Backdating and Legal Fees

With the legal troubles of Bill Lerach and his former firm, Milberg Weiss, in the news, there has been a tendency to look at the plaintiffs bar as if it brought improper law suits, no doubt motivated by a large pay off.  Whatever troubles Bill Lerach may have engendered, his actions do not diminish the merits of the cases he brought.  But when plaintiffs ask for fees, they often have to fight for them and sometimes undergo substantial cuts.

Often overlooked are the fees generated by defense counsel.  Remember, they do not take the cases on a contingency fee basis and, as such, incur no meaningful risk of non-payment.  Moreover, companies usually rely on highly skilled but very expensive firms that often specialize in defending securities or derivative suits.  We know how much plaintiffs are paid because the court has to approve any request for fees.  We often do not know how much defense counsel is paid.

With that, we note an interesting article from Law.com about the fees paid to defense counsel in backdating cases.  According to the article, Brocade has so far paid $65 million in fees, a number that may swell to $100 million.  Similarly, Mercury "spent an astounding $72 million on legal fees, as of June 30, 2006."  Others included the $36.8 million paid by KLA-Tencor and the $32 million paid by Monster.

In other words, we hear plenty of complaint about the fees paid to those representing shareholders and investors but hear a lot less complaining about fees paid to defend companies and management. 

Comments

[M.D. Fatwa]

Seems unlikely that you are going to complain about your own lawyers fees in court, unless you never plan on using that lawyer (or his or her friends, acquaintances, law school buddies, etc.) ever again. For most corporations, that seems unlikely. More likely is that they will argue over fees with the firm once the case is over. That happens all the time. All that said, when corporations complain about tort cases, they aren't complaining just about the costs they pay out if they lose, but also the costs of defending against such suits.

[J. Robert Brown]

It seems to me that the common attitude is that counsel for plaintiffs in securities class action suits are overpaid and avaricious. This is supported by the amount of fees that they seek in cases. I think it would lead to a more balanced discussion to emphasize that counsel for the companies may actually receive higher fees than plaintiffs. Moreover, the fees paid to defense counsel likely reduce the face amount of the D&O insurance, usually the source of most settlements. This means that the more that is paid to defense counsel, the less that is available to shareholders.