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State Street fallout for Labaton: Lawyer sues over unpaid ‘referral’ fees

6 minute read

A gavel and a block is pictured on the judge's bench in this illustration picture, U.S., June 9, 2021. REUTERS/Andrew Kelly

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(Reuters) - The plaintiffs' firm Labaton Sucharow is experiencing the unpleasant after-effects of a notorious investigation of its fees in the $300 million State Street class action.

The acute phase of the investigation ended in February 2020, when U.S. District Judge Mark Wolf of Boston slashed the firm’s fee award by $10 million and concluded that Labaton improperly entered and failed to disclose an agreement to pay $4.1 million to a Texas lawyer, Damon Chargois, who had facilitated the firm’s introduction to the Arkansas pension fund that served as the lead plaintiff in the State Street case.

But the debacle's consequences are lingering: Chargois is now suing Labaton and two partners at the firm for allegedly refusing to pay him the fees he says he is owed under their longstanding fee-splitting deal.

Chargois filed a declaratory judgment lawsuit in state court in Harris County, Texas, asking for a judicial determination that Labaton must fulfill its fee-splitting agreement. The suit, filed in May, does not specify the cases for which Labaton allegedly owes Chargois money but refers to Chargois’ testimony in the State Street fee investigation and the now-final fee award in that case. Chargois’ lawyers from Sorrels Law alleged that Labaton has since claimed, without “a cognizable nor legal reason,” that Chargois isn’t entitled to any payments from the firm.

On Monday, Labaton and partners Christopher Keller and Eric Belfi removed Chargois’ case to federal court in Houston. Neither the initial complaint nor the Labaton removal notice specifies exactly how much money the Texas lawyer believes he is entitled to, but a declaration from Belfi said the amount “far exceeds” the $75,000 threshold for diversity jurisdiction.

Keller and Belfi did not respond to my emails about the Chargois suit. Chargois counsel Randall Sorrels declined to comment on the dollar amount at stake, emphasizing that the suit is intended just to clarify Chargois’ rights under his agreement with Labaton.

Labaton has already paid millions to Chargois under a “secret” agreement that entitled him to a cut of fees Labaton received in cases in which it represented the Arkansas Teacher Retirement System, according to a 159-page opinion from Wolf in the State Street case. Chargois reached the fee-splitting deal with Labaton more than 10 years ago, according to his deposition testimony in the State Street fee investigation. His side of the deal, Wolf wrote, was “to find institutional investors in the Southwest for Labaton to represent in class actions, and to influence them to hire Labaton.” In exchange, Labaton would pay Chargois as much as 20% of its fees.

The deal between Chargois and Labaton came to light in 2018, after Wolf appointed retired federal judge Gerald Rosen to investigate the fees requested by plaintiffs lawyers from Labaton, the Thornton Law Firm and Lieff Cabraser Heimann & Bernstein and appointed. (The underlying State Street class action involved allegations that the bank charged excessive fees for foreign exchange transactions.)

Wolf had by then awarded the firms $75 million in fees but ordered the investigation after reports in the Boston Globe raised questions about allegedly inflated hourly bills from Labaton and Thornton, as well as alleged political contributions from lawyers at the two firms to state pension fund officials.

Labaton, according to the special master, “engaged in consistent, conscious, and calculated efforts to conceal Chargois from almost all participants” in the State Street case. Rosen nevertheless uncovered details not only about the $4.1 million Chargois was slated to receive in State Street but also the fees Labaton had already paid him from its awards in eight other cases in which the Arkansas teachers’ fund was a lead plaintiff.

According to Rosen’s 377-page report, Labaton’s agreement with Chargois did not require the Texas lawyer to do any actual litigation work, like filing an appearance or even keeping the client apprised of litigation developments. (In fact, the Arkansas fund officials who oversaw the State Street case were not aware of Chargois’ fee agreement, according to Rosen and Wolf.)

“Our deal with Labaton is straightforward – we got you ATRS as a client (after considerable favors, political activity, money spent and time dedicated in Arkansas) and Labaton would use ATRS to seek lead counsel appointments in institutional investor fraud and misrepresentation cases,” Chargois wrote in a 2014 email to Belfi. “Where Labaton is successful in getting appointed lead counsel and obtains a settlement or judgment award, we split Labaton's attorney fee award 80/20. Period.”

Wolf found that Labaton’s fee deal with Chargois was impermissible under Massachusetts’ rules of professional conduct. Those rules allow referral fees but prohibit “finders’ fees” for lawyers who merely recommend colleagues to clients. The judge also concluded in his February 2020 ruling – which cut Labaton’s fee award from $32 million to $22 million – that Labaton’s efforts to conceal the Chargois deal from the court and from plaintiffs' lawyers pursuing parallel ERISA claims against State Street indicated that the firm “knew the arrangement was highly questionable, if not improper."

Labaton did not appeal the February 2020 ruling, although its co-counsel from Lieff Cabraser asked the 1st U.S. Circuit Court of Appeals to review Wolf’s finding that Lieff’s “inaction and acquiescence contributed to the misconduct of Labaton and Thornton.” (Thornton is also not appealing the decision.)

One potential complication for Chargois: According to his own testimony in the State Street investigation, he did not have a formal, written agreement with Labaton. “There’s no four-corner document,” Chargois said, according to the special master. “It’s just an email relationship.” (Chargois also testified, when he was asked about the nature of the deal, that it was not a referral or local counsel arrangement. “Just an agreement,” he said.)

Chargois counsel Sorrels told me he’s not worried about the lack of a formal contract. “There’s plenty in writing to show there was an agreement,” he said.

And doubtless one that Labaton now would like very much to be rid of.

Read more:

Judge in notorious State Street case requests counsel in Lieff appeal to 1st Circuit

Labaton asks State Street judge to step aside in $75 million fee inquiry

Boston federal judge puts Labaton, Lieff on the hot seat in fee review

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Opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Principles, is committed to integrity, independence, and freedom from bias.

Alison Frankel has covered high-stakes commercial litigation as a columnist for Reuters since 2011. A Dartmouth college graduate, she has worked as a journalist in New York covering the legal industry and the law for more than three decades. Before joining Reuters, she was a writer and editor at The American Lawyer. Frankel is the author of Double Eagle: The Epic Story of the World’s Most Valuable Coin. Reach her at alison.frankel@thomsonreuters.com

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