Defense Lawyers See Bonanza From Lehman, Bear, Other Collapses
bloomberg.com
Oct. 27 (Bloomberg) -- Defense lawyers are bullish on Wall Street.
A rising number of defendants and suspects in government probes of collapsed financial firms may yield the biggest fee bonanza for the defense bar since the days of Enron Corp. and WorldCom Inc. The largest cases can generate millions in revenue. Former Enron Chief Executive Officer Jeffrey Skilling alone paid $23 million in legal fees even before he went on trial for fraud and was convicted.
``There's a very interesting ballet going on now between clients, lawyers and the investigating agencies,'' said Harvard Law School professor Alan Dershowitz, who represented convicted 1980s junk bond king Michael Milken. ``People are rushing to get the best lawyers before they can be hired by someone else.''
Bankrupt Lehman Brothers Holdings Inc. alone is the subject of three federal investigations and at least 20 subpoenas. Markets for subprime mortgages, credit default swaps and auction- rate securities have come under scrutiny for possible fraud too. In New York, four former executives at Credit Suisse Group and Bear Stearns Cos. have already been charged with fraud.
``I think the defense bar is going to see very full employment,'' said Robert Morvillo, who is defending former American International Group Inc.'s Chief Executive Officer Maurice ``Hank'' Greenberg in investigations by the U.S. Securities and Exchange Commission and New York Attorney General Andrew Cuomo. Morvillo is a lawyer with New York-based Morvillo Abramowitz, Grand, Iason, Anello & Bohrer.
Fuld Subpoenaed
The credit crunch that began last year has claimed Bear Stearns, which was swallowed up by JPMorgan Chase & Co. The U.S. government nationalized mortgage lenders Fannie Mae and Freddie Mac and bailed out AIG, the world's largest insurer. Bank of America Corp. took over Merrill Lynch & Co. Lehman Brothers collapsed into bankruptcy.
Harvey Miller, Lehman's lead bankruptcy lawyer, said at least 12 individuals have been subpoenaed to testify before grand juries. Those receiving subpoenas include Lehman CEO Richard Fuld, former President Joseph Gregory and former Chief Financial Officer Erin Callan, according to a person briefed on the matter.
Patricia Hynes, Fuld's lawyer, declined to comment. Robert Cleary, who represents Callan, didn't return calls seeking comment. A call to Gregory seeking comment wasn't returned.
The Federal Bureau of Investigation is looking into 26 firms over possible subprime and other securities fraud, including AIG, a senior law-enforcement official has said. The SEC has more than 50 investigations open, the agency said.
`Very Intensive'
``Whether they bring cases will turn on whether misleading information was being conveyed to the public,'' said Ira Sorkin, who headed the SEC's New York office and represented Robert Furst, a former Merrill Lynch managing director whose conviction for conspiring to inflate Enron's earnings was overturned. ``These are going to be very fact-intensive investigations.''
Sorkin said prosecutors or regulators will likely ask when executives discovered that the securities involved were overvalued and what was said to investors or analysts after that. If they misled on value in filings or issued optimistic views, ``that's where the potential criminality comes in,'' he said.
Fannie Mae has hired Leslie Caldwell, the former head of the Enron Task Force, to represent its interests. Freddie Mac has hired Carey Dunne and Robert Fiske, both partners at Davis Polk & Wardwell, to defend it in Justice Department and SEC investigations, people familiar with the matter said.
Numerous Subpoenas
In the Lehman probes, investigators subpoenaed Ernst & Young LLP, Lehman's auditor; U.K.-based bank Barclays Plc, which bought its North American brokerage; and the New Jersey Division of Investments, which runs a pension fund that lost $115.6 million on a $180 million investment in Lehman's $6 billion stock sale in June, according to people familiar with the case.
Also subpoenaed were Putnam Investments LLC, the Boston- based mutual fund firm that oversees about $163 billion and bought Lehman bonds and shares; New York-based fund manager BlackRock Inc., a Lehman creditor; AIG; and New York-based C.V. Starr & Co., run by ex-AIG CEO Maurice Greenberg, according to the people familiar with the probes.
Lawyers said the coming prosecutions may differ from those sparked by the collapses of Enron and WorldCom in 2001 and 2002.
``Those were accounting frauds, where there are public statements at the same time there are facts or evidence that prove these statements were untrue,'' said Gerald Lefcourt, a former president of the National Association of Criminal Defense Lawyers. ``This is a different situation. In terms of wrongdoing and misrepresentation, they're going to have to have pretty solid evidence, and that takes a lot of work to develop.''
Not Necessarily Criminal
The fact that a company collapsed doesn't necessarily mean charges are warranted, said Paul Shechtman, a lawyer for Adelphia Communications Corp. founder John Rigas. Rigas was convicted in 2004 of looting his company and sentenced to 12 years in prison.
``People make bad judgments and misprice assets all the time,'' Shechtman said. ``Bad judgments can bring down companies, but that alone doesn't make a criminal prosecution.''.
The current probes will involve unraveling relationships between banks, hedge funds, private-equity firms and the complex financial instruments they bought and sold, defense lawyers said.
Morvillo, who represented Martha Stewart when she was convicted in 2004 for obstruction of justice, said evidence compiled by investigators in such cases may routinely include millions of pages of documents and e-mails.
Morvillo received ``several million'' pages of evidence in his defense of former Refco Inc. finance chief Robert Trosten against charges he defrauded investors of more than $1 billion. Trosten later pleaded guilty and cooperated with the government.
Focus on What Said
``I think we are going to see the focus on what CEOs and CFOs said in securities analysts calls and what they were saying in contemporaneous e-mails to each other,'' said John Coffee, a Columbia Law School professor. ``If you can show they were saying one thing to investors and another in contemporaneous e-mails,'' then there are grounds for a securities-fraud case, Coffee said.
U.S. Attorney Benton Campbell in Brooklyn, New York, obtained indictments in June against former Bear Stearns hedge fund managers Ralph Cioffi and Matthew Tannin. The prosecutor cited e-mails showing that the two men disparaged the securities they were touting. The collapse of their funds helped trigger the subprime mortgage crisis. The defendants, who pleaded not guilty, face fraud charges they cheated investors out of $1.6 billion.
``The subprime crisis took everyone by surprise, including the Fed and Treasury,'' said Cioffi's lawyer, Edward Little in June. ``Because his funds were the first to lose might make him an easy target but doesn't mean he did anything wrong.''
`Scapegoat'
Tannin's lawyer, Susan Brune, has said her client ``is being made a scapegoat for a widespread market crisis.'' Both men have pleaded not guilty.
Last month, Campbell also charged Julian Tzolov and Eric Butler, two former Credit Suisse traders, with fraudulently selling corporate clients more than $1 billion of auction-rate securities linked to subprime mortgages.
The two allegedly sent clients e-mails that falsified names of auction-rate securities to make it appear they were backed by the government, prosecutors said. Sorkin, who represents Tzolov, said he would fight the charges at a scheduled 2009 trial.
Paul Weinstein, a lawyer for Butler, said his client ``believed he was doing the best for his clients, and they agreed, until the entire auction-rate securities market failed.''
``The biggest challenge that defending these cases will pose is the spirit of the times,'' said Herb Stern, who defended former Qwest Communications International Inc. CEO Joseph Nacchio. His insider trading conviction was overturned.
People Angry
``The community is angry, and that anger cuts across all economic class lines,'' Stern said. ``The community, the mob, is looking for heads. A defense attorney has to bring sanity and realism to protect the client against scapegoating.''
Doing that job can produce huge fees. L. Dennis Kozlowski, the imprisoned ex-CEO of Tyco International Ltd. convicted of stealing millions of dollars from his company, spent $25 million to defend himself at two trials, according to a court filing.
Adelphia founder John Rigas and two of his sons spent more than $40 million on their criminal and civil cases. Former Cendant Corp. Vice Chairman E. Kirk Shelton, convicted of accounting fraud, spent $24 million in fees on his failed defenses, U.S. prosecutors said in 2005.
``The only people who are going to come out of this thing rich are the criminal-defense lawyers,'' Dershowitz said. ``They stand to make hundreds of millions of dollars collectively.''
To contact the reporters on this story: Patricia Hurtado in U.S. District Court for the Eastern District of New York in Brooklyn at pathurtado@bloomberg.net; David Voreacos in Newark, New Jersey, at dvoreacos@bloomberg.net; and Lindsay Fortado in New York at lfortado@bloomberg.net. |
