- Arizona opened law firm doors to outside investors, and Steve German had high hopes.
- But he says his co-owner, 777 Partners, was hit by scandal and failed to invest the promised millions.
- Germany also regulates law firms with outside investment and says they are subject to abuse by billionaires.
Two years ago, Steve German was optimistic.
He had done well as a trial lawyer in Phoenix, suing insurance companies on behalf of workers who were denied benefits. And he had just launched a venture with Miami investment firm 777 Partners that he hoped would revolutionize the legal industry.
Arizona recently began allowing non-lawyers to invest in law firms, which is prohibited in almost every other state. German seemed ready to ride the wave of deregulation and build what he would later describe as “generational wealth.”
State bars have long blocked lawyers from selling stakes in their firms to outside investors, in an effort to protect consumers from bad advice, to prevent financiers from distorting firms’ ethical obligations to their clients – and keep the profits in the hands of the lawyers. . This meant that companies essentially had to eat what they killed: any investment in marketing, technology, or case building had to come from client fees or the company’s share of jury awards and settlements. .
Allowing private equity wealth to flow into law firms seemed like a game-changer. When he spoke with Business Insider in 2022, German enthusiastically described how he could use 777’s money to lower fees and allow customers to nominate charities they would like to benefit from. He established connections with referral sources and said he hired BerlinRosen, one of the best-known public relations firms that works with plaintiffs’ attorneys.
“It was something revolutionary in many ways, and it was something that I saw as a way to do good,” German said. The firm, called Scout Law Group, was one of the first firms of its type — known as an alternative business structure — to be approved by state regulators.
“The ABS program reminds me of when Uber came to town and everyone was like, ‘Oh, my God, this is crazy,'” said Andy Kvesic, who serves on the state committee that approves applications ABS.
German’s optimism was short-lived. Before the end of 2022, its relationship with 777 had begun to deteriorate due to disputes over funding. Today, German has become a vocal critic of Arizona’s hands-off approach to regulating these new entities.
German said 777 failed to provide money on the terms or within the time frame promised and planned. Although he secured some funding and was able to build a portfolio of about 300 to 400 cases, German said the millions his partner promised were never paid. He had to take out his own checkbook to pay suppliers and employees, he said in a statement. lawsuit filed in April for fraud, breach of contract and unpaid wages. This is one of several lawsuits involving 777, which Semafor said have also received increased scrutiny from the Justice Department.
777 has not yet filed a response to German’s complaint. The company did not respond to a request for comment.
He first decided to resign from Scout last summer, a few months after the company and its executives filed licensing documents with state regulators that he now believed were incomplete. But he told BI that after taking his “breakup letter” to state regulators, he came to regret the decision; this sparked an investigation at a bar and resulted, for a time, in the suspension of Scout’s license. He eventually rescinded his resignation and stayed on until 777 chose a new compliance lawyer in December, he said.
After all that, he hoped the company and its new executives’ licensing application would be scrutinized. He said the constant drumbeat of negative reporting made it clear that 777 had not been upfront about the controversies in which it was involved.
But, he said, the committee reviewing ABS’ applications renewed Scout’s license with virtually no discussion. German also serves on the committee and was recused from the decision. But he said that and subsequent board decisions, such as giving a pass to a lawyer who failed to mention he had been suspended in another state, unsettled him.
“What we’re doing is sending the wrong message,” he said. “What we are saying is don’t disclose your bad things.”
Regulators approved 777 partners despite litigation, DOJ investigation
German is not the first business partner to sue 777 Partners, and he may not be the last. After the company began investing in soccer clubs, Brazilian media outlet O Globo reported that one of its owners, Josh Wander, was on probation until 2018 for a cocaine-related charge. (At the time, 777 called it “ancient history.”) The company’s reliance on insurance premiums, which are normally invested conservatively to ensure payment of future claims, to finance its Risky bets on sports teams and other speculative investments was discovered by Semafor. , and insurance regulators and business partners have asked questions and filed lawsuits.
But German said that, in some ways, it’s about more than money. The revelations about 777’s other lines of business – for example, its work with online payday lenders that charge exorbitant interest rates and pay Native American tribes to use their sovereign immunity as a legal shield – l was put off when he heard about it in July after reading articles about the company in soccer publication Josimar, he said.
When asked why he wasn’t aware of the controversies until 2023, German said he asked Steven Pasko, one of 777’s executives, if the company was facing lawsuits then that he was filling out ABS licensing paperwork, and he denied it. . He said he still did not know why the controversies had not been brought to the attention of ABS committee staff.
“These people are the exact opposite of who should be approved,” he said. “We’re supposed to be looking out for the public interest and we’re letting in guys who are being prosecuted for RICO?”
The ABS committee minutes show that Scout’s renewal request was accepted 5-1, with two recusals and two absences. According to the committee’s latest annual report, 25 new entities got the green light last year; a request was refused. The number of complaints increased from zero in 2022 to 24 in 2023, without any disciplinary measures being imposed on any of the four entities subject to complaints.
Lynda Shely, an Arizona legal ethics attorney who is also a member of the committee, said she would not comment specifically on the dispute between German and 777 and Scout, whom she has advised. She was also recused from voting on Scout’s renewal application. But she pushed back against the idea that Arizona was too permissive, saying many applications weren’t even voted on because of the scrutiny by committee staff. Finance and marketing companies were making deals with law firms in nonpublic arrangements for years before Arizona changed its rules, she added.
“Our model allows for a lot of information to be disclosed,” she said. “There is more transparency on the relationship with an ABS.”
As BI reported in 2022, Arizona’s ABS structure sparked a wave of experimentation. In some entities, lawyers and accountants work side-by-side to better serve their clients, and in others, technologists help traditional law firms work more efficiently, with the ability to share benefits. Advocates see it as a way for lawyers to sell packages of valuable services, instead of selling billable hours.
But one of the most common uses of an ABS has been for personal injury and mass tort lawyers to team up with lenders and marketers more directly than the ABS rules allow. legal ethics of other states.
Defenders of traditional law firm structures say lawyers take an oath to do what’s best for their clients. They argue that the involvement of outside financiers in the management of the business creates a risk that profits come first and customers second.
But some supporters of systems like Arizona’s say those risks can be managed by requiring lawyers to have the final say, closely monitoring new firms and taking complaints seriously. They say there’s nothing wrong with lawyers using outside money to reach more injured clients, who may not know where to turn when faced with medical bills from car accidents. car and dangerous drugs.
“So far it’s been a success,” Shely said. As with any new initiative, she said, it “will have some growing pains and will need to be adjusted and refined as we go.”
For much of 2023, German said he expressed displeasure with 777’s leadership, including its then-general counsel, Ed Gehres, and its chief financial officer, Damien Alfalla . He said he had discussions with other investors about purchasing 777’s stake in Scout, but the discussions ultimately went nowhere. He said other investors wanted to borrow money against Scout’s unearned contingency fees, which could have prevented those clients from finding a new lawyer if they had to leave Scout for any reason.
Gehres and Alfalla did not respond to emails seeking comment.
Following his own dispute with 777, he said, he became alarmed by the state’s permissive approach to licensing and believes further review is needed. He still believes the ABS model has the potential to fill gaps in the legal market, he said, but giving the green light to any candidate — many of whom have few ties to Arizona — is a mistake.
Allowing outside investment in law firms, he said, “is a privilege.” “This serves a purpose of access to justice,” he added. “It is not the place of a billionaire stock fund to use the process to circumvent the process.”
Correction: June 18, 2024 — An earlier version of this story misspelled the name of the former CFO of 777 Partners. This is Damien Alfalla, not Damian Alfalla.