BOSTON (Legal Newsline) - Lieff Cabraser lost its hard-fought battle to reverse sanctions a judge imposed against the firm for submitting an inflated fee request in the State Street securities class action, after the First Circuit Court of Appeals ruled the penalty was merited for “materially misleading” behavior.
The prominent California class-action firm appealed the sanctions order by U.S. District Judge Mark Wolf last year after tenaciously fighting for a larger share of the $300 million State Street agreed to pay customers in 2016 over excessive foreign exchange fees. Judge Wolf ordered the sanctions after Lieff submitted a request for fees that mischaracterized an academic study of fee awards in other class actions.
The First Circuit agreed with Judge Wolf that sanctions were justified, however, ruling that there was ample evidence Lieff had knowingly told the judge a 25% slice of the settlement was “right in line” with a report by Vanderbilt Law School Professor Brian Fitzpatrick when in fact that study found fees were significantly lower when settlements exceeded $100 million.
The sanctions order included stiff criticism of Lieff and its co-counsel, Labaton Sucharow and the Thornton Law Firm, over their behavior in the State Street case. Starting with a Boston Globe expose of double billing for low-paid contract attorneys, the court eventually uncovered questionable practices including the payment of $4.1 million to Damon Chargois, a Texas lawyer who did no work on the case other than introducing Labaton to officials who hired the firm to represent the state teachers pension plan in the case.
The First Circuit refused to consider Labaton’s appeal of Judge Wolf’s criticisms, saying it only had jurisdiction over the actual Rule 11 sanctions order. The appeals court repeated some of those criticisms, however, noting Chargois “appears to have been paid to entice Arkansas public officials to retain Labaton as counsel,” something the law firms should have disclosed voluntarily to the court.
The court also criticized Lieff for its tactics in the appeal. After his investigation uncovered evidence of potential ethical violations, Judge Wolf trimmed the fees for all three firms to $60 million from $75 million. Only Lieff appealed the fee cut, but it did so by asking the First Circuit to award it unclaimed funds from the settlement, rather than challenging Judge Wolf’s fee order or his instructions for splitting the money among the firms.
The First Circuit called this “classic doublespeak”: Having said it isn’t challenging the total fee award or how it is split among the law firms, the court said, “Lieff cannot now seek both an increase in fees awarded and a greater share for itself.”
Lieff challenged the Rule 11 sanctions on several grounds including that it didn’t get sufficient notice and it hadn’t signed the report that the court found misrepresented the Fitzpatrick report. The First Circuit rejected all of its arguments, noting Judge Wolf had repeatedly told the law firms considering sanctions. “Lieff certainly responded as if it well understood what was at stake,” the court said, hiring experts, filing briefs and arguing in court.
In considering the case, the First Circuit said, it was important to point out that once State Street agreed to the settlement, “the defendant, having bought peace, had no dog in the hunt for fees.” That left the trial judge with the job of ensuring the money split between claimants and their lawyers was fair, the appeals court said.
“The court's need to rely on counsel in this ex parte proceeding left it vulnerable to being misled, whether by affirmative misrepresentation or by half-truths that deceived through their incompleteness,” the First Circuit said, calling for “an elevated level of candor.”
If State Street had challenged the law firms’ fee request, the court went on, much of what Judge Wolf uncovered would have emerged in the adversarial process.
“It is fair to say that courts often and wisely inure themselves to those unfortunately frequent occasions when counsel slide their toes over the uncertain line that separates fair advocacy from deception,” the court concluded.