Perino’s Article to be Published by Columbia Law Review

Professor Michael Perino’s new article, Is the Price Right? An Empirical Study of Fee-mpSetting in Securities Class Actions (co-authored with Professors Lynn A. Baker and Charles Silver of the University of Texas School of Law) was accepted for publication by the Columbia Law Review. Here is the abstract:

Every year, fee awards enable millions of people to obtain access to justice and strengthen the deterrent effect of the law by motivating lawyers to handle class actions.  But the process by which judges decide how much to pay lawyers remains a black box.  Settlements go in one side; fee awards come out the other.  The inputs and outputs have been studied, but the actual operation of the fee-setting mechanism has not. Consequently, it is difficult to know why judges award the amounts they do or whether they size fee awards correctly.

Both numerically and in terms of dollars recovered, securities cases dominate the federal courts’ class action docket.  We therefore undertook to peer into the fee-setting black box by studying in detail all of the 434 securities class actions that settled in federal district courts from 2007 through 2012.  We examined the actual court filings in each case to create an original, comprehensive dataset of information on all points at which federal judges are likely to consider issues relating to fees.  These data enable us to paint a picture of the fee-setting process that is unusually detailed and nuanced and that falsifies many common beliefs. 

Among our major findings are that: (1) federal judges often deviate from the path Congress laid out in the Private Securities Litigation Reform Act (PSLRA), which requires lead plaintiffs to set the terms of class counsel’s retention and federal judges to serve as backstops against abuses; (2) fees tend to be lower in federal districts that see a high volume of securities class actions than in districts that handle these cases less often; (3) fee cuts are significantly more likely among judges that see a high volume of securities class actions than among low volume judges; (4) the well-known “decrease-increase” rule, according to which fee percentages decline as settlements become larger, operates mainly in high-volume districts; and (5) judges appear to cut fees randomly, that is, on the basis of their own predilections rather than the merits of fee requests.  Finally, we learn that so-called “lodestar cross-checks,” which require judges to consider the “time and labor expended by counsel” and other factors to ensure against excessive fees, accomplish nothing.  Actual fee awards reflect something closer to a pure “percentage of the fund” approach.

In sum, we found little evidence that the actions currently taken by the courts in securities class actions move class counsel’s fees closer to the “right price.” We therefore propose a set of procedural reforms which courts could easily adopt that would make fee-setting in securities class actions more transparent, more compatible with the normative goals of the PSLRA, and more predictable.  The reforms would encourage lawyers to invest optimally in class actions, with salutary effects for investors seeking compensation and the integrity of the financial markets.

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