Attorneys go to court over sharing $103 million

A few years ago, the state of Minnesota said it lost nearly $250 million in pension fund investments because of false and misleading statements by AOL Time Warner. The state eventually recovered $3.3 million, its slice of a huge nationwide settlement that the company paid to end a class-action lawsuit.

But the deal led to a bitter behind-the-scenes battle over splitting $103 million in legal fees awarded to the Minneapolis law firm of Heins Mills and Olson, which negotiated the nationwide settlement.

Two former partners in the firm sued, accusing Samuel Heins and his wife, Stacey Mills, of wrongly depriving them of profits for their work on the AOL Time Warner case. One of the lawsuits was resolved last year by confidential agreement between the two sides. In the other, a judge issued a summary judgment dismissing some claims while allowing others to be heard in a trial scheduled for Tuesday in Hennepin County District Court.

The plaintiffs aren't talking about their accusations, and a judge has sealed much of the court file in the continuing case.

However, documents that are publicly available from both cases offer a glimpse at a rancorous dispute over money earned by a law firm thanks to its representation of the state pension board and thousands of other institutional and individual investors.

"This case arises from acts of unprecedented greed by lawyers ... from their representation of the principal retirement fund for Minnesota state workers," said the complaint in the earlier suit by former partner Daniel Hedlund, which also named other firm partners as defendants. One of them was granted summary judgment before the settlement.

Hedlund alleged he was instrumental in the assembly, review and analysis of millions of pages of documents that ultimately persuaded AOL Time Warner to settle the case well before trial preparations progressed. Hedlund alleged that Heins Mills terminated him to avoid sharing upcoming profits.

Heins Mills said in its court filings that Hedlund was named a partner without any promise that he would share in the firm's profits, only that he would get a raise, a parking space, a cell phone and "be eligible for a higher discretionary bonus." Heins, in a sworn statement, said Hedlund was a salaried employee with no ownership interests and none of the financial risks of the firm, and said Hedlund was laid off because the firm was downsizing and he lacked the characteristics the firm was looking for in lawyers.

Hedlund, the firm and other defendants agreed last year to dismiss the case. "The matter has been resolved on a strictly confidential basis," said Vincent Louwagie, an attorney for Hedlund.

Court filings by Hedlund say Heins received $48 million and Mills received $32 million from the AOL Time Warner settlement. Attorney Bryan Crawford received $10 million, and lawyers Vincent Esades, Brian Williams and Alan Gilbert each received about $4 million, according to the filings.

Gilbert, who originally was a defendant in the Hedlund case, won a summary judgment dismissing the claims against him before the suit was resolved. Esades, who originally was a defendant in the case set for trial, recently won summary judgment dismissing all claims against him.

Heins did not return a telephone call seeking comment.

Great expectations

The Minnesota State Board of Investment, which oversees pension funds for more than 100,000 government employees and retirees, was among numerous investors around the nation filing lawsuits in 2002 against AOL Time Warner. They accused the firm of violating securities laws by making false and misleading statements about its finances that inflated the company's stock price.

The office of then-Attorney General Mike Hatch, a DFLer who also sat on the State Investment Board, recommended in 2002 retaining Heins Mills to press the state's case.

Partners of the firm have contributed to DFL candidates over the years, giving $14,150 to campaigns since 2001, including $1,000 to Hatch's campaign in 2002 and $3,750 since then.

The other members of the Board of Investment at the time were then-Independence Party Gov. Jesse Ventura, then-Republican Secretary of State Mary Kiffmeyer and then-DFL Auditor Judi Dutcher. Her campaign received a total of $4,500 in campaign contributions from Heins and his wife in 2001 and 2002.

Dutcher said retaining Heins Mills made sense because the firm was working on a contingency basis so the state didn't have to spend any money on the suit.

"Hindsight being twenty-twenty ... we could have gotten more, we should have gotten more, we also could have gotten nothing," she said.

A federal judge in New York consolidated all the lawsuits against AOL Time Warner, and in 2003 named Minnesota the lead plaintiff because it claimed the biggest loss and appointed Heins Mills lead attorney for the entire class of plaintiffs.

Gilbert, one of the partners who received $4 million from the settlement, was a top aide for Hatch before going to work in January 2003 at Heins Mills, where he played a leading role in the AOL Time Warner case. He said he was on a leave of absence from the attorney general's office in late 2002 and quit shortly thereafter to avoid a potential conflict after his wife became a judge.

"I had nothing to do with selecting Heins Mills ... nothing to do with that retention at all," Gilbert said last week. "I wouldn't have gone [to Heins Mills] if I thought there was a problem with it."

Gilbert returned to the attorney general's office in 2006.

The AOL Time Warner case was brought on behalf of investors across the country, including other government pension funds. Heins Mills reached a $2.65 billion settlement with AOL Time Warner in 2005, and distributions began last summer. About 600,000 claimants stood to benefit. The total claims exceeded the settlement, and investors received a small portion of their alleged losses -- a little more than 1 percent of claimed losses for the Minnesota pension funds.

Hatch refused to comment about the AOL Time Warner matter last week. After the settlement was announced in 2005, he estimated that the state would get $25 million to $30 million.

In an interview last year before the settlement was known, Heins said the payout to the state would likely be far less than its nearly $250 million in estimated losses because that figure included losses due to ordinary market declines unrelated to alleged fraud.

The law firm's $103 million fee was part of $147 million in total legal fees in the case. The firm was awarded the fee for its representation of the entire class. U.S. District Court Judge Shirley Wohl Kram, who approved the settlement, said the award "both as a percentage and in overall terms, properly rewards class counsel for their vigorous advocacy of the class's interests over four years of litigation." Kram praised the "exemplary behavior" of attorneys on both sides and noted in her order that the total fees represent less than 6 percent of the settlement, consistent with percentages in other large settlements.

Fight over money

According to Hedlund's suit, he began working at Heins Mills in 1997 at a salary of $52,000 with the potential of making more if the firm was successful in class-action cases. His employers deemed his work exceptional and made him partner in 2004, his filings claim. He was assigned to supervise numerous attorneys reviewing and analyzing AOL Time Warner documents, and the work, according to his court filings, "was so successful that HMO [Heins Mills] was able to obtain a $2.65 billion class settlement without ever having to conduct a deposition."

Hedlund said the firm terminated him in 2005 soon after it was assured of getting a big payout in the AOL Time Warner case. He rejected its $60,000 severance offer.

Heins Mills, in its court filings, described Hedlund as "well-liked" but "disengaged, unenthusiastic about the practice of law. ... It was hoped [Hedlund's] performance would improve if he were given the title of partner."

He was laid off in an effort to downsize the firm and because he "was not a good fit for the firm going forward," according to the filings.

The trial scheduled Tuesday involves Williams, the former partner who made $4 million from the AOL Time Warner case but now says he was deprived of millions more. Williams, who was a defendant in the Hedlund suit, accuses Heins Mills of putting off an arrangement that would have given him and other partners a greater share in large future fee awards as the AOL Time Warner case appeared to be nearing a settlement. At one point, Williams said in his suit, Mills pounded a conference room table in a meeting with partners and said distribution of the AOL Time Warner money would be withheld if they didn't acknowledge a compensation arrangement.

In its filings, Heins Mills said Williams "received many millions of dollars" under a bonus program, "took no financial risk ... and attracted no client to the firm."

Hennepin County District Judge Denise Reilly issued an order in the Williams case making certain business and personal financial records confidential.

Last week, Heins Mills asked Reilly to close portions of the trial itself. Williams' lawyers opposed the request, emphasizing the public's interest in open proceedings where a public contract is concerned.

The Star Tribune also has asked to appear to oppose the closure.

Pat Doyle • 651-222-1210