By Wayne Schneider, General Counsel, New York State Teachers' Retirement System

The quiet revolution in reduced attorney fees won by public sector pension plans, which was previously noted in my October 2005 commentary in these pages, continues apace.

Notable new entries on the list of significantly reduced fees include the 7 percent fee request in the AOL Time Warner case, which the Minnesota State Board of Investment settled for $2.65 billion; the 15 percent fee request in the Royal Ahold case, which the Public Employees' Retirement Association of Colorado settled for $1.1 billion; the 7.8 percent fee request in the McKesson HBOC case, which the New York State Comptroller settled for $960 million; the 9 percent fee request in the Raytheon case, which the New York State Comptroller settled for $460 million; the 7.93 percent fee request in the Waste Management case, which the Connecticut Retirement Plans and Trust Funds settled for $457 million; the 16 percent fee request in the Global Crossing ERISA litigation, which the Ohio Public Employees' Retirement System and the Ohio State Teachers' Retirement System settled for $245 million.

Although these fee requests as a percentage of the settlement amounts are astonishingly low compared to the typical fee requests in the days before the enactment of the Private Securities Litigation Reform Act of 1995, why haven't the successful efforts of public sector funds in reducing class action fees received greater attention and galvanized greater interest in seeing lower fee awards in the cases in which public sector plans are not serving as lead plaintiffs?

Obviously, the plaintiffs' class action bar is not about to tell the federal courts that they are agreeing to rates that are far below those prevailing before public pension plans started signing on as lead plaintiffs under the Reform Act. (Some firms, however, will make the point in promotional materials, such as those that have crossed my desk.)

The business press has stayed away from the story presumably because the fees requested in cases like the above still represent significant dollars even though they are far lower as a percentage of the recovery than heretofore prevailing. Institutionally, they may prefer to complain broadly about the amount of money being paid out in attorneys' fees, much like the weather, rather than enter into a reasoned discussion of where the counsel fees in federal securities class actions should properly settle to.

This leaves the legal academic community, which one might expect would be eager to ponder the considerable benefits investors have gained from the efforts of public sector pension plans to reduce class counsel fees and the ramifications of those stunning developments on future fee awards generally in federal securities class actions.

Other Professors Support High Fee Requests
On the other hand, other members of the legal academic community continue to write affidavits in support of class counsel fee requests. Perhaps, the classic example of this phenomenon is the battery of academic talent brought to bear in the support of what I believe was a brazen request for a fee of 35 percent of the $110 million settlement in the DPL case after a year's worth of work. Fortunately for the class, the court chose to disregard the views of those worthies at least to the extent that it awarded a fee of only 20 percent of the settlement, though that was still quite a considerable sum for only a year's worth of work.

Another example is the affidavit submitted by Professor Charles Silver of the University of Texas Law School in the Titan case, where class counsel sought a fee of 25 percent of the $61.5 million settlement, which represented a whopping 5.12 times class counsel's claimed time expended on the case. The centerpiece of Silver's views was the notion that the class should be stuck with whatever fee arrangement had been negotiated at the outset of the case between the lead plaintiff and class counsel, no matter how excessive that negotiated fee might prove to be when the case is settled. Turning the salutary experience of public sector funds on its head, he argues that, because a lead plaintiff could have negotiated a favorable fee arrangement with class counsel, the lead plaintiff must be presumed to have, in fact, done so regardless of the result of that negotiation. Later on, he argues that high fee requests must not be questioned by courts at the fee setting stage because ex post determinations of counsel fees carry the risk that judges will be affected by “hindsight bias” in making their determinations. In other words, even if the agreed fee proves excessive in light of the settlement achieved, that is just too bad for the class.

I recently received a copy of the affidavit by Professor John Coffee of Columbia University Law School, which was submitted in the Bristol-Myers Squibb case in support of an application for a 19.77 percent fee for a $185 million settlement. Although the requested fee is somewhat closer to the level of fees being obtained by public sector plans, it happens that the fee arrangement negotiated between the lead plaintiff and class counsel called for a fee of only $21.9 million, or about 12 percent of the settlement. Without a nod to Silver's argument that fee agreements should be rigorously enforced when they result in high fees for class counsel, Coffee argued in his affidavit that, in this case, “it would be ... pointlessly rigid to enforce the original retainer agreement.”

Coffee's affidavit makes clear that, in making this argument, he does not differ with Silver's view that class counsel should get very large fees. For example, Coffee cites an obviously dated NERA study indicating that, during the period 1991-94, the average fee in federal securities class actions was 31.71 percent and the median fee was 33.33 percent as well as other dated studies for similar conclusions. He also cites a handful of cases involving fee awards which represent fat multiples of 4 to 9.3 times the claimed value of class counsel's time, which citation was utterly unnecessary inasmuch as the requested 19.77 percent fee was supposed to be roughly equal to the value of the time spent by class counsel.

Public sector funds are showing in quite dramatic fashion that the 30 percent plus fees celebrated by legal academics hired to support fee requests are not necessary to provide reasonable compensation for class counsel in federal securities class actions. The legal academic community could perform a great service by following Professor Perino's lead and bringing this quiet revolution to the attention of the courts, investors, and the public generally.

Indeed, I would think that the remarkable reductions in fees would be one of the most interesting subjects for legal academic study and publication. A discussion of these developments by legal academics could perform a valuable service for the courts, the investing public, and the public generally. Hopefully, it would bring closer the day when the courts, investors, and the public might look back and wonder how it ever could have been believed that the kind of fees that used to be paid out in federal securities class actions were reasonable and not excessive.

Each year the president of the United States provides the nation with a “State of the Union” address that provides an update on the status of our country. Given the many recent developments, industry reports, and high-profile cases that have resulted in a flurry of discussion concerning the health, status, and future of securities class action litigation, we offer this State of the Union for securities litigation:

It's about the same as it's been for the last 10 years.

At least that's how we see it, despite some curious media pronouncements this year about the supposed demise (or at least the supposed decline) of securities litigation.

Already in 2006, Stanford University/Cornerstone Research, NERA Economic Consulting, and PricewaterhouseCoopers have published interesting studies presenting securities litigation statistics and analysis of possible trends. These studies, combined with notable events such as the high-profile settlements in the Enron case, as well as the criminal indictment of powerhouse plaintiffs' law firm Milberg Weiss Bershad & Schulman, have provided the press and pundits with numerous opportunities to opine on where securities litigation is headed.

The Stanford/Cornerstone report in January got the ball rolling when it showed that new case filings dropped 17 percent in 2005 (from 213 new cases in 2004 to 175). Articles in The Wall Street Journal and the New York Times covered the release of this report by describing the “steep drop” or “sharp decline” in securities class actions in 2005, and pondered the possible causes, from the success of Sarbanes-Oxley to the end of the dot-com line of cases.

In fact, however, there was no “steep drop” or “sharp decline” in cases in 2005. Viewed in context, the 2005 decline of 37 cases simply does not appear to be historically significant. To the contrary, it is directly in line with the pattern of the last nine years. Looking at the fluctuation of the number of cases filed through the years as shown in the same Stanford/Cornerstone report, this becomes quite clear. Since 1997, the number of securities class action filings has gone up and down in a narrow range with amazing consistency: up a bit every even year, down a bit every odd year.

The NERA Economic Consulting study, which was published in April, similarly found that the number of federal filings in 2005 declined to its lowest point since 1997. It concluded, however, that “it is far too early to conclude that there is a downward trend.” The study's statistical testing confirmed what a glance at the chart above also shows—that “the 2005 dip is not statistically different from either the post-PSLRA average or from a longer-term trend.” Interestingly, NERA also clarified that almost all of the difference between the 2004 and 2005 totals was accounted for by an unexplained drop in filings in the Ninth Circuit, and it concluded that the most likely explanation for the drop in 2005 was simply random year-to-year variation.

The NERA study contained another statistic, however, that generated its own measure of confusion. The study noted that “dismissal rates have doubled since PSLRA” became effective in 1996, stating that “dismissals accounted for only 19.4 percent of dispositions for cases filed between 1991 and 1995. More recently, for cases filed between 1998 and 2003, dismissals have accounted for 40.3 percent of dispositions.” The report explained, though, that “there is no indication that dismissal rates have continued to rise after an initial adjustment to the tougher pleading requirements of PSLRA.” In other words, nothing has changed in terms of dismissal rates since approximately 1998.

Notwithstanding that fact, a newsletter called Agenda wrote in late May that securities class actions have begun to “dry up,” citing both the lower number of cases in 2005 and “the increase in the number of securities class actions that have been dismissed in recent years. Indeed, more than 40 percent of the securities class actions filed between 1998 and 2003 were dismissed, according to a study issued last month by NERA Economic Consulting. That's more than double the number of cases filed in the four-year period from 1991 to 1995 that were dismissed.”

Again, viewed in context, neither the number of cases in 2005 nor the NERA dismissal statistics support the argument that securities class actions have recently “dried up” in any meaningful way—the number of cases is roughly what it has been since 1997 and the dismissal rate is, according to NERA, the same as it has been since 1998.

Other recent events that, while noteworthy, do not seem to signal any dramatic change in the securities litigation landscape include the Enron settlement and the indictment of law firm Milberg Weiss. While the approval of the Enron settlement in May prompted some to assume that the settlement symbolized the end of the line for big securities settlements, this does not appear to be the case. Indeed, the ISS Settlement Pipeline, which measures the sum of all pending or tentatively announced settlements for which the claim deadline has not passed, currently stands at a massive $14.9 billion and includes significant cases such as Nortel Networks ($2.7 billion), Royal Ahold ($1.1 billion), and the IPO Securities Litigation (currently $1 billion and possibly much more). Indeed, including SEC settlements, there are currently 20 settlements in the pipeline valued at over $100 million.

With respect to Milberg Weiss, it seems clearer now that even if the firm's practice is diminished or destroyed altogether by the indictment, there will not be a significant impact on securities class actions generally. There are far too many competent plaintiffs' law firms out there that will gladly fill any void that may be created. It also appears that to the extent Milberg Weiss is losing any lawyers, it is because these lawyers are being recruited away by competitors, where they will promptly resume their securities class action practices.

One thing that has changed markedly in the securities class action world is the size of settlements. The recent PwC 2005 Securities Litigation Study showed that the average settlement of a securities class action soared to $71.1 million in 2005, a 156 percent increase from the $27.8 million average in 2004. Notably, these numbers exclude the mega-settlements in the historic WorldCom and Enron cases.

As PwC notes, the reasons for this surge likely include the success of plaintiffs in involving third parties such as investment banks, accountants, and law firms as defendants in these cases, as well as the huge “theoretical economic damages” present in cases involving companies with large market capitalizations and huge stock drops. Other reasons may include the impact of large pension funds serving as lead plaintiffs, and the phenomenon that each new high dollar settlement sets the bar a bit higher, encouraging plaintiffs to demand more money in settlements (and arguably contributing to a recent surge in the number of trials occurring in securities class action cases).

TENTATIVE SETTLEMENTS

Williams Companies
Williams Companies has agreed to pay $311 million to settle investor lawsuits pending in federal court in Oklahoma, according to the law firm of Bernstein Litowitz Berger & Grossmann. The firm represents the lead investor plaintiffs, the Arkansas Teacher Retirement System and the Ontario Teachers' Pension Plan.

The class includes investors who purchased Williams Companies or Williams Communications Group securities between July 24, 2000, and July 22, 2002. This settlement does not resolve Section 11 claims by Williams Communications investors; those claims are still pending.

Williams Companies, founded in 1908, engages in the exploration, production, and transportation of natural gas.

For more details, see the SCAS website by clicking here.

Sears, Roebuck and Co.
Sears, Roebuck, a subsidiary of Sears Holdings, announced that the company has reached a preliminary $215 million settlement with shareholders. The accord, which is subject to court approval, would resolve claims by investors who purchased Sears, Roebuck securities from Oct. 24, 2001, through Oct. 14, 2002. The case, filed in 2002, has been pending in the United States District Court for the Northern District of Illinois.

For more details, see the SCAS website by clicking here.

Refco-Bawag PSK Group
Austria's fourth largest bank, Bawag PSK Group, has agreed to a settlement with investors led by Pacific Investment Management Company and RH Capital Associates to resolve securities lawsuits over the collapse of U.S. futures broker Refco.

Bawag has agreed to pay a total of $108 million to Refco stock and bond purchasers, plus an additional $32 million if the bank is sold by owner OeGB, an Austrian trade union federation, which hired Morgan Stanley in April to find a buyer. The accord is part of a $675 million global settlement reached by Bawag to resolve U.S. and international investigations into the accounting scandal at Refco, which filed for bankruptcy in October 2005.

The investors contend that Bawag helped Refco conceal hundreds of millions of dollars in related-party receivables on its balance sheet. This alleged fraud helped Refco proceed with a $600 million bond offering in August 2004 and a $583 million initial public offering in August 2005, the investors claim.

For more details, see the SCAS website by clicking here.

Other companies that announced tentative settlements during the past month include Advanced Marketing Services and Tellium. You can find out more information about these settlements and others by visiting the SCAS website at: http://scas.issproxy.com/TentativeSettlements.php.

DISMISSALS

Cell Therapeutics
U.S. District Judge Ricardo S. Martinez has granted the company's motion to dismiss a securities class action lawsuit filed in November 2005 in U.S. District Court for the Western District of Washington. The lawsuit was brought on behalf of investors who purchased Cell Therapeutics' common stock from Nov. 14, 2003, to March 7, 2005.

For more details, see the SCAS website by clicking here.

AtheroGenics
AtheroGenics announced that the securities lawsuits filed against the company and certain of its officers and directors have been dismissed. The lawsuits had been consolidated in the U.S. District Court for the Northern District of Georgia. The suits were brought on behalf of investors who purchased AtheroGenics securities from Sept. 28, 2004, to Dec. 31, 2004.

For more details, see the SCAS website by clicking here.
For more details, see the SCAS website by clicking here.

Hilb Rogal & Hobbs
A federal judge in Alexandria, Virginia, has dismissed a securities class action lawsuit filed on behalf of purchasers of Hilb Rogal & Hobbs securities from Aug. 11, 2000, to May 26, 2005.

For more details, see the SCAS website by clicking here.

Also, please note that a securities lawsuit against NYFIX was recently dismissed.

For more details, see the SCAS website by clicking here.

Funds have been recently disbursed (or approved for disbursal) in the following cases:

• Bristol-Myers Squibb
• Electro Scientific Industries
• KeySpan
• MSC Industrial Direct
• Raytheon

High Court Rules for Investors in SLUSA Case
By Ted Allen, Director of Publications

In a procedural victory for investors, the U.S. Supreme Court ruled on June 15 that securities defendants may not appeal a federal court's decision to send a class-action case to state court.

The case, Kircher v. Putnam Funds Trust, arose from the Securities Litigation Uniform Standards Act of 1998 (SLUSA). That law which was enacted by Congress to prevent investors from bringing class-action lawsuits in state court to circumvent the stricter pleading requirements of the Private Securities Litigation Reform Act of 1995 (PSLRA). Most corporate defendants view the federal courts as a more predictable and fairer forum for litigating securities cases.

The Kircher case arose from eight Illinois state court lawsuits against 15 mutual fund companies by investors who claimed they were harmed by market-timing and other trading practices. The investors' lawsuits included both fraud and negligence claims. Other defendants include Deutsche Bank, Janus Capital, and units of Morgan Stanley and Bank of America.

After the mutual fund companies tried to move the case to federal court, a U.S. district judge ruled that the negligence claims should be heard in state court. However, the U.S. Circuit Court of Appeals for the Seventh Circuit reversed and decided that the SLUSA applies and preempts the state law claims.

On appeal to the Supreme Court, the investors argued that the appeals court did not have the authority under federal procedural law to review the district court's decision that it lacked jurisdiction to hear the case. A lawyer for the mutual fund firms argued that the district court's remand order could be reviewed because it was critical to the firms' defense that they can't be sued under state law.

The Supreme Court, in a 9-0 decision written by Justice David Souter, ruled that the remand order involved a jurisdictional question that is not subject to appellate review.

Option Timing Scandal Sparks More Than 70 Lawsuits
The U.S. stock option timing scandal is attracting the interest of pension funds in Europe and Australia, which along with U.S. pension funds and other investors, have filed more than 70 lawsuits against more than 25 firms. So far, more than 55 companies have disclosed internal, regulatory, or criminal probes into whether option grants were backdated or otherwise manipulated to maximize executive compensation.

Darren Robbins, a partner with the law firm of Lerach Coughlin Stoia Geller Rudman & Robbins in San Diego, told the Associated Press that the pension funds are "completely beside themselves and outraged over the self-dealing that has gone on." Robbins said he is filing 34 cases on behalf of 350 to 400 pension funds. “The damages total in the tens of billions of dollars,” Robbins told Red Herring, a technology industry magazine, noting that he would seek to recover for the market value that investors have lost after companies disclosed option probes.

The international investor plaintiffs include the New South Wales Treasury, which filed a lawsuit against American Tower in Massachusetts, according to Red Herring.

Earlier, UnitedHealth Group was sued by pension funds from Ohio, Connecticut, Minnesota, Florida, Mississippi, and Louisiana. The investor lawsuits allege the board allowed CEO William McGuire to “dictate his own compensation through the secret manipulation of the company's stock option plans” for almost a decade. The investors also contend that UnitedHealth's directors “completely abdicated their fiduciary responsibilities” to shareholders, leading the company to overstate its earnings and issue misleading financial statements since at least 1997. 

Judge Approves Enron Director Settlement
On June 22, a federal judge approved a $168 million settlement that Enron investors reached with 18 former directors of the energy company, Bloomberg News reported.

The settlement includes $155 million in payments from the insurers. The remainder includes personal payments from 10 of the former board members. This settlement, along with one reached by former WorldCom directors, is noteworthy, because few non-executive directors have ever had to make personal payments to settle securities lawsuits.

So far, investors led by the University of California have obtained more than $7.1 billion from Enron's former lenders. Investors, who claim they lost $40 billion during Enron's 2001 collapse, are still pursuing claims against other banks, as well as the company's former lead outside law firm, Vinson & Elkins.

Lawmakers Introduce Bill to Amend the PSLRA
Three Republican lawmakers are pushing legislation to amend the PSLRA following the May 18 indictment of Milberg Weiss Bershad & Schulman on charges of making illegal payments to clients.

The “Securities Litigation Attorney Accountability and Transparency Act” was introduced May 25 by U.S. Reps. Richard Baker of Louisiana, Patrick T. McHenry of North Carolina, and Jeb Hensarling of Texas. According to the sponsors, the legislation (H. R. 5491) would:  

• permit courts to select lead plaintiffs' attorneys through an auction process;
• require disclosure to courts of conflicts of interest between plaintiffs and plaintiffs' attorneys and permit courts to disqualify attorneys for unmanageable conflicts to ensure that all investors have the strongest legal advocacy; and
• permit courts to hold losing parties' attorneys accountable for attorneys' fees in lawsuits deemed frivolous to ensure plaintiffs, not attorneys, are in control of litigation.

The House Financial Services Committee's Subcommittee on Capital Markets held a June 28 hearing on “plaintiffs' attorney abuses” and possible legislative remedies. The scheduled witnesses included Chief Judge Vaughan R. Walker of the U.S. District Court for the Northern District of California, Massachusetts Secretary of the Commonwealth William F. Galvin, Theodore H. Frank of the American Enterprise Institute, and Professor James Cox of Duke University.