By Wayne Schneider, New York State Teachers' Retirement System

When considering the impact of the Private Securities Litigation Reform Act of 1996 on federal securities class actions, the actual and potential future impact that responsible institutional investors are having on attorneys' fees in federal securities class actions cannot be stressed enough.

The plaintiffs' class action bar will routinely argue that class counsel fee awards in federal securities cases have been, and still are, in the 30 percent range. Yet, responsible institutional investors serving as lead plaintiffs under the Reform Act are demonstrating that competent class counsel can be reasonably compensated for their efforts by fees that are substantially below the 30 percent level and, indeed, substantially below 20 percent.

Everyone is undoubtedly familiar with the fee award in the Cendant Corp. securities litigation, which resulted in a $3 billion settlement in 2000. The fee award, however, was only $55 million because of the retainer agreement that class counsel had entered into with the lead plaintiffs, the New York City Pension Funds, the New York State Common Retirement Fund and the California Public Employees' Retirement System.

Can there be any doubt as to the magnitude of the benefit that these institutional investors conferred on the class by driving a hard bargain on class counsel fees? Let's do the math. Suppose the fee award had been 30 percent, in line with what the plaintiffs' class action bar claims is the “standard” fee in federal securities class cases. Had the fee award been 30 percent, Cendant investors would have realized $845 million less from that settlement. Even if the fee award had “only” been 20 percent, that award would have meant over $545 million less in the pockets of Cendant investors. The value of the savings on counsel fees in the Cendant case by itself dwarfs the settlement amounts in all but a handful of federal securities class actions!

Other Favorable Fee Arrangements
Fortunately, the Cendant case is not an isolated instance but instead only one of the most remarkable examples of the way in which responsible institutional investors may be reshaping forever the perception of what should constitute a reasonable fee for class counsel when a federal securities class action finally settles. Other examples of favorable fee arrangements reached by institutional investors include the following:

• Class counsel agreed to seek a fee award not to exceed 17 percent of the $102 million settlement in the Symbol Technologies Inc. case in 2004. The lead plaintiffs are the Louisiana Municipal Police Employees' Retirement System, the Louisiana Sheriff's Pension & Relief Fund and the City of Miami General Employees' & Sanitation Employees' Retirement Trust.
• Class counsel agreed to seek a fee of 10.5 percent in the Homestore.com Inc. case, which was settled in 2003 for $13 million in cash and 20 million shares of Homestore.com common stock, for a total reported value of $93 million. The California Teachers' Retirement System was the lead plaintiff in that case.
• Class counsel agreed to seek a fee of 17 percent in the Gemstar-TV Guide International Inc. case, which settled in 2004 for $67.5 million. The lead plaintiffs in that case are the Teachers' Retirement System of Louisiana and the General Retirement System of the City of Detroit. (As it happened, the court awarded a fee equal to approximately 13.6 percent of the settlement.) Other claims were settled more recently for $25 million and class counsel is seeking a fee not to exceed 20 percent of the settlement.
  
• Class counsel agreed to seek a fee of 14 percent in the Providian Financial Corp. case, which settled in 2004 for $65 million. The lead plaintiff was the Retirement Systems of Alabama.
  
• Class counsel agreed to seek a fee of 15 percent in the Enterasys Networks Inc. case, which settled in 2004 for $50 million in cash and stock. The Los Angeles County Employees Retirement Association was lead plaintiff in that case.
  
• Class counsel agreed to seek a fee of 10.5 percent in the Critical Path Inc. case, which settled in 2002 settled for $17 million plus 850,000 warrants. The Florida State Board of Administration was lead plaintiff in that case.
  
• More recently, class counsel has agreed to seek a fee of 18 percent in the OM Group Inc. case, which settled for $92.4 million. The Policemen & Firemen Retirement System of the City of Detroit is the lead plaintiff in that case.

And then we have this year's “blockbuster” settlements:

• In the Bristol-Myers Squibb Co. securities case, which settled for $300 million, the fee originally agreed to by class counsel was 15 percent but that fee was reduced in subsequent negotiations to 7.5 percent. (The court eventually awarded a fee equal to approximately 4 percent of the settlement.) The lead plaintiffs were the Teachers' Retirement System of Louisiana, the Louisiana State Employees' Retirement System, General Retirement System of the City of Detroit, and Fresno County Employees' Retirement Association.

• In the Dynegy Inc. case, which settled for $473 million, class counsel agreed to seek a fee not to exceed 9 percent of the settlement. The Regents of the University of California are the lead plaintiff in that case.

• In the most spectacular case, class counsel in the WorldCom Inc. class action agreed to accept a fee of only 5.5 percent of the $3.56 billion in settlements achieved in 2005. The New York State Common Retirement Fund is the lead plaintiff in that case.

There has been some judicial recognition of the efforts of responsible institutional investors in reducing fee requests. For example, the court in the Motorola Inc. case remarked in 2003 that lead plaintiff New Jersey State Treasurer had entered into retainer agreements providing for fees that are “significantly below” the level of fees often awarded by courts.

In the academic community, Professor Lisa L. Casey wrote in her 2003 article, “Reforming Securities Class Actions from the Bench: Judging Fiduciaries and Fiduciary Judging,” in the Brigham Young University Law Review:

“Experience demonstrates that institutions applying for the role of lead plaintiff can and do negotiate fee agreements with putative lead counsel before selecting attorneys for the class. In the Waste Management megalitigation, for example, lead plaintiff Connecticut Retirement Plans and Trust Funds negotiated a contingent fee agreement with lead counsel . . . . The pact included a provision capping attorneys' fees if the case settled after resolution of motions to dismiss but before a decision on motions for summary judgment. The court approved the contract fees as reasonable and awarded counsel 7.93 percent of the case recovered for the class in the megasettlement, or $36.225 million of the $457 million recovery fund. Acting as lead plaintiff in the megalawsuit arising from the Enron debacle, the University of California Board of Regents also negotiated a contingent fee contract with lead counsel Milberg Weiss calling for a fee below 10 percent of any recovery--again, substantially lower than the 25 percent benchmark previously utilized by many courts.”

Competition by Lawyers
Even members of the plaintiffs' class action bar will, in unguarded moments, acknowledge the impact responsible institutional investors can have in substantially lowering fee requests in federal securities class actions. For example, in a 2004 newsletter, one plaintiffs' firm stated the following:

“[P]ublic fund plaintiffs have sharply reduced the percentage of the settlement pool that goes to the lawyers who represent [investors] in securities class actions. In cases where individuals act as lead plaintiffs, contingent fees have historically ranged up to 33 percent. But institutional investors have the sophistication and the commitment to the class they represent to negotiate significantly lower fees.

“Institutions look for ways to ensure that attorney fees are reasonable and reflect the results obtained, as well as the time and effort expended. Their fee agreements often include anti-windfall provisions and other incentives that tie the lawyers' share to the size of the recovery and the length of the proceedings.

“The New York State Common Retirement System last year issued a Request for Proposals in which all responding securities litigation counsel agreed to a fee scale that set fees of 8 percent to 14 percent for settlements under $100 million. Larger settlements are governed by a multi-tier system that lowers the percentage even more. Other funds have come up with similar formulas to keep legal fees reasonable, providing a valuable service not only to their plan members but also to the wider pool of shareholders entitled to part of the settlement.”

There is no reason to believe that responsible, properly informed institutional investors serving as lead plaintiffs cannot secure lower fees in federal securities class actions for the benefit of the investor class they are representing. Counsel for public sector funds, for example, can attest to a highly competitive environment in which plaintiffs' firms are vigorously competing with each other to represent public sector funds. Counsel for public sector funds are routinely bombarded with all manner of promotional material from plaintiffs' firms and invited to lavish conferences and other activities designed to promote the firms' capabilities in the prosecution of federal securities class actions. Representatives of these firms regularly attend meetings of organizations in which public sector funds participate in an effort to drum up business.

Unfortunately, outside the circles of plaintiffs' class action firms and public sector funds, the efforts of responsible lead plaintiffs in driving down fees have attracted little notice. The lack of media attention to these efforts by responsible institutions leaves a considerable opening for class action firms to continue to recruit lead plaintiffs who have no knowledge of what kind of reduced fees can be obtained through obtaining bids from competing law firms and hard negotiation.

If more attention were paid to these efforts, more investors might better understand one of the reasons they are getting more money back--thanks to the substantially reduced legal fees negotiated by institutional shareholders.

Wayne Schneider is general counsel of the New York State Teachers' Retirement System. The views expressed in the commentary represent only the views of the author and do not necessarily represent the views of the institution by which he is employed.

Commentary: SCAS in the U.K. By Bruce T. Carton, Vice President, ISS' Securities Class Action Services

Although the proxy advisory side of ISS' business went global long ago, ISS' Securities Class Action Services (SCAS) business--tracking and filing claims in securities class action settlements for institutional investors--took a bit longer to really gain traction in markets such as the U.K. The waiting is over, however, as U.K. institutions are now being bombarded from all sides about the importance of filing claims in securities settlements, and are even being solicited by U.S. lawyers to become “lead plaintiffs” in U.S. securities litigation.

The latest news from the U.K. is that legal experts have begun warning U.K. pension fund trustees that they face a real risk of being sued by their funds' members if they fail to file the settlement claim forms that permit the funds to receive their rightful share of the billions of dollars now being paid out annually in U.S. securities class action settlements. (SCAS Alert readers may recall my article in the February 2005 edition of this publication about similar litigation that has already been brought against U.S. mutual fund advisers). According to a Sept. 20 article in the Times (U.K.) newspaper, Alan Owens, a partner of the U.K. law firm Irwin Mitchell, told a conference of 60 senior investment professionals that “British pension trustees are lagging behind their colleagues in the U.S. in clawing back money owed to clients. . . . Trustees need to get their own house in order before members start asking some very uncomfortable questions.”

Indeed, as the Investment Editor of the Times subsequently stated in an editorial,

As we reported in the Times in July, British pension funds and other institutional investors are already missing out on £4.5bn by failing to collect compensation won on their behalf in class action lawsuits in the U.S. We may be sniffy about America's litigiousness, but it's surely madness not to claim our share of the spoils?

How much are U.K. institutional investors leaving on the table by failing to file in U.S. settlements? Over $8 billion (£4.5 billion) according to the Times, but the methodology for that calculation is unclear. Suffice it to say, however, that with over $20 billion in U.S. securities class action settlements over the past five years according to the SCAS database, and with roughly one-third of that amount (approximately $7 billion) reportedly left on the table by investors who failed to collect the money due to them, there is little doubt that U.K. investors have missed out on at least hundreds of millions of dollars that are rightfully theirs.

Many U.K. institutions also suddenly find themselves being aggressively courted by U.S. plaintiffs' law firms for the first time for a different reason: to serve as lead plaintiff in U.S. securities class actions. As opposed to simply filing a claim form in a securities class action after it has settled, serving as lead plaintiff means actually being an involved party to the litigation. Specifically, a lead plaintiff will have responsibilities such as:

• initiating the litigation by filing a complaint with the court against particular defendants and competing against other interested plaintiffs to be the “lead”;
• choosing the “lead counsel” (lawyers) for the class and negotiating attorneys fees;
• monitoring the litigation and providing input or advice to counsel on strategy and key motions with the court;
• subjecting itself to the “discovery” process (depositions, requests for documents, interrogatories, etc.) should the case survive a motion to dismiss; and
• advising counsel on the acceptable terms for any settlement and evaluating all settlement offers.

U.S. lawyers' new-found attention to U.K. institutions is not without ulterior motives--as mentioned above, the lead plaintiff selects lead counsel in such cases, and being lead counsel in a successful securities class action can be highly lucrative. U.S. plaintiffs' law firms are now looking to the U.K. for potential lead plaintiffs because, as one lawyer who is now recruiting German institutions recently told the Wall Street Journal, “All the fields have been plowed in the United States. If you want to enter new markets, you have to go outside the United States.” In order to decide whether and when they may wish to become lead plaintiffs, U.K. institutions will need to begin paying more attention to the losses they have suffered in each newly filed case, and develop or hire resources that will permit them to evaluate the merits of these cases.

Critical Distinction
The new focus on U.S. securities class action litigation by U.K. institutions should help clarify one important point that has not been fully appreciated by many U.K. institutions: that there is a fundamental difference between (1) a “lead plaintiff” who actually files a complaint against a defendant to initiate a lawsuit and undertakes the responsibilities laid out above; and (2) a shareholder who simply files a claim form at the conclusion of a securities class action lawsuit to recover its pro rata share of the settlement fund.

Recognizing this distinction is critical for U.K. institutions that may well be, like the editor of the Times, “sniffy” about American litigiousness. Under U.S. law, when a securities class action lawsuit is filed, all shareholders who traded the security in the relevant time period are automatically members of the “class” that will be entitled to recover if the case ends in a settlement. If the case settles, all class members, including U.K. investors, are eligible to participate in the recovery by filing a claim form with the claims administrator.

ISS' experience with its clients shows that a major reason many U.K. investors fail to file claims in settlements is the mistaken belief that they will have to sponsor, endorse, bear costs or otherwise participate in the class action itself to be eligible for a share of the settlement. This is simply not the case.

TENTATIVE SETTLEMENTS

Bennett Environmental Inc.
Bennett Environmental has agreed to pay $9.75 million to settle the class action lawsuit filed in July 2004 in the U.S. District Court for the Southern District of New York. Investors who purchased securities of Bennett Environmental between June 2, 2003, and July 22, 2004, are expected to be eligible to take part in the settlement.

Bennett Environmental provides high-temperature treatment services for the remediation of contaminated soils and other PCB-contaminated construction debris.

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

KongZhong Corp.
KongZhong Corp. has agreed to pay $3.5 million to settle the class action lawsuit filed in August 2004 in the U.S. District Court for the Southern District of New York. Investors who purchased American depositary shares of KongZhong between July 9, 2004, and Aug. 17, 2004, are expected to be eligible to take part in the settlement.

KongZhong, through its wholly owned subsidiary, KongZhong Information Technologies (Beijing) Co., provides wireless entertainment, media and community services throughout China. In addition, KongZhong provides wireless services on the networks of China United Telecommunications Corp. and China Netcom Group Corp.

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

PSS World Medical Inc.
PSS World Medical (formerly known as Physician Sales & Services Inc.) has agreed to pay $16.5 million to settle the class action lawsuit filed in May 1998 in the U.S. District Court for the Middle District of Florida. Investors who were PSS shareholders as of March 26, 1998, are expected to be eligible to take part in the settlement.

PSS World Medical is a national distributor of medical supplies and equipment to office-based physicians and long-term health care providers.

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

DISMISSALS

Synopsys Inc.
A class action lawsuit by Synopsys investors has been dismissed. The lawsuit was filed in August 2004 in the U.S. District Court for Northern California.

Synopsys is a provider of electronic design automation software and services to companies in the semiconductor, consumer electronics and aerospace industries.

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

Lexar Media Inc.
A class action lawsuit by Lexar Media investors has been dismissed. The lawsuit was filed in May 2004 in the U.S. District Court for Northern California.

Lexar Media designs, develops, manufactures and markets digital media and other flash-based storage products for consumer markets, consumer electronics, industrial and communications markets.

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

Synovis Life Technologies Inc.
A class action lawsuit by Synovis investors has been dismissed. The suit was filed in June 2004 in federal court in Minnesota.

Synovis develops, designs and manufactures devices for surgery and the treatment of disease.

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

In addition to these cases, the following dismissals recently occurred and can be found by utilizing the search function on the SCAS website:

• Cogent Communications Group Inc.
• Interpool Inc.

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

• Interstate National Dealer Services Inc.
• Muse Technologies Inc.
• Prism Solutions Inc.
• Sonic Innovations Inc.
• SRI/Surgical Express Inc.
• Steven Madden Ltd.
• Earthgrains Co.
• Value America Inc.

U.S. Judge Approves $3.56 Billion WorldCom Settlement
By Ted Allen, Director of Publications

On Sept. 21, a federal judge approved $3.56 billion in settlements for WorldCom Inc. investors in addition to a $2.6 billion accord approved last year. A lawyer for investors said they may start collecting their money in mid-2006.

The latest class-action settlement includes $2 billion from J.P. Morgan Chase & Co.; $325 million from Deutsche Bank AG; $65 million from WorldCom's former auditor, Arthur Andersen; $55 million from former WorldCom directors; and $45 million from former CEO Bernard Ebbers. The earlier settlement included $2.6 billion from Citigroup Inc.

Overall, more than 800,000 institutional and individual investors led by the New York State Common Retirement Fund are slated to receive about $6.1 billion in the second-largest securities settlement ever after those obtained by Enron Corp. investors.

WorldCom bondholders are to receive most of the money--about $5 billion. On average, holders of company bonds issued in 2000 and 2001 will get $426.66 for every $1,000 in bonds, according to Bloomberg News. Shareholders are to receive an average of 56 cents per share. The deadline for filing claims was Aug. 26.

Lawyers for WorldCom investors, led by Bernstein Litowitz Berger & Grossmann of New York and Barrack Rodos & Bacine of Philadelphia, are to receive $336.5 million in fees under the settlements. In court filings, the lawyers reported that they spent 277,862 hours on the class-action case, which went to trial this spring on the claims against Arthur Andersen.

U.S. Judge Denise Cote set the fee award at almost 5.5 percent of the total settlement, rather than basing it on the hours worked on the case, the New York Law Journal reported. The judge deferred to the retainer agreements, writing that those arrangements were negotiated at “arm's length” by the New York state pension fund, a “sophisticated lead plaintiff possessing a large stake in the litigation,” a $300 million loss on WorldCom investments. The judge also noted the pension fund's “close supervision” of the litigation.

In her order, Cote praised the “superb” work of the investors' lawyers and said their fee request was reasonable given what other courts have awarded in similar litigation.

“The size of the recovery achieved for the class, which has been praised even by several objectors, could not have been achieved but for the unwavering commitment of lead counsel to this litigation,” the judge wrote. “Several of the lead attorneys essentially devoted years of their lives to this litigation, with the personal sacrifices that accompany such a commitment.”

(For more on legal fees in securities class action cases, see the “Guest Commentary” in this month's issue of the SCAS Alert.)

WorldCom, the second-largest U.S. long-distance phone-service company, collapsed into bankruptcy in July 2002 after acknowledging that it overstated revenue and concealed expenses. The company is now known as MCI Inc. and has agreed to be acquired by Verizon Communications Inc.

SEC Loses Ruling Over Selective Disclosure
In other news, a federal judge dismissed the Securities and Exchange Commission's claims that Siebel Systems Inc. violated Regulation Fair Disclosure (Reg FD) when two executives met privately with financial analysts in 2003.

Reg FD, which took effect in 2000, bars companies from selectively disclosing material information to analysts and brokers, without communicating that same information to investors and the public.

The SEC alleged that the company executives gave a more optimistic portrayal of its prospects to analysts in April 2003 than Siebel earlier communicated to the public. Siebel, which claimed that it communicated "virtually identical" information to the analysts, also challenged the constitutionality of the regulation. The U.S. Chamber of Commerce supported Siebel in the litigation.

U.S. District Judge George Daniels ruled Sept. 1 that Siebel did not violate the regulation, but he did not decide the constitutionality of Reg FD. He did chastise the agency for applying the regulation too aggressively, noting that Reg FD "does not require that corporate officials only utter verbatim statements that were previously made public."

Lawyers for companies argue that the judge's decision provides clearer guidance about what companies may say and will in fact increase the flow of information to investors.

While defense lawyers hailed the ruling as a rebuke to the SEC, other legal experts, including Don Langevoort, a Georgetown University law professor and former SEC lawyer, said they expect that the SEC will pursue other Reg FD cases. Former SEC Chairman Arthur Levitt Jr., who championed Reg FD during his tenure, told Bloomberg News that he hopes that the ruling will be overturned on appeal.

Another Increase in Class Action Settlements

So far this year, there have been 121 U.S. securities settlements, an increase of 4.3 percent from the first three quarters of 2004. The graph in the beginning of this newsletter details the number of settlements and new lawsuits per quarter for 2005.

During the first quarter of 2005, it appeared that settlement activity was declining. There were 27 settlements worth an average of $16.41 million during that period, down from 31 accords averaging $21.99 million in the first quarter of 2004.

However, the second and third quarters of this year saw an explosion in settlement numbers and value. There were 43 settlements in the second quarter, followed by 52 accords in the third. That compares with 37 and 45 settlements during those same periods in 2004. Furthermore, the average amount per settlement has increased significantly. This year, second quarter settlements averaged $36.56 million, while third quarter agreements reached $94.17 million on average. Those numbers far exceed the $19.79 million and $16.88 million averages in those periods last year.

While settlement dollars have continued to increase this year, there has been a decrease in new case filings so far. This decline may stem from increased compliance and better governance practices by companies. With more and more settlements occurring each year for higher dollar values each time, companies are well aware of the potential cost of misleading investors.