Smoke-filled room

When Dan Morales brokered Texas' $17.3 billion tobacco settlement, he blew away Governor Bush. He also made sure his friends got a few puffs.

Morales considered dozens of possible teams for the tobacco litigation. But by November 1995, a month after the attorney general's alleged run-in with Jamail, Morales had settled on a five-firm group led by Walter Umphrey.

A Hornet's Nest
Long before he met with Morales about working on the tobacco case, Umphrey, a successful 61-year-old trial lawyer, had distinguished himself as a generous contributor to political campaigns in Texas. Umphrey acquired his wealth through asbestos litigation. Today, he's majority shareholder of a bank in his hometown, Beaumont.

When former Gov. Ann Richards and Jim Mattox competed for the Democratic gubernatorial nomination, Umphrey at first backed Mattox. But when Richards prevailed, Umphrey made up for lost time by channeling $400,000 to Richards in loans and contributions. He also tried to contribute money to Gov. Bush, but according to a deposition of Karl Rove, Bush's political consultant, the governor returned the money.

"We returned the check because we thought it was awkward for him [Umphrey] and the governor," Rove says, noting that Umphrey was Ann Richards' biggest financial supporter.

In a two-week period during December 1995, shortly after he signed up for the tobacco case but before he'd signed the contingency contract with Morales, Umphrey and members of his firm contributed $40,000 to Morales' campaign.

Umphrey has also put up millions to finance tobacco litigation in other states. Like the other plaintiffs' lawyers who participated in Texas' case, Umphrey has pledged not to talk to reporters about the lawsuit. The American Lawyer magazine, however, has reported that Umphrey invested $5 million in Florida's tobacco litigation. Ness Motley lawyers, with whom Umphrey has worked in the past, led the team that sued the tobacco industry on Florida's behalf a month before Texas filed its case. In exchange for his investment, Umphrey will receive from Ness Motley 7 percent of the attorneys' fees that are ultimately awarded in Florida.

In that state, the plaintiffs' lawyers had negotiated a 25 percent contingency agreement. Morales points to that figure while making his claim that he did better for Texas--by bringing the lawyers' cut down to 15 percent.

A federal judge, however, eventually threw out the Florida fee proposal. More to the point, Florida's attorney general and governor--working together--nixed the lawyers' option of billing the state for its fees if an arbitration panel awarded them less than they expected.

Umphrey's investment in Florida's tobacco litigation has raised a question central to the Texas fee dispute: How much of Ness Motley's inside knowledge of the tobacco industry did he tap into while fighting Texas' case?

Because of its participation in so many states' tobacco lawsuits, Ness Motley has access to a pipeline of damaging information on the tobacco industry. The existence of that information could mean that the risks of taking on tobacco litigation weren't nearly as high as Morales might have thought when he negotiated the 15 percent contingency fee.

Contingency fees, by law, are supposed to correspond to the risks of pursuing a particular case. If Umphrey possessed--because of his relationship with Ness Motley--inside information indicating that the risks weren't as high as outsiders thought, he had an ethical obligation to share that knowledge with the state of Texas before signing his contingency-fee contract.

Umphrey "probably had such insight because of his financial investments in the Florida litigation...There is no clear evidence that such private knowledge and special insight was adequately conveyed to general Morales," wrote Geoffrey C. Hazard, a Yale University law professor hired as a consultant by Bush, in an affidavit to the court.

When the Observer interviewed Ness Motley partner Joe Rice, who negotiated Umphrey's investment in the Florida deal, he initially said Umphrey put his money behind the Florida litigation in January 1996--two months before he signed his contingency fee contract with Morales. But Rice later insisted that Umphrey invested in Florida after he signed the contract with Texas.

When contacted by the Observer, Umphrey himself seemed insulted by the whole line of inquiry. He initially said he'd be willing to talk about the case, despite the informal gag order imposed by Morales. But his congenial manner vanished when the Observer asked its first question: "On what date did you invest in the Florida case?"

"I don't think that's material other than to stir up another controversy," Umphrey said. "We did a good job for the state of Texas. I'm not discussing anything else."

Morales argues that no one could have predicted that the states' tobacco cases would lead to such extraordinary settlements. "When we signed the [fee contract], the industry had never lost a suit, never settled a case," Morales says. "Everything...led us justifiably to expect that we were in for the fight of our lives."

Rice, who would eventually help Texas negotiate its settlement, agrees. "The only thing that Umphrey and those guys would have known is that they were jumping into a hornet's nest."

Umphrey and the rest of the Texas legal team knew one thing for sure: They were expected to hire George Shipley, Morales' longtime political consultant, to handle various aspects of the case. "I was sort of forced on them by the AG," concedes Shipley, who has served Mattox, former Gov. Richards, and others.

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