Circle C Neighbors

A Con Man's Deal with Victims' Lawyers falls short

By Pamela Sherrid
(U.S. News & World Report 3/25/2002)

Imagine the bloodied victim of a hit-and-run driver whose insurance company cuts a deal with that driver that could leave the victim with nothing. That appears to be roughly the plight of hundreds of thousands of elderly Americans. In the 1990s, they were scammed by a big-time con man. Now, in a class action settlement aimed at bringing them restitution, the lawyers may wind up with more money than the victims-some of whom won't see even a dime-and the U.S. court system doesn't seem to mind.

The con man is James Blair Down. Working out of his native Canada and also from Barbados, Down's ruthless telemarketers wildly exaggerated returns on shares in his pools of lottery tickets and other sweepstakes. Hindered by Down's complex money laundering and the difficulty of getting key evidence, U.S. prosecutors took several years to nab him. In 1998, Down was sentenced to six months in prison and forced to repay $12 million of the more than $100 million that law enforcement officials estimate he stole.

The law firm whose job it was to help Down's prey get more of that $100 million back is the prominent South Carolina firm of Ness, Motley, Loadholt, Richardson & Poole. It's famous for its lucrative settlements in asbestos cases and its billion-dollar fees from the Big Tobacco settlement. In the current chapter of this twisted story, it may be that Ness Motley and the U.S. legal system will be seen as the bad guys. Ness Motley stands to make $2 million in fees suing Down, no matter how few victims get refunds. More important, this tale illustrates the failings of the nation's legal system in protecting the interests of society's most vulnerable: the little guy. While it's the job of judges to oversee class action settlements, many agreements are rubber-stamped, leaving victims without a true advocate.

Class action suits do serve a public purpose, deterring corporate wrongdoing and permitting a few plaintiffs to sue on behalf of a large number of similarly aggrieved people, who wouldn't find it worthwhile to pursue a lawsuit individually. But the system often allows plaintiffs' lawyers to earn astronomical fees, while victims receive pittances and defendants get off cheap. Typically, class action attorneys identify a problem and search for clients, rather than the other way around, and no class member actively monitors the suit. ''Such 'clientless' litigation holds within it-self the seeds for questionable practices,'' notes the Rand Institute for Civil Justice in Santa Monica, Calif.

(see Part 2 below)

Class Action Crumbs (Part 2)


CASH IS KING
Recent settlements that provided huge payouts to lawyers but little or no redress to consumers involved cable TV late-payment penalties and overpriced NASCAR souenirs. In one excoriated California case regarding smaller-than-promised computer monitors, consumers received a $13 rebate toward the purchase of a new monitor. The lawyers got $6 million. The Association of Trial Lawyers of America says such settlements are relatively rare and that understaffed judges need more resources to make sure settlements are fair. ''These settlements are a major threat to the civil justice system,'' says Leslie Brueckner, an attorney with Trail Lawyers for Public Justice in Washington, D.C.

The latest wrinkle in this saga began about the time Down was donning prison garb. Regretting that it couldn't get more restitution, the U.S. attorney's office in Seattle brought the situation to the attention of Interclaim, a small firm based in Dublin. Founded in 1997, Interclaim is in the business of collecting complex international debts, often earning a sizable commission. The idea of Interclaim's taking a big chunk of whatever money it was able to recover for victims is indeed controversial. But U.S. Consumer experts weren't complaining. ''It was either that or nothing,'' says Brian Wolfman, a lawyer at the public-interest group Public Citizen. By spending its own money to find and freeze Down's assets, ''Interclaim was taking a very significant risk, so it was entitled to a significant benefit,'' says Wolfman.

At first, Interclaim made great strides. It says it identified an estimated $100 million of Down's assets in about a dozen countries. It persuaded Canadian courts to freeze about $60 million. When it hit a dead end in Canada's courts attempting to tap those funds, Interclaim opted for a class action suit in the United States. It already had powers of attorney to act on behalf of 29 of Down's victims.

In February 2000, Interclaim hired Ness Motley to bring the suit. Ness Motley selected Madison County, Ill., known as a class action paradise, as the venue. To help, Interclaim gave Ness Motley the names of 344 potential plaintiffs. The Irish firm also shared its hard-won data about Down's assets, including a chart tracking his worldwide money flow. Fearing that Canadian courts would lift the freeze, Interclaim urged Ness Motley to obtain a temporary restraining order preventing Down from disposing of any of those assets. The judge obliged.

Everything was going smoothly until Aug. 17, 2000, the day Ness Motley began settlement talks with Down's attorneys. Interclaim says Ness Motley told it to skip the meeting because Down was so angry at Interclaim that its presence might make negotiations harder. Later that day, Ness Motley dropped a bombshell. It told Interclaim that Down had offered to settle for $10 million with ''full restitution,'' but only if Interclaim were excluded from any recovery and further talks. At that point, says H. Blair Hahn, the Ness Motley attorney for the victims, it was clear that the interests of the class were diverging from the interests of Interclaim. ''If a defendant offers full restitution to the class, I had no choice but to take that,'' says Hahn.

But how ''full'' is the restitution really? While Hahn says ''my only interest is to serve class members,'' and a judge has given his blessing, the settlement seems to fall short. Among the caveats:

(see Part 3 below)

Class Action Crumbs (Part 3)


THE MISSING LIST
Down agreed to pay $6 million to victims, with $2 million to go to Ness Motley and $2 million for administrative costs. Any of the $6 million not claimed by victims goes back to Down. That's why it is imperative that class members be notified. The settlement specifies that Down spend over $1 million publicizing the refunds on cable TV and in magazines. Of course, it's far more efficient to contact people directly by mail using a customer list. ''If there's a list, a list is superior,'' says Katherine Kinsella, whose Washington D.C., firm specializes in advertising to class members.

Although two such rosters exist, they aren't being used. Down had a list, but an expert asserted that it was too old to be useful, and the judge accepted that argument. Then there's Interclaim's list, which it acquired from a mass mailer that Down used, cataloging the names and addresses of 418,256 people who got suckered. Interclaim tried to intervene in the settlement, arguing that its list should be used-and that it deserves compensation-but the judge shot the company down. The more people contacted directly, of course, the bigger Down's tab. Hahn says Interclaim won't fork over its list, but Interclaim counters that he never asked for it. Last week, Interclaim told U.S. News it plans to send the list free of charge to the claims adminisrator.

SLIM PICKINGS
The bulk of the funds Down is offering to refund - $5.5 million of the $6 million - can go only to people who provide written proof of their losses in the form of a years-old credit card receipt or canceled check. That's stiff hurdle for anyone but particularly for older people who may be in declining mental or physical health. Using Interclaim's list, which includes details of $28 million in transactions, could have meant a less onerous burden of proof. As it stands, every person who makes an unsubstantiated claim has to share in a pool of only $500,000.

PAYING UP
In a well-negotiated plan, says New York University law Prof. Geoffrey Miller, the plaintiffs' lawyer makes sure the money is ''in a safe place.'' There's no doubt that Interclaim gained tremendous leverage over Down by freezing his assets. But in the Ness Motley deal, the temporary restraining order was lifted. Ness Motley says it is confident Down will pay, and Down's Canadian lawyer says the deal is secure, though he won't say how. ''They have taken the naked promise of a convicted felon and known money launderer,'' says Irving Cohen, Interclaim's chief operating officer.

(see Part 4 below)

Class Action Crumbs (Part 4)


SNUBBED VICTIMS
Under the settlement, any of Down's 29 victims who hooked up with Interclaim can't participate. About half of them got redress in the earlier federal action, but the rest have never received anything, according to Interclaim. Among those excluded from the settlement is Tilden Brughelli, 88, a retired farmer living in a trailer park in Lompoc, California, despite the fact that he can document $28,990 in losses.

Nonetheless, the settlement is due to be finalized on June 6. Interclaim says it is out $6 million, and it has been ordered by a Canadian judge to pay Down's legal costs in Canada, where he now lives. (It is appealing.) The firm is now suing Ness Motley in U.S. federal court for allegedly breaching its fiduciary duty to Interclaim, misappropriating the Irish firm's confidential information, and breaking its agreement. Ness Motley's motion to dismiss those charges was denied in October. Says the judge: ''Without Interclaim, Ness Motley would be completely unaware of the facts in this case.'' Former Ness Motley lawyer Hahn joined a new law firm last month but continues to represent Down's victims. Ness Motley remains responsible for Hahn's actions while a partner there.

Independent experts in class action litigation call upon judges to scrutinizesed proposed settlements. The Rand Institute suggests that judges award fees to plaintiffs' lawyers as a percentage of funds actually disbursed, not as a fraction of the gross amount of the settlement. Such a reform is unlikely to fly, given the power of the opposing lobbies of corporate America and trial lawyers. ''Neither defendants nor plaintiff lawyers have an interest in that change,'' says Susan Koniak, a professor at the Boston University School of Law.

Big business, hoping to stem litigation, is pushing a bill in Congress that would move most class action suits out of state courts and into the federal system, where judges might better monitor lawyers. But in the post-Enron world, legislation that might make it harder to pursue corporate misbehavior understandably faces an up-hill climb. In the meantime, how many of Down's victims get their money back - and how much of it - is in a court's hands.