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"One of the Biggest Pay-to-Play Deals Is Little Known"



Interesting letter to the editor the other day (Nov. 6) in the Wall Street Journal from Edward Siedle of Benchmark Alert, responding to a Journal editorial. It is reprinted here with his permission:

It is true, as your Oct. 31 editorial "Pay-to-Play Torts" says, that public pension pay-to-play schemes involving plaintiffs law firms deserve the same enhanced scrutiny that many states are now bringing to financial brokers and other intermediaries. There is simply no justification for special treatment of lawyers. Indeed, given the nature of legal services and the special fiduciary duties that apply to the attorney-client relationship, more intense scrutiny should be applied to lawyers than to the public-pension broker or intermediary hires.

Sometimes campaign contributions to public officials by plaintiffs lawyers influence or determine the selection of these firms by these same officials. But campaign contributions alone cannot explain the countless hires of plaintiffs firms by thousands of public-pension managers around the country. A major drawback of campaign contributions is that they are relatively easy to trace. Another drawback is that for most public pensions a single elected official or even multiple elected officials may not control the lay board.
On the other hand, in virtually all public-pension class-action litigation, class-action law firms share fees with local fund counsels in order to secure hires. Public-pension local fund counsels generally have substantial experience in labor matters. Their relationships with labor groups explain their role with the pension funds. They have little knowledge to offer regarding investment matters or securities class actions. In many cases, poor public-pension investment decisions can be linked to ineffectual legal representation in their negotiations with Wall Street investment firms. Yet these local fund lawyers can earn substantial referral fees on class actions which dwarf the standard retainers they receive from pensions.

The amount of fees paid by plaintiffs firms to local fund lawyers are largely undisclosed to public-pension boards. In my 25 years of public pension experience I have never met a public-pension board member who had even the vaguest understanding of the massive referral fees local fund counsels receive. These board members would be shocked to find that their local fund counsel earned more for recommending class actions than from hourly billings for providing advice to the fund.

By far the most common and least transparent form of pay-to-play involving public-pension legal services involves plaintiffs firm hiring or entering into fee-sharing arrangements with local fund counsel intermediaries. Until disclosure is mandated and attention is drawn to the powerful economic incentives impacting these "legal gatekeepers," you will see lots of public funds jumping on the class-action bandwagon.

 

 


Rafael Mangual
Project Manager,
Legal Policy
rmangual@manhattan-institute.org

Katherine Lazarski
Manhattan Institute
klazarski@manhattan-institute.org

 

Published by the Manhattan Institute

The Manhattan Insitute's Center for Legal Policy.