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Second Circuit to Reduce Attorney Fees in Madoff Class Action

June 28, 2017 | Posted in : Contingency Fees / POF, Fee Allocation / Splitting, Fee Award Factors, Fee Dispute, Fee Issues on Appeal, Fee Reduction / Fee Denial, Lodestar / Multiplier

A recent Law 360 story by Cara Salvatore, “2nd Circ. To Reduce Fee Award in $655M Madoff Settlementreports that the Second Circuit approved the general shape of a $655 million class action settlement involving investors in hedge funds that placed money with Bernard Madoff’s investment firm, but said attorneys’ fees were set too high given the low risk they took on.

The appeal stemmed from a district court fight over how to divvy up money returned to a group of funds that invested in Bernard L. Madoff Investment Securities LLC after the funds reached an agreement with the Madoff bankruptcy trustee in 2011 to settle battling claims.  Plaintiffs in the class action case invested in various funds managed by Tremont Group Holdings Inc., which in turn funneled money to Madoff.

Though some Tremont investors said the plan of allocation, or POA, was unfair because they received less than those whose investments were 100 percent Madoff-related, the Second Circuit disagreed.  “The district court did not abuse its discretion in approving the POA … It is the product of protracted, contentious mediation [and] appellants’ interests were adequately represented and protected,” the Second Circuit said.

But the appeals court raised an eyebrow at the attorneys’ fees in the suit, which it said could have gone over $40 million under the scheme that had been approved by a district judge.  That included 3 percent of the fund plus a lodestar multiplier of 2.5.

“In absolute terms, an award of three percent of a common fund is not excessive,” the Second Circuit said.  However, “It does not do to multiply the fee award here — which is based on hours worked after the [2011] Investor Settlement — in order to compensate a risk that dissipated when the court approved that settlement.”

The panel wants the multiplier reduced — but said it doesn’t have to be as low as 1, and that the district court should use its discretion.  Contingency risk is the number-one factor that should direct a lodestar multiplier, and there was not enough of that risk here, the panel said.  Another 2011 settlement in the trustee litigation “essentially guaranteed” that there would be ample money to compensate the attorneys, it said.

Additionally, any risk that the plan would have been completely taken down by objectors was “remote” and so the attorneys should not receive any extra for that possibility, the panel said.

At a hearing in March, counsel for the investors objecting to the plan of allocation told the Second Circuit that the allocation arrangement was flawed and was ultimately the product of unfair side-deals made between various plaintiff parties at a 2014 mediation session.

Meanwhile, Weil Gotshal & Manges LLP attorney Irwin H. Warren, a representative for a group of institutional investors who supported the POA, said that approval of the deal should stand, and that those who objected are actually net winners overall.

Tremont reached a $1 billion settlement with the Madoff bankruptcy trustee in 2011.  The agreement established two settlement funds for the benefit of investors, including one consisting of all of the assets remaining in one group of funds overseen by Tremont, called the Rye funds, which was to be distributed according to the allocation plan approved by U.S. District Judge Thomas Griesa.

Tremont, part of Massachusetts Mutual Life Insurance Co., was the second-largest Madoff feeder fund.  The $1 billion settlement stemmed from allegations by trustee Irving Picard that the company continued to pour money into Bernard L. Madoff Investment Securities LLC despite obvious red flags.