A federal judge reviewing a $74.5 million fee request in a case against State Street Corp. has ordered lawyers from three plaintiffs firms to appear in court later this month to answer more questions about their billing, including Labaton Sucharow's $4.1 million payment to a Texas lawyer.

Labaton, one of the three firms, reached an agreement last year with a special master who, while reviewing the fee request, uncovered what he called an undisclosed $4.1 million “referral payment” to Damon Chargois, a lawyer in Houston. Under the deal, Labaton said it would return more than $4.8 million, which also included its share of another $4.1 million in overbilling identified by the special master, Gerald Rosen. The two other plaintiffs firms in the case, San Francisco's Lieff Cabraser Heimann & Bernstein and Thornton Law Firm in Boston, have objected to the special master's findings.

But, instead of signing off on Labaton's agreement, or the fees, U.S. District Senior Judge Mark Wolf of the District of Massachusetts had more questions.

“I'm trying to find out whether the Chargois arrangement was unique in the history of Labaton or whether there were other agreements of this nature, essentially bare referral fees,” he told Labaton's lawyers at a Nov. 7 hearing. “Is this Chargois matter an isolated incident or not?”

In a May 31 order, Wolf scheduled a June 24 hearing on that question, among others. He told lawyers from all three firms to prepare for arguments and possible testimony and indicated that the hearing could last several days. He also ordered Labaton chairman Christopher Keller and Eric Belfi, a partner on the executive committee, to be there, as well as four lawyers from Thornton Law Firm, including chairman Michael Thornton and managing partner Garrett Bradley. Both firms have retained outside counsel in the matter, while Lieff Cabraser partner Richard Heimann has represented his own firm.

“We look forward to the upcoming hearing and arriving at a final resolution of any outstanding issues in the State Street case,” Labaton said in an emailed statement. “All the evidence has been diligently and extensively reviewed by special master Rosen, who agreed in the proposed settlement that Labaton helped achieve, resulting in a record recovery for the class.”

Heimann, in Lieff Cabraser's San Francisco office, did not respond to a request for comment. Thornton, Bradley and the other two partners at Thornton Law Firm, Evan Hoffman and Michael Lesser, also did not respond.

In addition to the Chargois matter, Wolf also had questions about potential overbilling that prompted him in 2017 to appoint Rosen, a retired federal judge from the Eastern District of Michigan. Among other things, he wanted to know whether the total number of billable hours was now accurate, after deducting $4.1 million for overbilling, whether the rate for staff attorneys was reasonable, and whether the firms should have counted their contract attorneys as expenses, not billable legal fees.

Wolf also wanted to know more about Rosen's recommendation to refer Garrett Bradley, of Thornton Law Firm, to the Massachusetts bar authorities for submitting a false fee declaration, and about why Michael Bradley, his brother, received $500 per hour as part of the firm's fee request despite doing little work on the case. (Michael Bradley, a lawyer in Quincy, Massachusetts, did not respond to a request for comment).

“You know, I think when somebody signs a document under oath and gives it to a federal judge, it's a consequential thing,” Wolf said at the Nov. 7 hearing.

In 2016, Wolf approved the State Street settlements and granted $74.5 million in attorney fees, which were about 25% of the settlement fund. But, soon afterward, Labaton filed a letter to the court admitting that, of their $41 million in billable hours, the three firms had inadvertently double-counted work done by staff attorneys, resulting in a $4.1 million overbilling error.

That prompted Wolf to appoint Rosen to look into the matter further. In a 2018 report and recommendation, Rosen recommended that each of the three firms return one-third of the $4.1 million overbilling error to the class.

Rosen also discovered what he called a referral payment that Labaton failed to disclose in the fee request. The special master insisted that the payment violated the Massachusetts Rules of Professional Conduct. He recommended that Labaton return the $4.1 million payment, to both class members and three additional plaintiffs firms, whose related cases under the federal Employee Retirement Income Security Act were included in the settlement.

In its Oct. 10 deal with the special master, Labaton said it would return more than $4.8 million to both the class and the ERISA firms and make several internal changes, such as switching its general counsel and bringing in a former federal judge to review its fee arrangements. Belfi and Keller filed declarations acknowledging that Chargois had worked with Labaton in at least three other litigation matters but, unlike the State Street case, actually did work on the cases—or planned to do so.

But Wolf wanted to know more. So, Labaton brought in Garrett Brown, a retired federal judge from the District of New Jersey, who spent two months interviewing attorneys about more than 300 cases the firm settled since 2007. In a Jan. 8 report, amended Feb. 6, Brown wrote that the payment to Chargois, who received 20% of the State Street settlement and other cases involving the client Arkansas Teacher Retirement System, was “unique in the history of the firm.”

The report “confirmed that Labaton was in compliance with ethical and professional requirements in those cases,” Labaton said in its statement.

Wolf plans to ask more questions about the report at this month's hearing.

Billing Questions

Despite the special master's findings, all three firms continue to defend their $74.5 million fee request. Lieff Cabraser and Thornton Law Firm also still challenge the special master's recommendation that they return one-third of the $4.1 million in overbilling.

“Lieff Cabraser made an honest mistake,” Heimann wrote in a Dec. 18 objection. “The State Street action is the first time, and the only time, the firm has had to revise a fee petition and to withdraw inappropriately included lodestar. The firm requires no patronizing lectures or financial penalties to 'deter' it from making bookkeeping mistakes in the future.”

They also question the special master's insistence that both firms submit contract attorney work as expenses, not billable work—what Rosen called in court documents “one of the most far-reaching and significant issues” in his report.

“It is not simply a question of mathematical services and calculation of hours; it is an issue that goes directly to the integrity of the legal process and public confidence in how attorneys are compensated,” he wrote in a Nov. 20 revision to his report's findings regarding Lieff Cabraser. “Permitting law firms to mark-up contract attorney rates for the purposes of increasing profits goes against the very tenets of an employer-employee relationship.”

In that revision, he recommended that Lieff Cabraser return $2.2 million for improper billing related to contract attorneys and that Thornton Law Firm pay $1.3 million for the same reason.

Thornton Law Firm also is fighting what it called “draconian and unprecedented sanctions” against the firm of up to $1 million related to Garrett Bradley's fee declaration.

Lieff Cabraser's objection also notes that the three firms have already spent $4.8 million to fund the special master's investigation—more than enough of a penalty.

“The financial impact of the special master's investigation and recommended penalties against Lieff Cabraser are unjust and wildly disproportionate to the firm's conduct,” Heimann wrote.