(Reuters) - In a newly unsealed motion, the plaintiffs’ firm Labaton Sucharow has asked U.S. District Judge Mark Wolf of Boston to consider stepping aside from an inquiry into a $70 million fee award to Labaton and other firms that obtained a $300 million class action settlement with State Street Bank. Labaton’s motion, originally filed last week under seal, argues that Judge Wolf has injected unsupported allegations of misconduct and public corruption into the inquiry, calling his impartiality into doubt.
The recusal motion – which reveals new details about a sealed special master’s report addressing Labaton’s relationship with the Arkansas public pension fund that led the State Street case - ratchets up the already staggering stakes in the State Street fee investigation. Judge Wolf originally appointed a special master, retired federal judge Gerald Rosen, to look into dubious billing records submitted by plaintiffs' firms in the case, which involved State Street’s alleged overcharges for foreign exchange transactions. Judge Rosen’s nearly 400-page report, submitted in mid-May, remains under seal. But it has become clear that the special master ventured well beyond plaintiffs’ firms’ billing records. Rosen himself advised Judge Wolf that his report could have “serious and far-reaching adverse ramifications” for the entire class action bar.
Judge Wolf provided a preview of the report’s allegations at an extraordinary May 30 hearing in which he personally questioned Labaton’s client, the executive director of the Arkansas Teacher Retirement System. Many of the judge’s questions for ATRS official George Hopkins involved an Arkansas state legislator named Steve Faris, who, based on Judge Wolf’s questions, appears to have tracked the State Street case. Hopkins testified that there was nothing improper or corrupt about his conversations with Faris, who is an old friend. Despite those denials, Judge Wolf told Hopkins at the May 30 hearing that his fund might be embarrassed by the “misconduct” of its lawyers in the State Street case.
The new recusal motion, which describes a private sidebar at which Labaton’s counsel, Joan Lukey of Choate Hall & Stewart, confronted Judge Wolf for alleging misconduct, fleshes out the controversy Judge Wolf obliquely alluded to in his questions to Hopkins. According to the recusal brief, Labaton paid $4.1 million from its fee award in the State Street case to a Texas lawyer, Damon Chargois of Chargois & Herron, who first introduced the plaintiffs’ firm to the Arkansas teachers’ fund in 2008. Labaton contends the referral fee was consistent with Massachusetts ethics rules. It also contends it was not obligated to disclose the fee to Judge Wolf under state ethics rules or the Federal Rules of Civil Procedure.
The special master’s ethics expert, law professor Stephen Gillers of New York University, apparently concluded that Labaton had a duty to disclose the referral fee to Judge Wolf. Labaton said Gillers’ theory was “novel and aspirational” and has “no support in the law as it currently exists.” The plaintiffs’ firm brought in expert witnesses to counter Gillers, including William Rubenstein of Harvard, who opined that without a court order, Labaton was not required to have disclosed the $4.1 million referral fee.
Judge Wolf, according to Labaton’s recusal motion, escalated a legal dispute over disclosure obligations by introducing the specter of public corruption. At the sidebar conference on May 30, according to the motion, the judge told Labaton counsel Lukey, “I think it is foreseeable that when the (special master’s) report becomes public, there are going to be questions about the origin of this relationship and whether all those millions of dollars stopped with Mr. Chargois.” Lukey asked Judge Wolf if he was implying an improper payment to Faris, the Arkansas legislator, the judge said, “Yes, those questions occur to me when I read it.”
In a statement accompanying the unsealed recusal motion, Labaton vehemently denied any payment to the Arkansas lawmaker. “The evidence and testimony of all relevant parties in this matter is clear: The referral payment went only to the lawyer who made the original introduction of our firm to ATRS,” the statement said. “State Senator Steve Faris has received no political contributions or any other payments from any member of either Labaton or the referring lawyer, and Labaton made no payment of any kind to obtain work from ATRS.”
Judge Wolf’s implication to the contrary is the heart of the recusal motion. Labaton counsel Lukey said at the hearing that she was shocked and appalled by the judge’s suggestion of public corruption, which she said was nowhere to be found in the special master’s report. Labaton elaborated on that point in the motion. “Within the costly and heavily disputed, but intricately detailed (report), no suggestion whatsoever exists of alleged wrongdoing in the nature of public corruption,” the brief said. “There is no such contention in this case. Labaton respectfully requests that the court consider whether the court’s impartiality in these de novo proceedings might reasonably be questioned in light of the sua sponte injection of ‘questions’ of public corruption into these proceedings, in the absence of any evidence or suggestion of the same in the master’s submission.”
The plaintiffs' firm said even the order directing its client, the Arkansas pension fund director, to appear before Judge Wolf and answer questions about whether the fund could and should continue to serve as lead counsel suggests bias against the law firm. (The pension fund trustees recommended that the fund withdraw from the case but Hopkins, the executive director, told Judge Wolf in a filing last week that he would not voluntarily give up leadership of the case.) The judge’s questions to Hopkins at the hearing, Labaton said in its recusal motion, implied that Wolf has already sided against Labaton, without even considering Labaton’s answer to the special master or, by the judge’s own admission, studying the special master’s report in detail.
“ATRS has fought for the rights of investors throughout the country with honor and integrity,” Labaton said in its statement. “We are saddened by the innuendo in this matter, unsupported by the record or the truth.”
Labaton’s recusal motion concedes that it’s up to the judge to decide whether he must step aside. Judge Wolf has invested an awful lot of time and hard work in the State Street fee investigation. I seriously doubt he’ll back out now. That Labaton would even ask him to – filing the first recusal motion in the firm’s 50-year history, according to its statement – shows just how much the firm and its brethren in the plaintiffs’ bar have to lose in this case.
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