Judge Slams Contract Attorney Charges In Madoff Feeder Fund Case

14 May 2013 – A federal judge in New York approved a hotly disputed fee for lawyers who negotiated a $217 million settlement with Madoff “feeder funds,” but only after leveling harsh criticism at the firms for trying to obtain excessive markups for low-paid contract attorneys.

In a 43-page opinion issued last week, U.S. District Judge Colleen McMahon rejected the New York Attorney General’s objection to a $40.7 million fee request from lawyers led by Lowey Dannenberg who obtained the settlement from Ivy Asset Managment on behalf of pension funds that lost money in the Bernie Madoff swindle.

“I will not allow the NYAG to take credit for a settlement that, for whatever reason, it did not obtain,” she wrote. “Once the prospect of a settlement disappeared, so did the Attorney General.”

McMahon was critical of the thousands of hours Lowey Dannenberg and other firms including Bernstein Liebhard and Cohen Milstein spent reviewing documents. Critics including the NYAG in this case say class-action firms spend far too much time reviewing documents, knowing they can submit the hours run up by low-paid contract attorneys at a substantial markup.

The private effort required 110 lawyers and more than 67 staff and paralegals, the NY AG said, compared with three lawyers and support staff who combed through the identical set of documents and negotiated a $140 million settlement.

In a March order, McMahon required the lawyers to hand over their billing records so she could determine whether the hours were justified. Yesterday, she generally praised the work of the private lawyers but said she regretted not setting firm ground rules on document review:

There is little excuse in this day and age for delegating document review (particularly primary review or first pass review) to anyone other than extremely low-cost, low-overhead temporary employees (read, contract attorneys) – and there is obviously no excuse for paying those temporary, low-overhead employees $40 or $50 an hour and then marking up their pay ten times for billing purposes. [our emphasis added]

She ordered the law firms to cut their hours submitted for document review by 25%, which will reduce the fee below the suggested $40.7 million by an undetermined amount. Even at the higher level, she noted, it is below the 22% Lowey Dannenberg negotiated with its clients and well below prevailing fee awards in class actions in New York.

McMahon’s decision is also interesting because she says there is “serious question” as to whether the New York AG “even had standing to bring the lawsuits he filed.” Under the doctrine of parens patraiea, she said, the NYAG cannot bring claims for damages on behalf of private citizens or corporations. Having failed to obtain a settlement, “the NYAG had no real ability to recover through litigation the money that plaintiffs had lost – even on behalf of citizens of the State of New York.”

“The weakness of the NYAG’s position as a party to litigation might well explain its failure to take even a single step to move its lawsuit forward,” she wrote.