Reed Smith’s pursuit in New York state court of $6.75 million in fees it said it was owed for its work in a federal class action settlement amounted to a “sleight of hand” that the district court was correct to block, the U.S. Court of Appeals for the Second Circuit ruled in a per curiam order Tuesday.
U.S. District Judge Naomi Buchwald of the Southern District of New York presided in Kaplan v. S.A.C. Capital Advisors, a case filed by shareholders in 2012 against a now-defunct hedge fund management company after the discovery of an insider trading scheme that led to SAC Capital trader Mathew Martoma’s conviction in Manhattan federal court, and a separate $1.2 billion penalty levied against the investment firm.
Wohl & Fruchter served as co-class counsel in the action, and sought out additional trial counsel ahead of the settlement. Reed Smith was approached in September 2016, but shortly thereafter the relationship ended after settlement negotiations began. An agreement was reached in December 2018, and Buchwald preliminarily approved attorneys fees, while calling on any other counsel that believed it was entitled to fees to notify the court.
Reed Smith did not provide such notification, according to the court Tuesday.
When the settlement was finalized, Buchwald stipulated that only an order from the district court could later make additional litigation expenses available, with the court retaining exclusive jurisdiction to decide any such request.
About one month later, Reed Smith brought a claim against Wohl & Fruchter in Manhattan state Supreme Court over its claim of co-representation of the class in the federal case. The suit claimed Wohl & Fruchter had tortiously interfered with Reed Smith’s engagement contract with the lead plaintiffs, and that the firm had gone on to unjustly enrich itself as a result. The firm sought $6.75 million in damages.
Wohl & Fruchter turned around and sought injunctive relief from the district court, which was granted. Buchwald barred Reed Smith from pursuing its state court action, but declined to rule on the state court suit’s merits.
On appeal, the panel, composed of Circuit Judges Pierre Leval, Rosemary Pooler, and Debra Ann Livingston, found no merit to Reed Smith’s claims the district court was out of line in asserting ancillary jurisdiction based on the terms of the federal court settlement.
Buchwald was well within her powers, the panel stated, because the federal action over the state-based litigation “implicates the district court’s ability to effectuate its decrees.” Reed Smith’s action represented an “impermissible end run around” the binding fee order issued by Buchwald after the settlement was finalized.
“Reed Smith attempts to style the state‐court action as something other than a request for fees, but the allegations in the state‐court complaint belie this sleight of hand,” the panel stated.
The state-based elements required to prove the allegations against Wohl & Fruchter were undercut by Reed Smith’s own actions in federal court. For example, to satisfy the damages element, Reed Smith would have had to submit its claim for fees during the settlement proceedings. Having chosen not to, it now can show no damages, the panel ruled.
Reed Smith was represented on appeal by Dechert partners Andrew Levander and Gary Mennitt. The Dechert attorneys declined to comment on the record. A spokeswoman for Reed Smith did not immediately responded to a request for comment.
Paduano & Weintraub name attorneys Leonard Weintraub and Anthony Paduano represented the class action plaintiffs and their counsel on appeal. Weintraub declined to comment on the record.
Wohl & Fruchter name attorney Ethan Wohl declined to comment.