BOSTON (Legal Newsline) - A federal judge unsealed a lengthy report accusing Labaton Sucharow and a Massachusetts law firm of deliberately misleading the court about how it distributed the fees in a $300 million settlement with State Street Bank and Trust Co., including $4.1 million paid to a Houston lawyer who did no work on the case.
The report recommends Labaton and two other firms disgorge more than $10 million of its $75 million fee and Garrett Bradley, lead partner at the Thornton Law Firm in Boston, pay up to $1 million in fines for allegedly violating Massachusetts legal ethics rules. And in a related order, U.S. District Judge Mark Wolf revealed that federal prosecutors tried to obtain the special master’s report and other records before they were unsealed, as part of a criminal investigation into alleged political payments by Thornton lawyers to obtain pension-related legal work in Massachusetts.
The 377-page report by retired U.S. District Judge Gerald E. Rosen begins by complimenting Labaton and its co-counsel, which also included Lieff Cabraser, for “fine and effective lawyering” that resulted in a large settlement for investors who were allegedly overcharged by State Street in foreign exchange transactions. But Rosen immediately goes on to say their work “became tainted and entangled in a web of concealment and highly questionable ethical practices by experienced attorneys who should have known better.”
Central to Rosen’s report is the discovery, midway through his 14-month investigation, that Labaton agreed to pay an undisclosed $4.1 million fee to Damon Chargois. The Houston lawyer was an intermediary between Labaton and the Arkansas Teacher Retirement System, which served as lead plaintiff in the case. Chargois’s involvement was concealed from other lawyers within Labaton as well as most of the co-counsel on the case, the judge and, until stray e-mails turned up last August, the special master stated.
Among other materials Labaton later turned over was a 2014 e-mail in which Chargois complained about being undercompensated in some of the other cases where Labaton represented ATRS.
“We got you ATRS as a client after considerable favors, money spent and time dedicated in Arkansas,” Chargois said in that e-mail. That e-mail apparently caught the eye of Judge Wolf, who saw it as a possible indication of political payoffs in Arkansas similar to allegations federal prosecutors were investigating in Massachusetts. In a heated May 30 sidebar conference that recently became public, Judge Wolf asked Labaton’s lawyer Joan Lukey directly “whether all those millions of dollars stopped with Mr. Chargois.”
“I just have to tell you, your last comment, I am really in shock,” said Lukey in response.
Judge Wolf became interested in tracing where every dollar of the $75 million in fees he awarded in the State Street case went after a series of articles in the Boston Globe raising questions about the accuracy of the law firms’ billing records and suspicious payments including $400,000 at $500 an hour that flowed to Michael Bradley, Garrett’s brother, who normally works as a $53-an-hour public defender.
Labaton, in its own 97-page motion opposing the special master’s conclusions, accused Rosen of imposing his own “personal feelings and aspirations” on what is a case of some mistaken billing records and the “perfectly permissible” practice of paying referral fees in Massachusetts. (The practice is prohibited under American Bar Association rules adopted by most other states). Labaton also said Rosen’s “conclusions of law are almost entirely incorrect.”
Thornton Law said Rosen’s report “is riddled with factual and legal errors and mischaracterizations of the record, not to mention internal contradictions.”
Judge Wolf ordered the unprecedented investigation into the State Street fees after the Boston Globe examined the so-called “lodestar” report law firms frequently submit in class actions to serve as a cross-check to verify their fee award is reasonable. Under Federal Rule of Civil Procedure 23 governing class actions, judges have a fiduciary duty to ensure that class members who may not even be aware they are in a suit are not charged unreasonable fees. In the lodestar report, lawyers identify the attorneys who worked on the case, the hours worked and their hourly rate. The total is then usually assigned a multiplier to reflect the risk they took of not getting paid at all.
The Boston Globe uncovered evidence of double-billing by the Thornton Law Firm, which submitted hours for attorneys who were actually employed by Labaton and Lieff Cabraser and also appeared in their lodestar reports. Garrett Bradley later submitted a declaration that Judge Wolf declared was filled with falsehoods, including citing typical hourly rates the firm charges even though it works only on contingency. Rosen, in his report, said the failure to immediately disclose the double-billing violated Massachusetts ethics rules and called for a fine of $400,000 to $1 million.
Thornton, in its response, dismissed the errors as minor and because he didn’t take the time to “closely” read the document before he signed it. Garrett Bradley is a former assistant majority leader in the Massachusetts House of Representatives who contributed heavily to officials who oversee pension funds that serve as plaintiffs in securities class actions.
The special master cited an e-mail in which Bradley referred to the practice of billing for additional staff attorneys as the “best way to jack up the loadstar [sic].” But Thornton said Bradley was referring to how law firms deal with each other internally when dividing up a fee and said including it in the report was “a transparent attempt to generate a soundbite.”
Class-action firms frequently join forces in large securities cases, and the report provides an unusually detailed look at how they allocate billable hours among themselves, not just on one case but across several cases. That leads some critics to suggest the law firms are colluding with each other to avoid competing for clients by lowering their hourly rates.
The special master criticized Labaton and Thornton for “hyper-focus on business development and fee generation” and said both firms “would benefit from the imposition of on-going ethics supervision.” He said it was disappointing neither firm expressed any remorse over the behavior he’d uncovered, instead hiring a “phalanx of experts” who “erected a wall of legalistic and formalistic excuses and blame-shifting.” Labaton even moved to have the judge recuse himself for perceived bias. Wolf, in a detailed response released yesterday, refused and said his recusal “could encourage the perception that litigants can manipulate the system to veto an unwanted judge.”
The case features a battle of prominent legal ethics experts, with Labaton hiring William Rubinstein of Harvard Law, who said the firm did nothing wrong, and the special master hiring Stephen Gillers of NYU Law School, who recommended sanctions.
(In a surprisingly aggressive aside, Thornton referred to Gillers, one of the nation’s best-known authorities on legal ethics, as “a self-proclaimed `expert’ from NYU Law School” whose report is “replete with clearly erroneous legal and factual findings.”
The case also features sharply differing views on secrecy and the proper role of a judge in overseeing how fees are paid in a class action. Judge Wolf views the entire amount of money a defendant agrees to pay to settle a case as belonging to the class members until the court decides how much to award the attorneys. That view comports with the economic reality that defendants are only concerned with the total cost of a settlement, not how it is divided up.
The judge was concerned that the close relationship between ATRS and Labaton/Chargois – they were involved in at least nine prior securities lawsuits – might prevent ATRS from negotiating aggressively over fees on behalf of the rest of the class. When the special master recommended Labaton pay back more than $10 million to class members and other lawyers on the case, the judge said, that close relationship created “a very real potential conflict” between ATRS and the class.
Labaton and its experts maintain the payment to Chargois came out of their share of the fees, never belonged to class members and therefore didn’t need to be disclosed to anyone.
The judge also expressed frustration more generally with how Labaton tried to keep information from the court and the public. “Only the most compelling reasons can justify non-disclosure of judicial records,” he wrote.
Labaton insists there are no improprieties in its relationship with Chargois, who admitted in a deposition that he didn’t even know what an institutional investor was before Labaton agreed to pay him 20% of any fees it earned from public clients in Arkansas. But Judge Wolf and Rosen expressed more than a little suspicion about the arrangement.
The payments to Chargois “suggested questions about whether any of the money paid to Chargois had been used to make political contributions or other payments, and the potential for the criminal investigation to expand to include Chargois,” the judge said in a June 28 order.
Rosen was more circumspect in his report, only noting the questions raised by Chargois’ 2014 e-mail discussing the “considerable favors” and “money spent” getting ATRS as a client.
“The special master did not investigate further into the background facts alleged by Chargois in this email as to how the Chargois/Labaton/ATRS relationship was originated and developed,” the special master said in a footnote. “This investigation is beyond the scope of the Special Master’s assignment.”