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Class actions feel effects of Milberg case

  Law Center  -   POSTED: 2008/02/11 10:24

As famed class-action lawyer William S. Lerach steps before a federal judge in Los Angeles today to learn his sentence in a wide-ranging fraud and conspiracy probe, his misdeeds and those of former colleagues may be helping to alter the way securities law is practiced.

The number of class actions filed on behalf of disgruntled investors has been dropping, and legal experts say that is partly because practitioners are distancing themselves from the aggressive tactics that made Lerach, 61, and his former partners courtroom legends and lightning rods for critics of the civil justice system.

In some instances, judges have balked at certifying class actions they have deemed frivolous and in others have rejected settlements for paying attorneys at the expense of plaintiffs, sometimes citing the ongoing prosecution of Lerach's former firm, once known as Milberg Weiss Bershad & Schulman.

Lerach left in 2004 to found a San Diego class-action practice now called Coughlin Stoia Geller Rudman & Robbins. Lerach resigned from that firm in October, days before he pleaded guilty to one count of conspiracy.

"What you're watching is a bit of a transition from a world in which class-action practice did have some disreputable aspects to a different model that's much more responsible, publicly oriented and closely regulated," said Stephen Bundy, who teaches law at Boalt Hall, at UC Berkeley.

Lerach's trademark vitriol -- he famously threatened to "destroy" companies that balked at settling -- and his fondness for television cameras may belong to the past. Lawyers who now dominate the field are far less confrontational, Bundy said, and their resumes resemble those of their big-firm opponents.

Several factors may explain the drop in securities class-action filings from the peak years of 2000 to 2004, including, until recently, rising stock prices.

Bundy said, though, that the decline also reflects an evolution from "smaller, informal and slightly shady firms" to more mainstream law practitioners.

Federal rules helped push the change.

Until 1995, the first law firm to file suit could direct the class action and reap the largest legal fees. The rules favored firms with a stable of ready-made plaintiffs: people with a few shares in many companies who were willing to immediately lend their name to litigation. That year, Congress changed the law so the lead law firm should be one that represents the plaintiff with the most significant holdings at risk.

These days, state pension funds and other institutional investors are the major plaintiffs in shareholder suits. Such big-money investors are reluctant to discuss their legal strategies, but litigation watchers contend that they are choosing their lawyers more carefully -- examining a firm's ethical record, for example, and even its campaign contributions.

"There's heightened concern," said San Francisco lawyer Richard Heimann, who represents plaintiffs in securities class actions. Fund managers who have approached him want reassurance "that there weren't any skeletons in our closet," he said, often asking for written declarations from prospective lawyers that they have not been indicted or disciplined by the bar.

The Milberg Weiss prosecutions also are likely to make lawyers more careful, said Stephen Gillers, who teaches legal ethics at the New York University School of Law.

"It has to worry them even if they're doing nothing wrong because the Justice Department has shown its willingness to look into how they do business," he said.

Some institutional investors have opted out of class actions in recent years, believing they would do better on their own, Heimann said.

His firm represented Merrill Lynch in a securities class action against McKesson HBOC a couple of years ago. Class members ultimately recovered 15% of their losses in that case, he said, but Merrill Lynch recouped $150 million -- more than its monetary loss -- by opting out of the class and settling with McKesson separately.

Heimann also helped settle a case last year in which two Alaska public funds recovered 90% of their economic losses by bowing out of the class. It was many times more than they would have gotten if they'd remained in, he said.

Some legal experts say the Milberg Weiss probe also has prompted judges to more closely monitor these cases, particularly those involving that firm or Coughlin Stoia.

Federal rules require judges to ensure that class-action settlements are fair and adequate for individual plaintiffs.

Noting those rules, several companies targeted by Milberg Weiss or Lerach's former firm have asked judges within the last year to refuse class-action status, citing the firm's indictment or Lerach's guilty plea. The motions have met with mixed results.

Lawyers split on whether the case is casting a shadow beyond the two law firms.

New York plaintiffs' lawyer Sean Coffey sees no evidence that judges are scrutinizing settlements or fee requests from other firms more closely. But a Los Angeles defense attorney said that since the prosecution, he has been called into the judge's chambers to justify the legal fees in the case and how much money class members will get.

Those settlement agreements "used to be accepted more readily," said the lawyer, who requested anonymity out of concern that pending settlements might be jeopardized. "Now they make you really explain."

Until his guilty plea in October, the pugnacious, Brillo-haired Lerach was one of the most feared lawyers in the nation, boasting of having wrung billions over the years for investors from Enron Corp., WorldCom and Intel Corp. and a roster of blue-chip corporations.

Many clients and consumer groups credit Lerach with defending them against what he called the "dishonorable and despicable greed" of corporate America. Corporate executives denounced the lawsuits as extortion but usually chose to settle rather than roll the dice at trial, paying out millions to plaintiffs.

Two former partners at Milberg Weiss -- David Bershad and Steven Schulman -- also have pleaded guilty to fraud charges as part of an alleged scheme to pay $11.4 million in illegal kickbacks to clients who agreed to serve as ready-made plaintiffs in class actions. The two men await sentencing for their roles in the conspiracy which, prosecutors allege, earned the firm $250 million in fees from dozens of cases stretching back more than 20 years.

The law firm and co-founder Melvyn Weiss have pleaded not guilty, but the probe has triggered an exodus of lawyers and clients. A trial is scheduled for August.

John Beisner, a Washington lawyer who faced Lerach in a number of fraud suits, said the case marked a milestone. The guilty pleas, he said, have sidelined "some of the great lions of the plaintiffs bar."

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