Working Hard or Making Work? Plaintiffs’ Attorneys Fees in Securities Fraud Class Actions

Concerns about securities class actions typically focus on the low-value cases. These cases settle for relatively small amounts of money, raising concerns that they are motivated by the potential for a nuisance settlement, rather than a desire to target actual fraud. The cases at the other end of the spectrum with settlements of hundreds of millions of dollars look like success stories and therefore do not receive the same empirical scrutiny. These cases, however, pose risks of their own. In our paper Working Hard or Making Work? Plaintiffs’ Attorneys Fees in Securities Fraud Class Actions, we examine these mega-settlements, focusing specifically on the fees awarded to plaintiffs’ attorneys in these suits.

Mega-settlements stand apart as a distinct category of settlements in securities class actions. The bottom 90% of settlements—i.e., the settlements in the first nine deciles—average $11 million, with settlements in the ninth decile averaging $41.8 million. The settlements in the top decile, by contrast, average $295.5 million, more than seven times larger than the settlements in the decile below. Predictably, these settlements lead to significant fees for the plaintiffs’ attorneys—a mean of $39.5 million compared to a mean of $2.7 in the other nine deciles.

We examine how the high stakes in these mega-settlements influence plaintiffs’ attorneys in requesting attorneys’ fees and judges in awarding them. To do so, we collected data on every securities class action with a disclosure claim filed in federal court between 2005 and 2016, a total of 1,719 cases. We used individual case dockets and filings on PACER to gather information on the contest for lead plaintiff, the allegations in the final consolidated complaint, potentially dispositive motions, and the resolution of each case. In every case that ended with a settlement, we collected data regarding the terms of the settlement, the fees requested by lead counsel and awarded by the court, and the hours worked and lodestar data. Finally, we supplemented the litigation data with the defendant corporations’ market capitalization, which we measured on the last day of the class period.

We first analyze how plaintiffs’ attorneys respond to the increased stakes in the high-stakes cases. This analysis is shaped by the fact that judge almost never award plaintiffs’ attorneys more than one-third of the total settlement amount, regardless of the lodestar amount presented in the fee application. In smaller cases, this de facto cap may constrain the hours that plaintiffs’ attorneys invest in the litigation. In higher-stakes litigation, however, plaintiffs’ attorneys are unlikely to run up against this cap because the expected settlement value is so large that any credible lodestar amount will still be well below a third of the settlement. As a result, plaintiffs’ attorneys can invest more hours into building the cases—for example, by researching possible claims, pouring through discovery, and filing and responding to motions—because they know that they are likely to be paid for this work if the case settles. We call this possibility the “working hard” hypothesis. At the same time, however, plaintiffs’ attorneys in higher-stakes litigation may also be more likely to inflate their hours by doing work that is duplicative or unnecessary, a possibility that we call the “making work” hypothesis.

We perform empirical tests to determine whether plaintiffs’ attorneys are working hard or making work in high-stakes securities class actions. We first use the presence of multiple lead counsel as a proxy for a greater incentive for plaintiffs’ attorneys to generate duplicative or unnecessary hours. We conjecture that the presence of multiple lead counsel is driven more by relationships among attorney firms and between attorney firms and specific institutional investors rather than the merits of a specific case (the topic for a parallel empirical research project we are conducting). Using a multivariate ordinary least squares model, we find that having multiple lead counsel corresponds to 4,100 more attorney hours, even controlling for case characteristics and other factors. In the high-stakes cases, however, having multiple lead counsel increased the total hours reported by plaintiffs’ attorneys by 28,900 hours.

We find similar results after the U.S. Supreme Court’s decision in Halliburton II. We posit that Halliburton II’s price impact defense at the class certification stage provided a “shock,” increasing the need for more work on the part of plaintiffs’ attorneys in securities class actions, while at the same time providing cover for attorneys interested in inflating hours to do so (i.e., duplicative work on the part of multiple lead counsel). Using a difference-in-difference analysis, we show that hours significantly increased in cases with multiple lead counsel after Halliburton II, consistent with more “make work.”

We then examine whether judges serve as a meaningful check on these agency costs. In determining what percentage of the settlement to award in fees, judges often consider the plaintiffs’ attorneys’ lodestar, as well as a multiplier. The conventional explanation for multipliers is that they reward plaintiffs’ attorneys in contingency fee litigation for the risk that they may expend resources in litigation but not receive any compensation. The higher the risk in a particular case, the higher the multiplier, at least in theory.

Our empirical tests, however, do not support the conclusion that courts calibrate the multiplier to the actual risk that plaintiffs’ attorneys face in litigation. Instead, we find that courts award higher multipliers in cases with pre-litigation observable characteristics that indicate a lower risk of dismissal—and a correspondingly higher probability of settlement—particularly against larger companies. These cases presumably pose less risk to plaintiffs’ attorney because of their higher ex ante probability of settlement. Our findings suggest that judges reward attorneys simply for winning the lead counsel spot in the largest cases. Judges appear to be poorly attuned to the amount of effort needed to prosecute such cases or the actual risk faced by the plaintiffs’ attorneys.

Overall, our findings indicate that plaintiffs’ attorneys may be receiving windfall fee awards in mega-settlement cases at shareholders’ expense. We note, however, that our research has limitations. We cannot directly observe whether firms are inflating their hours by doing unnecessary work. Without this direct evidence, we have to rely on proxies, such as the presence of multiple lead counsel or increased hours at certain stages of the litigation. We also recognize that the larger-stakes cases may differ from other securities class actions in ways that our data does not capture.

The complete paper is available for download here.