King of the Shareholder Suit Himself Tastes Defeat

William S. Lerach, who has built a legal empire filing securities fraud lawsuits and collecting multimillion-dollar settlements from corporate America, on Tuesday agreed to pay $50 million to settle a suit by one of his targets.

The settlement, among the largest ever agreed to by a law firm, came as a federal jury prepared to tack potential punitive damages onto a $45-million judgment issued Monday against Lerach and his firm.

The settlement marks an unusual reversal for Milberg Weiss Bershad Hynes & Lerach, which has become a legal nemesis for countless public companies, particularly California’s technology firms.

Lerach, who lives on an 11-acre spread in Rancho Sante Fe, is the undisputed king of the shareholder lawsuit. His success in wielding suits against large firms has even prompted federal lawmakers to pass legislation trying to rein in his legal strikes.

Lerach, 53, had been accused of attempting to destroy Lexecon Inc., by maliciously naming the Chicago legal and economics consulting firm as a defendant in the now-infamous Lincoln Savings & Loan scandal.

At the end of a six-week trial, a Chicago jury deliberated for only six hours before voting Monday to award Lexecon $45 million in compensatory damages. Overnight, Lerach’s attorneys negotiated a settlement rather than risk a huge damage verdict.

The settlement represents a windfall for Nextera Enterprises Inc., a consulting firm controlled by former junk-bond king Michael Milken and Lawrence Ellison, chief executive of Oracle Corp. Nextera bought Lexecon for $63 million earlier this year.

Lexecon lawyers and others sought to portray Tuesday’s settlement as the first sign of Lerach’s vulnerability.

“A lot of corporate defendants settle with him because they’re afraid to go to trial,” said Mark Gitenstein, an attorney with the firm that represented Lexecon. “This makes Bill Lerach look a lot less fearsome.”

Lerach saw himself as a champion of the investor underclass, filing suits on behalf of small shareholders who might otherwise be powerless to fight large corporations.

Over the last 20 years, his firm--with offices in San Diego and New York--has filed hundreds of suits, typically targeting companies whose stock has dipped, accusing them of fraud and mismanagement.

Critics say Lerach engages in a form of extortion. His suits present targeted companies with the dismal choice of spending countless hours and small fortunes defending themselves, or cutting their losses with a settlement. Most opt to settle, often for millions of dollars.

Since 1988, Milberg Weiss has raked in nearly $700 million in profits. During that same period, Lerach and his senior partner, Melvyn I. Weiss, took home about $100 million each, according to evidence presented at the Chicago trial.

Large portions of Milberg Weiss’ profits have been used to bankroll other massive class-action suits. Lerach has also used his personal fortune to support politicians. In recent years, he has ranked among the top donors to candidates for federal office.

Technology companies have been popular targets of Lerach suits, largely because their stocks tend to be particularly volatile. In the Silicon Valley, executives speak of being “Lerached,” and have warred politically with him in recent years over state ballot measures alternately designed to curtail or ease shareholder suits.

On Tuesday, many executives cheered Lerach’s setback, calling it well-deserved payback.

“Couldn’t have happened to a nicer guy,” said Al Shugart, who has been named in four Milberg Weiss suits, three as an executive of disk drive maker Seagate Technologies and one as a board member of Valence Technology. “He certainly is guilty, and has been for years, of misusing the system.”

Alan Salpeter, a Chicago lawyer who represented Lexecon, said Milberg Weiss agreed to wire the entire $50 million by Tuesday evening to his client’s bank account.

The settlement appears to be eclipsed only by Jones, Day, Reavis & Pogue of New York, which in 1993 paid the federal government $51 million to settle malpractice claims involving legal work done for Charles H. Keating Jr.’s Lincoln Savings & Loan Assn.

Lerach declined comment, but legal experts say that the lion’s share of the $50 million will come from the firm’s insurance carrier.

“It’s today, it’s cash, it’s immediate,” Salpeter said. “This is an enormous victory and important case for the legal profession because it shows that lawyers are not above the law.”

Only a couple years ago, the Lexecon case appeared unlikely to cause Milberg Weiss any significant trouble.

A federal judge in Arizona threw out most of Lexecon’s claims. Last year, the U.S. Supreme Court, acting on Lexecon’s appeal, breathed new life into the case, saying it should have been heard in Chicago.

(The case, which was filed in Chicago, had been transferred to Arizona so that it could be coordinated with other Lincoln Savings & Loan cases.)

When the case came before U.S. District Judge James Zagel, an appointee of Ronald Reagan, Milberg Weiss found itself on the opposite side of some unfavorable legal rulings.

The judge allowed Lexecon attorneys to pursue a theory that Milberg Weiss abused the legal process.

Lexecon officials had testified as expert witnesses on behalf of a company that prevailed in a suit filed by Milberg Weiss.

In that other case, the law firm’s client lost a bid for $200 million in damages stemming from the failure of Nucorp Energy Inc., a San Diego firm that went bankrupt in 1982.

Milberg Weiss attempted to steer business away from the consulting firm by linking it to the infamous Lincoln S&L; debacle, Lexecon officials argued.

Weiss, who with Lerach testified at the Chicago trial, acknowledged telling Lexecon’s economist Daniel R. Fischel during the Nucorp case that “we will destroy you.” But he insisted that those remarks were “inconsequential.”

Milberg Weiss has consistently denied wrongdoing, but buckled after Monday’s jury verdict.

John C. Coffee, a Columbia University Law School professor who specializes in securities law, said the jury’s verdict could trigger copycat lawsuits against Milberg Weiss.

Coffee, who has criticized Milberg Weiss’ tactics, said he and many litigators regarded Lexecon’s case as one that was “controlled by a determined and one-sided federal judge.”

An appellate court might have reversed the verdict, Coffee said, but in an irony not lost on legal experts, Milberg Weiss apparently decided to cut its losses.

“Milberg Weiss has been accused of filing frivolous lawsuits and collecting huge settlements,” Coffee said. “This looked like a lawsuit more frivolous than meritorious, but one that got $50 million. What goes around comes around.”