The law firms Greenberg Traurig and Quarles & Brady will together pay $77.5 million to settle a class action that accused them of aiding a $900 million Ponzi scheme.
Greenberg Traurig has agreed to pay more than $61 million to investors in the defunct real estate investment company Mortgages Ltd., according to preliminary approval orders filed recently. Quarles & Brady will pay $26.5 million to investors in Mortgages Ltd.’s financier, Radical Bunny.
The federal class action claimed that the firms had helped the companies bilk about 2,000 investors out of nearly $1 billion from 2005 to 2008.
Mortgages Ltd. and Radical Bunny collapsed with the economy in 2008. Scott Coles, who had been CEO of Mortgages, committed suicide the same year.
The class said that Greenberg Traurig, which represented Mortgages Ltd., and Quarles & Brady, which represented Radical Bunny, created “a facade of legitimacy” that allowed the Ponzi scheme to continue.
US District Judge Fredrick Martone said in court papers that he will consider objections to the proposed settlement until 21 days before a final approval hearing, which is scheduled for August 24th.
The deals were disclosed in papers filed in the US District Court in Phoenix. If they receive final approval, the agreements will end the certified class action.
A US 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 on June 20 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 US 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.”
