In a rare instance of law firms compensating investors burned in the mortgage meltdown, Greenberg Traurig and Quarles & Brady moved closer on Wednesday to settling a class action that accused them of participating in a $900 million Ponzi scheme.
Greenberg, accused of assisting the fraud by advising now-defunct lender Mortgages Ltd, agreed to settle charges for $61 million. Quarles & Brady, which advised Radical Bunny, an investment firm that funded Mortgages, received preliminary approval of a $26.5 million accord from U.S. District Judge Frederick Martone in Phoenix.
The deals were disclosed in papers filed in U.S. District Court in Phoenix. If they receive final approval, the agreements will end the certified class action.
“While we have always stood behind the work we did in this matter, entering into this settlement is a sensible step for the firm,” Greenberg Traurig said in a statement.
Quarles & Brady in a statement said that while it “believes its conduct was at all times lawful and ethical,” it agreed to settle the case to avoid future expenses and uncertainty. The firm also said neither the U.S. Securities and Exchange Commission nor Arizona securities regulators found any fault in the firm’s representation of Radical Bunny.
Greenberg Traurig and Quarles & Brady will pay for the settlements out of insurance funds, according to court papers.
A U.S. Supreme Court decision in 2008 restricted federal securities claims for aiding and abetting by third-party advisers such as law firms and accounting firms. The Mortgages Ltd and Radical Bunny cases instead relied on Arizona’s state securities law statute, which plaintiffs lawyers in a brief Wednesday described as remedial in nature and providing broader protections than federal law.
Prior to its collapse, the Arizona-based Mortgages Ltd made high-interest bridge loans to real estate developers. Radical Bunny in turn helped raise $197 million from investors nationally to lend to Mortgages Ltd.
But the class-action complaint claims that by 2005, Mortgages Ltd was insolvent and had been raising money to prop up the “extravagant” lifestyle of its CEO Scott Coles. Amid the real estate market’s collapse, Coles committed suicide in June 2008, and the company filed for bankruptcy weeks later. Radical Bunny, which investors and the U.S. Securities and Exchange Commission say was never registered to sell the securities, filed for bankruptcy as well.
Investors sued Greenberg Traurig and Quarles & Brady, claiming the law firms’ actions as counsel to Mortgages Ltd and Radical Bunny helped mask the fraud, enabled the Ponzi scheme and allowed for the illegal sale of securities. Both law firms continue to deny the allegations.
Martone certified two investor classes against the firms in March. Lawyers for the plaintiffs in their settlement papers estimated damages in the case could have reached $552 million for Quarles & Brady and $499 million for Greenberg Traurig.
But in both cases, the plaintiffs lawyers said they factored in the risk that verdicts of those sizes “would trigger a mass exodus of partners (at the firms) leaving the class members with a largely uncollectible paper judgment.”
The co-lead plaintiffs firms Tiffany & Bosco and Bonnett, Fairbourn, Friedman & Balint plan to seek a fee of 15 percent of the settlements, or $13.1 million.
A lawyer for the plaintiffs, Andrew Friedman of Bonnett Fairbourn, declined to comment.
The settlements were first reported by Law 360.
The case is Facciola v. Greenberg Traurig, LLP, U.S. District Court for the District of Arizona, 10-cv-01025.
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