The Right Lodestar

Both the Federal Rules of Civil Procedure and the PSLRA provide that plaintiffs’ counsel in a securities class action may be awarded a “reasonable” fee as determined by the court. Courts generally agree that it is appropriate to cross-check a proposed percentage fee award using the lodestar method (take the reasonable hours expended times a reasonable hourly rate and adjust with a multiplier), but there is no uniformity as to what are the appropriate hours, rates, and multiplier to use.

Bloomberg has an article on the approval of the settlement in the Nortel securities litigation. There are two items of note. First, the overall settlement value apparently has declined by over $1 billion since the settlement was first announced. Second, the court reduced the proposed attorneys’ fees from 8.5% (approximately $96 million) to 3% (approximately $34 million) of the settlement value.

A review of the opinion, which is not yet available online, reveals that the court’s main concern was that the proposed attorneys’ fees award resulted in a lodestar multiplier of 5.8 (i.e., “fees totaling 5.8 times the number of hours actually worked”). The court viewed this as excessive, citing a number of prominent cases (including Bristol-Myers Squibb and Worldcom) where other S.D.N.Y. judges approved attorneys’ fee awards that had lodestar multipliers of 3.5 or less. Based on a 3% award, the lodestar multiplier in Nortel is approximately 2.05.

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