The fight goes on, over legal fees. (Photo credit: Wikipedia)
A federal judge in Manhattan this morning is scheduled to pry into the arrangements plaintiff lawyers have with contract attorneys who perform much of the grunt work in securities class-action cases but are paid a tiny fraction of court-awarded fees.
Judge Colleen McMahon of the Southern District of New York will hear arguments over a $40.1 million fee that lawyers are seeking in exchange for recovering $219 million for investors who lost money through "feeder funds" that placed their money with Bernie Madoff.
New York Attorney General Eric Schneiderman has criticized the fee as excessive and "unreasonable," partly because it reflects thousands of hours of lawyer time he says were unnecessary given New York had already secured a $140 million settlement offer from Ivy Funds before the private lawyers did a lot of their work.
To settle the question of how much the private lawyers are entitled to, McMahon has taken the unprecedented -- but hardly unreasonable -- step of requiring the private firms to submit not only detailed billing records but the fees they paid outside contract attorneys to work on the case.
Plaintiff firms have made a profit center out of such contract attorneys, who generally earn less than $50 an hour in New York yet can be billed to shareholders in class actions at as much as $1,000.
As I reported in another case involving Citigroup, Kirby McInerney has submitted a bill to the court that seeks $550 an hour for attorneys who, according to their resumes, in some cases have minimal legal experience or serious disciplinary actions against them. In conversations with lawyers who work in the contract trade, I have been told most agencies pay a fixed $32 an hour for working long hours in front of a computer, clicking on preformatted forms to identify whether documents should be investigated further or ignored.
The judge in the Citigroup case ordered Kirby McInerney to provide more detailed billing records, but stopped short of ordering the firm to disclose how much it actually paid its contract lawyers. Law firms argue they shouldn't be required to do so, any more than they should disclose the salaries of associates who are on their own payroll.
But in a March 7 letter to the law firms in the Madoff case, Judge McMahon went to the crux of the matter. She ordered the firms to answer questions including whether contract attorneys were used, the lowest amount of compensation paid to contract attorneys, the rate billed for those attorneys, and the highest rates paid contract attorneys. She also required the years of experience and where the outside attorneys worked.
Ethics rules in most states prohibit lawyers from charging excessive markups for legal services, and they are not allowed to mark up costs at all. Critics including Ted Frank of the Center for Class Action Fairness say contract attorneys should be treated like any other expense, including paralegals and secretarial services, and passed through at cost to the shareholders who are actually paying the fees. A key distinction is whether the outside lawyers work in a firm's offices, running up overhead, or work at the contract agency's offices where overhead costs are folded into their hourly rate.
In his objection, Schneiderman said the private firms claim they expended 118,000 hours of licensed J.D. time on the case, "an astounding number to develop the same body of evidence that the Attorney General developed in 6,000 hours."
The number is even more astounding in light of the fact that Class Counsel conducted their discovery with the aid of a 55-page complaint the Attorney General filed in New York State Supreme Court that set forth in minute detail the evidence adduced by the Attorney General in its investigation, and the documents and deposition testimony supporting the allegations.
The private effort required 110 lawyers and more than 67 staff and paralegals, the AG said, compared with three lawyers and support staff who combed through the identical set of documents and negotiated a $140 million settlement.
Judge McMahon expressed similar wonderment. "I confess I find it astonishing that plaintiffs could possibly have had 2 million documents to produce, but stranger things have happened," she said. "I need a lot more information about this," including what sorts of documents were produced, and whether the private lawyers discussed reducing the amount of paperwork that needed review. "I am concerned about the amount of time expended on these cases, especially since much of that time was expended on document production and review," she said -- the biggest moneymaker for plaintiff law firms, since they can hand the work to contract attorneys and mark it up 10 times or more.
In defense of the fees, lawyers at the lead plaintiffs' firm, Lowey Dannenberg Cohen & Hart, said the New York AG never told them about the $140 million offer from Ivy and "repeatedly rebuffed attempts to collaborate." The plaintiffs filed their suits 16 months before the NY AG, they said, and the private lawyers had to counter aggressive defense on every motion. The U.S. Labor Dept., which was involved because the plaintiffs were union pension funds, negotiated the fee down from 22% to 20%, Lowey said, saving the investors millions.
Ivy, a unit of NBY Mellon, allegedly placed pension funds in Madoff's Ponzi scheme without telling trustees essential facts including there wasn't enough options volume on U.S. exchanges to support Madoff's reported returns. The AG's office said the private lawyers, after fees, delivered only an additional $25 million beyond what the AG's office had already obtained.
