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Silverman v. Motorola

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Robbins Geller receives an excessive $60 million award in a $200 million PSLRA settlement. A professional objector appeals—and the Seventh Circuit, in an opinion by Judge Easterbrook, affirms. [Frankel]

This is an enormously frustrating case. Robbins Geller had $60 million at stake, and threw everything they had at the case, including a "bless-these-fees" expert opinion from Charles Silver. The objector...didn't, and was likely hoping to make himself enough of a nuisance that he got paid to go away, but not too much of a nuisance because then his objection might succeed and he wouldn't get paid. As a result, shareholders were fighting with one hand tied behind their backs, the best arguments were waived, and there's now a precedential opinion that will get misread as applying to more thorough objections.

Judge Easterbrook endorses a market-based rate. But what private actor agrees to pay 30% (or as the opinion calls it, 27.5%) in a megafund case? Easterbrook endorses a sliding scale, monotonically decreasing rate, but notes that the objector failed to raise it below, and therefore the district court's failure to consider the question wasn't reversible error. Would it have been reversible error if the objector had raised it? The implication is yes, especially with the implicit criticism of the Silver opinion, but that's far from sure. How I wish I had done both the objection below and any Seventh Circuit briefing and argument.

Some other observations:

1) The opinion keeps referring to Robbins Geller receiving 27.5% of $200 million. But that's not true. Class counsel asked for and received $60 million, which they split up as $55 million in fees and $5 million of expenses. And the PSLRA says that it is "fees and expenses" that must be a reasonable percentage of the fee. One presumes that the objector failed to point this out.

2) Easterbrook values the risk that Robbins Geller incurred as a grounds for supporting such a large fee. Except risk is an empirical question: even in the district courts of the Seventh Circuit, the majority of PSLRA cases settle; moreover, the vast majority of PSLRA cases that don't settle are largely the cases that are dismissed at the pleading stage before any real attorney time is spent on discovery. This case was riskier because plaintiffs faced a summary judgment motion, but most summary judgments lose. All in all, a lodestar multiplier of 2 would have ex ante more than compensated Robbins Geller for the risk, and, if courts applied risk multipliers consistently, would have been enough to induce them to take the case even if they were risk averse rather than carrying a large portfolio of megafund cases. (This is especially true since Robbins Geller's lodestar itself would give it gigantic profits: they're paying the contract attorneys doing the bulk of the work on the case $33/hour plus a markup to the agency that doesn't include holidays or benefits.) Of course, Easterbrook can't know this when the objector doesn't make the argument.

3) Judge Easterbrook errs, I think, when he presumes that the lack of institutional objectors is meaningful: "Thedifference between 27.5% of $200 million and a smaller award (say, one averaging 20%) could be a tidy sum for institutional investors (including this suit's lead plaintiff, a pension fund), one worth a complaint to the district judge if the lawyers' cut seems too high." Except that's simply not true. The settlement awarded 28 cents a share to class members before fees; the lawyers' cut of that was 9 cents a share; the amount in dispute is between 3 and 6 cents a share. That means an institutional investor who purchased $20 million in stock during the class period—one million shares—has between $30,000 and $60,000 in fees at stake. That's a rounding error to institutional investors: it doesn't even pay to have an attorney evaluate whether the fee is too high or even to follow the docket to see whether there is an objection worth joining. And it's not like class counsel shares the list of class members with objectors to see if there are interested parties. (Update: Todd Henderson reminds me of the paper showing that many institutional investors do not even make the claims for free money under the settlement agreement—if they're not making administrative claims for 70% of the settlement proceeds, they're not going to hire an attorney to attempt to increase their share to 80%.)

In Citigroup, the lodestar and out-of-pocket expert expenses my objection incurred was over $200,000—and would have been much higher if we had been permitted the discovery we had requested. (Given how much the appeals court relied on the Silver report, surely it would have been reversible error to refuse to let an objector depose him. Of course, the objector in this case doesn't even seem to have tried.) So, in the absence of clear precedent entitling objectors to a reasonable share of fee recovery (talk about real risk!), attorneys won't take these cases on contingent fees, and class members have no incentive to spend $200,000 over $30,000 at stake. An attorney willing to litigate my Citigroup objection for 6% of the recovery could have asked for a $1.6 million contingent fee for the $26.7 million victory if the court was willing to award 6%. No one took up my offer, and I had to litigate pro se.

The "institutional investor" thing seems to really be acting as a proxy for "Is this a professional objector hoping for a quid pro quo payout?" If so, one wishes that was the point the opinion made. But if courts want objectors to use a strategy other quick-and-dirty objections followed by quid pro quo payouts, they need to provide the incentive for objectors to invest in the quality of their objections.

An investor would have to have purchased nearly 5% of outstanding Motorola shares during the class period to have enough at stake to mount a legitimate objection in the absence of a contingent-fee attorney. As the Seventh Circuit has stated elsewhere, acquiescence to a bad class action settlement does not equal consent or approval. The same principle applies here, but the appellant failed to make the best arguments.

4) Easterbrook notes that "institutional investors have in-house counsel with fiduciary duties to protect the beneficiaries." Sounds like an entrepreneurial attorney frozen out from the current PSLRA game should be issuing demand letters for malpractice suits, because institutional investors are systematically shirking their fiduciary duty to challenge these oversized fee petitions. Here, it cost shareholders at least $15 million.

Update: the more I look at this, the more I see this as a case of objector waiver. A giant fee reduction was there for the taking had objectors made the right arguments at the district-court and appellate level. But on an abuse-of-discretion standard, the Seventh Circuit was unwilling to require a district-court judge in a PSLRA case to anticipate arguments objectors didn't make. The institutional-investor argument suggests that a district court would be required to reduce fees if this were a run-of-the-mill consumer-class action for a megafund.

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Isaac Gorodetski
Project Manager,
Center for Legal Policy at the
Manhattan Institute
igorodetski@manhattan-institute.org

Katherine Lazarski
Press Officer,
Manhattan Institute
klazarski@manhattan-institute.org

 

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