Some on panel urge review of systems’ rehiring of law firm

Several lawmakers want the boards of trustees for state government’s two largest retirement systems to reconsider their decisions to rehire a New York law firm accused of overbilling in a lawsuit over investments, a few lawmakers said last week.

Members of the Legislative Council’s Review Subcommittee examined the decisions of the trustees of the Arkansas Public Employees Retirement System to hire 18 securities-monitoring firms in November and of the Arkansas Teacher Retirement System to hire six in December.

Securities-monitoring firms represent the systems in class-action lawsuits over investments. The firms are paid on a contingency-fee basis with payments determined by a judge and coming out of any settlements and awards. Potentially millions of dollars are at stake in successful cases that are large, complex and involve many retirement systems.

The retirement systems

reported their contracts with the law firms to the subcommittee on Wednesday. On Friday, the Legislative Council voted to accept the subcommittee’s report, with Sens. Terry Rice, R-Waldron, and Kim Hammer, R-Benton, and Rep. Mark Lowery, R-Maumelle, dissenting.

The firm in question was Labaton Sucharow, which represented the Teacher Retirement System in a class-action lawsuit in federal court in Massachusetts against financial-services provider State Street. The lawsuit resulted in a $300 million settlement and an initial award of $75 million in attorney’s fees. A dispute that arose afterward involved allegations of overbilling and a $4.1 million referral fee paid to Texas attorney Damon Chargois.

In testimony to lawmakers in July 2018, George Hopkins, then-executive director of the Teacher Retirement System, said that until a special master raised questions about the referral fee, he didn’t know that was part of the attorney’s fees.

Hopkins also testified at the time that he directed the system’s securities-monitoring firms not to pay any referral fees and any fee that was shared with another firm has to relate to work done and be reasonable.

Hopkins retired Nov. 16, 2018, after nearly 10 years with the system. He has said his retirement had nothing to do with the controversy over Chargois’ referral fee.

A federal judge later cut the attorney’s fees in the State Street case to $60 million, including trimming Labaton’s fees from $32 million to $22 million.

Sen. Jason Rapert, R-Conway, told his colleagues Wednesday that he had been concerned about the matter and received calls about it. The system’s leadership has changed.

“Any organization, any entity is only as good as the people that are running it and that are in it, and to be honest with you, I think that a lot of the parties that made bad decisions that may be blurred across some of the lines are no longer in those positions,” he said. “A lot of those things that were troubling at the time, that needed to be dealt with, have been dealt with.

“I just wanted to raise my hand to say we can’t continue punishing a firm itself just because some decisions were made with some people outside of them, and that basically drug them into the middle of a mess that was happening right here in Arkansas,” he said.

But Lowery countered, “I would have to differ dramatically with the statement that was just made by the senator.

“The individuals at Labaton are still there,” he said. “I would think in fiduciary responsibility, it’s not only to protect the investment, but it is also to protect the reputation and integrity of the retirement systems that you oversee.”

Lowery said news reports and findings by U.S. District Judge Mark Wolf in the State Street case are “damning enough of Labaton that it damages the reputation of the retirement systems to continue to participate with them.

“The truth is, Labaton never had any relationship with ATRS or APERS at all until this referral fee, this referral was made,” Lowery said. “And the statement that was made by the firm, in trying to justify the referral fee, they said we got you ATRS as a client after considerable favors, political activity, money spent and time dedicated in Arkansas.

“That is a very damaging indictment I believe by extension to ATRS’ reputation,” Lowery said. He urged the members of the Legislative Council and the Review Subcommittee to ask the boards of both retirement systems to review their rehiring of Labaton.

Clint Rhoden, executive director of the Teacher Retirement System, said, “The process … we knew from the start was going to include Labaton because they are one of the biggest firms in this space, one of the most experienced and qualified.

“We looked at the past referral fee situation. Nobody likes it. It was very embarrassing, very damaging to both Labaton and ATRS’ reputation,” he said.

“However, at the end of the day, we have to also balance that with our fiduciary duty in order to recover investment damages,” Rhoden said. “Once, we determined that that was not a disqualifying factor, we factored that into the evaluation matrix and they still scored in our top six.

“They were not No. 1 obviously because of this past ethical situation, but it is a balancing act. That’s what the board has decided at this point,” Rhoden said.

Lowery said his concerns went beyond referral fees.

He said Wolf found that submissions by Labaton and another firm, the Thornton law firm, in support of the original fee award of $75 million “were replete with material false and misleading statements,” and the firms had in many respects violated federal rules of civil procedure and Massachusetts rules of professional conduct.

Lowery said that information should have been provided to the retirement systems’ trustees in revisiting Labaton’s rehiring.

Rhoden said he will make that information available to the Teacher Retirement System’s trustees.

“I wish you could open it up at your next meeting, if they want to look at this again,” Rice said. “Again, that’s y’all’s determination, but there is concerns that I have.”

Sen. Scott Flippo, R-Mountain Home, the Review Subcommittee co-chairman, addressed both Rhoden and Duncan Baird, the executive director of the Public Employees Retirement System.

“Mr. Rhoden and Mr. Baird, I would tell you I would get a feel for where a number of the legislative body is on this issue,” Flippo said.

“I think it might be worth holding and revisiting in June,” he said. “However, that’s at your purview and I would just say that you got your work cut out for you. People are looking at this. People are paying attention.”

Labaton said Thursday in a written statement to the Arkansas Democrat-Gazette that the firm was selected by the Teacher Retirement System “on the strength of our historic credentials as part of a public [request for qualifications] process in 2008.

“With respect to that [request for qualifications] application, Labaton included Mr. Chargois with the intent to have his firm serve as local counsel on the ground in Arkansas,” the firm said. “As the relationship developed, we began to work directly with ATRS. We continue to object strenuously to any inference of public corruption or political influence associated with our work. Specifically, the claim that any part of the referral fee paid to Mr. Chargois was used in an inappropriate or unethical manner … is simply untrue.

“Our work with ATRS has yielded positive financial results for the state of Arkansas and has recovered millions of dollars for Arkansas taxpayers,” Labaton Sucharow said.

After the legislative panel’s meeting, Rhoden said the final amount on how much the system will receive as a result of the settlement of the State Street case hasn’t been determined yet, but “the current estimated range is $175,000 to $200,000.”

Rhoden told the subcommittee that the system issued a request for qualifications last year “in order to renew and top reevaluate the number of the securities-monitoring firms that we have on our bench.

“We worked with the Office of State Procurement in order to create that evaluation criteria,” he said, and “the evaluation criteria included the question, please disclose all civil, criminal actions, all malpractice suits, all court actions, court sanctions regarding ethics or violations, etc., and any procedures that you have in place to prevent those.

“That was put in there specifically because of the Labaton situation from 2018. Obviously, Labaton’s reputation was called into question due to an undisclosed referral fee. That referral fee provision is exclusively prohibited now in these six contracts. That was recognized as, to say the least, not a best practice and that will not happen again,” Rhoden said.

“That being said, Labaton has been a quality firm for ATRS since 2009, has successfully litigated many cases for us,” he said.

Rice asked whether any of the concerns of the Teacher Retirement System’s board played into the hiring decision by the Public Employees Retirement System board.

Baird said the system issued a request for qualifications for securities-monitoring firms shortly after he started working at the system in April of last year, “but my assumption is that was driven in part by everything that was going on, everything that we were hearing and seeing.”

Eighteen of the securities-monitoring firms met the system’s minimum criteria of the request for qualifications and the system’s board decided to choose all 18 firms with varying levels of experience to fulfilling its fiduciary duties, he said.

Most of the firms likely will not be engaged in a case on the system’s behalf during the next several years, he said.

Rhoden said the Teacher Retirement System’s trustees have had a policy since at least 2010 that the system would employ six securities-monitoring firms.