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Discussion Topic: Just How Likely Are Contingency Fee Arrangements For Investors Who Litigate?
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After reading George Friedman's article in the July edition of the SAC print newsletter ("The Camel and the Last Straw or the Frog and the Boiling Water: Pick Your Parable"), we have been thinking (and talking to others in the field) about what it would be like for investors with arbitrable disputes, if broker-dealers were to abandon their "mandatory" PDAAs.

Of course, there are many variables to consider, but, in talking to one lawyer who does Claimant's work, we focused on one point where real differences would arise for investors: the availability of contingency fee arrangements. Here's how things stacked up in his words on the question of taking an investor's case to court:

"Court is a very expensive place to be for hourly clients and taking a case to court on contingency just screws up the math. When I take a contingent case, I analyze it from the standpoint of complexity, what will be involved in discovery, how long will the hearing take, etc. I then build an hourly budget, i.e., how much time would be involved if I took the case on an hourly basis times my rate. To take the economic risk of a case on a contingent basis, I need the probability of a premium to my hourly time on the back end. The risk premium floor is probably 50%, i.e., I want a fee recovery half again as much (or more) than what I would have made hourly.

"So, hypothetically, let's say I have a case where my budget says it will cost $100k in hourly time to try in court (not an unrealistic amount - in arbitration, it would probably be half that amount). That means my risk premium expectation is a minimum of $150k. On a one-third contingent basis, I need a case with hard quantifiable damages of at least $450k to make it work. Anything smaller that that, I would only take hourly. In my experience (several decades), most arbitration cases have REAL damages less than $500k. The average range is probably $100-$300k. That means not many investors will get contingent fee consideration, when court is the only choice."

Our friend's math might, on the surface, suggest that contingency fee arrangements in securities arbitration cases would be difficult to accept at a damage level under $200,000 or so. But, there are other differences between litigation and arbitration that change the "economic risk" equation for the practicing attorney. First, while FINRA arbitration now stretches out to almost 20 months, the time frame to award and "reward" is telescoped compared to litigation, at least in the big cities. Moreover, when the 20 months is over and the Award issues, that's it. There is a minimal risk of reversal or even of appeal. Discovery is much more compact, as are the associated costs, and, for the Claimant, some return, whether from a favorable decision or a settlement, is likely in 70% or more of the cases. Part of the reason for that high "satisfaction" rate relates to the relative lack of motion practice. Claimants are assured, with some minor exceptions, of reaching a hearing. All of these factors make taking an arbitration case on contingency far more practicable, it seems to us, at a much lower dollar-level for Claimant's attorneys.

(ed: So, what about all the investors with claims under $450k? If your answer is let them employ FINRA Rule 12200 - i.e., all the cases under $450,000 can still be arbitrated -- we'd say the next question for discussion is just how likely is it that FINRA-DR will remain a robust and viable forum in that instance?)


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