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Stable Fund Suit Settlement Sanctioned, But…

Litigation

Terms of a stable value fund settlement announced nearly two years ago have finally been approved – but not without a bit of controversy.

In November 2017, J.P. Morgan agreed to pay $75 million to resolve an ERISA class action suit in which the plaintiffs alleged that the firm breached its fiduciary duties by having 78 of its stable value funds “invest heavily” in proprietary bond funds – funds that the plaintiffs alleged were invested in “excessively risky, highly leveraged” mortgage-related assets. The suit, filed back in 2014, alleged that that J.P. Morgan’s stable value funds’ investment in the mortgage-related assets was not suitable for a stable value product and was not prudent given the “character and aims of stable value funds.”

Settlement Terms

Ultimately the terms of the settlement broke down into the customary buckets: 

  • Attorney fees - $25,000,000 (a third of the $75,000,000 Settlement)
  • Cost reimbursement - $1,468,795.86 in out-of-pocket expenses incurred during the litigation of this matter 
  • A “service award” for each of the class representatives (12 in this case, and $20,000 each)

In the settlement agreement memorandum, the plaintiffs estimated actual damages between $410 million and $555 million.

According to the judgment, notice of the multi-plan settlement required communication with 699,101 401(k) participants – and three objected. Of the three objections, one protested the reasonableness of the requested fees, and a second believed Defendants should pay the administrative costs of the Settlement to Class Members.

Turning his attention to those objections, U.S. District Judge Vernon S. Broderick noted that the traditional criteria in determining a reasonable common fund fee include: (1) the time and labor expended by counsel; (2) the magnitude and complexities of the litigation; (3) the risk of litigation; (4) the quality of representation; (5) the requested fee in relation to the [recovery]; and (6) public policy considerations. He concluded that, “…consistent with “a jealous regard to the rights of those who are interested in the fund,” that all six factors were satisfied, and “the fact there were only two objections to fees and costs, support a one-third (33%) attorney fee award of $25 million.” 

Counsel Compensation

A frequent concern in these cases is the size of the award for plaintiffs’ counsel. Here Judge Broderick noted that the Declarations and Exhibits submitted with the Motion “demonstrate that Class Counsel expended 26,952 hours over seven years of litigation, with a total lodestar (I’ll explain in a minute) of $17,644,916, and advanced out-of-pocket costs of $1,468,795.86.” This, Judge Broderick noted, constituted the commitment of “very significant time and resources in prosecuting this action, all with no guarantee of payment.” Moreover, he noted that the case “was exceedingly difficult and complex and of considerable scope and extraordinarily long duration,” and that “counsel faced very high risks of non-recovery from the inception of the case in 2012 through the Settlement reached in 2018, including merits risks, and risks proving damages that could have resulted in zero recovery for the Class and Class Counsel” – and “at a time that avoided the risk that some or all of the Class’ claims could have been decided adversely in conjunction with the Defendants’ pending motion for summary judgment.”

Judge Broderick also noted that “Public policy considerations weigh in favor of granting the requested fees,” including the “social and economic value of class actions, and the need to encourage experienced and able counsel to undertake such litigation.” Then, citing that this was “especially true in ERISA class actions,” Judge Broderick went on to write that “this case had an extra contribution to the public interest—even beyond the typical public interest attendant to ERISA class actions: acting in lieu of enforcement by the U.S. Department of Labor, thus saving scarce public resources.”

I kid you not.

In concluding, Judge Broderick noted that this award “compares very favorably” to awards in other ERISA class actions within this circuit, the “overwhelmingly positive” response by the class (“with roughly 699,1010 notices sent and only a very small number of notices returned as undeliverable,” as well as only two objections), and the timing of payment (within 10 days of settlement).

Regarding another key factor in ascertaining reasonableness – Judge Broderick explained that when a percentage-of-the-fund approach is used, the Court may also use a lodestar “cross-check” based on a summary of hours to test the reasonableness of the percentage. He then explained that, “based on Class Counsel’s reported lodestar of $17,644,916, the requested one-third award of the common fund equates to an implied multiplier of 1.4, which is in line with implied multipliers approved in other comparable cases in this Circuit and elsewhere” (citing In re Colgate-Palmolive Co. ERISA Litigation, 36 F. Supp. 3d 344, 353 (S.D.N.Y. 2014), where the mean lodestar multiplier in ERISA cases was 2.1).

So – what’s a lodestar “cross-check”? Quite simply it’s determined by multiplying the number of hours reasonably devoted to the case by a reasonable hourly rate – the latter may, of course, vary based on the geographical area, the nature of the services provided, and the experience of the attorneys. And, of course what’s deemed “reasonable.”

Got it? OK, hold on to that for a minute.

Objections Able?

Turning his attention to the two objections, Judge Broderick noted that Warren K. Holopigian objected to “…the imposition of the direct costs of processing and delivering associated with the distribution of the Underperformance Amount of every class member.” Basically, he argued that in using part of the settlement to pay for the administration of the restoration, the class members are being penalized for bringing the action (since if things had been done properly there would be no costs of restoring the losses – which wouldn’t have occurred).

To that, Broderick had a simple response: “neither the objectors nor the Court are allowed to pick and choose the terms of the Settlement they may desire to have modified. Instead, the question for the Court is whether the Settlement should be approved in total as proposed or rejected.” Moreover, he noted that it was “typical” for such costs to be paid from the settlement fund.

Then there was James Stringfield, who Judge Broderick noted identified four separate objections to the settlement, one of which (the largest) was that “[t]he award to the legal team is too large.” However, Broderick said that Stringfield’s objection “…ignores the 26,952 hours the firms expended prosecuting the case which were all at risk and with no compensation received for the past seven years. Instead, he looks only at the out-of-pocket costs Class Counsel advanced and claims the $25,000,000 fee sought is a 1429% profit ($1,750,000 x 1429% = $25,007,500).” But Judge Broderick noted that “as seen in Class Counsel’s fee petition, their lodestar has a value of $17,644,916 and they seek a modest multiplier of 1.4.”

As for the expenses (“adequately documented, were reasonably incurred in connection with the prosecution of this action, and are reasonable for a case of this complexity, scope, and duration, as they amount to less than two percent of the fund”) – and the service awards to the plaintiffs (“well-deserved, appropriate, reasonable in proportion to the total amount of the Settlement, and in line with those awarded in other cases”) – well, Judge Broderick found no issue with them, either.

And approved the settlement.

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