The opinion of the court was delivered by: Walls, District Judge.
Lead Counsel, the law firms of Bernstein Litowitz Berger & Grossman LLP
("BLBG") and Barrack, Rodos & Bacine ("BRB"), petition the Court for an
award of attorneys' fees in the amount of 8.275% of the total settlement
fund (after deducting costs and expenses of litigation); a total fee
award of $262,468,857. One of three co-Lead Plaintiffs, the New York City
Pension Fund ("NYCPF"), and three other class members object to the
request. The requested fee is awarded and expenses in the amount of
$14,623,806 are allowed.
On April 15, 1998, Cendant announced that it had discovered accounting
irregularities in a former CUC business unit and that Cendant's financial
statements for 1997, and possibly earlier years, would be restated.
Thereafter, a number of purchasers of Cendant securities filed class
actions against Cendant and other defendants. On May 29, 1998, this Court
consolidated all of the actions then pending against Cendant under In re
Cendant Corporation [Securities] Litigation, Civ. No. 98-1664 (WHW).
On August 4, 1998, the Court appointed the New York State Common
Retirement Fund ("NYSCRF"), the California Public Employees' Retirement
System ("CalPERS"), and NYCPF as co-Lead Plaintiffs for the class action
against Cendant Corporation filed by those who held Cendant stock other
than PRIDES, another form of security issued by Cendant.
At that time, this Court announced the procedure it would use to select
lead counsel to represent the plaintiff class. The Private Securities
Litigation Reform Act ("PSLRA"), 15 U.S.C. § 77k, 77l, 77z-1, 77z-2,
78j-1, 78t, 78u, 78u-4, & 78u-5, attempts to protect the plaintiff class
to ensure that total attorneys' fees and expenses awarded by a court to
counsel for the plaintiff class do not exceed a reasonable percentage of
the amount of any damages and prejudgment interest actually paid to the
class. 15 U.S.C. § 77z-1 (a)(6); § 78u-4(a)(6). To implement the
objectives of the PSLRA, this Court determined that the selection of
counsel should be the subject of competitive, adversarial bidding. In re
Cendant Corp. Litig., 182 F.R.D. 144 (D.N.J. 1998).
The Court invited any attorney who wanted to be lead counsel for the
class of shareholders excluding the PRIDES-holders to submit a sealed bid
to the Court.*fn1 Fifteen law firms from around the country submitted
twelve separate bids which, among other requirements, described their
professional qualifications and ability to undertake and maintain all
costs of the litigation. The Court reserved the right to reject any bid
which it deemed not to have been made in good faith or which was contrary
to the interests of either plaintiff class. Id. Recognizing that the
PSLRA gives Lead Plaintiffs the statutory opportunity to choose their
counsel, subject to Court approval, the Court gave Lead Plaintiffs'
original counsel the right of first refusal: if plaintiffs' original
counsel was qualified and had not submitted the lowest qualified bid, it
would be given the opportunity to agree to the terms of what the Court
had found to be the lowest qualified bid. Bidders BLBG and BRB, the
original counsel for co-Lead Plaintiffs, exercised that right and
accepted the terms and fee bid schedule which the Court had determined to
be the lowest qualified bid to represent the class. On October 13, 1998,
the Court appointed BLBG and BRB as Lead Counsel for the class.
Lead Counsel assert that the 8.275% request "adheres precisely to the
market-established fee grid, which the Court
determined was the lowest qualified bid." Lead Counsel seek fees under
the second column of the fee grid, because settlement was reached during
discovery — after motions to dismiss and before the summary
judgment stage. They further seek the sum of $14,623,806 (plus interest)
as reimbursement of costs and expenses incurred during prosecution. The
amount includes a $13,208,151 fee of Lazard Frères & Co., an
investment banking firm hired by Lead Counsel for its expertise; $271,560
charged by the damages expert, Forensic Economics, Inc.; $349,881 to
compensate an accounting firm, Marks Paneth & Schron LLP; $250,000 to
another investment banking expert, Arthur S. Ainsberg; and $528,812 in
law firm expenses.
B. Lead Counsel's Analysis of Fees in Large Class Actions
Lead Counsel state "[t]he Supreme Court has . . . consistently held
that the percentage [of settlement fund] approach is the correct method
for determining attorneys' fees in common fund cases." LC Brf. at 9
(citing Blum v. Stenson, 465 U.S. 886, 900 n. 16, 104 S.Ct. 1541, 79
L.Ed.2d 891 (1984)). They rely, in part, on the conclusions of a report
issued by the Third Circuit Task Force which analyzed court-awarded
attorneys' fees (the "Task Force Report"). See Court-Awarded Attorney
Fees, Report of the Third Circuit Task Force, 108 F.R.D. 237, 255-56
(Oct. 8, 1985). That report criticized the lodestar method of awarding
fees and recommended:
that in the traditional common-fund situation and in
those statutory fee cases that are likely to result in
a settlement fund from which adequate counsel fees can
be paid, the district court, on motion or its own
initiative and at the earliest practicable moment,
should attempt to establish a percentage fee
arrangement agreeable to the Bench and to plaintiff's
counsel. . . .
In 1995, the Third Circuit expressly determined that a percentage of
recovery approach was the most appropriate method of fee calculation in
common fund cases. See In re General Motors Corp. Pick-Up Truck Fuel Tank
Prods. Liab. Litig., 55 F.3d 768 (3d Cir.), cert. denied, 516 U.S. 824,
116 S.Ct. 88, 133 L.Ed.2d 45 (1995); see also In re Prudential Ins. Co.
of Am. Sales Practices Litig., 148 F.3d 283, 332 (3d Cir. 1998), cert.
denied, 525 U.S. 1114, 119 S.Ct. 890, 142 L.Ed.2d 789 (1999).*fn2 Courts
approve of the percentage recovery fee award because it "more accurately
reflects the economics of litigation practice" and is "result-oriented."
Swedish Hosp. Corp. v. Shalala, 1 F.3d 1261, 1269 (D.C.Cir. 1993).
Importantly, Congress, by the PSLRA, adopted the percentage of recovery
method. 15 U.S.C. § 78u-4(a)(6) states: "Total attorneys' fees and
expenses awarded by the court to counsel shall not exceed a reasonable
percentage of the amount of any damages and prejudgment interest actually
paid to the class." This admonition was recognized by this Court at the
time it adopted the auction process — "To seek the requisite
reasonableness of costs for such talent which is to be borne by the
entire plaintiff's group in this case in the event of recovery, it is my
judgment that legal fees also be the subject of adversarial competition."
Transcript of August 4, 1998 Hearing at 109-114 (emphasis added).
Lead Counsel ask the Court to adhere to the bid resulting from the
auction. They quote from the transcript of the August 4, 1998 Hearing and
the Court's "auction opinions" issued September 8, 1998 and October 2,
1998. Then the Court said that the lowest qualified bid would be the
"benchmark of reasonableness" for determining an eventual award of fees.
lodestar, the Court declared "under no circumstances will I permit
lodestar to be used in this litigation." Tr. at 26. It continued, "I have
known people who, given a problem, could solve it in 45 minutes. Whereas
I might take two hours. And some other person might take two and a half
hours. And in that sense I'm an elitist because I feel as though the
person who is able to settle the case, settle the problem in 40 minutes
should not be penalized." Tr. at 44-45. This reasoning was later
clarified at the fairness hearing of June 28, 2000. See Fairness Hearing
Tr. at 143 (June 28, 2000), quoted in n. 9.
The "lowest qualified bid," determined by the Court, provides for fees
ranging from 2%-9% of recovery. As the recovery rises, the fee percentage
increases. Lead Counsel support this methodology and refer to Professor
John C. Coffee, Jr.'s declaration submitted to the Court in August 1998:
My point is that the first dollars in any settlement
are easy, while the marginal dollars become
progressively harder. An optimal fee formula should
reward the attorney for working harder and gaining
more for the class. This does not mean that the
attorneys will necessarily receive more money. A fee
formula that starts low (at 5% to 10% and ascends to
25%) may produce the same (or lesser) compensation as
one that starts at 25% and then descends to 5%
— but it will clearly work better to discourage
"cheap" early settlements. . . .
Coffee Decl. at ¶ 18. Lead Counsel further assert that the structure
adopted by auction should not now be "renegotiated."
Lead Counsel argue that irrespective of the auction process, 8.275% of
the recovery, net of expenses, is reasonable in relation to other awards
in class action cases. The General Motors court noted that "fee awards
have ranged from nineteen percent to forty-five percent of the settlement
fund." 55 F.3d at 822. Counsel also surveyed fees awarded by judges
within the districts of the Third Circuit which routinely were between
30-35% of the settlement. Brf. at 23-24, 23 n. 8. A study by the National
Economic Research Associates ("NERA") done in 1994, and updated in 1996,
concluded "[r]egardless of case size, fees average 32 percent of the
settlement. This finding holds even for cases with settlements in excess
of $50 million." See Denise Martin et al., National Econ. Research
Ass'n, Recent Trends IV: What Explains Filings and Settlements in
Shareholder Class Actions? 10-11 (NERA 1996).
Lead Counsel focus first on fees awarded in larger securities class
actions — cases where the class recoveries ranged from $62-$220
million. Awards for these cases ranged from a low of 20% in the case with
a $200 million recovery to a high of 33.3% for cases with recoveries of
$77.5 million and $110 million. Brf. at 24-25 (chart).
They also survey recoveries in what they label "mega-fund" cases
— billion dollar plus recoveries: In re NASDAQ Market-Makers
Antitrust Litigation, 187 F.R.D. 465 (S.D.N.Y. 1998) ($1.027 billion
recovery); Shaw v. Toshiba America Information Systems, Inc.,
91 F. Supp.2d 942 (E.D.Tex. 2000) (estimated $1.1 billion); and various
cases against tobacco companies brought by certain states ($17.3 billion
in Texas, $13 billion in Florida, and $4 billion in Mississippi). The
NASDAQ fee was 14%, plus expenses of the recovery; the Toshiba fee was
approximately 15% of recovery; five firms litigating in Texas on behalf of
the state against the tobacco industry will receive 19% of the state's
recovery; eleven firms in Florida will receive approximately 25% of the
recovery; and thirteen firms in Mississippi, 35% of the recovery. The
Toshiba court noted that in "mega-fund cases, where recoveries are very
large, fees in the neighborhood of fifteen percent (15%) are common." 91
F. Supp.2d at 989.
Co-Lead Plaintiff, NYCPF ("the city"), objects to the fee request. This
objection arises from events of June 1998. The fund alleges that during
that month, it, together with co-Lead Plaintiffs CalPERS and NYSCRF,
entered into a detailed retainer agreement with BLBG and BRB. The fourth
section of that agreement contains a fee grid. Fees were based on a
percentage of the amount recovered with the fee percentage decreasing as
the recovery increased. The percentages set in this agreement were
maximum awards or "fee caps": "The fee will be a function of both the
timing and size of the recovery but, unless agreed to by the Funds, will
in no event exceed the following: . . ." Retainer at 2 (emphasis added).
The agreement further states: "In any event [Lead Counsel] will not
submit any fee application to the Court without the prior approval of the
Funds. . . ." Retainer at 2.
At the hearing on August 4, 1998, Max Berger of BLBG referenced the
retainer agreement to argue that Lead Plaintiffs rightly and responsibly
selected BLBG and BRB as counsel — "not only did they [plaintiffs]
engage in an extensive process in the selection of best counsel . . . but
in addition, your Honor, have negotiated the best fee probably ever
negotiated in advance . . . . the hardest bargain ever driven in a
security fraud class action case." Tr. at 8, 12. On August 4, the three
funds were appointed co-Lead Plaintiffs and the auction was instituted.
The Court stated "[s]uch [auction] will probably result in reduced costs
for the entire group or groups." Tr. at 110. (The city now argues that
the anticipated "reduced costs" were not realized but rather resulted in
"an increased cost to the class of $76 million." Brf. at 5.)
According to the city, "Lead Plaintiffs were extremely disturbed by
[the auction]" and "even discussed pulling out of the case." Pugh Decl.
at ¶ 15. The city now argues that it wrote to the Court on August
17, 1998 to suggest "several considerations that we believe are crucial
to obtaining the best representation at the lowest price." Letter at 1.
In a footnote they added "we recommend that any numbers/percentages in
the grid be established as fee caps only, with the actual fee subject to
approval by Lead Plaintiffs before submission to the Court."
As noted, BLBG and BRB, although bidders, were not the lowest bidders,
but agreed to match the lowest bid of a qualified bidder.*fn3 The city
has since reviewed the bids placed and maintains that "[i]t does not
appear that lead counsel bid the same percentages as the mileposts it had
agreed to in the Retainer." Brf. at 6; Pugh Decl. ¶¶ 10, 19. It is
clear that the city's fee grid decreased the percentage-of-recovery
allocated as fees as the recovery increased, while the auction-set fee
increases with the size of recovery. The city now alleges that
post-auction it made an off-the-record objection to the use of the Court's
fee schedule because of the existing retainer agreement. Pugh. Decl.
¶ 19. "To the best of Mr. Pugh's [the Assistant Corporation Counsel,
City of New York] recollection, the Court agreed that the Retainer was in
full force and effect except as to the grid for which the results of the
auction would take precedence. The Court acknowledged that the grid
represented a cap." Brf. at 7. The Court denies that recollection of Mr.
Pugh. When asked by Mr. Pugh, who, with others, was walking out of
chambers at the time, if the auction bid prevented Lead Plaintiffs from
negotiating a lower fee in the future, the
Court remarked "go ahead, if you can." (And Mr. Pugh never reported back
to the Court.) That is altogether different from Court approval of a
retainer agreement made before the auction, the details of which had not
The city now asks the Court to reject the fee sought and set a
"reasonable" fee; or to hold an evidentiary hearing to determine the
appropriate fee; or to reinstate the retainer agreement and ask Lead
Counsel to negotiate a fee with Lead Plaintiffs pursuant to the terms of
The city states that it agrees with the percentage-of-recovery fee
method of fee calculation but argues that In re Prudential Insurance Co.
of America Sales Practices Litigation, 148 F.3d 283, 334 (3d Cir. 1998),
cert. denied, 525 U.S. 1114, 119 S.Ct. 890, 142 L.Ed.2d 789 (1999),
limits the acceptable percentage. There, the Third Circuit reversed an
award of 6.7% of an approximately $1.352 billion settlement and remanded
the fee determination to the district court judge to "set forth a
reasoned basis and conclusion regarding the proper percentage applicable
in this case . . . in light of the magnitude of recovery." 148 F.3d at
340. The city cites the Prudential district court, which noted that
"percentage awards generally decrease as the amount of the recovery
increases. See In re Prudential Ins. Co. of Am. Sales Practices Litig.,
962 F. Supp. 572, 580 (D.N.J. 1997), vacated and remanded, 148 F.3d 283
(3d Cir. 1998), cert. denied, 525 U.S. 1114, 119 S.Ct. 890, 142 L.Ed.2d
789 (1999). On appeal, the Third Circuit agreed with this premise, but
"question[ed] whether the `reduction' implemented "adequately adjusted
the fee in relation to the size of the settlement." 148 F.3d at 339. The
Circuit Court found that the 6.7% fee represented a higher percentage of
recovery than fees in cases with smaller recoveries examined by the trial
court — for example a 4.1% fee with a recovery of $183.8 million
(In re Baldwin-United); a 5.5% fee of $180 million (Agent Orange); and 7%
of a $205 million settlement (MGM Grand). See id. at 339 n. 118 (citing
The city also claims that lodestar must be used as a "cross-check" on
the reasonableness of a percentage fee in common fund cases. It contends
that Lead Counsel's lodestar indicates that an 8.275% recovery is clearly
unreasonable. Here, according to the city, the requested fee is 32.7
times lodestar or $10,861 per hour. "The highest multiplier the City
Pension Funds have been able to find in the Third Circuit is 9.3 times
lodestar." Brf. at 14 (citing In re Prudential, 148 F.3d at 340
(referencing Weiss v. Mercedes-Benz, 66 F.3d 314 (3d Cir. 1995))). (Time
records through December 31, 1999 show that counsel had spent 20,208
hours, a $6,701,557 lodestar. Lead Counsel now estimate that to date
lodestar is approximately $8 million.*fn4)
The city contends that such a high fee award/lodestar multiplier is
also unreasonable where, as here, "[l]iability . . . was a foregone
conclusion." They cite to the (recently unsealed) bid opinion of October
1998 which states: "Basic liability in this case has been conceded by the
major corporate defendant. No one needs to be reminded that it was
Cendant's public admission on April 15, 1998 that spawned this
litigation." In re Cendant Corp. Litig., 191 F.R.D. 387 (D.N.J. 1998).
Scrutiny of this case, argues the city, "reveals no justification for an
enhancement of attorneys' fees in light of the low contingency risk in
this case." Brf. at 16. Moreover, the city attributes at least some of
the recovery not to counsel but to experts' input for which the class
will pay dearly. See In re Oracle Securities Litig., 136
F.R.D. 639, 644 (N.D.Cal. 1991); Pugh Decl. ¶ 22.
The city then argues that the results of the auction are not set in
stone: "There is nothing in the Court's orders that requires lead counsel
to apply for fees in accordance with the Court's auction grid and we
would have expected our attorneys to honor the terms of the Retainer and
to have sought our approval before submitting their fee application."
See 182 F.R.D. 152 ( "The auction will not obviate the Court's final
review of fees and costs pursuant to Rule 23(e).").
The city addresses the auction process. "[A]nother way of looking at
the Court's non-binding auction is to view it as a process to determine
which counsel will work for the lowest fee; and not as establishing
precisely what that fee will be. As it turned out, the counsel chosen by
lead plaintiffs agreed to work at the fee determined by the Court to be
the `lowest' fee. We now know that the `lowest' fee is that specified in
Finally, the city argues that the auction was an unnecessary intrusion
into the rights and duties of Lead Plaintiffs under the PSLRA. The PSLRA
specifies that the party "most capable of adequately representing the
interests of class members" should serve as Lead Plaintiff.
15 U.S.C. § 77z-1(a)(3)(B)(i), 78u-4(a)(3)(B)(i). Usually this means
the party or parties with the largest financial stake in the litigation.
§§ 77z-1(a)(3)(B)(iii)(I)(bb), 78u-4(a)(3)(B)(iii)(I)(bb). The act
further provides that "the most adequate plaintiff shall, subject to the
approval of the court, select and retain counsel to represent the class."
§§ 77z-1(a)(3)(B)(v); 78u-4(a)(3)(B)(v). The city reads this to mean
that "the only time lead counsel's right to choose class counsel should
be interfered with is when the court deems that choice adverse to the
interests of the plaintiff class." See In re Milestone Scientific
Securities Litig., 187 F.R.D. 165, 176 (D.N.J. 1999). Here, it asserts,
it had already selected counsel in a competitive manner, thus the Court
had no right to intervene. In fact, Lead Plaintiffs signed the retainer
agreement with BRB and BLBG after conducting their own bidding process.
Moreover, the retainer agreement safeguarded the rights of plaintiffs by
mandating that Lead Plaintiffs pre-approve all fee requests.
In conclusion, "[b]y substituting an auction and its own fee grid, the
court, in effect, nullified lead plaintiffs arm's-length negotiations .
. . . [i]n doing so the Court not only unnecessarily interfered with lead
plaintiff's attorney-client relationship with lead counsel . . . but ran
counter to the policies at the heart of the Reform Act."
The Joanne A. Aboff Family Trust ("the trust"), represented by the law
firm of Sirota & Sirota LLP, objects to the fee request on the grounds
that "it is grossly excessive and seeks unprecedented compensation."
First, the trust argues that the settlement documents do not contained
sufficient information regarding the lodestar figure — "based on
the information provided, class members have no way to compare the fee
with the amount of work actually performed since the number of hours
worked was not stated in the [Settlement] Notice or in the fee
application." (The trust estimates that the fee sought is 33 times
Second, the trust contends that it should have been provided with
information on competing bids in order to make an informed objection to
the fee request.
Third, the trust argues that the fee is "excessive" and "outrageous."
The trust cites to In re Prudential that percentage of recovery fee
awards should decrease as the size of the recovery increases. 148 F.3d at
339. Here the percentage increases with the recovery. For many of the
same reasons presented by the city, the trust states that 8.275% is far
above other mega-fund recoveries.
The trust further argues that once the fee request is cross-checked
against lodestar, the "magnitude of the windfall sought by lead ...