While prior securities fraud class actions studies under the PSLRA have found that class counsel’s fee requests and awards are lower in cases in which the lead plaintiff is a public institutional investor, prior work has not explained the mechanism that underlies this reduction in agency costs. Specifically, do public funds negotiate better terms with their chosen counsel ex ante than do other lead plaintiffs? Or are judges responsible for the reductions in agency costs, suggesting that the PSLRA may not be working as Congress intended. Lynn A. Baker (Texas), Michael A. Perino (St. Johns), and Charles Silver (Texas) take up these questions in Setting Attorneys' Fees in Securities Class Actions: An Empirical Assessment. A summary of their findings follows.
"To learn how the mechanism created by the PSLRA is working on the ground, we studied securities class actions that settled between 2007 and 2011 in the three federal district courts that processed the largest numbers of these cases: the Central District of California, the Northern District of California, and the Southern District of New York. Briefly stated, we found little evidence that ex ante fee agreements play a role in the process for selecting lead plaintiffs. At the settlement-approval and fee-award stages, however, we found that lawyers more frequently invoked such agreements to support their requested fee and that courts deferred to attorneys’ fee requests more often in cases with evidence of an ex ante fee agreement. We further found evidence of an ex ante fee agreement or of a proxy for such an agreement (specifically, the presence of a public pension fund as the lead plaintiff) to be correlated with statistically and economically significant reductions in fee requests and awards, as well as with greater judicial deference to the requested fee. Overall, the court awarded a lower fee than the class counsel requested in about 18% of the cases we reviewed, a somewhat higher percentage than we had anticipated."