The D & O Diary : Directors and Officers Liability and Insurance : The D & O Diary : Kevin LaCroix : Securities Laws, Corporate Fraud, D & O Litigation

The changing mix of corporate and securities litigation is a recent phenomenon on which I have frequently commented on this blog. While identifying the fact of the change is relatively straightforward, explaining it is more challenging. According to a January 11, 2012 article in The Review of Securities & Commodities Regulation entitled “Shareholder Litigation After the Fall of an Iron Curtain” (here), written by Boris Feldman of the Wilson Sonsini law firm, the changing pattern in corporate and securities litigation filings is a result of changes in the plaintiffs’ securities litigation bar – particularly, the elimination of a dominant plaintiffs’ firm. These changes, according to Feldman, have resulted in the five recent securities litigation trends he identifies in his article.

 

For many years, according to the article, the Milberg Weiss law firm was the “dominant securities plaintiffs’ law firm.” Even after it split into two separate law firms on the East and West Coasts, it was, according to Feldman, “the 800-pound gorilla of the shareholder litigation jungle.” In addition to dominating the litigation, the firm “exercised some discipline” on the rest of the plaintiffs’ securities bar, demonstrating “substantial influence over smaller firms and parvenus.”

 

Now, “for reasons of retirement and incarceration,” the familiar patterns of the past have been disrupted. Feldman analogizes this disruption in the standard order of the securities litigation world to the disruptions that followed in the political world in the wake of the fall of the Iron Curtain.

 

Without a dominant firm, smaller firms are now “free agents,” and new entrants have appeared. These smaller and newer players are “less predictable (and often less rational).” According to Feldman, these changes in the plaintiffs’ bar explain five trends in shareholder litigation he identifies in his article.

 

First, Feldman notes the recent rise in multi-jurisdiction litigation, where a single company can face multiple suits in different jurisdictions arising out of the identical factual circumstances. Feldman notes that although this might have happened from time to time in the past, when it did, the plaintiffs firms worked things out among themselves. But this is far less common now. Instead, firms that have “decided they have a better shot at participating in the litigation” have consciously chosen to file outside the company’s home jurisdiction, particularly in connection with shareholder derivative litigation. This multiplication of litigation has forced corporate defendants to have to defend themselves in multiple courts, resulting in added expense and uncertainty.

 

The second trend Feldman notes is the proliferation of demand letters. In the past, plaintiffs would bypass this statutory prerequisite to the filing of derivative litigation, out of a concern that the demand represented a concession that demand was not futile. More recently, however, demand letters have become “fashionable,” as secondary players, eager “to get in on the action,” will submit a demand even if derivative litigation has already been filed. Feldman notes that this may “actually be advantageous to defendants,” as courts will often stay derivative litigation while the defendant company considers the demand.

 

Third, Feldman notes the rise of derivative litigation paralleling shareholder class action lawsuits. In the past, the type of stock drop that would trigger a 10b-5 class action would not also spawn a derivative suit, at least in the absence of a major accounting problem and restatement. Now, parallel derivative suits are “de rigeuer.” The plaintiffs bar now “just cannot resist cribbing the class complaints,” even though the company’s setback does not suggest any breach by the company’s board. This change is attributable to a simple explanation: “different suits for different folks.”

 

The fourth trend Feldman notes is the automatic filing of litigation when a merger is announced. When “giants roamed the earth,” there was merger objection litigation, but not every single time a merger was announced. Now the litigation is pervasive and it follows a standard pattern of an initial suit alleging a breach of fiduciary duty after the deal is announced, followed by an amended complaint alleging disclosure violations after the proxy has been filed. The other change Feldman notes about this litigation is that in the past, the litigation went away once the deal closed, as the defendants defeated the preliminary injunction seeking to block the deal. Now the merger suits are increasingly surviving the closing, based on amended allegations that “range from weak to laughable.” Though few of these suits result in a payout, the plaintiffs’ lawyers “persist,” seeking “a place in the sun.’

 

Finally, Feldman notes the rise in actions under Section 220 of the Delaware Code seeking to inspect the corporate defendant’s books and records. Feldman says there has been more of this litigation in the past year than in all prior recorded history. In part this rise is due to encouragement from members of the Delaware judiciary. But this rise is also attributable to a cottage industry of plaintiffs’ firms eager to “get in on the action.” Defendant companies find these suits impossible to avoid; whatever they produce, the plaintiffs ask for more until they have “created an impasse and gotten a ticket to sue.” Feldman suggests that this “epidemic” of Section 220 litigation is “unlikely to be solved without intervention by the Delaware legislature.”

 

Feldman closes by suggesting that in the current, rapidly changing world, the “more fragmented world of plaintiffs’ securities lawyers will continue to amaze and surprise us with their innovation and resilience.”

 

Very special thanks to Boris Feldman for sending me a link to his article.

 

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In their terrific new book "Circle of Greed: The Spectacular Rise and Fall of the Lawyer Who Brought Corporate America to Its Knees," Patrick Dillon and Carl M. Cannon detail the fascinating story of Bill Lerach, who rose to the pinnacle of his profession only to be brought down by criminal wrongdoing. My review of the book appears here.

 

While I was reading it, I began to wonder about the Pulitzer-prize winning journalists who had written the book and what they thought about their subject and their project. I approached them and asked them if they would be willing to answer some questions. To my surprise, they said yes.

 

I have set out below my written Q&A exchange with the authors. The text in italics following the Qs represents my questions, and the text following the As represents their answers.

 

 

Q: Why did you write a book about Bill Lerach?

 

A: He’s a great story, and we’re journalists – it was a natural. Bill Lerach’s life and career is a classic parable. We couldn’t resist.

 

Q: Lerach cooperated with your work on this book. What effect do you think this had? What would you say to any reader who thinks his cooperation meant that you soft- pedaled what you wrote?

 

A: We’d tell them to read the book. We hardly soft-pedal Bill Lerach’s crimes or his rough edges. Bill is on record as telling other journalists that he thought we were tough, but fair. We’ll accept that description. And Bill cooperated without ever so much as asking to see a single word of this manuscript before it was published in its final form. To us, that willingness to let the chips fall as they might demonstrated a gutsy pragmatism and a confidence in his own story that we couldn’t help but admire.

 

Q: You obviously drew on many difference sources in gathering your material for the book. Did you run into any particular problems in trying to gather information?

 

A: Much of the material was in the public record. We found other troves in our own files in our attics and basements as we both had written about Learch earlier in our careers. Most of the lawyers and other key actors were generous with their time. Our big regret is that Lerach’s law partner Melvyn Weiss would not consent to an interview.

 

Q: Your book is rich in anecdote and detail. What do you think was the most interesting thing you found in gathering information?

 

A: Well, Kevin, you’ve read it so you know. Fascinating scenes crop up throughout this narrative—because they did in Bill Lerach’s life. He seemed at times to be a real-life (if very smart) version of Forrest Gump. We hope these tales delight readers as much as they did the authors when we came across them: The preposterous art theft that led to the criminal case against Milberg Weiss; the epic trials pitting Lerach against the Methodist Church and, later, against the entire "Chicago school" of business. Bill doing legal battle with the great Sam Witwer; sweet talking iconic leftist Jerry Voorhis, the congressman defeated by Richard Nixon; Bill funneling money to Bill Clinton and then asking him for a veto; wringing a dramatic apology from John McCain; tangling with New York plaintiff’s lawyer Sean Coffey; cross-examining Roy Disney; jousting with Kirk Kerkorian; readying for holy war against Dick Cheney and Halliburton, suing every Silicon Valley entrepreneur you ever heard of; prevailing in Enron. Writing this book sometimes felt like being on a treasure hunt.

 

Q. Your book reports on Lerach’s question whether his criminal prosecution was in retaliation for his pursuit of claims against Halliburton. What do you make of that idea?

 

A: Readers of the book will see that this simply isn’t true. The criminal investigation of Milberg Weiss and its top partners predates the Halliburton mess, and it was managed by a dedicated civil servant in the Los Angeles U.S. attorney’s office named Richard Robinson who is not only a career prosecutor, but a Democrat. We think Bill makes some of these assertions for dramatic effect. Having said that, what’s that old phrase, "You’re not paranoid if they’re really out to get you." That may apply here. How many individuals in this country found their business practices targeted by the Republican Party’s 1994 "Contract with America"? How many had an act of Congress aimed specifically at them? (The Private Securities Reform Litigation Act of 1995 was dubbed the "Get Lerach Act.".) Bill Lerach didn’t imagine that. Bill also believes that the U.S. Supreme Court went through some strange gyrations to make third-party actors virtually immune from class action securities lawsuits—even when their fraud is massive and manifest. In this contention, Lerach appears to the authors to be on solid footing.

 

Q: While writing this book, you obviously had to become immersed in the world of securities class action litigation. Based on what you have seen, what do you think about this kind of litigation and the way it goes forward in our system? 

 

A: Kevin, as someone who is interested in the other side of this issue—the other side from Bill Lerach, that is—you know the havoc that the old "strike suits" wreaked on entrepreneurs, corporate officers, and the companies that insured them. This was especially true before enactment of the PSLRA, when class action securities cases were filed on no more evidence than a simple dip in a company’s stock price. Even in cases with no merit at all, the cost of settling them was less than the cost of defending them. So a consensus emerged that these lawsuits had become a kind of legalized extortion racket and were an anathema to justice and good business practices. Bill Lerach and Mel Weiss and their imitators came to be seen as glorified shakedown artists. We had covered these issues before writing this book (Carl Cannon covered Washington for the San Jose Mercury News, and Pat Dillon edited Forbes ASAP in Silicon Valley) and we knew this back story. It forms the narrative tension in Circle of Greed.

 

However, as we delved deeply into the rationale for such lawsuits, we couldn’t help but notice some other facets of your question. Here’s one: Although Lerach would allege fraud based on little more evidence than a falling stock price and a few upbeat press releases, he would in the course of his litigation routinely uncover instances of insider trading—the dumping of stock by top company officers immediately before bad news was about to be announced. The authors couldn’t help but be disillusioned by the frequency of this practice. A second point we would make: Once Congress decided that class action securities lawsuits were not the best way to enforce shareholders’ interests (not to mention honest business dealings), it became incumbent on the Securities and Exchange Commission to be ever-more vigilant against fraud. Perhaps this was too big a job for the SEC, but this did not happen. The upshot, as Lerach himself had warned many times, was a tsunami of fraud on Wall Street in the past decade that did great harm to investors and working people alike and which we believe made the current recession much worse for almost all Americans.

 

Q: In your book’s Epilogue, you write that "Bill Lerach was no monster, but he had indeed gone after fraud by using fraud." Do you think that this is just an instance of someone getting corrupted by the system, or was it something innate, something particular to Lerach himself, that drove his willingness to cross the line?

 

A: You mentioned that line in your very thoughtful review of our book, but let’s parse that sentence for a moment: He used fraud to go after fraud. That means there was fraud to begin with, and Bill Lerach would say that this reality—not his legal strategy—was the larger underlying problem. This contention may be self-serving, but it’s worth taking seriously. There was indeed something rotten on Wall Street—and in Silicon Valley—and instead of addressing the way corporate capitalism had been turned into an insiders’ game, Congress, the White House, and the Supreme Court spent their energy reining in the law firms that were rooting out corporate corruption and malfeasance.

 

As for Lerach’s personal motivation in being willing to cross the line into illegality, that seems to entail a complicated set of incentives and impulses. Let’s start with his fierce competitive streak. Like most super-successful trial lawyers, Bill Lerach loves to win and hates to lose. In the law, as in life, that attitude can lead to ethical shortcuts. Also, altruism was certainly a factor as well—a fierce brand of altruism animated by Bill’s populist political views: Lerach was convinced, and remains so, that he was doing good with these lawsuits. Finally, of course, greed was a factor in this epic morality play, just as it was for those on the receiving end of Lerach’s wrath—hence our title.

 

Q: Have you been surprised by the responses your book as received?

 

A: We’ve been pleased so far, although it’s instructive to see how critics and commentators tend to concentrate on passages in the book that bolster their pre-existing views.

 

Q: What do you think the lessons learned or conclusions are from the story you have told in this book?

 

A: We’d mention two: First, politics in this country really is broken. It’s an overly partisan hothouse environment where monetary contributions crowd out the art of compromise, and where the merits of any given issue give way to a desire to reward your allies and punish your rivals. Second, in the heat of his three-decade war of attrition with corporate officers and directors Bill Lerach ultimately began to resemble his adversaries—the ones he detested the most. There’s a lesson here for all of us in this, and it’s the line that precedes the one you mentioned about monsters. It’s from Friedrich Nietzsche, who put it this way: "Whoever fights with monsters should see to it that he does not become one himself."

 

The D&O Diary would like to express its deep gratitude to the authors’ willingness to answer our questions. We hasten to add that everyone who has read this far really should definitely read the book.

 

Speakers’ Corner: On Tuesday, March 16, 2010, I will be speaking at the C5 D&O Liability Insurance Forum in London. I will be speaking on a panel with my good friend John McCarrick of the Edwards Angell law firm on the topic "What are the Risks to European D&O Insurers from Class and Derivative Actions in the U.S." Information regarding the event can be found here.

　

 

　

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During his long and provocative legal career, former class action securities litigator and convicted felon Bill Lerach was a self-selected lightening rod for controversy. He taunted his foes, stalked his enemies, challenged convention, and in the process transformed himself into a larger than life figure.

 

And so when his legal career collapsed among revelations that he and his colleagues had paid improper kickbacks, the post-mortems almost inevitably reflected much of the same mythmaking hyperbole that Lerach himself generated. Lerach became a stock figure in a morality tale, in which the angry, defiant mortal is struck down for his pride.

 

The reality is that Lerach’s tale is so much more interesting that this stock narrative frame. And is certainly a tale worth telling, as demonstrated in the marvelous new book entitled "Circle of Greed: The Spectacular Rise and Fall of the Lawyer Who Brought Corporate America to Its Knees," written by two Pulitzer-prize winning journalists, Patrick Dillon and Carl Cannon. (Full disclosure: Carl is an old family friend, but I feel comfortable in saying I would have liked the book every bit as much if Carl and I had never met.)

 

The authors explain in their Prologue that initially, Dillon had intended to co-author a book with Lerach, but that project got waylaid when it became clear that Lerach’s legal difficulties were serious. Though the project moved into an unanticipated direction as a result of these events, Lerach continued to cooperate with the authors, right up to making himself available for interviews from prison.

 

The authors ask themselves why Lerach cooperated with them, and they confess they are not entirely sure. I was initially concerned the book might shade in Lerach’s favor or even fall into myth-making trap. Make no mistake, however, the authors fully and damningly document all of Lerach’s most outrageous flaws and faults.

 

The authors open their book at the point where Lerach’s many shortcomings have finally caught up to him, at the court hearing in October 2007 when Lerach pled guilty to one count of obstruction of justice. Then, to discern how the career of one of the most influential lawyers of our time could have come to this, the authors then trace his career from its very beginning, including his childhood in Pittsburgh and his early legal career with the Reed Smith firm. A case in which Lerach was involved for Mellon Bank took both took Lerach to San Diego and also introduced him to Mel Weiss, his law partner whose fame, fortune and fate would follow its own parallel trajectory.

 

Lerach’s skill and his excesses emerged in his first successful case in San Diego, in which he represented a group of retirees against the Methodist Church. Lerach’s legal performance was by all accounts brilliant, and produced a great result for his clients. But, the authors note, "along with the good came the other things: the hubris, the taunting, the acrimony with the opposing side, the hyperpartisanship borne of the Manichean world view."

 

Following after this victory, Lerach sooned carved out a career for himself as the high-profile scourge of Corporate America, and at the same time becoming the poster child for class action excesses. This list of companies Lerach ultimately sued reads like a membership list for the U.S. economy. Lerach became feared and reviled. And he also became enormously rich.

 

Despite (or perhaps because of) his enormous success, the weaknesses Lerach had shown in the Methodist Church case clearly could at times consume him. This is perhaps nowhere as evident as in his mad, ill-fated bid to avenge himself on Daniel Fischel, who had testified as a witness for the defense in the Nucor case. Lerach blamed Fischel for his stinging defeat in that case. When Lerach later filed a suit against Charles Keating in connection with the Lincoln Federal scandal, Lerach named Fischel and his firm as defendants. Though the claim was later compromised (in a "disposition," not a "settlement") Fischel never forgot the many outrageous things Lerach said along the way (many of which cannot be reproduced in this family-oriented blog).

 

In the end, Fischel was the one to get revenge. His subsequent slander suit against Lerach and his firm resulted in a $45 million verdict in his favor, and while the unresolved punitive damages phase was pending, the law firm agreed to pay $50 million to resolve the whole thing, agreeing even to have the settlement funded, in cash, that same day. There is something about this whole sequence of events that encapsulates so much about Lerach -- the excess, the outrageousness, and the way in which his own conduct caused him so much damage.

 

The book’s authors are not lawyers, but I think they deserve high marks for the way they deal with the legal topics. They also deserve credit for their appreciation of the atmosphere that Lerach’s excesses generated and how it influenced other participants in the process.

 

For example, the authors perceptively note that many of Lerach’s targets felt compelled to capitulate rather than confront a mad man – yet, the authors note, many of the companies who were unwilling to give in managed to walk away paying nothing. The lesson that the authors drew was that "if you really had done nothing wrong, it made sense to fight these class action securities cases in court. If more firms had done this successfully, there likely would have been fewer plaintiffs’ lawsuits."

 

The authors, unlike many other journalists that traverse this ground, also demonstrate an appreciation for the complex role that D&O insurance plays in the process, and indeed, that the actions and activities of class action attorneys have on the D&O insurance marketplace.

 

But what the authors do best, and what makes this book worth reading, is the way they weave the story of the criminal investigation through the massive corporate scandals, which were unfolding at the same time. The authors also methodically show how so much of Lerach’s crusading activities depending on his firm’s corrupt system for procuring plaintiffs on whose behalf to bring the suit, as well as on the testimony of a corrupt expert witness.

 

Many of the details of the criminal investigation may be familiar to many readers. The almost unbelievable way that a lover’s quarrel in Cleveland triggered a sequence of events that ultimate brought down Bill Lerach and Mel Weiss has been told elsewhere. The authors retell these tales particularly well. But what makes their version so compelling is the way the authors overlay events that were going on at the same time, particularly Lerach’s representation of the Enron litigants and his dispute with Weiss over the WorldCom case.

 

Frankly, Lerach’s contributions also help make the story compelling. His involvement provides a narrative tone and personal focus that bring the events to life. Lerach does not come off sympathetically, but he does come off as a real person – corrupt, deeply flawed, but real. As the authors say toward the end of their book, "Bill Lerach was no monster, but he had indeed gone after fraud by using fraud."

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The financial relationship between plaintiffs’ securities firms and the clients they represent has long been questioned, and not only because of the kinds of improper kickback payments for which Bill Lerach and Mel Weiss, among others, wound up in jail. Another practice that has raised recurring concerns is what is referred to as "pay-to-play" – which in this context refers to the plaintiffs’ lawyers’ payment of political contributions to elected officials in charge of public pension funds, supposedly in exchange for the lawyers’ selection as the funds’ class action counsel.

 

But while these kinds of concerns are frequently raised, a preliminary question is often overlooked – that is, regardless of questions about the effect the practice might have on the counsel selection process, are the plaintiffs’ lawyers in fact making political donations to elected officials who have authority over public funds?

 

That is the question examined in a recent New York University Law Review article by Drew T. Johnson-Skinner entitled "Paying to Play in Securities Class Actions: A Look at Lawyer’s Campaign Contributions" (here). The article’s author notes that while alleged pay-to-play practices are often discussed, and have even been the subject of various reform proposals, many commentators have simply "skipped" the "first stage of the analysis," which is the question "whether law firms are contributing to investment funds’ leadership at all."

 

In order to analyze the question, the article’s author looked at all 1076 securities class action lawsuits that were filed from 2002 to 2006, and then narrowed the data set to the 74 cases where "the filing lead plaintiff was an institutional investor with at least one state-level elected official or a person appointed by a state-level elected official, on its controlling board."

 

The author then looked at whether the law firms selected as counsel in each of the 74 cases had made campaign contributions to any elected officials affiliated with the funds that selected the firm. Reviewing publicly available information, the author found that "in a majority of cases where pay-to-play was possible, at least one law firm made a political contribution to an elected official with a lead plaintiff pension fund in the case."

 

The author concluded that his analysis "confirms that plaintiffs’ law firms are contributing to the pension funds that select them as counsel," and that "campaign contributions that could be the basis of paying-to-play are present across a broad range of cases." Moreover, the amount of money contributed by firms is also "significant."

 

However, the author cautioned that his research "does not explain why firms contribute to pension funds or the role that campaign contributions actually play in funds’ counsel-selection decisions." Rather, the author suggests that the value of his research is that it rules out any possible contention, in response to pay to play allegations, that law firms are not contributing to pension funds. In fact, they are.

 

While the law review article’s author declined to question whether the plaintiffs’ law firms’ political contributions are a form of pay-to-play, a separate legal study suggests at a minimum that the existence of political contributions may affect the attorneys’ fees that a public pension fund may pay.

 

A December 22, 2009 article (here) by New York University law professor Stephen Choi, Drew T. Johnson-Skinner, and University of Michigan law professor Adam Pritchard suggests that "state pension funds generally pay lower attorneys’ fees when they serve as lead plaintiffs in securities class actions than do individual investors serving in that capacity," but that when the authors controlled "for campaign contributions made to officials with influence over state pension fund" the differential disappears. Thus, the authors conclude, pay to play "appears to increase agency costs borne by shareholders in securities class actions."

 

In any event, questions continue to arise whether plaintiffs’ lawyers campaign contributions to officials that control public pension funds represents a form of improper influence.

 

For example, in connection with the class certification motion in the Countrywide subprime-related securities class action lawsuit, the Defendants had argued that the lead counsel in the case had made a series of campaign contributions to the New York State Comptroller, the sole trustee of the New York State Common Retirement Fund, one of the lead plaintiffs in the case. (The other lead plaintiff group is the New York City Pension Funds.) The various contributions for the lawyers at the firm ranged in amount from $6,200 to $9,600, all made within four days’ time, after the law firm had been selected as lead counsel. The payments totaled "precisely $50,000."

 

In her December 9, 2009 order certifying the class (here), Central District of California Judge Mariana Pfaelzer noted that any suspicion of pay-to-play activity "would be relevant to attorney-class conflicts and the willingness of [the State Fund] to monitor its attorneys and make decisions for the benefit of the class rather than its attorneys," but she found that any such suspicion "may be somewhat speculative" in the Countywide case.

 

Judge Pfaelzer noted as a preliminary matter that "attorneys are free to exercise their right to donate to politicians who support their views" and that the defendants "do not allege that the donations violated any law." She also noted that "though not exactly correlative," lawyers and parties on the defense side have "similar political-donation freedom."

 

Perhaps more importantly, in rejecting the defendants’ objections, Judge Pfaelzer found that the lead plaintiffs’ firm had been retained for the case "after career staff recommended" the firm, following "reasonable ethics protocols" and based on the law firm’s "independent investigation of the case."

 

A December 10, 2009 WSJ.com Law Blog post about Judge Pfaelzer’s ruling can be found here.

 

The suggestion of similar concerns surfaced more recently in connection with the composition of the Financial Crisis Inquiry Commission, which commenced its high profile investigation of the financial crisis on Wednesday. As detailed in a January 13, 2010 Wall Street Journal article (here), one of the individuals on the ten-member commission is a lawyer with the Coughlin Stoia law firm. In addition, a senior commission staffer is on leave as a partner in the Coughlin Stoia law firm.

 

The Journal article reports that the commission chairman, Phil Angelides, received $250,000 in contributions from the law firm during his 2006 campaign for governor. The article quotes a representative of the U.S. Chamber Institute for Legal Reform as saying that the appointment of plaintiffs’ class action attorney to the commission and its staff "raises a very real concern as to whether they will use the important work of the commission ultimately to feather their own nest." A law professor is also quoted as saying that the ties to the law firm could hurt the commission, noting that "the commission must maintain its distance from the perception that this is all a ‘gotcha’ exercise."

 

These kinds of concerns about plaintiffs’ law firms’ political contributions at a minimum draw upon a suggestion of at least the appearance of impropriety. As one way to try to avert this appearance, Florida has instituted a public process, conducted by its State Board of Administration, which oversees the state employee pension funds, to determine which firms will represent the Board in future securities class action lawsuits.

 

According to Allison Frankel’s December 14, 2009 AmLaw Litigation Daily article (here), 31 firms submitted proposals, from which a field of 12 candidates was selected. In a January 12, 2010 update (here), Frankel reported on the outcome of the process and the names of the five law firms finally selected. Her January 12 article also reports on the many "interesting tidbits" revealed in the law firms’ public submissions, including the firms’ hourly rates and the portfolio monitoring services the firms provide for many public pension funds.

 

Though the Florida process has all the virtues of transparency, the process itself did not eliminate the phenomenon of plaintiff’s lawyers’ campaign contributions to influential public officials. According to a December 12, 2009 St. Petersburg Times article (here), in the preceding 14 months, "lawyers and others tied to the firms interested in representing the SBA have spent at least $850,000 on Florida politics." The article quoted critics who suggested that "Florida’s short list mirrors the entrenched, pay-to-play culture between public pension funds and prominent class-action law firms."

 

In other words, as the law review article cited above demonstrates, the plaintiff’s law firms are in fact making political contributions to elected officials who are in a position to influence the counsel selection process. Whether or not the contribution are made for the purpose of influencing the counsel-selection process and whether the process is in fact influenced may be questions about which there may be a diversity of views; the plaintiffs’ lawyers are quick to defend their actions.

 

But I wonder whether this is going to be one of those kinds of issues that is out there and frequently noted, but then suddenly blows up when some very specific development moves it to the front burner. This is the kind of issue that could get people very excited if a certain combination of facts and circumstance should come to light. Even absent some dramatic revelation, the questions will continue, simply because of the way it looks.

 

Indeed, given the shadow it inevitably casts over plaintiffs' attorneys and their motivations, you do wonder why they continue these practices. More cynical minds might suggest that it is obvious why the plaintiffs lawyers don't stop.

 

　

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Several of the lawyers for the plaintiffs in the Bisys Group securities lawsuit are concerned with the whereabouts of more than $9 million from the $65.8 fund established in connection with the settlement of the case. 

 

As reflected in the transcript of the April 20, 2009 hearing before Southern District of New York Judge Ned Rakoff (here), in response to a question from the court about the missing $9.3 million, counsel for plaintiffs’ attorney Gene Cauley (sole signatory on the settlement fund escrow account) reported that "the funds are presently unavailable to be delivered," and when asked why, counsel responded by saying that "if I go into anymore detail, I think I might violate a privilege against self-incrimination."

 

In response, Judge Rakoff said that "it appears not unlikely... that Mr. Cauley may have committed a crime or several crimes" and that "he may have committed disbarrable conduct in one or many ways." Judge Rakoff also said that he was drawing the inference from Cauley’s taking the Fifth that "Mr. Cauley has either misappropriated or otherwise misallocated these funds" and that because of that possibility, Rakoff "asked the U.S. Attorney to have someone here today." There was in fact an AUSA in the courtroom at the hearing, and Rakoff observed that "I trust there will be a prompt investigation of this matter by the U.S. Attorney’s office."

 

When the Bisys Group litigation settled in October 2006, Cauley’s former law firm, Cauley Bowman Carney & Williams, was a co-lead counsel in the case and appointed as custodian for the settlement fund. Cauley was designated as sole signatory on the escrow account in which the funds were deposited.

 

Rakoff had ordered distribution of the settlement funds to the class plaintiffs through a class action settlement administrator, AB Data. The class funds were to be provided to administrator in a series of payments, the last of which, in the amount of $9.3 million, was to have taken place on April 2, 2009. Apparently Cauley advised A.B. Data that the funds for the April 2 installment were invested in a 90-day Treasury bill and that the funds would be available by April 8. However, the $9.3  million is yet to be provided to A.B. Data.

 

On April 15, several of the lawyers from Cauley’s former firm, now part of a firm called Carney Williams, faxed Rakoff a letter advising him of the situation. Though Rakoff was out of the country at the time, he directed his law clerk to convene a joint conference call, in which Cauley apparently declined to participate. Rakoff then issued an order requiring Cauley’s appearance at the April 20 hearing.

 

At the April 20 hearing, Rakoff ordered the funds that have been deposited so far with the settlement administrator to be distributed to the plaintiff class.

 

In a WSJ.com Law Blog post about these remarkable circumstances here, Cauley’s counsel is quoted as stating with respect to the missing $9.3 million that Cauley is "working to be able to find the money and to pay it in 90 days." The lawyer also said that Cauley "expects to make everyone 100% whole."

 

Judge Rakoff closed the April 20 hearing with a brief peroration reflecting on the unusual circumstances in the Bisys Group case: "When I hear people cracking lawyer jokes, I always take umbrage and point out that the profession of Lincoln, the profession of Madison and Jefferson often represents the highest ideals in our society. But recent events give me pause about how true that is."

 

Cauley was the subject of a past, somewhat colorful WSJ.com Law Blog post (here), which makes for even more interesting reading in light of these more recent circumstances.

 

Special thanks to a loyal reader who also forwarded me a copy of the hearing transcript.

 

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One of the recurring issues in securities litigation is the way the erstwhile class counsel and their clients, the prospective class representatives, come together. In what one federal judge described as a "blatant, shocking conflict of interest," it appears, from testimony at a recent lead plaintiff selection hearing, that the leading plaintiffs’ firms are providing investment portfolio "monitoring services" for which the firms are paid only if their public pension fund clients pursue litigation recommended by the law firm. In a post-hearing brief in the case, the  firm involved defended its practices as appropriate.

 

These issues arose at an April 1, 2009 hearing before Southern District of New York Judge Jed Rakoff, involving two cases, the Credit Based Asset Servicing case (about which refer here) and the Merril Lynch Mortgage Pass Through Certificate case (refer here). Both cases involve alleged misrepresentations in connection with the initial public sale of certain mortgage-backed securities.

 

At the April 1 hearing, Judge Rakoff consolidated the two cases. The primary purpose of the April 1 hearing was to determine which of the two proposed plaintiffs was the "most adequate" to represent the class in the consolidated case.

 

As reflected in the hearing transcript (here), Judge Rakoff first heard testimony from an administrator for Iron Workers Local No. 25 Pension. In response to questions from the Judge, the administrator testified that they way he learned about the allegations in the case was that "they were brought to me by counsel."

 

The administrator explained that the lead plaintiffs’ firm representing the pension fund in the case has a long-standing investment portfolio monitoring contract with the fund. Under this contract, the law firm monitors the fund’s investments and advises the firm when circumstances arise that would warrant a lawsuit. The plaintiffs’ firm is only paid if they bring a lawsuit and recover.

 

Among other things, Judge Rakoff called this arrangement "about as obvious an instance of conflict of interest as I’ve ever encountered in my life," noting that the plaintiffs’ counsel,

 

under the guise of monitoring the [pension fund’s] investment to determine whether or not there are any violations of the law …have made an arrangement whereby they will only get paid if there are lawsuits brought that they can recover on, and that they will be plaintiffs’ counsel in that lawsuit.

 

Judge Rakoff observed that "if that isn’t a gross conflict of interest in violation of the most elementary fiduciary duties, I don’t see what is." He added that the arrangement inherently compromises the objectivity of the monitoring they’ve been asked to undertake. Indeed, to be frank, I’m shocked that any law firm would enter into such an arrangement."

 

Counsel for the Iron Workers gamely defended the arrangement, among other things asserting that "this portfolio monitoring is not something unique to this firm," an argument that did not impress Judge Rakoff. In response to plaintiffs’ counsel’s suggestion that his law firm analyzes and evaluates the merits of the case before recommending that the fund become involved in litigation, Judge Rakoff said that arrangement "makes crystal clear that the Iron Workers are being led by counsel rather than the other way around," a circumstance the PSLRA had tried to eliminate.

 

Judge Rakoff then heard testimony from the Special Assistant to the Mississippi Attorney General, on behalf of the other proposed lead plaintiff, the Mississippi Public Employees Retirement System. The representative’s testimony established that Mississippi also had monitoring arrangements with plaintiffs’ law firms, but with twelve separate firms rather than just one. The representative also testified that the possibility of bringing this particular action had been brought to the state’s attention by a separate firm that performs bankruptcy related services for the state.

 

The representative explained by using plaintiffs’ firms for monitoring , rather that paying for independent monitoring services, the state was able to save costs. The state representative described the use of plaintiffs’ firms for monitoring services as a "commonplace practice," in response to which Judge Rakoff observed

 

Yes, well, I’m learning that, and to be frank, that doesn’t make me less shocked, that makes me more shocked, because what you’re telling me is that persons, entities with a fiduciary duty, which includes a fiduciary duty to monitor the investments they’re making with their members’ money, have concluded that to save a few bucks they will employ as monitoring entities firms that can only profit of their advice goes one way and not the other.

 

Judge Rakoff did find certain distinguishing characteristics in Mississippi’s case, in that one of its twelve monitoring firms had not brought the case to the state (although it turns out that the bankruptcy firm that did bring the case to the state does have a contingency fee interest in the case); and that even if one of the twelve firms were to bring a case forward, the case would be independently evaluated by other firms and the state’s own representatives. Finally, the state representative testified that in this case the state had reached out to the lead plaintiffs’ firm, rather than the other way around.

 

Ultimately Judge Rakoff did not rule at the April 1 hearing on the question of which of the two proposed plaintiffs would be the lead plaintiff in the case. Rather, he asked for further briefing, noting a concern that at the hearing he might have been "overreacting because of hearing about this arrangement for the first time."

 

Even though Judge Rakoff ultimately did not rule at the April 1 hearing, his shocked response to the practices that were described multiple times at the hearing as "commonplace" does seem to suggest that there may be concerns with the monitoring arrangements. Certainly, the language the Judge used to characterize the arrangements is impressive, to say the least.

 

Pursuant to Judge Rakoff’s briefing schedule, and in response to his comments, on April 8, 2009, the Iron Workers filed a legal brief (here), that among other things defends the monitoring arrangements on the grounds that the monitoring agreement does not itself authorize the firm to initiate litigation on the fund’s behalf without the fund’s authorization, and that the fund is under no obligation if it decides to pursue litigation to use that particular law firm.

 

In addition, the Iron Workers’ brief cites multiple cases in which various courts found that the existence of similar monitoring arrangements were not a barrier to the proposed plaintiffs’ service as a class representative.

 

Finally, the brief also includes an opinion from the distinguished legal scholar Geoffrey Hazard that the portfolio monitoring services were not "professionally improper" and that there is no conflict of interest in these circumstances because the pension fund is not obligated to bring suit even if the firm recommends it. Hazard also stated that the mere fact that the plaintiffs’ firm was "working for a contingent fee" does not present an "inappropriate bias."

 

The Mississippi Public Empoyees' Retirement System's brief regarding the alleged conflict and the lead plaintiff issue can be found here. Merrill's brief can be found here.

 

UPDATE: In an  April 23, 2009 order (here), Judge Rakoff appointed the Mississippi Public Retirement System as the lead plaintiff in the cases. In the April 23 order, Judge Rakoff also stated that  the lead plaintiff determination "involved the Court's resolution of several difficult issues, which will be elaborated in a written opinion." Judge Rakoff said that he would issue the detailed opinion after he completed an ongoing criminal trial that he has been conducting.

 

Special thanks to a loyal reader for providing a copy of the hearing transcript.

 

 

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With the sentencing of the last two defendants in the criminal investigation of the Milberg law firm and several of its former partners, it may be time to ask what the impact has been on the plaintiffs’ securities bar and what the future may be for securities litigation. There are also interesting questions about what the impact may be on securities litigation as a result of  Barack Obama’s election to the White House and the augmentation of the Democrats’ control of Congress.

 

These questions were the focus of a November 5, 2008 panel at the PLUS International Conference in San Francisco. The panel, which was moderated by Edwards Angell Palmer & Dodge partner John McCarrick, included Boris Feldman of the Wilson Sonsini firm; Professor Joseph Grundfest of Stanford Law School; Keith Fleischman of the Grant & Eisenhofer firm; and Judge Vaughn Walker of the Northern District of California.

 

The session was preceded with a fascinating video created for the event entitled "The Rise and Fall of William Lerach," which detailed the career and criminal prosecution of former plaintiffs’ securities bar titan Bill Lerach. The video also included an interview of Lerach that had been taped before Lerach began his incarceration.

 

The video included a detailed history of the circumstances underlying the criminal investigation of the Milberg firm, including the fascinating story of how a lovers’ quarrel in Cleveland and the discovery of stolen paintings in a public storage warehouse led to Lerach’s indictment and eventually to the entry of guilty pleas by Lerach and others. (I detailed these events behind the criminal indictments, including pictures of the stolen paintings and how they related to the overall story, here).

 

The video contained some extraordinary footage, including a vintage video clip of Lerach in a 2003 speech about supposedly corrupt corporate officials, quoting the Bible (refer to text here) as saying, "What profit a man if he gain the whole world but lose his own soul?" – adding parenthetically on his own, "or his freedom." The video also quoted Lerach as saying several times in an apparent attempt to defend the kickback payments that led to his conviction that "it was an industry practice" and that his firm did it "because we had to" in order to "meet competition. "

 

Following the video, the panelists turned to the question of the current state of the plaintiff securities bar and what may lie ahead.

 

The discussion focused initially on the question whether the leading plaintiffs’ lawyers’ demise has opened the door for other plaintiffs’ firms. Boris Feldman observed that the level of talent in the plaintiffs’ has proven to be both deep and broad. He added, however, that in his view that the more significant development is that the power of the securities class action cases seems to have shifted from an individual lawyer, like a Lerach or a Mel Weiss, to institutional investors. Keith Fleishman agreed that institutional investors are in greater control of these cases.

 

Judge Walker expressed a contrary view, commenting that from his perspective the cases "largely have not changed." He said that the involvement of a sophisticated institutional investor that "rides herd" occurs "in relatively few cases." In the vast majority of cases, he said, "things have not changed." He said that in his view, plaintiffs’ lawyers are "still very much in the drivers’ seat."

 

He went on to note that the problems with the system are not confined to the conduct to which Lerach plead guilty, noting that Lerach had plenty of what Walker called "accessories." Among the "accessories" Walker identified are the judges who have not "ridden herd" to scrutinize settlements, fee awards and claim administration. He also identified the defense bar as among the "accessories," who present settlements without having obtained the facts but instead "locking arms" with the plaintiffs’ counsel at settlement hearings, as a result of which there is no "adversary presentation" of the kind on which courts depend.

 

Judge Walker expressed concern that there is little monitoring or participation in the strategic process, and "frankly not enough discipline" in the system "to weed out the cases" that should not be pursued.

 

Keith Fleischman disagreed with Judge Walker and said that in his experience, courts were very much engaged in the supervision of cases and their settlements, and required a process in which the developments were "highly scrutinized."

 

Professor Grundfest offered the view that perhaps both Judge Walker’s and Fleischman’s viewpoints were correct because the cases are "bifurcated" between the larger cases in which institutional investors are actively involved and the smaller cases where smaller plaintiffs’ firms and investors with smaller interests are involved. Grundfest observed that the vast majority of cases either are dismissed or settle for under $10 million, and the institutional investors are not involved in these smaller cases.

 

Boris Feldman observed that some of these smaller plaintiffs may include small Taft-Hartley funds whose involvement may represent a "version 2.0" of the activities that led to the problems of which Lerach was convicted. He raised the question about the small union locals that are repeatedly involved in securities cases in which they actively seek lead plaintiff status, which, Feldman suggests, raises questions about what is really in it for the local funds and whether there are favors of one kind or another that that motivates these small funds.

 

An interesting related question that came up in the panel discussion is whether or not the institutional investors’ involvement in securities litigation could lead to an increase in the number of securities cases that go to trial. Fleischman first raised this, suggesting that expectations on both sides of these cases have changed, which could lead to more cases going to trial.

 

Feldman came back to this topic later, suggesting that the dynamic has changed in cases in which politicians are involved, such as where the lead plaintiff is a large public pension fund. Feldman observed that the specialized lawyers who have handled these cases generally know what a case is worth, and generally know about where a case will settle. Politicians may have other motivations, and may well believe that a trial victory would be more valuable to them than a settlement.

 

Professor Grundfest also suggested that plaintiffs’ firms, managing a portfolio of cases almost in the same way a hedge fund manages its investments, may find it expedient to take cases to trial as one way to try to maximize returns across their entire portfolio. Grundfest agreed that we are probably going to see more trials.

 

The panel discussed a number of other topics, including the way in which plaintiffs’ plead damages in the class action complaint. Judge Walker observed that insufficient attention is paid to whether the theory of damages alleged makes sense. He noted that not enough attention is paid to demonstrating the way that the defendant company’s stock price moved with respect to the alleged misrepresentations.

 

The panelists also discussed the way in which e-discovery has changed these cases. Feldman observed that e-discovery has been a "goldmine" for the plaintiffs’ lawyers, and because of the expense involved, the "big loser" has been the insurance companies. Grundfest noted that he tells his students that "e-mail" stands for "evidence mail" because it "captures and creates smoking guns." Judge Walker noted that these documents can sometimes assume an importance all out of proportion to the case as well.

 

What the Election Means for the Plaintiffs’ Bar: The panel concluded with the panelists making predictions about what Tuesday’s election may signify for securities litigation. Grundfest opened the discussion by stating that as a result of the Democrats’ sweeping electoral victory, the headline is that "Christmas comes early" for the plaintiffs’ bar, and the only question is "what’s in the boxes and what’s under the tree." Grundfest suggested that the plaintiffs’ bar may succeed in having Congress legislatively reverse Stoneridge and Central Bank.

 

Grundfest also suggested that Congress might move toward revising the pleading standard in securities cases, moving from the currently more restrictive standard to one where the case could survive a motion to dismiss if there were the "mild aroma" of fraud. Grundfest also suggested that as the likely changes could "dramatically increase the exposure" for the insurers, because the potential securities litigation exposure is "likely to go up in the future."

 

Feldman agreed that, after a period in which conditions may have been relatively advantageous for defendants, we could have entered "a bad period from a claims perspective for insurance companies." Feldman suggested that Obama’s judicial appointees are likely to be more receptive to class actions, and to favor the "interests of the little man." He agreed that the plaintiffs’ priorities are likely to get through Congress and also that Central Bank is likely to be legislatively reversed. He also said that the current credit crisis will feed into this processes, as excesses unearthed as part of the credit crisis will become the "poster children" to justify the legislative changes.

 

Judge Walker concluded the discussion with an observation of the irony that we now find ourselves in a period of the greatest upheaval of our generation yet two of the most talented plaintiffs’ lawyers are "out of action."

 

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In what may be the beginning of the final act in the Milberg Weiss criminal investigation, on September 20, 2007, a federal grand jury indicted Mel Weiss of participating in a scheme that paid millions of dollars in kickbacks to paid plaintiffs in over 235 class action and shareholders derivative lawsuits. The payments, allegedly made over a 25-year period, garnered the Milberg Weiss firm over $250 million. The Second Superseding Indictment naming Weiss and adding additional allegations against the Milberg Weiss firm and against Seymour Lazar, one of the paid plaintiffs, can be found here. The U.S. Attorneys' Office's press release announcing the indictment can be found here.


In addition, on September 20, 2007, former Milberg Weiss partner Steven Schulman agreed to plead guilty to a federal racketeering charge and to acknowledge that he and others conspired to conceal the secret payments from courts and absent class members. Schulman's plea agreement can be found here, and the U.S. Attorneys' office's September 20 press release announcing the plea agreement can be found here.



A September 21, 2007 Wall Street Journal article describing the new indictment and Schulman's guilty plea can be found here. A September 21, 2007 New York Times article can be found here.

The new indictment describes a scheme in which Weiss, Bill Lerach (refer here), David Bershad (refer here), Schulman, and unnamed Milberg Weiss partners E, F and G formed a conspiracy to provide individuals illegal kickbacks, and to cause the individuals to provide false and misleading statements in court documents and in depositions. The three named paid plaintiffs are alleged to have received at least $11.3 million in illegal payments, and others are alleged to have received hundreds of thousands of dollars in payments.

The new indictment alleges that in order to conceal the payments, some of the payments were made through intermediary law firms, and one of the criminal defendants named in the indictment is Paul Selzer, an attorney who is alleged to have received and transmitted the payments for Lazar.

Many of the allegations in the new indictment appeared in the indictments previously filed or were revealed at the time of Bershad's plea agreement. The new indictment does add the allegation that the kickback payments were omitted from or mischaracterized within the Milberg Weiss law firm's accounting books and records, and that as a result the law firm "provided false and misleading information to Milberg Weiss's outside accountants and tax preparers concerning such payments." The indictment also alleges that the law firm prepared false tax documents to disguise the nature of the payments to the intermediary law firms. (There is certainly some significant irony in the fact that the law firm, which garnered hundreds of millions of dollars in fees by alleging that corporations misrepresented their financial condition, is itself alleged to have misrepresented itself financially and to have falsified its own books and records.)

The new indictment also contains some interesting new tidbits. For example, the indictment alleges that after Bershad warned Weiss that paying one of the named plaintiffs in Florida would violate Florida law, "Weiss and Partner F replied, among other things, that because they would be paying [the individual] in cash, there would be no paper trail and therefore there was little risk they would ever be caught." The indictment also alleges that in the mid-80s, Weiss carried thousands of dollars in cash to Florida to pay the Florida paid plaintiffs.

The new indictment also contains detailed allegations regarding the disposition of the Milberg Weiss firm's $40 million fee from the Oxford Health case (about which refer here). Schulman's plea agreement suggests where this information may have come from, and is described further below.

The Milberg Weiss firm and Weiss himself are also alleged to have obstructed justice by withholding and or misrepresenting the discovery of a 1990 fax from one of the paid plaintiffs (Stephen Cooperman, about whom refer here) to Bershad. The indictment alleges that the document was withheld from production called for by a Grand Jury subpoena, and that later Weiss made a false statement by stating that he had found the document in a safe in his office at the law firm and that he had forgotten about the document at the time of the document production. The new indictment alleges that Weiss "had not discovered the 11/15/1990 telefax in his safe, but instead had taken the document from David J. Bershad, who had found it in his desk drawer when searching for documents responsive to the Grand Jury Subpoena." (It appears that many of the details in the new indictment may have come from Bershad, who is cooperating with the government as part of his plea agreement.)


According to the U.S. Attorney's Office press release, Weiss will appear in court on October 12, and will be arraigned on October 25. The press release also states that Weiss faces a maximum prison sentence of 40 years in federal prison. The indictment also seeks the Milberg Weiss firm's forfeiture of the entire $251 million it is alleged to have made in the cases in which the paid plaintiffs allegedly participated.


Although somewhat overshadowed by the new indictment, Schulman's plea agreement also has some interesting new information. As part of his agreement, Schulman agreed to pay a $250,000 fine and a criminal forfeiture of $1.85 million ($1 million within seven days of his guilty plea and $850,000 seven days before his sentencing). The plea agreement also contemplates a sentence of from 27 months to 32 months, but the sentencing calculation is not binding on the court. Schulman retains the right to appeal the amount of any forfeiture or fine and also the conditions of his supervised relese. Schulman has agreed to cooperate with the government.


Exhibit A to Schulman's plea agreement reflects the factual allegations against him. The exhibit alleges that Schulman entered in to an agreement with Weiss, Bershad and unnamed Milberg Weiss partner E to make and conceal secret payments to Vogel. The specific allegations relate to payments made in connection with the settlement of the Oxford Health class action. Schulman and Vogel and alleged to have agreed that in light of the size of the Milberg Weiss law firm's $40 million fee in the case, Vogel's share should be reduced from his usual 12 percent.


Schulman allegedly told Weiss that Vogel was willing to accept a smaller percentage, but Weiss is alleged to have said that "in light of the pending criminal investigation" he did not want to negotiate over the telephone. Weiss allegedly instructed Schulman to set up a meeting, and Weiss later allegedly told Schulman that he had worked out an agreement. Schulman is alleged to have sent a Milberg Weiss law firm check to an intermediary attorney, in order to effect payment to Vogel, with a letter stating that the check was to the law firm in payment of services rendered in the Oxford Health case.


Schulman is also alleged to have made or to have caused to be made false and misleading statements in several cases, in which Vogel stated that he was not accepting payments for serving as a plaintiff.


According to the U.S. Attorney's Office press release, Schulman is scheduled to appear in court on October 19 and is scheduled to be arraigned on October 22.


The prison term specified in Schulman's plea agreement (27 to 32 months) seems to stand in odd contrast to the significantly shorter 12 to 24 months specified in Lerach's plea agreement. (This may provide one more fact supporting the view, favored in certain quarters, that Lerach got off easy.) However, Schulman's relatively greater recommended sentence may be due to the application of negative Sentencing Guideline factors specified in his plea agreement as "substantial interference with the administration of justice"; "obstruction extensive in scope"; and "abuse of a position of trust."


With all of the (currently) indicted Milberg partners having pled guilty, Weiss stands alone to face the allegations. The government's case apparently will be aided by Bershad's and Schulman's cooperation. (Lerach did not agree to cooperate with the government in his plea agreement.) Meanwhile, the Milberg Weiss law firm also faces even more serious allegations than it did before. The firm released a statement today (here) that "we will continue to fight for our clients and class members and to achieve the record recoveries for which our firm has long been known." The statement adds that none of the firm's active partners is alleged to have been involved in any wrongdoing." (Of course, the partners who are alleged to have committed wrongdoing on the firm's behalf have all left the firm, and several of them have already pled guilty. But, hey, they aren't at the firm any more, are they?)

So cue the "Ride of the Valkyries" and raise the curtain for what may prove to be the final act, the one in which the fat lady could possibly sing.

Hat tip to the Legal Pad blog (here) for the links to the new indictment, press releases and Schulman plea agreement.

More Subprime Lawsuits: The D & O Diary is maintaining a running tally (here) of subprime-related securities class action lawsuits. Today, I added two new lawsuits to the list, a new lawsuit filed against NetBank (press release here) and a new lawsuit against Opteum (press release here). The addition of these two new lawsuits brings the total of subprime related lawsuits to 16, in addition to four subprime-related lawsuits that have been filed against construction companies.

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According to news reports (here), on September 18, 2007, Bill Lerach has agreed to plead guilty to a federal conspiracy charge. The plea agreement can be found here, the criminal information can be found here, and the governement's press release can be found here. Hat tip to the WSJ.com Law Blog (here) for the links to the plea documents.

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The agreement by now-former Milberg Weiss partner David Bershad to enter a guilty plea in connection with the government's investigation of the firm's alleged kickbacks to individual class plaintiffs represents a watershed event, not only in connection with the criminal investigation but also potentially for the Milberg firm and even for the plaintiffs' class action securities bar. Bershad's plea agreement can be found here and the Statement of Facts accompanying the plea agreement can be found here. (Hat tip to the WSJ Law Blog, here, for the links to the plea documents.)

The Statement of Facts accompanying the plea agreement has a number of interesting features, not the least of which is the statement of potential criminal matters the government agrees that it will not continue to pursue against Bershad. The non-prosecution agreement includes not only the allegedly improper payments to class plaintiffs, but also references alleged violations of law arising out of "requests to courts for reimbursement of fees and costs of a damages expert witness and/or his associated entities based in Princeton, New Jersey" or "the Princeton Expert's financial relationship with PNC bank." These allusions to the expert witness apparently refer to regular Milberg Weiss expert witness John Torkelson, who separately entered his own guilty plea in an unrelated matter in November 2005 (refer here). Bershad's plea agreement also references non-prosecution for "election, campaign or other political contributions." Unfortunately, the plea agreement provides no further elaboration on what this last point might be all about.

Another interesting feature of the Statement of Facts is its description of the personal cash pool that Bershad and other Milberg partners supposedly formed to be "used by the Conspiring Partners to supply cash for secret payments to paid plaintiffs and others." The contributions to the pool, which was maintained in Bershad's office, were proportionate to the contributing partners' respective partnership interests. The contributing partners then "caused Milberg Weiss to award 'bonuses' to them" to reimburse them for the cash contributions to the pool. Among the partners alleged to have contributed to and made cash payments out of the fund are the pseudononymous "Partner A" and "Partner B" whom some commentators (refer here and here) believe to refer to Melvyn Weiss and Bill Lerach, respectively. Neither Weiss nor Lerach has been charged with any crime, nor even mentioned by name in any of the government documents in the criminal matter.

Among other features of the government's undertakings in the plea agreement is the government's agreement that if Bershad provides "substantial assistance to the prosecution" (according to the plea agreement's specifications) then the government agrees "to move the Court...to fix an offense level and corresponding guideline range below that otherwise advised by the Sentencing Guidelines, and to recommend a sentence no greater than the low-end of this reduced range." In other words, Bershad has a real incentive to cooperate - he will undoubtedly provide the government with a lot more particulars about the "cash pool" and the activities in connection therewith of Partner A and Partner B. (According to the Washington Post, here, Bershad could avoid jail time altogether if the government elects to fully reward him for his help.) These incentives are the reason that there had been speculation (refer here) that Bershad's entry into a plea agreement might well put enormous pressure on, say, Partners A and B.

There had been press coverage (refer here) suggesting that Mel Weiss and Bill Lerach had recently rejected possible plea agreements. (The Wall Street Journal also confirmed here that Lerach will retire from his firm by year's end.) Whether or not they will face further pressure or have further opportunities to reach an accommodation with prosecutors remains to be seen. But the obvious incentive for the government to reach an agreement with Bershad was to enlist his assistance to go after 'bigger fish" (as the Los Angeles Times put it, here) - which would suggest further pressure on Messrs. Weiss and Lerach. Indeed, most of the press coverage of Bershad's plea is focused on the boost Bershad's cooperation will give the prosecutors, as illustrated for example in the articles in USA Today (here) and the Wall Street Journal (here)

Where all of this leaves the Milberg Weiss firm itself is even more complicated. The firm was named as a defendant in the prior criminal indictment (refer here). The Statement of Facts accompanying Bershad's plea suggests that firm checks were used for some of the improper payments and that the partnership itself reimbursed the payoff pool participants out of partnership proceeds. Bershad's actions were clearly undertaken on the firm's behalf, as well. Whether the firm itself will now be forced to face the music also remains to be seen, but Bershad's forthcoming cooperation with the government does not bode particularly well for the firm. According to the Washington Post (here), the firm's criminal defense lawyer is negotiating with the government toward a possible plea agreement, supposedly involving a "multimillion dollar" payment, in advance of a scheduled August 6 hearing. The Legal Pad Blog's very pointed comments about the Milberg Weiss firm's fate can be found here.

It may take a while longer for all of these possibilities to sort themselves out, but make no mistake that the consequential effects from Bershad's plea agreement will, in the end, result in a reordered plaintiffs' class action bar. The role of the most prominent players and prominent firms on the plaintiffs' side will substantially change. Other plaintiffs firms may jockey for position, but only within the constraints of the game as it will now be played in the backwash from these events. Among other things, these events may also portend that the current lower level of securities class action filings may continue for some time, if for no other reason than that the leading players are just a little preoccupied right now.

Options Backdating Litigation Update: Regular readers know that I have been maintaining a list (here) of companies that have been sued in options backdating related litigation. I have recently updated the post to include in the list of companies named in options backdating related securities class action litigation a reference to PainCare Holdings. When the securities class action lawsuit was originally filed against PainCare (refer here), the lawsuit did not contain options backdating allegations. But when plaintiffs filed their Amended Consolidated Complaint on May 23, 2007 (here), the amended pleading included for the first time allegations of stock option manipulations. In light of the amended allegations, I have added the PainCare case to the list.

Special thanks to Cara Perlas of the Stanford Law School Securities Class Action Clearinghouse for the link to the amended complaint in the PainCare case.

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In a series of recent editorials, the New York Sun has raised some interesting and troubling questions about a New York City's pension fund's involvement as lead plaintff in the Apple Computer options backdating securities litigation.

The first Sun editorial on the topic, entitled "New York Versus Apple "appeared on January 25, 2007 (here). The editorial noted the irony that the same day as the city's Mayor, Michael Bloomberg, and its senior U.S. Senator, Charles Schumer, released a report (here) asserting among other things that meritless securities litigation was undercutting the competitiveness of the city's financial markets, the New York City Employees' Retirement System (NYCERS) was named as lead plaintiff in a class action lawsuit against Apple Computer and its executives and directors. The editorial observed that the city's law firm in the lawsuit, Grant & Eisenhofer, includes on staff as Senior Counsel, Leslie Conason, whose firm website bio reports that prior to joining the law firm, she "was responsible for managing all securities lititgation for the City of New York, where she was in charge of securities litigation for the $100 billion in pension assets held by the workers and retirees of the City of New York."

The editorial also points out that a partner at the Grant & Eisenhofer law firm, Keith Fleischman, had made a $1,000 campaign contribution to the city's Comptroller, William Thompson, Jr., in 2003, when Fleishman was at the Milberg Weiss firm. (As reported on the Comptroller's website, here, among Thompson's duties is the managment of the city's pension funds.) The editorial concludes by saying that:

The notion of a shareholder suit against Apple strikes us, in any event, as a stretch. Whatever shenanigans went on with Steve Jobs' stock options, the company's stock price is up 600% over the past two years, far outpacing the overall gains by the stock market or NYCERS. Any reasonable shareholder should be happy as a clam. New York's economy and streetscape have certainly benefited from the city's Apple Stores in SoHo and at the plaza of the GM building. If there's a bright spot, it's that one of the Apple directors named as a defendant is Albert Gore, Jr. By the time the vice president is done being deposed by the class action lawyers hired by the NYCERS board, he may be ready to line up with Messrs. Schumer and Bloomberg the next time they call for legal reform.

 

In a letter to the editor printed in the February 27, 2007 issue of the Sun (here), Thompson defended himself and the city's process for selecting counsel. His letter explains that after a selection process that included interviews and reference checks, the city executed agreements with nine plaintiffs' firms in mid-2006. His letter also points out that each of the city's pension systems' Board of Trustees makes the final determination as to whether or not to proceed with this type of litigation. Thompson's letter also defended the decision to pursue the Apple litigation, and the city's role in shareholder litigation generally.

In the same February 27, 2007 issue in which Thompson's letter to the editor appeared, the Sun ran a second editorial, this one entitled "Thompson's Trial Lawyers" (here). The paper found that six of the nine firms in New York City's "securities litigation pool," had made a total of $102,491 in donations to Mr. Thompson's 2005 election campaign - an election in which Thompson "faced only token opposition" and in which he was "reelected with more than 90% of the vote." Among other firms, the Kirby, McInerney & Squire firm is reported to have given $39, 975, and the Wolf Popper firm is reported to have given $36,256. Wikipedia notes that Thompson is a leading candidate to become the Mayor of New York in 2009 and has amassed a compaign fund of over $2 million.

In addition, the editorial reports that the head of the pensions division in the city's Law Department said that the Grant & Eisenhofer "brought the idea of NYCERS filing a lead plaintiff application to the Law Division." In other words, the editorial notes, the city didn't discover it was injured and look for a lawyer, "a lawyer chased down a perfectly healthy client and brought the client the idea of a lawsuit, even though the Apple stock the city owned was up 600% in the past two years." The editorial concluded that:

It's one thing... to take campaign money from trial lawyers. It's another thing entirely to turn around and allow those lawyers to use the good name of the city pension fund to pursue litigation with no redeeming value other than racking up huge fees for those same trial lawyers. The price Mr. Thompson pays for the more than $100,000 in campaign contributions he has taken from the class-action aecurity lawyers who represent the city is inevitability that the newspapers -- and, someday, perhaps, voters -- are going to question his judgment in pursuing this sort of litigation.

The Sun added a third editorial on February 28, 2007, entitled "Absentee Trustees" (here) in which the paper took a closer look at Thompson's assertion that a pension fund Board of Trustees had supervised the decision to pursue securities litigation on behalf of the fund. The paper found that at the October 24, 2006 Board "regular meeting" at which the city's Law Department claims that the vote to pursue litigation took place, "the so-called meeting of the 'board' included not 11 trustees [the total number of trustees on the board], not 10 trustees, not nine trustees, not eight trustees, but exactly one. That's right, just one actual trustee." The editorial points out that the board may want to reconsider its processes; "after all, the directors of Apple Computer are being sued by NYCERS for allegedly failing to provide proper oversight." The editorial concludes with the observation that "if things take an unfortunate turn for the New York City Employees' Retirement System, it's conceiveable that some enterprising class-action lawyer might look at them as a target. Apple stock appreciated 600% and it still got sued."

Way back in the optimistic era of securities litigation reform, back when Chris Cox was still just a Congressman from Orange County, when Congress enacted the Private Securities Litigation Reform Act of 1995, there was a notion that institutional investors needed to become more involved in order to eliminate abusive lawyer-driven securities litigation. So Congress promulgated a lead plaintiff process, in which the "most adequate platiniff" would be selected based on which plaintiff showed the "largest financial interest." Whatever Congress thought might result from this reform, it seems fairly likely that it did not envision institutional plaintiffs pursing lawsuits as a result of an unsupervised and campaign finance driven process, supplemented by a revolving door between the institutional investors and the plaintiffs' firms. (As an aside, I also suspect that Congress did not envision institutional investor driven opt-out litigation either, about which I recently commented here.)

The Sun identifed the ironic propinquity of the Bloomberg/Schumer report's release and NYCERS' selection as lead plaintiff in the Apple litigation. An irony the Sun missed is that the Paulson Committee Interim Report (here), which preceded the Bloomberg/Schumer report by only a few weeks and raised similar concerns about the adverse competitive effects of meritless securities litigation, specifically decried "pay to play" practices between institutional investors and the plaintiffs' bar. The Paulson Committee Report asserted that:

When political contributions are made by lawyers to individuals in charge of a state or municipal pension fund, the attorneys should not be permitted to represent the fund as a lead plaintiff in a securities class action. Following the lead of the municipal bonds industry, the securities litigation regulations should be comprehensive and should cover any direct contributions as well as indirect contributions (made through "consultant" or other similar arrangements) ... At a minimum, the SEC, as an amicus, should ask courts to require disclosure of all political contributions or fee-sharing arrangements between class counsel and a lead plaintiff (or controlling individuals within the lead plaintiff organization). This disclosure should occur prior to the court's appointment of either counsel or plaintiff and should be followed by a similar disclosure at the fee award hearing. (Emphasis added)

 

The D & O Diary has a suggestion for Mayor Bloomberg. If he really thinks abusive securities lawsuits are undermining the competitiveness of his city's financial markets, he should toss the report that he and Senator Schumer paid McKinsey to write and read the Paulson Committee's Interim Report's comments about "pay to play" practices. And then he should take a very hard look at practices in his city's Law Department. The good news for Mayor Bloomberg is that he doesn't even need to await the SEC action the Paulson Committee's Interim Report advocated; he can institute his own securites litigation reform without any fuss or bother or press conferences or grandstanding speeches or anthing like that. For reasons the D & O Diary has elaborated upon at length elsewhere (most recently here), this reform is unlikely to affect the relative competitiveness of the city's financial markets in the global marketplace, but it certainly would clean up some pretty unattractive looking circumstances and practices.

How to Find out Who is "Paying to Play": Readers who are interested to know more about plaintiffs' lawyers campaign contributions (or those of anybody else, for that matter) will definitely want to spend some time on the website (here) of the Center for Responsive Politics, where campaign contributions are searchable by donor name. (Click on the "Who Gives" tab and select "Donor Lookup" from the dropdown menu.) For example, a search on the name William Lerach identifes 150 separate donations totaling $1,283,430 (including several donations to Hillary Clinton ) A search on the name Mel Weiss shows that Weiss made 120 donations totaling $699,102. Among other candidates, Weiss made a number of donations to Senator Schumer. Hmmm, that's kind of interesting... maybe after the law firm's indictment, Schumer felt he could...yep, that's probably it.

Isn't It Ironic, Don't You Think?: The Sun obviously has an eye for irony and an interest in securities fraud litigation. The Sun's outlook must be in its DNA, because its founding investors, according to Wikipedia (here), included none other than Conrad Black, who has been working for years on his own wing in the securities fraud litigation house of blues. You don't suppose that has anything to do with the paper's obvious and manifest hostility to securites lawsuits? Nahhh...

The D & O Diary wishes to acknowledge with grateful thanks the two alert readers who prefer anonimity and who provided links to the Sun editorials and to the Center for Responsive Politics website.

 

 

 

 

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Regular D & O Diary readers will recall my discomfort (as reflected here) with the Enron civil action plaintiffs' leniency pleas on Andrew Fastow's behalf at his September 26, 2006 sentencing. This week's Fortune Magazine has an article entitled "Why Enron's Fastow May Only Serve Five Years" (here), that explains how it came about that representatives of the lead plaintiffs in the civil action appeared at Fastow's criminal sentencing.

It turns out that John Kekar, Fastow's criminal defense attorney, has another prominent client - Bill Lerach, of the Lerach, Coughlin firm. Kekar represents Lerach in connection with the criminal investigation that has so far resulted in the indictment of the Milberg Weiss firm and two of its partners. Lerach also happens to be counsel for the Univeristy of California, the lead plaintiff in the Enron civil action.

According to the article, in an "11th hour deal," Fastow agreed to aid Lerach in the civil case, by providing detailed debriefings (the 175-page declaration Fastow supplied the plaintiffs' counsel can be found here) and also agreeing to sit for a deposition. In return, Fastow received "the formal support of the Enron investors in a plea for leniency (a factor the Judge explicitly noted)." Fastow was also dismissed as a defendant from the civil suit and "even got the plaintiffs' lawyers to pay his legal fees for his deposition." As a result of the plea for leniency, the 10-year sentence to which Fastow agreed when he first entered his guilty plea was reduced to 6 years. According to the article, if Fastow is accepted into a prison drug-treatment program for his claimed addiction to anti-anxiety pills, he could be out of prison in five years.

As the article points out, Fastow's cooperation provides a "massive windfall" for Lerach. Not only does Lerach get fresh evidence aiding the civil claims against the remaining Investment Bank defendants, but Fastow's assistance could help "enrich Lerach, adding $100 million or more to the contingency fee for the plaintiffs' lawyers and raising the prospect that they could walk away with close to $1 billion from the case." (Readers will recall that it was this enormous potential fee benefit that made me so uncomfortable with the civil plaintiffs pleading for leniency at Fastow's sentencing.)

Lerach's involvement in the ongoing Milberg Weiss investigation may also be causing him problems in the Halliburton securities fraud lawsuit. According to a December 13, 2006 post on the Legal Pad blog entitled "Lerach Firm Will Fight Client to Stay in Halliburton Case" (here). The lead plaintiff in that case, the Archdiocese of Milwaukee Supporting Fund (AMS Fund), has filed a motion to remove the Lerach Coughlin firm, and its co-lead counsel Scott + Scott, as lead plaintiffs' counsel and to substitute David Boies of the Boies, Schiller & Flexner firm. Apparently, Lerach's involvement in the criminal investigation was a factor in the AMS Fund's decision to file the motion.

The Halliburton case has an "unusal procedural history." An early agreement to settle the case for $6 million was scuttled when the AMS Fund, represented at the time by Scott + Scott alone, opposed the settlement as inadequate. The court agreed, and the case went forward. The Lerach Coughlin firm then intervened in the case on behalf of three public pension funds. The Lerach Coughlin firm was appointed co-lead counsel with Scott + Scott. However, the departure from Scott + Scott of Neil Rothstein seems to have been a turning point in the case. Rothstein remained "special counsel" to the AMS Fund, and in fact filed the motion to substitute Boies for Lerach on the AMS Fund's behalf. Lerach has opposed his client's motion, on the ground's that the substitution would be disruptive and that Boies has a conflict of interest. The court has not yet ruled on the motion.

There is a certain symmetry here; at least according to Wikipedia (here), David Boies also represented Andrew Fastow.

Rothstein now runs Truth in Coporate Justice LLC, which appears to maintain a website (here) about the Halliburton case. Rothstein's account (here) of his unsuccessful attempt to attend the May 17, 2006 annual meeting of Halliburton makes for some interesting reading. Not every annual meeting has a SWAT team on the roof of the meeting building.

Another Backdating List: One of the byproducts of the options backdating scandal has been the proliferation of lists. For example, my ongoing tally of options backdating related lawsuits may be found here. Jack Ciesielski of the AAO Weblog (here) recently published a very thorough list of the all of the companies that have mentioned investigations of option granting practices in their filings, or have been mentioned in the news. The list, which can be found here, identifies over 200 companies (including 45 members of the S & P 500).

Little Blog Horn: As I can attest, maintaining a blog is a lot harder than it looks. So there should be little surprise that even in the few short months I have been contributing to the blogosphere that several other blogs have emerged, briefly breathed, and then blinked out of existence. The Vangal blog (here) is one of the many to meet that fate. Two more recent departures from the blogging scene, the Governance News Watch blog (here) and the Securities Litigation Watch blog (here) will both definitely be missed. But for those of you who, like me, had become fans of the Governance News Watch during its brief but interesting existence will be pleased to learn that the blog's author, Janice Brand, has moved on to a new blog, Brand on Business, which may be found here. The new blog looks promising and we here at The D & O Diary wish Janice well.

PLUS D & O Symposium: It may be hard to believe, but the 2007 Professional Liability Underwriting Society (PLUS) D & O Symposium is only a few weeks away. The 2007 Symposium will take place on January 31 and February 1, 2007, at the Marriott Marquis in New York City. I will be co-Chairing this year's Symposium with my good friends Ivan Dolowich and Jeffrey Lattman. Among the many panelists and speakers will be such luminaries as Linda Thomsen, the head of the SEC Enforcement Division; Nell Minow, the founder and editor of the Corporate Library; and Charles Elson, Director of the John L. Weinberg Center for Corporate Governance at the University of Delaware, as well as many other distinguished speakers and guests. The keynote speaker will be former Senator and Secretary of Defense George Mitchell. The entire program schedule can be found here. The Registration materials are here. I look forward to seeing everyone there.

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On September 12, 2006, the Wall Street Journal carried an editorial entitled "The Milberg Effect," (here, subscription required) commenting on the possible impact of the Milberg Weiss indictment on the decline in the number of securities lawsuits in 2006. (To see the Cornerstone Consulting data about the decline, refer here.) The Journal editorial incorporated a bit of dodgy math projecting the likely year-end 2006 number of securities lawsuits and attributing the entire projected annual decline to the Milberg firm's reduced filing activities. The editorial itself has been the subject of some criticism in the blogosphere. Both the Securities Litigation Watch (here) and the 10b-5 Daily (here) criticized the editorial for failing to account for the fact that multiple law firms usually target each company that is sued, so that the Milberg firm's reduced activity alone could not be the sole cause of the reduced number of securities lawsuits in 2006.

The D & O Diary does not dispute these honorable fellow bloggers' commentaries on the Journal editorial. Indeed, when the Milberg firm this week announced (here) what is its first new lawsuit since the firm was indicted in May 2006, the company it sued (IMAX) had in fact already been sued by multiple other law firms. (Refer here for a law firms that previously sued the company).

There are undoubtedly multiple reasons behind the decline in the number of lawsuits. (It is possible that improved corporate behavior is one of the important causes, although The D & Diary has its doubts, as discussed in a prior post, here.) But even conceding the criticisms of the Journal editorial, the D & O Diary believes that the Milberg indictment nevertheless has had an important impact on the decline in number of securities lawsuits.

As The D & O Diary noted previously noted (here), the most important fact to take into account in assessing the possible reasons for the decline is the fact that the decline began in September 2005. The significance of the date is that that is the same month that the grand jury that ultimately indicted the Milberg firm and two of its partners returned its first indictment. That first indictment was filed against Seymour Lazar, who was later named in the Milberg indictment as one of the paid plaintiffs that the Milberg firm allegedly maintained in order to be able to quickly file lawsuits when companies announced bad news. The D & O Diary poses the question (previously discussed at greater length in its prior post, here) whether or not it is a coincidence that the number of lawsuits began to decline immediately after the Lazar indictment. Could the Lazar indictment have communicated to the entire plaintiffs' bar that the grand jury investigation was serious and that the practice of paying people to act as paid plaintiffs had to be abandoned immediately? Is the significance of the Milberg indictment not limited to its effect on the law firm itself, but does it perhaps reach to the activities of the entire plaintiffs' bar? The D & O Diary wonders whether the reason that the number of lawsuits has declined since September 2005 is because the lawsuits that depended on the availability of paid plaintiffs are no longer being filed.

For an interesting study (with pictures) of one of the alleged paid plaintiffs named in the Milberg indictment, see this prior D & O Diary post (here) -scroll down the page to view the entry regarding the paid plaintiffs.

Options Backdating Litigation Update: The D & O Diary's running tally of options backdating lawsuits (which may be found here) has been updated to incorporate the shareholders' derivative lawsuits that have been filed naming Affymetrix (here), Bed Bath & Beyond (here), Cable Vision Systems (here) and Par Pharmaceuticals (here) as nominal defendants. The addition of these lawsuits brings the number of companies named in options timing related derivative suits to 75. The number of companies named in securities fraud lawsuits stands at 16.

Special thanks to Bill Ballowe for the link to the Bed Bath and Beyond lawsuit.

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An August 4, 2006 Reuters article provides numeric support for the proposition, advanced in this prior D & O Diary post, that the declining number of securities fraud lawsuits is a consequence of the Milberg Weiss indictment. The article states that the indictment is "having a big impact on [the firm's] ability to bring fraud cases and on class-action litigation in general." The article reports that the Milberg Weiss firm has filed just 17 securities lawsuits during 2006, compared to 55 in the first half of 2005 and 36 in the second half of 2005. The article also reports that Milberg Weiss has announced no new lawsuits since the indictment. The article also states that the firm has declined to 75 lawyers, down from 125 at the time of the indictment.

The downturn is even more dramatic when the comparison of filing rates is taken further back in time. According to data graciously supplied to The D & O Diary by Bill Ballowe of Woodruff-Sawyer, the Milberg firm filed 124 lawsuits during the 16-month period from May 1, 2004 to August 31, 2005 (or an average of about 7.8 lawsuits a month), compared with only 37 new lawsuits during the period September 1, 2005 to June 30, 2006 (an average of about 3.7 lawsuits per month). The case filing data in the Reuters article suggests that this filing rate has declined as 2006 has progressed.

Nor is this dramatic downturn after September 2005 limited just to the Milberg Weiss law firm. Milberg Weiss's alienated sibling firm, Lerach Coughlin, has also shown a similar decline in its rate of new case filings. According to Ballowe's data, during the 16-month period from May 1, 2004 to August 31, 2005, the Lerach firm filed 179 new lawsuits (or about 11.2 per month) but during the ten-month period between September 1, 2005 and June 30, 2006, the Lerach firm filed only 52 new lawsuits (or only about 5.2 per month). There is some overlap in the filings as in many instances both firms initiated lawsuits against the same company.

This large drop off from these two major plaintiffs' law firms is significant because, according to Ballowe's data, only about a fifth of the time before September 1, 2005 and only about a quarter of the time after September 1, 2005, is a company sued in a securities class action lawsuit without one or the other of these two firms filing a complaint.

As The D & O Diary noted in its prior post, the drop off after mid-2005 is significant, because the indictment alleges that the practice of paying plaintiffs to permit plaintiffs' attorneys to use their names to file lawsuits continued through 2005. Moreover, in June 2005, the U.S. Attorney's office in Los Angeles indicted Seymour Lazar for alleged accepting millions of dollars in kickbacks from the Milberg Weiss firm. Lazar is one of the Paid Plaintiffs identified in the Milberg Weiss indictment. The Lazar indictment, discussed in this July 19, 2005 International Herald Tribune article, undoubtedly had its impact on plaintiffs' firms and their practices. The indictment is clearly having an impact on the Milberg Weiss firm, and it hardly required a leap of imagination to suggest that the indictment is having its impact on the Lerach Coughlin firm as well. A prior D & O Diary post discussing the indictment's possible impact on the Lerach Coughlin firm can be found here.

But regardless of its cause, the diminution in filing activities from the two leading firms has had a dramatic impact on overall securities litigation frequency.

Special thanks to Bill Ballowe for the securities class action filing data.

Anatomy of a Paid Plaintiff: One of the Paid Plaintiffs identified by name in the Milberg Weiss indictment is Stephen G. Cooperman. According to the indictment, during the relevant time, Cooperman resided in Brentwood, California and Connecticut and prior to May 1989 was a licensed ophthalmologist. According to the indictment, Cooperman and two relatives (identified as Cooperman Plaintiff 1 and Cooperman Plaintiff 2) received "approximately $6.5 million in secret and illegal kickbacks." A copy of the First Superseding Indictment against the Milberg Weiss firm may be found here.

Readers with a longer memory may recall Cooperman's involvement in an even more colorful set of circumstances that wound up having a critical impact on the Milberg Weiss criminal investigation. According to AP news reports, in June 1997, the Cleveland Police found two paintings that had been reported stolen from the Brentwood, California home of a Stephen G. Cooperman. According to the report and a related article in the Los Angeles Times, in 1991 Cooperman acquired $12.5 million in insurance for the two paintings. In 1992, Cooperman reportedly told police that someone burglarized his Brentwood home and stole the paintings while he was on vacation in New Jersey. Police found that Cooperman's burglar alarm had not been tripped and there were no signs of a break in. The only things taken were the two paintings. According to the press reports, the two insurance companies sued Cooperman for fraud and settled out of court. The paintings later surfaced as a result of a domestic dispute, when a Cleveland woman told police that her ex-boyfriend had paintings in a climate-controlled rented locker. The lawyer, named in the reports as James Little, had done legal work for Cooperman while in Santa Monica in the early 1990s, before Little moved to Cleveland.

The news reports about the paintings may be found here. (Scroll through the listings to the entry for June 6, 1997).

Cooperman was later prosecuted and convicted of fraud charges in 1999 and faced a 10-year prison term. According to this New York Times article, to reduce his sentence, Cooperman offered to testify against Milberg Weiss. Cooperman was not sentenced until 2001, when his sentence was reduced and he ended up serving less than two years in prison. According to the Times article, the opinion in Cooperman's divorce case reports that Cooperman cooperated with prosecutors to help "implicate members of the Milberg Weiss firm."

As part of its settlement with Cooperman, the insurance companies acquired title to the paintings. One of the paintings, entitled "The Custom Officer's Cabin at Pourville" was painted by Claude Monet in 1882, and was one of 14 paintings that Monet did of an abandoned Napoleonic-era coast guard post overlooking the English Channel.

Monet had moved to Pourville after his first wife's death from tuberculosis in 1879. The cycle of coast guard hut paintings prefigured later "series" paintings for which Monet is perhaps best known, reflecting a single subject in varying light and viewpoints. During the 1880s and 1890s, Monet painted over twenty views of the Rouen Cathedral, and later he painted a variety of perspectives on the water lilies in his garden at Giverny. Cooperman acquired the Monet from the Montgomery Gallery in San Francisco in 1987.

The second painting was entitled "Nude Before a Mirror" and had been painted in 1932 by Pablo Picasso. The painting's more realistic style and more somber mood reflects the period between the wars when Picasso reverted to more of a classical technique, a phase he broke from in dramatic fashion in 1937 with his painting depicting the Guernica bombings. Cooperman also acquired the Picasso from the Montgomery Gallery.

Special thanks to a loyal D & O Diary reader for the Cooperman links.

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When the Cornerstone Research and the Stanford Law School Securities Class Action Clearinghouse released their "2006 Mid-Year Assessment" earlier this week, the Report showed a 45% decline in the number of securities lawsuits filed in the first half of 2006 compared to the prior year period. According to the Report, the 61 securities class action lawsuits filed in the first half of 2006 represents the lowest level of securities lawsuit activity since 1996. The Report suggested a number of possible reasons for the decline, including the dissipation of the ill effects from the boom and bust period of the late 90s; the cleansing effects of Sarbanes Oxley; and the absence of stock market volatility. A prior D & O Diary post discussing the Report may be found here.

The D & O Diary finds the Report's explanations for the litigation decline plausible, but insufficient. There is another possible explanation that, while cynical, may come closer to the truth.

Another hot topic in the securities law arena shows that sometimes only a cynical view can get at the truth. For years, academics had had been aware of a statistical pattern showing that share prices often rose quickly after options were granted. The early researchers speculated that corporate executives who knew that good news was on the horizon and made sure that options were granted beforehand. According to the May 30, 2006 Wall Street Journal(subscription required) article describing his research, when Erik Lie (now a Professor at the University of Iowa Business School) examined options grants as part of his doctoral research, he "found a striking pattern in which prices fell before the grant date, and rose soon afterward. He also discovered that the stock market as a whole also often rose following option grants at certain companies." Dr. Lie found it "uncanny" how good the executives apparently were at predicting future stock prices. He became suspicious, and when he released his research, he suggested that at least some of the awards had been timed retroactively. Other academics thought his explanation to "sinister" and rejected it. It was not until his research appeared in a front page Wall Street Journal article that his cynical explanation for a widely observed phenomenon was accepted. Professor Lie was just cynical enough to be able to explain a widely observed but inexplicable set of facts.

Perhaps a similarly cynical view may also explain the decline in securities lawsuit filings.

An alert D & O Diary reader commented that the decline actually began in September 2005. It was this observation that raised the possibility to me that the answer to the frequency decline may lie in the Milberg Weiss indictment. Paragraphs 26 and 27 of the First Superseding Indictment (which may be found here) provide as follows:

26. During the time relevant to this Indictment, MILBERG WEISS brought numerous class actions and shareholder derivative actions against publicly traded companies and other major businesses. These lawsuits generated hundreds of millions of dollars in attorneys' fees for MILBERG WEISS. To bring these lawsuits, MILBERG WEISS needed persons who would agree to serve as named plaintiffs, and whom the courts would likely approve to represent absent class members or shareholders.

27. Beginning at least as early as in or about 1981 and continuing through at least 2005, in order to facilitate the recruitment of named plaintiffs, MILBERG WEISS, BERSHAD,SCHULMAN, and others known and unknown to the Grand Jury agreed to and did secretly pay kickbacks to named plaintiffs in class actions and shareholder derivative actions in which MILBERG WEISS served as counsel. Specifically, MILBERG WEISS, BERSHAD, SCHULMAN, and others known and unknown to the Grand Jury agreed to and did pay to certain individuals a substantial portion of the attorneys' fees MILBERG WEISS obtained in actions in which such an individual served, or caused a relative or associate to serve, as a named plaintiff for MILBERG WEISS.

These of course are mere allegations and the defendants are entitled to a presumption of innocence. But if we assume for the sake of argument that these allegations are true, several things are clear: Milberg Weiss "needed" the paid plaintiffs because without them they could not have made hundreds of millions of dollars in fees. Milberg Weiss certainly would not have paid people to serve as plaintiffs if there were people willing to do it for free. Lacking volunteers, the firm employed mercenaries. The paid plaintiffs were an indispensable component in the firm's ability to produce inventory -- leading one to wonder whether production would have ceased or at least declined if the component supply were cut off?

Milberg Weiss now stands accused of paying kickbacks. Milberg Weiss may have drawn the prosecutors' attention because of its prominence, and perhaps even because of the scale of its reliance on paid plaintiffs, but if it happened, is it possible that they were the only firm relying on paid plaintiffs? Or is it more likely that in the highly lucrative but highly competitive world of the plaintiffs' securities bar that these practices were widespread?

The indictment alleges that the practice of paying plaintiffs continued "through at least 2005," right about the time it started to look as if the prosecutors were serious about pursuing Milberg Weiss criminally. The grand jury investigation was well publicized, so it became pretty clear that paying plaintiffs could lead to trouble, and, it may be presumed, the practice stopped. Right about the time that the securities lawsuit frequency started to decline.

Is it possible that securities lawsuit frequency is declining because the threat of criminal prosecution has disrupted supply of a key component in the plaintiffs' lawyers' most important product - that is, without the ability to pay people to serve as named plaintiffs, the plaintiffs' lawyers can't find anyone else to do it so they are producing fewer lawsuits? Is it possible that the lawsuits that depended on paid plaintiffs just aren't getting filed?

The D & O Diary is interested in your comments.

D & O Insurers' Exposure to Backdating Lawsuits: According to John Degnan, the Chief Administrative Officer of Chubb, "[t]he early hype about the impact of backdated stock options on D & O insurers may be overblown." According to news reports, Degnan cites several reasons why Chubb's exposure may be limited:

In most cases, Chubb is only an excess carrier, so it's not immediately exposed to costs related to directors' and other executives' legal costs as they defend backdating allegations, he explained. (Excess of loss insurance only kicks in when losses breach certain thresholds).

Chubb has also limited the maximum payouts on the D&O policies it writes. Limits are now "far lower" than they were when the corporate scandals of earlier this decade struck, Degnan added.

Chubb usually only insures one chunk of potential losses on each D&O policy it underwrites. That should help it avoid lots of different losses piling up, Degnan said.

Share price drops in the backdating scandal have been limited so far, which should keep securities class action lawsuits to a minimum, he also noted.

Most of the claims Chubb has received so far come from derivative lawsuits, which are harder for plaintiffs to win and usually result in smaller settlements, Degnan said

Nineteen companies have notified St. Paul Travelers of stock option-related claims or potential claims under their policies covering directors or officers, according to Chief Operating Officer Brian MacLean. Of those, St. Paul Travelers is the primary insurer at only one company, and there is a $10 million limit on that policy, he said."We believe that based on the facts today this is not going to be a big issue for us," he said. McLean's comments may be found here.

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According to Gerald Silk of the Bernstein, Litowitz, Berger & Grossman firm, options backdating is a "make-or-break issue." Silk is not talking about the interests of aggrieved shareholders --he means that options backdating is a really big deal for the plaintiffs' bar. His comments appear in a July 24, 2006 article entitled "Plaintiffs' Lawyers Jockey for Position," in which law.com explores the struggle amongst plaintiffs' lawyers for control of the growing wave of options backdating litigation. Among other things, the article examines the struggle between lawyers representing institutional and individual investors. The article also show why plaintiffs' lawyers are preferring shareholders' derivative lawsuit to securities fraud class actions in attempting to capitalize on the options backdating scandal; the article attributes the following to Silk:

derivative actions are more common in these backdating cases because, in order to have a securities class action under Rule 10-b(5), the stock has to fall and an investor has to demonstrate harm. This has not always been the case when it comes to the backdating scandal.

The article also shows that while derivative actions may represent a more limited opportunity for plaintiffs' lawyers (from a fee standpoint), derivative actions have certain procedural advantages, such as the absence of a statutory preference for institutional shareholders and the absence of a statutory waiting period or discovery stay, all of which apply or may pertain in a federal securities action. As a result, plaintiffs' lawyers representing individuals in derivative lawsuits are "rushing to court."

The article's comments about the absence of significant share price declines for many of the companies involved in the options backdating investigation is consistent with The D & O Diary's view that the options backdating scandal may not prove to be a "severity event" for the D & O insurance industry. On the other hand, it clearly is already a significant frequency event, and the frequency will continue to rise as the investigations continue to expand. For up-to-date frequency data for the options backdating litigation, visit this post of The D & O Diary, "Counting the Options Backdating Lawsuits."

Hat tip to Adam Savett of the Lies, Damned Lies blog for a link to the law.com article.

Following our Right Honorable Friend, Bill Lerach: "These days Bill Lerach is either at the top of his profession -- or on his way to jail." That is the lead in the July 23, 2006 Los Angeles Times article reporting on what life is like these days for Lerach, in the wake of the Milberg Weiss law firm indictment. The Los Angeles Times article reflects various pundits' speculation that Lerach's firm or Lerach himself may yet be dragged into the criminal proceedings. In what I suppose is intended to pass as news, the article concludes that "legal observers are divided about whether prosecutors are still gunning for Lerach." While much of the article replays Lerach's background with Milberg Weiss and his recent success in the Enron case, one comment reported in the article is particularly colorful; the article reports the following commentary from Walter Olson, a senior fellow at the Manhattan Institute for Policy Research:

Lerach is "far from the only lawyer who has concluded that being noisy and unpleasant is good tactics for getting what you want," Olson said. He stands out because "he's personalized it in a way that others haven't done, turning litigation into a contest of peacocks in the barnyard."

Nugget Author Moves On: Chris Jones, heretofore a partner in the Boca Raton office of the Milberg Weiss firm and also the author of the PSLRA Nugget, announced today in a post on his blog that he is leaving the Milberg Weiss firm to join two other prior Milberg Weiss departees at the new law firm of Saxena and White. According to a post on the WSJ.com law blog, the Milberg firm will now be closing the Boca Raton office and is now down to two offices from four.

Today's PSLRA Nugget post says that future posts will "decrease a little in frequency" as Jones adjusts to his new firm. The D & O Diary hopes the PSLRA Nugget is soon back up to speed. The D & O Diary is a subscriber to and regular reader of the Nugget and looks forward to continuing to read the Nugget's interesting and entertaining posts.

A WSJ.com law blog post with futher discussion of the implications for the Milberg Weiss firm can be found here.

Outside Director Liability: The liability of outside directors was a hot topic earlier last year when the Enron and WorldCom settlements were first announced. As a result of the options backdating scandal, outside director liability is a hot topic again. Any public company director has to be concerned with the news that three outside directors at Mercury Interactive have been served with "Wells Notices" in connection with the options backdating investigation at Mercury. (Mercury's press release disclosing the Wells Notices can be found here.) In an earlier development, outside directors of Hollinger were served with Wells Notices in connection with the SEC's investigation of Conrad Black. Outside director liability is clearly going to remain a hot topic. The author of The D & O Diary's views about the risks and practical D & O insurance implications surrounding the issue of outside director liability can be found in this July 24, 2006 article entitled "Outside Director Liability: Increased Risks and Practical Considerations."

Proportionate Liability: The 10b-5Daily blog has an interesting July 24, 2006 post discussing a July 5, 2006 holding in the Enron Derivative and ERISA litigation in which the PSLRA's proportionate liability language is examined. The court, concerned about the "havoc" that the bare statutory language could create at trial, establishes threshold requirements for proportionate liability. Becase so few securities cases go to trial, this issue has not previously been examined by a court.

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