On 2” Square
www.americanlawyer.com May 2011
With Bleed
Madoff work has brought in $120 million to Baker Hostetler. And, the firm hopes, that’s just the beginning.
SilverLining
Illustration By Brian Hubble By Susan Beck
In the summer of 2008, Baker ist would lead to the splashiest, most spectacular, and & Hostetler LLP made a lateral partner hire that most lucrative case Baker Hostetler has ever handled? didn’t attract much attention. The firm’s intellectual Because of a series of serendipitous events, Baker property group added a 65-year-old partner from Hostetler’s recruitment of David Sheehan in July Troutman Sanders who had spent most of his career 2008 turned out to be arguably the most impor- at a regional New Jersey firm. The unheralded re- tant hire in the firm’s 95-year history. Sheehan, as cruit hardly seemed like the kind of hire who would it happened, was a friend and former partner of Ir- make a huge difference to the Cleveland-based firm. ving Picard, who in December 2008 was appointed But sometimes life and business take unexpected trustee for the liquidation proceedings of Bernard turns. Who would have guessed in July of 2008 that L. Madoff Investment Securities LLC. Picard, then someone named Bernard Madoff would emerge a few a partner in New Jersey’s Gibbons law firm, chose as months later as the most audacious Ponzi schemer counsel Sheehan and the lawyers at Baker Hostetler, who ever lived? And would anyone have imagined instead of his own firm. Within a week, Picard that expertise in the rather obscure Securities Investor joined Baker Hostetler. Since then, Picard, Sheehan, Protection Act ( SIPA) would turn out to be so valu- and the firm have regularly made headlines as they able? And who would have figured that the Baker lat- wage a tenacious and controversial fight to recover eral’s longtime friendship with another SIPA special- money for Madoff’s victims. nently promotes on its Web site. But every firm knows that it’s risky to rely on one mat- ter for a large percentage of its revenue. The challenge for Baker Hostetler, which earned 20 percent of its 2010 revenue from Mad- off 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 ex- ecutive 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 be- loved 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 liq- uidation 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 Mad- off work. Most of Baker Hostetler’s practice areas are up, including corporate and non- Madoff litigation, he says. The firm has re- cently expanded in Chicago and Washington, D.C., and has added lateral partners in intel- lectual property, health care, and mergers and acquisitions. In late March it brought in While Irving Picard, top Left, is the Madoff trustee, it’s his colleague David sheehan, a 17-lawyer group from the defunct Howrey, top right, who has been the Most Outspoken ABOUT investors feeding at Madoff’s including Robert Abrams, the cochair of its “trough of Greed.” global litigation group. The firm’s clients So far, the sprawling assignment has gener- off work, Baker Hostetler’s presence in include Major League Baseball, The Pro- ated $120 million in fees for Baker Hostetler, New York has doubled since December gressive Corporation, Cardinal Health, Inc., and that’s just the beginning. At press time the 2008; the firm now has roughly 150 law- Ford Motor Company, Inc., and Wal-Mart firm had not yet submitted a fee application yers at its office at 45 Rockefeller Plaza. Stores, Inc. for the time it’s logged since September 30, At press time the 69-year-old Picard had Still, there’s no doubt that Madoff is Bak- which is likely to be its biggest request yet. (As recovered or reached settlements for a to- er Hostetler’s claim to fame these days. “The the firm stresses in each fee application, its fees tal of $7.6 billion. And Picard isn’t stopping whole visibility and profile of the Madoff as- are not paid out of funds recovered for Ma- there. He’s filed $100 billion worth of law- signment has been very helpful to us,” Kest- doff’s customers, but instead are paid by the suits against deep-pocketed banks and other ner notes, adding that it’s led to some strong Securities Investor Protection Corporation, a wealthy investors who, he claims, knew or lateral hires and new engagements, although private entity funded by broker-dealers.) should have known that Madoff was run- he declined to name any of these new assign- This surge in activity boosted the ning a scam. That’s more than the amount of ments. Looking forward, the firm has formed 700-lawyer firm’s revenue last year by 17 money lost to Madoff’s scheme: Picard has de- a strategic development group to plan how to percent, to $386 million, which was the termined that roughly $20 billion in invested capitalize on its Madoff expertise, but Kest- third-highest percentage increase among money was lost, and an additional $44.8 bil- ner says it’s too soon to reveal details. Am Law 100 firms. The firm’s profits per lion in fictitious profits were credited to cus- When asked if he’s concerned that so partner jumped 28 percent, to $765,000, tomer accounts. much of the firm’s revenue stems from one giving it the fourth-highest percentage Baker Hostetler is understandably thrilled matter, Kestner sidesteps the question. “I increase. Largely because of the Mad- to have this assignment, which it promi- think every day in any business, you have to ask where your business is coming from to- Million,” below left]. Picard’s outstanding money to Madoff on behalf of investors, and morrow,” he says. “It’s obviously a significant claims include a $9 billion suit against HSBC high-profile investors (like Picower and the amount. Our lawyers are getting great results, Holdings plc, a $6.4 billion suit against JP- Mets owners) who, Picard claims, knew or and we’re looking to build on this work.” Morgan Chase & Co., and a $1 billion claim should have known that Madoff was up to no The $7.6 billion that Picard and his Baker against a group of investors including the top good. The firm is investigating activities in at Hostetler team have already recovered or executives of the New York Mets. 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 “We’ve had to create a new template for large-scale case,” says Sheehan in an interview in March. litigation with what we’re doing here,” says Sheehan. “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— reached settlements for is more money than The Madoff matter is mind-boggling in pure avoidance actions, bad-faith cases, suits most observers thought possible at the start. its size and complexity. In rough numbers the against feeder funds and banks, and customer
P h o (Another $2.5 billion in forfeited property is firm is overseeing 16,500 customer claims, claims—and assigned teams from different t o held by the U.S. Department of Justice and of which 2,400 have been approved as valid; offices to each task. He’s also organized com- credits may be distributed to customers.) Of this 4,700 objections have been filed by those mittees to make sure that the firm takes a amount, $5 billion comes from a settlement whose claims Picard rejected. The 1,000 consistent approach to handling claims. One pre v i o us with the widow of investor Jeffry Picower, lawsuits that Picard has filed include actions committee looks at every proposed settle- which is under appeal [see “Hunting for $100 against so-called feeder funds that funneled ment, another considers investor hardship cases, and a third focuses on overall strat- page egy. “He has a remarkable gift for making fr o m complex things very plain,” says Oren War- shavsky, a Baker Hostetler partner who serves t o p :D as Sheehan’s lead Madoff deputy.
I mages ;aniel A cker /G etty A rnd Hunting for $100 million To organize the blizzard of documents— which the firm estimates may reach 25 mil- As trustee for the liquidation of Bernard L. Madoff Investment Securities LLC, Baker & lion—Baker Hostetler’s IT professionals, Hostetler’s Irving Picard has filed roughly 1,000 lawsuits in his effort to recoup $100 billion for led by chief information officer Bob Craig, Madoff’s victims. Here are four of the most prominent cases: have built an ambitious intranet to organize and share information. Craig says that doz- Irving Picard v. Jeffry Picower ens of other clients have been able to ben- Picard sued this longtime Madoff investor and his wife for $7.2 billion. After Picower was found efit from the technologies developed for the dead in his swimming pool in 2009, Picower’s widow, Barbara, agreed last December to settle for Madoff case. Ott $5 billion. This represents the largest Madoff settlement to date. U.S. bankruptcy court judge Burton “You don’t have to have the next Madoff I mages illing /G etty P I mages ;R ich E mmert /G etty G raff /N ewsc o m ;D ewaldDo n ;Mo nika o Lifland approved the settlement in January. It is under appeal by certain investors. [case] to take advantage of these resources,” says partner Judy Selby, who heads the firm’s Picard v. Saul Katz and Fred Wilpon discovery management team. “We offer a re- Here, Picard has gone after a group of investors who include the top executives of the New York ally top-notch document review team. The Mets—suing the baseball team’s chief executive officer, Fred Wilpon, and president, Saul Katz, as efficiencies are four times greater than if a well as their investment fund, Sterling Equities, Inc., and their family members. Picard seeks the re- client did an outside [document] review.” turn of $300 million in fictitious profits, plus $700 million in principal as a fraudulent conveyance. The “It sounds like we’re the Seventh Army,” defendants’ lawyers at Davis Polk & Wardwell have called Picard’s allegations “indisputably false.” says Sheehan, referring to the famed Ameri- can unit of World War II. “But it’s not Picard v. JPMorgan quite that.” Seeking $6.4 billion, Picard claims that the megabank was Madoff’s primary banker for more Sheehan is a student of military history than 20 years and was complicit in his fraud by turning a blind eye to suspicious behavior. Picard de- and served as a lieutenant in the U.S. Navy mands $1 billion in fees and profits and $5.4 billion in damages. JPMorgan Chase & Co., represented Judge Advocate General’s Corps during the by Wachtell, Lipton, Rosen & Katz, asserts that it wasn’t aware of any fraud and at press time was Vietnam War. He credits this experience with trying to get the case transferred out of bankruptcy court and into federal district court. helping him oversee a mammoth project. “I came away with real insight into managing Picard v. HSBC people and achieving good overall team re- In his biggest action to date, Picard seeks $9 billion from the British bank, a network of feeder sults,” he says. funds, and the mysterious Austrian banker Sonja Kohn. The trustee claims that the bank marketed He honed his management skills dur- Madoff feeder funds to investors throughout the world with the assistance of Kohn, while it ignored ing his 17 years as the managing partner of warnings of fraud from its own auditors. Represented by Cleary, Gottlieb, Steen & Hamilton, HSBC the Gibbons law firm in New Jersey, which Holdings plc has stated that it wasn’t aware of Madoff’s fraud and itself lost $1 billion to Madoff’s grew from 45 to 200 lawyers during his ten- scheme. Like JPMorgan, it’s seeking to get this case transferred to federal court. ure from 1987 to 2004. It was at the Gib- bons firm that Sheehan became friends with rate for Lehman work ($874) is 46 percent ligation to go get it and take it all back.” He Picard, who was a partner there. higher than Baker Hostetler’s average part- added, “As everyone was participating in this The Gibbons firm declined to comment on ner rate for Madoff work ($598). And Weil’s and just feeding at this trough of greed . . . Picard’s departure for Baker Hostetler shortly average associate rate ($539) is 52 percent they were hoping that it was never going to after he was appointed trustee. “Gibbons higher than Baker Hostetler’s average associ- end.” (This interview took place more than represents numerous victims of the Madoff ate rate ($353). a year before Madoff’s son Mark committed fraud,” the firm said in a written statement. “In In the first 20 months of the Madoff case, suicide. After the younger Madoff’s death, some instances, we are adverse to the trustee. Sheehan has logged an average of 265 hours Picard publicly said: “This is a tragic devel- As a result, we are not in a position to com- a month on the matter. (His Madoff hours fell opment, and my sympathy goes out to Mark ment about Mr. Picard or his lawyers.” The slightly last fall because he was helping to try Madoff’s family.”) firm declined to say if Picard’s trustee assign- an unrelated trademark case on behalf of the Lots of criticism has been directed at ment created a conflict that prompted him to United States Polo Association against Polo Picard and Sheehan. They’ve been attacked leave. (Baker Hostetler says that it did not.) Ralph Lauren Corporation. At press time for their stance that there are blameless good Gibbons clients with Madoff claims include the case had not been decided.) That’s a lot investors and culpable bad investors. They’ve the Lautenberg Foundation, established by of time for someone who is past the manda- been criticized for their claims that the al- New Jersey senator Frank Lautenberg, and tory retirement age at many firms. Five years leged bad investors, as well as certain banks David Bershad, the former name partner of ago, when Sheehan joined Troutman Sanders and feeder funds, knew or should have known Milberg, Weiss & Bershad. from Gibbons, a reporter for sibling publica- that Madoff was up to no good, and bear Like Picard (who is the most prolific SIPA tion New Jersey Law Journal asked him why some responsibility. Davis Polk & Wardwell, trustee in the law’s history), Sheehan has ex- he was seeking new opportunities at his age. which represents the Mets executives Fred perience working on cases arising from failed “I’m a 62-year-old in a 36-year-old body,” Wilpon and Saul Katz, has blasted Picard as brokerage houses. (The SIPA was enacted in joked Sheehan. irresponsible, and accuses him of distorting the evidence. Picard issued a statement sim- ply stating: “The Katz Wilpon defendants are wrong on the facts and the law. The trustee will prevail.” So far, Manhattan bankruptcy judge Bur- Picard has filed $100 billion worth of lawsuits ton Lifland, who is presiding over this case, and, so far, recovered $7.6 billion. 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 1970 to protect the customers of failed bro- “He’s a man that inspires loyalty and hard some liability compared to other more inno- kerage firms.) Sheehan is also a seasoned work,” remarks Timothy Pfeifer, a Baker cent investors. In that ruling, Judge Lifland litigator. A fellow in the American College of Hostetler counsel. “We don’t want to disap- refused to dismiss a case that Picard brought Trial Lawyers, he’s tried more than 100 cases, point David.” against the family of the late Stanley Chais, ranging from product liability to intellectual who was one of Madoff’s largest investors. property to antitrust. In September 2009 Picard and Sheehan ap- Judge Lifland has also endorsed Picard’s Baker Hostetler’s team may not be the peared in a 60 Minutes segment called “Meet net losers approach to apportioning the re- Seventh Army, but it is big. The firm’s most the Liquidator.” As they were interviewed covery. (The U.S. Court of Appeals for the recent fee application listed 100 partners and by correspondent Morley Safer, Picard ap- Second Circuit heard an appeal on this issue counsel, 177 associates, and 68 paralegals, peared calm and relaxed; Sheehan—whom in February.) clerks, and other staff who billed time on Ma- Safer described as Picard’s bloodhound— Given all these unresolved issues, as well doff matters in a four-month period. Sheehan came across as more strident, and did most as the fierce fight that Picard’s biggest targets and Picard are billed out at $825 an hour. of the talking. Wearing his trademark thick- will surely wage, it’s a good bet that Baker As a point of comparison, Baker framed black glasses, Sheehan sounded Hostetler’s Madoff work will continue for Hostetler’s fees (which include a 10 percent personally affronted by the actions of Ma- quite a while. public interest discount) are significantly doff, his family, and some of his investors. lower than those charged by Weil, Gotshal “If you were those sons, and you knew E-mail: [email protected]. & Manges in the ongoing Lehman Brothers what you [know] today, about where all the bankruptcy. In large part, that’s because the money came from, wouldn’t you be embar- firm is using lots of lawyers and staff from rassed to keep that money?” Sheehan asked. Cleveland, Houston, Denver, and other of- “They should give it all back, and if they fices with lower rates. Weil’s average partner don’t give it all back, I think we have an ob-
Reprinted with permission from the May 2011 edition of THE AMERICAN LAWYER © 2011 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited. For information, contact 877-257-3382 or [email protected]. # 001-04-11-10