Setting Attorneys' Fees in Securities Class Actions : An Empirical Assessment

Previous studies of securities fraud class actions 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 rather than a union fund or individual investor. Those studies, however, have not explained the mechanism that underlies this reduction in agency costs. 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.To learn about the role that negotiated fee agreements play in the PSLRA's fee-setting process, we studied 134 securities fraud class actions that settled between 2007 and 2011 in the three federal district courts that processed the largest numbers of these cases (the Southern District of New York and the Central and Northern Districts of California). Our examination of the court filings in these cases revealed that fee agreements played little role in the lead plaintiff selection process, but were more important at the fee-award stage. On average, fee requests were smaller in cases with evidence of ex ante fee agreements than in cases without them (13.2% vs. 25.4%), a difference that remained statistically and economically significant in regressions when we controlled for other case characteristics. Judges cut the requested attorneys' fees in 19.7% of cases without evidence of an ex ante fee agreement but in only 5.9% of cases with such evidence, although this difference was not statistically significant because of sample size. Finally, the presence of a public pension fund as lead plaintiff may serve as a proxy for an ex ante fee agreement. Public pension funds correlated with statistically and economically significant reductions in fee requests and fee awards, and with greater judicial deference to class counsel's fee request