N.Y. AG rebuffed in clash with private lawyers with parallel claims
On Monday, former New York governors Mario Cuomo and George Pataki wrote anÂ unusual joint opinion piecein The Wall Street Journal, calling on New York Attorney GeneralÂ Eric SchneidermanÂ to drop threats that he will continue to seek injunctive relief against former AIG chief Hank Greenberg, even though the AG has already had to abandon damages claimsÂ becauseÂ Greenberg reached a private settlementÂ with investors in a securities class action. As my Reuters colleague Karen Freifeld explained inÂ a really smart analysisÂ last Friday, Schneiderman is constrained by a 2008 ruling that limits the AG’s right to recovery in the name of investors who have already settled a federal-court class action. Freifeld said that the same holding, Spitzer v. Applied Card, may ultimately force the AG to drop claims for money damages against Bank of America in connection with its merger with Merrill Lynch and against Ernst & Young for its audit of Lehman Brothers, even though both suits were brought under New York’s powerful Martin Act, which permits the state to bring securities claims on behalf of supposedly defrauded investors.
I’ve written a lot aboutÂ the tension between class action lawyers and state regulatorsÂ with parallel claims. The battle to recover damages on behalf of misled investors (and the right to claim credit for the recovery) is part of that interplay: In New York, whoever makes a deal first wins.
A 44-page decision FridayÂ by U.S. District JudgeÂ Colleen McMahonÂ of Manhattan provides a vivid illustration of the burgeoning competition between the New York AG and securities class action lawyers. McMahon ruled that plaintiffs’ lawyers are entitled to about 18 percent of a $220 million settlement on behalf of investors in the Bernard Madoff feeder fund Ivy Asset Management (and related defendants). As Daniel Fisher of Forbes reported Friday, sheÂ ordered a 25 percent haircutÂ on the hours and rates that five plaintiffs’ firms billed for reviewing documents previously produced to regulators, finding that the firms (whom she otherwise praised to the skies) should not have jacked up billing rates for the contract lawyers who conducted the review.
What was more interesting to me, however, was McMahon’s evaluation of the role of the New York AG – the primary objector to the plaintiffs’ fee request – in obtaining the settlement. In the Ivy case, as in Greenberg’s, the AG brought a case alongside class action plaintiffs and uncovered some of the key evidence in the case. But in the final analysis, McMahon said, results are what matter.
The Ivy class actions, including an ERISA case and derivative suits, were filed within months of Madoff’s exposure in December 2008. But while the securities class actions were stayed pending the feeder fund’s motion to dismiss, former New York AG Andrew Cuomo began an investigation. Ivy was concerned enough about the AG that it entered settlement negotiations, offering in 2010 to pay $140 million in a global deal on behalf of investors in all of its affiliated Madoff feeder funds. Talks fell apart when the AG couldn’t assure a global deal. Ivy withdrew its offer and in May 2010 Cuomo’s office filedÂ a detailed complaintÂ against the funds, based on more than 10 million documents and 37 depositions.
That was much more discovery than class action lawyers had been permitted because of the automatic stay required by the securities litigation statute. So plaintiffs’ lawyers adopted evidence from the AG’s complaint to help them withstand Ivy’s dismissal motion. Once their case got past that obstacle, they obtained the underlying documents that had been turned over to the AG and other regulators as well as depositions conducted by the AG’s office.
The AG’s office, meanwhile, didn’t do much litigating after filing its complaint. Ivy entered mediation with the private plaintiffs, who knew nothing of the tentative settlement the fund had reached with the AG but then abandoned. After nine months of negotiation and motion practice, the class action lawyers reached a $220 million deal ($217 million in cash and $3 million fees forgone by an Ivy fund) that was accepted by 464 of 470 eligible investors. (McMahon said she had never seen anything like the “astonishing” claims rate of 98.7 percent that this case achieved.) The settlement designated $5 million to go to the New York AG.
The AG objected to the $40.7 million fee request by plaintiffs’ lawyers, arguing that the fee award should be based not on the entire $220 million settlement but only on the $76 million Ivy agreed to cough up in addition to the $140 million deal it had offered to the AG. Private lawyers, the AG said, had piggybacked on its investigation and shouldn’t be rewarded for regulators’ work.
McMahon disagreed. “The NYAG cannot take credit for bringing about this happy result because he did not herd all the cats that needed to be rounded up in order to bring it to fruition,” she wrote. “Ivy may well have offered $140 million to settle with the NYAG sometime prior to the filing of the NYAG’s complaint, but it did so on a condition the NYAG was either unwilling or unable to fulfill. . . . As a result, Ivy took its offer off the table and began litigating – not with the NYAG but with the private plaintiffs.”
You can see why, as a policy matter, this kind of scenario is of concern: It permits a defendant to pick whom it wants to settle with. (Of course, that’s been a long-running argument by private plaintiffs’ lawyers when their class actions are co-opted by regulators.) “This ruling dramatizes all of the things that can happen when there are overlapping claims,” saidÂ Adam Zimmerman, a professor at the law school at St. John’s and a specialist on relations between AGs and class action lawyers.
McMahon, however, seemed determined to rein in the New York attorney general, even throwing in a footnote citing “serious questions” about the AG’s standing to assert damages claims in a parens patriae action. That’s a red herring since the AG unquestionably has the right to bring claims for money damages under the Martin Act, which was the basis of four of the counts it asserted against Ivy. “The footnote only seems to muddy the waters by confusing the statutory-based settlement powers of AGs with their common law authority,” Zimmerman told me in an email. “(It) strikes me as an attempt to send a shot a across the bow to the AG’s office to warn against overreaching in a global settlement deal.”
A representative of the attorney general’s office declined to comment on McMahon’s ruling.
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