A deal that was reached this week in a long-running fee dispute has the potential to reshape the way law firms that represent plaintiffs bill for their work and pay other lawyers for referring clients to them.
The proposed settlement could prompt greater transparency about so-called finder fees that are paid to lawyers -- especially those who do little actual work in a matter. It was agreed to late Tuesday by Labaton Sucharow, a well-known class-action securities law firm.
Under the settlement, which requires approval by a federal judge in Boston, Labaton would have to cough up $4.8 million in fees it collected, splitting the money between the plaintiffs and some of the other firms involved in the case. It must also retain a former federal judge to make sure its fee-sharing arrangements with other lawyers "are in compliance with applicable rules and emerging best practices."
The deal would bring to a close an ugly dispute that shined a spotlight on the kinds of behind-the-scenes deals that plaintiffs' law firms reach with other lawyers to build their cases. The dispute has played out as some judges are demanding greater transparency and disclosure on financial arrangements in big lawsuits. In May, for example, a federal judge in Cleveland overseeing hundreds of cases against opioid makers ordered the plaintiffs' law firms to disclose any financing they were getting from third parties.
It is not uncommon for law firms like Labaton, which has achieved significant settlements in securities cases involving Facebook, the Brazilian petroleum giant Petrobras and the mining company Barrick Gold, to pay referral fees to lawyers who bring them clients. But typically, the lawyers are expected to have done some work to justify a significant fee. It is considered good legal practice for such arrangements to be disclosed to all parties in the lawsuit -- something the Labaton firm did not do in this litigation.
John Coffee Jr., a professor at Columbia Law School who specializes in securities law, said the case had shed an important light on the "rather sordid market of buying and selling plaintiffs" in securities class actions.
"I think the whole arrangement was under the table and dubious," Coffee said.
In a statement, Labaton acknowledged that its disclosure about the finder's fee "fell short of emerging best practices." The firm, in a court filing that accompanied the proposed settlement, said it "accepts responsibility" for that shortcoming.
Judge Mark Wolf of U.S. District Court in Boston is expected to hold a hearing on the proposed agreement Monday. A spokesman for the firm said Larry Sucharow, its chairman, would attend the hearing and "be prepared to address any questions the court may have regarding the proposed agreement."
The dispute over lawyers' fees erupted in 2016, not long after Labaton secured a $300 million settlement from State Street, a Boston financial services company, in a securities class-action lawsuit concerning transaction fees charged on foreign currency trades.
Wolf approved that settlement, carving $75 million out of the total to pay Labaton and a handful of other law firms that worked on the case. But almost as soon as the judge approved the fee package, concerns arose about some of those firms' billing practices, which were the subject of an article in The Boston Globe.
In March 2017, the judge appointed a special master -- the former federal judge Gerald Rosen -- to look into the appropriateness of the fee package, including the issues of double-counting attorney hours spent on the case and the reasonableness of the rates charged by the lawyers. But during a 14-month investigation, Rosen made a startling discovery: Labaton had paid a lawyer in Texas a finder's fee equal to 20 percent of the attorneys' fee it received in the litigation.
The payment to the lawyer, Damon Chargois, had not been previously disclosed. Rosen's investigation unearthed documents showing that Chargois did no work on the litigation other than help introduce the Arkansas Teacher Retirement System to Labaton roughly a decade ago. In 2011, Labaton filed a lawsuit for the retirement fund that was later consolidated with similar lawsuits filed by a few other law firms.
None of those other law firms, nor Wolf, were aware of the payment to Chargois. The Arkansas retirement fund also was unaware of any fee arrangement.
The discovery of the undisclosed referral fee was a focus of a blistering 377-report that Rosen filed in federal court in June. He sharply criticized the Labaton firm for not disclosing the referral fee and said it "raises serious questions regarding class action attorneys' ethical and legal obligations to clients and co-counsel, as well as considerable concerns about how judges can fulfill their essential fiduciary obligations to the class."
Business on 10/12/2018