Jury Is Out on Effect of Limit to Lawyers’ Fees

Two years ago, Irvine-based First Pension Corp. and affiliates collapsed under the weight of a Ponzi-style scheme that left 8,000 investors with losses totaling $136 million. The scheme landed its operators in jail and spawned a huge securities class-action suit against its lawyers and accountants.

Would this lawsuit have been brought under Proposition 201, the initiative on Tuesday’s ballot that would often require losing parties in securities fraud lawsuits to pay the winners’ attorney fees and costs?

It’s very doubtful, according to some of the plaintiffs and their lawyer. They argue that Proposition 201 would effectively close the doors of the courthouse to small investors--especially the elderly, who most often are the prey of con artists.

“It would stop us completely,” said retired aerospace engineer Joseph T. Murray, one of the plaintiffs named in the class action. Murray said he and his wife, Karmele, lost $120,000. “We were completely wiped out.”

Defense attorneys insist, however, that the suit still would have been filed. Proposition 201 simply would make plaintiffs investigate more fully before filing. And it would encourage investors and their lawyers to avoid wasteful, frivolous actions, they contend.

“A lawsuit has a devastating effect on people being sued; lawyers on both sides forget that,” said Seth Aronson, a Los Angeles lawyer who defends companies and executives against such litigation. “It’s too easy to file lawsuits and too easy to name individuals.”

Proposition 201 is one of three ballot measures aimed at limiting lawsuits and attorney fees. The arguments on both sides are heated, and the money being spent to sway voters could reach $20 million.

No one doubts that Proposition 201 would change the balance of power between shareholders and corporations. The question is whether their interests--and the interests of society in general--would be more fairly served under the initiative. The issue is particularly important now that federal law, which used to be more favorable to plaintiffs, is now less hospitable.

Under Proposition 201, plaintiffs’ lawyers argue, legitimate cases wouldn’t be brought unless they could be easily proven. This would scare off difficult but worthy cases and render the system less able to police corporate scams, they contend.

“It’s not going to put lawyers out of business,” said Michael J. Aguirre, attorney for First Pension investors. “But it’s going to make it possible for people to get away with much more pervasive fraud than they have been.”

Proposition 201 was prompted mainly by securities fraud lawsuits that were filed against growing high-tech companies in the Silicon Valley as soon, it seemed, as their stock dropped. Many of the suits were ill-founded, conceded Joseph W. Cotchett Jr. of Burlingame, who was the lead trial lawyer for investors bilked out of $285 million in the collapse of Lincoln Savings & Loan in Irvine and the empire created by Charles H. Keating Jr.

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The initiative not only requires the losing party or its attorney to pay, it also requires the winner to pay the other side’s costs on any claims that the winning side loses. And if the plaintiffs turned down a settlement offer that turned out to be for more than the amount they won, they could still be required to pay the losing side’s costs.

But the initiative gives trial judges broad ability to waive such payments if the losing party can show that its position was “substantially justified.”

If the plaintiffs named in the securities fraud lawsuit don’t represent at least 5% of the shares, they would also have to post a bond equal to what the judge thinks the defense will spend on attorney fees and costs.

The effect that Proposition 201 might have is evident in the First Pension case.

The corporation’s founder, William E. Cooper, admitted that he had been swindling investors out of their retirement savings for a dozen years. Cooper, once a major Orange County GOP campaign fund-raiser, is now serving 10 years in prison after pleading guilty to fraud charges.

The ensuing class-action suit was filed against First Pension, its operators and various professional advisors. Caught in the net are U.S. Rep. Christopher Cox (R-Newport Beach) and former state Corporations Commissioner Gary Mendoza, both of whom handled First Pension legal work while colleagues at Latham & Watkins law firm in the 1980s. Both have denied any wrongdoing.

Cox and Mendoza, as well as the firm, recently won a preliminary court order throwing out two of six accusations leveled at them. Four claims, including fraud, misrepresentation and aiding and abetting a fraud, remain. A final order is expected soon.

Under Proposition 201, the investors could have to pay defense costs to the firm, Cox and Mendoza for each of the claims dismissed, though any payment probably would not be ordered until the case is over.

First Pension plaintiffs Joseph and Karmele Murray of San Jacinto wouldn’t have joined the lawsuit if Proposition 201 were law because of fears that they could lose the case and lose their house in the process, Joseph Murray said. “Both my wife and I are living on Social Security,” he said.

Murray said that none of the other First Pension victims he talks with regularly supports Proposition 201. “It would make the average retirees who got wiped out helpless.”

But Cox’s attorney, George Link, contends that Proposition 201 is intended to impose some responsibility on parties when they bring a suit. “You can argue on how great the responsibility should be, but the objective is a good one.”

Link has asserted that the plaintiffs took “enormous logical hurdles” and made “preposterous legal conclusions” in an effort to tie Cox to the First Pension scandal. He argued that the congressman worked on one public offering, which resulted in sales of only $5 million, and that the complaints don’t allege anyone lost money from it.

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Cox played a major role in passing the federal law that tightens court access, which was passed by Congress over President Clinton’s veto.

Financial news columnist Andrew Tobias, a strong supporter of Proposition 201 and the two other so-called anti-lawyer initiatives--Propositions 200 and 202--said the “legitimate securities fraud cases” will still be brought and will police the system.

“This would not in any way hurt the small shareholder,” Tobias said. “We are not trying to end all lawsuits by any means. But the ones that are just knee-jerk lawsuits are a real drag on the California economy.”

Plaintiffs’ lawyers disagree.

“There are a lot of pension cases out there where losses aren’t properly recorded on books,” Aguirre contended. “You’ll find that First Pension is just the tip of the iceberg.”

As baby boomers reach retirement age, he said, they “are going to wake up and find out they have no pension.”

Times staff writer Kathy Kristof contributed to this report.