A securities plaintiffs’ lawyer could hit it big by buying a lottery ticket, but the odds of a win are long. A new study suggests they’re better off filing as many suits as they can and creating unnecessary work to defend massive fee requests. It turns out the odds of a windfall there are as sure-fire as Derek Jeter making the Hall of Fame.
In the new report “Working Hard or Making Work? Plaintiffs’ Attorneys Fees in Securities Fraud Class Actions.”, three law professors, Stephen J. Choi, Jessica Erickson, and A.C. Pritchard, of New York University, University of Richmond, and University of Michigan, respectively, argue that: “being appointed as lead counsel in a securities class action that is likely to end with a large settlement is like receiving a winning lottery ticket.”
The report highlights how plaintiffs’ lawyers have every incentive to “make work” in these big cases—finding ways to boost their billable hours to justify those mammoth fee requests.
The incentive to run out the clock – at shareholders’ expense – is designed to bolster an argument for a large fee award.
The “make work” phenomenon started in 2014, when the U.S. Supreme Court affirmed something called a “price impact” defense in the Halliburton II case – which allows for a more vigorous defense effort, but also may require plaintiffs’ attorneys to respond with a corresponding increase in hours.
The professors say this case introduced new incentives for plaintiffs’ lawyers to boost their hours in the biggest cases, where “the informal 33% cap on plaintiffs’ attorneys’ fees is less likely to constrain fee applications.” Sure enough, in cases where there was a potential for a big payday, plaintiffs’ attorneys work hours increased. On the contrary, work hours decreased in smaller cases. Basically, these plaintiffs’ lawyers focused on cases where they could charge higher fees.
In those same cases, the study finds a pattern of “decreased efficiency” in the plaintiffs’ lawyers’ workdays. After Halliburton II, they found significantly more hours per day in litigation for the plaintiffs’ attorneys in big money cases.
But if Halliburton II opened the door to more defenses, then plaintiffs’ attorneys would naturally have to work harder and take on riskier cases, right? Well, not entirely.
To combat this risk issue, courts often award a “multiplier” to the plaintiffs’ lawyers, or a number by which hours and fees are multiplied to compensate the attorneys for taking on a difficult case.
But, it turns out that these multipliers really don’t reflect the riskiness of the case. The data found a pattern “inconsistent with the multiplier compensating for the risk of non-settlement”—meaning slam-dunk cases not in jeopardy of being dismissed were rewarded just as much as those that were truly risky.
Naturally, there is a big incentive to start putting in more hours when the risk of a dismissal goes away. And more hours is exactly what the data shows on cases with the promise of big paydays.
Put all of these things together and what do you get? Inflated hours on cases with low non-settlement risk—and all coming directly out of the pockets of the class members they supposedly represent.
Securities litigation is at an all-time high, with this year’s pace already well above historical averages. This new report, the second examining securities class actions by this academic trio (“Risk and Reward: The Securities Fraud Class Action Lottery”), suggests that nothing will change unless there is serious reform.
That reform could start with the U.S. Securities and Exchange Commission, which has an interest at examining the issues associated with modern day securities litigation. Congress should also take legislative action to adjust for the workarounds found by entrepreneurial plaintiffs’ lawyers since it last reformed the system in 1995.
Until Congress or the SEC acts, we’ll continue to see more lawyer-driven lottery tickets for the plaintiffs’ bar, while everyday investors are paying the cashier.