BOSTON (Legal Newsline) - Labaton Sucharow, having failed to get a federal judge to recuse himself, asked him to turn over records of any out-of-court communications with the special master probing allegations that Labaton overcharged its clients and improperly shared part of its $75 million fee.
In a filing Friday, Labaton said the firm’s lawyers have “grown increasingly concerned that the Special Master may have engaged in substantive ex parte communications with the Court,” which could leave the judge biased against the firm.
In a heated sidebar conversation on May 30, U.S. District Judge Mark L. Wolf said the special master’s sealed report could lead readers to suspect political payoffs may have been involved in Labaton’s relationship with the Arkansas teacher pension fund, which served as lead plaintiff in the case.
The $300 million settlement with State Street that is the subject of the special master's report provided $75 million to plaintiffs attorneys.
According to the transcript of that conversation and later filings by Labaton, the firm paid $4.1 million to a Texas lawyer, Damon Chargois, as a referral fee for introducing the firm to the pension fund’s leaders. Securities class action lawyers compete fiercely to secure large institutions under the Private Securities Litigation Reform Act, which directs judges to award lead-plaintiff status to the investors with the largest stake in the outcome of the case.
In last month’s sidebar conversation, Judge Wolf said that once the special master’s report becomes public, “there are going to be questions about the origin of this relationship and whether all those millions of dollars stopped with Mr. Chargois.”
Labaton said the judge’s comments could be seen as indications of bias and earlier this month asked him to recuse himself. The judge refused in a curt order on June 21, saying “a reasonable person could not question my impartiality in this case.”
Labaton followed up with its motions a day later, asking the judge to reveal any ex parte communications with the special master, retired federal judge Gerald Rosen. American Bar Association rules counsel judges not to discuss the facts of a case outside of court, although they may consult with court staff and other judges on matters associated with carrying out their own duties.
In its motion, Labaton said nothing in Judge Rosen’s report suggested political corruption, yet the judge brought the topic up anyway. “Labaton became concerned that the Special Master may have been the source of the Court’s misapprehension regarding political corruption,” the firm said in its motion.
Lawyers for the special master dispute Labaton’s description of the report, however. In a heavily redacted June 21 letter to the judge, William F. Sinnott said the firm’s “statements as to the filed record, which were echoed in Labaton’s motion to recuse the Court, are, quite simply, not accurate.”
The next two paragraphs are largely blacked out, but then Sinnott concludes by saying “we believe that there remains a strong and broader interest in clarifying and enlarging the record.”
The Arkansas pension fund was lead plaintiff in a lawsuit against State Street Bank & Trust alleging foreign exchange violations and represented by law firms including Labaton, Lieff Cabraiser and the Thornton Law Firm, who were awarded $75 million in fees.
The case splashed into public view after the Boston Globe uncovered examples of double-billing and odd payments including $200,000 paid to Michael Bradley, the brother of Thornton partner Garrett Bradley. Michael Bradley's normal work is as a $50-an-hour public defender.
Alarmed by these allegations, Judge Wolf appointed Rosen as a special master last year. He’s stuck Labaton with the $3.8 million bill for compiling his report, which has been described as suggesting significant fee givebacks. Labaton has fought to keep the report under seal and disagrees with the findings of ethics expert Stephen Gillers of NYU Law School, who apparently concluded the law firm should have disclosed to the court how it distributed its fees.
In the May 30 sidebar, Judge Wolf returned repeatedly to the question of whether Arkansas and Labaton could adequately represent class members, given their own potential legal entanglements. Labaton reportedly hired Chargois, a Texas lawyer whose work has included representing employees in workers’ compensation cases, to introduce it to the head of the Arkansas pension fund. In a May 30 hearing, George Hopkins, the current chief of the pension fund, told the judge he didn’t think of hiring Labaton to handle securities cases until “political leaders” convinced him he should, according a report by Law.com, which attended the hearing.
Wolf zeroed in on the role of Steve Faris, a retired Arkansas state legislator whose committee oversaw the pension fund. In an interview with Law.com, Faris said he introduced the former head of the pension fund to lawyers at Labaton, but did nothing more.
In the May 30 sidebar, the judge said “Arkansas Teacher’s going to be defending itself, and its interests are different than the interests of the class.”
“I just have to tell you, your last comment, I am really in shock,” said Joan Lukey, a lawyer with Choate, Hall & Stewart representing Labaton, since nothing in the report suggests improper political payoffs.
“So the suggestion that that’s at play here shocks me,” said Lukey. “That’s the kind of thing that causes the press to sit up.”
“If you’re shocked because it occurred to me, then I’ve only prepared you for the shock you’re going to have when the report and recommendation is public,” the judge responded.