The Thirteenth Stroke of a Clock

A court in the S.D.N.Y. has approved the settlement of a securities class action brought against Citigroup, but not without a fair amount of drama over the award of attorneys’ fees. In the case, the plaintiffs alleged that Citigroup misled investors, from 2007 to 2008, by understating the risks associated with assets backed by subprime mortgages and overstating the value of those assets. The case settled for $590 million and lead counsel submitted an attorneys’ fees request of $97.5 million or 16.5% of the common fund.

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 find that it is appropriate to cross-check a proposed percentage fee award using the lodestar method (i.e., by multiplying the reasonable hours expended by counsel by a reasonable hourly rate, and then adjusting that number with a multiplier to compensate for the risks the law firm assumed), but there is no uniformity as to the appropriate hours, rates, and multiplier to be used. In the Citigroup case, the lodestar used by lead counsel – $51.4 million (resulting in a multiplier of 1.9 to reach the $97.5 million request) – drew a strong objection from the Center for Class Action Fairness. The court largely agreed that the lodestar was improperly inflated.

In particular, the court made the following reductions:

(1) Lead plaintiff/lead counsel contest – Following the appointment of lead counsel, the firm decided to join forces with one of the firms who had unsuccessfully applied for the position. As part of the fees application, however, that second firm included the hours it spent attempting to become lead counsel as compensable time. The court disagreed and struck $4 million worth of time that the second firm claimed for pre‐complaint investigation, drafting its complaint, and participating in the lead counsel contest.

(2) Post-settlement discovery work – The court was sharply critical of lead counsel’s decision to engage in thousands of hours discovery-related tasks after the parties reached a settlement in principle of the case. The court concluded that that “a reasonable paying client would not have authorized or paid for these hours” and cut $7.5 million from the lodestar.

(3) Hourly rate for contract attorneys – The objector and lead counsel strongly disagreed over the proper way to account for contract attorneys. The objector argued that the market rate for contract attorneys was no more than $100 per hour and, in any event, contract attorneys are an expense that should not be included in the lodestar, while lead counsel submitted a blended rate of $462 per hour (which the court noted was higher than the blended associate rate). The court found that it was appropriate to include the contract attorneys in the fee request, but a more appropriate blended rate for those attorneys was $200 per hour, for a savings of $12 million.

(4) Waste and inefficiency – The court’s review revealed a number of instances of questionable billing, including hundreds of hours spent on reviewing depositions. The court decided to cut 10% ($2.8 million off the remaining $27.9 million) for waste and inefficiency.

In total, the court cut the lodestar in half, from $51.4 million to $25.1 million. However, the court also found that given the complexity and risks associated with the case (in addition to several other factors) a fairly large multiplier of 2.9 was appropriate. In the end, lead counsel was awarded attorneys’ fees of $70.8 million (down from $97.5 million) or 12% of the common fund.

Quote of note: “In a case of this magnitude, it is inevitable that attorneys will spend more hours than turn out to be necessary on some projects. But it is, or ought to be, far from inevitable that attorneys will attempt to charge those hours to their client. And some instances of waste and inefficiency are so egregious that their inclusion in a motion for fees casts a shadow over all of the hours submitted to the Court—just as the thirteenth stroke of a clock calls into doubt whether any previous stroke was accurate.”

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