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Attorneys defending the class action against “boiler room” brokerage house Sterling Foster & Company have been blocked from collecting $600,000 in fees. The attorneys claim they should receive the fees from the settlement of a related civil enforcement action brought by the Securities and Exchange Commission. But Judge Barbara S. Jones refused to allow Huntington, N.Y., attorney Joseph D’Elia and Miriam Bahcall, of Chicago’s Ungaretti & Harris, to intervene to collect their fees in the aftermath of an $11.5 million settlement reached between the SEC and defendants Sterling Foster, broker Adam Lieberman and others. Rejecting the arguments of D’Elia and Bahcall that the misconduct of Lieberman and the SEC justifies their intervention, Jones said the two attorneys were merely “unsecured creditors of Mr. Lieberman who continue to extend him credit at their own peril.” The ruling came in the case of SEC v. Sterling Foster & Co. Inc. 97 Civ. 1077. The SEC sued Lieberman and Sterling Foster in 1997 charging that investors were defrauded of at least $75 million through the manipulation of stock prices in the sale of micro-cap securities in six companies. The suit came in addition to a criminal action filed against Lieberman and the company, as well as several individual suits that were later consolidated as a class action in the Eastern District of New York. In March 1997, Jones issued an order freezing assets that allowed Lieberman only to withdraw monthly expenses and transfer funds to his attorneys for the payment of legal fees. Lieberman later agreed to plead guilty and cooperate with the government in its criminal case. Both he and Sterling Foster reached a settlement in the SEC action in November 1998 that called for them to hand over $75 million in illegal profits — a figure that was later reduced to $11.5 million. The money was to be distributed to defrauded investors. Bahcall and D’Elia claimed they had represented Sterling Foster and Lieberman in connection with 357 matters including arbitration proceedings and state regulatory matters, as well as the class action in Brooklyn. They argued they should be entitled to intervene as of right under Rule 24 of the Federal Rules of Civil Procedure and present a motion for relief under Rule 60(b) because of “injustice attributable to the misconduct of the parties.” The misconduct, they charged, was that the SEC and Lieberman withheld information about settlement talks — or even that a settlement had been reached. In an statement submitted to Jones, Bahcall said “Ungaretti & Harris and D’Elia were never told that Mr. Lieberman was cooperating with the SEC, were never told that he would be making a plea … and were never advised that Mr. Lieberman had entered into a cooperation agreement or that he had pledged monies frozen by this court in the asset freeze order.” Attorneys Loren Schechter and Lawrence D. McCabe of Kirkpatrick & Lockhart, who represent D’Elia and Bahcall, filed a memorandum with Jones alleging that the SEC approved payment of fees to Lieberman’s counsel — Squadron, Ellenoff, Plesent & Sheinfeld — but then “instructed Squadron to prevent the petitioners from seeking their fees under the asset freeze order.” The memorandum states that when D’Elia and Bahcall indicated before the settlement was reached that they were going to move for payment of fees, they were put off by Squadron and told “it would not be in the best interests” of Lieberman to seek fees under the asset freeze order. “Simply, where the government has acted in league with a claimant (Squadron) to benefit that claimant while prejudicing another, it cannot argue that its actions were appropriate,” according to the memorandum. JUDGE NOT PERSUADED But Jones was not persuaded. She said that while the lawyers had “undoubtedly performed legal services for Lieberman and Sterling Foster” … the performance of these services creates no legal or equitable right to intervene in this action,” or “to upset the settlement….” Allowing Bahcall and D’Elia to intervene “would deplete the already insufficient pool of money that ought to be returned to investors,” she said. And Jones rejected Bahcall’s and D’ Elia’s argument that they were the “third-party beneficiaries” of the asset freeze. “Lieberman had the right under the asset freeze order to transfer otherwise frozen funds to his attorneys for the payment of legal fees,” she said. “But he was in no way contractually obligated to do so, and he made no attempt to pay Petitioners out of the frozen funds.” Even if the lawyers could somehow be considered “parties” under Rule 60(b), she said “they have no colorable argument that the balance of equities tips in favor of further depleting the already inadequate disgorgement and, in essence, requiring the defrauded investors to pay the legal fees of their defrauder.” Assistant U.S. Attorney Elisabeth L. Goot represented the SEC. Ira Sorkin of Squadron represented Sterling Foster and Lieberman in the SEC action.

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