NEWSMAKER PROFILE
Attorney rises as Enron falls
UC claim restores his title -- king of shareholder class actions
Reynolds Holding, Chronicle Staff Writer Sunday, February 17, 2002
--------------------------------------------------------------------------------
For William Lerach, the most despised attorney in corporate America, it looked like the end of the line.
In 1995, Congress cracked down on the securities-fraud class actions that had earned him millions of dollars in legal fees.
Four years later, the U.S. Court of Appeals in San Francisco made it all but impossible to sustain the suits in the federal courts of nine Western states.
That same year, a Chicago jury ordered Lerach and his firm -- Milberg Weiss Bershad Hynes & Lerach -- to pay an old opponent $45 million for abuse of the legal process.
And in 2000, Lerach's right-hand man quit, calling his former partner "reckless," "vindictive" and "dangerous."
"The Lerach machine," wrote Fortune magazine, "is starting to break apart."
Then came Enron.
On Friday, a federal judge in Houston restored Lerach to his throne as king of the shareholder class action, naming his client -- the University of California -- lead plaintiff and his firm lead counsel in the multitude of suits charging Enron and its auditors with bilking investors.
The decision could mean another multimillion-dollar payday for Lerach and his firm and, perhaps of all for the 56-year-old San Diego litigator, vindication for his mantra that much of corporate America is riddled with financial fraud.
But it's not all good news for Lerach. A federal grand jury in Los Angeles is investigating charges that Milberg Weiss illegally paid plaintiffs to participate in shareholder lawsuits. And Friday in San Francisco, U.S. Court of Appeals judges considered unfriendly to the firm heard arguments in a case that could sharply cut its legal fees in shareholder cases.
"The Enron case is a huge shot in the arm for Milberg Weiss," said San Francisco attorney Steven Sidener, whose firm competes with Lerach's. "But there are storm clouds on the horizon."
For months, Lerach appeared to be running a weak third in the contest for lead counsel in the Enron case, trailing lawyers representing groups that claimed investment losses far larger than the University of California's. Generally, federal law directs judges to choose as lead counsel the lawyer representing the client with the biggest loss.
But Lerach dropped his first client -- Amalgamated Bank of New York -- in favor of UC, which claims $144 million in losses, closer to the amounts that the other groups claim. And he initiated a typically aggressive publicity campaign that made it appear as if he were already running the show.
LINK TO AN ENRON DIRECTOR
Information then emerged that a money manager for one of the other groups' members -- the Florida State Board of Administration -- was linked to an Enron director. The board dropped the money manager, but the Enron connection hurt its chances of becoming lead plaintiff.
The factors that turned the tide for Lerach and UC are unclear, because the judge's opinion is not yet available. But experts say they are not surprised that Lerach burst to the front of a crowded field.
"Milberg Weiss got their name out there early," explains Sidener, "and did a lot of things to show the judge that they are very careful and have the manpower to start the litigation immediately."
Lerach's reputation as the attorney American business loves to hate may survive his leadership of the Enron case. If nothing else, though, the company's debacle marks him as remarkably prescient about the dark side of corporate finance.
Since his early days as a one-man outpost for Milberg Weiss in San Diego, Lerach's legal attacks on public companies have earned him the sobriquets "prince of darkness," "pond scum" and "economic terrorist."
The hundreds of securities-fraud class actions he filed against companies whose stocks dropped for a variety of reasons provoked intense lobbying for a legislative response. Congress passed the Private Securities Litigation Act of 1995, which, in part, made it easier for judges to dismiss securities fraud lawsuits. The bill became law over a veto by President Clinton, for whom Lerach was a major fund-raiser.
Just how severely the law would cut into Lerach's business became clear in 1999, when a panel of three federal judges created a pleading standard that plaintiffs' lawyers -- and the federal Securities and Exchange Commission -- argued was all but impossible for aggrieved shareholders to meet.
ACCUSATION OF FRAUD
Earlier, an economics consulting firm called Lexecon Inc. sued Lerach and Milberg Weiss for accusing it of fraud in the infamous Lincoln Savings & Loan case. During the trial, Lerach's words were his own worst enemy. Colleagues testified that he said he had included one of Lexecon's principals in the Lincoln Savings case "because I want to put the little f-- out of business."
The $45 million verdict against Lerach and others -- and subsequent $50 million settlement -- started a long slide for Lerach and caused dissension within Milberg Weiss to the extent that senior partners began to leave.
Throughout his troubles, though, Lerach continued to write articles warning of "the dramatic decline in the quality of financial reporting by public companies during the last several years, and the upsurge in securities fraud."
As early as 1996, he mentioned an "explosion" of high-growth companies with "executive compensation systems" that "created powerful incentives to falsify results." He criticized a stock market that would "crush a stock for missing the 'whisper' earnings number by just a penny or two."
"Unless arrested," he wrote, "this will undermine a core value in our capital markets -- the integrity of public company financial reports."
The recent revelations about Enron, Global Crossing and other public companies echo Lerach's warnings and have led members of Congress, consumer groups and legal experts to call for changes in accounting rules and, in some cases, the 1995 securities litigation act.
"It was," says Duke University law professor James Cox, "the ultimate in special-interest legislation."
E-mail Reynolds Holding at rholding@sfchronicle.com. |
