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Is PSLRA litigation so risky as to require a 4x multiplier?


The courts of the Second Circuit, like most federal courts, do a "lodestar crosscheck" to determine whether the percentage of the fund in a settlement is reasonable: does the reasonable hourly rate times the number of hours spent times a "multiplier" correspond to the request for fees? But what is a reasonable multiplier in a PSLRA case, where most cases settle, and attorneys face very little risk?

Leave aside for the moment cases like Citigroup where the hourly rates are exaggerated to produce an exaggerated lodestar. The idea of the crosscheck is to ensure that class counsel isn't worse off for bringing contingent litigation when they could have been billing paying clients by the hour. (Thus, it is particularly unfair to the class to be billing temporary attorneys doing low-level work and who can be dismissed at no expense as if they are highly-skilled associates on a partnership track. If a $32/hour attorney had the skills such that a law firm could sell his work for $550/hour to a paying client, he wouldn't be a $32/hour attorney; but, again, leave that aside.)

The theory of the multiplier is that the risk of non-payment requires a multiplier of the lodestar rate to incentivize class counsel to bring litigation. This contradicts the Supreme Court's holding in Kenny A. v. Perdue that unmultiplied lodestar by itself is a reasonable fee, but we'll leave that aside. Assume a multiplier is legal, even in unexceptional nuisance settlements for pennies on the dollar. What multiplier would compensate PSLRA attorneys enough to bring meritorious but risky litigation?

As noted, most PSLRA cases settle, so the attorneys get paid. Moreover, risk is spread across a portfolio of cases, reducing variance. No firm has its eggs in one basket, but has several securities cases proceeding in parallel. So, for example, if 60% of all cases settle, and all hours are evenly distributed across meritorious and unmeritorious cases, then a firm that brings average-quality securities litigation needs only a 1.67 multiplier to average their lodestar rates. (And firms that average their lodestar are quite profitable: not only are the partners receiving $600-$900/hour, but they're making substantial profits on their associates and paralegals, who are lucky if they are receiving salaries 30% of their hourly rate.) Yet firms are regularly asking for multipliers well in excess of the 1.67 figure.

But even that 1,67 multiplier understates the risk: the cases that don't settle are the cases that get dismissed early in the process before the attorneys have run up large numbers of uncompensated hours. (Under the PSLRA, there is a discovery stay until the motion to dismiss is resolved. This benefits defendants and their shareholders, who aren't forced to expend millions while they're waiting to see if a complaint can meet minimum PSLRA requirements, but it also benefits class counsel, who minimizes downside risk.) And it's not like class counsel doesn't have a sense which mega-cases can have tens of thousands of hours safely thrown at them, and which should be settled quickly before a summary judgment motion is brought. Once plaintiffs get past a motion to dismiss, over 80% of cases settle. A multiplier a bit above 1.2 for the hours spent once the motion to dismiss is decided—the vast bulk of the hours invested in litigation—would be enough to ensure firms are fully compensated.

One way to ensure that firms make enough money to be fully compensated without realizing windfalls at the class's expense is to put the lead-counsel spot up for competitive bid. If firms are forced to compete on price, they would disclose what rates a competitive marketplace would pay to attract law firms to bring securities actions and would no longer realize windfalls at the expense of the class. One would suspect that we'd see multipliers even below 1.2.

But until that day, courts need to scrutinize requests more closely, and not tolerate requests for a 4.2x multiplier—as was made in the recent Wyeth securities litigation, City of Livonia Employees Retirement Sys. v. Wyeth, No. 07-cv-10329-RJS (S.D.N.Y.). Plaintiffs' counsel claims that their lodestar was $3.9 million; even assuming that that is not exaggerated, the $16.2 million request for

The Center for Class Action Fairness has objected on behalf of a shareholder to this multiplier using data from the Cornerstone report on the percentage of cases that settle. We don't think a multiplier is appropriate in nuisance settlements, but if the court is to apply a multiplier, it should be one related to the actual risk class counsel faces. We've asked plaintiffs' counsel, Robbins Geller, to disclose their portfolio recovery in PSLRA cases, if they are going to dispute our figures. Dan Fisher covers at Forbes.

The Center is not affiliated with the Manhattan Institute.


When you can't see the difference between a fee-shifting case like Kenny A., and the fees in this common-fund case (which by the way you must have forgotten to post the details of, the percentage of the fund class counsel is seeking as fees would appear to have some relevance in this context) your "analysis" isn't going to carry much weight. Although this is not surprising to hear from someone who thinks bringing a PSLRA case carries "very little" risk and that it doesn't take a great deal of time, effort, and skill to satisfy the pleading requirements under the PSLRA and Rule 9(b).

The details are in the brief. I haven't hidden anything. And the size of the common fund is irrelevant under the PSLRA, which requires the tie to be to the amount actually awarded to the class.

As for whether there's substantial risk in filing a complaint, that's an empirical question. The fact that Robbins Geller refuses to open their books suggests that I'm being I sufficiently cynical in my assumptions.

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Rafael Mangual
Project Manager,
Legal Policy

Manhattan Institute


Published by the Manhattan Institute

The Manhattan Insitute's Center for Legal Policy.