Kickback claims against Bernstein Litowitz unsealed by 2nd Circuit

February 24, 2016

(Reuters) – Did the renowned plaintiffs’ firm Bernstein Litowitz Berger & Grossmann pay a private lawyer in Mississippi $112,500 in order to secure its client relationship with the Mississippi attorney general’s office, where her husband worked?

The kickback allegation comes from a 2014 racketeering and breach of contract complaint by Bruce Bernstein, who spent four years as of counsel at Bernstein Litowitz. The lawyer claimed that Bernstein Litowitz hired Jackson, Mississippi, solo practitioner Vaterria Martin to act as local counsel in a securities class action in which Mississippi’s employee pension fund was the lead plaintiff against Satyam, the Indian technology company. Martin was supposedly paid $112,500 for unnecessary and unusable work – and that fee, according to Bernstein, was not disclosed to the federal judge overseeing the Satyam case.

Bruce Bernstein claimed he eventually learned that Martin was married to a lawyer in the Mississippi AG’s office, which selects the plaintiffs’ firms hired to represent the state’s public pension fund in securities class actions. Miss PERS, as the pension fund is known, is a longtime Bernstein Litowitz client and a frequent lead plaintiff in shareholder suits. Bernstein asserted that Bernstein Litowitz partners told him to stop asking questions about the ethics of Martin’s fee. One prominent partner allegedly said, “Do you ever want us to work with Mississippi again?”

Bruce Bernstein’s claims are unproven allegations, as the 2nd U.S. Circuit Court of Appeals emphasized in an opinion Wednesday disclosing the case, which had been litigated pseudonymously and under seal. Bernstein Litowitz has called the onetime of counsel a “disgruntled former employee” who asserted “sensational, unfounded accusations” to extort a payment from the firm. Bernstein Litowitz name partner Max Berger told me in an email that his firm is well known for its high ethical standards and integrity. “I can assure you no case and no amount of money would ever get us to deviate from our standards,” Berger said.

Regardless of the merits of Bruce Bernstein’s allegations, Bernstein Litowitz did not want its former employee’s case to become public, not least because the firm said Bernstein was exposing client communications. Two weeks after the lawyer filed a sealed complaint in federal court in Manhattan – and a day before the temporary seal was set to expire – Bernstein Litowitz reached a confidential settlement with Bernstein. The firm and its former of counsel asked U.S. District Judge Valerie Caproni to close the case file and leave the complaint permanently sealed.

She said no, sending Bernstein Litowitz to the 2nd Circuit on appeal. (The appeal was captioned “ABC v. DEF.”) Judges Amalya Kearse, Jose Cabranes and John Walker held Wednesday that the public interest in the case’s kickback allegations far outweighs Bernstein Litowitz’s “weak private interest” in keeping the case sealed.

“As the district court noted, the complaint alleges that defendants, as counsel for a state employees’ pension fund that was a lead plaintiff in a major securities class action, ‘regularly engage in a kickback scheme with the Mississippi Attorney General’s Office, a public entity whose constituents might otherwise be in the dark about the arrangement,'” wrote Judge Walker. “Whether true or not, this allegation would naturally be of legitimate interest to the public (especially those who contribute to and receive payments from MPERS) and to federal courts in the future (e.g., those considering whether to name BLB&G as lead class counsel or find MPERS to be an adequate class representative in future class actions).”

Hard to argue with that, though you can understand why Bernstein Litowitz and its counsel, Gregory Joseph of Joseph Hage Aaronson, might wish otherwise. As of mid-afternoon Wednesday, Bruce Bernstein’s complaint and Judge Caproni’s unsealing opinion remained unavailable on Pacer, as were substantive filings in the appellate record. Vaterria Martin did not respond to my phone message requesting comment. A representative for Mississippi Attorney General Jim Hood said the former Bernstein Litowitz lawyer’s allegations “are untrue and we give them no merit.”

But based on the 2nd Circuit opinion and a Bernstein Litowitz brief before Judge Caproni, here’s what we know about Bruce Bernstein and his claims. Before Bernstein joined Bernstein Litowitz, he represented a Merck investor who was, along with a Bernstein Litowitz client, co-lead plaintiff in a long-running securities case over Merck’s Vioxx disclosures. (Bernstein previously worked at Milberg and Marc Dreier’s ill-fated firm.) By hiring Bernstein as of counsel, Bernstein Litowitz consolidated its lead in the Merck case.

Bruce Bernstein also worked on the class action against Satyam, in which Bernstein Litowitz was co-lead counsel with Grant & Eisenhofer and two other firms. He signed class counsel’s fee petition in the Satyam case, which requested an award of 17 percent of the $125 million settlement. The petition did not disclose any fee-sharing agreement between Bernstein Litowitz and Mississippi lawyer Vaterria Martin. In late 2011, Bruce Bernstein raised concerns within the firm about Martin’s fees. He also allegedly questioned why Bernstein Litowitz had engaged lawyers in Mississippi, whom Bernstein considered unqualified, to work on the Merck case.

Bernstein took his allegations of impropriety to the U.S. Attorney’s office in Manhattan in December 2011. A year later, he resigned from Bernstein Litowitz. Two years after that, he sued, claiming he was hounded out of the firm because his ethical concerns rankled partners.

Bernstein Litowitz maintains there was nothing at all improper about the firm’s hiring of Martin, its disclosures in Satyam or its employment of Bernstein. According to the firm’s filing, the Mississippi AG’s office had an entirely ethical policy of encouraging outside counsel to use Mississippi lawyers. Bernstein Litowitz did not disclose Martin’s work in the Satyam fee application, the firm said, because there was no need to do so. Rules governing practices in the Southern District of New York had recently changed to eliminate required disclosure of fee-sharing agreements and the judge overseeing the Satyam case understood that lead counsel intended to allocate fees to other firms.

Bernstein Litowitz said that its payment to Martin came out of its share of the fee award, so Satyam investors weren’t affected by it. Despite the innuendos of its onetime of counsel, Bernstein Litowitz said, its fee disclosures were proper and correct. Bruce Bernstein, according to the firm, was continuing to allege they were not because he wanted more money from his former employer.

The 2nd Circuit opinion notes the rule change on fee-sharing disclosure but carefully avoids taking sides in the now-settled case. Prosecutors have not taken any public action in response to Bruce Bernstein’s allegations, which he reported more than four years ago.

Both Bernstein and the firm signed statements when they settled Bernstein’s suit in early 2015. The Bernstein Litowitz statement said the firm’s “negative assertions” about its former employee were made in the litigation context and that when he worked at the firm, Bernstein was “intelligent, dedicated and maintained the highest degree of integrity.” In his statement, Bernstein said that after interviewing witnesses and reviewing documentation, he and his lawyer believed there were “insurmountable factual and legal challenges” to his racketeering claim.

Bernstein, who now works as a trial lawyer in the Justice Department’s civil division in New York City, declined to comment. Bernstein’s counsel is Justin Sher of Sher Tremonte.

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