Enron Legal Foe Finds Its Tactics Under Scrutiny

The unfolding Enron mess should be William Lerach’s finest hour, a chance for the nation’s top litigator of shareholder class-action suits to take center stage in one of the largest corporate scandals in history.

Lerach’s firm, Milberg Weiss Bershad Hynes & Lerach, appeared to be poised to grab control of the Enron shareholder litigation, proceedings that will showcase plaintiffs’ lawyers at a time when the growing crisis in corporate accounting practices, restated earnings and tumbling stock prices could trigger more demand for their services.

But now Lerach’s 190-member firm is under a cloud that could undermine his campaign to win appointment as the lead law firm representing Enron shareholders.

Two days after Lerach made a splash in Houston with a box of shredded Enron documents, it was leaked to the news media that a federal grand jury in Los Angeles was investigating Milberg Weiss in connection with possible improper payments to shareholders enlisted for suits.

The investigation reportedly stemmed from information provided by Beverly Hills eye surgeon Steven G. Cooperman after he was convicted in 1999 of arranging the theft of a Picasso and Monet from his home and defrauding Lloyds of London of $12.5 million. Cooperman, who is serving a 37-month prison sentence, was one of a group of shareholders who were named as plaintiffs in several shareholder suits filed by Milberg Weiss.

Milberg Weiss has acknowledged the probe and said it would cooperate. But its principals, including Lerach, have declined to comment further.

Lawyers on both sides of the shareholder lawsuit business said the timing of the leak had a political whiff about it, although none of them would speak for attribution.

Lerach was a major contributor to former President Clinton political campaign. Assistant U.S. Atty. Mike Emmick, a former member of Ken Starr’s investigative team that looked into Clinton’s Monica Lewinsky affair, is one of two prosecutors working with the grand jury in the Milberg Weiss probe.

A former federal prosecutor said there are so many other remedies for the allegations reportedly under investigation, including bar association and civil sanctions, that a criminal prosecution doesn’t make sense. “I think it’s so clearly politically motivated,” he said. “Think of how many cases the U.S. attorney has ever brought against [lawyers], not to mention big law firms. I can barely think of any.”

A corporate defense lawyer said he would be surprised if the firm had done anything illegal. “I think the Milberg Weiss lawyers are pretty smart, and they know what they’re doing,” he said. Lerach is “very talented. He’s a true believer in what he does. And I think they’re a creative, entrepreneurial group. He’s obviously on a lot of people’s enemies lists.”

Thom Mrozek, a spokesman for the U.S. attorney’s office in Los Angeles, refused to comment directly on the reported investigation. But speaking generally, he said, “The United States attorney’s office does not initiate criminal investigations based on any political motivation.”

The disclosure of the grand jury investigation came at a critical time in Lerach’s campaign to win the firm’s appointment as lead counsel in the shareholders’ case against Enron.

“There’s tremendous jockeying,” said Trey Davis, a spokesman for the University of California board of regents, which lost $145 million on its Enron investment and has retained Lerach’s firm to represent the institution. “Milberg Weiss is the preeminent firm to handle a securities fraud case of this magnitude,” he said. “We’re talking about the largest financial scandal in American history--billions and billions of dollars in losses.”

Davis said the regents retained Milberg Weiss in December, about a month before word of the grand jury investigation leaked out, but they were not concerned about it. “Milberg Weiss has assured us that there is no merit to the inquiry,” he said.

The contests among plaintiffs’ lawyers for status as lead counsel can be as hard fought as the cases against the corporations themselves. The lead law firm gets to run the case and take home the lion’s share of fees, which can total as much as a third of any settlement or judgment.

In pursuit of the Enron case, Milberg Weiss posted news releases and updates about the litigation on its Web site, inviting aggrieved shareholders to click to join the fray.

Lerach set up a command post in a Houston hotel in Enron’s backyard, posing for the media with a box of shredded Enron documents. It was quintessential Lerach. The firm’s most famous and controversial partner was doing what he does best--championing shareholder rights and staking his claim to what could be the biggest case of investor loss in U.S. history.

The Enron debacle is exactly the type of corporate transgression that Lerach, 55, has made a career pursuing since he left a Pittsburgh corporate defense firm in 1976 and crossed to the other side. The son of a Pittsburgh salesman clobbered in the stock market crash of 1929, Lerach joined the New York-based firm Melvyn I. Weiss co-founded in 1965 and opened “Milberg West,” the firm’s West Coast offices, in San Diego.

Lerach did not pioneer the class-action shareholder suit, but he developed the legal tactic into a highly lucrative business model. The firm made nearly $700 million in profit during the 1990s, according to evidence presented in a trial. Lerach and Weiss each took home about $100 million during that period.

“Mel Weiss really started the first cases, but Bill Lerach took it to new heights,” said Wayne W. Smith, a corporate defense lawyer in Orange County. “Bill Lerach is a very smart individual and a very tough individual, and he really single-handedly drove the huge expansion in these types of lawsuits. Others saw his success and wanted to emulate him. He really was the dominant force. Still is.”

Corporate executives who’ve been “Lerached”--hit with a shareholder suit filed by any lawyer--hold him in special regard.

“Bill Lerach is among the most disliked, if not hated, figures in the trial bar by people in corporate America,” said James M. Wootton, president of the U.S. Chamber’s Institute for Legal Reform. “A lot of people view it as an extortion racket, where the lawsuits are filed in the hope that ... settlement will be needed to protect the brand of the corporation,” Wootton said. “There are those who believe he’s perfected the art of milking the most out of the extortion value of the lawsuits.”

Lerach “strikes the fear of God into most corporations,” said Jeff Christian, chief executive of Christian & Timbers, an international executive search firm based in Cleveland. “But what he does, he’s the best at. You can’t knock being the best, even if you don’t agree with the tactics, the strategy or the business model. In corporate America, he is seen as the enemy.”

Lerach lives in a villa on 11 acres in Rancho Santa Fe and works out of offices in a high-rise with views of San Diego’s harbor. He is a big contributor to Democratic politicians and spoke to the former president at a White House dinner four days before Clinton vetoed the 1995 Private Securities Litigation Reform Act, which was aimed squarely at Lerach.

Congress mustered the votes to override the veto, enabling the bill to become law. Among other things, the reform act limits the frequency with which a shareholder could serve as lead plaintiff to five times in three years. Because the lead counsel appointment almost always goes to the law firm that represents the shareholder who is named lead plaintiff, that change was aimed at curbing lawyers’ use of so-called professional plaintiffs.

Before the reform act, filing first was often all it took for a lawyer to persuade a judge to name his client lead plaintiff and his firm lead counsel.

“The price of the stock drops, and the next morning, somebody is standing there ready to file a claim,” Smith said. “We always said, ‘How do you suppose between yesterday and today they got a shareholder to file a suit?’ Everybody wonders, because you don’t really know how these plaintiffs magically appear.”

The reform act sought to deter such races to the courthouse by giving priority for lead plaintiff status to the shareholder or group of shareholders with the biggest losses. Initially, many lawyers responded to the reform act by resolving among themselves any disputes over lead counsel, hammering out a deal and presenting the agreement to judges, who often approved.

“There was chaos until all the plaintiffs’ firms would emerge with an agreement, and generally Milberg Weiss would emerge as the lead firm, passing out work to other firms as desired,” Smith said.

Indeed, Milberg Weiss has a bigger share of the shareholder lawsuit pie than the firm had before the securities reform act.

In 1994, Milberg Weiss was responsible for 35% of the suits filed outside California, said Bill Ballowe, who tracks such activity for Woodruff & Sawyer, a San Francisco-based insurance broker. Milberg Weiss’ share of federal shareholder suits more than doubled to 72% by 2000, although it dipped to 60% last year.

Within California, Milberg Weiss has dominated shareholder suits for years, handling 65% to 85% of them, Ballowe said.

Many believe the tougher pleading standards and other hurdles imposed by the reform act actually helped Milberg Weiss, which, with greater financial resources than other firms, has been better able to mount a complex prosecution and wait out contingency fee paydays.

About 60% of the shareholder suits settle, according to a study by two Northern California economists who often testify on behalf of defendant corporations. Milberg Weiss settles slightly more of its cases, 63%, according to that study, and the firm settles on average for 15% of potential investor losses, slightly less than other firms, which average 17%.

The findings add to the debate over whose interests are being served by the shareholder suits, said Mukesh Bajaj, a managing director of LECG, an Emeryville, Calif.-based economics firm, and coauthor of the study.

“There is a lot of concern that these lawsuits have simply become a game by which lawyers sue firms, get rich quick, and insurance premiums go up,” Bajaj said. “It’s not clear that these lawsuits are serving a meaningful function in deterring wrongdoers, because what you typically find is these cases settle and they settle within the insurance limit. And everyone moves on. The company doesn’t necessarily suffer any ill effect of such wrongdoing.”

*

Times staff writers Myron Levin and David Rosenzweig contributed to this report.