Among the bright stars emerging in the plaintiff financial litigation bar is Labaton Sucharow partner David J. Schwartz. He’s already secured leadership roles in some of the largest pending securities class action litigation against Canntrust, Lordstown, Paypal, Mindbody and others.
He is passionate about finding justice for regular investors and everyday people, just like his parents, when they are ripped off or given the short end of the stick by corporations and financial conglomerates. He came to his enthusiasm sincerely, by defending corporations facing claims they helped cause the 2008 financial crisis.
He recalls when he told colleagues at his white-shoe firm that he was leaving to become a plaintiffs’ lawyer, most of them had the same reaction: You’re going to the dark side.
“Is that a joke?” wondered Schwartz. His work in BigLaw had enabled a comfortable lifestyle, but failed to ignite any passion for the law. He felt his job was to listen to executives recount behavior that had led to litigation, then rely on their attorneys to craft its defensible narrative. He was also frustrated with the lack of entrepreneurialism in major corporate firms. That reality was brought home when he landed a new client who wanted to start a private equity fund.
“They had limited partners, they had capital and they needed to draw up papers,” Schwartz says. “I was very proud of myself. I had a client ready to go. I got the client. And I was going to introduce them to some of the partners, and the firm’s reaction was, ‘This is too small-fry. We don’t need this.’”
The reaction was all the more crushing since moving ahead at any law firm hinges, for the most part, on client relationships. In 2015, Schwartz realized it was time to move on.
“When I left, I knew that I wanted to do something different,” he recalls. “I didn’t know exactly how to do it, but I wanted to stop defending large corporations and do something entrepreneurial. I believed that I had a talent, that I could help people.”
It was the start of a quest that would lead him first to Bernstein Litowitz Berger & Grossmann, and now Labaton Sucharow, where he’s a partner in the New York office focusing on event-driven and special-situations litigation.
“I developed a passion for working on the plaintiffs’ side because I saw how much fraud is out there,” he says. “There are a lot of bad actors. To be able to fight against bad guys and make good money doing it, that’s about as good as you can get.”
LD: That’s what drives so many great plaintiffs’ lawyers. Tell me a little about your background and how it fostered that attitude.
DS: I grew up in New York City, Upper West Side, and came from a large family of teachers, parents and grandparents, which is probably one of the factors. I can really empathize with people who work hard, the 9-to-5ers, the union members, the bedrock members of the workforce who labor for every dollar. I knew law school was a great way to get a good degree and make a good living. I enjoyed the classes, but I didn’t wake up at 22 years old or 25 years old and say, “I’m Clarence Darrow,” or, “I’m going to make a difference.” To be honest, I wasn’t passionate about it until I joined the plaintiffs’ bar.
LD: Until you were doing work you found meaningful, which makes complete sense. And plaintiffs’ lawyers, in general, have much more autonomy, which can also give a greater sense of satisfaction, I think.
DS: On the defense side, it’s definitely more rigid: The compensation structure, the institutional clients that have been there for 100 years. Many of the clients are funneled to litigation through other divisions such as corporate and bankruptcy. There was just no way to shine, except writing an exquisite brief that may or may not have seen the light of day.
LD: In some ways, it’s a feudal system. Ambitious lawyers who really want to be litigators, do some good or do something outside of the narrow confines of what a corporate defense firm rewards, can find themselves stuck.
DS: It’s a machine, really. So when I went to Bernstein Litowitz, that was my first taste of being an entrepreneurial lawyer. On the plaintiffs’ side, if you're smart and you're hungry, they don't care what your pedigree is. It’s a perfect environment.
I started developing a corporate governance practice, talking more to hedge funds, alternative asset managers, and getting some interesting cases in Delaware.
But I also realized there was a bit of an upper bound as to how entrepreneurial they wanted me to be, and I eventually found a home at Labaton, where I helped enhance the corporate governance and international practice. I have no restrictions. If I'm interested in international appraisal in New Zealand and think it can make money and plan it out and the pitch makes sense, the attitude is, “Let’s do it.” From every perspective, they’ve said, "Go forth, young man, and try and make us money."
LD: That's so exciting.
DS: It's an entrepreneur’s dream.
LD: What areas have you focused on most for business development?
DS: When I started in May 2017, appraisal litigation in the United States – where minority shareholders ask a court to determine the fair value of their stakes – was starting to dry up.
A lot of our competitors were engaging in third-party deals where the outcomes were bad, but I knew that there was a market out there in terms of arbitrageurs and hedge funds that would still want to monetize legal claims, if you could find a good one.
And then, by chance, in the Cayman Islands, a very favorable ruling was handed down in In re Shanda Games. I saw it, and it was almost like the light was shining down on the computer. And I thought, “If I could build a group here in this jurisdiction and the firm would allow it, I think that we could do well here. We could make some money for these guys.”
So we became the first U.S. law firm to build a group of claimants in the Cayman Islands for appraisal. Labaton, at the time, didn’t have a hedge fund practice, so I started that up.
There’s a change in that area of the law: For many years the lead plaintiffs in class actions were solely pension funds, and now, more hedge funds, alternative asset managers and retail investors are getting involved. The alternative asset managers and the hedge funds have fiduciary responsibility for their limited partners, and when there’s fraud, they want remedies for those clients.
LD: Can you give me an example of one of them?
DS: Sure. One of my hedge fund clients is involved in the CannTrust case, involving a Canadian cannabis company that, unfortunately, imploded. They were using growth techniques that weren’t allowed, from the types of seeds to growth rooms, to increase production at the expense of the law. They got caught, and the stock tanked, even though it was a great time to start a cannabis company.
It was a very complicated case, because there were U.S.-listed securities, Canadian-listed securities, and a Canadian bankruptcy. There were all types of players and all types of insurance. But we were able to get preliminary approval on a $66 million settlement.
We haven’t settled with everybody, but it’s potentially one of the largest cross-border settlements in recent years, and it’s a great result for the client, who was almost never involved in leading a securities class-action litigation.
LD: You mentioned retail investors earlier. Can you tell me a little more about the increased interest you’re seeing in legal action from them?
DS: That’s a large client base – essentially, mom-and-pop investors – that’s been appearing more and more, sometimes in response to press releases with information about proposed class-action cases. It’s gratifying to deal with investors like that who don’t have a ton of money. These people are salt of the earth, very dependent on some of the stocks in their portfolio for retirement and you hear the heartbreak in their voices. You get on the phone with them, and they’re really emotionally invested in the cases.
One of the differences in our practice is that we treat each of these people with respect, like they’re the president of the United States, because they deserve it. Some of the stories are very sad, where people are tied up in stocks and lose significant chunks of their net worth – and they don’t have a lot of net worth to spare. We have a case involving retail investors in Lordstown Motors, for instance, which is pending in federal court in Ohio. The claims relate to false statements by the company that misled stockholders about the prospects of the business.
The orders that were touted were non-binding, and many of the purported customers could not afford the company’s Endurance electric truck or wouldn’t need it; the vehicle, in fact, burst into flames on its first test run.
LD: That’s horrifying. You’ve really put your knowledge of the securities markets and investors to good use for a wide variety of clients. How did you get so savvy about them?
DS: That’s a good question. I have an economics degree from the University of Chicago, and I've worked for investment banks. I think that I understand the language of hedge funds. Hedge funds, alternative asset managers, they don't want a lot of fluff.
They want the Straight Talk Express, as Sen. John McCain used to call it. These guys do not have a lot of time to screw around. Five-, 10-minute conversations: “Can you get to the point? Do we have a loss? Can we make our money back? Is this right? Is this wrong?”
And I have a good reputation for being very blunt, straightforward, knowing what I'm talking about and getting results.
LD: It’s a fascinating area for development. The law always moves, right? There are always people like you who are looking for your niche, or like your hedge fund clients, who are looking for theirs. It’s an opportunistic field that only continues to evolve because of plaintiffs’ lawyers.
DS: Exactly. And litigation doesn't have to be dull. Litigation can be a way for institutions to make money. Appraisal is a good example, opt-out direct-action litigation, securities class-action claims. This is all litigation monetization. And there are hedge funds that specialize in merger-and-acquisition litigation that are monetizing litigation. Plus, who doesn’t want to go to a beautiful Caribbean island like Cayman?
LD: Exactly. Can you tell me about some of the cases you’re working on right now?
DS: One of them involves the $2 billion acquisition of QAD, a Santa Barbara, Calif.-based enterprise software company, by private-equity firm Thoma Bravo. There was a clause in the QAD charter specifying that in the event of a buyout/acquisition, Class A stockholders were entitled to no less favorable consideration than Class B holders. What was actually happening in the acquisition, however, was that the company’s founder, Pamela Lopker, who was the dominant Class B holder, was getting significant rollover into the new company that Class A shareholders weren’t offered.
My client, a hedge fund that owns more than 5 percent of the stock, came to us and said, “We think there’s corporate malfeasance.” We went to Delaware Chancery Court and won a partial injunction that forced the company to disclose more information, including a plan to flip the company in three to four years for a significant premium that is already in motion and hurts the Class A stockholders. Lopker had also purchased a private jet with the head of the purportedly independent special committee created by the QAD board to negotiate the merger.
The deal has already closed, but the judge said in the preliminary hearing that we had a meaningful post-closure damages claim, so we’re going to be going after the company, Thoma Bravo, and anyone else responsible.
LD: Impressive. That’s a great case. It sounds like the work is not only meaningful to you and your client, but you’re having fun.
DS: Definitely. We have a small, tight-knit aggressive team. I would say we’re some of the most aggressive lawyers in the plaintiffs’ bar. My partners and I and the associates, we looked at every single document in the case ourselves – as lawyers with significant experience in corporate governance – rather than relying on contract attorneys, and that made all the difference. We said, “We need to get the goods on these guys.”
LD: That’s what sets you apart.
DS: It does. Contract attorneys and even some other firms might use algorithms and put in a formula. They’re not reviewing every document, or even if they do, they don’t have the right people reviewing the right document. They’re just going by the odds.
LD: Exactly. I wouldn’t trust my client’s rights and claims to an algorithm.
DS: I think it's going to be a very meaningful case. We have an opportunity to get substantial additional consideration for our client. This is a hedge fund that owns over 5% of the stock and they're seeking our legal advice and assistance in getting better outcomes.
So, to come from the son of teachers to representing multi-billion-dollar hedge funds in multi-billion-dollar acquisitions, it’s pretty cool.