We have all seen the various league tables showing which plaintiffs’ firms have had the highest average securities class action settlements. But do these firms wind up at the top of the tables because they produce better outcomes for the plaintiff class, or do they produce these results simply because they are better at winning the race to become lead counsel in the better cases? As three academics put it in their recent paper, “do the plaintiffs’ lawyers matter”?

In their paper, New York Law Professor Stephen J. Choi, University of Richmond Law Professor Jessica M. Erickson, and University of Michigan Law Professor Adam C. Pritchard survey securities class action lawsuit settlements in order to determine whether the “top tier” plaintiffs’ firms actually produce better outcomes for the plaintiff class. Interestingly, the authors conclude that while the top firms produce better outcomes in a narrow subset of cases, in most other cases they do not. The authors suggest these observations have important implications for both claimants and courts. The authors’ paper can be found here. The authors’ March 12, 2024, column in the CLS Blue Sky Blog about their paper can be found here.  

The authors’ analysis begins with the observation that while there are certain plaintiffs’ firms that obtain larger settlements than other firms, the cases in which these firms are involved are fundamentally different as well. These law firms seek out and often with the lead counsel spot in the most promising cases – such as a parallel government investigation, termination of top officers, or restatement of financials. These top firms also target defendants with larger market capitalizations, which typically permits the plaintiffs’ counsel to seek larger damages.

In order to permit the results achieved by the top-tier firms to be compared with the results achieved by the lower-tier firms, the authors used a statistical technique (“inverse propensity score weighting”) to balance out the differences in the types of cases in which the different tiers of law firms are involved. Using this approach, the authors were able to estimate the average effect of representation by the top-tier firms.

The authors then sorted the securities class action settlements into deciles based on the market capitalization of the defendants and compared the settlements of the top-tier firms with the settlements of the lower tier firms.

Using this methodology, the authors found no significant difference in the results obtained by the top-tier firms and the lower-tier firms in the market capitalization deciles 1-7 and 10. The only significant difference was in cases against companies whose market capitalizations were in deciles 8 and 9 – that is, the larger defendants but not the largest. In those larger cases, the top-tier firms did obtain better outcomes. This difference may be attributable to the variations in time and expense; the top tier firms invest almost twice the time and almost three times the expense in deciles 8-9.

The fact that the authors analysis shows that the top-tier firms did not produce better outcomes in most subsets of case “call[s] into question the preferential treatment that top-tier firms receive when it comes to lead counsel appointments and fee awards in securities class actions.” The fact that these firms are able to tout their larger settlements and larger average settlements “may simply reflect the fact that these firms handle cases with better facts and larger potential damages.”

The authors suggest that these findings may have implications for institutional investor plaintiffs. These institutional investors, the authors suggest, “should be wary of appointing a firm to lead counsel simply because it has a history of achieving large settlements.” The firm’s record “may simply reflect its luck in being awarded the role of lead counsel in cases with more promising facts. A “savvy plaintiff” should “look behind a firm’s settlement numbers and inquire into facts of the firm’s cases and the firm’s specific role in increasing settlement value of these cases.”

Courts, the authors suggest, “should also look more closely at a firm’s specific contribution to the case.” Judges “can be swayed by large settlement amounts, even if the settlements do not always reflect the law firm’s efforts.” Courts should be aware that “in most categories of cases, the top-tier firms do not obtain better results for shareholders,” which, the authors suggest, that “the top-tier firms receive outsized fees for what may be baseline efforts.” Judges should “take a harder look at the lawyers’ specific contributions to the case, analyzing whether the firms actually went above and beyond in returning funds to shareholders.”

Finally, the authors suggest that Congress may want to revisit the lead plaintiff provision of the PSLRA. The provisions were written in order to encourage institutional investors to become lead plaintiffs so that the investors could take charge of the cases and ensure that the best law firms are brought in to litigate the cases. The authors suggest that their research “casts doubt on whether institutional plaintiffs are performing this role effectively.”

Discussion

I have no qualifications to assess whether the “inverse propensity score weighting” technique the authors used to balance out the different case characteristics of the cases led by top-tier firms and the cases led by lower-tier firms validly reduces the differences sufficiently to allow the outcomes of the cases to be compared.

However, I do have perspective on another key part of the authors’ analysis. An important part of the authors’ analysis is the categorization of plaintiffs’ law firms between top-tier and lower-tier. The authors found that among the many law firms that have been involved in securities class action settlements only a smaller number have been involved in as many as ten settlements. From within this smaller number of firms, only 15 firms have average settlements in excess of $30 million. The authors designated these 15 firms as “top-tier.” The remaining firms with at least ten settlements but an average settlement below $30 million are categorized as “lower-tier.”

There is a certain numerical coherence to this approach. However, I do think it is a fair question to ask whether there really are as many as 15 plaintiff-side securities law firms that can be categorized as “top tier.” In my humble opinion, there are far fewer than 15 top-tier plaintiffs’ firms.  I have no way to show this, but my intuition tells me this: The inclusion of as many as 15 firms within the “top-tier” inevitably has the effect of diluting the analysis. Or to put it another way, the outcome of the authors’ analysis might would look different if the results of only the truly “top-tier” firms are considered.

I recognize I am attempting to insert a qualitative consideration into what is a very deliberately objective and numeric analytic process. But without refences to the qualitative consideration, it is hard for me to assess the conclusion that the “top-tier” firms don’t produce better outcomes; it may well be that the firms that qualitatively are the “top-tier” firms do in fact produce better outcomes, when the analysis is not diluted by the outcomes produced by other firms that are not qualitatively “top tier.”

On the other hand, it may be that I have no business whatsoever attempting to comment on the authors’ analysis. Even if I do have some familiarity with securities class action litigation, the exercise the authors have undertaken depends on a methodology that is entirely alien to me. For that reason, there is a good case to be made that I should forebear from commentary altogether. Moreover, their analysis has produced an unexpected conclusion that is worth consideration. Certainly, their question – that is, whether the plaintiffs’ lawyers matter – is an interesting and important one, and their analysis of this issue is sure to provoke further discussion of the issue. Along those lines, it would be interesting to hear the viewpoints of a wide variety of securities litigation practitioners of the question of whether the plaintiff’ lawyers matter.