Florida skimps on vetting law firms for plum job

If you were interviewing candidates for a critical job, with billions of dollars at stake, how closely would you scrutinize their resumes?

Would you call their references? Do in-person interviews?

Would that be enough?

Because that was the extent of the due diligence performed by the state panel that recently selected lawyers to represent Florida taxpayers and the state's $112.5 billion pension fund in class-action suits against major corporations.

How thoroughly did the panel vet the candidates?

• The firm the panel ranked No. 1, Bernstein Liebhard LLP, bowed out after an anonymous letter alerted evaluators to tax problems and other issues at the firm, issues that had been raised in news accounts years ago.

• The firm the panel ranked No. 2 repeatedly touted its win in a landmark U.S. Supreme Court ruling favoring shareholder rights over Wall Street. A quick Google search would have shown the ruling was the opposite of how the firm portrayed it.

• None of the state's evaluators noticed when a third finalist took credit for a major securities case that, in fact, had been dismissed. The case status is easily checked using the U.S. court system's Web site.

The State Board of Administration, which manages a total of $137.6 billion in assets, defended the vetting process. "Staff verified references," said spokesman Dennis MacKee. "Evaluators had the opportunity to challenge or independently verify any facts."

But it's impossible to tell what kinds of challenges the evaluators might have raised. Though the interviews in Tallahassee were open to the public, they were not recorded. MacKee said that's normal procedure.

John Challenger, head of the Chicago executive recruiting firm Challenger Gray & Christmas, said more and more employers are paying for thorough background checks on candidates for high-profile positions. They often ask applicants to fill out exhaustive personal questionnaires, then verify answers.

Challenger, who was not familiar with the SBA's search, was surprised when told that a panel acting on behalf of all Florida taxpayers, with billions of dollars at stake, checked references but did little else.

"Depending on how much risk there is attached to hiring the wrong person,'' he said, "they may want to do more investigating in the future.''

Edward Siedle, an accountant and former Securities and Exchange Commission attorney, helps pension funds investigate fraud. "The SBA's selection process was about the best anyone has ever done. And that's pathetic,'' he said.

"You never rely on what they tell you. You need to verify, verify, verify. People were ratting each other out, but there was very little vetting done by the committee."

• • •

Across the nation, public pension funds and institutions are winning multimillion-dollar settlements in securities fraud cases. Last fall, after years on the sidelines, the state with the nation's fourth-largest pension fund decided to go after companies it blames for misdeeds that led to investment losses. The SBA also may pursue securities litigation on behalf of other, smaller funds under its management, including the local government investment pool.

Gov. Charlie Crist, Attorney General Bill McCollum and Chief Financial Officer Alex Sink, who oversee the SBA, each appointed a lawyer-representative to join two SBA attorneys and an outside consultant on the selection committee.

About 30 nationally known firms that specialize in securities litigation submitted their resumes. The SBA panel did a first round of scoring, called in a dozen firms for interviews and selected six that will bid on handling litigation.

Bernstein Liebhard was the committee's top choice until an anonymous letter arrived at McCollum's office. It accused the law firm's principals of failing to disclose personal tax problems and other wrongs.

The SBA committee called partner Stanley D. Bernstein in for another interview. Three times Bernstein said he was never investigated for personal tax problems. He insisted that a former partner's tax offense in 2008 was unrelated to anyone else at the firm.

But in a letter to the SBA two weeks later, Bernstein said he had "failed to recall" that the New York District Attorney's Office had asked for his personal tax returns and that they had been "turned over to tax authorities for civil resolution." Bernstein withdrew from the SBA's consideration.

The SBA and its trustees said the incident proved the selection process worked.

"The anonymous letter demonstrated the value of the transparent evaluation process," said Ryan Wiggins, a spokesman for McCollum's office. "Those allegations were discussed and as a result, the SBA placed Bernstein under closer scrutiny in the evaluation process."

Others, including some from firms that didn't make the SBA's short list, asked why it took an outsider to force the SBA to take a closer look at Bernstein Liebhard. An Internet search reveals critical news stories as far back as 2006, accusing the firm of possible conflicts of interest by owning companies they also represented as plaintiffs. The firm denied any conflicts.

• • •

The SBA selection team's No. 2 ranked firm was Pomerantz Haudek Grossman & Gross of New York. At least a half-dozen times in its application, the firm referred in glowing terms to the U.S. Supreme Court order in Stoneridge Investment Partners vs. Scientific-Atlanta.

Representing the investors suing a cable company, Pomerantz's lawyer had argued that they should be allowed to extend liability to suppliers who provided false data that the investor relied upon when buying the stock.

In January 2008, the high court rejected the concept of "scheme liability." Investors can sue only the party that committed the fraud, the court said; they can't go down the line to sue "aiders and abettors."

A quick Web search shows how the legal and popular press depicted the ruling:

"High Court's 'Stoneridge' ruling a win for business," said Law.com.

Business Week said Wall Street was "uncorking the bubbly" at the news.

The New York Times said the ruling put a "towering obstacle in the path of shareholders looking for someone to sue when a stock purchase turns sour."

But in a section of its SBA application on how Pomerantz is "shaping the law," the firm described Stoneridge as one of many landmark decisions "that have enhanced shareholders' rights and improved corporate governance."

Said Stephen K. Halpert, a University of Miami law professor: "Stoneridge is pretty much regarded as the death knell to scheme liability. But it's hard to boast about representing the losing side in the Supreme Court."

Shaheen Rushd, the Pomerantz partner interviewed by the SBA, defended the accuracy of the firm's submission. "We didn't say it (Stoneridge) was an unheralded success, but people say scheme liability is dead and it is not," she said. "It's definitely narrowed (by the ruling) and it's not what we want it to be, but it's not dead."

None of the legal experts who took issue with how Pomerantz characterized the Stoneridge decision thought the issue affected the firm's ability to represent Florida's pension fund. But James D. Cox, a law professor at Duke University, said it's troubling if law firms hoping to win state business make omissions or exaggerations.

Pomerantz also overstated its role in Desert Orchid Partners vs. Transaction System Architects. The firm characterized itself as "Lead Attorney'' when in fact its motion to intervene in the case had been denied.

The firm said that ruling was being appealed when the case was settled.

Another firm the SBA selection panel picked as a finalist, Barrack Rodos and Bacine, proudly listed a lawsuit against Siebel Systems as one of 25 in which it had been named lead counsel. The firm neglected to mention the same lawsuit, however, when asked about cases that were dismissed. The firm did not respond to a request for comment on the omission.

Puffery might be expected in job applications, but Cox, the Duke professor, said that as officers of the court, lawyers should be held to a higher standard. "It should be something that sets lawyers apart from plumbers," Cox said.

• • •

Now that the SBA has selected its pool of five law firms, including Pomerantz and Barrack Rodos, if the state decides to pursue a lawsuit, the firms will compete for the assignment. The agency said it will aggressively negotiate their fees. In previous class-action cases, Florida taxpayers have paid as much as $695 an hour for senior attorneys.

After the St. Petersburg Times reported that the law firms seeking lucrative contracts with the state had contributed at least $850,000 in 14 months to Florida politicians and their parties, the SBA's trustees put a $50 million cap on outside legal fees.

Michael Perino, a St. John's University Law School professor, says he has reviewed dozens of securities cases and found similar outcomes regardless of the law firm in charge. The significant differences were in the lawyer fees.

"That is one of the real benefits an institution like the Florida pension fund can perform," Perino said. "They are the client, zealously advocating for members of the class. They can really bargain hard on fees."

Times researcher Carolyn Edds and Times staff writer Sydney Freedberg contributed to this report. Kris Hundley can be reached at khundley@sptimes.com or (727) 892-2996.

Fast Facts

Counsel pool

Florida SBA's securities litigation counsel pool

Pomerantz Haudek Grossman & Gross, New York City

Bernstein Litowitz Berger & Grossmann, New York City

Berman DeValerio, Boston

Barrack, Rodos & Bacine, Philadelphia

Kaplan Fox, New York City

Florida skimps on vetting law firms for plum job 03/03/10 [Last modified: Thursday, March 4, 2010 7:15am]

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