A Brief Explanation of the Economics of Secuirities Lawsuits

Forbes quotes Center for Class Action Fairness' Ted Frank on how securities lawsuits work.

Frank represents an investor who objects to the $16.5 million fee Robbins Geller is seeking for negotiating the settlement with Wyeth, which would consume a quarter of the settlement and represents a multiple of more than four times the amount the firm claims to have invested in the case (which likely includes a hefty markup already).

As Frank explains:

Thanks to the discovery stay, it is easy for PSLRA attorneys to act like hedge-fund managers or like card-counters in blackjack. The motion to dismiss is risky, but the plaintiffs’ attorneys can devote relatively small bets and investments to the early part of the case. If they lose the motion to dismiss, the loss is pretty small. But once they survive the motion to dismiss, the odds are better than 4:1 in their favor on average, and they can load up the lodestar with as much discovery as the other side will tolerate. Moreover, plaintiffs’ attorneys can pick and choose which cases to put resources into, and will naturally choose the cases that are more likely to have a large settlement—just like a blackjack player will double down on an 11, but not on a 12. Thus, it is very rare for PSLRA attorneys to devote tens of thousands of hours to a case and be unable to settle for an amount that pays their lodestar in full. The decision to invest an hour of an attorney’s time is made on an ongoing basis as the case continues—and the decision to invest time is considerably less risky after a motion to dismiss is resolved favorably than before. If class counsel is required to disclose how much lodestar they spend on securities cases before a motion to dismiss is decided and how much lodestar is spent after a motion to dismiss was denied, the Court will see a stark difference: in most cases settled after a motion to dismiss is resolved favorably, most of the hours in the case will have been devoted well after most of the risk of not settling had passed.

Read the full article at Forbes.