Through reforms enacted in the PSLRA, Congress intended for lead plaintiffs and courts to exercise some control over the plaintiffs’ law firms that pursue securities class action lawsuits. The securities laws also require courts to determine the amount of plaintiffs’ counsel’s fee awards. Yet, as the authors of recent academic paper suggest, the lead plaintiffs and the courts often lack the tools they need to execute these functions.

To try to derive the kinds of information that would allow lead plaintiffs and courts to fulfill their intended roles, the authors reviewed case records of thousands of cases, as a way to identify important indica of law firm performance as well as to extract detailed information about the fee awards. With the benefit of this information, the authors — Professor Stephen Choi of the New York University Law School, Professor Jessica Erickson of the University of Richmond Law School, and Professor Adam Pritchard of the University of Michigan Law School – suggest a variety of ways that lead plaintiffs and courts can better serve their intended functions under the PSLRA. The authors’ February 2023 paper, entitled “The Business of Securities Class Action Lawyering,” can be found here.

The authors’ starting point for their analysis is their perception that “effectively overseeing the lawyers in securities class actions requires data on the business behind these lawsuits.” For example, prospective lead plaintiffs “need to know which firms are better than others in recovering money from shareholders.” Similarly, in awarding attorneys’ fees, courts “need to encourage the future filing of meritorious cases without giving the attorneys a windfall.” In order to fulfill these objectives, lead plaintiffs and judges “need data to realize the promise of the PLSRA” – yet, the authors note, lead plaintiffs and judges do not have this information.

To try to develop this missing information, the authors collected data on every securities class action lawsuit filed against a public company between 2005 and 2018, a dataset consisting of 2,492 lawsuits and involving 756 plaintiffs’ law firms. The authors limited their analysis of the cases to the 91 law firms that participated in at least 10 securities class actions during the study period; these 91 firms accounted for move than 96 percent of all of the plaintiffs’ law firm revenues in the study.

Using these data and analytical criteria, the authors identified six discrete business models of the plaintiffs’ firms involved, four of which include firms that primarily serve as lead counsel and two of which include firms that primarily serve in non-lead supporting roles such as liaison counsel (in most cases, local counsel), or as additional counsel (for example, providing subject matter expertise, such as bankruptcy law).

The authors then divided the 49 firms that serve as lead counsel into four categories, which the authors called Top-Tier (15 law firms, with average settlements over $30 million); Mid-Tier (16 law firms, with average settlements of between $9 million and $30 million); Bottom Tier (11 law firms, with average settlements of less than $9 million); and Merger Objection firms (7 law firms). Further analysis of the cases and settlements according to this framework showed that the firms in each of these tiers have different clientele, filing patterns, and revenue models.

The full extent of the authors’ analysis of the plaintiffs’ firms using the lawsuit and settlement data is beyond the scope of this blog post, but suffice it to say that the authors’ analysis shows that the different firms have very different approaches to the business of securities litigation based on where they sit in the food chain. The firms in the top tier tend to get selected as lead counsel in the largest cases, involving the largest companies, and often involving the most egregious facts. The firms further down the table often sue smaller companies, file more lawsuits, and produce measurably different average and median settlements. (Readers wanting to know more about this part of the authors’ analysis will want to take some time to read Section III of the authors’ paper, which is fascinating.)

From the authors analysis of the law firms’ apparently diverging business models and settlement patterns, the authors discern three “insights.”

The first is that the plaintiffs’ securities firm industry represents a “complex ecosystem,” with a variety of firms taking different approaches to the business and often taking differing roles.

Second, the authors show that there is a “substantial variation in the results that these law firms achieve for shareholders.” In particular, the authors demonstrate that the law firms vary widely according to several key indicia, including average and median settlement achieved; range of settlements achieved; and percentage of cases settled. This analysis highlights specific metrics that lead plaintiffs and judges can use in selecting or approving lead counsel.

Third, the authors conclude that “judges’ fee awards consistently fail to account for firm performance or risk in any systematic way.” Judges, the authors conclude “base their awards largely on the size of the settlement, rather than factors that reflect the law firms’ own contribution and risk.”

Based on these conclusions. the authors propose reforms at two stages of the litigation process, which, taken together, the authors hope will “improve the ability of lead plaintiffs and judges to hire and compensate securities class action law firms.”

First, the authors propose a framework for prospective lead plaintiffs to use in selecting counsel, through a series of questions that would “allow lead plaintiffs to focus on firms’ relative performance,” while giving judges the information they need to uncover potential conflicts of interest.

Second, the authors suggest that judges “bring more analytical rigor to the fee award process” by asking for standardized information from the law firms, including “relevant data from comparable cases and details about the law firms’ own work on the case.” The authors suggest that judges can use this information to “set fee awards that reflect law firm performance and risk.”

There is a great deal of interesting information in the authors’ paper. Their extensive review and analysis of the data has yielded a host of interesting observations. Their suggested reforms have substantial merit; in particular, the authors suggested framework for prospective lead plaintiffs to use in selecting lead counsel could be of very substantial assistance to the institutional investors who frequently lead these lawsuits. The authors’ discussion of fee awards poses some very important questions for courts to pursue. The paper merits reading at length and in full.