I’ve written about how the class action system benefits lawyers at the expense of class members. The poster child for the dysfunctional class action system was the Ford Explorer SUV class action settlement, a case in which plaintiffs’ lawyers were awarded $25 million in attorneys’ fees even though class members only received $74,000. Class counsel claimed that class members were receiving $500 million worth of $500 coupons toward the purchase of new Ford vehicles, but only 148 coupons were redeemed for a total value of $74,000. That’s right, $25 million for the lawyers, although the class members actually received $74,000.
But this holiday season brings to us what may be the gift of a new poster child for class action abuse.
In a nationwide class action, now awaiting approval in the U.S. District Court of Northern California, lawyers sued Charles Schwab & Co. on behalf of every person who anytime since 2005 had or has an individual retirement account (IRA) with Schwab. They alleged that the IRA agreement that Schwab has all of their customers sign contains language allowing Schwab to take money from a customer’s IRA if a customer owes Schwab money. The lawyers claimed that this language permitted transactions to occur that are prohibited by the Internal Revenue Service (IRS) and thus, customers forfeited the tax-exempt status of their accounts. By the way, neither party contends that the IRS has ever made such a claim.
The plaintiffs’ lawyers settled the case and have proudly announced in their request to the court for $500,000 in attorney’s fees that, although class members are receiving no money, the settlement has helped some 4 million class members protect $400 billion in retirement account funds from losing their tax-exempt status. Schwab agreed to add a paragraph containing a retroactive amendment to the IRA agreements saying that any language in the IRA agreement that is inconsistent with either the IRA plan or the tax code would be null and void. But there is no assurance that the IRS is obligated to honor such a change.
What the plaintiffs’ lawyers didn’t so proudly announce was that as part of the settlement agreement, class members were giving up their right to sue Charles Schwab for any damages that could occur in the future as a result of the alleged tax code-violating provision of earlier IRA contracts.
As a result of this proposed settlement agreement, there have been a slew of objections stating the obvious: This settlement is ridiculous because the class members are getting no benefit while the plaintiffs’ lawyers are asking for $500,000. However, the objectors have also taken note of the fact that if their accounts did indeed lose their tax-exempt status, class members could owe the IRS hundreds of millions of dollars in taxes, interest and penalties, regardless of Schwab’s additional language.
Although the plaintiffs’ lawyers contend that Schwab has exposed their customers to potentially catastrophic tax liability, the settlement they negotiated allows Schwab to wash its hands of any responsibility for the improperly drafted account provisions. For this they are asking for half a million dollars in fees?
It’s clear that the class members are the victims here, but who is the victimizer? Is it Charles Schwab for absolving itself of the enormous potential tax consequences to their customers because their IRA agreements were improperly drafted? Or is it the plaintiffs’ lawyers for enriching themselves based on allegations of Schwab’s negligence while their settlement leaves Schwab better off and class members worse off than if the lawsuit hadn’t been filed? Or both?
Lawrence W. Schonbrun is the executive director of Class Action Watch.