(Reuters) - When financier Philip Falcone entered into a settlement with the Securities & Exchange Commission in 2013, he told his lawyer Matthew Dontzin of Dontzin Nagy & Fleissig that it was the right move for him. Falcone, the founder of the hedge fund Harbinger Capital, was facing two SEC fraud suits at a time when the commission was under intense pressure to hold financial bigwigs accountable for the recession. Falcone’s settlement required him to admit to reckless conduct and barred Falcone from the securities industry for five years. But the settlement did not require an admission of fraud and allowed Falcone to apply for reinstatement after five years. In an August 2013 email, Falcone told Dontzin that he had done a “super job.”
Nevertheless, Falcone subsequently balked at paying Dontzin a $5 million success fee for obtaining a settlement with the SEC. In 2018, Dontzin’s firm brought an arbitration against the financier, asserting that Falcone owed the firm not just the $5 million success fee but another $4 million in unpaid fees for matters Falcone assigned Dontzin after the SEC settlement. Falcone and his lawyers at Huth Reynolds came up with an array of reasons why Dontzin’s firm didn’t deserve a success fee, including Falcone’s new assertion that the settlement shouldn’t be regarded as a success for him. In fact, Falcone asserted, Dontzin Nagy actually owed him money - more than $800 million for failing to pursue potential malpractice claims against a law firm that represented his fund in one of the deals scrutinized by the SEC.
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This is as vicious a fee dispute as you’ll find. But at the moment, Dontzin Nagy is on top. In an order last week, Manhattan State Supreme Court Justice Arthur Engoron said Falcone and Harbinger were on the hook for at least $13.7 million in unpaid fees and years of interest, confirming a December 2019 award from JAMS arbitrator Caroline Antonacci, the former director of a mediation program for New York’s Appellate Division, First Department. In addition, Justice Engoron granted the Dontzin firm’s motion to freeze Falcone’s assets.
In an email, Falcone said the evidence in the case shows that even Dontzin did not regard the SEC settlement as a successful deal. “In his own words, after the fact (Dontzin) states that ‘Phil’s career … was dead over,’” Falcone said. “How is that deemed a ‘success’?” Falcone said it was “incredibly disappointing” that his lawyer talked about “delivering” Falcone’s consent to the settlement in communications with the SEC, “essentially delivering me on a platter to the benefit of others.”
Dontzin Nagy said in an email statement that Antonacci, the arbitrator, praised the firm’s work for Falcone and the results it obtained. “Despite that tenacious advocacy and those extraordinary benefits, Mr. Falcone failed to pay (Dontzin Nagy) the fees he promised to pay,” the firm said. “The arbitrator issued a thorough award compelling Mr. Falcone to finally keep his word and pay his bills.”
The story of Falcone’s relationship with Dontzin Nagy is laid out in the arbitrator’s December 2019 ruling. The SEC began investigating Falcone and his companies in 2010. In May 2012, after paying millions in fees to Gibson Dunn and Paul Weiss, Falcone brought in Matthew Dontzin, who billed himself as an aggressive litigator. The following month, after Paul Weiss advised Falcone that the SEC was insisting that he accept a fraud charge and a cease-and-desist order, Falcone rejected the proposal. The SEC filed two suits against him, both containing securities fraud claims.
In July 2012, Falcone and Dontzin signed a retainer agreement that included a $2.5 million success fee for settlements in each of the SEC’s two cases. (Falcone’s side would later argue that a previous agreement was the operative retainer but the arbitrator concluded otherwise.) According to the arbitrator, Antonacci, Dontzin was as aggressive as billed, filing motions to dismiss the SEC cases that led the judge overseeing them to question the SEC’s allegations. The SEC asked to delay a ruling on the dismissal motions and to re-open settlement talks with Falcone. In April 2013, they reached a tentative agreement that would have barred Falcone from the industry for two years.
That deal came apart when it was publicly disclosed in a filing by one of Falcone’s companies and criticized as too lenient. Dontzin was “tenacious,” according to arbitrator Antonacci, in the subsequent negotiations for a revised deal. “Dontzin was able to negotiate an admission to ‘reckless’ conduct, without an admission to a (securities) fraud violation,” the arbitrator wrote. “Moreover, the consent did not contain an anti-fraud injunction or a cease and desist order.” Antonacci also mentioned the “unique carveout” that allowed Falcone to continue to serve at LightSquared, citing testimony from an ex-SEC enforcement chief who testified for Dontzin that the carveout was “a very good thing” for Falcone.
Falcone would later testify that Dontzin did not apprise him of how difficult it would be to persuade the SEC to reinstate him after the five-year bar. The lawyer, he claimed, told a Falcone colleague that Falcone’s career as a hedge fund manager “was dead,” but Falcone said he didn’t get that advice. Falcone’s side turned up evidence that Dontzin described the deal as “terrible,” in comparison to agreements the SEC was rumored to be negotiating with other hedge fund defendants and “so bad” that he could hardly stand to look at it, according to documents produced in the arbitration. He also, based on arbitration documents, told the SEC that Falcone was “quite suspicious” of the proposed terms, adding, “If I can explain it would help me deliver.”
Antonacci found Falcone to be no dupe. The hedge fund founder closely tracked negotiations with the SEC, advised not just by Dontzin but by his general counsel and outside counsel Marc Kasowitz of Kasowitz Benson. The arbitrator cited several instances of Dontzin reassuring Falcone that he didn’t need to accept the SEC offer and could win the case at trial.
“The evidence refutes any claim that Mr. Dontzin committed ‘mistakes’ or that Mr. Falcone was ‘compelled’ to settle with the SEC,” she wrote. “Mr. Dontzin, provided tenacious and zealous advocacy on behalf of Mr. Falcone and his entities.”
Falcone hired Dontzin Nagy for important work in the wake of the SEC settlement, including a high-stakes tax investigation by the New York attorney general. He and his companies paid the firm more than $11 million, and, according to arbitrator Antonacci, frequently acknowledged that the firm was owed more. But when Dontzin Nagy filed for arbitration to compel payment, Falcone said not only that he didn’t regard the outcome of the SEC case a success that merited two $2.5 million bonuses but that Dontzin had committed malpractice by failing to attempt to pin blame for one of the deals at the heart of the SEC case on another law firm that had represented Harbinger.
The arbitrator was not buying it. She called the alleged malpractice claim “meritless.” Overall, the arbitrator’s ruling portrays Falcone as a defendant searching for an after-the-fact justification to avoid paying his lawyers what he owed.
After Dontzin Nagy petitioned in Manhattan State Supreme Court to confirm the arbitrator’s award of $13.7 million in fees and interest, Falcone cross-petitioned to vacate the award, arguing among other things that Antonacci did not enforce discovery rules that would have given Falcone access to internal law firm documents addressing whether Dontzin believed it was entitled to the success bonus.
Those arguments made so little headway with Justice Engoron that the trial judge ruled in Dontzin’s favor from the bench last Monday. He issued his order – and unsealed the case records – last Wednesday.
Falcone can still attempt to set aside the arbitration award at the Appellate Division, First Department.
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