Senior Judge Mark Wolf of the U.S. District Court for the District of Massachusetts (Courtesy photo)

Labaton Sucharow and two other law firms at the center of a growing public corruption scandal are in talks to settle their objections to a special master's report in securities class actions against financial services provider, State Street Corp., according to court records.

The 377-page special master's report, unsealed in June, highlighted a $4.1 million payment that New York-based Labaton made to Chargois & Herron, a Texas firm with ties to the Arkansas pension fund that is now lead plaintiff in a $300 million settlement with State Street. The report spurred a raft of court filings from Labaton and two other lead plaintiffs firms, the Thornton Law Firm in Boston and San Francisco's Lieff Cabraser Heimann & Bernstein, objecting to the special master's findings. Labaton has insisted the payment was legal.

On Aug. 9, just prior to a hearing, the special master requested that U.S. District Judge Mark Wolf hold a chambers conference “to discuss recent developments concerning possible resolution of this matter.” Last week,  the special master, Gerald Rosen, a retired federal judge, wrote that settlement talks were expected to last through Sept. 6.

A Labaton spokesman confirmed there were ongoing discussions but declined to give details.

Wolf appointed Rosen a year ago to look into potential overbilling after a $75 million fee request by the three lead plaintiffs firms. But the special master's report found the referral payment wasn't disclosed and, citing some additional billing irregularities, recommended returning more than $10 million to the class.

This month's hearing was to address whether Rosen had the authority to respond to the numerous objections to his report. The three plaintiffs firms, which have paid $3.8 million so far to fund the report, have insisted that the special master has concluded his assignment.

But Rosen insisted his job isn't over. In a letter unsealed this month, his lawyer, William Sinnott of Boston's Barrett & Singal, cited “numerous references in the report and filed record that could raise reasonable questions about potentially improper political activities.”

The hearing also addressed whether the Center for Class Action Fairness at the Competitive Enterprise Institute could participate as a guardian ad litem for the class.

Ted Frank, the center's director of litigation, said he would be concerned if a proposed settlement “shortchanges the class.” Rosen's report recommended referring Garrett Bradley, managing partner of the Thornton Law Firm, to state bar authorities, but Frank suggested that the special master turn over discovery materials to federal prosecutors in Massachusetts and Arkansas, where lawmakers are investigating the referral fee arrangement.

“The special master's already pulled his punches,” Frank said. “The court is entitled to issue tougher sanctions than what has happened here, and probably should and could issue tougher sanctions.”

In court filings, he noted that Labaton continues to hide its relationship with Chargois & Herron— specifically referencing a case involving investors of Facebook who sued over losses stemming from its initial public offering. The Arkansas Teacher Retirement System is a lead plaintiff in that case, in which Labaton and Bernstein Litowitz Berger & Grossmann filed court documents this month asking for 25 percent of the $35 million settlement fund in attorney fees.

Frank also asked for money to serve that role, both for his organization and for Burch, Porter & Johnson, a Memphis law firm that plans to work with him.

Plaintiffs firms opposed the center's involvement, insisting the class is adequately represented.

In a statement, Labaton said: “Labaton is committed to fulfilling its role as co-lead counsel to the State Street customer class and will continue to assert our privilege to serve in that capacity throughout the duration of the special master's review and the court's ultimate determination.”

In an Aug. 7 brief, lawyers for Labaton and the Thornton Law Firm called the center's request “boldly self-serving” and an “opportunistic payday.”

“There is no need for CCAF to enter this case, and no party or class member has requested it to do so,” wrote Labaton's counsel, Joan Lukey, of Boston's Choate Hall & Stewart, and Brian Kelly of Nixon Peabody in Boston, who represents the Thornton Law Firm. “At bottom, for all its lip service toward protecting the class, CCAF has opportunistically seized a chance to carve out a role for itself in this case, with attendant publicity and potential compensation.”

Labaton also called the allegations about the Facebook IPO case “baseless and false.” In an affidavit, a lead Labaton partner on the case, James Johnson, said that “no referral fee has been paid or will be paid to Damon Chargois in the Facebook case.”