A recent American Lawyer story by Scott Flaherty, “Labaton Fee Deal in State Street Case Prompts Arkansas Legislative Inquiry,” reports that Arkansas’ state Legislature is looking into a $4.1 million fee that Labaton Sucharow paid to a Texas-based lawyer who helped the plaintiffs firm attract an Arkansas public pension fund as a client in securities class actions, according to court documents made public. The existence of a legislative investigation in Arkansas was referenced in a letter to U.S. District Judge Mark Wolf in Boston from a lawyer representing Gerald Rosen—a retired federal judge who, as a special master, has been reviewing a $75 million attorney fee awarded to Labaton Sucharow and other firms after they secured a $300 million securities class action settlement with State Street Corp.
Rosen’s counsel, William Sinnott of Barrett & Singal, wrote that Rosen had received inquiries from Arkansas lawmakers and was looking for guidance from Wolf on how to respond. “He will not, of course, conduct discussions or provide sealed documents to legislative, law enforcement or other requestors without the express direction of the court,” Sinnott wrote of Rosen. “However, he does wish to alert the court to these inquiries as they implicate access to matters of public concern.”
Sinnott’s letter was initially filed confidentially, but Wolf unsealed it, making it public. The judge also issued an order directing that people interested in information or documents about the case should make those requests directly to Wolf. If Rosen receives further questions, Wolf wrote, the special master should respond with a copy of the judge’s order.
Word of the Arkansas legislative probe follows a mammoth special master report released publicly in June in which Rosen found “questionable” a number of billing practices carried out by Labaton Sucharow and other plaintiffs firms involved in the State Street litigation. The special master recommended that Labaton Sucharow, The Thornton Law Firm and San Francisco’s Lieff Cabraser Heimann & Bernstein return more than $10 million.
Labaton Sucharow, represented by Choate Hall & Stewart, has strongly contested Rosen’s findings in the special master report. It also has sought to have Wolf removed from the State Street case but on July 25, the U.S. Court of Appeals for the First Circuit denied Labaton Sucharow’s request for an order forcing Wolf’s recusal.
Among the concerns Rosen detailed in his report was evidence that Labaton Sucharow paid a Texas-based lawyer named Damon Chargois to help the firm secure an Arkansas state teachers’ pension fund as an institutional investor client. Chargois, who had connections to the pension fund and made an introduction, didn’t actually work on the State Street case, though he earned about $4.1 million from Labaton Sucharow under a referral agreement, according to Rosen. The Arkansas pension fund, represented by Labaton Sucharow, ultimately served as lead plaintiff in the State Street securities case.
Labaton Sucharow did not disclose the Chargois payment to the court or to other members of the settlement class and its co-counsel in the case during the period when Wolf was considering whether to approve the $75 million fee award, according to the special master report. Rosen wrote that the lack of disclosure about the Chargois payment “kept the court in the dark and denied it the very information it needed” to determine the proper amount to award plaintiffs lawyers leading the State Street litigation.
In objections to Rosen’s findings, Labaton Sucharow has maintained that the payment to Chargois qualifies as a “bare referral” fee and that lawyers are allowed to enter such arrangements under the Massachusetts rules of professional conduct. “Judge Rosen may be offended by a ‘bare referral’ fee—one where the referring attorney does not have to do any work in order to receive the referral fee, but it is the law in Massachusetts,” Labaton Sucharow said in a June statement after Rosen’s report became public.
The Chargois payment now appears to be at the center of the Arkansas legislative probe. In the letter made public Wednesday, Rosen’s counsel quotes from an email sent by Arkansas state Rep. Mark Lowery, who co-chairs the state Legislature’s Joint Performance Review Committee. “We are extremely concerned about references to ‘political favors’ that brought about the relationship between ATRS, Labaton Sucharow and the Chargois … law firm,” Lowery wrote in the email to Rosen’s representatives.
In a statement, Labaton Sucharow acknowledged that it is among a small group of law firms that regularly represent the Arkansas Teacher Retirement System (ATRS) in securities cases, saying it was selected only after “a public request for qualifications and based on our long track record as one of the country’s pre-eminent class action law firms on behalf of institutional investors.” The statement went on to say there was nothing to indicate that any money paid to Chargois was used improperly.
“We are confident that our work with ATRS yielded positive results for the state of Arkansas and strenuously object to any inference of political influence associated with our work. Moreover, there is no evidence that any of the referral payment made to Mr. Chargois was used inappropriately,” the statement said.