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A Philadelphia judge yesterday refused to approve a $4.5 million settlement proposed by the law firm Ballard Spahr Andrews & Ingersoll and limited partners of the Keystone Venture V capital fund in an attempt to resolve a legal malpractice suit alleging that lawyers failed to keep public pension funds in Pennsylvania, Connecticut and Massachusetts from losing money. Under the proposed settlement, the state workers’ pension funds would have recovered $4.5 million — less plaintiff attorney fees and other costs — of $9 million the limited partners alleged in the complaint was lost when the partnership’s principal, Kiernan Dale, wrongfully diverted money to several companies controlled by Michael Liberty, a businessman. Five limited partners, representing 71 percent of the limited partners, filed the derivative lawsuit, Treasurer of the State of Connecticut v. Ballard Spahr Andrews & Ingersoll, on behalf of Keystone. The complaint and the unopposed stipulation and agreement for settlement were filed on the same day, Dec. 13. The Pennsylvania State Employees’ Retirement System and the city of Philadelphia Board of Pensions and Retirement are two of the plaintiffs. The limited partners alleged in the complaint that the law firm, while representing Keystone, was told about the misappropriated funds but didn’t advise the managing directors who were dealing with the incident to tell the limited partners about Dale’s misconduct. The limited partners also alleged they should have been told that the law firm had negotiated a settlement with Liberty’s companies releasing them from legal liability in any claims arising out of the unexplained payments. The law firm has denied any wrongdoing or liability. Derivative lawsuits are those brought by shareholders on behalf of a corporation alleging that an action caused the company harm. Under state rules of civil procedure, such lawsuits cannot be dismissed or compromised without the court’s OK. “It is this court’s job to determine whether the settlement is fair, reasonable and beneficial to Keystone, its limited partners and the public employees whose money was invested in Keystone and subsequently lost,” Common Pleas Judge Gene D. Cohen told lawyers for the parties in City Hall Courtroom 443 yesterday. Noting that litigation in the case would undoubtedly be complex, contentious and lengthy, Cohen nevertheless found the proposed settlement was not in the best interest of Keystone. Cohen said it was “quite possible” that Keystone would be entitled to more than its estimated actual damages, considering that not only Ballard Spahr but also the partnership’s managing directors, Liberty’s companies and others had apparently caused the damages Keystone suffered. “The court believes that there is the distinct possibility that Keystone could recover substantially more from Ballard and from the other potential defendants if plaintiffs asserted conspiracy claims against them all,” Cohen said. “Therefore, the court finds that the proposed settlement, in which Keystone and the plaintiffs agreed to release all such claims for a mere $4,499,640, is not in Keystone’s best interest.” In addition to the possibility the plaintiffs may recover punitive damages on a successful claim for civil conspiracy, Cohen suggested they might recover triple the actual damages on a successful civil claim brought under the federal Racketeering Influenced and Corrupt Organizations Act. In a footnote, Cohen also suggested that a criminal complaint could have been brought against some or all of the alleged co-conspirators. According to court documents, the Keystone Advisory Board did refer the matter to the U.S. Attorney’s Office for the Eastern District of Pennsylvania and the U.S. Securities and Exchange Commission. However, Cohen said, by the plaintiffs’ bringing their claims against each of the possible co-conspirators in “piecemeal fashion,” they failed to bring conspiracy claims against all potentially responsible parties. They had also failed to provide the court with estimates of the best possible recovery and the probability of recovery on these potentially greater claims, Cohen said. Nolan N. Atkinson Jr. and Stephen A. Mallozzi of Duane Morris represented the plaintiffs. “Obviously, when we came into court we believed the settlement was appropriate and hard-fought and required approval — otherwise we never would have presented it,” Atkinson said yesterday. “We felt that with 71 percent of the limited partners supporting the settlement that it was a fair and equitable one.” When asked whether the plaintiffs considered filing other claims, such as the ones Cohen mentioned, Atkinson said, “The claims that we mentioned in the complaint were what we felt would lead most quickly to a successful resolution and would bring a monetary statement to our clients.” A decision on how the plaintiffs will proceed from this point has not been made, Atkinson said. Some of the options the plaintiffs have to consider are a motion for reconsideration, an appeal or renegotiating with the law firm, said William R. Sasso, who represented the Pennsylvania State Employees’ Retirement System. “Any further litigation would be very expensive and protracted,” said Sasso, chairman of Stradley Ronon Stevens & Young. “It’s a very complex case factually, and that is why we were trying to have the settlement approved. But the judge is very highly regarded and we just have to take into account some of the statements he’s made.” Counsel for Ballard Spahr, Barbara W. Mather of Pepper Hamilton, had joined Atkinson in asking the court to approve the final settlement. None of the limited partners had objected to the settlement. Mather declined to comment after the judge’s announcement. Ballard Spahr’s chairman, Arthur Makadon, said in a statement that the law firm was disappointed with the decision, “especially in view of the unanimous agreement among all interested parties that the settlement is fair and reasonable.” Makadon declined to comment further. Cohen, who read his opinion aloud in court, said he was “troubled” by the fact that no formal discovery was conducted by the parties prior to the settlement agreement. “The stage of litigation at which settlement occurs is an important consideration in determining whether to approve settlement,” Cohen said. “In this case, the court is unable to evaluate fully the adequacy of the proposed settlement because it was hatched in the shadows of private mediation and not in the full light of public court proceedings.” Atkinson told the court that the parties had exchanged about 90,000 documents during an “informal” discovery process before mediation proceedings they attended last summer. “This was a document-intensive case,” Atkinson told the court when he was asking Cohen to grant his petition for the settlement’s final approval yesterday. “E-mails and documents told the story of what happened.” Cohen said he “does not believe that such limited, informal investigation is any substitute for court-sanctioned and –supervised discovery,” concluding that the parties had not sufficiently investigated the facts underlying their claims and defenses. After the informal discovery, which included interviews with three Ballard Spahr attorneys and two Keystone managing directors, the parties went before a mediator, who reviewed the documents and discussed the case with the parties, according to court documents. In considering the settlement’s approval, Cohen requested copies of the depositions of the Ballard representatives but was told that no such depositions were ever taken, he said. Those interviews weren’t taken in the form of a deposition or a testimony under oath, Sasso said. “There are settlements approved by courts where informal discovery is a part of the informal discovery process,” Atkinson noted. The municipal pension funds of Middlesex and Melrose, Mass., were to recover an additional $1.3 million from Ballard Spahr in a related settlement that was independent of the one before Cohen yesterday. That settlement is unaffected by Cohen’s decision because as a non-derivative claim against the law firm it did not require court approval, Atkinson said. Keystone, a $100 million venture fund, was liquidated recently for $5.5 million, according to court documents. (Copies of the 10-page opinion in Treasurer of the State of Connecticut v. Ballard Spahr Andrews & Ingersoll , PICS No. 04-0291, are available from The Legal Intelligencer . Please refer to the order form on Page 10.)

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