Reed Kathrein | 2003 Settlement in Largest Investment Manager Lawsuit in History

2003 Settlement in Largest Investment Manager Lawsuit in History

SETTLEMENT IN LARGEST INVESTMENT MANAGER FRAUD CASE IN US HISTORY

REFLECTS SUPERB CASE-MANAGEMENT SKILLS

Steven T. Taylor

"They'll drag out a case for as long as they can so that they can bill, bill, bill and bilk every penny in the piggy bank." Unfortunately, and as we all know, that's essentially what many people think when they think of attorneys. Let's face it, this negative stereotype is grounded in enough reality to spawn countless lawyer jokes and unfavorable public impressions.

Of course, even well-intended attorneys who don't try to drag out a case to increase the bottom line have trouble side stepping the quagmire that entangles both plaintiffs and defendants in much of today's complex litigation.

Occasionally, however, a legal matter arises, is dealt with and is filed away with such efficiency and expedition that those inauspicious public impressions are, or at least should be, inverted. Hazzard v. Capital Consultants, what's been called the largest investment manager fraud case in US history, is exactly that type of matter.

In early December, a Portland, OR, judge issued an order that governed the distribution of more than $300 million to the plaintiffs in Hazzard after a settlement in the case had been reached last June, which was a mere 18 months after the suit was first filed. The court's directive culminates a swift and masterfully orchestrated mediation of what could have been a tedious decade-long dispute. It also shows that, given the right motivation, the right organization, and the right representation, complex legal matters can be judiciously resolved at a minimum cost of time, resources, and legal fees. In fact, it serves as a blueprint for proficient case management, with Portland's Bullivant Houser Bailey playing the role of chief architect, drafting the parameters within which scores of attorneys representing thousands of plaintiffs and defendants, who no doubt harbored countless notions of justice, could find a way to, simply put, work it out and do the right thing.

"The most challenging aspect of this case was working with all the different parties with their different constituents and different goals and trying to keep it all together," says Reed Kathrein, an attorney in the San Francisco office of New York's Milberg Weiss Bershad Hynes & Lerach, one of the many firms involved in the case. "Steve English at Bullivant did an incredible job of managing the process, of keeping together a very diverse group of parties."

Unfortunately, because several law firms were named in the case as aiders and abettors, Hazzard also shows that, like attorneys representing Enron (which Hazzard case pre-dates), some lawyers apparently would rather look the other way than say no to a remunerative yet ethically dubious client.

100,000 Suffer Losses

The history-making case arises from alleged fraud committed by Capital Consultants, formerly one of the nation's most well-regarded investment firms. Capital was accused of concocting an elaborate but ultimately defective Ponzi scheme that resulted in losses of nearly $500 million in ERISA pension and health benefit trust funds and other private investments. Some 100,000 ERISA plan beneficiaries in all 50 states suffered the losses.

First, Capital founder Jeffrey Grayson and other company leaders started making loans at high interest rates, which were purported to have either insurance or other collateral backing them, assuring pensioners that their money was safely invested. The problem was that the loans didn't have such support, and no one was paying them back.

"Grayson was rolling over these loans to make it look like they were paying off," says English, the Bullivant partner who served as the plaintiffs' lead attorney in the case, "but by and large, no one was ever paying anything back. It all started crashing down in the late fall of 1998. At that point, all these notes came due, in a sense. There was no money to pay them so [Capital] hid that part of it, and that's when we claim that the Ponzi scheme started."

The Ponzi scheme, English adds, created another company, which pretended to buy all these bad loans, taking more money from Capital and paying through a series of bogus companies and making it look to the pensioners like the original amount of money was actually getting paid off.

The Department of Labor (DoL) had been investigating the investment firm for years but did not uncover Capital's scheme until a one-half billion dollars had been squandered. Ironically, Grayson had been heralded by the government as one of the nation's top investment managers for these types of funds.

"Jeff Grayson may not have been the poster boy for the Department of Labor, but he certainly was held in high regard by DoL," English says. "During part of the time that he was being investigated by one arm of DoL for taking excessive fees, he was asked to be an expert witness for the DoL."

English's partner, Chrys Martin, who as one of Bullivant's labor and employment attorneys and also played a prominent role in the case, put it this way: "It was a case of the right hand of government not knowing what the left hand was doing."

Eventually, the Securities and Exchange Commission (SEC) investigated the case, discovered Capital's scheme, and closed the company in September 2000. Since then, several major players in the scheme have been indicted, including two relatives of Lane Kirkland, head of the AFL-CIO. Barclay Grayson, son of the founder, is in jail, and his father, Jeffrey Grayson, is in a coma. "The father is in his own kind of jail," English noted.

In August 2000, English and Martin were called to a Saturday morning meeting by a local ERISA attorney, Mort Zalutsky, who represented some of the pensioners. In order to brief the two visiting Bullivant attorneys, Zalutsky had assembled two ex-FBI agents; a former assistant US attorney, who *17 had specialized in labor and racketeering; and an ex-DoL investigator. Zalutsky had displayed on his office walls charts, diagrams, and pictures outlining the course of Capital's financial and ethical mis-steps.

English and Martin decided to get involved, building a team to spend the next three weeks poring over every relevant document they could get their hands on. In September, within days after the SEC closed Capital's shop, Bullivant filed a lawsuit on behalf of plaintiffs who had lost about 40 percent of the $500 million. Named in the suit were Capital and its principals, of course, but also the company's accountants and lawyers, who many thought should have caught the corporate hanky-panky.

Eventually, five law firms were named for aiding and abetting "the perpetration of fraud on the pensioners," according to English. They were Seattle-based Lane Powell Spears Lubersky; Los Angeles megafirm O'Melveny & Myers; Portland's Stoel Rives; Newark's McCarter & English; and Portland's Weiss Jensen Ellis & Howard, which has since merged into Miami's Holland & Knight. "We felt that there was plenty of blame to go around," English says.

Pooling Plaintiffs Together

English and Martin didn't know what would happen with the many other lawsuits that had been filed, but they soon began getting calls from other pension-fund attorneys who were seeking advice. Here's where the Bullivant firm made one of its first key decisions.

"We could have played hardball and said, 'We're doing our thing here,"' English recalls, "but Chrys and I felt it made sense to be inclusive rather than exclusive. So we freely and willingly gave [the other attorneys] copies of everything we had. People started wanting to piggyback with us. We quickly said, 'Great, let's share costs, and we'll work out fees later."'

In December 2000, when US District Court Judge Garr King convened a meeting with plaintiffs, defendants, and attorneys for both sides in his Portland courtroom, he saw dozens of familiar faces. Attorneys' faces; and he wasn't exactly happy to see them. "Look around the room and think about how much money is being spent on lawyers and litigation," he snarled, according to a local press account.

More than 40 attorneys attended that courthouse meeting, and that was only about a quarter of the total number of attorneys involved in the 20 civil lawsuits, three criminal cases, and one bankruptcy that the case had produced. In fact, more than 150 attorneys were involved, representing thousands of parties.

Judge King said that something had to be done to save the proceedings from turning into a circus. "By the time we had the first meeting in court, it was filled with lawyers," English says. "I knew most of these people. Judge King recognized most of them as well. Essentially, he said, 'We're not going to let this thing get out of hand. We have to come up with a plan.' That's what Chrys and I had decided as well. We volunteered to formulate a plan. We gathered other plaintiffs and started communicating with the defendants' lawyers."

English emerged as the leader for the plaintiffs' side. "Neither the court nor our firm appointed Steve the lead attorney," Martin says. "The other attorneys did. We were in it first and had the facts down, and Steve has a great reputation as a trial attorney."

That was paramount because the plaintiffs' attorneys knew that they had to have someone out front against whom the other side would fear going to trial, someone who would make them seriously consider settling.

As discussions regarding settlement began, the Bullivant offices became the crowded intersection for the case, as all the meetings took place in the firm's many conferences rooms. As many as 50 attorneys and others would convene, and Bullivant kept them all plied with coffee, tea, and sandwiches. "We bought a lot of lunches for a lot of lawyers, including defendants' attorneys," Martin says. "It was one of the smartest things we did."

*18 The Bullivant team realized that it had to act quickly and deliver to the defense a deal that would get them out of their problems with the DoL and, after they paid a settlement, would indemnify them against future claims.

After much discussion, the parties came up with several elements of an agreement. "They were," explains Martin, "starting mediation early; exchanging documents confidentially so that they wouldn't end up on the front page of the newspaper; producing witnesses voluntarily for unsworn testimony to help us get through the facts; mediating with confidentiality; and choosing Judge [Edward] Leavy as the mediator."

Both sides credit Judge Leavy for his charming demeanor, keen communication skills, and intellectual depth. "Judge Leavy was the perfect mediator," English says. "He had everyone's respect. He's very bright, but he doesn't carry his credentials on this sleeve."

As one might imagine, getting all the plaintiffs to agree to mediation was not an easy task. "It was tough to get all the plaintiffs on board because there were a lot of people who didn't want to do any mediation," says the soft-spoken English. "Others wanted it done in 30 days. Others said, 'Let's take a year.' Soon we started picking up some of the defendants' attorneys, but many of them wanted more time. Eventually, we got the template built." The parties forged the agreement, the judge accepted the plan, and formal mediation started in May 2001.

Money or Revenge ?

The plaintiffs contended that Capital had "engaged in conduct which caused hundreds of millions of dollars in damages to the plaintiff investors," according to Bullivant documents. "Defendants were aided by professional services advisors [accountants and lawyers] who structured, approved and documented transactions; defendants conduct resulted in losses."

The plaintiffs also agreed on a goal. Simply put, they wanted to return to investors the most money in the least amount of time. To do this, the Bullivant team decided that all attorneys involved should move quickly, meet weekly, and strive to cut costs to preserve insurance proceeds.

Strong agreement on this goal was another key to the success of the case, and English put it to the plaintiffs in the most straightforward terms. "I said, 'Look, you can either get money or revenge, but you can't get both,"' he recalls. "'We can get you money and the US Attorney can get you revenge."'

The plaintiffs realized that going for Capital's collective jugular would not be the most prudent approach. "A scorched-earth strategy would have done us absolutely no good," Martin says. "It would have eaten up all the assets. So, if you figure a way to save the insurance company a little bit of money, then you have created risk on the other side. We could say, 'If you go to trial with us, we are good trial attorneys and we've got a good case. But we can give you an opportunity to settle for less than policy limits."'

During the course of the meetings, English decided that he must find a way to accommodate all the very large egos involved in the case. After all, many top-shelf attorneys from very prestigious law firms were involved, including attorneys for the defense from two of the best litigation shops in the country--Irell & Manella and Munger, Tolles & Olson, both based in Los Angeles.

"We always tried to come up with a working plan or strategy that others could either pick apart or chew on, something to work from," English says. "We made sure that everybody got a chance to speak his or her mind. I never told anybody to shutup. We kept a tone of professionalism. Then, after everyone spoke, we said, 'We have to make a decision. Are we going to act like lawyers or like businessmen?"'

That underscores a theme that has emerged in recent years: In today's legal profession, lawyers must be more than lawyers, something that attorneys in the case clearly realized. "Steve's organization of the case bore that out, that lawyers need to do more than practice law," Milberg's Kathrein says of English. "A lot of us were acting as just lawyers. There was a lot of animosity and a lot going on away from meetings and conference calls, a lot of fighting and positioning; but Steve managed to keep it all together."

Another linchpin to English's approach was the recognition that different attorneys had different talents and the appointment of tasks to match those skills. For example, when it came time to draft the *19 settlement document, English remembered the most difficult time he'd ever had in negotiating an agreement. So he asked John Lusky from Portland's Miller Nash to write the document. "I remember when I had to deal with him, he meticulously dotted every "i" and crossed every "t"; he drove me nuts," English says with a smile.

"John Lusky was invaluable in drafting the agreement, just incredible; and Steve English kept it all together and held the respect of both sides," says Chris Carson, with Portland's Kilmer, Voorhees & Laurick, which represented plaintiffs in the case. Carson adds that the defense attorneys also "deserve a lot of credit for reaching settlement so quickly."

Indeed, the matter was resolved quickly. It took two years when other cases of this immensity and complexity routinely take a decade or more. Moreover, the amount recovered by the investors was more than even the most hopeful would have thought possible at the outset.

When all was said and done, the settlements will return more than 60 percent of the at-risk investments. Most recoveries in such cases typically are settled for 10 percent to 20 percent of the total loss. "I am unaware of any cases of this magnitude returning this percentage of recovery," Judge King said during the case. "It is remarkable that the litigation costs were far below anything experienced in these cases."

Lawyers Afraid to Say "No "

What shouldn't be lost in the settlement, however, is the alleged culpability of the law firms that Capital had retained, according to some observers of the case.

"What the hell is wrong with the law firms that would do this, which is essentially aide and abet in malfeasance?" says a source on the East Coast who is familiar with the case. "Just like in the Enron case, but this occurred before Enron, it seems that some attorneys were afraid to say no to their client.

It comes down to individual partners who are scared to death of losing a client, of partners who are more concerned about their own books of business than they are for the rule of law."

English says that he isn't certain what role Capital's law firms played in the malfeasance. When asked about those attorneys, he initially said, "Even the most reputable, highest-quality lawyers can make mistakes."

When pressed, he does go further: "In our opinion, there were certain business people who set out to cheat people. Should the professionals have caught this, and by their inaction did they aid and abet? Well, that was our contention, and we feel that, at the end of the day, the amount of money that we recovered was some reflection that they felt there was risk there as well."

The Bullivant attorneys say that they learned a lot by handling the case, and they are now transforming that experience into services to their clients and prospective clients to help prevent other companies from getting into similar trouble. Among other things, the firm has set up training programs to help trustees understand ERISA regulations and is urging is clients to adopt stringent conflict-of-interest policies and tighten their corporate governance procedures.

"Employers must understand ERISA, that the company could be sued," Martin says. "Many employers are not in compliance with ERISA or don't have enough insurance or other safeguards to help them. We've been asked by a number of clients to do individual audits of their benefits plans and check for compliance to keep them out of trouble."

Martin added that the firm is also marketing these services, a move that has garnered praise from outsiders. "That's an example of very good law firm marketing," says a NY-based marketing consultant. "Here's a firm that has just won this major settlement, and it's now turning around and saying it will help companies with proactive education. That's just plain shrewd."