Attorney General Alan Wilson said Loftis didn't initially disclose details of his longtime relationship with lawyer Mike Montgomery. When Wilson learned of them later, he signed off on Montgomery's involvement because he believed it wouldn't affect taxpayers.
Loftis said he told Wilson about his connection to Montgomery from the start and "did everything to say, you know, 'This is my guy,'" when he sought clearance from Wilson.
"We don't hire enemies to do stuff for us," Loftis said.
Regardless, Wilson sees no harm in the arrangement and said such connections are common in South Carolina's relatively small legal community.
Montgomery's engagement in a contingency fee case, in which lawyers get paid a percentage of whatever their client wins, does not violate any laws. But when The Associated Press described details of the arrangement, legal experts and government watchdogs said it raises questions about how the state distributes legal work and the role relationships may play in deciding who gets to spin the wheel on contingency fee contracts. Other states have moved to systems requiring more vetting.
"It smacks of political patronage," said Gerald Finkel, a Charleston School of Law professor and past president of the South Carolina Trial Lawyers Association, now called the South Carolina Association for Justice.
Contingency arrangements and hiring outside lawyers have been top issues for the American Tort Reform Association for years. The group has pressed states' attorneys general to pledge to be more open in how they award that lucrative work. The arrangements are rare in South Carolina - just six contingency fee contract lawsuits have won approval since 2008 - and they leave unanswered questions about how taxpayers can be sure the best qualified lawyers are handling their interests.
Taxpayers should expect the state to field its best legal minds because the defendants will bring their best, said Darren McKinney, the association's spokesman. "You can rest assured they'll have their hall of famers in the lineup. It would be suicidal not to," McKinney said.
More than a year ago, former state Treasurer Converse Chellis tapped Columbia lawyer Mitch Willoughby to look at a lawsuit against Bank of New York Mellon Corp. The state had a contract for short-term conservative investments for state and retirement cash. The state alleges the bank lost money by investing in long-term, mortgage-backed securities, a claim that bank spokesman Tim Steele said has no merit.
In January, as Loftis prepared to succeed Chellis as treasurer, Willoughby briefed Loftis and Montgomery on the case. Montgomery, a Loftis friend since 1978 when they were Pi Kappa Alpha brothers at the University of South Carolina, has handled Loftis' legal work for more than 20 years and continues to do so. At the time of the Bank of New York Mellon conversation, he was working as Loftis' unpaid transition lawyer.
"I would say I've pretty much been involved every piece of legal work he's had since 1986 from his business and personal standpoint," Montgomery said.
Willoughby, who had no previous connections with Loftis, came out of the briefings thinking that Montgomery should be added to the lawsuit's legal team, though he insisted no one pressured him to make that move. He had worked on different sides of cases with Montgomery, known him for about 20 years and respected his work.
"Mr. Montgomery's talent and skill - that was unquestioned in my mind because I had personal knowledge of that," Willoughby said. "But I also knew he had a relationship with Mr. Loftis that provided a foundation as a trusted adviser that had been earned over many, many years."
Montgomery had another tie to Loftis: political donor. Campaign finance reports show Montgomery gave at least $1,052 to Loftis during his bid for treasurer last year.
The Bank of New York Mellon case involves other connections between lawyers as well. Willoughby, for instance, had known Chellis for years before being hired. Chellis, a certified public accountant before his election as treasurer, had testified on cases Willoughby had argued.
Even Wilson, who approved the hiring of Montgomery, had been special counsel in Willoughby's firm for two years before last year's election and had known him for years through the South Carolina Army National Guard.
Finkel, the professor, said it's unusual to add another lawyer as far into a case as Montgomery was, particularly against a major opponent like one of the nation's largest banks. "Getting a lawyer or switching horses midstream generally is not done that far into the litigation," Finkel said. "And it just doesn't pass the smell test if there are personal relationships that have colored the employer relationship."
Loftis said the state could be repaid $200 million from the bad investments. If the state wins back the full amount, the lawyers would be paid $14 million under a contingency contract that pays them 23 percent of the first $5 million and decreasing percentages for damages exceeding that. Willoughby's agreement with Montgomery gives him 77.5 percent of the fee, or $10.9 million before expenses; Montgomery would get 22.5 percent, or $3.1 million.
The fee split recognizes Willoughby's firm's "significant time and effort to date and the successful development of the case to the critical point of filing the complaint," the lawyers' Jan. 18 fee agreement says.
Willoughby regarded the fee deal as a private agreement but allowed a reporter to review it at Loftis' urging.
Loftis said he didn't know how much Montgomery will be paid and shrugged off the notion his friend could see a big payday. "That's not my business," Loftis said. "I don't have the slightest bit of interest in it."
Loftis said he kept the arrangement above board by posting Montgomery's contract on the state treasurer's official website along with other documents in the case.
In South Carolina, lawyers who do state work agree to fees, have to be in good standing, and typically are hired at the request of the agency needing the legal work without an interview or resume, Wilson said. "Absent some disqualifier - some ethical charge or something going on outside of the norm - we generally defer to that agency head," he said.
The arrangement with Montgomery was approved the same day the request was made, and there was no reason to delay, said Mark Plowden, a Wilson spokesman. "After such a request from a constitutional officer, the better question would be - Is there a reason NOT to allow the hire? We attempt to turn around requests as quickly as we possibly can," Plowden said in an email.
Wilson said no one should be shocked by relationships in a state with a small legal community.
"I get criticized if I know a lawyer too well. I get criticized if I don't know a lawyer at all," Wilson said. For taxpayers, he argues, the point is whether their interests are being served. In the Bank of New York Mellon case, he notes, taxpayers are not paying more just because Montgomery was added.
"I don't see how anybody gets harmed," Wilson said.
Other states hire outside lawyers using different approaches that may limit the role personal relationships may have on who handles cases.
In neighboring Georgia, lawyers can request to be considered for appointment for specific types of legal work. "Their requests will be considered based on a number of factors, including their expertise and willingness to do the work for the rate or fixed fee established by the AG," said Lauren Kane, a spokeswoman for Georgia Attorney General Sam Olens.
In Washington state, the State Investment Board keeps a pool of qualified lawyers and rotates the work among them, said Washington attorney general spokesman Dan Sytman.
John Crangle, South Carolina's director for the government watchdog group Common Cause, said Montgomery's deal looks like the good old boy system at work. "That's the way things have been done in South Carolina since Adam and Eve," Crangle said.