Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-cand-3_02-cv-03510/USCOURTS-cand-3_02-cv-03510-0/pdf.json

Nature of Suit Code: 850
Nature of Suit: Securities, Commodities, Exchange
Cause of Action: 15:78m(a) Securities Exchange Act

---

United States District Court

For the Northern District of California

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IN THE UNITED STATES DISTRICT COURT

FOR THE NORTHERN DISTRICT OF CALIFORNIA

In Re HPL TECHNOLOGIES, INC

SECURITIES LITIGATION

 /

No C-02-3510 VRW

ORDER

By an order and judgments filed March 11, 2005 (Doc

##164-166), the court granted final approval to two settlements and

a plan of allocation in this securities fraud class action. In the

same order, the court reserved decision on lead plaintiff’s motion

for an award of attorneys’ fees and expenses to lead counsel. Doc

#164 at 9-12. The award of fees and expenses is to be paid out of

a common fund of $17 million and 7 million shares of HPL

Technologies common stock (“HPL stock”) -- the combined settlement

consideration from all defendants. Under the proposed fee award,

lead counsel would receive an award of 15% of the common fund

(taken in both cash and stock), plus lead counsel’s reasonable

expenses. The requested 15% award translates to $2.55 million and

1.05 million shares of HPL stock.

At first glance, such a percentage seems reasonable

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because fee awards in other cases have captured a larger portion of

common fund recoveries (although in still other cases, lower

percentage fee awards have been made). Furthermore, the fee here

is below what has, in some decisions, been characterized as the 25%

“benchmark” for common fund fee awards. See Paul, Johnson, Alston

& Hunt v Graulty, 886 F2d 268, 273 (9th Cir 1989).

For the reasons set forth here, the court rejects

reliance solely on a comparison of the percentage fee requested

here with other percentage awards or with a so-called benchmark

percentage. Merely comparing percentages overlooks the factors

that may make a certain percentage fee reasonable in one case and

unreasonable in another. And “a theoretical construct as flexible

as a ‘benchmark’ seems to offer an all too tempting substitute for

the searching assessment that should properly be performed in each

case.” Goldberger v Integrated Resources, Inc, 209 F3d 43, 52 (2d

Cir 2000). Moreover, the court has been admonished that “the

benchmark percentage should be adjusted, or replaced by a lodestar

calculation, when special circumstances indicate that the

percentage recovery would be either too small or too large in light

of the hours devoted to the case or other relevant factors.” Six

(6) Mexican Workers v Arizona Citrus Growers, 904 F2d 1301, 1311

(9th Cir 1990). So the circumstances that require adjusting the

percentage need to be considered.

Percentage awards are not meant to be a windfall for

class counsel at the expense of the class. Nor should “[a]

lawyer’s fee * * * be likened to a case of salvage, where reward is

given to the successful finder, * * * with little regard to how

much or how little effort the finder expended.” Klein ex rel

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SICOR, Inc v Salvi, 2004 WL 596109 at *11 (S D NY). An inspection

of the circumstances in this case indicates that the requested fee

is “too large in light of the hours devoted” and “other relevant

factors.” This conclusion -- based on the circumstances and facts

of this case -- is bolstered by the court’s review of the

literature which suggests that percentage-based fees in common fund

class actions systematically exceed lodestar-based fees. See, e g,

Theodore Eisenberg & Geoffrey P Miller, Attorney Fees in Class

Action Settlements: An Empirical Study, 1 J Empirical Legal Stud

27 (2004) (concluding that, controlling for other variables,

lodestar-based fees in common fund class actions are about 89% as

much as percentage-based fees).

The court can envision no defensible normative reason in

this case -- or indeed in common fund cases generally -- that the

amount of the fee ought to depend on the method used to compute it. 

Both methods should result in a “reasonable” fee, and

reasonableness cannot logically depend on whether the fee is

expressed as a percentage of the recovery or the product of hours

and rates. Hence, when counsel apply for a fee award on a

percentage basis, the requested award should approximate the fee

counsel would have claimed on a lodestar basis. The two fee

computations can be compared by a multiplier that, in the context

of lodestar fee awards, is thought to represent a premium on

counsel’s services reflecting the ex ante risk of taking the case

and the superior results achieved in the face of that risk.

Stated another way, a proposed percentage fee can (and,

for the reasons hereafter explained, should) be compared against

the fee that lead counsel would have been awarded on a lodestar

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basis. If the multiplier implied by that comparison is reasonable,

then the percentage-based fee request is reasonable as well; if the

implied multiplier is unreasonably high, then so is the proposed

percentage fee award. See, e g, In re GMC Pick-Up Tuck Fuel Tank

Prods Liability Litig, 55 F3d 768, 820-21 & n40 (3d Cir 1995)

(Becker, J) (describing the lodestar cross-check); Vizcaino v

Microsoft Corp, 290 F3d 1043, 1050-51 (9th Cir 2002) (approving a

district court’s use of a lodestar cross-check).

A lodestar cross-check of this type is now in common use

in district courts elsewhere in the country. See, e g, In re

Cendant Corp Securities Litigation, 109 F Supp 2d 285, 302 (D NJ

2000) (“Traditionally, the ‘appropriate’ percentage [fee award] is

* * * subjected to a cross-check.”), vacated and remanded by In re

Cendant Corp Litigation, 264 F3d 201 (3d Cir 2001); In re

Bristol-Myers Squibb Securities Litigation, 2005 WL 447189 at *3 (S

D NY) (citing Goldberger, 209 F3d at 50) (“Typically, courts

utilize the percentage method and then ‘cross-check’ the adequacy

of the resulting fee by applying the lodestar method.”). The

Manual for Complex Litigation (Fourth) endorses the lodestar crosscheck. Manual for Complex Litigation (Fourth) § 14.122 (FJC, 2004)

(“The lodestar is at least useful as a cross-check on the

percentage method by estimating the number of hours spent on the

litigation and the hourly rate * * *.”); id § 21.724. The court

heeds these authorities.

To that end, the court requested at the final approval

hearing on February 24, 2005, a lodestar computation from lead

counsel. Lead counsel complied the very next day. Barton Decl

(Doc #162). Upon review of the Barton declaration, which

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establishes a base lodestar fee of approximately $900,000, the

court requested more detailed information about the breakdown of

hours and billing rates of the attorneys at lead counsel’s firm. 

Because it was deferring decision on the attorney fee issue, the

court also requested further detail about the proposed award of

expenses. Lead counsel has satisfied both of the court’s requests,

Sidener Decl (Doc #167), and lead plaintiff’s motion for an award

of attorneys’ fees and expenses (Doc #142) is now ripe for

decision. These inquiries, and class counsel’s quick responses,

greatly aided the court’s consideration of what information is

necessary to make a lodestar cross-check work. It is apparent that

a fairly systematic, although not terribly difficult assessment of

the time devoted to a case and the value to be attached to that

time is required to enable a lodestar cross-check of a percentage

fee to comply with the Federal Rules’ mandate of reasonableness. 

See FRCP 23(h).

I

This case is governed by the Private Securities

Litigation Reform Act of 1995 (PSLRA). Accordingly, the court must

first determine what discretion (if any) it has under the PSLRA to

depart from an award of fees and expenses that is proposed by a

lead plaintiff. There is apparently no Ninth Circuit authority on

whether the court retains its usual authority under FRCP 23(h) to

fix an award of attorneys fees and expenses in a common fund class

action. Lead counsel have not contended that the court lacks its

usual authority, apparently assuming that the court possesses such

authority. The court has nevertheless considered the matter.

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Here, lead plaintiff did not negotiate a fee arrangement

with lead counsel immediately after lead plaintiff was selected. 

(By “fee arrangement,” the court refers to an agreement, such as an

individual plaintiff would make with an attorney, that provides for

compensation for the attorney’s work and an allocation of the outof-pocket expenses of litigation.) Rather, Frederick Stanske (a

Senior Vice President, Portfolio Manager and board member of lead

plaintiff) “personally approved of [l]ead [c]ounsel’s fee request

of fifteen percent (15%) of the settlement recovery.” Stanske Decl

(Doc #128) ¶8. Lead plaintiff has not weighed in on the proposed

award of expenses, and no further evidence on lead plaintiff’s

negotiation for or approval of the requested fee is before the

court. Such a superficial fee arrangement is apparently permitted

under the PSLRA, which with respect to fee arrangements requires

only that the lead plaintiff “shall, subject to the approval of the

court, select and retain counsel to represent the class.” 15 USC §

78u-4(a)(3)(B)(v) (emphasis added). The PSLRA says nothing about

when retention must occur; nor, for that matter, does “retain[ing]

counsel” necessarily involve concluding a fee arrangement.

As a matter of first principles, the earlier a fee

arrangement is concluded between lead plaintiff and lead counsel,

the more deference the court should pay to that fee agreement. 

This is because fee agreements set early in the litigation -- ex

ante, so to speak -- are more likely than ex post fee agreements to

be the product of market forces (i e, competition among counsel

proposing to represent the class). See, e g, In re Synthroid

Marketing Litigation, 264 F3d 712, 718-19 (7th Cir 2001)

(Easterbrook, J). Those same market forces are thought to result

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in reasonable fee agreements between attorneys and clients in

individual (i e, non-class) cases. The PSLRA’s lead plaintiff

provisions are largely built around an ideal of private ordering

and client-driven class-action litigation; it is therefore

plausible that the PSLRA implicitly counsels deference to fee

arrangements concluded early in the litigation. There is also

Judge Shadur’s wise observation that it is inappropriate -- indeed,

downright unfair to class counsel -- to take a fee arrived at by a

market-based mechanism (such as by a court-administered auction or

by arms’ length negotiation between lead plaintiff and lead

counsel) and subject it to further review by the court; such a

process will often leave class counsel with the worst of both

worlds. See In re Comdisco Securities Litigation, 150 F Supp 2d

943, 947-49 (ND Ill 2001).

But deference to lead plaintiff is unwarranted here

because of the lack of evidence that lead plaintiff and lead

counsel negotiated a fee agreement early in this litigation in a

way that reflects the market value of lawyer services. Rather,

lead plaintiff’s involvement seems to have been confined to an

endorsement of lead counsel’s proposed fee. (Of course, lead

counsel’s desire to secure that endorsement may have constrained

the fee requested here, but the court has no evidence of that

before it.) 

In any event, even if lead plaintiff had shopped around

for lawyer services and concluded a market-based fee arrangement,

there is no textual indication in the PSLRA that it supplants FRCP

23(h), which obligates the court to evaluate and approve all fee

awards in class actions. If anything, certain provisions of the

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PSLRA affirmatively command the court to remain involved in

approving lead counsel and lead counsel’s fees. See 15 USC § 78u4(a)(3)(B)(v) (requiring that lead plaintiff “shall, subject to the

approval of the court, select and retain counsel”); 15 USC § 78u4(a)(6) (“[A]ttorneys’ fees * * * awarded by the court * * * shall

not exceed a reasonable percentage [of recovery].”). The Ninth

Circuit has recognized this in dictum:

[A] lead plaintiff’s retainer agreement is far

from the final word on what counsel will

actually get paid, because class counsel must

first be appointed, “subject to the approval of

the court,” 15 USC § 78u-4-(a)(3)(B)(v), and in

the normal case (virtually the universal case)

where there is a settlement, the court must

approve the actual fees paid, subject to the

[PSLRA’s] lmitations. See 15 USC § 78u4(a)(6).

In re Cavanaugh, 306 F3d 726, 733 (9th Cir 2002).

Likewise, the Third Circuit’s attorney fee opinions

arising out of the Cendant Corp securities litigation recognize

that even under the PSLRA courts must still play the central role

in making fee awards. In In re Cendant Corp Litigation, 264 F3d

201, 285 (3d Cir 2001) (Becker, CJ), the court rejected the

district court’s use of an auction to select class counsel and

remanded for consideration of the presumptively reasonable fee

arrangement negotiated by lead plaintiff with lead counsel. Yet

the court noted that the fee under the retainer agreement was

“staggering in [its] size,” and mandated that “the possibility of

rebuttal of the presumption of reasonableness” attaching to the

negotiated fee arrangement “must be seriously considered * * * on

remand.” Id. Such an evaluation would be made “according to the

standards * * * previous cases have set down for class actions not

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governed by the PSLRA.” Id. And the most recent Cendant opinion

explained:

[W]hile the PSLRA certainly represents a shift

toward the traditional attorney-client

relationship, it has not wholly adopted that

paradigm. Securities class actions are still

class actions, and the court retains the power

to award fees. See Fed R Civ P 23(h) (“In an

action certified as a class action, the court

may award reasonable attorney fees * * * .”). 

And courts would be remiss if they abdicated

all responsibility to the lead plaintiffs. The

lead plaintiff is not the sole client in a

PSLRA class action; instead, the lead plaintiff

serves as a fiduciary for the entire class. A

court must therefore retain oversight over lead

plaintiff’s compensation decisions in order to

ensure that the lead plaintiff has fulfilled

its fiduciary duties.

In re Cendant Corp Securities Litigation, --- F3d ---, ---, 2005 WL

820592 at *18 (3d Cir) (Becker, J). The court will attempt to

follow this wise guidance.

The court concludes that even if the PSLRA requires

deference to lead plaintiff’s negotiated fee arrangement with lead

counsel, no deference is owed here. Furthermore, even when

deference is owed, lead plaintiff’s deal with counsel must still

square with objectively reasonable fees and expenses.

II

Deference or no deference, the award of expenses in this

case poses no problem. Lead counsel’s detailed breakdown of the

expenses incurred in this case, Sidener Decl (Doc #167) Ex B, and

their quite modest amount make it easy to conclude that counsel’s

expenses are reasonable. Accordingly, the court GRANTS lead

counsel an award of $59,434.57 in expenses, to be paid from the

cash portion of the common fund.

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III

Turning to the question of a fee award, the court

previously indicated that a fee of 15% of the common fund appears

at first impression reasonable. Doc #164 at 9; Doc #131 at 13. In

its order preliminarily approving an award of fees, the court

reflected this impression:

This is a common fund class action, and counsel

seeks * * * 15% of the class’s gross recovery,

which counsel will take in cash and HPL common

stock in proportion to the settlement fund. *

* * The court has been impressed with the

quality of plaintiff counsel’s representation

in this matter, and preliminarily finds the

requested fees and costs to be reasonable in

light of the nature of the case, the risks

involved in the litigation, the size of the

recovery and the negotiation process that led

to the fee agreement.

Moreover, the fee request is on the low

end of the fees recovered in comparable cases. 

The court undertook to analyze the data

compiled in Stuart J Logan, Jack Moshman &

Beverly C Moore, Attorney Fee Awards in Common

Fund Class Actions, 24 Class Action Rep 167

(2003), which provides data covering cases from

the mid-1970s to mid-2002. Specifically, the

court looked at securities class action cases

in the $10 to $20 million gross recovery range,

the $20 to $30 million gross recovery range and

the combined $10 to $30 million gross recovery

range. For those sets of cases, the range,

mean and standard deviation for the percentage

of the common fund devoted to attorneys’ fees

and costs were:

$20 to $30mm $10 to $20mm $10 to $30mm

Range 7.6% to 70.8% 7.6% to 55.6% 7.6% to 70.8%

Mean 27.7% 29.5% 29.0%

Std Dev 10.9% 9.0% 9.5%

The attorneys’ fees and costs sought here

represent, depending on the exact amount of

costs and the actual value of the HPL stock,

15.3% to 15.4% of the common fund. This places

the request in this case at the low end of the

ranges above. In fact, assuming normally

distributed fee awards, the attorneys’ fees and

costs sought here fall no higher than the 13th

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percentile of fee awards.

Doc #131 at 13:15-14:20.

Further consideration suggests that the court’s initial

impression was wrong. Application of the lodestar cross-check

makes plain that this first analysis -- which considered only

percentage-based fees and failed to take account of the nature and

amount of work put into the case -- is insufficient to ensure a

reasonable fee. Relying on percentages without reference to these

other factors can be, like blind reliance on benchmarks, an “all

too tempting substitute for the searching assessment that should

properly be performed.” Goldberger, 209 F3d at 52. Here, a

lodestar cross-check warrants a fee lower than that sought by lead

counsel.

In applying a lodestar cross-check, the court must first

determine the dollar value of the proposed percentage-based fee

award. In the typical case, this is straightforward, because

settlement consideration is delivered entirely in the form of cash. 

Here, however, a component of the settlement consideration is in

the form of HPL stock. Accordingly, the court must first value the

HPL stock in dollar terms.

A

While the HPL stock has a market price (since the

settlement, as high as $0.93 / share), that price appears something

of an illusion for valuation purposes, because the market for HPL

stock is highly illiquid and quite volatile. Although the court

has been unable to locate volume data, the stock is traded only on

the “pink sheets”; and in just the week following the issuance of

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the court’s final approval order, the stock traded as low as $0.72

/ share and as high as $0.93 / share. Thus, there is not only

considerable uncertainty about the market price of the stock, but

also the more fundamental uncertainty that lead counsel could

liquidate the million-plus shares they would receive under the

proposed 15% award.

Moreover, a common fund fee award serves to reward

counsel for creativity and skill in enlarging a settlement fund

beyond what was thought possible or likely at the inception of the

case. See, e g, Paul, Johnson, Alston & Hunt, 886 F2d at 271

(“Since the Supreme Court’s 1885 decision in Central Railroad &

Banking Co of Ga v Pettus, 113 US 116 (1885), it is well settled

that the lawyer who creates a common fund is allowed an extra

reward, beyond that which he has arranged with his client, so that

he might share the wealth of those upon whom he has conferred a

benefit.”). As such, it is worth recognizing the value of class

counsel’s efforts at extracting a considerable amount of

unconventional settlement consideration from defendants whose cash

resources were limited. Treating non-cash settlement consideration

as if it were cash can overstate the dollar value of counsel’s

proposed percentage fee and thus penalize class counsel. When noncash consideration is valued too dearly, the percentage fee when

cross-checked against a lodestar fee can make counsel a victim of

their own ingenuity. Thus, for reasons of proper deterrence,

effective incentives and fairness to counsel, it is appropriate to

place a very modest value on the HPL stock.

Accordingly, the court concludes that it is inappropriate

to value the HPL stock component of lead counsel’s fee award at its

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market price. Instead, the court will treat the HPL stock as worth

$0.20 / share -- a third to a fifth of its recent market price. By

this valuation, the court certainly expresses no view of the

stock’s actual value; the court simply must place some dollar value

on a large block of an illiquid security, and doing so at this very

substantial discount appears fair to counsel.

B

Valuing the HPL stock at $0.20 / share, the settlement

fund is worth $18.4 million ($17 million in cash and $1.4 million

in stock) and the court is confronted with a straightforward

lodestar cross-check exercise. The first step is to establish a

lodestar figure; the second step is to cross-check the proposed

percentage fee against this lodestar figure.

1

Three figures are salient in a lodestar calculation: (1)

counsel’s reasonable hours, (2) counsel’s reasonable hourly rate

and (3) a multiplier thought to compensate for various factors

(including unusual skill or experience of counsel, or the ex ante

risk of nonrecovery in the litigation). In performing a lodestar

cross-check, however, the multiplier is implied by the ratio of the

proposed percentage fee to the computed lodestar fee. For example,

for a proposed percentage fee of $250,000 and a corresponding

lodestar fee of $100,000, the implied multiplier is 2.5. This

implied multiplier may be assessed for reasonableness. 

Accordingly, the court need only consider counsel’s reasonable

hours and counsel’s reasonable hourly rate in computing the

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lodestar.

For hourly rates, the court will simply use current (i e,

2005) hourly rates; doing so simplifies the calculation and

accounts for the time value of money in that lead counsel has not

been paid contemporaneously with their work in this case. See

Vizcaino v Microsoft Corp, 290 F3d 1043, 1051 (9th Cir 2002)

(citing Gates v Deukmejian, 987 F2d 1392, 1406 (9th Cir 1992)

(“Calculating fees at prevailing rates to compensate for delay in

receipt of payment was within the district court’s discretion.”);

Fischel v Equitable Life Assurance Society, 307 F3d 997 (9th Cir

2002) (citing In re Coordinated Pretrial Proceedings in Petroleum

Products Antitrust Litigation, 109 F3d 602, 609 (9th Cir 1997))

(district court has discretion to compensate for delayed payment by

either applying current rates or applying historical rates with a

prime rate enhancement). Of course, the annual rise in an

attorney’s billing rate represents not only inflation but also the

increased experience of the attorney, if different hourly rates are

used (as the court does here) for lawyers of different experience

and billing rates. But the inflationary effect should not usually

grossly affect the lodestar calculation, unless the litigation is

greatly prolonged, and such is not the case here. (The problem of

“experience inflation” can be avoided altogether by the use of a

“blended” hourly rate, which as explained presently has other

advantages.) At any rate, the relevant data are these:

/

/

/

/

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Attorney Experience 2005 Billing

Rate (per hr)

Total

Hours

Total

lodestar

Sidener 20 years $510 1027.50 $524,025.00

Bennett 31 years $550 72.75 $40,012.50

Cera 23 years $525 5.00 $2,625.00

Barton 8 years $360 397.00 $144,990.00

Giblin 9 years $340 66.50 $22,610.00

Dirksen 4 years $300 210.50 $63,150.00

Kim 2 years $200 48.25 $9,650.00

Investigator n/a $230 401.00 $92,230.00

Paralegals n/a $163 29.50 $4,805.00

Totals 2258.00 $904,097.50

The above figures are as reported in the Sidener declaration (Doc

#167), with the exception that the court has aggregated all

paralegal hours and converted individual paralegal rates to a

blended rate.

The Sidener declaration breaks out the hours expended by

lead counsel into five categories: (1) investigation; (2)

discovery; (3) pleadings, briefs and motions; (4) court

appearances; and (5) settlement. This is an especially helpful

compromise between reporting hours in the aggregate (which is easy

to review, but lacks informative detail) and generating a complete

line-by-line billing report (which offers great detail, but tends

to obscure the forest for the trees). Upon review of this

breakout, the court concludes that counsel spent a reasonable

number of hours on this litigation. Additionally, two aspects are

notable: First, the bulk of the hours (more than 75%) were spent

on investigation and settlement. Second, about 29% of the hours

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expended (and about 37% of the fees accumulated) were devoted by

Steven Sidener, the lead partner on this case, to settlement. This

captures the importance to this case of settlement preparations and

discussions.

The unusually large fraction of senior attorney time

devoted to settlement is also relevant to counsel’s hourly rate. 

Billing all attorney time at a “blended” hourly rate is probably

appropriate in most lodestar cross-check computations for two

reasons. First, it simplifies calculations. Second, it encourages

economically efficient allocation of work within class counsel’s

firm. Third, it avoids the problem of “experience inflation”

mentioned above. But the central role of settlement negotiations

in this litigation -- and the central role of attorney Sidener in

those negotiations -- suggest that typical blended hourly rates

(perhaps in the $200 per hour neighborhood) are inappropriate here. 

Cf Allen v Bay Area Rapid Transit District, 2003 WL 23333580 at *7

(ND Cal) (concluding in a civil rights case on which two attorneys

worked that “the court has no basis for employing a reasonable

hourly billing rate in its lodestar calculation either greater or

lower than the approximate local average of $150 discernible from

publicly available data”); Albion Pacific Property Resources, LLC v

Seligman, 329 F Supp 2d 1163, 1178 (ND Cal 2004) (holding, on a

successful motion to remand, “plaintiff is entitled to an

above-average hourly rate if it can demonstrate that its counsel

were more efficient than reasonably competent counsel would have

been” but that “[p]laintiff has made no such showing” and

accordingly awarding “a reasonable attorney fee at an hourly rate

of $190/hr for attorneys”); Yahoo!, Inc v Net Games, Inc, 329 F

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Supp 2d 1179, 1185, 1188 (ND Cal 2004) (explaining that “the

average market rate in the local legal community as a whole is a

better approximation of the hourly rate that would be charged by

reasonably competent counsel than the actual billing rate charged

by a single attorney” and that “[f]ocusing on the requested number

of hours as a whole rather than the requested hourly rates of

individual attorneys produces better attorney fee decisions”).

The court understands that such blended rates typically

depend on the overall billing mix including substantial time

expended in discovery by junior attorneys with relatively low

billings rates. Here, little time (3.8% of the total hours) was

spent on discovery, but a large fraction of lead counsel’s overall

time was spent -- and necessarily so, it seems -- by a senior

attorney in settlement discussions and preparation. Accordingly,

the court concludes that use of a blended hourly rate is a poor fit

for this case.

But the court must find some objective source for setting

counsel’s hourly rates; the court cannot simply look at a lone outof-context dollar figure and pronounce it “reasonable.” Because

the court has rejected the use of a blended rate here, another

problem arises: The court will need a variety of rates to account

for the various attorneys’ different levels of experience. One

well-established objective source for rates that vary by experience

is the Laffey matrix used in the District of Columbia. See

http://www.usdoj.gov/usao/dc/Divisions/Civil_Division/Laffey_Matrix

_4.html (citing Laffey v Northwest Airlines, Inc, 572 F Supp 354 (D

DC 1983), aff’d in part, rev’d in part on other grounds, 746 F2d 4

(DC Cir 1984)).

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(126.39 - 115.98) / 115.98 = 0.08976, or about 9%.

18

Under the 2005 Laffey matrix, attorneys with 20 or more

years of experience bill $390/hour; attorneys with 8-10 years of

experience bill $280/hour; attorneys with 4-7 years of experience

bill $225/hour; attorneys with 3 or fewer years of experience bill

$185/hour; and paralegals bill $110/hour. These figures are,

however, tailored for the District of Columbia, which has a

somewhat lower cost of living than the San Francisco Bay area (in

which lead counsel’s firm operates); the court will adjust these

figures accordingly. The locality pay differentials within the

federal courts -- which, like law firms, employ lawyers and legal

support staff -- can approximate this difference. See

http://jnet.ao.dcn/ Human_Resources/Pay_Tables/2005_Pay_Tables/

Judiciary_Salary_Plan_Pay_Tables_2005.html. The WashingtonBaltimore area has a +15.98% locality pay differential; the San

Francisco-Oakland-San Jose area has a +26.39% locality pay

differential. Thus, adjusting the Laffey matrix figures upward by

approximately 9% will yield rates appropriate for the Bay area.1

Applying this adjustment and rounding, the court obtains

the following rates: Attorneys with 20 or more years of experience

bill $425/hour; attorneys with 8-10 years of experience bill

$305/hour; attorneys with 4-7 years of experience bill $245/hour;

attorneys with 3 or fewer years of experience bill $200/hour; and

paralegals bill $120/hour. Not having a suitable substitute for

the investigator’s billing rate, the court will accept the value of

$230/hour from the Sidener declaration. Reproducing the table

above, but substituting these values and recomputing the totals

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yields:

Attorney Experience 2005 Billing

Rate (per hr)

Total

Hours

Total

lodestar

Sidener 20 years $425 1027.50 $436,687.50

Bennett 31 years $425 72.75 $30,918.75

Cera 23 years $425 5.00 $2,125.00

Barton 8 years $305 397.00 $121,085.00

Giblin 9 years $305 66.50 $20,282.50

Dirksen 4 years $245 210.50 $51,572.50

Kim 2 years $200 48.25 $9,650.00

Investigator n/a $230 401.00 $92,230.00

Paralegals n/a $120 29.50 $3,540.00

Totals 2258.00 $768,091.25

In the end, this substitution reduces lead counsel’s lodestar fee

by about 15% from the figure claimed in the Sidener declaration

(Doc #167).

2

The court now turns to the lodestar cross-check, which

entails evaluation of the multiplier implied by lead counsel’s

requested fee (15% percent of a $18.4 million settlement fund, or

$2.76 million) and lead counsel’s lodestar fee (computed above as

$768,091.25). These data imply a multiplier of 3.59. Is a

multiplier of 3.59 reasonable in this case?

Unfortunately, there are not (to the court’s knowledge)

any reliable compilations of the multipliers awarded in common fund

class actions against which the court could quantitatively compare

this 3.59 multiplier. Multiplier values are reported in the Class

Action Reports data set upon which the court has relied in previous

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orders. See Stuart J Logan, Jack Moshman & Beverly C Moore,

Attorney Fee Awards in Common Fund Class Actions, 24 Class Action

Rep 167 (2003). But the Class Action Reports data are contaminated

because the courts making the reported awards have been

inconsistent in reporting a base hourly rate. Floating without an

empirical tether, the court shares Judge Shadur’s sentiment in

Comdisco that “lodestar multipliers * * * seem most often to

represent an effort to provide some non-existent garb for the

proverbial emperor who has no clothes. * * * Unfortunately, any

ruling that a multiplier (say) of 2.5 is reasonable, while a

multiplier (say) of 3.5 or 4 is not, too often makes it possible to

paper over a result-driven conclusion with a purported semblance of

precision” 150 F Supp 2d at 948 n10.

The court has an idea for a solution (albeit one that is

impossible in this case): Class counsel’s risk of nonrecovery (or

the obverse, their probability of success) is central to the

multiplier. See In re Washington Public Power Supply System

Securities Litigation, 19 F3d 1291, 1301 (9th Cir 1994) (discussing

risk multipliers). Therefore, pursuant to FRCP 23(g)(1)(C)(iii)

and 23(h)(3), class counsel ought to be required at the outset of

the case to file (ex parte and under seal) a candid quantitative

assessment of their probability of success and the likely effort

entailed in obtaining various recoveries. The information

submitted to the court should address not only the probability of

total nonrecovery, but also the relative likelihood of various

levels of recovery, for it is only against the full continuum of

possible results that the court can assess the true success that

class counsel achieves (or fails to achieve). Moreover, counsel

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should provide their assessments of the likely time frame of the

litigation and the costs they expect to incur. Indeed, this

information should capture not only the “risk of nonrecovery”

aspect of a multiplier, see id, but also whether counsel achieved

exceptional results for the class, see, e g, Van Gerwen v Guarantee

Mut Life Co, 214 F3d 1041, 1045 (9th Cir 2000) (discussing

multipliers in fee-shifting context). To avoid any concern that

such evaluation would contaminate the judge’s decisions in the case

(or reveal confidences to opposing counsel), the evaluation would

remain under seal until needed to assess an application for fees

and expenses. A form order requesting this information and setting

conditions for its submission is annexed to this order.

It is entirely reasonable to expect class counsel to make

such assessments. Any economically rational individual plaintiff

retaining counsel would surely ask his attorneys for just this

information: “Honestly, what do I stand to recover, and how much

is it going to cost me in fees?” A sensible lead plaintiff

executing the ideal model of the PSLRA’s “most adequate plaintiff”

would obtain exactly this kind of information. Should not the

court also seek it, especially if there is any uncertainty that

lead plaintiff has searched for counsel and negotiated at arms’

length for a reasonable fee? Further, of course, “entrepreneurial

plaintiff’s attorneys” (Professor Coffee’s phrase) would perform

just such an analysis before commencing the long and arduous effort

that often characterizes class litigation. See John C Coffee, Jr,

Understanding the Plaintiff’s Attorney: The Implications of

Economic Theory for Private Enforcement of Law Through Class and

Derivative Actions, 86 Colum L Rev 669 (1986).

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Of course, in the class action context, knowing that the

court would use such an ex ante assessment to award a fee (should

counsel obtain a recovery), this exercise will no doubt tempt

counsel to emphasize the difficulty of the task ahead of them. The

court needs to recognize this danger. But even with it, bearing

the risk of an unduly pessimistic evaluation of the prospects at

the outset of a case or an overblown assessment of the effort

required seems no worse (and may be better) than facing inflated

claims of accomplishment when class counsel seek approval of a

compromise and an award of fees at the end of a case. An ex ante

assessment has to make economic sense or it loses credibility. 

Counsel who claim a one in twenty chance of a $10 million recovery

and estimate 10,000 hours of attorney time to obtain it are

obviously blowing smoke. There is a limit on feigned pessimism,

for counsel’s prediction has to square with their own economic

rationality: Predictions that are too pessimistic raise the

question why counsel got involved in the case in the first place. 

Thus an analysis using a blended hourly rate or the Laffey matrix

could reveal whether counsel’s ex ante assessment makes sense as a

matter of law firm economics -- and therefore is credible.

Furthermore, the court can evaluate counsel’s ex ante

assessment by the same standards that apply to many other aspects

of a court’s work. On the one hand, an evaluation that is not

substantiated by reasoned analysis and comparable cases would be

entitled to little weight. On the other hand, an evaluation that

laid out in detail the factors that went into the evaluation and

presented data to back it up would carry a good deal of weight even

if the predicted outcome, length of proceedings and costs differed

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from what actually occurred.

Even absent a true ex ante assessment, the parties ought

to be able to compile -- at least if the case is settled, as often

happens in successful common fund cases -- a record for the court

that demonstrates their assessments of their legal positions, their

predictions of liability exposure, their settlement positions and

negotiations and so on. Perhaps a complete record is too much to

ask for, but surely in every case some contemporaneous evidence

exists that is probative of the parties’ assessments of their

likelihood of success. Because the court has not asked for this

information and did not ask for an ex ante assessment in this case,

the court here proceeds from a rather more limited record.

Based on this limited record, the implied multiplier of

3.59 gives the court considerable pause. It exceeds the

multipliers the court has in its experience encountered and

observed in other common fund securities class actions. The court

can investigate this intuition further by positing a pair of

scenarios -- one optimistic, one pessimistic -- of the sort that

plaintiffs’ counsel almost certainly considered at the inception of

this litigation. Each scenario has several individual components

representing the probability of recovering a certain amount against

a certain defendant or group of defendants; using standard

probability, the expectation value of the total scenario can be

computed. Here are two scenarios that seem possible to the court

in light of its experience with company defendants, accountant

defendants and insurance coverage layers in securities class

actions in the context of the insurance coverage and resources of

the defendants in this litigation:

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Scenario 1: Optimistic Scenario

100% chance of recovering $3M from insurance carriers $3.00M

66.7% chance of recovering $4M more from company defs $2.67M

50% chance of recovering $10M from accountant $5.00M

Total expectation: $10.67M

Multiplier based on $18.4M settlement: 1.72

Scenario 2: Pessimistic Scenario

50% chance of no recovery at all $0.00M

50% chance of recovering $7M from company defendants $3.50M

25% chance of recovering $10M from accountant $2.50M

Total expectation: $6.00M

Multiplier based on $18.4M settlement: 3.07

These scenarios suggest that a multiplier between 1.72 and 3.07 is

reasonable.

In fairness, there is one reason to think that a

multiplier toward the higher end of this wide range is appropriate

here: Lead counsel have generated an unusually high recovery per

hour invested. Even valuing the HPL stock at $0.20 per share, the

settlement consideration is worth $18.4 million -- or about $8,148

per hour invested by lead counsel. If the court would approve a

15% fee award, the net recovery per hour would be about $6,926. 

Looking to the data compiled in Logan et al, 24 Class Action Rep

167, the court notes that in class actions with common funds of $10

to $20 million, the average net recovery per hour is $2,943, with a

range of $292 to $31,996. Of the 63 cases in this range reported

in Logan et al, this case would rank 6th highest in recovery per

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hour. In fact, this recovery per hour even exceeds the median

recovery per hour of $4,946 seen in “megafund” cases (those with

common funds that exceed $100 million, and thus should exhibit the

greatest economies of scale).

On the one hand, these impressive results may signal lead

counsel’s unusual skill and efficiency. On the other hand, they

may signal a case ripe for generous settlement. But the latter

possibility seems less likely: As the court has observed in its

prior orders, establishing liability against -- and hence

extracting a settlement from -- defendants other than Y David

Lepejian (whose participation in the fraud here was demonstrably

knowing) was far from certain, and it is clear that settlement

negotiations in this case were anything but a cakewalk.

Nonetheless, the court has difficulty squaring a

multiplier of 3.59 with what it knows about this litigation. The

lodestar cross-check has thus signaled that the 15% fee proposed by

lead counsel with lead plaintiff’s support leads to a multiplier

higher than appears reasonable. The court concludes, in the

exercise of its discretion in light of the foregoing discussion,

that a reasonable fee award is somewhat lower than the requested

15%.

The amount of reduction is the next question. For

reference, the court has tabulated various fee percentages, the

resulting fee and the corresponding multiplier (valuing the

settlement at $18.4 million):

/

/

/

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Percentage Fee

(millions)

Implied

Multiplier

15% $2.76 3.59

14% $2.58 3.35

13% $2.39 3.11

12% $2.21 2.87

11% $2.02 2.63

10% $1.84 2.39

9% $1.66 2.16

8% $1.47 1.91

7% $1.29 1.67

Based on the court’s conclusions above about reasonable multipliers

in this case, it appears that a reasonable percentage fee in this

case ranges from about 8% to about 12%. Because (1) lead plaintiff

supports a 15% fee award for lead counsel and (2) the recovery in

this case is exceptionally high for the amount of attorney time

invested, the court tends to the high side of this range. In its

discretion the court fixes lead counsel’s fee award at 11% of the

common fund.

Accordingly, the court awards lead counsel $1,870,000

cash and 770,000 shares of HPL stock from the common fund. With

respect to the award of HPL stock, to the extent that such an award

represents securities that are not registered pursuant to the

Securities Act of 1933, the court finds, pursuant to section

3(a)(10) of the Securities Act of 1933 that under the

circumstances, the exchange of these shares for a portion of lead

counsel’s services in this action is fair.

/

/

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IV

This order treads on somewhat unfamiliar ground, yet the

court believes no less is necessary to discharge its obligation

under FRCP 23(h) to award a reasonable fee. The court’s excursion

has led it to take up legal issues that have not been briefed by

counsel, and this order rests in some measure on a factual record

that counsel might have supplemented, had they known the court’s

view of the law. In other words, lead counsel have perhaps not

been offered a full opportunity to be heard on the issues addressed

herein -- an opportunity that this court must now in fairness

afford them, particularly given the deferential standard of

appellate review applied to fee awards under Rule 23(h).

Accordingly, the clerk shall enter final judgment on the

award of fees and expenses as described herein, but the court

expressly grants lead counsel leave to file a motion and supporting

papers pursuant to FRCP 60(b)(6) for relief from that judgment. 

Such a motion for relief from judgment shall be filed within the

time allotted by FRAP 4(a)(1)(A) -- that is, if lead counsel wish

to challenge this order here or in the Court of Appeals, they must

act within the time allotted by FRAP 4(a)(1)(A); otherwise,

distribution of the settlement fund may commence. Along with any

motion for reconsideration, lead counsel should advise the court

whether an interim distribution of the uncontested portion of the

settlement fund is warranted.

V

In sum, the court GRANTS lead plaintiff’s motion for an

award of attorneys’ fees and costs (Doc #142). Out of the common

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fund, the court awards lead counsel expenses of $59,434.57 and fees

of $1,870,000 cash plus 770,000 shares of HPL stock. These amounts

shall bear interest at the same rate and from the same date as the

settlement funds.

IT IS SO ORDERED.

 /s/ 

VAUGHN R WALKER

United States District Chief Judge

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United States District Court

For the Northern District of California

APPENDIX: SAMPLE ORDER

IN THE UNITED STATES DISTRICT COURT

FOR _________________

,

Plaintiff,

v

,

Defendant. /

No CORDER

Pursuant to FRCP 23(g)(1)(C)(iii) and 23(h)(3), the court

ORDERS putative class counsel to submit, under seal, not later than

__________ counsel’s good faith quantitative assessments of:

• their probability of prevailing on

plaintiffs’ claims, including their

likelihood of achieving various levels of

recovery;

• the hours of attorney and legal support

staff time they reasonably anticipate

spending to reach certain stages in the

litigation and to achieve various levels

of recovery; and

• the reimbursable costs they expect to

incur to reach certain stages in the

litigation and to achieve various levels

of recovery;

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stating with particularity the reasons for these assessments. See

In re HPL Technologies Securities Litigation, --- F Supp 2d --- (N

D Cal 2005).

Counsel shall contact the court room deputy for direction

in making this submission, which shall be made in paper form, ex

parte and under seal. The clerk is directed not to unseal this

submission or permit its inspection by anyone except upon notice to

the parties and further order of the court.

IT IS SO ORDERED.

 

United States District Judge

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