(Reuters) - The shareholders' firms Bernstein Litowitz Berger & Grossmann and Kessler Topaz Meltzer & Check said in a brief filed late Friday that they violated no ethical or contractual obligations to a group of New York City pension funds.
Bernstein Litowitz and Kessler Topaz contend that ethics expert Charles Wolfram of Cornell agrees they have not breached client confidentiality – and they argue that NYC funds concocted ethics accusations to divert attention away from defects in the funds’ bid to lead a securities class action against Kraft Heinz.
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Cohen Milstein’s Julie Reiser declined to comment on behalf of the New York funds. Ethics professor Wolfram did not immediately respond to my email.
The background to this ethics dispute is a bit complicated. As I told you last week, the New York City pension funds were contemplating a bid last April to lead a prospective class action against Kraft Heinz, which allegedly misled investors in the run-up to the company’s $15 billion write-down of brand assets in February. (Kraft Heinz has not commented on the underlying allegations.) The NYC funds circulated data about their trades in Kraft Heinz to six shareholders' firms that had been pre-approved in 2018 to represent the funds in securities class actions. Bernstein Litowitz and Kessler Topaz were on the NYC funds’ panel of pre-approved firms and received the funds’ trading data along with four other shareholders' firms.
The NYC funds ultimately moved in late April to be appointed lead plaintiff of the prospective Kraft Heinz class in federal district court in Chicago. They are represented by Cohen Milstein Sellers & Toll and claim losses of nearly $60 million in Kraft Heinz trades in the proposed class period, more than any other investor bidding for lead plaintiff.
Bernstein Litowitz and Kessler Topaz represent a different lead plaintiff candidate, a Swedish pension fund known as AP7 and the German fund Union Asset Management. The two foreign funds claim to have lost $51 million in Kraft Heinz trades.
Ordinarily, judges overseeing securities class actions select the investor with the biggest claimed losses to serve as lead plaintiff, especially when the biggest loser is a sophisticated institutional investor. But in briefing after lead counsel motions were filed in April, Kessler Topaz and Bernstein Litowitz argued on behalf of the Swedish and German funds that the NYC pension funds had overstated their losses.
Among other errors, Kessler and Bernstein argued, the NYC funds had included their losses in commingled investment vehicles that trade on behalf of more than one of the pension funds. According to Bernstein Litowitz and Kessler Topaz, the NYC funds may not have standing to assert claims for losses in the commingled investment vehicles because the funds did not directly own Kraft Heinz shares. (As you know, lead plaintiffs do not receive a significant financial benefit from heading up securities class actions but their lawyers are eligible to collect attorneys’ fees if they obtain a settlement.)
Bernstein Litowitz and Kessler Topaz moved for limited discovery on the NYC funds’ asserted losses. The New York City funds countered on June 7 with allegations that the plaintiffs firms had breached ethical and contractual obligations, undermining the NYC funds’ lead plaintiff candidacy by misusing confidential trading data.
The NYC funds said in their June 7 brief that they shared the data with Bernstein Litowitz and Kessler Topaz as they sought counsel on whether to move for appointment as lead plaintiffs. The funds said their agreement with shareholder firms on their pre-approved panel requires firms to obtain a written conflict waiver if they want to represent different clients in matters involving the pension fund. The agreement also contains a confidentiality provision barring lawyers from panel firms from disclosing pension funds’ trading data. The NYC funds said Bernstein Litowitz and Kessler Topaz did not obtain waivers and breached the confidentiality provision.
Bernstein Litowitz and Kessler Topaz said in Friday’s response that the funds’ trading data, as shared, was not confidential, citing a declaration by ethics expert Wolfram. The declaration is sealed, but according to the firms, Wolfram analyzed “the relevant circumstances surrounding the transmission of the New York Group’s April 2019 emails and trading data.” The firms noted that the data was sent to all six of the NYC funds’ pre-approved firms at once, so all of the firms were aware that others had received the trading records.
At the time the NYC funds shared their trading data, according to Bernstein Litowitz and Kessler Topaz, Kessler Topaz had already filed a securities complaint against Kraft Heinz for another investor. The firms said that Wolfram opined that the New York funds were aware of a “significant likelihood” that one or more of its pre-approved firms would be representing another client bidding to be named lead plaintiff.
Wolfram’s conclusion, according to Bernstein Litowitz and Kessler Topaz: “Under these facts … the trading data became ‘generally known’ within the relevant community.” The April emails containing the NYC funds’ trading data, they said, were therefore not confidential communication and they were justified in using the information the NYC pension funds had disclosed “to seek discovery and communicate directly with the New York group.”
The firms’ brief also said that Kessler Topaz and New York City have not fully executed their contract. In response, the city provided me with a contract signed by Kessler Topaz name partner Darren Check. According to the city, the signed contract is a public document. Kessler Topaz and Bernstein Litowitz did not immediately provide a statement in response to my query on the contract.
Bernstein Litowitz and Kessler Topaz said that they avoided any public disclosure of the NYC pension funds’ trading information during early briefing on the lead counsel appointment. Instead, they said, they privately corresponded with a Cohen Milstein lawyer representing the NYC funds to address the issue of losses in the funds’ commingled accounts. The correspondence, which is described in general terms in Friday’s brief and in a previous declaration from Avi Josefson of Bernstein Litowitz, is not public. Bernstein Litowitz and Kessler Topaz, which say they were advised by Professor Wolfson as they corresponded with the NYC funds, want the letters to be disclosed.
The exchange of letters, they said, “establishes that BLBG and Kessler Topaz repeatedly implored the New York group to correct representations made to the court concerning its claimed financial interest or provide a legitimate basis for their refusal,” the brief said. “Rather than accept the spirit in which the letters were written and address the substantive questions they raised, the New York group failed to provide credible explanations.”
In fact, according to Bernstein Litowitz and Kessler Topaz, the NYC funds’ own disclosures have now put into the public record enough information to compel the full release of their private correspondence. The firms said the NYC funds’ failure until the last phase of the lead counsel contest to ring alarm bells about their purported use of confidential information “speaks volumes about the real purpose of those arguments,” Friday’s brief said. “Although meritless, the distorted narrative being spun by the New York group forces, and unquestionably permits, AP7 and Union to defend themselves by providing the court the full text of the correspondence.”
Friday’s brief, in addition to refuting the New York funds’ ethics allegations, presses the argument that U.S. District Judge Robert Dow of Chicago should allow discovery on the funds’ claimed losses lest the investor class end up being represented by a wounded lead plaintiff. The NYC funds have said that even if losses in the commingled investment vehicles are not counted, they’ve still lost more than other lead plaintiff candidates and should be appointed to head the Kraft Heinz case.
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