BOSTON (Legal Newsline) - Securities class action firm Labaton Sucharow has reached a tentative truce with the special master investigating questionable activities that include a $4.1 million referral fee paid to a lawyer who did no work but served as the middleman between Labaton and an Arkansas pension fund that served as lead plaintiff in a lawsuit against State Street Bank and Trust.
The mysterious fee, plus earlier examples of double-counting in a so-called “lodestar” report Labaton submitted to the court to justify its $75 million fee in the State Street case, sparked a wide-ranging investigation that continues. Columbia Law School Professor John Coffee, in a recent article, said the case could be a “Legal Watergate” that could reshape class action practice by forcing lawyers to disclose how they distribute their fees, especially to rainmakers who connect class action lawyers with the institutional investors they need to establish control of a case.
The proposed settlement, released shortly after midnight Wednesday, represents a remarkable retreat for Labaton, which previously maintained an aggressive stance including seeking the recusal of U.S. District Judge Mark L. Wolf, who is overseeing the State Street case. When that gambit failed, State Street asked the judge to turn over any communications between Judge Wolf and the special master, retired federal judge Gerald E. Rosen, in search of evidence Rosen had injected bias against Labaton into the judge’s mind.
In the proposed agreement, Labaton said it “deeply regrets” paying a “bare referral” fee to Damon Chargois, a Texas lawyer who introduced the New York firm to Arkansas politicians and officials of the Arkansas Teacher Retirement System.
Labaton fought to keep the payment secret, but it emerged in an investigation Judge Wolf ordered after the Boston Globe uncovered more than $4 million in double-billing in the lodestar report Labaton submitted to the court to justify its fee in the case.
The firm said it would pay as much as $4.8 million to class members and other lawyers in the case as well as shouldering its cost of the special master’s investigation, which has cost millions of dollars so far.
Labaton was awarded $75 million in fees for negotiating a $300 million settlement with State Street in a lawsuit over foreign exchange fees. The special master concluded the fee was reasonable, but chastised Labaton for shoddy recordkeeping practices and failing to disclose the referral fee to Chargois, who did no work on the case and didn’t accept responsibility as a legal representative of the pension fund.
Professional ethics rules in Massachusetts allow for such bare referral fees, but they are prohibited nearly everywhere else, including most federal courts. Rosen also recommended Labaton retain its lead counsel role in the case.
“Labaton acknowledges that the non-traditional nature of the Chargois fee agreement, and the facts that he neither worked on nor assumed responsibility for the State Street case, constitute important factors that would likely have contributed to a more robust decision-making process by the Court in the fee award process,“ the firm said in a statement accompanying the proposed settlement.
The firm agreed to return $700,000 of the fee attributable to Chargois to class members, repay as much as $1.4 million to class members for double-counting, and shift $2.75 million in fees to lawyers representing ERISA clients. Those lawyers complained they were shortchanged on fees because of Labaton’s incorrect lodestar calculations and the undisclosed referral fee to Chargois.
Labaton formally adopted a policy prohibiting “bare referral” fees and an internal policy requiring the firm to disclose to all courts any fee-sharing agreement with other lawyers, following the ethics rules of the Eastern and Southern districts of New York. Labaton failed to disclose the Chargois fee because, it argued, Massachusetts, unlike other states, doesn’t prohibit such referral fees.
Labaton also agreed to halt the practice of allowing other firms to pay for Labaton staff attorneys working in its office, as well as allowing other firms to claim the time of Labaton staff lawyers on their lodestar petitions. Class action lawyers frequently share the costs of litigation, but also engage in undisclosed agreements to share lodestar hours, a practice critics say can mask anticompetitive behavior.
By agreeing to split fees with competing law firms, class action lawyers can avoid noisy fights over the job of lead counsel as well as potential price competition over fees to get the work.
To ensure future compliance, Labaton will hire James Holderman, former chief judge of the U.S. District Court for the Northern District of Illinois, to monitor the firm’s fee practices for a year. Labaton agrees to withdraw all pending motions, including its objections to the report, and waive its right to appeal. It will also pay its share of the special master’s costs and cooperate with the investigation and federal or state inquiries that may arise.
They can renew their objections if Judge Wolf rejects the special master’s recommendations. Labaton lead partner Larry Sucharow has been ordered to attend an Oct. 15 hearing with the judge over the proposed settlement.