State Street Case Update

Judge Wolf recently issued his opinion in the State Street case.  It's a long read at over 159 pages. Judge Wolf scorches class counsel and ultimately refers the matter to the state bar for possible discipline, if appropriate.  This is a case I've written about before and explored in an article with Anthony Rickey, arguing that we need more disclosures about the relationships between institutional plaintiffs and class counsel in securities litigation.

For those not following the case as closely, here is a quick refresher.  After a $300 million settlement, class counsel sought a significant fee award and presented the court with information about the time and money spent on the case.  The Court allocated $75 million to the attorneys.  Then the Boston Globe's Spotlight team started digging.  The Globe revealed that contract attorneys billed at $400 an hour had only been paid about $40 an hour for their work.  The Globe also revealed that the brother of the managing partner at one of the firms had been billed out at $500 an hour when he otherwise took $50 an hour court appointment cases.  The disclosures troubled the Court and caused it to appoint a special master to dig into the matter.  The special master discovered that after Labaton (one of the leading firms) obtained its millions in fees, it then directed $4 million to a lawyer who did little or no work on the case pursuant to a referral fee agreement which had not been disclosed to all members of the class or all lawyers working on the matter.  The special master also uncovered some troubling emails, including this one hinting that the institutional plaintiff may have faced pressure to work with the law firm:

We got you ATRS as a client after considerable favors, political activity, money spent and time dedicated in Arkansas, and Labaton would use ATRS to seek lead 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

After the revelations, the Court had to reconsider how to allocate the fees.  This brings us to the new opinion.  On the whole, the lawyers still collected a significant amount. The court trimmed the fee award back from $75 million to $60 million.  This is a reasonable result.  Despite the mess, the lawyers till did a good bit of work and obtained a significant settlement for the class.  The award adjusts the fee amounts to account for the issues and to compensate other firms which had to do additional work because of the imbroglio.

The Court still found significant cause for concern with the original "submissions "in support of the request for an award of $75,000,000 were replete with material false and misleading statements."  It found that Labaton and Thornton "violated Federal Rule of Civil Procedure 11(b) and related Massachusetts Rules of Professional Conduct." In particular, the court found that lawyers had not even read the documents they signed under oath and certified to be complete and accurate.  The Court also took issue with how the firms described their hourly rates because they were not generally paid by the hour--their compensation all came from contingency cases. The Court also took issue with a calculation error which led to the double counting of approximately $4 million worth of hours.  The list goes on. 

Class action settlements present a special circumstance where ordinary adversarial processes break down.  Once the defense settles its case, it lacks any incentive to oppose the settlement or thoroughly check everything class counsel claims in its papers.  Class counsel also has little incentive to bring up problems and slow down a significant payday. Because of this, Massachusetts ethics rules treat class action settlement hearings as ex parte proceedings where the attorneys have an expanded duty of candor to inform the court about all material facts, even those adverse to their position.  In light of the issues here, expansive ethical duties for class action settlements might be appropriate in all states.

The Court also called for other judges to more closely vet class action settlements:

The United States has a proud history of honorable, trustworthy lawyers. However, this case demonstrates that not all lawyers can be trusted when they are seeking millions of dollars in attorneys' fees and face no real risk that the usual adversary process will expose misrepresentations that they make. Therefore, in making fee awards in class actions, it is important that judges be skeptical, and do the hard work necessary to protect the interests of the class and the integrity of the administration of justice.