Arkansas Teacher Retirement System chief's role in suit flagged

Special master report questions settlement’s attorney fees

George Hopkins, executive director Arkansas Teacher Retirement System, is shown in this file photo.
George Hopkins, executive director Arkansas Teacher Retirement System, is shown in this file photo.

Some state lawmakers are raising questions and seeking more information about the Arkansas Teacher Retirement System's participation in class-action lawsuits.

The impetus for their interest is the system's role as the class representative in a class-action lawsuit against financial services provider State Street Corp. in which there has been a $300 million settlement. The federal judge in the case has asked whether the system should remain the lead plaintiff and about possible corruption.

System Executive Director George Hopkins decided five weeks ago to remain as a class representative in the lawsuit, even after the system's trustees recommended that he withdraw from that position.

The trustees' recommendation and Hopkins' decision came after the Boston-based federal judge, Mark L. Wolf, said he was considering a special master's then-sealed report recommending that three law firms in the case repay a significant part of the $75 million in attorneys' fees awarded as part of the settlement.

The three law firms are Labaton Sucharow LLP, Thornton Law Firm LLP and Lieff Cabraser Heimann & Bernstein. They took the case on a contingency-fee basis.

A good estimate of how much the teacher retirement system will receive from the settlement is not available at this time because of the nature and stage of the case, said Rod Graves, the system's associate director of operations.

But "if we were trying to get a ballpark estimate, it would likely fall in the $300,000 range," he said Friday.

In his 377-page report unsealed June 28, Special Master Gerald Rosen recommended that the three law firms disgorge more than $10 million in attorney fees -- including a $4.1 million payment to a Texas attorney, Damon Chargois, who introduced Labaton Sucharow, the lead law firm, to the Arkansas agency.

But Labaton Sucharow sharply criticized the special master's report.

The law firm said Rosen, having been unsuccessful in identifying anything more than an inadvertent billing error self-reported by Labaton, elected to divert his investigation into one costing nearly $4 million.

Rosen suggests that the class counsel engaged in "questionable conduct" by paying a referral fee to another lawyer, even though that payment was permissible under the well-established law in Massachusetts, according to the law firm.

On June 28, federal judge Wolf rejected Labaton Sucharow's request that he recuse from this case. The law firm has appealed his ruling to the 1st U.S. Circuit Court of Appeals. Among the issues is a private sidebar on May 30 in which Wolf suggested that when Rosen's report became public, "there are going to be questions about the origin of this relationship and whether all of those millions of dollars stopped with Mr. Chargois."

SYSTEM REAPS MILLIONS

The Arkansas system has collected more than $40 million as a result of securities class-action lawsuits, including those in which the system is lead plaintiff, over the past 10 years, Hopkins said.

Hopkins has been the system's executive director since December 2008. The Arkansas Teacher Retirement System is state government's largest retirement system with roughly $17 billion in investments and more than 100,000 working and retired members.

The system is seeking to recover more than $21 million in financial losses through about a dozen class-action lawsuits, he told the trustees recently.

Labaton Sucharow filed a class-action securities lawsuit against State Street, the nation's second-largest custodian bank, on behalf of the system in 2011. Wolf approved the settlement and the award of attorneys' fees in 2016. The underlying suit alleged that State Street swindled millions of dollars a year from its clients on their indirect foreign exchange trades over the course of a decade.

Hopkins estimated that he spent several hundred hours on this case over its five-year history, according to court records.

LEGISLATIVE REVIEW

The special master's report is on Tuesday's agenda for a combined meeting of the Joint Committee on Public Retirement and Social Security Programs and the Joint Performance Review Committee. The committee's leaders have requested records about state retirement systems' participation in class-action lawsuits. The meeting is at 9 a.m. in Room 151 at the state Capitol.

Rep. Doug House, R-North Little Rock, who is co-chairman of the retirement committee, said his primary concern is that the teacher retirement system's retirees get every dollar they have been promised.

House also said the Legislature shouldn't run state retirement systems because that's the job of the systems' trustees.

But "it is apparent that there is a lot of information those [teacher retirement system] trustees didn't have [about the State Street case] because they chose not to know, and that's a concern," he said.

He said Hopkins has indicated that he didn't want to know how the attorneys' fees were divided in the settlement, and the trustees didn't know either.

House said the trustees should be evaluating the contracts of the securities-monitoring firms each year.

The chairman of the system's board of trustees, Jeff Stubblefield, said, "I don't know that that's a bad idea.

"I don't think that's asking too much," said Stubblefield, who is superintendent of Charleston Public Schools. "I do appreciate Mr. Hopkins and his financial team trying to get financial recovery of people taking financial advantage of us."

Hopkins said Friday in a written statement that all of the system's contracts, including the securities monitoring contracts, go before the trustees at least once every two years.

"ATRS staff would have no problem pulling the legal contracts out for separate consideration," he wrote.

INNUENDO AND RUMORS

Rep. Mark Lowery, R-Maumelle, said he's worried about the negative exposure that the teacher retirement system is being subjected to, based on speculation about potential kickbacks and payoffs.

Lowery, who is co-chairman of the Joint Performance Review Committee, said he wants more information to determine what has transpired.

Five weeks ago, Hopkins told his trustees that he wished Rosen's report was unsealed at that time because "I think any innuendos put out will be shown to be incorrect."

At that time, Hopkins said he told the federal judge that then-Sen. Steve Faris, D-Malvern, introduced the Labaton Sucharow law firm to then-system Executive Director Paul Doane in 2007, based on documents that he has reviewed. Hopkins served as a former Democratic senator from Malvern before Faris.

Labaton Sucharow is one of five securities monitoring firms for the retirement system. It was selected to monitor securities for the Arkansas system under a request for qualification process before Hopkins became executive director in December 2008.

Hopkins said he became aware of the $4.1 million payment to Chargois after the special master's report came out.

Faris, who serves on the board of trustees for the Arkansas Public Employees Retirement System, said in an interview last week that he called Doane at the request of a friend, Tim Herron, on behalf of Labaton Sucharow and indicated the New York firm's interest in becoming a securities monitoring firm for the system.

Faris said he told Doane, "What you decide is your business."

Faris said he made many similar phone calls to state agencies on behalf of many other people during his tenure in the Legislature.

He noted that Herron's uncle is Gordon Powell, who formerly worked for the state House of Representatives during sessions. He said Powell formerly served as board president for Central Arkansas Telephone Cooperative, where Faris was manager. Hopkins formerly represented the company as an attorney.

Faris said he has been paid no funds by Chargois, Herron or Labaton Sucharow.

Labaton Sucharow said the "referral payment discussed in the master's report was made to Mr. Chargois, a Texas-based lawyer, who first introduced our firm to Arkansas Teacher Retirement System in 2007 ... before George Hopkins was hired by the Arkansas Teacher Retirement System.

"No referral payments were made to anyone in Arkansas," the law firm said in a written statement.

Chargois and Herron, who are in a law firm together, could not be reached for comment by telephone last week.

Labaton Sucharow said that "the State Street case has nothing whatsoever to do with kickbacks or payoffs or bribes or influence peddling or anything of that ilk.

"The 'speculation' stems from the presiding judge's improper comments in the courtroom during a May 30 hearing in which he made both public and sidebar statements that in part prompted the law firms to seek his recusal from the case [and] that effort is now on appeal in the First Circuit," the firm said a statement.

PRAISE FOR SETTLEMENT

The special master, Rosen, said in his report that "after much work, dedication and exceptional effort in the discovery and mediation process, the parties ultimately reached a $300 million settlement.

"Given the risks, complexities and legal challenges inherent in the litigation, it must be said that the $300 million settlement, procured by skilled and dedicated plaintiffs' counsel, was an excellent result for the class," he said.

Rosen said the most significant issue raised during his investigation was the nondisclosure of the $4.1 million payment to Chargois, who neither appeared in the State Street case nor worked on it.

He said the Labaton firm and Chargois & Herron law firm submitted a joint response to the retirement system's request for qualifications in July 2008.

The report said the system's then-chief legal counsel, Christa Clark, informed Labaton that it had been selected as an additional monitoring counsel, but Chargois & Herron was not approved as part of the proposal. Clark also wrote, however, that Labaton could use Chargois & Herron on a case-by-case basis if it was "a necessary and appropriate expense."

Labaton didn't seek Hopkins' approval to share information or remit payments to Chargois, and Hopkins was not informed of the agreement between Labaton and Damon Chargois that entitled Chargois to 20 percent of any attorney fee recovered on behalf of the Arkansas Teacher Retirement System, Rosen said.

Hopkins instructed a Labaton official not to inform him about attorney fee allocations in the State Street or any other case in which the system is a class representative, Rosen said.

ATTORNEYS' FEES SHARED

Labaton has paid Chargois a percentage of Labaton's total fee award on at least nine cases, including the State Street case, since this arrangement began in 2008, Rosen said.

In each of these cases, Labaton paid Chargois an amount that more often amounted to 10 percent to 15 percent rather than the originally agreed-upon 20 percent, and neither Chargois nor any of Chargois & Herron's attorneys appeared in court or did any work on the cases, Rosen said.

In response to this newspaper's questions about the total amount Chargois was paid in these cases, Labaton Sucharow said, "In each case cited in the master's report, the court granted lead plaintiff counsel a percentage of the settlement amounts awarded to the respective class," and "all of those settlement amounts and attorney's fees are part of the public record.

"The resulting distribution of those approved fees -- including allocation among co-counsel and referring counsel -- are not public; our firm, consistent with practice by other law firms, does not disclose how it distributes its fees," the law firm said in a written statement.

Rosen said the federal judge wasn't informed about the $4.1 million payment to Chargois and that's "a material omission."

But Labaton Sucharow said Massachusetts state law "is crystal clear" and class counsel is not required to disclose a referral payment absent an explicit order from the court, and the court made no order.

"Moreover, ATRS has reaffirmed its consent to the issuance of this referral payment, which is adequate under clear and controlling precedent from the Massachusetts Supreme Judicial Court," the law firm said in a written statement.

HOPKINS' ROLE QUESTIONED

In his report, Rosen said Hopkins' statement that he was not concerned with how the aggregate attorney fees are distributed among lawyers or law firms in any way raises "serious questions about Hopkins' adequacy to serve as a class representative moving forward.

"The class had a right to know that lead counsel intended to and did, pay $4 million out of settlement funds to a person who performed no work in the case, as a result of lead counsel's own pre-existing obligation, whether or not payment itself was permitted under Massachusetts ethical rules," Rosen said.

"We cannot see how in the light of clear dereliction of his fiduciary duties to the class, Hopkins can fairly and adequately protect the class's interests moving forward," Rosen said.

Hopkins, who is an attorney, said Friday in a written statement that he "was really surprised to see that the special master said this about me."

He said the class representative is not supposed to oversee fee allocations between attorneys, and the special master cites no case, law or rule that places that duty on him.

"I believe the special master is confused about this and just comes down on the wrong side of the law. He has spent almost $4 million so far to get to this point. So his statement about a 'clear dereliction' of my fiduciary duties to the class is just based on a false legal premise," Hopkins said.

"The ultimately irony of the special master's position on my duty here is that he recommends clawing back attorney fees from the attorneys representing institutional investors and reallocating much of those same fees to ERISA attorneys in the case and NOT back to the class," Hopkins said.

ERISA refers to the Employee Retirement Income Security Act of 1974, which applies to virtually all private sector benefit plans. Attorneys representing Employee Retirement Income Security Act plaintiffs also participated in the class-action lawsuit that started out as three separate suits that were later consolidated.

Hopkins said, "I decided to stay in the case specifically to argue that if attorney fees are clawed back, the class members and not attorneys should be the beneficiary of any clawed back fees."

Hopkins said all participants in this case have learned lessons.

"I now inquire about referral fees and require much more transparency in fee petitions," he said. "Although I had tried to stay out of how attorneys worked together on cases, I now do so while still ensuring the attorneys engage the best legal firms to protect the class."

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Democrat-Gazette file photo

Rep. Doug House, R-North Little Rock, is shown in this file photo.

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Democrat-Gazette file photo

Rep. Mark Lowery, R-Maumelle, is shown in this file photo.

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