Plaintiff suing Scruggs offers clues, poses questions

December 4, 2007, 6:51 PM UTC
Fortune

Why would big-time plaintiffs lawyer Dickie Scruggs try to bribe a judge in a small-potatoes fee dispute? In an interview, the plaintiff in the case offered a conceivable answer to the most puzzling question posed by Scruggs’s federal bribery indictment — but he also posed some fresh riddles as well.

The plaintiff in the suit is John G. Jones, 52, or, more accurately, his law firm: Jones, Funderberg, Sessums, Peterson & Lee of Jackson, Mississippi. A career plaintiffs lawyer, Jones’s firm was formerly a member of the Scruggs Katrina Group (SKG), a consortium of five law firms suing insurers over their handling of Hurricane Katrina claims. Scruggs, 62, is one of the nation’s most prominent plaintiffs lawyers, having made a fortune in asbestos and tobacco litigation.

Jones suggests that Scruggs’s possible motive for the bribe — assuming, of course, that Scruggs in fact had any involvement in one — may have been to hide from public view a suit that threatened to expose the allegedly shabby way Scruggs treats his business associates. “It isn’t what Clarence Darrow would’ve done,” asserts Jones.

At the same time, even Jones says he was shocked when he learned of the indictment. “I just knew these guys.” he says. “I did not think they had it in ’em. I’d have bet they’d never do anything like that.” (Only Scruggs and two lawyers in his office are accused of wrongdoing, and they’ve all pleaded not guilty. The lawyers at the other firms in the SKG group have not been charged with any wrongdoing.)

The indictment, available here, alleges that Scruggs paid $50,000 in an attempt to bribe Judge Henry Lackey, a state circuit judge in Lafayette (accent on the second syllable) County, who was presiding over a suit in which Jones claims that SKG was freezing his firm out of its fair share of a $26.5 million attorneys’ fee award.

Scruggs’s office had no comment on the criminal case, but a member of his legal defense team, attorney Joey Langston of Booneville, says that Scruggs “was never a party to paying a judge.” Scruggs’s lead counsel, John Keker of Keker & Van Nest, adds that the notion that Scruggs might have wanted to keep the case out of public view by putting it into arbitration is “absurd as a motive” for a bribe, since the case “was certainly going into arbitration” and that was “the only place it could possibly be.”

In the suit, Jones claims that three of the five firms in the consortium — Scruggs’s firm; the [Don] Barrett Law Office; and Nutt & McAlister (run by successful tobacco lawyer David Nutt) — planned to take more than 90 percent of the award, and had offered his firm a maximum of just 6 to 6.5 percent. The last member of the group was Dewitt “Sparky” Lovelace, a Destin, Florida, solo practitioner whom Jones describes as a college pal of Barrett’s.

The Nutt lawyers referred calls seeking comment on the fee dispute to Don Barrett, who has not yet returned a phone message left Monday at 3:30 pm. When he does, I’ll append his comments. Lovelace also did not return a call. Larry Moffett, the lead attorney defending the SKG group in Jones’s case, declined to comment on the fee dispute, and noted that he had “no knowledge of any of the illegal conduct alleged.”

In March 2007, Jones sued Scruggs and the other SKG partners. He specifically chose to bring the case in Oxford, where Scruggs lives and works, rather than in Jackson, where Jones does, in order to shame Scruggs, he says. (Oxford is about 160 miles north of Jackson.)

“I wanted a jury to hear it in Dickie’s backyard,” Jones says. “I wanted to ‘out’ this a little bit. I’d known he’d done this repeatedly to other lawyers, he and Barrett. They got them to do the work, but when the money came in, they’d just low-ball ’em.”

The most puzzling question raised by Scruggs’s indictment, filed in federal court in Oxford on November 28, is why an attorney of Scruggs’s enormous success, stature and savvy — he has said that he recovered more than $840 million in fees from his role in orchestrating the $246 billion state tobacco settlements of 1997-98 — would risk it all with a small-scale bribe in what one chronicler of the situation has memorably described as a “cracker-ass fee dispute.”

Scruggs, who has pleaded not guilty to the charge, will have a simple answer to that conundrum: I wouldn’t, and I didn’t. (In today’s Wall Street Journal, see here, a close friend of Scruggs suggests that a young lawyer hoping to curry favor with Scruggs approached the judge without Scrugg’s knowledge.)

Accordingly, if prosecutors hope to persuade a jury that Scruggs did play a role in the bribe, they’ll have to take a stab at that difficult question: Why? Answering it will be all the more challenging given that the ruling Scruggs was allegedly purchasing from Judge Lackey was simply an order sending the case to binding arbitration. Such an order, in and of itself, wouldn’t even guarantee Scruggs any victory in the underlying dispute.

One possibility, of course, was that Scruggs was also planning to bribe the arbitrator, too. But that’s speculative, and certainly no one’s produced any evidence supporting such a theory.

But another possibility, suggested by Jones, is that sending the case to arbitration — which is ordinarily conducted confidentially rather than in a public courtroom — would have at least shielded the dispute from public view. In that sense, Scruggs might have seen arbitration as a victory in itself.

“Mr. Scruggs would’ve been, in his public persona, highly offended by those allegations” being aired in public, Jones says. “He has almost an obsession with image in the public.”

Here’s the timeline. Katrina hit the Gulf Coast in August 2005. The Scruggs Katrina Group (SKG) began forming that October. The joint venturers decided that the litigation would be financed by Nutt & McAlister, which advanced $1 million for the cause, and committed to putting up another million dollars per year for up to three more years, if needed.

If there were a recovery, attorneys would get their capital contributions and expenses back first, and then the Nutt firm would get 35 percent of the net, reflecting the extra risk it took in financing the venture.

But how the other four firms would divvy up the rest was not specified in SKG’s joint-venture agreement, drawn up in November 2005, other than that it would be in accordance with Mississippi ethics rules. (Those dictate that lots of factors, including risk, time, contributions to success and so on, all play a role).

Jones claims that someone had suggested getting more explicit about the split at the time the agreement was being drafted, but that Scruggs opposed doing so, and Jones was ultimately persuaded.

“Here I am, like Gomer Pyle,” says Jones, disgusted with himself in retrospect. “I said, Okay, let’s do it on trust and faith.”

Under Mississippi law, Jones says, if there’s nothing in writing on how to split the fees, the law presumes they’re to be split equally. Accordingly, he assumed that the starting point for negotiation would be that the Nutt firm would get 35 percent (as specified in the contract), and that everyone else would get an equal 16.25 percent share.

He knew there would be further adjustments from there, he continues, since the firms’ contributions were not equal.

“We had 1.5 lawyers on it full-time, a secretary and a paralegal,” he says, “while Scruggs had three lawyers and three or four paralegals; Nutt had 2 lawyers and untold paralegals,” and so on. He says his firm took the lead on all briefing, developing of legal theories, and deposing State Farm’s corporate and expert witnesses.

Then a big settlement with State Farm took shape in late 2006. The tentative agreement — announced in November, though not finalized till January — awarded about $89 million to 640 State Farm claimants, while calling for an attorneys fee award of $26.5 million.

When Scruggs called him on December 3, 2006, Jones recalls, he said that Jones’s firm would get $1 million, or less than 4 percent.

Jones rejected that, and over the ensuing weeks, the joint venturers upped their offer to 6.5 percent, Jones says.

Jones, on the other hand, was demanding neutral arbitration to allocate the shares, since that was the designated remedy for “any dispute” provided under a clause of the SKG agreement. Jones claims that he asked for arbitration 14 times in writing, and nine times orally, but was always refused. (Ironically, as we’ll see, after Jones filed suit against SKG, the parties’ attitudes toward arbitration do a 180; the SKG group then wants it, while Jones opposes it, prefering to stay in court at that point.)

But during negotiations, Jones’s joint venturers at SKG had some bargaining leverage. The SKG joint-venture agreement has a clause — the very first paragraph, in fact — which allows four partners to vote to expel the fifth partner at anytime.

“Four had the right to vote one person off the island for any reason,” admits Jones. In that event, the agreement says, the expelled law firm gets back its capital contributions, if any, but the provision doesn’t say anything about fees.

Another clause says that “agreement by 4 of the 5 venturers is required to distribute . . . fees.” (It’s unclear if this also means that four can forcibly apportion fees, too; Jones’s position is that it doesn’t. A copy of the SKG agreement is appended to Jones’s civil complaint, which is here.)

In late February 2007, Jones says, he threatened to go to federal judge L.T. Senter of Gulfport, Mississippi, who was presiding over the State Farm cases, and ask him to freeze the trust account holding the attorneys fees from the settlement.

The other joint venturers persuaded Jones to hold off and, instead, come to a meeting on March 2 at the Nutt firm’s offices in Ridgeland, a suburb north of Jackson.

“I’m mad at you, Johnnie,” Barrett told Jones, as Jones recalls it. “Nobody’s ever threatened to sue me before. I’m highly offended.” Barrett then demanded that Jones accept 6 percent then and there. If he refused, the other joint venturers would vote to give him just 3 percent and then expel him from the group.

Though Barrett initially demanded that Jones decide before leaving the room, according to Jones, he later relented and allowed Jones to go discuss the offer with his law firm partners.

But when Jones got back to his office in Jackson later that afternoon and “got on the e-mails,” he recalls, there were two waiting for him from the SKG group. One gave him less than a half-hour to get back to them with his final answer, and the next — written after expiration of the deadline — told him he’d been voted off the island.

In March, Jones filed suit, and the case was assigned to Judge Lackey. Jones, who has had several cases before Lackey in the past, describes the judge as “extremely liked and respected. If you lined them all up, he’s the last judge in Mississippi I would’ve picked to try to bribe,” he says. (An article in Sunday’s Biloxi SunHerald, available here, notes that Lackey was “a deacon at First Baptist Church and a member of a state commission charged with ensuring judicial integrity.”)

Lackey is a “dyed-in-the-wool Republican” with no ties to the Mississippi Trial Lawyers Association, according to Jones. Lackey was appointed in 1993 by Governor Kirk Fordice, the first Republican governor of Mississippi since Reconstruction and, as Jones puts it, “the most conservative man to ever walk the face of the earth.”

While approaching any judge — Democrat or Republican — is obviously plenty risky, Lackey seems like such a bad choice as to be almost incomprehensible for a man of Scruggs’s worldliness. The indictment names attorney Timothy Balducci, 40, of New Albany, as the attorney who allegedly approached Lackey. Balducci had been an associate at the law office of Scruggs’s longtime friend and attorney Langston until last year, when he set up his own practice in New Albany. Balducci did not return a call left at his office. It’s unclear if he has yet been arraigned and, if so, how he pleaded. There has been much speculation in the press, e.g., here, that he may be cooperating with the government in the prosecution.)

In April, Jones says, Lackey recused himself from hearing Jones’s case without explanation. But then in May, on his own motion, Lackey suddenly “unrecused” himself, Jones says — again without explanation. Jones now surmises that Lackey had, by May, brought the FBI into the picture, and was now prepared to wear a wire and help it prove the crime. (See here for a Wall Street Journal article interviewing Lackey about the role he played.)

When Jones sued, he was no longer simply suing for his share of the State Farm award; he was also seeking punitive damages for breach of fiduciary duty and other torts as well. Accordingly, he no longer sought arbitration. The SKG group, on the other hand, soon decided that it did prefer arbitration, and asked the judge to order it.

In July a hearing was held, but afterwards Judge Lackey told the parties that another matter had come up and he would have to take the case under advisement.

Jones then heard nothing for months. When his attorney told him last Tuesday that Scruggs’s offices had been searched, Jones was shocked, he says, but it still never crossed his mind that what was happening might have anything to do with his fee dispute.

The next day his attorney told him that Scruggs had been indicted for trying to bribe the judge in his case.

“You have to be kidding me,” Jones remembers thinking, since the allegation seemed so out of character.

At the same time, Jones says of his joint venturers, “When money was on the table, it was like Dr. Jeckyll and Mr. Hyde…. They morphed into people I’d never known.” (Again, no one in the Barrett, Nutt, or Lovelace firms has been charged with any wrongdoing, nor have their attorneys in the case.)