A newly unsealed special master's report accuses the law firm Labaton Sucharow and its co-counsel of deliberately misleading the court about how it distributed the legal fees from a $300 million settlement with State Street Corp., prompting Labaton Sucharow to call the master's analysis “wholly unmoored” from legal precedent and professional conduct rules.

The report recommends Labaton Sucharow return as much as $8.1 million of its share of a $75 million fee award to the class, and says Garrett Bradley, lead partner at the Thornton Law Firm in Boston, should pay up to $1 million in fines.

Labaton Sucharow is one of three plaintiffs firms, along with Thornton and Lieff Cabraser Heimann & Bernstein, that served as lead counsel in a securities case against State Street that settled in 2016 for $300 million. U.S. District Judge Mark Wolf in Boston initially approved a plaintiffs legal fee award of $75 million in that case, but later appointed a special master—retired federal Judge Gerald Rosen—to review the fees after an article in The Boston Globe raised questions about potential double counting of hours.

The Globe had previously published an exposé detailing the political donation habits of lawyers at Thornton, and followed that with an examination of the fee request in the State Street case.

In light of the Globe's reporting, the plaintiffs firms admitted in 2017 to double-counting some hours put in by “staff attorneys” who were paid on an hourly basis and worked temporarily for the three firms, primarily doing document review. Although they described those mistakes as inadvertent and argued that they shouldn't affect the $75 million fee award, the plaintiffs firms initially agreed to pay $2 million to fund the special master's investigation.

However, the probe ended up stretching out for about a year and costing nearly $4 million, according to court records. At the end of it, the special master issued a 377-page report that was kept confidential while the parties to the case proposed that sections be redacted.

The long-awaited public version of the report, penned by Rosen and released on Thursday, walks through a litany of conduct that the special master viewed as “questionable.”

Rosen detailed the double-counting issues that the firms had already acknowledged. But he also trained his eye on money that Labaton Sucharow paid to a Texas-based lawyer named Damon Chargois, who helped the firm secure an Arkansas state teachers' pension fund as an institutional investor client. The Arkansas pension fund ultimately served as lead plaintiff in the State Street securities case.

According to Rosen's report, Labaton Sucharow paid Chargois—who had connections to the Arkansas pension fund, but didn't actually work on the State Street case—roughly $4.1 million under a referral agreement, but failed to disclose the payment to the court, other members of the settlement class and even its co-counsel in the case.

“By not disclosing the intended payment of $4.1 million to Chargois, Sucharow and Labaton kept the court in the dark and denied it the very information it needed in order to determine how much of the settlement funds should go to counsel, and which counsel, and how much,” Rosen wrote.

Rosen also criticized Labaton for its responses to the special master investigation, itself. Instead of expressing remorse for any potential misconduct, Rosen wrote, the firm responded with a “phalanx of experts, who together with Labaton, have erected a wall of legalistic and formalistic excuses and blame-shifting.

“Although Labaton certainly has a right to present its best case,” the special master continued, “some acknowledgment of the potential harm this conduct has caused to class members, co-counsel and the court would have been not only appropriate, but expected.”

Ultimately, after describing the mistakes made by the firms in how they counted hours ahead of their fee request and citing the undisclosed Chargois referral fee, Rosen recommended that the three firms pay back a little more than $4 million to the class to correct for the double-counting issues.

He also suggested imposing a sanction of $400,000 to $1 million against the Thornton firm, a reduction of the billing rates for contract lawyers that worked on the case—an amount totaling about $2.42 million that would also be returned to the class—and he recommended that Labaton Sucharow be required to pay $4.1 million in connection with the Chargois referral deal. Some $3.4 million of that would go to lawyers involved in a parallel Employee Retirement Income Security Act case, who were dragged into the special master investigation but weren't faulted for any conduct, while the remaining $700,000 would go back to the State Street investor class members.

But Rosen also concluded that, despite his concerns, no Labaton Sucharow lawyers should be recommended for professional discipline.

Labaton Sucharow quickly issued a stern response to the special master's findings. The firm, represented by Joan Lukey of Choate Hall & Stewart, filed a formal set of objections in court on Thursday and released a lengthy statement Friday describing the master's report as “wholly unmoored from the relevant law and the actual facts.

“The master could have concluded his endless and costly investigation long ago once he verified that the double-counting was, indeed, inadvertent,” the firm said. “Instead, he opted to go down the rabbit hole chasing the scent of an 'improper' referral payment because he believed it should have been disclosed to the court. In doing so, he elected not to act as a neutral fact-finder (as was his stated charge) but rather as an adversary seeking to impugn Labaton and customer class counsel for making a referral payment that was entirely legal, ethical and appropriate under Massachusetts law. Judge Rosen may be offended by a 'bare referral' fee—one where the referring attorney does not have to do any work in order to receive the referral fee, but it is the law in Massachusetts.”

Labaton Sucharow also noted that Wolf, as presiding judge, would have to conduct a “de novo” review of the special master's recommendations before deciding on a course of action. Once that review happens, the firm said it fully expects that the judge would “reject the master's novel and unusual interpretations” of the issues.

Thornton also lodged objections on Thursday; Lieff Cabraser, which largely escaped the harshest criticism in Rosen's special master report, had not filed objections as of Friday afternoon, according to the court docket.