COLUMN-Freeh report - a way forward for BP oil spill deal: Frankel

(Alison Frankel is a Reuters columnist. The opinions expressed are her own.)

By Alison Frankel

NEW YORK, Sept 10 (Reuters) - I'm on record as a skeptic of BP (LSE: BP.L - news) 's doomsday predictions about the impact of ballooning claims in its settlement with alleged victims of the 2010 Deepwater Horizon oil spill in the Gulf of Mexico.

I still don't buy BP's argument that future mass disaster defendants will shy away from group settlements because BP's agreement was open to what the oil company contends is misinterpretation by claims administrator Patrick Juneau. Nor do I think the 5th Circuit Court of Appeals should permit BP to argue that the settlement it once asked U.S. District Judge Carl Barbier of New Orleans to approve should now be undone. BP is a sophisticated defendant ably represented by Kirkland & Ellis in the long negotiations that produced the settlement agreement proposed to Barbier in March 2012. The oil company says the deal has been warped by Barbier's endorsement of Juneau's overly expansive reading of the terms for business and economic losses. But it bargained hard for the language in the settlement agreement and should have to abide by the deal it struck.

Nevertheless, I'm troubled by the 98-page report on corruption within Juneau's Claims Administration Office by former FBI director Louis Freeh. Anyone who believes in mass settlements should be. Freeh conducted a two-month investigation spurred by the resignation of a lawyer on Juneau's staff. His report, released Friday, goes out of its way to exonerate Juneau, whom Freeh praised for setting a clear ethical tone and implementing written policies on ethics and conflicts. Freeh also recommended that the claims approval process continue under Juneau's direction. That's the good news for Juneau and the plaintiffs lawyers defending the settlement against BP's attacks. The bad news: Freeh found copious evidence that corruption and conflicts have tarred some former members of Juneau's staff.

FEW BAD APPLES

The alleged wrongdoing detailed in the report ranges from venality - such as an attempt by Juneau's self-described "general counsel," Christine Reitano, to secure her husband a job with a company doing work for Juneau and an attempt by two other Juneau staff lawyers to capitalize on their work (and Juneau's name) to win additional claims administration assignments for their outside company - all the way to the supposed crimes of fraud and money laundering. According to Freeh, a lawyer on Juneau's staff named Lionel "Tiger" Sutton appears to have conspired with two outside lawyers, Jon Andry and Glen Lerner, to hide about $40,000 in referral fees routed through various vehicles from Andry and Lerner to Sutton. Freeh asserted that Sutton improperly "facilitated" claims by other clients of Andry and Lerner and expedited an $8 million award to one of Andry's other law firms. The report also said that Sutton - who is married to Reitano - never bothered to tell Juneau that during his employment at the Claims Administration Office he was also receiving $10,000 a month as Lerner's partner in a water reclamation company nor that Sutton is the co-owner of an oil rig services company with an active claim before Juneau's staff. (Defense counsel for Sutton and Andry told the Associated Press that Freeh had made unfounded allegations about their clients.)

There's lots more unseemly stuff in the report, like Freeh's account of an affair between a former Sutton client asserting claims against BP and an employee of BrownGreer, a settlement administration firm that Juneau employed to process claims. Or Freeh's discussion of suspicious claims by shrimpers whose tax returns didn't match up with Louisiana fishing records. Or the report's account of supposed efforts by Sutton and Reitano, acting in the best interest of the BrownGreer instead of Juneau, to squelch complaints about the outside vendor's inefficiency.

BP, as you might expect, was quick to seize on Freeh's findings as confirmation of its assertions of fraud and misconduct in the claims process, even though the investigation examined only one of the business and economic loss claims that BP has been complaining about before the 5th Circuit. (Admittedly, Freeh hints at problems with that claim, by one of several law firms linked to Jon Andry and his brother, noting BP's concern that one or both of the Andry brothers may have abandoned the law firm making the claim before the oil spill occurred.) A company spokesman told Reuters Monday that the Freeh report proves that "immediate steps" must be taken to prevent more fraud in the program. Juneau and the plaintiffs' steering committee, on the other hand, chose to focus on the positive: Freeh's exoneration of Juneau and the relatively few supposedly bad apples in an operation that involves hundreds of people on Juneau's staff and at outside claims administration companies.

'IN GOOD FAITH'

Freeh himself said in his conclusion that the alleged corruption of these few had tainted what was otherwise an honorable settlement, "written and administered in good faith" and designed to benefit victims of the oil spill. If he had grave concerns of pervasive fraud in the claims administration process, surely he would not have used those words, nor recommended that the process be permitted to continue under Juneau.

In my mind, Freeh's reminder that both sides entered this settlement in good faith suggests a way forward for BP, claimants, Juneau and Barbier. When the judge appointed Freeh as a special master on July 2, he gave the former FBI director a three-part assignment: Investigate the resignation of Tiger Sutton; conduct fact-finding on any other misconduct by members of Juneau's staff; and review the Claims Administration Office's internal controls and anti-fraud policies. Freeh's report covered the first two areas in minute detail. He touched upon the third when he discussed the disclosure agreements Juneau staffers signed and internal audits Juneau lawyers conducted on certain suspect claims. But aside from the two claims Freeh reviewed deeply - one by a former Sutton client and the other by the Andry firm itself - Freeh didn't report on potentially improper claims, or even on inefficiencies and possible abuses in the claims process.

JUNEAU'S HONOR

Judge Barbier saw that omission as an opportunity. In an order Friday that made the Freeh report public (and invited the lawyers targeted in the report to submit responses), Barbier said that Freeh will remain involved in the BP claims process. Under his new mandate, the former FBI director will design and help implement new anti-fraud and anti-corruption procedures for Juneau's staff. Barbier also assigned Freeh to review any past or pending claims that seem suspicious, to refer any findings of illegality to the Justice Department and to initiate litigation to claw back payment of fraudulent claims. Freeh, in other words, now has full judicial authority to police claims against BP, past and present, and to reverse any wrongful payments. That power - and the Freeh report's willingness to cast blame - should throw a serious scare into anyone asserting a dubious claim.

The report should also convince BP to reconsider its appellate and public relations campaigns against the claims process and Juneau. Unlike the oil company, Freeh emphasized the good intentions of both the settlement agreement and the claims administrator, who had to effect as seamless a transition as possible from the old Gulf Coast Claims Facility to the new Claims Administration Office, employing outside vendors selected before he took office. Juneau's honor survived a two-month investigation by Freeh. Shouldn't that - in combination with Freeh's new mandate to investigate whatever suspicious claim he comes across - satisfy BP's concerns about illegitimate claims?

The plaintiffs steering committee told me that its members "welcome any assistance by Judge Freeh," but then the plaintiffs aren't trying to undo the settlement. BP, what do you say? (Reporting by Alison Frankel; Editing by Ted Botha)