While Class Members Surrender All Control to the Lawyers and Court, Group Arbitrations Keep Clients Involved and In Charge.
As we noted in part 1, securities class actions tend to produce paltry returns for victims, while group arbitrations generally result in significant individual recoveries. There are many reasons for the disappointing results in class actions, but in our opinion, the main problem is the inherent conflict of interest between class action attorneys and their clients. Though class counsel technically have a strict duty to always put class interests ahead of their own, it rarely works out that way because class actions fracture the traditional relationship between attorneys and their clients.
The Downside of Securities Class Actions
In the traditional attorney-client relationship, the client hires and interacts with his or her lawyer and can control the major decisions that lawyer will make. In a class action, the court appoints the lead attorneys, and since most classes are enormous, the class lawyers don’t have to interact face to face with individuals who populate the class. Consequently, class counsel have a greater tendency to be guided by their own interests, one of which is to avoid going to trial and potentially losing out on the huge court-ordered attorneys fee that generally will accompany a settlement. The result of this disconnect between lawyer and clients is twofold: class counsel almost always will settle, even if they have a really strong case, and class counsel will settle the case more cheaply than the clients would permit if the clients had full knowledge of and control over the case.
The Difference Between Us and Them
Unlike class action lawyers, when we at HC&S handle groups of claimants, we retain a one-on-one relationship with each client in the group. The individual nature of each client’s claim is preserved and no client’s interest can take precedence over another’s. Group size is always kept small enough to ensure frequent direct communications between each group member and the lawyers. Also, we never make a material decision such as whether to discuss settlement of the case without first consulting with and obtaining the approval of each client. Thus, in contrast with the conflicted relationship between class action lawyers and class members, our actions in a group case are governed by the requirements of the traditional attorney-client relationship.
This difference leads to vastly better results for our group members than the 2% to 3% average recoveries achieved by class members in securities class actions. The group cases we’ve handled have consistently resulted in settlement amounts ranging from 55% to 80% of losses. And with sufficiently egregious conduct, even a future settlement of 100% of losses would not surprise us. (We refer to settlements rather than awards because thus far, every brokerage firm with which we’ve had a group case has chosen to settle rather than risk an adverse arbitration award.)
Continue to Part 3 – Individual Arbitration
Hugh Berkson is a Securities Attorney with McCarthy, Lebit, Crystal & Liffman, Co. LPA. Hugh is rated AV® Preeminent™ by Martindale-Hubbell®.
He obtained a business degree in Finance from the University of Texas at Austin in 1989, and is a 1994 graduate of Case Western Reserve University School of Law, where he was a member of the Order of the Barristers and received both the American Jurisprudence Award, (National Mock Trial) in 1993 and the Jonathan M. Ault Mock Trial Prize for 1993-1994.