The Arkansas Teacher Retirement System has landed in a legal dispute over attorney fees in a class action lawsuit in which it was a lead plaintiff and won a $300 million verdict.

Law360 reported after a hearing Wednesday in a Boston courtroom:

A special master appointed in a billing probe found misconduct on the part of the attorneys who led a $300 million class action settlement with State Street Corp. and recommended that a significant chunk of a $75 million fee award be returned, according to details revealed during a contentious hearing Wednesday in a Massachusetts courtroom.

Labaton Sucharow LLP, Thornton Law Firm LLP and Lieff Cabraser Heimann & Bernstein LLP served as lead counsel on the case and said they overstated the value of their work by 10 percent by double-billing for some work done by attorneys brought on for document review. Senior U.S. District Judge Mark L. Wolf appointed a special master, retired judge Gerald Rosen, to look into the billing kerfuffle, and the former judge said a fee paid to the attorneys in the case has raised a red flag.

Judge Rosen’s report was filed under seal, but the first details of his findings after the 15-month probe trickled out as Judge Wolf grilled the lead plaintiff in the suit, George Hopkins, executive director of the Arkansas Teachers’ Retirement System.

“The conduct of Labaton and the other lawyers you selected has been called into question,” Judge Wolf said. “The special master recommends a significant amount of money be returned from those lawyers and distributed to the class

Some of the dispute apparently relates to a referral fee paid by Labaton but not disclosed to the court, which their lawyer said was legal under Massachusetts law.

This is where it gets interesting. The special master said the fee could be better called a “finder’s fee.”

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As the filings from the special master remain temporarily under seal, the size of the fee paid is unclear, but the money came from all three firms’ $75 million cut and was paid to an attorney not involved in the case who helped bring the Arkansas retirement system and Labaton together. Exactly how much of the $75 million Judge Rosen said should be returned is also unclear, but the report did not recommend sanctions against Labaton.

Hopkins underwent questioning Wednesday.

Judge Wolf expressed concern about the Arkansas Teachers Retirement System’s ability to remain as the lead plaintiff, questioning its executive director, Hopkins, on the origins of his organization’s relationship with Labaton. Hopkins, who served in the Arkansas legislature, said another former Arkansas lawmaker helped arrange the introduction between Labaton and the retirement system more than nine years ago. Much of the questioning was spent on conversations Hopkins had with the politician, including one on Memorial Day during which Hopkins mentioned having to fly to Boston to testify in the ongoing fees probe.

Judge Wolf asked Hopkins to take a week to think about whether the Arkansas Teachers Retirement System’s best interests would be served by having the organization stay on as lead plaintiff.

“You picked Labaton to represent the class. Have you thought about whether it would injure the reputation of Arkansas Teachers and perhaps its opportunity to serve as lead plaintiff in future cases if the court finds Labaton engaged in misconduct?” Judge Wolf asked.

“Any time you are in a case that blows up, it impacts everyone in the case,” Hopkins replied, “but I don’t think you can impute any kind of misconduct you can find to me, and I wouldn’t be worried about ARTS.”

I”ve corresponded with Hopkins about the case this morning by e-mail. He did not answer my question about the lawmaker referenced in the reporting who put the retirement system with Labaton. He said  it was incorrect to say the hiring was his decision. The law firm was chosen by Paul Doane before Hopkins succeeded Doane as director nine years ago, he said. Hopkins said he believed a lawyer in Texas, whose role I’ve so been unable to confirm, was the recipient of the referral fee.

He also provided this prepared statement:

The court and special master have both acknowledged that ATRS to this point has been a very strong and positive class representative. The special master has stated that ATRS as a class representative was instrumental and crucial in obtaining a $300 million settlement for the class.

The attorney fee petition after the settlement had errors that caused the court to review the circumstances surrounding the attorneys’ fee submission. ATRS engaged the attorneys at the initiation of the case and has positive things about the quality of the work on the case. The case involved novel legal theories and involved millions of pages of documents. Despite the challenges, all agree the settlement was an extraordinary result for the class.

The court is now concerned that at this juncture in the case that a class representative who did not engage the attorneys may be in a better position to ensure the class is fairly represented in regard to any issue on what should go to the class and what attorney fees should be paid. Any issue about safeguarding the class is related to the fee petition, the aftermath of the fee petition, and not the activity that lead to the settlement.

The lawsuit alleged that State Street swindled clients on trades. The lingering issue is over the fee award and a related fight on what information should be released from the special master’s report because law firms say it could damage them. Said Reuters:

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.”

When the issue of class action lawsuit arises, the name John Goodson, the UA trustee and husband of Supreme Court Justice Courtney Goodson, inevitably arises. For the record, Hopkins said, “ATRS has never used John Goodson as an attorney in any case since I have been at ATRS.”  On the subject of legislators with potential connections to class action lawyers: Sen. Jeremy Hutchinson once had a working association with Goodson’s law firm but now is part of the firm of Steel, Wright, Gray and Hutchinson.  But he’s a current Arkansas legislator. Allen Gordon, a former state senator from Morrilton, was registered as a lobbyist for Labaton Sucharow in Arkansas in 2013.  Capitol Advisors Group, whose members include former Sen. John Burris, list Labaton as a current client. At least a couple of other former senators now lobbyists have big out-of-state law firms as clients.

UPDATE: George Hopkins now tells me the former senator with whom he spoke Memorial Day weekend, the person identified as introducing Labaton to ATRS, was former state Sen. Steve Faris. He’s a government insider of long standing former staff chief for Secretary of State Bill McCuen, legislator, lottery commissioner, Hutchinson appointee to board of school for math and science and to the Public Employees Retirement System Board, former adviser to Senate president Michael Lamoureux, who once named him to health marketplace board. So far I haven’t been able to reach Faris.

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PS: Statement coming soon from Labaton Sucharow, which feels a bit hampered by having to respond to references to a report not yet public that they believe is based on some erroneous facts and interpretation of law.

HERE’S THEIR STATEMENT:

Labaton Sucharow is one of multiple law firms that Arkansas Teacher Retirement System has engaged as a monitoring firm qualified to represent the fund and examine its investment portfolio to determine where there might be grounds for bringing securities actions. Our relationship goes back to 2008, when we responded to a Request for Qualifications issued by ATRS to serve as monitoring counsel – based on our extensive history and track record in representing institutional investors in securities class actions, Labaton met that threshold. We represented ATRS through the entirety of its role as lead plaintiff in State Street, beginning from when the case was filed in 2011 through the final settlement reached in November, 2016.

Regarding the question on referral payment, this is a substantive issue that will be taken up once the report produced by the special master has been unsealed by the court. We believe there are numerous conclusions and recommendations in the report that are not supported by law or the facts in the State Street case. However, since the topic was mentioned at the May 30 hearing, it is worth pointing out that Massachusetts, where State Street was litigated, permits lawyers to make referral payments to third parties. In State Street, such a referral payment was made by class counsel, taken entirely from attorneys’ fees awarded by the court after the global settlement was reached. The referral payment had no impact on the recovery by the class, reportedly the largest financial recovery on record under Massachusetts’ consumer statute. We believe we complied with all legal and ethical disclosure requirements in making that payment.