generally excel at deciding disputes after adversarial briefing. They may not have the institutional resources to slog through hundreds of pages in settlement disclosures or canvas other public records to determine whether to approve a settlement. We suggest some possible reforms to the settlement approval process to help bring relevant information to the court's attention.
Consider for example the information that came to light after the Boston Globe's Spotlight team cast a close eye on the settlement in a class action filed against State Street Bank and Trust Company. For those that haven't followed the case, it settled for $300 million, with $75 million going to attorneys' fees. The Globe's review found that some attorneys billed out at $400 an hour or more for settlement purposes were, in reality, contract attorneys who were actually paid about $40 an hour or less for their work. It also emerged that some hours had been double counted when the class counsel came to the court seeking to justify fee requests. Troubled, the Court appointed a special master (Master) to investigate.
The Master soon found more cause for concern, including a $4 million dollar payment out of the attorneys' fees to an attorney who had not done any work on the case. The Master unearthed an email raising concerns about whether any money had been spent in ways that would compromise the lead plaintiff's ability to act as a fiduciary for the class. One particularly salient email read:
“We got you ATRS as a client after considerable efforts, political activity, money spent and time dedicated in Arkansas, and Labaton would use ATRS to seek legal counsel appointments in institutional investor fraud and misrepresentation cases. Where Labaton is successful in getting appointed lead counsel and obtains a settlement or judgment award, we split Labaton’s attorney fee award 80/20 period.”
Commenting about the dynamic to the Times, Columbia's John Coffee explained that the "case had shed an important light on the 'rather sordid market of buying and selling plaintiffs' in securities class actions."
We break down what happened in the State Street Litigation and explore some other potential hidden conflicts which might also cause some lead plaintiffs to have interests more aligned with their lawyers than the class they ostensibly lead. Our article also suggests some reforms that courts and legislatures could undertake to surface otherwise hidden conflicts between plaintiffs and their legal representatives.