Fee request in BofA case is ammo for plaintiffs’ critics
Remember the vicious fight between plaintiffs’ lawyers in competing New York and Delaware derivative suits against Bank of America’s board? In April, plaintiffs in the federal case in New York reached a proposed $20 million settlement with the defendants, which prompted their Delaware Chancery Court rivals to scream that the New York lawyers were settling on the cheap after an inadequate investigation. They attempted in both Delaware and New York to block the deal, arguing that the derivative suit should be worth as much as $500 million, but failed to enjoin the settlement. On Thursday, plaintiffs’ lawyers in the New York case filed a motion for preliminary approval of the $20 million deal.
A whopping $13.6 million of the money, they said in the motion, should go to them for fees and expenses. That’s 68 percent of the entire settlement, which will be paid by one of BofA’s carriers of directors and officers insurance. This, folks, is what breeds skepticism about shareholder litigation.
Let me say upfront that it’s not completely outside the realm of possibility that the fee request is justified. Lead plaintiffs’ lawyers at Saxena White and Kahn Swick & Foti made what appears to be a tactical decision to divide the fee issue from the settlement approval process, so they’ll file a formal motion for approval of their request for $13 million in fees and $600,000 in expenses after the settlement itself gets a thumbs-up from U.S. District Judge Kevin Castel. Thursday’s filing said only that the plaintiffs’ lawyers have sunk 24,000 hours into the litigation, representing $10.4 million in time, and that they deserve a 25 percent enhancement of their hourly billings. (Just as an FYI, there are 8,760 hours in a 365-day year, and this case was filed in 2009.) I left phone messages with four partners at Saxena and Kahn Swick, as well as with liaison counsel Curtis Trinko of the Law Offices of Curtis V. Trinko, requesting more information on what they did in those 24,000 hours. None of them called me back.
It’s notable, however, that the defendants plan to contest the $13 million fee application, according to Thursday’s filing. (The defendants are represented by Davis Polk & Wardwell.) You don’t see that a lot in securities settlements, in which defendants almost always stay out of the court’s consideration of appropriate plaintiffs’ fees. Here, by contrast, BofA’s board and its D&O insurers are willing to pay for Davis Polk to litigate against the fee request – even though the plaintiffs’ fees would come out of the $20 million they’ve already agreed to pay to settle the case. That’s truly putting your money where your mouth is.
It’s also notable that the plaintiffs’ firms in the competing Delaware derivative case previously accused their New York counterparts of riding on the coattails of lawyers in the much bigger shareholder securities class action against BofA. That case, which accuses BofA of failing to disclose Merrill’s bonuses and looming losses to shareholders before they voted on the acquisition, was consolidated with the derivative suit for discovery. And, according to counsel in the Delaware derivative suit, the New York derivative lawyers rarely took a lead role in depositions, deferring to plaintiffs’ lawyers in the securities class action. (I called Delaware counsel at Chimicles & Tikellis; Horwitz, Horwitz & Paradis; and Wolf Haldenstein Adler Freeman & Herz to ask about the New York fee request but didn’t hear back.) Given the volume of documents and testimony in this heavily scrutinized and widely investigated deal, it’s possible that many of the 24,000 hours the New York derivative suit lawyers spent on the case were dedicated to reading the work product of other counsel.
Of course, the New York derivative case did survive a defense motion to dismiss, and plaintiffs’ lawyers engaged in mediation to reach the $20 million settlement. They also logged many hours writing briefs to defend their settlement against attacks by the Delaware lawyers. I’ll be interested to see if they include those hours in their billings on the case, which would have a sort of hall-of-mirrors quality: justifying your fees by pointing to briefs you wrote to justify your work.
One of the big complaints about derivative litigation is that it doesn’t actually benefit shareholders. The cases, remember, are brought against directors and officers in the name of the corporation, and whatever D&O insurers (and very, very occasionally individual defendants) pony up in settlements goes back into the corporate treasury. Clearly, the $20 million in this case isn’t going to make a big difference to Bank of America. So if we’re going to be cynical, who cares if $13.6 million goes to the plaintiffs’ lawyers and only $6.4 million to the bank?
But I’d argue that everyone who believes in the value of shareholder litigation should care about this fee request. Cynicism is your enemy. You should be as accountable as the corporations, boards and directors you sue. It’s not enough to say that your fees and expenses must be approved by judges – they also have to pass the smell test. And I suspect that a request for $13 million in fees on a $20 million deal needs some strong perfume.
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