(Reuters) - In an ominous order on Friday, U.S. District Judge Mark Wolf of Boston instructed the executive director of the Arkansas Teacher Retirement System to appear at a hearing Wednesday to defend the pension fund’s conduct as lead plaintiff in a $300 million class action against State Street Bank. This is no ordinary adequacy hearing: Judge Wolf said he has questions for fund officials based on a still-confidential report by a special master he appointed to investigate $75 million in fees awarded to plaintiffs’ lawyers from Labaton Sucharow, Lieff Cabraser Heimann & Bernstein and Thornton Law Firm. The judge wants to know whether the pension fund failed to safeguard the interests of State Street customers and whether the fund and its lawyers should be bounced from the case.
Wednesday’s hearing is likely to expose “substantial shenanigans,” said class action activist Ted Frank of the Competitive Enterprise Institute, an amicus in the State Street case. It’s rare, he said, for courts to examine the mechanics of relationships between institutional lead plaintiffs and their counsel, but Judge Wolf’s order suggests the State Street special master did. “Somebody did the digging and it’s apparently explosive,” Frank said.
A Labaton spokesman responded to my email to the Arkansas pension fund’s executive director, George Hopkins, with an email statement. “George Hopkins, the executive director of the Arkansas Teacher Retirement System - the lead plaintiff in this case - was instrumental in securing an excellent result for the class, reportedly the largest recovery under Massachusetts consumer statutes and one of the largest settlements achieved in the 1st Circuit,” the statement said. “We continue to have every confidence in George Hopkins and ATRS’ integrity in serving as lead plaintiff in this successfully resolved case.” Richard Heimann of Lieff Cabraser said in an email that he is traveling and unable to comment ahead of Wednesday’s hearing.
Judge Wolf appointed retired federal judge Gerald Rosen of Detroit in 2017 to investigate the billing records submitted by Labaton, Thornton and Lieff after a blockbuster 2016 Boston Globe story revealed apparent overbilling in the case, in which State Street customers claimed the bank inflated fees for foreign exchange transactions. (In a letter to the judge before the Globe story appeared, Labaton conceded that its review of timesheets in response to Globe inquiries showed $4 million in inadvertent double-billings, but contended the reduced lodestar should not impact the fee award, which was based on a percentage of the $300 million settlement.) Judge Wolf ordered Labaton to put up $2 million to cover the cost of the special master’s investigation.
Judge Rosen, as special master, did not restrict the investigation to a mere review of billing records. In a request in February for a third extension of time to file a report, Judge Rosen revealed “unexpected developments” in the investigation. He said he had hired an ethics expert, Stephen Gillers of New York University, to respond to an expert opinion submitted by the plaintiffs’ firms. Gillers’ 85-page report, Judge Rosen said, reached conclusions with potentially “serious and far-reaching adverse ramifications” – not just for the plaintiffs’ firms in the State Street case but for the entire class action bar and even judges overseeing the cases. Labaton, Lieff and Thornton, Rosen said, wanted time to respond to Gillers, considering that “the stakes for their clients are extraordinarily high in this matter.”
That’s pretty tantalizing stuff. So is the revelation in Judge Wolf’s order on Friday that the full Rosen report, which was submitted under seal on May 14, totals at least 371 pages. The executive summary alone is more than 50 pages. And at least some parts of the report “raise questions concerning whether ATRS properly discharged its duties as lead plaintiff.” Judge Wolf has not set a date for the release of a redacted version of the Rosen report, which makes Wednesday’s hearing with pension fund officials all the more intriguing.
The Arkansas folks had better be prepared for a grilling, if Judge Wolf’s recent history is a guide. As the judge noted in his order Friday, he recently cut no slack to a prospective lead plaintiff in a securities class action against the pharmaceutical company Tokai. When the lead plaintiff candidate, an individual investor, showed confusion about his contacts with the many law firms purporting to represent him, the judge actually raised the specter of perjury. Unsurprisingly, the prospective lead plaintiff withdrew his application. No other candidates stepped up so plaintiffs’ lawyers ended up dropping the case in federal court.
The Arkansas teachers’ fund is infinitely more sophisticated than the Tokai investor, of course. According to records from the Stanford Securities Class Action Clearinghouse, ATRS has been named a lead plaintiff in three securities class actions in just the first six months of 2018 (in cases against OSI Systems, GE and Frontier Communications), after at least three lead plaintiff appointments last year (against Aaron’s, Babcock & Wilcox and RH).
If defense lawyers in those cases are smart, they ought to be waiting to see what happens tomorrow in Judge Wolf’s courtroom.