Enron Shareholders’ Law Firm May Have Conflict in Andersen Lawsuits

The law firm suing Andersen for its botched audit of Enron Corp. may have a conflict of interest because it is also involved in four other large suits in which Andersen is a named or likely defendant, according to legal experts.

Milberg, Weiss, Bershad, Hynes & Lerach, the veteran shareholder litigator, was named as the lead attorney representing the investors who lost money in the Enron meltdown. Milberg also plays a role in other class-action suits against Andersen for its accounting or audit work involving Global Crossing Ltd., McKesson HBOC Inc., Hub Group Inc. and Prudential Securities Inc.

This potential conflict gained significance over the last week as Andersen began settlement discussions with plaintiffs in Enron and an unrelated case--and as the huge size of the potential settlements has become apparent, according to legal experts.

Milberg, the subject of an unrelated Los Angeles federal grand jury probe that is examining whether the firm paid people to serve as plaintiffs in shareholder class-action suits, did not return calls seeking comment.

The law firm took center stage in the Enron-Andersen case last month when a Houston judge named the University of California system the lead plaintiff in the class-action lawsuit. As the university’s attorney, Milberg became the chief law firm in the case, an enviable position among numerous law firms looking to collect lucrative billings from the lawsuit.

Indeed, Milberg’s experience as a class-action litigator was praised by U.S. District Judge Melinda Harmon when she selected the UC system as the lead plaintiff.

“In reviewing the extensive briefing submitted regarding the lead plaintiff/lead counsel selection, the court has found that the submissions of [Milberg] stand out in the breadth and depth of its research and insight,” Harmon wrote in her decision.

The UC system said it was comfortable with Milberg’s role in the litigation.

“Andersen has a complex insurance policy for separate claims in separate years,” said Trey Davis, a spokesman for the UC system. “Also, there has been no demonstration that Andersen does not have the financial wherewithal to pay the claims.”

Davis declined to discuss the status of settlement negotiations with Andersen.

However, an attorney for another law firm involved in the Enron negotiations told The Times that Andersen has broached a settlement that would range from $600 million to $800 million. Other news reports peg an initial offer at $750 million--$250 million from insurance and five annual $100-million payments.

Andersen, the nation’s fifth-largest accounting firm, declined to discuss its settlement talks.

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Suits’ Class-Action

Nature a Factor

In addition, Andersen is in settlement negotiations with Arizona officials seeking to collect $600 million in the failure of an investment fund operated by the Baptist Foundation of Arizona.

That case is scheduled to go to trial Monday but could be settled for “several hundred million dollars” before then, according to an individual familiar with the discussions.

Andersen officials declined to discuss the settlement talks.

“All of these classes have interests that are adverse to each other because of the limited amount of funds available for settlements or judgments,” said Dan Klerman, a USC law school professor.

Erwin Chemerinsky, a legal ethicist at the USC law school, said that Milberg might not have a conflict at the start of its five Andersen cases but that a potential ethical problem arises as it enters settlement talks.

An attorney, he said, might ask for so much money in the first case to be settled that there isn’t enough for the second, third or fourth.

The reverse also could be true. An attorney might not negotiate as hard in the first case, hoping to leave money for the subsequent cases. Yet in each case, the attorney is obligated to get the best deal for the different clients.

The class-action nature of the lawsuits complicates the issue, said Martin Zohn, an attorney at Proskauer Rose in Century City.

“If they were representing private parties, they would explain to each that there is a competition for the same assets,” Zohn said. “The problem in this instance is that there are large public classes rather than individuals, and that makes that sort of communication much more difficult.”

It is not unusual for lawyers to have multiple lawsuits against a defendant. Some lawyers have filed 100 or more lawsuits against Ford Motor Co. related to the Explorer sport-utility vehicle rollover and Firestone tire controversies. Yet because of the auto maker’s deep pockets, no one has suggested that those attorneys have ethical conflicts in serving multiple clients.

What is different with the Milberg cases, the legal experts said, is that real potential exists for Andersen to run out of funds, file for bankruptcy or go out of business.

Andersen officials have declined to discuss their finances but have said they intend to remain in business.

In fact, one attorney involved in the Enron case labeled Andersen’s recent settlement efforts as a “save-the-company initiative.”

The accounting firm figures that if it doesn’t get out from under Enron’s cloud, it will become increasingly difficult to retain its staff and its clients, especially over the next several months, a period when many U.S. companies select their auditors.

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Accounting Firm

Has Few Hard Assets

Andersen already is losing clients. Over the last three months, Andersen has lost 32 audit clients and gained five for a net decline of 27, according to Auditor-Trak, a service of Atlanta-based Strafford Publications. During the same period a year ago, it had a net loss of 16 clients.

A professional services firm such as Andersen has comparatively few hard assets that could be attached to pay a judgment or settlement, said Zohn, a bankruptcy attorney.

Any funds for a settlement or judgment would come from its $250 million in insurance, its future earnings and partners who could be charged an assessment because of the firm’s legal structure.

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Added Element

of Gamesmanship

John C. Coffee Jr., a Columbia University law professor, said the combined liability of the lawsuits against Andersen could reach beyond its ability to pay.

“While this has not been clearly addressed in case law, it is correct as a matter of economic logic,” Coffee said. “And it would clearly be a conflict in a bankruptcy case. You can’t represent rival classes for limited funds.”

“This is something that the courts have to think about seriously,” Coffee said.

The expectation that Andersen’s combined legal liabilities could overwhelm it has introduced a level of gamesmanship to any potential settlement.

“You want to get your money now, especially if you think there might eventually be a bankruptcy,” said Daniel Lefler, an attorney at Irell & Manella in Los Angeles. “And you have to believe that with so many [suits], one of the cards Andersen has to play is the threat of bankruptcy. It could be a powerful bargaining chip.”

“There is an absolute race for the money,” Lefler said. “That’s not lost on any of these guys.”

An added wrinkle, Zohn said, is that bankruptcy law creates an incentive for attorneys to reach settlements with Andersen quickly and to get the money deposited.

A Bankruptcy Court judge could unwind any settlements reached 90 days before an Andersen bankruptcy filing, Zohn said.