U.S. District Court, Boston.

As published on Legal Newsline:

BOSTON (Legal Newsline) – The federal judge who unleashed a wide-ranging investigation into the fee practices of Labaton Sucharow was unimpressed by the class action firm’s agreement to install an ethics monitor and revamp its rules, saying he was more concerned about getting to the bottom of misstatements Labaton and some of its co-counsel made when applying for a $75 million fee.

In a lengthy and sometimes contentious hearing Monday in Boston, U.S. District Judge Mark L. Wolf expressed lingering anger over inaccuracies in the documents and statements Labaton made to support its fee application in the $300 million settlement of foreign exchange claims against State Street Bank and Trust. He also repeatedly brought up the firm’s failure to disclose a $4.1 million finder’s fee it agreed to pay a lawyer who did no work in the case.

The judge reminded the plaintiff lawyers in the room that he had the power to revisit the $75 million fee as well as decide how it should be divided among them. He dismissed as “enlightened self-interest” the measures Labaton agreed to last week in a tentative settlement with retired federal judge Gerald Rosen, the special master in charge of the investigation.

“Perhaps (Labaton) can make itself a model for the profession – that would be fine,” Judge Wolf said. “I’m concerned about what was said to me and why.”

Judge Wolf also repeated his concern about Labaton and the Arkansas Teacher Retirement System’s involvement in the State Street case, saying “in my mind Labaton is only class counsel for the purposes of administering the settlement.”

“The way things have evolved, I would not appoint Arkansas Teacher lead plaintiff, because of its relationship with Labaton, and I wouldn’t appoint Labaton” to represent the class, he said. In a sign he is concerned about continuing improprieties with finder’s fees, he ordered the firm to supply a list of contracts involving referral fees by Oct. 18, as well as any changes the firm has made to those contracts in the wake of the State Street scandal.

Ted Frank, a lawyer with the Competitive Enterprise Institute who was invited to file friend-of-the-court briefs in the case, said he was worried no one is representing class members as the lawyers fight with Rosen and the court over the $75 million fee. The money legally belongs to class members until the judge makes a final decision on what the lawyers should have been paid.

“There is nobody at the table in these negotiations representing the class,” Frank said. “All the pushing is in one direction.”

Judge Wolf appointed Rosen to investigate Labaton and its co-counsel, The Thornton Law Firm and Lieff Cabraser, after the Boston Globe ran a series of stories detailing questionable practices including more than $4 million in double-billing and $400,000 in fees paid to a brother of a lead lawyer at Thornton who normally works as a public defender.

Rosen began his probe by looking into the practices described in the Boston Globe articles. Only later did he learn about the finder’s fee to Houston lawyer Damon Chargois, who arranged meetings between the New York law firm and politicians with influence over the Arkansas Teacher Retirement System, which served as lead plaintiff in the State Street case.

Class action firms compete aggressively to sign up institutional investors as lead plaintiffs in financial lawsuits, mainly because Congress reformed securities class action laws to require judges to award control of such litigation to parties with the biggest stake in the case. Judge Wolf has raised pointed questions about how Labaton came to represent Arkansas Teachers, however.

In a heated sidebar conference in May, he asked whether “all those millions of dollars stayed with Mr. Chargois,” making an inference of corruption that offended Joan Lukey, a lawyer representing Labaton.

The suggestion Chargois steered money to Arkansas politicians “shocks me,” Lukey said at that May hearing.

“If you’re shocked because it occurred to me, then I’ve only prepared you for the shock you’re going to have” when Rosen’s report is made public, the judge responded.

He continued along those lines Monday, repeatedly asking about emails between Labaton partner Eric Belfi and Chargois suggesting Chargois had recruited other clients for the firm, and even at one point asked whether Belfi was still employed by Labaton. (He is.) The judge also questioned the arrangement under which Labaton and Lieff Cabraser loaned staff attorneys to the Thornton firm to increase the number of billable hours Thornton could submit in the so-called lodestar report Labaton submitted to the court to justify the fees in the case.

The three law firms don’t have such a harmonious relationship now, with Lieff Cabraser and Thornton both objecting to paying more for the special master’s investigation, which has cost $3.8 million so far and is being billed to the plaintiff firms. The judge suggested he won’t rule on Labaton’s tentative settlement until the other two firms have discussed their concerns with Rosen. He also reminded all the lawyers he might revisit the $75 million fee, both for the overall amount and how it is divided.

“We appreciate the Court’s goal of reaching a final resolution that is in the best interests of the customer class,” the Labaton firm said. “We will work to address the outstanding issues raised by the Court in hopes that a final agreement can be approved soon.”