Thursday, July 8, 2021

Class Counsel Must Be Fully Candid When Requesting Fees - Another ATRS Case

A little while ago, Anthony Rickey and I published an article looking at the settlement approval process in class actions with a particular focus on the State Street Case.  Our article noticed that Judge Wolf found that class counsel made deceptive, less than fully candid statements when it submitted hourly rates to a court which no client had ever actually paid:

In theory, a vigorous lead plaintiff actively supervises its lead counsel, examining fee requests to maximize the portion of the settlement retained by the class. The efforts that ATRS undertook to supervise its class counsel remain unclear, but they do not seem to have been effective. In the State Street litigation, Judge Wolf harshly criticized Thornton for declaring, under oath, that one attorney's regular rate was $500 per hour, when the firm could only identify one case in which that attorney had been charged at even $300 per hour. He similarly noted that Labaton submitted as “regular rates” for services hourly rates that had “never been charged to paying clients.” ATRS did not volunteer these facts. They were only discovered because the State Street court took the apparently unprecedented step of appointing a special master to investigate.(footnotes omitted) 

In the State Street litigation, Judge Wolf went on to find significant problems with class counsel representing to the court that their firms "regularly charged" certainly hourly rates when no paying client ever actually paid that rate.  Rather, all their work was on a contingency basis and they had simply convinced other courts to approve fee awards referencing those "hourly" rates.  Wolf sharply criticized both Thornton and Labaton for their statements about "hourly" rates.  This led Judge Wolf to cut the total fee award and the allocation to class counsel.  Arkansas Tchr. Ret. Sys. v. State St. Bank & Tr. Co., No. CV 11-10230-MLW, 2020 WL 949885 (D. Mass. Feb. 27, 2020), appeal dismissed sub nom. Arkansas Tchr. Ret. Sys. v. State St. Corp., No. 20-1365, 2020 WL 5793216 (1st Cir. Sept. 3, 2020).  

Ultimately, the issues caused Judge Wolf to cut the fee award from the $75 million he initially approved to $60 million.  Within the final fee allocation, he left the fees untouched for the firms which had not participated in any misconduct and taxed the investigation costs to the firms found to have been less than fully candid. 

Judge Wolf also made very specific findings about the need for class counsel to avoid stating that they "regularly charge" certain rates when they are pure contingency firms.  Consider the findings with respect to Thornton and Labaton. 

As to Thornton:

Garrett Bradley did not, as required by Federal Rule of Civil Procedure 11 and the Massachusetts Rules of Professional Conduct, read the fee declaration in support of the fee request that he signed under oath before it was submitted to the court on behalf of Thornton. It included many false statements. For example, Bradley represented that certain attorneys were employed by Thornton and that the hourly rates attributed to them for the purpose of calculating Thornton's lodestar were “the same as my firm's regular rates charged for their services, which have been accepted in other complex class actions.” G. Bradley Decl. ¶4 (Dkt. No. 104-16) (emphasis added). However, Thornton worked solely on a contingent-fee basis. It had no clients who paid the firm on an hourly basis and no “regular rates charged” for its attorneys. In addition, Michael Bradley was not, as represented, employed by Thornton. Nor had the firm, as Garrett Bradley claimed, ever charged $500 an hour for his services, which in this case were worth far less.

As to Labaton:

Labaton also repeatedly violated Rule 11 and the related Massachusetts Rules of Professional Conduct. Sucharow filed a sworn declaration stating that the lodestar calculations of all of plaintiffs’ firms that he submitted were “based on their current billing rates.” Dkt. No. 104, ¶176. This was not true with regard to Thornton, at least. A reasonable inquiry -- such as a question to Garrett Bradley who was also Of Counsel to Labaton -- would have revealed Sucharow's sworn statement to be untrue. However, evidently neither Sucharow nor anyone at Labaton made any inquiry at all
. . .
Sucharow also falsely claimed that the rates attributed to Labaton attorneys were “the same as my firm's regular rates charged for their services, which have been accepted in other complex class actions.” Dkt. No. 104-15, ¶7 (emphasis added). When Sucharow made this statement under oath he believed that Labaton did not have any clients who were charged or paid hourly rates.
Reading this, I think the obvious take away for class counsel has to be that you want to be careful and clear when you seek fees, particularly before Judge Wolf.  In the State Street case, class counsel ended up taking home $15 million fewer dollars and walked out with a referral to go talk to the Massachusetts Bar as well.   
Ultimately, the lesson is easy to learn.  If you've never actually charged a client a particular rate on an hourly basis, you shouldn't say that your firm "charges" those rates or imply that you get paid that much on an hourly basis to value your time.  I expect you could probably get just as much money approved in a fee award without making those statements.  Be factually accurate in representations to the court and you'll take millions more home.
This brings me to a very recent new decision.  It features two of our old friends, ATRS and Judge Wolf.  Arkansas Tchr. Ret. Sys. v. Insulet Corp., No. CV 15-12345-MLW, 2021 WL 2635204 (D. Mass. June 25, 2021). This time, a different cast of class counsel sought fees for representing ATRS in another suit against Insulet Corporation.  The firms submitted sworn declarations in support of their fee requests.  You can probably guess where this is going.  A subset of class counsel, here Bernstein Litowitz Berger & Grossmann LLP (“Bernstein”) and Glancy Prongay & Murray LLP (“Glancy”), made the same mistake as Labaton and Thornton.  
Judge Wolf clearly has an eye on this issue.  He asked class counsel if they knew about what happened the last time ATRS showed up in his court.  Class counsel "represented that he was 'familiar with the issues that prompted [this court] to appoint a special master to review the award of attorneys’ fees in the Arkansas Teachers v. State Street case.'” 
Despite that, when the fee requests came in, the sworn declarations for two firms made the same mistake.  Two other firms did not.
As to Bernstein:
Bernstein's lodestar that “[t]he hourly rates for the attorneys ... in my firm included in Exhibit 1 are the same as the regular rates charged for their services, which have been accepted in other securities or shareholder litigation.” Docket No. 129-3 at ¶4. At the August 2, 2018 hearing at which the proposed settlement was approved, Mr. Harrod stated that Bernstein works on a contingent fee basis and did not have any clients who had actually paid the hourly rates represented in his affidavit to be the regular rates charged for the services of the attorneys who worked on this case. See Aug. 2, 2018 Tr. (Docket No. 136) at 38. Mr. Harrod also stated that the preparation of the fee petition had been supervised by ATRS’ Executive Director George Hopkins, who was also centrally involved in the State Street case. Id. at 31-32, 57.
As to Glancy:
A partner in another firm seeking part of the requested award of attorneys’ fees, Joshua L. Crowell of Glancy Prongay & Murray LLP (“Glancy”), also stated in his sworn declaration that with regard to Glancy's lodestar “[t]he hourly rates for the attorneys ... in my firm included in Exhibit 1 are the same as the regular rates charged for their services, which have been accepted in other securities or shareholder litigation.” Docket No. 129-5, ¶3. However, at the August 2, 2018 hearing Mr. Crowell too stated that his firm worked almost exclusively on a contingent fee basis and had very few paying clients. See Aug. 2, 2018 Tr. at 37. He could not say that any client had ever paid what were represented to be the regular rates charged for the Glancy attorneys who worked on this case. Id. at 38.
Every firm in this business line should just update the language in their templates at this point.  It's an easy problem to avoid.  The other firms simply described their fees as "[t]he hourly rates for the attorneys included in Exhibit 1 are their customary rates; my firm's hourly rates have been accepted in other securities litigation" and "“[t]he hourly rates for the attorneys and professional support staff in my firm included in Exhibit 1 are the same as the regular rates which have been accepted in other securities or shareholder litigation."  Judge Wolf didn't raise any issue with those representations.
Judge Wolf explained that this is an expensive mistake to make:
In this case, absent important public policy considerations, the other traditional factors would cause the court to award 25% of the common fund, $4,875,000, as attorneys’ fees, and allow the four firms sharing them to divide the fee award in proportion to their respective lodestars as they agreed. See Aug. 2, 2018 Tr. at 34:20-28. However, as described earlier, in 2018, in calculating and presenting to the court their lodestars, Bernstein and Glancy each represented that they had used the “regular rates charged for their [attorneys’] services” and this was not true.
As also described earlier, essentially the same false and misleading statement was made by several firms in State Street. Those statements contributed to this court's decision to appoint the Master and, ultimately, to award attorneys’ fees in the amount of 20% of the common fund, $60,000,000, rather than the 25%, $75,000,000, requested.
Judge Wolf did essentially the same thing here.  He cut the fees.  This time he awarded 23% in fees and shifted the allocation. Class counsel walked out with $4,608,240.  It's a solid fee award, but they could have had about $270,000 more had they not made the same mistake. The firms that did not make the misrepresentation got what they would have received had there been a 25% award.  The firms that did picked up their share of the 23%, less the amount needed to keep the fee award as if it were at 25% for the innocent firms.  
Judge Wolf also made findings about ATRS' failure to supervise class counsel.  Judge Wolf noted that ATRS’ Executive Director George Hopkins had supervised the litigation in the State Street case as well.  This gave him a great opportunity to learn to watch for this problem.  In asking for a service award, as the lead plaintiff, ATRS specifically declared that it "undertook to review the reasonableness of the proposed award of attorneys’ fees and evaluated lead counsel's fee request."  Judge Wolf  noted that this " review and evaluation was done, at least in part, by George Hopkins."  Despite that, two firms still made the same mistake.  Judge Wolf denied the request for the fee award.
Judge Wolf also went on to make some findings which may cause class action firms to put ATRS out to pasture as a client.  He noted that he found that ATRS was “deficient in directing and supervising” its counsel in State Street.  Judge Wolf denied the service award "in the hope that this frequent lead plaintiff, at least, will be encouraged to supervise its counsel properly in future cases."
In the next large securities class action, lawyers might want to be careful about going into a lead plaintiff dispute for control of some other action with ATRS as their client.  Even if ATRS lost more money than some other fund, it wouldn't surprise me if a court put a different plaintiff in charge of the class action because of this mess.

| Permalink


Interesting article - thank you. But there's a hole in it. Why did the judge have to raise these issues? What were the defense firms and defendants saying and doing about the rates? A cynic would think they just looked the other way because they simply wanted a deal.

Posted by: Kirk Hartley | Jul 9, 2021 4:21:32 AM

This is an issue that the defendant doesn't have any real interest in getting into. Once they've agreed to settle the case for a set amount, how it gets divided up isn't all that important to the defense.

This is a big problem with an adversarial justice system. When it comes to class settlements, there usually isn't anyone with an interest in looking through these issues all that closely. I'm not sure that a defendant would even want to pay lawyers to even just read and review all of the papers submitted by class counsel at the fee award stage.

Posted by: Benjamin Edwards | Jul 9, 2021 9:52:01 AM

Post a comment