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August 25, 2011 7:28 PM

Judge Scrutinizes Legal Fees in WexTrust Ponzi Scheme Case

Posted by Sara Randazzo

It's been a tough month for law firms looking to be paid for their work on the receivership case connected to WexTrust Capital, a Chicago-based real estate investment firm that collapsed in 2008 after the Securities and Exchange Commission charged two of its executives with running a Ponzi scheme that defrauded 1,200 primarily Orthodox Jewish investors. According to the SEC, WexTrust Capital illegally diverted $100 million of the $255 million it raised to invest in commercial real estate, commodity funds, and South African diamond mines for other purposes.

In addition to raising concerns about the proposed hiring of Kasowitz Benson Torres & Friedman as insurance coverage counsel on the matter at an early August hearing, Judge Denny Chin of the U.S. Court of Appeals for the Second Circuit has also limited fee awards to several firms working on the case and rejected what he said was too lenient a settlement with a Chicago law firm accused of malpractice by the WexTrust estate. (Chin continues to oversee the case, filed in Manhattan federal district court, though he was elevated to the appellate bench last year.)

In a court order filed Wednesday, Chin recognized the "diligence, competence, and skill" of ther various professional services firms working on the matter, but also said he was troubled that the WexTrust estate has paid more than $15.5 million to those firms so far—"more than three times the approximately $5 million paid to the victims."

Of that $15.5 million, more than half has gone to Dewey & LeBoeuf, the former firm of court-appointed WexTrust receiver Timothy Coleman. When Washington, D.C.–based Coleman jumped to Freshfields Bruckhaus Deringer in March 2010, he took the WexTrust work with him.

Chin ruled Wednesday that Dewey has received enough money from the estate for now and denied the firm's latest fee request, its tenth, for $666,605 covering its work on the matter from November 2009 to June 2010 (Dewey says approximately $23,000 of that belongs to Coleman). According to Chin's order, he will reconsider Dewey's fee request when the case concludes.

A fee request from Freshfields for work done between March 2010 and December 2010 fared better. Chin approved payment of $155,479, including $17,438 billed by Coleman specifically. The approved amount reflects a previously agreed upon 50 percent holdback of the firm's already discounted fees. Freshfields, too, can apply to receive the balance of its fees at the conclusion of the case, Chin ruled.  

In his order, Chin did express concern over Freshfields's rates which, even factoring in its agreed-upon 35 percent discount, still run between roughly $179 and $634 an hour.

It wasn't the first time this month that the judge raised the issue of high law firm billing rates in connection with the case.

At an August 3 hearing to discuss a proposed settlement with Much Shelist Denenberg Ament & Rubenstein, a Chicago law firm facing a malpractice suit for its work representing WexTrust on securities matters before it collapsed, Chin considered a request from Coleman to hire Kasowitz to help pursue professional liability claims against Much Shelist's insurance company.

"Kasowitz Benson is a terrific law firm, an expensive law firm," Chin said at the hearing, according to The Virginian-Pilot. Then he asked, "Do we need Kasowitz Benson here?"

Chin questioned whether Kasowitz's fees would consume a significant portion of the $13 million Coleman had proposed hiring the firm to recover, the Virginian-Pilot reports. A number of defrauded investors filed court papers objecting to Kasowitz's hiring. In one such letter, an investor pointed to the proposed hiring of Kasowitz as continuing "the pattern of draining excessive fees from the estate for the benefit of the lawyers."

The question of Kasowitz's hiring may be moot for now. On Wednesday Chin also denied the proposed settlement that would have allowed Kasowitz to go after Much Shelist's insurer. The proposed settlement, filed with the court on May 6, suggests that it would be futile to try and extract any money from Much Shelist directly and would only generate more litigation-related legal fees for the estate. Chin took issue with that position, pointing to a public record showing that Much Shelist generates more than $15 million a year in income.

Chin, according to Wednesday's order, objected to the proposed settlement's leniency, saying it "would not require Much Shelist to pay even a nickel" and would bar any future claims from being brought against the firm over its WexTrust work. He also questioned why Much Shelist should be able to keep $2.38 million it collected for work done between January 2005 and December 2008 for the investment fund.

In Wednesday's order, Chin also approved $35,133 in fees for Arent Fox, and $262,760 for real estate adviser Badger Real Estate.

Chin has expressed concern about skyrocketing legal fees since the beginning of hearings. In December 2008, the judge asked Dewey to explain its billing practices, including why it should be paid $2.2 million for 20 days of work. The following month, he slashed that bill by 20 percent. Dewey later reduced its fees even further because of a lack of returns for WexTrust victims.

In attempting to recover some of the defrauded funds, the receivership got into at least one battle over where it's going to recover that money. The Am Law Daily reported in February 2010 that a group of 77 commodity pool investors claimed Dewey seized a $17.6 million fund unrelated to the fraud in order to pay itself millions in legal fees. 

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