BOSTON (Legal Newsline) - The federal judge who ordered a wide-ranging investigation into the fee practices of Labaton Sucharow and a Massachusetts law firm in the $300 million State Street Bank & Trust case isn’t done asking questions yet.
Lawyers from Labaton and the Thornton Law Firm have been ordered to appear at a June 24 hearing to discuss, among other things, how a brother of the lead partner at Thornton, who normally works as a public defender, earned $400,000 in fees for securities work in the case. In a curt, four-page order dated May 31, U.S. District Judge Mark L. Wolf also said he will seek testimony from two Labaton attorneys on a Houston lawyer with political ties to Arkansas pension officials who earned an undisclosed, $4.1 million fee despite doing no work on the case.
A special master last year compiled a scathing report accusing Labaton and Thornton of misconduct for deliberately misleading the court about how it distributed some $75 million in fees it was awarded for negotiating settlements in the securities litigation against State Street. He recommended slashing the fees by $10 million and imposing a $1 million fine on the Thornton firm for allegedly submitting false fee declarations.
The allegations emerged after the Boston Globe published a series of stories about political connections between the Thornton firm and Massachusetts pension officials, which led to evidence of double-billing in the State Street case as Labaton and Lieff Cabraser, another national class action firm involved in the case, “lent” staff attorneys to Thornton and all three billed for their work.
The double-billing inquiry led in turn to the revelation that Labaton had steered more than $4 million of its fee to Damien Chargois, a Texas lawyer who helped Labaton line up the Arkansas Teacher Retirement System as a client in securities class actions. Chargois claimed a close relationship with the then-head of the state pension fund.
The undisclosed fee enraged Judge Wolf, who in a heated sidebar discussion last year asked Labaton’s lawyer “whether all those millions of dollars stopped with Mr. Chargois.”
Labaton and Thornton fought the judge aggressively as he probed their fee arrangements, even asking he be recused from the case. But in a proposed settlement last October, the firm admitted “errors” that led to double-counting of attorneys on a report submitted to the court. It also acknowledged its arrangement with Chargois “did not comply with emerging best practices.”
In the June 24 hearing, Judge Wolf said he will hear argument on whether the $75 million or 25% fee award was reasonable and whether class counsel misrepresented a study of class action fees by failing to inform the court that fees tend to drop below 20% as the size of a settlement fund exceeds $100 million. The judge also wants to hear whether contract attorneys should be billed as an expense, instead of counting toward the so-called “lodestar” record of hours expended on a case that judges use to calculate a reasonable fee.
Plaintiff firms frequently hire roomfuls of contract attorneys, sometimes earning as little as $20 an hour, to perform routine work that critics say could be handled by paralegals or software.
The judge also wants to hear arguments on whether Thornton’s managing partner, Garrett Bradley, submitted a false declaration when he placed lawyers from other firms on Thornton’s lodestar report and cited the “firm’s regular rates” when it works only on a contingent-fee basis. And he ordered Garrett Bradley to address whether it was reasonable to pay his brother Michael, normally a $53-an-hour public defender, $500 an hour in the State Street case. Legal fees in class actions are typically calculated with a multiplier to the lodestar, meaning Thornton earned an additional $200,000 on Michael Bradley’s work after a 1.8 multiplier.
Labaton attorneys Eric Belfi and Christopher Keller are to discuss other cases in which Chargois earned a fee and a report by retired Judge Garrett Brown that the law firm commissioned into its fee practices. In that report, Brown concluded the arrangement with Chargois was “unique and aberrational.” The Houston lawyer earned “bare referral fees,” which are prohibited in most states but allowed under Massachusetts ethics rules, of $26,000 to $300,000 in several other cases, Brown found.
Labaton wanted to stop paying Chargois his share of fees in cases in which Arkansas was a plaintiff after his main contact at the pension fund left in 2008, Brown wrote, but Chargois threatened to sue the firm in Galveston, which many perceive as a plaintiff-friendly jurisdiction. So Labaton kept paying the fees, failing to disclose them to Arkansas or the court in the State Street case.
Brown said Labaton did not pay “bare referral” fees to any other lawyers, although it does pay referral fees to law firms, including Thornton, that manage relationships with pension funds that serve as plaintiffs in securities class actions.
Labaton, in a statement, said “we look forward to the upcoming hearing and arriving at a final resolution of any outstanding issues in the State Street case.” The Brown report included “a review of approximately 250 settled cases over a multi-year period and confirmed that Labaton was in compliance with ethical and professional requirements in those cases,” the firm said.