On Monday, former New York governors Mario Cuomo and George Pataki wrote an unusual joint opinion piecein The Wall Street Journal, calling on New York Attorney General Eric Schneiderman 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 claims because Greenberg reached a private settlement with investors in a securities class action. As my Reuters colleague Karen Freifeld explained in a really smart analysis 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 about the tension between class action lawyers and state regulators 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 Friday by U.S. District Judge Colleen McMahon 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, she ordered a 25 percent haircut 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 filed a detailed complaint against the funds, based on more than 10 million documents and 37 depositions.