Cendant Case Counsel Seeks $34M Fee
Opponents say request far exceeds bid that won the firm a lead-counsel role
New Jersey Law Journal - 05.17.99
By Henry Gottlieb

When U.S. District Judge William Walls used a pioneering competitive bidding system to pick the lead plainftiffs' counsel in the Cendant Corp. class action fraud litigation last September, he left some wiggle room. He vowed to consider subjective criteria too, not just the bid price, when it came time to dole out legal fees.

Now it's time to decide how much to wiggle.

In a proposal that critics call "grossly inflated," New York's Kirby, McInerney & Squire, lead counsel for the smaller of two classes of shareholders, is asking for $34 million fee award for its work. The sum represents ten percent of the amount the company plans to pay under a March 18 settlement.

Kirby, McInerney says it deserves the fee because it firged a settlement that will make the shareholders whole, and did it quickly - eights months after being appointed. Even better, the firm says, the deal with Cendant was artfully crafted so that relatively little of the fee, if any, will come from shareholders' recoveries.

But the critics, led by Howard Sirota of New York's Sirota & Sirota, say that the request goes far beyond the bid proposal and that despite Kirby, McInerney's assurances there's no telling how much of the fee will end up diluting the recovery.

Sirota, who represents a number of individual shareholders and lost a bid to be lead counsel, argues that the fee would be an undeserved windfall even under traditional methods of figuring class action counsel awards.

The request "would be grossly excessive even in the absence of competitive bidding," Sirota said in a pleading objecting to the settlement and the fee it envisions.

Not that Sirota is a disinterested watchdog. In an unusual request of its own, Sirota's firm and its allies in New Jersey have requested a share of counsel fees that come from any fund that Cendant creates to pay for the settlement, even though the firm lost the bidding to be lead counsel for the holders of the 29.1 million shares of Cendant securities affected by the proposed settlement.

Sirota's rationale: The judge adopted the competitive bidding system at his urging. And because the bidding system is likely to benefit all the shareholders, Sirota and his allies say they deserve a bonus for pushing the idea.

U.S. Magistrate Judge Joel Pisano denied Sirota & Sirota's request to apply for the fee last month, but the firm is appealing to Walls at the same time that it pushes the notion that Kirby, McInerney's fee request is too high.

aA member of Sirota & Sirota's team, John Barry of Newark's Tompkins, McGuire, Wachenfeld & Barry, says of the lead counsel's $34 million fee request: "They're giving it a shot and we're saying, hey, it's wrong. And the judge will do whatever he wants to." Walls has scheduled a hearing for tomorrow.

The squabbling between plaintiffs' firms demonstrates that the lust for a good battle over fees hasn't been slaked by federal reforms, court decisions or even novel compensation systems like the one Walls used.

The litigation began last April after the Parsippany conglomerate - created by a merger the year before - announced that accounting irregularities had vastly inflated the value of one of the predecessor entities, CUC International Corp. of Stamford, Conn.

From a high of $36 per share, Cendant's common stock plunged to $16 after suffering one of the biggest one-day percentage losses in the history of the New York Stock Exchange. About $15 billion worth of value in the company disapeared.

In the litigation consolidated before Walls, two classes of shareholders were certified, those holding common stock - the larger of the two groups - and those holding shares of arcane offerings called PRIDES, which Cendant had sold through Merrill Lynch & Co.

Under federal reforms enacted in 1995 ans subsequent court decisions, judges have been given a road map for selecting counsel and setting their compensation. But they have latitude to be creative. Walls was only the second judge in such a case to use competitive bidding to pick the two sets of lead lawyers.

The bids were not made public, and Walls said that in setting the fees he also would consider the application of traditional criteria for judging the value of the firms' services. Traditional criteria include the degree of difficulty, the amount of time expended and the brilliance of the attorneys involved.

Litigation over whether the company and it hired professional committed fraud is continuing on behalf of the common stockholders, but the agreement announced March 18 would settle the claims of PRIDES holders.

Under the complex settlement, holders of PRIDES as of April 15, 1998, the day before the stock crashed, would be made whole be receiving new securities, so called Rights, that they could sell or hold until February 2001. The $341.5 million worth of Rights issued by the company would have a stated value of $11.71 each.

Under the settlement, Kirby, McInerney would receive all or most of its fee - 10 percent of the estimated totla value of the deal - in the form of Rights left over after the company distributes them to authorized claimants. The firm would receive the Rights of shareholders who opt out of the settlement or fail to respond to the company's offer.

The firm also would receive up to 738,526 Rights that represent PRIDES stock held by Merrill Lynch, which is not eligible for the conversion offer to other PRIDES owners because it is a defendant in the litigation.

By Kirby, McInerney's own reckoning, all or most of the fee won't dilute the sum going to the class action plaintiffs because the firm would be collecting Rights that aren't going to anyone else.

If there aren't enough Rights to satisfy the full fee, however, the value of the authorized claimants' recovery will be diminished, the firm conceded.

'A Slam-Dunk'

Even so, the total contriubution from the claimants would probably be less than the fee Kirby, McInerney would be entitled to under the bidding proposal.

Because the bids have not been made public, it's impossible for outsiders - including the shareholders - to know at this stage how the bid proposal compares with the $34 million fee request or the amount by which the claimants' share would be reduced.

Though he can't disclose the bids, Barry says, "They're asking substantially more than what they bid." If the request was equal to the bid, he adds, "there wouldn't be any objection."

He notes that, so far, Kirby, McInerney hasn't submitted a justification for the request citing time spent and all the work done on the case, and Barry suggests that, "their problem is they didn't put in any time."

They didn't have to, he says, because Cendant hired investigators and admitted liability. "They put out all the details on the Internet. How much work does a law firm have to do?" he says. "The case was a slam-dunk."

Cendant has taken no position on Kirby, McInerney's $34 million fee proposal. However, it has lots to say - none of it good - about the Sirota & Sirota group's call for a share of whatever award Walls eventually grants.

The group, whose third member is Roseland's Carella, Byrne, Bain, Gilfillan, Cecchi, Stewart & Olstein, is claiming that it is entitled to a share of fees under a doctrine that says a firm, even one that has not designated lead counsel, is entitled to a reasonable fee from the common fund if its work benefits the common fund.

By the Sirota & Sirota group's reasoning, its advocacy of the competitive bidding system that Walls eventually adopted is likely to have a substantial benefit to the comon fund, and therefore, the firms deserve a fee beyond what they will collect from their small group of individual clients.

"It's an undisputed fact that when the whole issue of appointing lead counsel arose, we were the only people who espoused competitive bidding," Barry says. "Everybody else either violently opposed it, or said nothing about it."

According to Sirota, his group has performed another service to the common fund: Fighting Kirby, McInerney's fee request. "We hope to obtain the benefit of reducing the fee they requested," Sirota says.

Maybe so, but that's not enough of a contribution to warrant a fee award, according to pleadings by Cendant counsel Samuel Kadet, a partner with New York's Skadden, Arps, Slate, Meagher & Flom and Micheal Rosenbaum, of Short Hills' Budd Larner Gross Rosenbaum Greenberg & Sade.

"The law firms' contention that they are entitled to a fee because they urged the Court to adopt competitive bidding is far too attenuated to justify an award of fees," the Cendant lawyers said.

Of course, if Walls disagrees and awards Sirota & Sirota a fee, it should be sliced from the lead counsel's pie, and not be something Cendant should pay, the company's counsel concluded.

Back to Publicity