Special Master Recommends Return Of $10.6 Million In Attorneys' Fees To Class Members

Former U.S. District Judge Gerald Rosen, the Special Master appointed to investigate alleged improper billing by class plaintiffs' firms in Arkansas Teacher Retirement System v. State Street Bank and Trust Company, recommended that the firms return up to $10.6 million of the $74.5 million in attorneys' fees awarded to them after reaching a $300 million settlement in the underlying class action. If upheld, the results of the Judge Rosen's report will likely have both negative and positive impacts. For example, it may create some barriers to the effective prosecution of plaintiffs' securities cases, but it also may lead to more detailed scrutiny of fee applications to the benefit of class members.

In his balanced Special Master's Report, Judge Rosen praised the "skilled and dedicated" plaintiffs' attorneys for six years of work leading to an "excellent" settlement of a complex case in which plaintiffs alleged that State Street engaged in unfair and deceptive practices in conducting foreign exchange transactions on behalf of its customers while failing to disclose mark-ups to clients from which State Street ultimately benefited.

In fact, Judge Rosen found that, "all other things being equal, the attorneys' fee award [of nearly $75 million] was fair, reasonable and deserved." However, according to Judge Rosen, "all other things were not equal." The investigation—which spanned over 14 months, cost $3.8 million, and encompassed written discovery, production of 200,000 pages of documents, 34 witness interviews and 63 depositions—resulted in, according to Judge Rosen, "a mixed narrative of good intentions, great talent, and undeniable accomplishment and result, undermined by serious albeit inadvertent mistakes compounded by a troubling disdain for candor and transparency that at times crossed the line into outright concealment of important material facts."

Double-Billing for Staff Attorneys in Lodestar Petitions

Judge Rosen's investigation arose after the Boston Globe notified one of the firms on November 8, 2016—less than one week after the Court approved the $300 million settlement—of its intent to publish an article revealing that class plaintiffs' firms, each and separately, included duplicative staff attorneys' names and billable hours (totaling 9,322.9 hours) in their lodestar reports. After conducting internal reviews, the plaintiffs' firms unanimously agreed that the double-billing resulted in a lodestar overstatement of $4,058,654.50. In response, one plaintiffs' firm submitted a November 10, 2016 letter to the Court explaining that the errors were inadvertent. (According to the docket, after submitting this letter, but before receiving a response from the Court, on December 8, 2016, the firm instructed its bank to disburse the fees, expenses, and service awards approved by the Court to plaintiffs' firms. The docket does not reveal any notice to the Court of the firm's intention to request these disbursements, despite them reporting the overstatement to the Court a few weeks prior.)

Judge Rosen ultimately agreed—finding that the "mistakes made were largely inadvertent," and attributing the errors to a combination of one firm's internal compartmentalization of its litigation practice and a lack of any formal agreement between the firms as to their sharing of staff attorneys. Judge Rosen explained that this firm's internal compartmentalization resulted in the preparation of the fee petition by a partner "who was not involved in the litigation, and knew nothing of the [staff attorney] cost-sharing arrangement" between the firms. Accordingly, Judge Rosen recommended that the firms should be required to return the entire lodestar overstatement of $4,058,654.50 in equal shares to the class.

In its June 29, 2018 objections to Judge Rosen's report, one plaintiffs' firm took exception to the recommendation that the firms should split the overstatement equally. In so arguing, the firm pointed to the fact that: (1) it received 24% of the total fee award in the State Street case; (2) it has paid 24% of the court-ordered costs for Judge Rosen's investigation; (3) it was responsible for only 21% of the total double-counted lodestar; and (4) the portion of the double-counted lodestar for which it was responsible is only 2% of the total aggregate...