In an April announcement of Ken Bell’s nomination for a federal judgeship, the White House cited the Charlotte attorney’s role in helping recoup hundreds of millions of dollars for victims of one the largest Ponzi schemes on record.
Now, after Bell’s candidacy on Thursday moved on to the full Senate, Bell’s handling of the same case has drawn stinging criticism from a government watchdog agency, specifically over what Bell and his law firm have billed for their work.
Six years ago, Bell was appointed “receiver” in a lawsuit filed by the U.S. Securities and Exchange Commission against the massive ZeekRewards online investment scam. Since then, he and other lawyers from the Charlotte office of McGuireWoods have tracked down money to cover some of the losses of tens of thousands of Zeek victims.
According to a status report Bell filed last month, he and his legal team have recovered $375 million since August 2012, disbursing almost $345 million.
In a Sept. 13 filing, however, the SEC not only challenges the amount of money the Bell group has directly recouped, it also accuses Bell and McGuireWoods of billing improprieties. The document cites what the SEC describes as a “dramatic increase” in what Bell and other McGuireWoods attorneys now want to be paid.
SEC attorneys say the firm’s requested fees for 2017-18 represent about a 30 percent jump over the hourly rate set under the original fee agreement — an increase that did not receive prior approval of the SEC or U.S. District Judge Graham Mullen of Charlotte, who is hearing the case, the attorneys say.
Now, the SEC wants a hearing with Mullen before the judge decides whether to approve the new pay scale.
Six years into the recovery effort, “one would expect the receivership — and the corresponding fee requests by McGuireWoods (and others involved in the case) — to be winding down,” the SEC filing says. “Instead, the fees requested by McGuireWoods have increased dramatically over the prior four quarters.”
The agency wants Mullen to block any further fee increases and order a “robust cost/benefit analysis” for the remainder of Bell’s work.
Contacted about the dispute last month, Bell told the Observer he could not comment.
But in a Sept. 28 filing for the case, Bell described the recovery work as a “massive and complex undertaking” that has been “remarkably successful and efficient.” He said all the submitted legal fees are reasonable and have been “well earned.”
He also says the proposed increases were included in documents sent to the SEC.
In a statement to the Observer, McGuireWoods said the SEC criticism lacks merit, its fees are reasonable, and that “McGuireWoods intends to respond to the (SEC) objections in court.”
It’s unclear what impact, if any, Bell’s dispute with a federal agency will have on his judicial nomination, which was approved Thursday on a 11-10, party line vote by the Senate Judiciary Committee.
Neither the offices of Judiciary Committee chairman Sen. Charles Grassley, R-Iowa, nor Sen. Thom Tillis, a committee member, responded to Observer emails seeking to discuss the matter. Tillis, a Republican from Cornelius, sponsored Bell’s candidacy, as did Sen. Richard Burr, a Winston-Salem Republican. Burr’s office also did not respond to an Observer email.
Bell, a 20-year federal prosecutor, has become one of the city’s best-known, white-collar, criminal defense attorneys. If confirmed by the full Senate, he will fill a vacancy on the bench in the Western District of North Carolina, which stretches from east of Charlotte to Asheville.
The Ohio native was an unsuccessful Republican candidate for Congress in 1990.
Throughout his legal career Bell has developed the reputation of being an aggressive legal advocate, both as a prosecutor and a defender.
The Judiciary Committee’s vote on his nomination, originally set for late September, was postponed by the prolonged debate over Supreme Court nominee Brett Kavanaugh. If approved by the committee as expected, Bell’s candidacy would move on to the full Senate.
Elizabeth Gilbert, a retired UNC law school specialist on bankruptcies and financial law, described the dispute between Bell and the SEC as “significant,” and said it should be considered by the Senate before Bell is approved. She also alluded to the Kavanaugh debate.
“If we are interested in what judges were doing in high school, we should be interested in what they are doing in their current cases,” said Gibson, who read the SEC filing at the Observer’s request.
At best, McGuireWoods and the SEC are “just in a disagreement over how to staff the case,” Gibson said. At worst, Bell and the firm, according to Gibson, “saw this case as a cash cow where we could run up our fees.”
In another reference to the Kavanaugh matter, Duke University law professor Sam Buell says he would be shocked if a dispute over legal fees holds up Bell’s appointment when the Judiciary Committee endorsed a Supreme Court nominee “facing allegations of sexual assault.”
Receiverships are prized by law firms — both for their status and their profitability.
As with ZeekRewards, the legal work and the billable hours can go on for years. Because legal fees are paid from the same pool of money that goes to victims, attorneys sometime voluntarily work at a discount or reduce their fees. In other cases, judges order them to do so.
In 2009, according to Forbes, a federal judge in New York City told the SEC it had been “asleep at the switch” when its receiver team in a corporate fraud case filed for $11 million in legal fees after recovering just $2.4 million for victims. The judge cut $3.5 million from the final payment, Forbes says.
On the other hand, the receiver in the $20 billion Bernie Madoff investment scandal has recouped to date more than $13 billion, with $11.3 billion returned or committed to victims, according to the figures from the Madoff Recovery Initiative website.
ZeekRewards, headquartered in Lexington, attracted some 1 million investors worldwide, including about 1,500 from the Charlotte area, before federal authorities shut it down in 2012. Almost 90 percent lost money. Total losses approached $1 billion. Based on the number of victims, Zeek is the largest Ponzi scheme on record.
McGuireWoods, where Bell is a partner, is one of Charlotte’s most prominent legal firms. It also stands to receive about 60 percent ($13 million) of the $21.5 million in legal fees that have been submitted to date by the ZeekRewards receivership, documents show.
According to documents, the firm has billed at a 15 percent discount, and Bell says it has already written off almost $381,00 in earned payments. When the SEC challenged its fee requests for 2017, the firm cut another $10,000 from its bill, documents indicate.
In their September filing, however, SEC attorneys say Bell and his team have repeatedly submitted “vague and repetitive” billings that make it impossible for the government to know if the legal fees being sought are justified.
They also allege that Bell and McGuireWoods have inflated their bills by regularly using highly paid partners of the firm to do less complicated work that should have been handled more affordably, document shows.
For example, in the disputed fee requests from third quarter of 2017, a partner of the firm identified in the SEC document by the initials “IMB” submitted almost 60 percent of the attorney fees requested by the firm during the billing period, the document says.
The partner charged at a rate of $684 a hour, the SEC says. Many of his billable hours were spent in what is described by the SEC as the management of “the settlement/discharge process,” which commission attorneys consider to be a non-legal task.
“Counsel for the commission has repeatedly encouraged the receiver to establish lower rates for non-legal work performed by McGuireWoods attorneys and paralegals, but the receiver has resisted this approach,” the filing say.
In what is perhaps its most pointed criticism, the SEC also challenges the amount of money Bell’s team directly have raised.
Within months of the SEC’s original lawsuit, more than $325 million had been recouped by the courts and government agencies and turned over to Bell, the SEC filing says.
Since January 2013, Bell’s team has raised an additional $48 million, the SEC says in its filing. During that same period, it has charged almost $19 million in legal fees, 40 percent of the total money recovered, the federal agency says.
In his filed response, Bell accuses the SEC of “minimizing” his team’s accomplishment. Bell says the legal fees sought by the receivership amount to 3.6 percent of the total money recovered. In the end, he says, victims with recognized claims could receive up to 85 percent of what they lost.
“Such a favorable result in a Ponzi scheme receivership may be unprecedented,” Bell wrote, adding that the higher legal fees sought in the case beginning in 2017 were “exactly in line” with normal increases that other McGuireWoods’ clients paid.
Under an earlier agreement, ZeekRewards and founder Paul Burks paid the SEC $4 million in penalties. Bell had not been appointed receiver at the time. If he had been, Bells says in his filing, he would have objected to the payment and tried to recoup the money for victims. The SEC did not respond to an Observer email seeking comment.
“If the court determines that the receiver and his professionals have billed excessively for the extraordinary success achieved, the receiver will accept that judgment,” Bell says.
In the meantime, Bell appears to be preparing for his new job. He is already advertising for law clerks. According to the listings, the jobs would start Jan. 1.