Results matching “milberg”

Lerach to quit? - PointOfLaw Forum

The Washington Post is reporting that Bill Lerach is leaving his firm Lerach Coughlin, which he formed three years ago in a celebrated split from Milberg Weiss. The article by Carrie Johnson suggests that Lerach's departure might be linked to the reported decision by former Milberg partner David Bershad to explore possible cooperation agreements with prosecutors in the government's ongoing investigation of alleged improper payments to securities class action plaintiffs:

In May 2006, the Milberg Weiss law firm and partners Steven Schulman and David J. Bershad were indicted by the U.S. attorney in Los Angeles on multiple criminal charges stemming from what prosecutors called a more than 25-year-long scheme to pay people to serve as plaintiffs in large class-action lawsuits. At least one former client has been assisting the government with that case. The firm has been fighting the charges, and the individual partners, who held high-ranking positions and earned tens of millions of dollars in their heyday there, have presented a forceful defense.

Bershad may be interested in exploring settlement possibilities with the government, according to an article on the Wall Street Journal's Web site last night. The Journal reported that he may cooperate with prosecutors in exchange for leniency at sentencing.

Johnson also points to the link between Lerach and the pending Stoneridge case that Ted wrote about in today's Wall Street Journal:

As recently as last week, Lerach was prodding regulators. He published opinion pieces and joined with prominent union leaders to press the Securities and Exchange Commission to file court briefs that would make it easier for investors to collect money from investment banks and accounting firms that watched silently while their corporate clients engaged in misconduct.

We'd previously reported Lerach's lobbying of the SEC here, and his sniping at SEC Chairman Chris Cox here.

Does the solicitor general's office really want to follow a guy like Lerach in its approach to Stoneridge? One would only hope that his sudden departure might cause the government, at a minimum, to discount his heavy-handed tactics.

Bell Atlantic v. Twombly - PointOfLaw Forum

A minor procedural opinion released today by the Supreme Court is being treated a mere dismissal of a Milberg Weiss case alleging antitrust conspiracy, but it will have much larger implications.

Last year, Richard Epstein argued in a paper for AEI-Brookings that Federal Rule of Civil Procedure 8 was poorly situated to resolve motions to dismiss antitrust complaints. The Supreme Court appears to agree in today's 7-2 Bell Atlantic v. Twombly decision (even citing to the Epstein paper), and, by repudiating Conley v. Gibson's "no set of facts" standard, appears to reintroduce some element of fact-pleading back into the complaint procedure, thus making it easier to dismiss meritless complaints at the pleading stage. As discovery has gotten more and more expensive, this is an efficient rebalancing of the risks of false positives versus false negatives, but one would prefer the Supreme Court take action to modify Rule 8 rather than create a judicial overlay on the text of the rule. It is still a welcome change, and reduces the ability of plaintiffs' attorneys to bring extortionate complaints to be settled solely for nuisance value. Earlier discussion: Nov. 27.

Dan McLaughlin also analyzes the procedural implications of the decision.

Milberg indictment, one year later - PointOfLaw Forum

Nathan Koppel at WSJ Law Blog has a roundup. Key paragraph:

Some lawyers predicted that the indictment would be a swift death knell to Milberg. Arthur Andersen, after all, closed shop shortly after its 2002 indictment for allegedly destroying documents related to its Enron audits. Perhaps the reputational damage from an indictment poses a graver threat to a firm hired to audit financial statements than a firm hired to file lawsuits. Another thought: A defense-side law firm would arguably be hurt worse by an indictment. It�s hard to imagine corporate titans turning to a firm under a cloud.

Our coverage is here and here.

Ross Billing Ethics Survey - PointOfLaw Forum

WSJ Law Blog reports on Professor William Ross's recent survey of 251 attorneys, which indicates that most attorneys are aware of other attorneys who pad hours. I don't disagree with this conclusion, but I think the problems of bill-padding and double-billing likely pales in comparison to (1) the expense incurred by parties because of lawyers making overconfident recommendations to embark on misguided litigation where those recommendations happen to coincide with the interest of the attorney to bill more hours; and (2) the excessive billing caused by law-firm technological and human-resources inefficiencies that regularly result in the wheel being reinvented at client expense. A disturbing number of the hours I billed as an attorney came about because my firm got involved in a case where a lawyer with a creative theory of business-competition-through-litigation initiated a suit that ultimately cost his or her client more money in the long run.

Stephanie Mencimer (whose blog post headline seems to misunderstand the fact that the study did not involve self-reporting) sneers that this result should be trumpeted as loudly as well-publicized problems of plaintiffs' attorneys stealing from their clients (e.g., Kentucky fen-phen or the Milberg Weiss indictment). But there is a critical difference. Plaintiffs' attorneys are dealing with one-time players; attorneys for corporate defendants (and plaintiffs) are usually repeat players. Thus, the latter faces a certain degree of market discipline that a plaintiffs' attorney does not: sophisticated clients can compare and contrast bills and results from the different law firms they hire, as well as hire third-party analysts to scrutinize bills. A law firm whose bills are out of line with results will lose business in the long run. Plaintiffs' attorneys face no such disincentive, and their ability to capture rents present a much greater public-policy problem, not least because (unlike the case of defense counsel) it also creates the incentive to engage in litigation with negative externalities.

I especially like one easy customer-service-based solution to the potential problem of hourly bill padding. Seattle law firm Summit Law Group has an innovative policy of a "value adjustment line" on all of their bills: "We empower each of our customers with the right to adjust our billing, upward or downward, based on our customer�s perception of the value received, not ours." Summit claims that, over the years, clients have been more likely to adjust bills upward than downward. This obviously is much more likely to work in the repeat-player context where the law firm can fire the client as well as vice versa.

Around the web, April 30 - PointOfLaw Forum

  • The calming storm? Sen. Lott and State Farm settle his Katrina insurance suit [AP]

  • Did you know much-honored Harvard lawprof Arthur Miller "has had a longstanding relationship with Milberg Weiss"? [Lattman; more on lawprof consultants from NLJ]

  • Despite hype, activists have failed to prove bias underlies male-female pay gap [Chapman]

  • Calling Gerry Spence a limousine liberal may not be great for your career as a young trial lawyer [Cernovich]

  • Some N.J. lawmakers would like to ban lawyers from soliciting as clients persons whose names are scraped from court and police records [NJLJ]

  • Billions at stake as Supreme Court mulls whether to uphold exemption of home health workers from FLSA wage/hour standards [AP]

  • Just sad: tenured prof departs Iowa Law School (albeit with big severance) after faking student evaluations [Volokh]

Milberg Weiss case: Schulman heard from - PointOfLaw Forum

Indicted Milberg Weiss partner Steven Schulman has filed a motion to dismiss the criminal charges pending against him; Nathan Koppel and commenters discuss at the WSJ law blog.

The Vioxx Litigation - PointOfLaw Columns

By Ted Frank

This piece originally appeared in the Class Action Watch, 03-31-07

On September 30, 2004, Merck withdrew its painkiller Vioxx from the market because of a study showing a small but statistically significant increase in risk of cardiovascular events from long-term usage of the drug. What had been a trickle of litigation over the drug became a flood. As of January, there were over 27,000 personal-injury lawsuits involving over 45,000 plaintiff groups, and another 265 putative class actions filed. Plaintiffs' attorneys, it seems, are using the procedural class-action mechanism to achieve substantive advantages in litigation. The vast majority of the class actions Merck faces can be placed in one of four categories.

Personal Injury Class Actions

Many seek to try personal-injury cases as a class action. There is very little chance a nationwide personal-injury class will be certified in any jurisdiction. Pharmaceutical products liability litigation requires the substantive law of fifty different states, and product liability law (as well as the learned intermediary defense) has substantial differences from state to state, making a class impossible. "No class action is proper unless all litigants are governed by the same legal rules[1]."This is because variations in state law may swamp any common issues and defeat predominance[2]."Thus, In re Vioxx Products Liability Litigation held that a nationwide personal-injury class was inappropriate in the Vioxx litigation[3].

Moreover, as Judge Fallon noted, the individualized issues are complex:

The plaintiffs' allegations that Merck failed to warn doctors adequately regarding the alleged health risks of Vioxx--whether they sound in strict liability or negligence--necessarily turn on numerous individualized issues such as: the alleged injury; what Merck knew about the risks of the alleged injury when the patient was prescribed Vioxx; what Merck told physicians and consumers about those risks in the Vioxx label and other media, what the plaintiffs' physicians knew about these risks from other sources, and whether the plaintiffs' physicians would still have prescribed Vioxx had stronger warnings been given.

Constitutional due process demands Merck have the opportunity to defend against each case individually: "one set of operative facts would not establish liability and the end result would be a series of individual mini-trials which the predominance requirement is intended to prevent[4]." Similarly, the fact that plaintiffs have individualized damages claims, including claims for non-economic damages, prevents compliance with the predominance requirements. (In the now-infamous Dukes v. Wal-Mart case, in order to shoehorn the case into certification, the Ninth Circuit permitted the class plaintiffs to waive what would be billions of dollars of non-economic damages if the complaint's allegations were true, a mechanism that seemed designed to benefit the trial lawyers ahead of any class member that had actually suffered injury.) One would not expect Judge Fallon to certify even the individual state personal-injury class actions.

An interesting question is whether Judge Fallon will be willing to hold that his federal decision would bind pending state-court class action certification decisions, or whether plaintiffs will have the opportunity to shop for a better ruling. Judge Easterbrook in In re Bridgestone/Firestone, Inc. held that a federal ruling that a class certification was inappropriate precluded state courts from certifying a class action on the same facts, and that the Anti-Injunction Act did not prohibit a federal court from enjoining such proceedings[5].

Given the unlikelihood of a personal-injury class action certification, why would the plaintiffs' bar devote any resources? The answer can perhaps be found in the Supreme Court's decision in American Pipe & Construction Co. v. Utah which held that the statute of limitations for individual class members' causes of action were tolled while a class action certification was pending[6]. As Jim Beck and Mark Herrmann point out on their Drug and Device Law blog, this decision creates an incentive to file putative class actions that are not necessarily strong on the merits. Ironically, as the two note, the American Pipe Court justified its holding on the grounds that, without a tolling rule, courts would be deluged with duplicative filings. But American Pipe has had no administrative advantage in practice.

Medical Monitoring Class Actions

Merck faces a variety of class actions seeking medical monitoring relief. Medical monitoring was originally devised as a remedy in the unique case of an airline accident. The case involved depressurization and hypoxia where there was no question that the plaintiff children, refugees from Vietnam, faced irreparable harm without an immediate comprehensive medical exam. Plaintiffs took that precedent and ran with it, seeking to extend it to situations where relief was not so clear-cut.

Courts have differed on the appropriateness of expansion of this new cause of action to cases where plaintiffs have suffered no physical injury. The Supreme Court, for one, rejected medical monitoring as a remedy under the Federal Employers' Liability Act in Metro-North Commuter Railroad v. Buckley, noting the dangers of creating a new cause of action that might create unlimited liability, the difficulties of having a court administer a complicated medical plan, and the individualized nature of plaintiffs' medical conditions[7]. Indeed, a wide-open medical-monitoring cause of action would expose nearly every manufacturer in America to liability, given the possibility of arguing that any given substance from automobile pollution to over-the-counter medicine to saturated fats could bring rise to the need for medical monitoring. Meritorious and meritless claims would be difficult to distinguish, and the confusion would almost certainly encourage fraud. The West Virginia Supreme Court, at the other end of the spectrum, created a medical monitoring cause of action in Bower v. Westinghouse Electric and North American Philips Corporation. A very small risk of injury was sufficient to create a cause of action, and there was no requirement that the medical monitoring be effective, or even that there be oversight by the court to ensure that lump sum payments were used for the sought-after remedy[8].

The Vioxx medical monitoring class action that is furthest along arises in Judge Higbee's courtroom in Atlantic City, Sinclair v. Merck. The New Jersey Supreme Court had already endorsed a broad medical monitoring remedy in Ayers v. Township of Jackson, which permitted a lump-sum payment in an environmental tort case involving drinking water[9]. Even so, with the exception of environmental torts, New Jersey had only permitted medical monitoring where there was physical injury. Moreover, the New Jersey products liability law required an injury before bringing suit[10]. Thus, Judge Higbee dismissed Sinclair as outside of New Jersey medical monitoring law: a product-liability suit could not claim risk of injury to support a medical monitoring remedy. The New Jersey Court of Appeals reversed on grounds that the dismissal was premature. Still, even if Sinclair returns to the trial court, there remains no evidence that Vioxx has a long-term effect once it has been metabolized from the system, and thus no scientific evidence supporting a medical monitoring remedy.

"Consumer Fraud" Class Actions

The greatest danger to Merck shareholders comes from the dozens of "consumer fraud" class actions seeking recovery under various broad state consumer fraud laws. These lawsuits seek recovery, claiming not that Vioxx caused them personal injury, nor that Vioxx did not effectively alleviate pain, but that, because Merck allegedly failed to disclose information to the public, it received a higher price than it would have otherwise. Plaintiffs argue that the broadest of these consumer fraud laws do not require any showing of reliance, or a showing that the consumers for whom recovery is sought were affirmatively misled. In one such case, International Union of Operating Engineers Local 68 Welfare Fund v. Merck, Judge Higbee held that New Jersey's consumer fraud laws applied to all of Merck's United States sales and certified a nationwide class of third-party insurers; an intermediate court affirmed that class certification, which is now pending before the New Jersey Supreme Court, which will hear argument shortly.

This class action certification did not take into account basic choice-of-law principles by applying New Jersey law to transactions in all fifty states, regardless of the location of the doctor who prescribed the drug, the patient who took the drug, or the third-party payor. The court's rationale asks, in effect, "What state wouldn't want stricter consumer-fraud liability?" But defendants maintain that it is reasonable to assume that several states are concerned about the disincentives created by overdeterrence when consumer liability attaches without injury at the same time liability attaches with injury[11].

Second, the court undid the statute's requirement that consumer fraud must be shown to cause an individual's injury by rewriting the requirement to fit the class action, and holding that it was sufficient to allege "pervasive" defendant misconduct. But class actions are procedural devices, and cannot change the underlying substantive law or the rights of a defendant to present every available defense (a right reaffirmed by the Supreme Court in Philip Morris v. Williams). Third, it remains unclear how "ascertainable loss" is going to be calculated on a class-wide basis. Every third-party payer has its own individualized means of determining which prescription drugs will be covered by its formulary. Should the Local 68 suit proceed, plaintiffs will seek treble damages disgorging billions of dollars paid to Merck for Vioxx, plus attorneys' fees.

Shareholder Class Actions

Merck stock dropped dramatically when it announced the withdrawal of Vioxx from the market. And where there is a large drop in stock price, a shareholder class action usually follows, demanding that present shareholders compensate previous shareholders' losses (with a substantial commission for the trial lawyers who make the arrangement). Investors who are diversified shareholders are hurt by such lawsuits in the aggregate: the lawsuits merely transfer wealth from their left-hand pocket to their right-hand pocket, because ex ante, one is just as likely to be a seller of an artificially inflated share of stock as a buyer, and shareholder lawsuits do nothing to disgorge wealth from the innocent sellers. (Inside trades are, of course, another matter.) But attorneys' fees are calculated on the aggregate, and, of course, shareholders also pay for the defense of such claims.

A major event in any shareholder class actions comes when the court chooses the lead plaintiff. The internecine battle is especially noteworthy in this instance, because one of the lead firms appointed, Milberg Weiss, is under the shadow of an indictment after two of its regular lead plaintiffs pled guilty to taking kickbacks from the firm. Its lead client fired the firm, but Milberg Weiss did not inform the court, resulting in months of further litigation that was resolved when Milberg Weiss agreed to cut in another firm, Bernstein Litowitz, in the lead-counsel pay-offs. Merck's motion to dismiss the entire case is pending.

Ted Frank is a resident fellow and director of the Liability Project at AEI.


1 In re Bridgestone/Firestone, 288 F.3d 1012, 1015 (7th Cir. 2002) ("Firestone I").
2 Castano v. American Tobacco Co, 84 F.3d 734, 741 (5th Cir. 1996).
3 ___ F.R.D. ___, 2006 WL 3391432 (E. D. La. Nov. 22, 2006).
4 Steering Committee v. Exxon Mobil Corp., 461 F.3d 598, 602 (5th Cir. 2006). See also Philip Morris v. Williams (U.S. Feb. 21, 2007).
5 333 F.3d 763 (7th Cir. 2003).
6 414 U.S. 538 (1974).
7 521 U.S. 424 (1997).
8 522 S.E.2d 424 (W.Va. 1999). See generally Victor E. Schwartz et al., Medical Monitoring: The Right Way and the Wrong Way, 70 MO. L. REV. 349 (2005).
9 525 A.2d 287 (N.J. 1987).
10 N.J.S.A. 2A:58C-2.
11 Firestone I; see generally Michael Greve, Harm-Less Lawsuits? What's Wrong with Consumer Class Actions (AEI Press 2005).

Federalist Society Class Action Watch - PointOfLaw Forum

The latest Class Action Watch from the Federalist Society is out:

In this issue, Ted Frank looks at the issues surrounding �the Vioxx class actions� against the drug company Merck, which have continued to mestastasize since the recall this fall. Margaret Little considers the wider ramifi cations of the indictment of Milberg Weiss, the nation�s largest class action firm. David Owsiany reviews the Ohio controversy, in which a class action firm was recently and for the first time barred from a court over deceitful representation in an asbestos litigation case. John Shu provides an overview of the late Verizon settlement, one of the largest in American history. Tara Fumerton weighs a possible trend in Illinois supreme court rulings, and two of our members ask whether the welding fume litigation has come to an end.

Around the web, March 20 - PointOfLaw Forum

Updating some ongoing Point of Law stories:

Legal Imperialism - PointOfLaw Columns

By Joseph G. Finnerty III and John Merrigan

This piece originally appeared in the Wall Street Journal, 2-28-07

The media recently has been writing the obituary of the tort lawyers. "The power of the plaintiffs bar is on the wane," argued the American Lawyer; a cover story in Business Week promised to reveal "How Business Trounced the Trial Lawyers." With apologies to Mark Twain, the reports of the trial lawyers' demise are greatly exaggerated.

While asbestos and tobacco litigation bonanzas are winding down, America's most aggressive contingency-fee law firms still have in place a fee structure in search of an investment strategy. And so, faced with shrinking domestic opportunities, these firms have gone global.

Consider one class-action lawsuit, in which a plaintiffs firm sued Deutsche Bank on behalf of an African tribe which suffered atrocities committed by imperial Germany in the 19th century. Or another, consolidating 10 complaints filed around the country on behalf of all South Africans injured by the former apartheid regime from 1948 to the present.

One of the South African complaints was on behalf of a class including 32,000 plaintiffs; the class in another was estimated to encompass "millions of individuals." The defendants, almost 100 multinational corporations that did business in South Africa after 1948, were alleged to be liable for injuries on the theory that they had aided and abetted the apartheid regime. Purported damages in just one of the consolidated actions total $400 billion.

The law used to lodge these massive foreign class actions in the U.S. is the Alien Tort Statute (ATS). This obscure piece of legislation adopted in 1789 gave federal district courts jurisdiction in civil cases brought by an alien for a tort committed in violation of the law of nations, or of a U.S. treaty. The law was passed primarily to assure a hearing for cases involving offenses against foreign ambassadors, violations of safe conduct and piracy.

The ATS was virtually dormant for two centuries. Then relatives of a Paraguayan citizen who had been kidnapped and tortured to death by a Paraguayan police official—on Paraguayan soil—brought a civil suit against the police official. Plaintiffs and defendants happened to be in the U.S., the police official illegally. In 1980 a U.S. court of appeals allowed the suit to go forward under the ATS, on the grounds that the police official violated international law, including various U.N provisions. From that acorn a mighty oak has grown.

Even by American standards the size of recent ATS class actions is extraordinary. Cases involving wholly foreign events routinely consist of tens or hundreds of thousands of "John Doe" plaintiffs who reside in remote locations as distant as Sudan and Pakistan. The size of the class of defendants has also grown to 500 or more deep-pocketed individuals or companies.

The fact that these lawsuits appear in U.S. courts at all defies common sense. Imagine our justifiable indignation if courts in Japan, France or Russia determined they had jurisdiction over alleged wrongdoing by Americans, in America, against other Americans. It takes a thoroughly arrogant view of the world—call it legal imperialism—to presume that our courts should be the arbiter of problems everywhere, whether or not the problem had anything whatsoever to do with the U.S.

Nevertheless, our tort lawyers presume just that, demanding that our court system sit in judgment over alleged conduct occurring completely within the borders of other sovereign nations, regardless of the effect this may have on U.S. foreign relations. Huge ATS cases have been filed against classes of unnamed defendants in Saudi Arabia, the United Arab Emirates, Qatar and other countries in the Middle East where vital, and delicate, U.S. national security interests are at stake.

Of course, it ultimately will be impractical for U.S. courts to police these monster ATS class actions if they are allowed to proliferate; they dwarf in size the asbestos cases that currently plague the U.S. courts. Congress could have amended the ATS to limit the damage, and in 2005, Democratic Sen. Dianne Feinstein proposed to do so, without success.

Fortunately, the Supreme Court weighed in. In Sosa v. Alvarez-Machain, a Mexican doctor suspected to have participated in the torture and murder of a U.S. DEA agent was apprehended in Mexico by Jose Sosa, a Mexican national hired by U.S. law enforcement. Mr. Sosa brought the Mexican doctor to the U.S., where he was arrested. The doctor sued Mr. Sosa for unlawful detention. In 2004, the Supreme Court dismissed the action and imposed a "high bar" against innovative ATS lawsuits. As a result of Sosa, several ATS suits have been rejected because of the potential for interference with U.S. foreign policy.

In one case, the D.C. circuit dismissed an ATS case seeking reparations from Japan for crimes committed during World War II because the suit interfered with state-to-state negotiations and threatened to "disrupt Japan's delicate relations with China and Korea, thereby creating serious implications for stability in the region."

In another, a federal court dismissed a case brought after the Israeli Defense Forces used heavy equipment to demolish buildings in the Palestinian territory. Plaintiffs sought damages from the manufacturer, Caterpillar, along with an order to stop supplying products to the Israeli armed forces. The court noted that the plaintiffs improperly sought to challenge the acts of an existing government in a region "where diplomacy is delicate and U.S. interests are great."

Trial lawyers nevertheless continue to test the outer limits of ATS liability, "high bar" or not, by filing an array of increasingly ambitious ATS class actions. In one pending case, Wal-Mart has been sued on behalf of residents of China, Bangladesh, Indonesia, Swaziland and Nicaragua. Plaintiffs seek to hold the company vicariously liable for the labor policies of its overseas suppliers. The improvement of labor policies in other countries is certainly a worthy goal. But it is the province of the executive branch and Congress under the foreign affairs and treaty-making powers, not that of attorneys looking for contingency fees.

The corporations named in the South African case—including IBM, General Motors, Ford, Xerox, Coca-Cola and Citigroup—were legally doing business in South Africa pursuant to the official U.S. policy of "constructive engagement" that sought to encourage positive changes in South Africa through economic investment. Recognizing this, the federal court in the Southern District of New York dismissed all 10 of the cases.

That dismissal, along with the dismissals of several other ATS cases, is now pending on appeal before the Second and Ninth Circuits. As these and other ATS cases ripen for appellate review, the era of post-Sosa ATS jurisprudence is entering a critical phase.

The executive branch has promoted strict conformance with Sosa: Both the Clinton and Bush administrations have filed progressively stronger "Statement of Interest" briefs urging that federal courts dismiss ATS cases that could interfere with U.S. foreign policy.

Still, leading class-action law firms such as Motley Rice, Milberg Weiss and Cohen Milstein have launched exploratory ATS cases to test the waters, trying to maneuver around sovereign immunity, which prevents lawsuits against foreign governments. Instead, the plaintiffs lawyers claim that U.S. corporations doing business abroad are vicariously liable for the purely overseas acts of foreign governments, or other actors, in jurisdictions where the U.S. companies do business. And pressured by the massive exposure involved in ATS class actions, defendants in some early cases have opted to settle rather than undertake the risks of litigation.

These plaintiffs firms are flush with cash, experts in the business of creating cases, and undeterred by setbacks. In fact, contingency-fee lawyers take each rejection as a lesson in which tactics work and which do not. They know that if they can weather dismissal motions in a single case, they can proliferate a succession of copycat ATS class actions.

Once they do, you can be sure that a torrent of global ATS class actions will follow—to the detriment of the U.S. court system, foreign policy and U.S. standing around the world.

Mr. Finnerty heads the New York Litigation Practice Group for DLA Piper, which represents defendants in ATS cases. Mr. Merrigan, a partner at DLA Piper, is former chairman of the Democratic National Committee's Business Council.


For more information, please see "There They Go Again" The Trial Bar's Quest for the Next Litigation Bonanza By Arthur Fergensen and John Merrigan, January 2007.

The Capital Market Crackup - PointOfLaw Columns

To shoot yourself in the foot is bad enough for U.S. capital markets; so why are we reloading and firing again?

By Jim Copland

(This piece appeared in the December 2006 issue of Chief Executive Magazine)

At the turn of the 20th century, most American companies were incorporated in the state of New Jersey. Today, of course, public companies are typically chartered in Delaware.

How did New Jersey lose the valuable corporate charter business to its southern neighbor? As New Jersey's governor, Woodrow Wilson led a crusade to "trust bust" big businesses through the state's unique position as the incorporation state of choice. Predictably, however, businesses chafed at the new restrictions and moved to Delaware, which had incorporation laws identical to New Jersey's old regime. Today, Delaware's low taxes are due in part to Wilson's folly; the state earns over 40 percent of its general revenues from incorporation fees.

This history lesson is apropos today, as the U.S. appears to be losing its long-established grip on the market for publicly traded securities. IPOs on European exchanges surged past those in the U.S. in 2005, in terms of both number (603 to 433) and the total offering value (51 billion euros to 28 billion euros)�marking the first time that the U.S. had not led at least one of the two categories Only two of the 20 largest IPOs in 2005 were listed in the U.S.

Although some weakening of the American position is inevitable as foreign capital markets grow more sophisticated, closer examination of 2005 numbers makes this reversal of fortune more ominous. Among overseas IPOs, in which a registrant listed in a non-home market, Europe placed 126 offerings worth 9.6 billion euros, as compared to America�s 23 offerings worth 3 billion euros. London has become the venue of choice for large Russian and Chinese IPOs. Even for venture-backed start-ups, European exchanges hosted 60 IPOs in 2005 versus 41 in the U.S.; nine of the 10 largest VC offerings went public in Europe.

What explains the rush away from the U.S.? The biggest explanatory factor is the Sarbanes-Oxley Act of 2002. Its many new demands include greater reporting requirements for insider trading; firewalls to ensure auditor independence; bans on most personal loans to company officers and directors; and stiffer civil and criminal penalties.

Notable from the perspective of being publicly listed on U.S. exchanges is Section 404 of SOX, which requires an internal control report in each mandated annual 10-K filing. According to a survey of over 200 businesses with average revenue of over $5 billion, annual Section 404 compliance costs totaled over $4 million per company; analysts estimate a total direct compliance cost of $6 billion. Small-cap companies suffered a 22 percent rise in audit fees, versus 6 percent for mid-cap, and 4 percent for large-cap corporations.
What's more, SOX imposes huge indirect costs through what Professors Larry Ribstein and Henry Butler, authors of The Sarbanes-Oxley Debacle, characterize as "interference with business management, distraction of managers, risk aversion by independent directors, over-criminalization of agency costs, reduced access to capital markets, and the crippling of the dynamic federalism that has created the best corporate governance structure in the world." Ribstein and Butler estimate the total indirect costs of SOX to top $1 trillion and point to a "litigation time bomb" waiting to explode.

American businesses already suffer from an out-of-control legal system, which, even excluding securities litigation and the massive multistate tobacco settlement, costs more than twice as much as the legal systems of other developed nations as a percentage of the economy. Moreover, America's securities litigation industry imposes a direct tax on companies that enter the U.S. public equity markets. Though hailed as defending the small investor, securities litigation brings no direct benefit to most shareholders.

What�s more, though the threat of litigation clearly creates incentives that affect the behavior of corporate officers, the changes in behavior do not seem to be related to improving information relevant to market pricing. In part, this failing can be explained by the excessive cost of discovery in securities class action litigation, which enables plaintiffs' attorneys to extract substantial settlement values from defendant firms, regardless of case merits.

In 1995, Congress tried to reform securities litigation through the Private Securities Litigation Reform Act (PSLRA). First, the PSLRA tried to rein in "strike suits" in which securities lawsuits are filed whenever a stock price sees a rapid, major decline. Such stock price drops are regular occurrences in the technology sector, which naturally trade at high multiples of current earnings, if any, and are priced based on speculative assumptions about future earnings growth. The PSLRA sought to address the issue by requiring more in-depth pleading standards to support a securities claim and automatically staying discovery while a motion to dismiss is pending.
Second, the PSLRA tried to remedy what legal scholars call the "agency cost" problem inherent in any class action litigation. By definition, individual claims are small for class litigation, so no individual plaintiff typically has sufficient interest to monitor or control the class attorneys. As securities class action king Bill Lerach once boasted to Forbes, "I have the greatest practice in the world. I have no clients." To fix this issue, the PSLRA forced judges to select the investor most likely to protect the class of claimants' interests�typically the largest investor�as the lead plaintiff, rather than permitting the first plaintiff filing suit to control the litigation.

Unfortunately, the PSLRA did not, in general, work as intended. After an initial one-year decline, the number of securities lawsuits filed annually essentially returned to the pre-PSLRA level, and indeed increased slightly.

Enterprising plaintiffs' lawyers realized that the largest investors in the economy were none other than public employee pension funds, typically governed by politicians and state employee union heads. The securities lawyers cultivated these constituencies. Furthermore, if federal prosecutors' indictment against Milberg Weiss is to be believed, at least some securities lawyers skirted the PSLRA by offering kickbacks to individuals who filed bogus suits.

Meanwhile, SOX opens up new avenues of litigation by imposing hosts of new disclosure and monitoring requirements and thus theories of liability. It also gives firms strong incentives to develop more complex mechanized oversight systems, which will make public companies even more susceptible to onerous electronic discovery.
So what's a CEO to do? There may be some synergies created by acquiring smaller companies overburdened by the new requirements. But such savings should not be overstated �and are likely outweighed by greater exposure to securities litigation.

Clearly, the incentive to take one's company private, or to delist from U.S. markets and relist overseas, is now more compelling. But the preferable�and certainly the more patriotic�response is to encourage Congressional leaders to revisit SOX as part of a comprehensive securities law reform, closing the loopholes left open by the PSLRA. If not, U.S. markets may suffer New Jersey�s fate from a century ago.
Jim Copland is the director of the Manhattan Institute's Center for Legal Policy. This article is based on his testimony before the House Financial Services Subcommittee on Capital Markets, Insurance and Government- Sponsored Enterprises of International Tort Costs.

Was Milberg satisfied, or just shy? - PointOfLaw Forum

Did the class of workers being represented get enough relief that the lawsuit could be dropped? Or did turning on the light make the law firm scurry away?

Plaintiffs' firm Milberg, Weiss & Bershad voluntarily dismissed a nationwide employment class action late last year against Wal-Mart, saying that the retailer three months earlier had changed its policy on health care coverage. But the move to dismiss came just two weeks after the Atlanta federal judge handling the case told defense attorneys they could probe "highly irregular" payments to the lead plaintiff by the local counsel....

The dismissal came after a federal judge in Georgia allowed Wal-Mart's attorneys to conduct more discovery regarding payments to Lisa Smith Mauldin by George Stein, the Georgia lawyer who was serving as local counsel at the time. The judge also refused to allow Milberg Weiss to appoint a new lead plaintiff in the case until the discovery had been completed.

"Stein's payments to Mauldin are highly irregular and at the very least create the appearance of impropriety," wrote U.S. District Judge Julie E. Carnes of Atlanta in a Nov. 22, 2006, order. "Moreover, Milberg Weiss was recently indicted on charges of recruiting and paying plaintiffs to participate in class action lawsuits."

Stein, who has withdrawn from the case, has admitted paying Mauldin checks totaling $2,250, but denies that it was to induce her to sue Wal-Mart or that Milberg knew about it.

Cooperman to plead guilty to Milberg Weiss kickbacks - PointOfLaw Forum

Steven G. Cooperman will plead guilty to taking $6.4 million in kickbacks from Milberg Weiss as a named class representative in seventy cases where they obtained more than $133 million in attorneys fees. The indicted firm, whose politically-connected lawyers are among the lead fundraisers for the Democratic Party, continues to deny the allegations. Trial is scheduled for January 2008. [WSJ; Bloomberg; Reuters; DOJ press release; The Recorder; LA Times; NY Times]

I discussed the Milberg Weiss indictment in testimony to Congress last year.

Securities class actions down in 2006 - PointOfLaw Forum

Lyle Roberts summarizes the competing numbers from Cornerstone and NERA:

Why the decline in filings this past year? Possible reasons put forward by the reports include better corporate governance (Cornerstone and NERA), a strengthened federal enforcement environment (Cornerstone), a strong stock market combined with lower stock price volatility (Cornerstone), and distraction on the part of the plaintiffs' bar (NERA).

The Chamber of Commerce votes for the last explanation, noting that the decline in Milberg Weiss cases alone is greater than the decline in total cases. If I can add two more explanations: (1) there's just simply a backlog of bigger cases filed earlier in the decade. 21st-century cases have many more e-mails and tertiary defendants than cases in the 1990s; (2) the number of securities cases has always naturally fluctuated somewhat—add an upward market, firms withdrawing from or refusing to enter American securities markets, and Milberg Weiss distraction, and of course the total number is going to go down.

What's worth noting is that "number of securities suits" is hardly the best number to judge this by: Lerach Coughlin doesn't get paid by the complaint. Settlements and contingent fees are up, and so are legal defense expenses. It's hardly an improvement in the legal climate if the plaintiffs' bar has replaced the $10 million nuisance settlement with the $1-billion extortion payoff by a bank to avoid a 5% risk of being bankrupted by a meritless legal ruling holding it entirely responsible under joint and several liability for the Worldcom or Enron collapse.

Worse still for Mr. Lerach - PointOfLaw Forum

Building on Ted's posting, today's Wall $treet Journal reports that the main plaintiff in a securities fraud suit in Dallas has asked the court to fire William Lerach and his firm, Lerach Coughlin Stola Geller Rudman & Robbins LLP, because its relationship with Lerach had "deteriorated" following the DOJ investigation of him and his former firm (Milberg Weiss).

A troubled December for Milberg Weiss - PointOfLaw Forum

The indicted law firm has been disqualified twice in the last two weeks from serving as lead counsel because of concerns over the effect of the indictment on their ability to try cases (including a scathing ruling by U.S. District Judge D. Brock Hornby of Maine); such concerns could well be self-fulfilling. Milberg's troubles may get worse before they get better; if Milberg adheres to the traditional end-of-year bonus and profit-distribution schedule for its attorneys, that means that they could be due for a rash of resignations in January. I'd hate to see Milberg wither away because of the indictment before they can be convicted in a fair trial.

The W$J reports that, following Milberg Weiss�s indictment for allegedly sharing legal fees with class-action clients, the firm has just been disqualified from serving as lead counsel in an antitrust class action. The suit claims that automobile manufacturers tried to prevent cars purchased relatively cheaply in Canada from entering the United States.

Here is the ruling on the disqualification motion. Melvyn Weiss says his firm has invested three years and $2.3 million in fees and expenses in the case. He downplayed the judge's decision: "Judge Hornby �is not an expert on the future of my firm,� Weiss asserted. �Courts all over the country are keeping us in as lead counsel and even appointing us as lead counsel.�

We shall see...

Schulman's Milberg departure, cont'd - PointOfLaw Forum

Via David Lat: Justin Scheck, at newish CalLaw blog Legal Pad (hey, isn't that name taken?) has some speculation about possible financial reasons for the timing of the Milberg Weiss partner's resignation (see Dec. 8), and also about the question of whether the feds are going to flip him (Schulman, that is). Specifically (to borrow some language from Ted, who also noticed this story) under Schulman's contract with the firm a resignation before year-end allows him to have his severance pay based on 2005 (pre-indictment) profits rather than 2006 (post-indictment) profits, something that could be worth an additional $5 million to him. Scheck further notes that Schulman recently switched defense attorneys, and that he "very well could" agree to a plea deal, which would almost certainly require him to testify against co-defendant Weiss and the so-far-unindicted Lerach.

Incidentally: on the question of who got to the "Legal Pad" name first, note that Cal Law's first post is dated Oct. 31, while Roger Parloff's is Oct. 8. Advantage: Parloff!

P.S. On the question of "Legal Pad" timing, Brian McDonough, who edits the CalLaw blog by that name, corrects my misimpression and is a good sport about it:

Thanks for linking today to Justin Scheck�s item about Brad Schulman, but I must take issue with you over your good-natured shots at us regarding the name �Legal Pad.� We�re actually not as �newish� as you think. You compared the Oct. 8 debut of that CNN blog to our current blog, where you found the earliest post to be Oct. 31. In fact, our initial post was November 8 � 2005! We initially launched our blog on another host, and that version is still up, at It never occurred to us to link backward to the pre-migration version, so there was nothing there on Typepad to tell you that we beat CNN by nearly a year.

Of course, �Legal Pad� is such an obvious and common term, it�s no surprise that it shows up multiple places, but when we chose the name, a cursory Google search had failed to turn up any other blog using it. If you�re motivated to update your item, we would appreciate it. Regardless, though, we�re pleased your forum linked to us.

I feel illiterate at having somehow overlooked this CalLaw blog, which, as a check of its URLs will confirm, has been publishing all sorts of good stuff -- this on the Lemelson patent litigation, for example -- for more than a year now.

Schulman quits Milberg Weiss - PointOfLaw Forum

Indicted partner Steven Schulman has resigned his place at the embattled firm. The WSJ's Nathan Koppel in June published (sub-only) a profile of Schulman which mentions other controversies involving the lawyer, including allegations in two then-pending civil suits that he used complainants as plaintiffs without their consent.

More on the Committee on Capital Markets Regulation - PointOfLaw Forum

And Peter Lattman has a great quote from the report itself:

  1 2 3 4 5 6 7 8 9