Obama Calls Out Bankers, but What About the Class Action Lawyers, Mr. President?

08/02/2010 11:26 am ET | Updated May 25, 2011

President Obama's plan to reign in excessive compensation paid to the nation's bankers has focused attention on how this country's financial elite have unfairly enriched themselves at the expense of their shareholders. The bankers received huge bonuses even though their companies' stock had fallen dramatically. But it isn't only our nation's bankers who are receiving huge paychecks for subpar results. The nation's class action plaintiffs' lawyers regularly receive huge bonuses for winning less than stellar results for their clients -- "enriching" class members with coupons they don't want, extended warranties they will never use, and, in the case of securities class actions, mere pennies in recoveries for each dollar of damage that their clients are alleged to have suffered.

Unfortunately, Mr. President, don't expect a public outcry over this problem. The practices of the class action lawyers are cleverly disguised so that few people know about this problem. Class action settlement notices, written in legalese, are for the most part treated like junk mail and thrown in the garbage. But if there is to be increased oversight of executive pay at the nation's banks, shouldn't there be increased scrutiny of the exorbitant attorneys fees being collected by the nation's class action plaintiff's lawyers. The pay scale of these lawyers is insulting to hardworking Americans, particularly during these times of economic dislocation, and needs reform.

Class action plaintiff's lawyers regularly claim hourly rates of $500, $600, and $700 per hour. Even with these lofty hourly rates, their fee awards go beyond their time and expenses in a case. The lawyers successfully argue (like the bankers) that the risks associated with their work justifies hourly rates multiplied two, three, and four times, and even as high as ten times. Mr. President, a district court judge in Northern California approved the payment of an attorney's fee of at least ten times the lawyers' normal hourly rate. As if that wasn't bad enough, a new scam has been developed where class action plaintiff's law firms hire contract lawyers, who are paid $35 to $40 an hour, yet charge class members $300 an hour and pocket the 800% profit.

Like the bankers, class action lawyers' compensation is tied to the wrong incentives.

1. Take, for example, a class action settlement against Intel Corporation where class members won the right to file a claim for a rebate coupon worth $50. Only 159 people responded out of 450,000 potential class members. Thus the entire class received a total of $8,000 while their lawyers received $1.5 million in attorneys' fees. Mr. President, the incentives are all wrong.
2. Then there is the even more infamous Bank of Boston case, in which class members had their accounts credited between $2.19 and $8.76 as a result of the class action settlement, but had their accounts debited up to $91 each to cover the costs of the settlement. For this claimed "benefit" to class members, class counsel received $8.5 million in fees. Mr. President, the system needs reform.
3. In another case, a shareholder in the Enron class action settlement complained about her lawyer's request for over $700 million in attorneys fees (that would pay one of the attorneys nearly $3000 an hour!). She noted that in the settlement she would be receiving $6.79 for each share which she originally purchased for $70. Should class action lawyers really be getting $700 million in fees while their clients suffer these staggering losses? Mr. President, the incentives are all wrong.
4. In what could be the poster child for class action abuse, lawyers in the Ford Explorer class action settlement received $25 million in attorneys fees from the court while claiming that the class members were receiving a benefit of $500 million. However, what class members actually received was a $500 coupon towards the purchase of a new SUV, and only 75 were redeemed for a total value of $37,500. Mr. President, the system needs reform.

These are not isolated incidents; rather, they represent the tip of the iceberg of the failures of the class action system. Were this situation not below the nation's national radar, the attention currently focused on bank executives would quickly spread to class action lawyers.

Mr. President, we agree with your desire to realign executive pay with performance. But you should realign compensation for class action lawyers too so that it is based on performance -- lawyers should not be receiving $25 million for winning their clients $37,500! Mr. President, you can help by using your bully pulpit to call attention to this disgraceful misuse of our legal system by the plaintiff's class action lawyers.