f/k/a archives . . . real opinions & real haiku

August 25, 2003

Fee-duce-ary Advice and Pension Funds

Filed under: pre-06-2006 — David Giacalone @ 12:03 am

BenefitsBlogger B. Janell Grenier was nice enough to ask ethicalEsq? to comment on her posting of Aug. 21, and a Benchmark Alert, captioned Invasion of the Class Action Securities Lawyers.    The Alert states that securities class action law firms, hoping to secure lucrative lead counsel status in pension class action suits, appear to by paying lawyers who represent pensions hefty referral fees (which may or may not be disclosed to the fund-client).”   Noting that this appears to raise serious ethical questions, the article continues (emphasis added):



Pension boards rely upon their lawyers to provide them with advice regarding (1) whether to participate in a securities class action lawsuit; (2) which law firm to retain to represent them and, finally, (3) what level of contingency fee the firm should be paid. Obviously, if fund counsel is receiving 10-18% of a class action law firm’s fee for the referral, he cannot be relied upon to provide the fund with impartial advice.


It is our understanding that many legal advisers to pensions and others receiving referral fees do not disclose the financial arrangements. While states may differ as to the ethical requirements applicable to lawyers within their boundaries, in our opinion those who serve as legal advisers to pension fiduciaries should observe the highest ethical standards. 


There is indeed a great potential for harm to the pension fund client if referral fees are taken without fully informing the client of their existence and size — and, if the fees is out of  proportion to the contribution of the referring attorneys to the class action firm.   Whether in the form of a fixed fee (kickback) or a division of any future class action fees received, Model Rule 1.5 (e)  seems applicable:


(e) A division of a fee between lawyers who are not in the same firm may be made only if:



(1) the division is in proportion to the services performed by each lawyer or each lawyer assumes joint responsibility for the representation;


(2) the client agrees to the arrangement, including the share each lawyer will receive, and the agreement is confirmed in writing; and




(3) the total fee is reasonable


Even if the requirement of a fully informed and consenting client is met, fulfilling the proportionality requirement in subsection (1) appears — to put it mildly — fairly difficult.   I agree with the Benchmark article: pension fund attorneys need to abide by the “highest ethical standards,” and should therefore stop taking such referral fees.   Pension funds owe it to their own beneficiaries to insist upon it, perhaps requiring a signed statement from their lawyers confirming that no referral fees will be taken.  That’s the only way to avoid the appearance of giving or receiving “fee-duce-ary” [fee-induced] advice.

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