The Mud On A Fancy Law Firm

Taxpayers have borne the brunt of the pain and suffering of the savings and loan fiasco. But over the past few years, regulators have been aggressively pursuing professionals, including lawyers, accountants, and directors And officers, for their work on behalf of failing thrifts. Now, BUSINESS WEEK has learned that Paul, Weiss, Rifkind, Wharton & Garrison, the blue-chip, New York-based law firm, is close to settling charges by federal banking regulators that it assisted David L. Paul, the embattled ex-chairman of CenTrust Savings Bank, in his alleged looting of the thrift.

Without admitting liability, Paul, Weiss is expected to pay between $40 million and $45 million to settle allegations by the Resolution Trust Corp. and Office of Thrift Supervision, according to sources familiar with the settlement talks. The firm has been clashing for months with the government over the firm's role in the demise of CenTrust, once the largest S&L in the Southeast. Its collapse has cost taxpayers more than $1.7 billion, making CenTrust the fourth-most-costly thrift to go under. Paul, Weiss was the primary counsel for CenTrust from 1983, when David Paul gained control of the thrift, until 1990, when the government took it over. For his part, Paul is facing a 100-count indictment for fraud and misappropriation of funds. The ex-developer, who has vociferously maintained his innocence, declined to comment. His trial is scheduled for Sept. 20.

If a deal is reached, Paul, Weiss would join the ranks of other powerhouse firms, such as Kaye, Scholer, Fierman, Hays & Handler, that have paid a penalty for their S&L work (table). Since 1989, the RTC alone has collected or will collect close to $500 million from professionals. Of that, almost $200 million comes from accountants, with about $150 million from lawyers. And there's more litigation to come. The Federal Deposit Insurance Corp. and the RTC combined have 500 suits pending against professionals.

Many lawyers and other professionals criticize the government's campaign against them. "I think it's pretty obvious that the FDIC and RTC are only looking for money. So they sue directors, law firms, and accounting firms as an extension of that," charges Rosemary Stewart, a partner at Jones, Day, Reavis &Pogue, who once worked at the OTS. Jones, Day, without admitting liability, in April settled an RTC action for $51 million related to the firm's representation of Charles Keating's now-infamous Lincoln Savings & Loan Assn.

But regulators have maintained that professionals knew or should have known that many of the financial activities of the S&Ls were unsafe and unsound. "They started representing management's interests at the expense of the institution," claims Michael Manning, a private lawyer who works for the RTC on professional-liability matters. "And that's why they find themselves on the wrong end of these lawsuits."

LUMINARIES. For Paul, Weiss, ending up on the wrong end is particularly noteworthy, given the firm's sterling reputation and impressive array of Wall Street clients, such as Time Warner Inc. The firm boasts such luminaries as Arthur L. Liman, Michael R. Milken's lawyer and former counsel to the Senate committee that investigated the Iran-contra scandal, and Theodore C. Sorensen, a former White House adviser to John F. Kennedy. The principal lawyer handling CenTrust's account was Peter R. Haje, who left Paul Weiss in 1990 to become general counsel of Time Warner. Haje did not return calls seeking comment.

The settlement talks between the RTC and Paul, Weiss have been aimed at heading off costly litigation and public embarrassment. Since there have been no public charges filed yet, neither the RTC nor OTS would comment for this story. Phone calls to several Paul, Weiss partners were not returned, and the firm's counsel in the matter, New York-based Sullivan & Cromwell, could not be reached for comment.

Sources familiar with the charges advanced by the government against Paul, Weiss say the firm's liability stems from its intricate involvement in some of David Paul's allegedly shaky investments and financial dealings. The feds claim that the firm, in advising CenTrust both on the legality of those transactions and on their compliance with state and federal regulations, breached its fiduciary duty to protect CenTrust'sdepositors.

Many of the transactions concerned CenTrust's $1.3 billion investment portfolio of junk bonds, much of it purchased from now-defunct Drexel Burnham Lambert Inc. Losses on CenTrust's junk-bond portfolio cost the thrift as much as $250 million, according to a $274 million RTC suit against Paul and other CenTrust directors. The suit alleges that the thrift's junk holdings were excessive and unacceptably risky and violated CenTrust's own internal investment policies.

PENSION FUNDS. Some of the government's evidence of Paul, Weiss's alleged complicity consists of letters written to state regulators by the firm. "Every letter we ever received was drafted by" Paul, Weiss, recalls one regulator. Adds Barry D. Hunter, a Miami lawyer who represented 2,000 CenTrust pensioners in a now-settled action against David Paul and the law firm, "It is fairly clear to me that everything that was done, was done with the input and knowledge of Paul, Weiss."

Hunter's case alleged that David Paul and CenTrust's board used employee pension funds to make risky investments in junk bonds and the company's own volatile stock. That, Hunter contended, violated federal pension regulations that prohibit thrifts from using these funds to make large investments in unsafe and unsound securities. Because Paul, Weiss served as a principal outside counsel to CenTrust, the pensioners charged that the firm "knew or should have known" that the investments were illegal. Hunter's case was settled in late 1991 for $1.7 million.

Paul, Weiss did not admit any liability in this lawsuit, nor is it expected to do so in the anticipated settlement with the government. But the impact on the firm from its connections to one of the most notorious players in the $500 billion thrift debacle is likely to persist for a long time.

      Paul, Weiss, Rifkind, Wharton & Garrison could join a long list of blue-chip 
      accounting and law firms who paid dearly for their role in the S&L crisis. Here 
      are some of the biggest settlements:
      ARTHUR ANDERSEN In July, 1993, the accounting firm agreed to pay $79 million to 
      settle charges that its audits of five thrifts, including Lincoln Savings & 
      Loan, were negligent.
      KAYE, SCHOLER, FIERMAN, HAYS & HANDLER In March, 1992, the New York law firm 
      settled charges that it helped Charles Keating mislead regulators about 
      troubles at Lincoln Savings and Loan for $41 million.
      ERNST & YOUNG In November, 1992, the big accounting firm agreed to pay $400 
      million to settle federal banking charges that it helped mislead regulators 
      about the financial health of several thrifts.
      JONES, DAY, REAVIS & POGUE In April, 1993, the Cleveland law firm paid $51 
      million to settle government charges that it aided Keating's looting of Lincoln.