Editor’s Note: On April 18, after this article went to press for The American Lawyer, Baker & Hostetler filed its most recent fee application, seeking $43 million for the four-month period ending Jan. 31.
In the summer of 2008, Baker & Hostetler made a lateral partner hire that didn’t attract much attention. The firm’s intellectual property group added a 65-year-old partner from Troutman Sanders who had spent most of his career at a regional New Jersey firm. The unheralded recruit hardly seemed like the kind of hire who would make a huge difference to the Cleveland-based firm.
But sometimes life and business take unexpected turns. Who would have guessed in July of 2008 that someone named Bernard Madoff would emerge a few months later as the most audacious Ponzi schemer who ever lived? And would anyone have imagined that expertise in the rather obscure Securities Investor Protection Act (SIPA) would turn out to be so valuable? And who would have figured that the Baker lateral’s longtime friendship with another SIPA specialist would lead to the splashiest, most spectacular, and most lucrative case Baker & Hostetler has ever handled?
Because of a series of serendipitous events, Baker & Hostetler’s recruitment of David Sheehan in July 2008 turned out to be arguably the most important hire in the firm’s 95-year history. Sheehan, as it happened, was a friend and former partner of Irving Picard, who in December 2008 was appointed trustee for the liquidation proceedings of Bernard L. Madoff Investment Securities LLC. Picard, then a partner in New Jersey’s Gibbons law firm, chose as counsel Sheehan and the lawyers at Baker & Hostetler, instead of his own firm. Within a week, Picard joined Baker & Hostetler. Since then, Picard, Sheehan, and the firm have regularly made headlines as they wage a tenacious and controversial fight to recover money for Madoff’s victims.
So far, the sprawling assignment has generated $120 million in fees for Baker & Hostetler, and that’s just the beginning. At press time the firm had not yet submitted a fee application for the time it’s logged since September 30, which is likely to be its biggest request yet. (As the firm stresses in each fee application, its fees are not paid out of funds recovered for Madoff’s customers, but instead are paid by the Securities Investor Protection Corporation, a private entity funded by broker-dealers.)
This surge in activity boosted the 700-lawyer firm’s revenue last year by 17 percent, to $386 million, which was the third-highest percentage increase among Am Law 100 firms. The firm’s profits per partner jumped 28 percent, to $765,000, giving it the fourth-highest percentage increase. Largely because of the Madoff work, Baker & Hostetler’s presence in New York has doubled since December 2008; the firm now has roughly 150 lawyers at its office at 45 Rockefeller Plaza.
At press time the 69-year-old Picard had recovered or reached settlements for a total of $7.6 billion. And Picard isn’t stopping there. He’s filed $100 billion worth of lawsuits against deep-pocketed banks and other wealthy investors who, he claims, knew or should have known that Madoff was running a scam. That’s more than the amount of money lost to Madoff’s scheme: Picard has determined that roughly $20 billion in invested money was lost, and an additional $44.8 billion in fictitious profits were credited to customer accounts.
Baker & Hostetler is understandably thrilled to have this assignment, which it prominently promotes on its Web site. But every firm knows that it’s risky to rely on one matter for a large percentage of its revenue. The challenge for Baker & Hostetler, which earned 20 percent of its 2010 revenue from Madoff work, is not just managing this colossal matter. It’s figuring out how to leverage this gem of an assignment into a successful future when the Madoff case winds down.
“We’ve always been kind of a quiet firm,” says R. Steven Kestner, the 56-year-old executive partner of Baker & Hostetler. “Our goal here is to make sure we’re doing the best to let people know about all the great lawyers we have.”
Kestner sits in a windowless conference room in the firm’s Cleveland office, where he is based. On one wall hangs a framed signed athletics jersey of one of Cleveland’s most beloved sports icons, former Indians shortstop Omar Vizquel. Opposite it hangs the signed jersey of a certain basketball player who is no longer welcome in this town. Seated next to Kestner is one of the firm’s recently hired public relations professionals, who keep a tight rein on the media’s access to anything Madoff-related. ( The American Lawyer was not permitted to talk to Picard, and could talk to Sheehan and others in New York only by phone for a limited time. The firm agreed to discuss its management of the Madoff liquidation proceedings, but declined to discuss specific litigation or case strategies.)
“We would have had a good 2010 in any event,” Kestner says, explaining that the firm would be busy even without the Madoff work. Most of Baker & Hostetler’s practice areas are up, including corporate and non-Madoff litigation, he says. The firm has recently expanded in Chicago and Washington, D.C., and has added lateral partners in intellectual property, health care, and mergers and acquisitions. In late March it brought in a 17-lawyer group from the defunct Howrey, including Robert Abrams, the cochair of its global litigation group. The firm’s clients include Major League Baseball, The Progressive Corporation, Cardinal Health, Inc., Ford Motor Company, Inc., and Wal-Mart Stores, Inc.
Still, there’s no doubt that Madoff is Baker & Hostetler’s claim to fame these days. “The whole visibility and profile of the Madoff assignment has been very helpful to us,” Kestner notes, adding that it’s led to some strong lateral hires and new engagements, although he declined to name any of these new assignments. Looking forward, the firm has formed a strategic development group to plan how to capitalize on its Madoff expertise, but Kestner says it’s too soon to reveal details.
When asked if he’s concerned that so much of the firm’s revenue stems from one matter, Kestner sidesteps the question. “I think every day in any business, you have to ask where your business is coming from tomorrow,” he says. “It’s obviously a significant amount. Our lawyers are getting great results, and we’re looking to build on this work.”
The $7.6 billion that Picard and his Baker & Hostetler team have already recovered or reached settlements for is more money than most observers thought possible at the start. (Another $2.5 billion in forfeited property is held by the U.S. Department of Justice and may be distributed to customers.) Of this amount, $5 billion comes from a settlement with the widow of investor Jeffry Picower, which is under appeal [see "Hunting for $100 Million," below left]. Picard’s outstanding claims include a $9 billion suit against HSBC Holdings plc, a $6.4 billion suit against JPMorgan Chase & Co., and a $1 billion claim against a group of investors including the top executives of the New York Mets.
The Madoff matter is mind-boggling in its size and complexity. In rough numbers the firm is overseeing 16,500 customer claims, of which 2,400 have been approved as valid; 4,700 objections have been filed by those whose claims Picard rejected. The 1,000 lawsuits that Picard has filed include actions against so-called feeder funds that funneled money to Madoff on behalf of investors, and high-profile investors (like Picower and the Mets owners) who, Picard claims, knew or should have known that Madoff was up to no good. The firm is investigating activities in at least 20 countries.
And who manages all of this? “David Sheehan,” says Kestner. “David is a master at keeping all the trains running on time and moving in the right direction.”
“There’s never been a case like the Madoff case,” says Sheehan in an interview in March. “We’ve had, to a large extent, to create a new template for large-scale litigation with what we’re doing here.”
Sheehan neatly outlines the process of managing this mountain of work in a way that makes it sound simple. He’s divided the work into four “tranches,” as he puts it–pure avoidance actions, bad-faith cases, suits against feeder funds and banks, and customer claims–and assigned teams from different offices to each task. He’s also organized committees to make sure that the firm takes a consistent approach to handling claims. One committee looks at every proposed settlement, another considers investor hardship cases, and a third focuses on overall strategy. “He has a remarkable gift for making complex things very plain,” says Oren Warshavsky, a Baker & Hostetler partner who serves as Sheehan’s lead Madoff deputy.
To organize the blizzard of documents—which the firm estimates may reach 25 million—Baker & Hostetler’s IT professionals, led by chief information officer Bob Craig, have built an ambitious intranet to organize and share information. Craig says that dozens of other clients have been able to benefit from the technologies developed for the Madoff case.
“You don’t have to have the next Madoff [case] to take advantage of these resources,” says partner Judy Selby, who heads the firm’s discovery management team. “We offer a really top-notch document review team. The efficiencies are four times greater than if a client did an outside [document] review.”
“It sounds like we’re the Seventh Army,” says Sheehan, referring to the famed American unit of World War II. “But it’s not quite that.”
Sheehan is a student of military history and served as a lieutenant in the U.S. Navy Judge Advocate General’s Corps during the Vietnam War. He credits this experience with helping him oversee a mammoth project. “I came away with real insight into managing people and achieving good overall team results,” he says.
He honed his management skills during his 17 years as the managing partner of the Gibbons law firm in New Jersey, which grew from 45 to 200 lawyers during his tenure from 1987 to 2004. It was at the Gibbons firm that Sheehan became friends with Picard, who was a partner there.
The Gibbons firm declined to comment on Picard’s departure for Baker & Hostetler shortly after he was appointed trustee. “Gibbons represents numerous victims of the Madoff fraud,” the firm said in a written statement. “In some instances, we are adverse to the trustee. As a result, we are not in a position to comment about Mr. Picard or his lawyers.” The firm declined to say if Picard’s trustee assignment created a conflict that prompted him to leave. (Baker & Hostetler says that it did not.) Gibbons clients with Madoff claims include the Lautenberg Foundation, established by New Jersey senator Frank Lautenberg, and David Bershad, the former name partner of Milberg, Weiss & Bershad.
Like Picard (who is the most prolific SIPA trustee in the law’s history), Sheehan has experience working on cases arising from failed brokerage houses. (The SIPA was enacted in 1970 to protect the customers of failed brokerage firms.) Sheehan is also a seasoned litigator. A fellow in the American College of Trial Lawyers, he’s tried more than 100 cases, ranging from product liability to intellectual property to antitrust.
Baker & Hostetler’s team may not be the Seventh Army, but it is big. The firm’s most recent fee application listed 100 partners and counsel, 177 asso­ciates, and 68 paralegals, clerks, and other staff who billed time on Madoff matters in a four-month period. Sheehan and Picard are billed out at $825 an hour.
As a point of comparison, Baker & Hostetler’s fees (which include a 10 percent public interest discount) are significantly lower than those charged by Weil, Gotshal & Manges in the ongoing Lehman Brothers bankruptcy. In large part, that’s because the firm is using lots of lawyers and staff from Cleveland, Houston, Denver, and other offices with lower rates. Weil’s average partner rate for Lehman work ($874) is 46 percent higher than Baker & Hostetler’s average partner rate for Madoff work ($598). And Weil’s average associate rate ($539) is 52 percent higher than Baker & Hostetler’s average associate rate ($353).
In the first 20 months of the Madoff case, Sheehan has logged an average of 265 hours a month on the matter. (His Madoff hours fell slightly last fall because he was helping to try an unrelated trademark case on behalf of the United States Polo Association against Polo Ralph Lauren Corporation. At press time the case had not been decided.) That’s a lot of time for someone who is past the mandatory retirement age at many firms. Five years ago, when Sheehan joined Troutman Sanders from Gibbons, a reporter for sibling publication New Jersey Law Journal asked him why he was seeking new opportunities at his age. “I’m a 62-year-old in a 36-year-old body,” joked Sheehan.
“He’s a man that inspires loyalty and hard work,” remarks Timothy Pfei­fer, a Baker & Hostetler counsel. “We don’t want to disappoint David.”
In September 2009 Picard and Sheehan appeared in a 60 Minutes segment called “Meet the Liquidator.” As they were interviewed by correspondent Morley Safer, Picard appeared calm and relaxed; Sheehan—whom Safer described as Picard’s bloodhound—came across as more strident, and did most of the talking. Wearing his trademark thick-framed black glasses, Sheehan sounded personally affronted by the actions of Madoff, his family, and some of his investors.
“If you were those sons, and you knew what you [know] today, about where all the money came from, wouldn’t you be embarrassed to keep that money?” Sheehan asked. “They should give it all back, and if they don’t give it all back, I think we have an obligation to go get it and take it all back.” He added, “As everyone was participating in this and just feeding at this trough of greed . . . they were hoping that it was never going to end.” (This interview took place more than a year before Madoff’s son Mark committed suicide. After the younger Madoff’s death, Picard publicly said: “This is a tragic development, and my sympathy goes out to Mark Madoff’s family.”)
Lots of criticism has been directed at Picard and Sheehan. They’ve been attacked for their stance that there are blameless good investors and culpable bad investors. They’ve been criticized for their claims that the alleged bad investors, as well as certain banks and feeder funds, knew or should have known that Madoff was up to no good, and bear some responsibility. Davis Polk & Wardwell, which represents the Mets executives Fred Wilpon and Saul Katz, has blasted Picard as irresponsible, and accuses him of distorting the evidence. Picard issued a statement simply stating: “The Katz Wilpon defendants are wrong on the facts and the law. The trustee will prevail.”
So far, Manhattan bankruptcy judge Burton Lifland, who is presiding over this case, has mostly sided with Picard and Sheehan. In February he issued a key ruling in which he signaled that he is receptive to Picard’s arguments that sophisticated investors—and their children, spouses, and other family members—who should have caught on that Madoff was running a Ponzi scheme bear some liability compared to other more innocent investors. In that ruling, Judge Lifland refused to dismiss a case that Picard brought against the family of the late Stanley Chais, who was one of Madoff’s largest investors. Judge Lifland has also endorsed Picard’s net losers approach to apportioning the recovery. (The U.S. Court of Appeals for the Second Circuit heard an appeal on this issue in February.)
Given all these unresolved issues, as well as the fierce fight that Picard’s biggest targets will surely wage, it’s a good bet that Baker & Hostetler’s Madoff work will continue for quite a while.
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