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November 15, 2018

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Judge Rakoff Highlights the Financial Risk to Objectors of Class Settlements

On August 15, 2018, Judge Jed S. Rakoff of the U.S. District Court for the Southern District of New York awarded an objector to the Petrobras class settlement nearly $12,000 in attorneys’ fees (click here for the Order).  The objector had asked the Court for almost $200,000 to cover 231.7 hours of legal work. Approximately one month later, Judge Rakoff sanctioned another objector to the Petrobas class settlement (click here for the Order). In the September Order, Judge Rakoff issued a grave warning to future objectors and reminded counsel that it is the Court’s duty to “safeguard the ability of objectors to protect class members from abusive settlements while in turn protect[] class members from being abused by the objectors themselves.”

The Petrobras class action arose out of alleged securities fraud committed by the Brazilian oil conglomerate accused of bribery (see below for links to our prior Viewpoints on the Petrobras securities litigation). The initial complaint was filed in federal court in New York in December 2014. After years of litigation, the court approved a $3 billion settlement in June 2018. There were several objectors.

In granting one objector an award of attorneys’ fees, to be taken out of class counsel’s fee award, Judge Rakoff quoted the Second Circuit's White v. Auerbach decision, stating:

[I]t is well settled that objectors have a valuable and important role to perform in preventing collusive or otherwise unfavorable settlements, and that . . . they are entitled to an allowance as compensation for attorneys’ fees and expenses where a proper showing has been made that the settlement was improved as a result of their efforts.

Judge Rakoff continued that attorneys’ fees are appropriate only if the party seeking fees was a “substantial cause of the benefit obtained.”  Here, he found the objector’s argument that class counsel’s “expenditures on Brazilian attorneys should be classified as costs rather than attorneys’ fees” directly led to the reduction of class counsel’s recovery by $46 million. The objector asked for nearly $200,000 in attorneys’ fees, 1.7 times the lodestar amount (based on 231.7 hours of legal work).  However, only one of the objector’s arguments, constituting 1.5 pages of the 25-page brief, aided the judge and the class.  Thus, Judge Rakoff awarded the objector approximately $11,000 or 10% of the lodestar.

One month later, Judge Rakoff sanctioned a “frivolous” objector to the class settlement in the amount of $10,000 upon finding the objection was made in bad faith and without merit. The Court criticized the objector’s “kitchen-sink brief,” which challenged the settlement in more than a dozen ways, “none of which had the slightest merit.” However, Judge Rakoff did note the “high burden” for awarding sanctions, demonstrated by his refusal to award sanctions to a third objector, who complied with the Court’s orders and whose brief was “lacking in merit and unsupported by case law” but not “frivolous.”  In this opinion, Judge Rakoff painted a negative picture of some class settlement objectors, one in which “some objectors seek to pervert the process by filing frivolous objections and appeals” for the purpose “of extorting personal payments in exchange for voluntarily dismissing their appeals,” something he refers to as “objector blackmail.”  Notably, Judge Rakoff writes that a pending amendment to the Federal Rules of Civil Procedure, which will require court approval for payment or consideration given in exchange of the withdrawal of an objection, may curb this practice.

Although Judge Rakoff’s September Order also noted the “useful” and “important role” objectors may play in protecting class interests, his Petrobras opinions may have a deterrent effect on objectors. When the upside to an objector is a fraction of the fees spent on an objection-brief and the downside is public humiliation and monetary sanctions, one wonders whether these opinions will decrease the number of objectors to class action settlements.

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About this Author

Peter M. Saparoff, Mintz Levin Law Firm, Boston, Corporate Law Attorney
Member

Peter co-chairs the firm’s Securities Litigation Practice. He is one of the nation’s leading securities litigators. He has represented clients in well over 100 cases, investigations, and proceedings throughout the country. He has successfully defended SEC investigations, class actions, derivative suits, stock exchange proceedings, and state securities investigations, and has handled numerous FINRA arbitrations, among other matters. Peter also represents hundreds of institutional investors with respect to the monitoring and evaluation of securities class action settlements.

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Joel D. Rothman, Litigation Attorney, Mintz Levin, Law Firm
Associate

Joel’s practice encompasses a range of complex commercial, securities, insurance, and employment litigation matters, including advising institutional investors with respect to the monitoring and evaluation of both foreign and domestic securities class actions, representing shareholders in post-closing merger disputes, counseling insurance companies in coverage disputes, representing attorneys and insurance brokers against claims of professional negligence, and advising employers on all facets of the employment relationship. He also focuses his practice on representing and advising newspapers, publishers, and other media-related entities and individuals in defamation, invasion of privacy, and First Amendment matters. He regularly advises clients at all stages of civil litigation, from pre-litigation counseling and investigation through discovery, alternative dispute resolution, trial, and the appeals process.

Before joining the firm, Joel held a clerkship position with the Massachusetts Supreme Judicial Court, serving under, then Associate Justice, now Chief Justice, Ralph D. Gants. He has also held internship positions in the litigation sections of law firms in Boston.

Before beginning his legal career, Joel had a successful career in human resources, including positions as an independent contractor and human resources manager for large and small businesses in the software, medical device, retail and transportation industries. In these roles, he provided oversight and training on compliance with federal, state, and international regulations involving corporate ethics and managerial conduct, family and medical leave, minimum wage, work authorization, occupational safety and health, and discrimination prevention. In addition, he prepared training materials, assisted in gathering due diligence items, investigated employee grievances, and participated in union negotiations.

While in law school, Joel worked as a research assistant, aiding in drafting briefs as amicus curiae for two United States Supreme Court cases, one relating to the Affordable Care Act, and the other challenging a federal immigration statute on equal protection and fundamental rights grounds.

617-348-4495
Associate

Ellen focuses her practice on securities litigation, including shareholder class actions and opt-outs thereto, and complex commercial litigation. She has experience taking and defending depositions, drafting briefs and other filings, as well as with internal investigations and patent matters. She represents public and private companies in a variety of industries, including life sciences.

Ellen also has an active pro bono practice. To date, she has successfully represented an individual seeking asylum and a Section 8 tenant facing eviction. She has also defended a victim of domestic...

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Kevin C. Mortimer, Mintz Levin, real estate disputes attorney, construction matters lawyer
Associate

Kevin engages in an expansive array of litigation matters. With prior experience as a project management operational consultant at a boutique mechanical engineering subcontracting firm and a large commercial real estate company, Kevin provides a well-informed perspective for groups concentrated on real estate disputes and construction law. Kevin also employs his educational background in the field of economics in his contributions to matters concerning institutional class action recovery, securities litigation, and commercial litigation.

During...

617.348.1754
Associate

Alain’s practice focuses on civil litigation matters for public and private companies in a wide variety of industries. In addition, he maintains an active pro bono practice.

Alain rejoins Mintz Levin after working as a Summer Associate at the firm in 2016. During law school, Alain served as a judicial intern for the Honorable Gregory C. Flynn of the Waltham District Court and the District Court Appellate Division. He was also a criminal law teaching assistant and served as a summer law clerk at Free Speech For People, a legal advocacy organization dedicated to campaign finance...

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