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Labaton Settlement Sheds Light on Behind-the-Scenes Class Practices

Oct. 12, 2018, 11:58 AM

A proposed settlement in a festering fee dispute could upend the relationships between law firms and how they connect with plaintiffs in class action cases.

Under the deal that still needs federal court approval, Labaton Sucharow, a leading class action securities law firm, would pay $4.8 million in legal fees to plaintiffs and other law firms involved in a case involving pension funds but avoid further legal consequences.

The settlement sheds light on the behind-the-scenes arrangements that some law firms make to “find” plaintiffs in large-scale cases, particularly in consumer fraud or securities.

Sometimes, law firms pay referral fees to lawyers who bring them clients.

Judges and other legal experts have grown increasingly critical of such arrangements, demanding to know more about who is bringing the legal actions and who is paying.

Recently, for example, a federal judge ordered law firms representing hundreds of plaintiffs suing opioid makers to disclose third-party financing of their suits.

“There is an underground market where parties buy and sell lead plaintiffs,” said John C. Coffee, Jr., a professor at Columbia University Law School.

He has criticized Labaton for not being more transparent.

Labaton, which has made a name for itself with high-profile securities cases that include one involving Facebook, “accepts responsibility” and acknowledges its disclosures did not meet “emerging best practices.”

Michael Canty, a firm partner, said in an interview that the firm is revising its practices.

“We have retained a former federal judge to assist us in implementing emerging best practices in our referral and retention agreements especially as it relates to disclosure,” Canty said. “While we followed the federal rules and the laws of Massachusetts governing referral payments, we are revising our practices to make sure the court is informed of all referral payments.”

Whether the settlement package will be accepted depends on U.S. District Judge Mark L. Wolf, who is set to review it on Monday in Boston.

Labaton Chairman Larry Sucharow is expected to attend to answer questions that have put an unwanted spotlight on the firm’s practices, specifically on failures to disclose representation details concerning a consumer fraud class action involving the Arkansas Teachers Retirement System.

Labaton first linked up with the pension fund in 2007. The firm paid Damon Chargois of Chargois & Herron, a Houston firm, for an introduction to pension officials, and agreed to pay him a fee when representing the pension fund in other matters.

Later, Labaton and other firms brought and settled three class actions against Boston-based State Street Bank and Trust Company, alleging unfair and deceptive practices in connection with fees charged on foreign exchange transactions.

The cases settled for $300 million, with $75 million designated for attorneys’ fees for Labaton and other participating firms. But irregularities began emerging that put it in question. A December 2016 article in the Boston Globe looked at whether there had been double billing by attorneys in the case.

The payments to Chargois were revealed when a court-appointed special master, Gerald E. Rosen, examined the matter. Earlier this year, Rosen, who is a former federal judge, issued a report critical of Labaton, noting that it paid Chargois a 20 percent fee—a percentage that Labaton disputes—but agrees that it was not disclosed.

Rosen found that Chargois had not worked on the case, but had benefited nonetheless.

Whether this case involving Labaton was a one-off deal or a symptom of a rotten system was being hotly debated.

The U.S. Chamber Institute for Legal Reform, linked to the Chamber of Commerce, has been fighting for years to rid businesses of the threat of class actions, and hailed the Labaton settlement.

“Anytime you lift up a rock in class action litigation, you find an ugly mess underneath,” said Harold Kim, the institute’s executive vice president.

“It’s unprecedented for a firm to admit hiding a $4.1 million ‘finder’s fee’ to secure a lead plaintiff from the court and its own client, and to agree to have a retired federal judge chaperone it to prevent similar future conduct,” Kim said.

Coffee, who writes regular column on corporate securities, wasn’t so sure.

“This episode could prove to be an isolated aberration,” he said. “Or it could be as common as a cockroach. Once you find one, you find they are everywhere.”

To contact the reporter on this story: Elizabeth Olson in Washington at egolson1@gmail.com

To contact the editors responsible for this story: Tom P. Taylor at ttaylor@bloomberglaw.com;