July 12, 2018 / 7:41 PM / 10 days ago

Facing $10 million clawback threat, Labaton asks 1st Circuit to bounce State Street judge

(Reuters) - The plaintiffs' firm Labaton Sucharow is asking the 1st U.S. Circuit Court of Appeals to order U.S. District Judge Mark Wolf of Boston to step aside in a class action in which a special master has called for Labaton and other plaintiffs' firms to disgorge more than $10 million of their $75 million fee award.

The law firm contends there are three reasons to question Judge Wolf’s ability to evaluate the special master’s clawback recommendation fairly. First, the firm said, the judge failed to disclose important ex parte discussions - including a 2018 conversation about a federal criminal probe of law firm payments to pension fund officials - with the special master he appointed in 2017 to investigate possible improprieties in class counsel’s billing records in a $300 million class action settlement with State Street.

Second, according to Labaton, Judge Wolf will have to decide whether Labaton and the other plaintiffs’ firms are at fault for failing to disclose what they describe as a $4.1 million referral fee to a firm that did no work on the class action - or whether he’s responsible for neglecting to ask class counsel how they would allocate fees. And finally, Labaton argues, it’s reasonable to doubt Judge Wolf’s impartiality because he ordered class counsel to cough up nearly $4 million to pay for the special master’s investigation.

“In each instance, the court will be asked to review a course of action that was set in motion by the court itself, again allowing a reasonable person to question the court’s impartiality,” Labaton told the 1st Circuit.

The law firm’s request to the appeals court is styled as a mandamus petition because Judge Wolf has already considered and rejected Labaton’s recusal motion, which claimed the judge had injected unsupported allegations of misconduct and public corruption into an inquiry that was supposed to be about billing records.

As you surely recall, the State Street investigation has become much more than that. The special master, retired federal judge Gerald Rosen, homed in on the $4.1 million referral fee paid to the Texas law firm Chargois & Herron that first introduced Labaton to the Arkansas Teacher Retirement System, the pension fund that served as lead plaintiff in the State Street case. Rosen’s ethics expert concluded that Labaton should have informed Judge Wolf of its relationship with Chargois & Herron and disclosed its intention to share fees with the firm. (Labaton’s experts have opined the firm was not obliged to disclose the fee.)

After the special master submitted the report under seal in mid-May, Judge Wolf was so concerned that he convened an extraordinary hearing in which he questioned the executive director of the Arkansas pension fund, George Hopkins, about whether the fund should remain lead plaintiff in the class action, considering its involvement with the law firms under the special master’s scrutiny. In open court, the judge asked Hopkins if the special master’s account of “the origins of Labaton’s relationship with Arkansas Teacher” would reflect badly on the fund and if he would be “embarrassed” by allegations of “misconduct” by his lawyers. At a private sidebar, Judge Wolf hinted at pay-to-play corruption, suggesting that when the Rosen report became public, “there are going to be questions about the origin of this relationship and whether all those millions of dollars stopped with Mr. Chargois.”

Labaton’s original recusal motion claimed Judge Wolf’s questions suggested bias because he implied misconduct the special master didn’t ever allege. The judge quickly denied the Labaton motion and followed up with a 72-page opinion explaining the basis of his questions at the Hopkins hearing.

That opinion revealed, among other things, that Boston federal prosecutors asked special master Rosen to provide information related to a Justice Department investigation of political campaign contributions by the Thornton Law Firm, one of Labaton’s co-counsel in the State Street case. “The master and I noted that prosecutors’ investigation suggested questions about whether any of the money paid to the Chargois (firm) had been used to make political contributions or other payments, and the potential for the criminal investigation to expand to include Chargois,” Judge Wolf wrote.

Rosen asked Judge Wolf how to respond to prosecutors’ request. Judge Wolf told him not to disclose anything unless prosecutors filed a motion in the State Street case or obtained a grand jury subpoena. But the judge said that his conversation with Rosen, as well as a Boston Globe report of an investigation of Labaton contributions to Massachusetts officials, raised concerns about the Arkansas fund continuing to serve as lead plaintiff. Those concerns, in turn, led him to order fund official Hopkins to appear in his courtroom.

“The Boston Globe article and the criminal investigation caused me to expect that there would be questions by the media at least about the origins of Labaton’s relationship with ATRS when the master’s report was unsealed,” the judge said. “Each of these matters is relevant to whether ATRS remains a typical and adequate class representative.”

Judge Wolf said the grave consequences of the State Street case – in which the special master has not only called for more than $10 million in disgorgement but has also recommended Judge Wolf refer a Thornton lawyer to the bar for disciplinary action – compel his continued oversight. “I have a duty to continue to preside in this case, in part to avoid encouraging the perception that litigants can manipulate the system to jettison an impartial judge in the hope of getting another more to their liking,” he wrote.

It’s now up to the 1st Circuit to decide if he’s right. I don’t envy the appeals court’s task. The State Street case is like an onion: The more layers you peel, the more tears you provoke.

The views expressed in this article are not those of Reuters News.

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