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E-MailStephen Choi is the Murray and Kathleen Bring Professor of Law at NYU Law School; Jessica M. Erickson is Professor of Law at the University of Richmond School of Law; and Adam C. Pritchard is the Frances and George Skestos Professor of Law at University of Michigan Law School. This post is based on their recent paper.
The Private Securities Litigation Reform Act (PSLRA) revolutionized the competitive landscape for plaintiffs’ attorneys in securities class actions. By creating a presumption that the lead plaintiff will be the shareholder or group of shareholders with the largest financial interest, the PSLRA gives law firms a strong incentive to form coalitions of shareholders to aggregate losses. These coalitions often involve multiple law firms sharing the lead counsel role. In our paper Coalitions among Plaintiffs’ Attorneys in Securities Class Actions, we examine this coalition building among law firms to determine when law firms join together to serve as co-lead counsel.
To examine this question, we collected data from lead plaintiff motions and rulings available on Bloomberg Law for every federal securities class action involving a disclosure claim from 2005 to 2016. We collected the names of the proposed lead plaintiff(s) for each initial motion, whether the plaintiffs were institutional investors, their claimed losses, and the law firm(s) filing the motion. We also collected data on 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 measured on the last day of the class period.
We then analyzed this data to answer two related questions. First, when do firms combine to form groups prior to filing a motion to serve as lead counsel? Second, having initially filed separate motions to serve as lead plaintiff, when do firms combine motions or withdraw from the competition? These questions matter because, in a companion paper forthcoming in the Journal of Empirical Legal Studies, we find that multiple lead counsel correlate with higher attorneys’ fees. These higher fees may be justified if plaintiffs’ law firms join together to benefit from each other’s expertise and obtain better outcomes for the class. If, on the other hand, multiple lead counsel join together simply to increase their own chances of winning the lead counsel contest without regard to the specifics of the case, this coalition building may come at the expense of the class.
We first examine coalitions in the initial filing of lead plaintiff motions. The mean number of law firms proposed as lead counsel by the movant is 1.188, illustrating that, at least at the initial motion for lead plaintiff filing, most movants represent in their motion that a single law firm is sufficient to litigate the class action. We use both a model with pooled data on motions for lead plaintiff using case characteristic controls and a model with case fixed effects. We find that multiple proposed lead counsel is positively correlated with the number of lead plaintiff movants, suggesting that investors often bring their own preferred counsel to the coalition. It is also correlated with the amount of the plaintiffs’ losses, which is consistent with firms coming together in an effort to maximize the alleged losses in their motion. In the model on pooled motion for lead plaintiff data, market capitalization and the initial number of motions, which are both proxies for the desirability of the case from the lawyers’ perspective, have negative coefficients, suggesting that firms have greater incentive to compete in the most lucrative cases. Other case characteristics, such as the type of allegations in the complaint, are generally insignificant, undermining the argument that multiple lead counsel reflect a need for resources or expertise.
Second, we examine coalition building after the initial round of lead plaintiff motions. For this analysis, we identify a “dominant” motion, which we define as the motion of the investor(s) eventually selected as lead plaintiff (with the assumption that the movants and their attorneys will be able to predict the strength of this motion during the lead plaintiff selection process). In most cases—87.4%—the motion with the highest loss among the initial motions is selected to lead the case. Approximately half of the original motions filed are no longer before the court by the time the judge selects among the lead plaintiff candidates, with 65.5 percent of the non-dominant motions withdrawing, 29.1 percent fighting, and 5 percent combining with the dominant motion.
We examine what drives the decision on the part of non-dominant motions to fight or cooperate (defined as either withdrawing or combining with the dominant motion) against the dominant motion in a case. We again use both a model with pooled data on motions for lead plaintiff using case characteristic controls and a model with case fixed effects. We find that these prior interactions between dominant and non-dominant motion law firms have a significant impact on how firms respond in future cases. If firms have a history of working together, the competing firm is less likely to fight the dominant firm, often choosing to withdraw or combine with the dominant firm instead. If, on the other hand, the firms have a history of fighting, they are more likely to fight in the current case. In the pooled motion level model, the characteristics of the particular cases were largely insignificant.
Finally, if multiple lead counsel occurs in a case because of synergies between law firms, we would expect the prevalence of multiple lead counsel to increase with the importance of synergies, such as for cases with higher stakes. Contrary to this expectation, we find that the correspondence of prior relationships between law firms on decisions to withdraw or combine does not increase with our proxies for the importance of synergies between law firms.
These results suggest that law firms join together as co‐lead counsel not because of the need to combine resources to litigate the case effectively, but because plaintiffs’ attorney firms view cooperation as more profitable than competition. Although a firm would prefer to take on the role of lead counsel alone, they are willing to combine with other firms if this leads to a higher likelihood of securing the lead counsel position. Case characteristics, such as the types of allegations in the complaint or the amount at stake, do little to explain why some motions come with multiple proposed lead counsel. The settlement class ultimately pays for this cooperation among plaintiffs’ attorney firms through higher total fees. Courts should therefore be skeptical of proposed co-lead counsel arrangements absent clear evidence that the class will benefit from having multiple firms working on the case.
The complete paper is available for download here.
