Jeremy Lieberman and his partners at the securities class action firm Pomerantz are about $171 million richer, after U.S. District Judge Jed Rakoff of Manhattan issued a decision Monday granting final approval of a $3 billion securities class action settlement against the Brazilian energy company Petrobras and one of its auditors. Pomerantz, one of three lead firms in the case, did the bulk of the work, so it’s receiving the lion’s share of the total $186.5 million Judge Rakoff awarded class counsel for obtaining an “exceptional” result in a risky case without a foreordained outcome.
You might expect Lieberman to be a very happy man today. He’s not – and it’s not just because Judge Rakoff awarded Petrobras class counsel nearly $100 million less than the $284.4 million they requested.
Lieberman told me that what bothers him wasn’t so much the result as the process. I’ll explain below how Judge Rakoff got to $186.5 million, but Lieberman’s complaint is that the judge did not honor Pomerantz’s fee agreement with its U.K. pension fund client, lead shareholder Universities Superannuation Scheme. When USS retained Pomerantz, the fund rejected Pomerantz’s initial fee suggestion and instead, as class counsel recounted in their memo requesting $284.4 million in fees, brought in former U.S. pension fund official Keith Johnson of Reinhart Boerner Van Dueren to advise the U.K. fund on appropriate fees for its class action lawyers. Their eventual sliding-scale deal, which granted Pomerantz a declining percentage of the recovery as the size of the settlement fund increased, would have netted lead counsel 9.4 percent of the $3 billion settlement, or $284.5 million. Judge Rakoff took that pre-negotiated fee deal into account when he appointed USS a lead plaintiff in the Petrobras case.
The judge, as Pomerantz and the other lead counsel acknowledged in their fee petition, was not required to defer to USS’s fee agreement with Pomerantz. Federal judges, after all, are supposed to look out for the interests of all class members, not just lead plaintiffs. But Pomerantz and the other firms argued that Judge Rakoff should give considerable weight to the USS fee deal, especially because it was negotiated before the litigation began.
Pomerantz partners relied on the terms of their USS fee deal when they made decisions about how to litigate the case, the fee memo said. To finance the expensive undertaking, they pledged their personal assets to assume a crushing debt load, “in large part informed by the ex ante fee agreement that was previously reviewed (and commended) by (Judge Rakoff).”
But when it actually came time to award fees, the judge said Pomerantz’s pre-negotiated fee deal was “at best just one factor” to consider in the tapestry of litigation events “that provide a much better indication of what was the value of the attorneys’ work to the class as a whole than any before-the-fact private agreement reached with an individual plaintiff.”
Instead, as I’ll explain, Judge Rakoff based his fee award on class counsel’s lodestar billings, boosted by a multiplier to reflect the excellent result they obtained. Rakoff used the 1.78 multiplier Pomerantz, Labaton and Motley Rice had originally suggested, when they analyzed lodestar billings as a cross-check on their fee request for the 9.4 percent of the settlement, the percentage Pomerantz had negotiated with lead shareholder USS.
Lieberman told me he’s distressed at the short shrift Judge Rakoff gave to Pomerantz’s fee agreement with its client and believes that, in the long run, disregarding such agreements undermines the legitimacy of class actions. Federal judges, as the class action bar is all too aware, are pushing for more transparency in these cases, pressing for details on relationships between lead plaintiff candidates and their firms, referral fees paid to firms that don’t have a role in the litigation, and dubious dismissals. Lieberman said judges should similarly recognize that arms-length fee agreements between institutional investors and their lawyers enhance the professionalism of the class action bar.
“Fee awards can’t be random in high-stakes litigation. It shows a lack of respect for the process, to just say, ‘Oh, I’ll figure it out afterwards,’” Lieberman said. “If you want class action work to be taken as a serious industry, you have to have a systematic way to assure in advance how lawyers will be paid. If we’re trying to clean up the business, let’s clean it up in all ways. No more randomness at the end.”
Lieberman said he believes Judge Rakoff acted with good intentions. He also acknowledged the inescapable truth of the judge’s point that he’s awarding a tremendous amount of money to plaintiffs’ firms. (Rakoff’s exact words: “It is important to also remember that we are dealing here, not just with percentages, billable rates, and multipliers, but with very large amounts of money in absolute terms that plaintiffs’ counsel will be receiving under any analysis.”)
But he said – and this is a legitimate point – that disregarding lead plaintiffs’ pre-negotiated fee agreements can distort the way class counsel litigate a case. “I was thinking for three years my fee agreement was going to be honored,” he said. “The future of our firm was on the line. We did that because we thought our agreement with the client would be honored.”
For a contrary take, I went to the Competitive Enterprise Institute, which filed a thought-provoking objection to the Petrobras settlement, protesting class counsel’s fee request, among other things. In an email responding to Lieberman’s argument, CEI lawyer Anna St. John said it’s important to remember that USS isn’t the only client in this class action, which is being settled on behalf of all Petrobras shareholders. USS, St. John wrote, “is just one of more than 1 million potential class members who are the clients that Pomerantz is supposed to represent,” she said in her email. “That agreement also does not protect those absent class members, who like in this case, are taken advantage of when lawyers seek to recover windfall hourly rates.”
CEI’s objection urged Judge Rakoff not to defer to the USS fee agreement because the class as a whole didn’t negotiate the deal and wasn’t apprised of its terms. “If it fails to preclude a windfall hourly rate, then it does not satisfactorily protect the class’s interests,” the filing said. “Class counsel fear that there is no value to ex ante vetting if courts can ‘simply upend (agreements) by the subjective post hoc determinations.’ Not so; a negotiated fee can reasonably serve as a ceiling even if it is inappropriate to employ it as a floor.”
Judge Rakoff’s award of $186.5 million, as I mentioned, was based on lodestar billings by class counsel, but he used a very unusual process to review their bills. Rather than appoint a special master – presumably at the expense of class members – to comb through the timekeeping records submitted by plaintiffs lawyers, the judge asked defense lawyers for Petrobras and its auditor to do it. “The court took this step because of defendants’ intimate knowledge of various aspects of the case, and the court’s confidence was rewarded by the highly professional way in which defendants’ counsel undertook their court-directed task,” he wrote.
Defense lawyers found some hinky charges, like the seven days a contract attorney claimed to have spent reviewing the third amended complaint – after the complaint had been filed. Class counsel voluntarily adjusted their lodestar report to eliminate some of the questionable hours uncovered by the defense firms but protested other supposedly inflated charges.
Judge Rakoff then waded into the time records himself. He ended up focusing on class counsel’s $28 million in billing for foreign contract lawyers who cannot practice in New York and nearly $100 million in bills for contract lawyers. He shifted the foreign lawyers’ bills to a reimbursable litigation cost (which means no multiplier) and cut contract lawyers’ fees by 20 percent. He also imposed an additional 50 percent cut on bills by contract lawyers acting as translators. Those cuts brought the total lodestar down from $159.5 million to $104.8 million. When the judge applied the 1.78 multiplier, the total came to the aforementioned $186.5 million.
Judge Rakoff said any more would be a “windfall” to plaintiffs lawyers who were already “highly incentivized to heavily litigate this huge case regardless of the expected fee award.”
Jeremy Lieberman begs to differ.
The views expressed in this article are not those of Reuters News.