The dispute within the plaintiffs’ bar regarding who gets the fee when multiple attorneys submit demand letters relating to a short-swing profit that the company recovers in full may be headed toward resolution by the courts. Following James Hunter’s filing of a complaint in April alleging that he was entitled to a fee even though another plaintiff’s attorney submitted a demand letter first, Mr. Hunter, David Lopez and Miriam Tauber have filed a joint complaint in which they appear to be taking the position that entitlement to an attorney’s fee should not be based on who was first to submit a demand letter. See Chechele v. TFS Financial Corporation.
According to the complaint, a director filed a Form 4 on May 15, 2020, to report the second leg of a short-swing trade which resulted in a profit of $60,608, and each of the plaintiffs submitted a demand letter “within hours.” On May 20, the company informed the plaintiffs that it had collected the full amount of the profit, and that the plaintiffs “were not the first” to submit demand letters so would not be paid a fee. The complaint alleges that the company’s recovery of the profit was “a direct and proximate result” of the plaintiffs’ letters and demands that the company pay them 25% of the recovery.
There are several issues lurking here, none of which, to my knowledge, has been clearly addressed by any court:
- Is a security holder’s entitlement to an attorney’s fee based on whether the shareholder conferred a benefit on the company by bringing a 16(b) claim to its attention, and if so do demand letters submitted after the first one confer any benefit (or serve as a “motivating factor”)? And if latecomers are entitled to a fee too, how late can an attorney be–hours, days?
- Is an attorney entitled to a fee if the attorney’s client didn’t own a security of the issuer at the time the demand letter was submitted? If not, a plaintiff’s attorney needs to wait for his or her client to buy a security before submitting a demand letter. If the attorney waits, though, s/he isn’t likely to be the first to submit a demand letter, and therefore is at risk of not receiving a fee. And if the attorney submits the first demand letter rather than wait, and the courts ultimately conclude that the attorney is ineligible for a fee because s/he had no eligible client, does that mean no subsequent plaintiff is entitled to a fee, because the benefit has already been conferred?
It would be helpful to the issuer and insider communities to have answers to these questions, and perhaps they will if the plaintiffs’ bar doesn’t resolve the issues on its own.
-Alan Dye, Section16.net June 2, 2020