The Sheldon Silver Scandal and Where We Are on Asbestos Corruption

23 Jan 2015 | Author: | No comments yet »

Silver Case Shows How `Referral Fees’ Can Be A Funnel For Graft.

Gov. The arrest of New York Assembly Speaker Sheldon Silver on federal corruption charges Thursday roiled Albany politics and inflicted grave damage on Silver’s fellow Democrats. Cuomo’s decision to pull the plug on his corruption-fighting Moreland Commission panel will have repercussions far beyond Thursday’s indictment of Sheldon Silver, insiders said.

In a strange twist, the graft accusations against the second-most powerful figure in New York state politics, after Democratic Governor Andrew Cuomo, elicited applause from national business lobbyists. The high-profile-yet-nearly-immobile education policies and politics of the Empire State may have cracked this week, the result of rapid climate change within New York’s Democratic leadership.

The move, some said, raised questions about Cuomo’s commitment to rooting out Albany’s pay-to-play culture and could harm his efforts to cast himself as an anti-corruption reformer. “It has a huge impact. [US Attorney] Preet [Bharara] confirmed that this is a result of the Moreland investigation, and that begs the question whether or not the governor knew about this information when he decided to disband the panel. Well before Bharara’s case against Silver, who allegedly took millions of dollars in a bribery scheme, went public, the prosecutor had been scheduled to speak at the breakfast at New York Law School. The scheme federal prosecutors laid out in the 35-page complaint against Silver looks an awful lot like what passes for standard practice in this area of the law. He opened with a suitably cocky joke. “I see some public officials here, and, after yesterday, I have two theories as to why that might be,” he said. “One, you thought I would be taking attendance. Attorney Preet Bharara issued a stinging rebuke of New York’s political culture, which he said allowed power to be concentrated in the hands of “three men in a room”—the governor, the senate president, and the assembly speaker.

Federal investigators say he did no legal work in these cases, but he is accused of using his power in Albany to provide benefits to the mesothelioma doctor who sent clients Silver’s way: $500,000 in state funding for the doctor’s cancer clinic as well as a job for the doctor’s son. In the meantime, he must surely vacate the powerful role that he has occupied and has used to foil, frustrate, delay and defenestrate many an important education-reform initiative within the state legislature — at least those opposed by the teachers unions, whose foremost champion he has been. Mickey Carroll of Quinnipiac University’s polling institute called the timing of the charges against Silver — a day after Cuomo delivered the State of the State Address with Silver at his side — was “very, very political.” “If I were the governor, I’d be keeping a very wary eye on this US attorney.

Among the main charges filed against the 70-year-old legislative leader is an allegation that he used his political position to steer asbestos cases to Weitz & Luxenberg, a potent personal-injury law firm based in Manhattan. Bharara’s office charged the State Assembly speaker with turning his office into a cash register through which millions in bribes and kickbacks flowed. Remove the state’s second-most-powerful politician from the equation, and what the government calls illegal kickbacks, and this looks pretty much like how the asbestos-litigation business works. Silver’s demise would not, in and of itself, cause New York to raise the cap on charter schools, much less enact a tax-credit scholarship program, both hated by the union and its buddies (a list that extends beyond the speaker). That theory is not universally accepted, she said, but is motivated by the idea that lawyers should refer clients to firms that will do the best work, not pay them the biggest cut.

Democratic political consultant George Arzt called the developments “an earthquake of seismic proportions” that would make short- and long-term governing difficult. “I don’t think anyone is happy in the political establishment given the repercussions to other members of the Legislature and other elected officials in high positions,” Arzt said. “Obviously, it’s bad for the speaker, but it’s also a bad reflection on government, and it adds to the negativity. Bharara, nominated for his position by Barack Obama and previously employed as an aide to Democratic senator Chuck Schumer, is digging into his own team. In securities class actions, plaintiff firms ally with union pension funds to bring cases since the law awards control of the case to the investor with the largest losses. (It’s hard to convince investment managers like Fidelity to sue their best clients.) Lead attorneys often share fees with referring law firms that seem to have no expertise in securities litigation, but do provide an invaluable conduit in to top union officials. It didn’t know that referrals by Silver “related in any way to the alleged actions on his part to benefit the referring doctor,” Marcia Horowitz, a firm spokesman, said via e-mail. The details of those fee splits are rarely made public, even though most states require lawyers to tell their clients how much they are being paid, and every class member in a securities lawsuit is a client.

Cuomo is, to the best of my knowledge, the first Democratic governor ever to propose a program of private-school choice for kids and families in his state. Silver’s defense attorneys derided the criminal charges as “meritless” and predicted the politician’s “full exoneration.” Silver, though, faces a tough fight.

Others (in Pennsylvania, Oklahoma, Arizona, maybe elsewhere) have tolerated this sort of thing when it originated outside of their offices, but this is the first time a state’s Democratic chief exec has taken the lead. The pattern is clear in the class actions I’ve observed over the years: A profusion of lawyers sue after some news event catches their eye or causes a stock to fall, then in an opaque but highly predictable process, the smaller firms retreat to the sidelines and the bigger firms take over. One can say that he follows in the footsteps of Democratic political figures like Colorado’s Roy Romer, Bill Clinton and — let’s be fair — Barack Obama, who have been outspoken supporters of charter schools.

When it comes time to split the fee, they often have to submit their billing records, but anybody in the business will tell you that the plaintiff firms horse-trade among themselves for billable hours to use in the “lodestar” calculation the judge uses to assess the fee request. They should be angry,” Bharara continued. “When so many of their leaders can be bought for a few thousand dollars, they should think about getting angry.

Since much of those hours were performed by low-paid contract attorneys, the firms can all make big markups and have little incentive to compete with each other on price. Only two days before Silver’s arrest, a series of private federal racketeering lawsuits against four other plaintiffs’ law firms were made public in North Carolina.

Garlock Sealing Technologies, a manufacturer of asbestos-lined gaskets, alleged that the plaintiffs’ firms fraudulently hid evidence that their clients had been exposed to asbestos-laden products made by other companies. Onetime class-action kings William Lerach and Melvin Weiss seemed to have the unluckiest clients on earth, investors who happened to own stock in just about every company that announced bad news.

Garlock claims that the deception vastly inflated the value of settlements it agreed to pay to the law firms’ clients, driving the gasket maker into bankruptcy proceedings in 2010. One such unlucky investor, Seymour Lazar, got $2.4 million in kickbacks that were routed – you guessed it – through a Los Angeles law firm as “referral fees” and payments for other legal work on Lazar’s behalf.

The U.S. bankruptcy judge overseeing Garlock’s ongoing Chapter 11 proceedings took a look at the company’s evidence before the suits were unsealed this week. Lerach and Weiss characterized the kickbacks as the “entitlement” due the intermediary firm or their “share,” but it was really just a way to get a portion of the more than $200 million in fees they earned over the period back to the plaintiffs who made it all possible. In the 1980s, plaintiffs’ lawyers helped reveal the now well-known deleterious effects of exposure to building materials containing asbestos fibers. The Ninth Circuit Court of Appeals in California rejected a cy pres distribution in 2011 after it was revealed that $25,000 was earmarked for a legal aid society whose directors included the husband of U.S. Other New York lawmakers are reportedly reeling from the indictment, fearing Wilson could whisper juicy stories to the Feds in exchange for, as The New York Times put it, leniency.

As a result, litigation ballooned, with the arbitrary results that courtroom skirmishing often yields: overcompensation of some victims, underpayment of others, huge legal fees. By the early 2000s, the manufacturers responsible for the largest number and most dangerous varieties of asbestos-laden products were insolvent or gone. Plaintiffs’ lawyers, meanwhile, stepped up their offensive against the remaining solvent companies, such as Garlock, regardless of whether clients’ ailments could be traced primarily to their particular products. The company argues that it ought to pay its fair share so it can get back to normal operations outside Chapter 11 and continue to pay its employees—as well as genuine asbestos victims who may get sick in the future.

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