BOSTON (Legal Newsline) - Labaton Sucharow revealed it has agreed to pay referral fees to outside lawyers in almost a third of its open lawsuits, responding to prodding from the judge overseeing the scandal-tinged, $300 million State Street Bank & Trust case.
The New York class action firm disclosed the fee arrangements in a filing last week after U.S. District Judge Mark L. Wolf gave Labaton three days to tell him how many referral contracts it has. The order came after a tense exchange in an Oct. 15 hearing between Judge Wolf and Jonathan Gardner, Labaton’s head of litigation.
The judge demanded the total after Gardner described how the firm had hired an outside legal ethics expert, Hal Lieberman, to examine the contracts and provide advice on how to modify them to better comply with “emerging best practices.”
Labaton found itself in the judge’s crosshairs after the firm belatedly disclosed $4.1 million in fees it had agreed to pay Damon Chargois, a Houston lawyer who did no work on the State Street case but played the role of middleman between Labaton and the Arkansas Teacher Retirement System, which served as lead plaintiff in the State Street case.
The fee angered Judge Wolf as well as Labaton’s co-counsel in the case, and Judge Wolf has suggested Chargois may have distributed some his fee to political figures in Arkansas. Arkansas legislators grilled the chief of the state teachers’ pension fund this summer about the arrangement.
In a three-page filing, Labaton said it “currently has 150 open cases,” and there are “referral arrangements” in 48 of them, under 18 separate referral agreements. The firm has replaced all 18 agreements with a new model contract intended to comply with New York ethics rules, which are considered tougher than some other states.
Massachusetts is unique in allowing “bare referral” fees, under which lawyers can pay money for nothing more than the name of a client. As the State Street controversy unfolded, emails surfaced suggesting Chargois tried to have his fee paid to a consulting firm, not his law firm, which Labaton vetoed as going too far even for Massachusetts.
Under its new rules, Labaton said it will disclose the names of all attorneys receiving a fee in future cases. Many class action lawyers spread fees liberally among potential competitors, the better to reduce inter-lawyer squabbling. Most legal ethics experts say those fees should be disclosed to the entire class, but class action lawyers often say they need only disclose fees to their immediate client.
These hidden fee arrangements have been criticized for masking the level of collaboration among lawyers who might otherwise compete for lead counsel status. They also can provide a stream of money to people connected with the institutional investors class action lawyers need to recruit as lead plaintiffs in order to control the litigation.
Judge Wolf ordered an investigation of the fees in the State Street case after the Boston Globe revealed in a groundbreaking series of articles that Labaton’s co-counsel, The Thornton Law firm, provided large campaign contributions to Massachusetts politicians who could provide help in obtaining state pension funds as clients for the firm. The Globe found that the firm, headed by Garrett Bradley, a former assistant majority leader of the Massachusetts House, reimbursed employees more than $1 million for political contributions in apparent violation of state and federal election laws. A Massachusetts special prosecutor declined to bring charges this year.
Labaton’s filing does not answer another question Judge Wolf posed to the firm last week, which is how many other clients Chargois brought in. Federal court filings show that Arkansas Teacher Retirement System has been a party in more than 50 lawsuits in recent years, including some 30 cases that are currently open in federal court.
Chargois was a central figure in the 377-page investigation into the State Street case by retired U.S. District Judge Gerald E. Rosen released earlier this year. Among other materials Labaton turned over was a 2014 email in which Chargois complained about being undercompensated in some of the other cases in which Labaton represented ATRS.
“We got you ATRS as a client after considerable favors, money spent and time dedicated in Arkansas,” Chargois said in that email.
Labaton, in a comment to Law360, a legal publication, said its filing, “illustrates that referrals among law firms is a highly common practice throughout the legal industry.”
“Labaton is one of the country’s leading investor protection litigation law firms — it is not surprising that such a significant portion of our caseload and our practice derives from our peers referring and recommending clients and matters to us.”