Did Greed Do in Dickie Scruggs?

Attorney John Jones, currently involved in a case against Scruggs that led to the indictment of Scruggs, his son and three others, recently told The Associated Press that Scruggs becomes a different person when it comes to money.”When the money hit the table, everybody’s sense of what the cause really was changed,” Jones said in the report.

He was speaking of an agreement between Mississippi Attorney General Jim Hood and State Farm Insurance Cos. that settled 640 Hurricane Katrina-related cases earlier this year. The policyholders alleged that State Farm shortchanged payouts, blaming more structural damage on flooding (covered by a federal program) than there was.

The Scruggs Katrina Group received more than $26 million when the settlement was reached. Jones was part of the group, though he began squabbling over how much he was owed. It led to a civil suit in Lafayette Circuit Court, and last week Scruggs was indicted for allegedly attempting to bribe Circuit Judge Henry Lackey.

According to the indictment of a federal grand jury, Scruggs, his son, co-worker Sidney Backstrom and Timothy Balducci and Steven Patterson of Balducci and Patterson, conspired to offer Lackey $40,000 to compel arbitration in the case with Jones.

“The three principals were Scruggs, Don Barrett from Lexington and David Nutt, had pretty much already decided that they were going to take 90 percent plus of the money,” Jones told the AP.

Here is a fascinating interview with Jones, the lawyer who alleged he was not compensated fairly by Scruggs and who filed the lawsuit:

“I wanted a jury to hear it in Dickie’s backyard,” Jones says. “I wanted to ‘out’ this a little bit. I’d known he’d done this repeatedly to other lawyers, he and Barrett. They got them to do the work, but when the money came in, they’d just low-ball ‘em.”

The most puzzling question raised by Scruggs’s indictment, filed in federal court in Oxford on November 28, is why an attorney of Scruggs’s enormous success, stature and savvy — he has said that he recovered more than $840 million in fees from his role in orchestrating the $246 billion state tobacco settlements of 1997-98 — would risk it all with a small-scale bribe in what one chronicler of the situation has memorably described as a “cracker-ass fee dispute.”

Scruggs, who has pleaded not guilty to the charge, will have a simple answer to that conundrum: I wouldn’t, and I didn’t. (In today’s Wall Street Journal, see here, a close friend of Scruggs suggests that a young lawyer hoping to curry favor with Scruggs approached the judge without Scrugg’s knowledge.)

Accordingly, if prosecutors hope to persuade a jury that Scruggs did play a role in the bribe, they’ll have to take a stab at that difficult question: Why? Answering it will be all the more challenging given that the ruling Scruggs was allegedly purchasing from Judge Lackey was simply an order sending the case to binding arbitration. Such an order, in and of itself, wouldn’t even guarantee Scruggs any victory in the underlying dispute.

One possibility, of course, was that Scruggs was also planning to bribe the arbitrator, too. But that’s speculative, and certainly no one’s produced any evidence supporting such a theory.

But another possibility, suggested by Jones, is that sending the case to arbitration — which is ordinarily conducted confidentially rather than in a public courtroom — would have at least shielded the dispute from public view. In that sense, Scruggs might have seen arbitration as a victory in itself.

“Mr. Scruggs would’ve been, in his public persona, highly offended by those allegations” being aired in public, Jones says. “He has almost an obsession with image in the public.”

Here’s the timeline. Katrina hit the Gulf Coast in August 2005. The Scruggs Katrina Group (SKG) began forming that October. The joint venturers decided that the litigation would be financed by Nutt & McAlister, which advanced $1 million for the cause, and committed to putting up another million dollars per year for up to three more years, if needed.

If there were a recovery, attorneys would get their capital contributions and expenses back first, and then the Nutt firm would get 35 percent of the net, reflecting the extra risk it took in financing the venture.

But how the other four firms would divvy up the rest was not specified in SKG’s joint-venture agreement, drawn up in November 2005, other than that it would be in accordance with Mississippi ethics rules. (Those dictate that lots of factors, including risk, time, contributions to success and so on, all play a role).

Jones claims that someone had suggested getting more explicit about the split at the time the agreement was being drafted, but that Scruggs opposed doing so, and Jones was ultimately persuaded.

“Here I am, like Gomer Pyle,” says Jones, disgusted with himself in retrospect. “I said, Okay, let’s do it on trust and faith.”

Under Mississippi law, Jones says, if there’s nothing in writing on how to split the fees, the law presumes they’re to be split equally. Accordingly, he assumed that the starting point for negotiation would be that the Nutt firm would get 35 percent (as specified in the contract), and that everyone else would get an equal 16.25 percent share.

He knew there would be further adjustments from there, he continues, since the firms’ contributions were not equal.

“We had 1.5 lawyers on it full-time, a secretary and a paralegal,” he says, “while Scruggs had three lawyers and three or four paralegals; Nutt had 2 lawyers and untold paralegals,” and so on. He says his firm took the lead on all briefing, developing of legal theories, and deposing State Farm’s corporate and expert witnesses.

Then a big settlement with State Farm took shape in late 2006. The tentative agreement — announced in November, though not finalized till January — awarded about $89 million to 640 State Farm claimants, while calling for an attorneys fee award of $26.5 million.

When Scruggs called him on December 3, 2006, Jones recalls, he said that Jones’s firm would get $1 million, or less than 4 percent.

Jones rejected that, and over the ensuing weeks, the joint venturers upped their offer to 6.5 percent, Jones says.

Jones, on the other hand, was demanding neutral arbitration to allocate the shares, since that was the designated remedy for “any dispute” provided under a clause of the SKG agreement. Jones claims that he asked for arbitration 14 times in writing, and nine times orally, but was always refused. (Ironically, as we’ll see, after Jones filed suit against SKG, the parties’ attitudes toward arbitration do a 180; the SKG group then wants it, while Jones opposes it, prefering to stay in court at that point.)

But during negotiations, Jones’s joint venturers at SKG had some bargaining leverage. The SKG joint-venture agreement has a clause — the very first paragraph, in fact — which allows four partners to vote to expel the fifth partner at anytime.

“Four had the right to vote one person off the island for any reason,” admits Jones. In that event, the agreement says, the expelled law firm gets back its capital contributions, if any, but the provision doesn’t say anything about fees.

Another clause says that “agreement by 4 of the 5 venturers is required to distribute . . . fees.” (It’s unclear if this also means that four can forcibly apportion fees, too; Jones’s position is that it doesn’t. A copy of the SKG agreement is appended to Jones’s civil complaint, which is here.)

In late February 2007, Jones says, he threatened to go to federal judge L.T. Senter of Gulfport, Mississippi, who was presiding over the State Farm cases, and ask him to freeze the trust account holding the attorneys fees from the settlement.

The other joint venturers persuaded Jones to hold off and, instead, come to a meeting on March 2 at the Nutt firm’s offices in Ridgeland, a suburb north of Jackson.

“I’m mad at you, Johnnie,” Barrett told Jones, as Jones recalls it. “Nobody’s ever threatened to sue me before. I’m highly offended.” Barrett then demanded that Jones accept 6 percent then and there. If he refused, the other joint venturers would vote to give him just 3 percent and then expel him from the group.

Though Barrett initially demanded that Jones decide before leaving the room, according to Jones, he later relented and allowed Jones to go discuss the offer with his law firm partners.

But when Jones got back to his office in Jackson later that afternoon and “got on the e-mails,” he recalls, there were two waiting for him from the SKG group. One gave him less than a half-hour to get back to them with his final answer, and the next — written after expiration of the deadline — told him he’d been voted off the island.

In March, Jones filed suit.