A white-shoe law firm ranking second largest in the world by revenue has agreed to pay $4.25 million to settle claims relating to its relationship with a New York investment manager suspected of running a massive Ponzi scheme through his now-defunct hedge fund. Skadden, Arps, Slate, Meagher & Flom LLP ("Skadden"), one of the world's most prestigious law firms, entered into the settlement with the bankruptcy trustee for a hedge fund previously operated by Alphonse "Buddy" Fletcher relating to Skadden's previous representation of Fletcher and his funds. Skadden has denied any liability, and stated that it entered into the settlement to "avoid the expense and uncertainty" of litigation.
After graduating from Harvard University and working for storied Wall Street firms Bear Stearns and Kidder Peabody (the latter who he later sued for racial discrimination), Fletcher formed an investment firm, Fletcher Asset Management. There, he operated several hedge funds, including 'master' fund Fletcher International Ltd. ("Fletcher International"). Fletcher gained prominence on Wall Street by securing consistent and outsized gains - at one point, one Fletcher fund went 11 years without a losing month. In offering documents provided to potential investors, Fletcher promised investors that their funds would be used for investments that were "immediately, quantifiably worth more to the buyer than the seller." In total, hundreds of of millions of dollars were raised from investors.
However, Fletcher's main fund, Fletcher International, later filed for bankruptcy protection in June 2012. A bankruptcy trustee, Richard J. Davis, was appointed and later issued a nearly-300 page report in late 2013 concluding that Fletcher's funds were inflated through "fraud," shared "many of the characteristics of a Ponzi scheme," and had likely been insolvent as far back as December 2008. In a response to the trustee's report, Fletcher vehemently denied the Ponzi allegations, even submitting an affidavit to the Court in which he stated under oath that "I am not the Black Madoff."
The trustee's investigation also identified third parties against which could potentially face liability for their relationship with Fletcher's funds. One of these third parties included Skadden, which faced liability "premised on advice Skadden allegedly provided or failed to provide to the funds, and Skadden’s alleged failure to protect adequately the interests of the Funds and their investors.” According to the trustee, Skadden served as primary counsel to Fletcher and his companies, and was identified as counsel in offering documents distributed to investors. Additionally, Skadden represented Fletcher and his investment firm in connection with an investigation by the Securities and Exchange Commission - which ultimately resulted in legal bills of over $3 million. While Skadden had denied that it had any liability for its role in Fletcher's fraud, it indicated that it had entered into the settlement to avoid the cost and uncertainty of litigation. The settlement remains subject to the approval of the bankruptcy court.
The trustee's report is available here.