Judge Urged to Limit Attorney Fees in Prudential Securities Case

NEW YORK —  California’s top securities regulator Thursday accused a group of investors’ lawyers of betraying their clients’ interests in settling a lawsuit against Prudential Securities Inc., and he urged a federal judge to sharply limit the legal fees they will receive.

The lawyers have sought fees of about $27 million in the class-action lawsuit involving the Prudential Energy Income Funds, plus at least $1.8 million in expenses. Any fees will be paid out of a $90-million settlement approved last month by a federal judge.

The charges by state Corporations Commissioner Gary S. Mendoza, in a letter to U.S. District Judge Marcel Livaudais Jr. in New Orleans, come as lawyers in the case say a major squabble seems to be brewing with Prudential over the size of the fees and how they will be divided.

They come, too, as securities regulators grow increasingly critical of class-action lawyers who specialize in representing investors. The regulators say these lawyers often negotiate large fees for themselves but little money for their clients.

The class action involved Prudential’s largest limited partnership program, which sold $1.44 billion in oil and gas investments to more than 130,000 small investors, many of them elderly. The vast majority of investors lost money.

Mendoza’s criticisms were aimed at the group of class-action lawyers who filed the case three years ago and had urged Livaudais early last year to approve a settlement that would have paid investors just $37 million in cash. After state regulators and another group of private lawyers objected, the judge derailed that settlement last February.

Since then, the partnerships have been sold for $491 million--a sum the investors will share, along with their portion of the $90-million settlement.

In his letter, Mendoza argued that the lawyers had been willing to settle the case for much less than it was worth and had sought to collect steep legal fees after performing relatively little work. He also noted that whatever is paid to the lawyers will mean less for the investors.

Mendoza urged Livaudais to limit the lawyers’ fees to the maximum of $12 million they would have received under the original settlement offer.

Edward A. Grossman, the lead investors’ class-action lawyer, could not be reached for comment Thursday.

However, Grossman has argued in court that the original offer was fair and that the lawyers were right to have accepted it because there was a strong chance that they would have lost had the case gone to trial. In legal papers, Grossman argued that he had helped bring about the larger settlement.

Joel Bernstein, a lawyer with another firm that is seeking a large share of the fees, declined to comment on Mendoza’s criticisms.

Mendoza has recently become outspoken on the Prudential limited partnership scandal, positioning California as the last holdout among the states in signing a disciplinary settlement with the firm. He contends that most of the credit for the larger settlement for Energy Income investors belongs to state securities regulators.

But a group of private lawyers that intervened in the case early last year says it persuaded Livaudais to torpedo the earlier offer. This group is now seeking a large portion of the legal fees in the case.

Sources said Prudential is also likely to ask Livaudais to reduce the lawyers’ fees. Under a separate settlement of civil fraud charges with the Securities and Exchange Commission, the company agreed to set up a $330-million restitution fund for investors. Amounts paid to investors in the Energy Income class action will be counted as part of the $330 million, but not sums paid in legal fees.

Prudential executives declined to comment.