By Buddy Gill
Happy that NCUA stopped corporate stabilization fund assessments? Happy that NCUA may be rebating stabilization fund assessments earlier than expected? Thank the legal team managed by NCUA.
Over the past seven years, the expert securities litigation legal team assembled by NCUA successfully recovered $4.3 billion from some of the largest and most powerful financial firms on the planet.
To do so, NCUA paid the lawyers contingency fees at an average rate of 23%. This rate is less than the industry average contingency fee range of 25% to as high as 40%. NCUA’s independent Inspector General later looked into the matter for Congress and concluded these fee arrangements well in line with the legal industry’s standards.
Monday morning quarterbacking going around on legal fees paid by NCUA to the winning outside counsel is unproductive. Let’s review. Coming off the financial crisis, a statute of limitations clock for filing such lawsuits was running. Virtually no credit union back in 2009-2010 would support a bigger NCUA annual budget to pay up-front for untold hourly legal fees, in risky and speculative litigation against well-heeled Wall Street firms.
Imagine the screams from credit unions and their trade groups if NCUA had increased its annual budget by multiples of millions over many years to directly fund this expensive and complex litigation against dozens of Wall Street firms. Would Congress have applauded, or screamed at NCUA (at trade association behest)? Now, imagine the screams from industry if NCUA had simply not acted at all?
Contingency Fees Were Only Rational Solution
Without using appropriate contingency fee arrangements, no lawsuits would have been brought at all, and there would be no talk today by the NCUA board about early corporate stabilization fund rebates. In fact, further corporate assessments in past years would have been likely.
Powerful Wall Street securities firms have huge legal war chests to pay their lawyers and protract any litigation over decades. Little guys needing a day in court (like credit unions) hardly stand a chance to financially compete alone. So, to take on Wall Street firms, you try to hire the toughest, meanest, best lawyers with the necessary field expertise and proven track records you can afford. But guess what? You can’t afford the best out of your own pocket – unless you agree to a reasonable contingency fee, one that aligns and invests the client’s interest with the lawyers.
Former NCUA Chairman Mike Fryzel (a Republican) put it well: “In a suit for damages, attorneys earn a percentage of what they recover. The more they get for a client, the more they earn for themselves. It is an incentive-based system that encourages a greater effort. Had they charged an hourly rate or the recovery was minimal, many would complain that NCUA wasted credit union funds.” So -- the more money your lawyers win in court for YOU, the more your lawyer gets paid.
A Curious Case
The renewed legal fee attention is curious. What interests are being served to re-litigate the paid legal fees? Are credit unions going to recommend suing our own lawyers, who recovered the $4.3 billion for us, who fronted the litigation costs, and would not have collected a penny if they lost? Good luck with that.
Perhaps there are other agendas behind these attacks? Could the very same Wall Street firms NCUA sued now support Congress acting to prevent independent federal agencies like NCUA from hiring lawyers using contingency fee arrangements in the future? One would hope credit union trades would lobby against that kind of restrictive legislation.
One banker trade group (ICBA) also recently publicly attacked the legal fees paid by NCUA. Why should ICBA even care? Their primary argument apparently is that NCUA is “in over its head” in managing the legal arrangements (continuing their attacks on NCUA as a rogue regulator) – which suggests to skeptics like myself that bankers would prefer Congress to perhaps consolidate regulators or rein in NCUA, and are using the legal fee argument as a pretext (among other reasons they may advance).
Remember These Benefits, Too
Perhaps special interests like bank trade groups and Wall Street firms support putting NCUA’s future budgets under Congressional appropriations, so outside interests can now too have their say in what NCUA can and can’t do? Through lobbying over NCUA’s future budgets, perhaps Wall Street can prevent any future litigation budget increases or prohibit use of contingency fees? Or banks stop NCUA’s ability to fund the regulatory infrastructure needed for credit union FOM expansion?
There are benefits to having an independent regulator that credit union foes can’t harm using their political clout via Congress. If both Wall Street and ICBA are unhappy with NCUA’s contingency fees arrangements that unarguably produced $4.3 billion in recoveries, perhaps there are hidden agendas we need to unmask behind this revived public flogging of the fees for lawyers. Let’s hope it’s not simply some partisan-driven attack.
Let’s all be smart and face facts. Without these contingency fee arrangements, NCUA could not afford to purse this critical litigation, and your credit union would not be getting any assessment rebate money back earlier than at least 2021. People with reasonable minds may differ, but in my opinion (as someone who has dealt firsthand with legal reform issues since 1993), it is not unreasonable to pay an average 23% share of any recoveries, still lower than legal industry average rate range of 25% to 40%, to these top-tier securities expert law firms needed to win. Our lawyers fronted all the litigation costs, not knowing how many years it could stretch out without any return, and took all the financial risk if these cases lost. Thankfully, while never any guaranteed outcome, these lawyers have so far won $4.3 billion from over two-dozen complaints in federal courts against more than thirty lawyered-up big securities firm defendants, with credit unions getting roughly 77% of that. Sure beats getting zero.
In this case, the big picture is: all the lawyers who took on Wall Street for credit unions and WON should be commended, not demonized. They are heroes, not villains. Why treat them otherwise?
Buddy Gill is former senior policy advisor to two NCUA Chairman. He can be reached at buddygill@mac.com.