Bailey Somers of a relatively new publication called Securities Law 360 has this article entitled "SEC Bypasses Fair Fund in Favor of Claims Administrator" about the SEC's proposal to distribute its $250 million Qwest settlement through the claims administration process in a parallel securities class action.  I previously discussed this proposal here.  As stated in the article,

This is not the first time the SEC has looked to a claims administrator to distribute settlement funds.

In February 2005, the agency outsourced the distribution of a $25 million settlement with Lucent Technologies. In 2004, the agency combined a $150 million settlement with Bristol-Myers Squibb with the $300 million settlement reached in the private class action litigation with the company.

The instances in which an outside distribution fund has been used have greatly benefited investors, according to Bruce Carton, Vice President of Securities Class Action Services at Institutional Shareholder Services, Inc.

"I think it's a great way to go for the SEC," Carton said. "I certainly hope we continue to see these outside funds used. We file claims for institutions, and it's difficult and challenging when you have the WorldCom class action settlement on one hand and the WorldCom SEC settlement on the other. To the extent that those can be combined, it makes investors' lives much, much easier. It also eliminates the need for the SEC to become a claims administrator."

Our fourth (and final) excerpt below from The Money Lawyers, by Joseph C. Goulden, sheds light on the behind the scenes wrangling that occurred between the plaintiffs' bar and President Clinton with respect to the Private Securities Litigation Reform Act of 1995.  As described by the author,  Lerach played the "Nader card" to persuade Clinton to follow through on an early promise to veto what had in the end become a "veto proof" bill. 

Excerpt #4 from The Money Lawyers
Chapter: "Lerach and Weiss: The Class Action Scourges of the West and East"
by Joseph C. Goulden

But even as the reform act moved through Congress, the plaintiff lawyers retained a powerful ally: President Bill Clinton. They gave him millions of dollars of campaign money; he passed himself off as their friend. During the summer and early autumn of 1995 he sent them repeated signals, Don't worry, I'll veto it and make them come back with something you can live with. I am your friend.

But was the President serious? The act finally passed with so-called "veto-proof" margins in both houses. So all sides began a tedious game of Clinton-watching: would he sign, or would he veto? What few persons appreciated was the deep, if ambivalent, relationship between Lerach and Clinton.

Lerach to Clinton: "Veto -- or Else!"

Bill Lerach and I had our first in-depth talk in September 1998, the very week that seamy details emerged of Clinton's adulterous affair with White House intern Monica Lewinsky. Lerach interrupted to take a phone call from his wife. In sotto voce murmurs he seemed to be trying to soothe some ruffled feelings.

After he hung up, he volunteered an explanation. The Lerachs were hosting a fund-raising event featuring President Clinton the following weekend. Given that Lerach has two beautiful daughters within Lewinsky's age range, the women of the house were not enthralled at entertaining a guest involved in outrageous philandering. Mrs. Lerach (the third woman to carry that title; she has since been replaced by the fourth) was upset also because she had just overseen an expensive decorating job, and the Secret Service detail wanted some things moved around. But Lerach was going ahead with the fundraiser anyway.

Lerach was typical of the Clinton supporters who during this troubling period were manually skilled enough to hold their noses and write checks at the same time. He found the President's sexual misconduct "reprehensible...unforgivable...a damned dumb thing." Without breaking verbal stride, he went on to say that he admired the President anyway because of their similar up-from-nothing backgrounds to success in their respective fields. (*)

(*)   Mel Weiss is also a political friend of Clinton. In 1997, The National Law Journal surveyed White House coffee and overnight visitor lists to see how many lawyers partook of Clinton hospitality. High on the list was Mel Weiss, who gave $224,000 to the Democrats in the 1995-1996 election cycle, $200,000 of which earmarked for the Clinton-Gore campaign.

Given that he had personally donated hundreds of thousands of dollars to Clinton and other Democratic candidates over the years, and led efforts that brought in millions more, in the autumn of 1995 Lerach was ready to demand a quid pro quo. He wanted a promise from Clinton that he would veto the PSLRA. Clinton wavered. He talked about the "veto-proof" vote. Why should he squander political capital in a losing fight? Lerach sensed that his supposed friend was wavering. And what he did can be interpreted as either (a) an attempt to persuade Clinton to stand by his stated intentions or (b) crass political extortion.

Whatever Lerach's motive, the central figure became Ralph Nader, who has long been a close friend and financial beneficiary of Lerach. Nader had long helped the plaintiff lawyers in their earlier fights against changes in securities laws. Now he (and Lerach) saw a means of bringing the President back in line. Along with other leftists, Nader that fall was increasingly disgusted with Clinton's centrist policies and his repeated betrayal of promises to persons who had helped him win election. Nader had already made public sounds about mounting a symbolic challenge to Clinton in the California Democratic primary the next spring. No one gave him a chance of winning. But Nader could embarrass Clinton into moving left and force him to spend dollars that he preferred to save for the general election. Lerach put the threat directly to the President, either during or just after a White House dinner that fall.

Lerach absolutely refuses to discuss what transpired between him and Clinton, or what he told the President. But the gist of his message was that either Clinton vetoed the reform act, or Lerach would give Nader enough money to make a serious run in the primary.

And Clinton capitulated. He vetoed the act, citing technical objections intelligible only to securities lawyers.            

Critics immediately jumped on Clinton for "selling out" to the plaintiffs' bar; Forbes Magazine, among other publications, noted that Lerach "had dinner at the White House" a few nights before the veto. Indeed he did, Lerach said -- along with about 400 other persons, including the chief executive of a Big Six accounting firm who supported the legislation. "Big deal, huh?" he scoffed.

The episode stands a vivid example of the power of money in American politics, and how a rich plaintiff lawyer can bully even a President of the United States.

Robert Kessler of Newsday has this mind-blowing article about the criminal trial of three former Symbol Technology executives in the USDC for the Eastern District of New York.  Apparently after a six-week trial and four days of deliberations, the jury presented the judge with a note stating "We are at a deadlock. We have exhausted all options."  The judge then granted a mistrial  at the request of the defense attorneys, and everyone basically went their separate ways.

Not so fast. 

The defense attorneys have now made a motion to bring the jurors back to court to be questioned as to whether they actually acquitted two of the defendants.  It seems that one of the defense attorneys has now spoken with seven of the twelve jurors, and they all concur that the jury had voted to acquit two of the three  defendants completely, and to acquit the third defendant of all charges except one!!

The article states that the prosecutors on the case are opposing the effort to recall the jury because

"unreported deliberations [outside the courtroom] can have no legal significance," the prosecutors said. A verdict counts legally only when a jury says so in open court, not afterward, the prosecutors said.

Notably, prosecutors reportedly concede that one of the defense attorneys asked the court if it would be appropriate to question the jury as to whether they had reached a verdict on any of the accused, but they argue that the defense attorney only did so "unambiguously" after the judge had granted the mistrial motion.

Honestly--how many people out there knew that the "Fair" in "Fair Funds" (from Section 308 of SOX, which permits the SEC to return civil penalties recovered in enforcement actions to investors) is actually an acronym?  I sure didn't, and I've been writing about this provision for years.

As mentioned in this article by Sara Hansard of InvestmentNews.com, "Fair" stands for

Federal
Account for
Investor
Restitution

Dubious, I briefly researched this on the Internet ... and confirmed that it is true.   

I recently was going through the oldest Litigation Releases available on the SEC website (1995 and 1996) and noticed a few things I thought were interesting:

1.  According to the Note at the bottom of the list of 1995 releases, the SEC's website was born on September 28, 1995.  This occurred during my time at the SEC in the Division of Enforcement but, oddly enough, I have no memory of the website being rolled out.  I do recall that for a long time--probably extending well into 1996--we did not have access to the Internet at our desks, but rather needed to go into a separate "Ticker Room" where a computer with Internet access was available alongside a Bloomberg machine and a Dow Jones News hook-up.

2. On November  15, 1995, less than two months after the SEC's website went live, the SEC issued what appears to be its first Litigation Release referencing the Internet.  I particularly like the old-school capitalization ("InterNet") used in the Release and the fact that a detailed explanation of the Internet was very much necessary back then:

As detailed in the Complaint, beginning in or about May 1995 through the present, Frye has posted numerous messages on the InterNet, a decentralized web of computers, accessible to millions of potential investors across the country and world-wide, in which Frye has solicited funds from investors.

3.  Although the SEC appears to have abandoned this practice today (see my post asking why here), there was a time that the SEC issued Litigation Releases about both its victories and its losses.  In this Litigation Release from December 1996, for instance, the SEC announced that a federal court in Texas had granted a defendant's motion for summary judgment in an insider trading case.  The Release candidly states that the court "ruled that the earnings information in Mr. Hoover's possession was not material.  On October 3, 1995, the Court entered a Final Judgment in favor of Mr. Hoover."

The SEC today provided the latest reminder to institutional investors of the importance of filing claims in securities class action settlements by proposing to dump the funds from its $250 million settlement with Qwest into the separate Qwest securities class action settlement pool.  You can see my longer post on the subject over at the ISS Corporate Governance Blog.  (You also can travel back through Parts I-IV of this series by starting here).

ISS launched a new corporate governance blog today called, well, "Corporate Governance Blog."  As ISS says in this press release,

The ISS Corporate Governance Blog is expected to be the Web's most comprehensive compilation of institutional level corporate governance content, including information on emerging corporate governance trends, proxy voting, social and environmental issues, shareholder meeting commentary, compliance considerations and other areas of interest to both global institutional investors, corporate issuers and industry constituents.

I expect to contribute to this new blog periodically so there will likely be some securities litigation content on there, as well.

Excerpt #3 below from The Money Lawyers, by Joseph C. Goulden, provides some interesting operational and financial details on the now-divided Milberg Weiss Bershad Hynes & Lerach law firm.   Probably not coincidentally, the income figures stated in the book (which are based on information revealed in 1999 litigation involving the firm) peak just before the effective date of the PSLRA (a.k.a. "Kill Bill Vol. 1").

Excerpt #3 from The Money Lawyers
Chapter: "Lerach and Weiss: The Class Action Scourges of the West and East"
by Joseph C. Goulden

Lerach argues that very structure of biotech and high-tech companies makes them vulnerable to lawsuits. In his view, "A small growing biotech company cannot pay its president the salary that General Motors or IBM pays their top person. In fact, a lot of the compensation for the executives is stock-option based, where the executives are going to exercise their stock options every quarter and sell the stock. This puts tremendous pressure on those executives in the short term to keep the stock price up because they know, as a matter of their ongoing compensation, that they are going to exercise options and sell stock.

"And, looking at it from the most favorable light, it is just a bad matrix. The compensation system puts pressure on them to put out positive news and conceal bad news because of that."

Aligning himself with Weiss also gave Lerach something he felt essential to a successful practice. "Call it what you like, but I like the term 'f*** you money,' which means a bankroll big enough to carry you when a suit drags for two or three years and does not provide a dime of income. Mel was doing well enough in New York, with his own stuff, that he could put up the capital I needed to get started. You can be smarter than anyone in the world, but unless you have enough money to keep a suit alive, you have nothing. You either lose, or you are forced to settle on the cheap to survive." Given the pool of capital initially supplied by Weiss, "the defense attorneys gradually learned that we were here to stay, and that they could not grind us down."

Now, of course, Lerach has money in his own right -- enough to support nearly 100 lawyers spread over three floors of the First American Center. (Weiss heads a New York office with 75 partners and almost a hundred associates. There are outposts in San Francisco and Florida. There are also researchers, investigators (both staff and contractors), enough computer nerds to staff a high-tech company, and specialists who do nothing else but keep track of the enormous flow of paper that sloshes around the office. (I asked Lerach how much money it cost a year to keep his operation going. He answered with a grin that said such information was none of my business. Nor would he or Mel Weiss tell me what they earned annually.)*

(*) Lerach made the same refusal in Congressional hearings in 1995. He told Representative Christopher Cox (R., Calif.), "You know, my mother told me when I was growing up, the most impolite question you could ever ask another person was how much money they make…. I don't ask other people what they make and I don't tell other people what I make." Cox noted that since Lerach reported $255,000 in political contributions in 1994, "I guess you made more than that."

In 1999 litigation in Chicago, however, the closely guarded figures about Milberg Weiss income came out of the closet. Here they are:

Year            Weiss               Lerach         Firm Profits (In millions)

1988           2.6                        2.3                   20.8

1989           7.1                        6.5                   35.4

1990           3.4                        3.2                   19.8

1991           5.8                        5.8                   33.4

1992           9.7                        9.3                   46.4

1993         14.1                      13.6                   85.5

1994         13.0                      16.0                 101.2

1995         16.1                      15.0                 112.3

1996           9.4                        9.1                   63.3

1997           7.6                        7.6                   61.1

1998         13.6                      13.6                  91.0

But investment in non-lawyer staff is essential to the firm's success, in Lerach's view. "Let me tell you why investigators are important," he said. "We're working on a potential case right now involving [a clothing firm on the West Coast]. At about the same time their stock began to go into the tank, the trade press carried an item saying that a 48-year-old executive who had been with the company for 21 years had resigned 'to spend more time with his family,' which is one of the euphemisms that always catch my eye.

"So we had an investigator see what she could find out by talking to employees on the Internet. She found a chat site for people who worked for the company, and she hit pay dirt in a hurry. The owner had a 29-year-old daughter, a high school graduate who had worked as a model, never got out of college, and who had never had a real job. She was suddenly made the president, and she didn't have an idea of what she was doing, and other employees were mad as hell. These people in the Internet chat rooms told her the whole story. Yeah, this research is expensive, and you hit some dry holes. But you've got to scratch for information." (Sure enough, several weeks later Lerach sued the company on grounds that it had not sufficiently informed shareholders of its earnings prospects and caliber of management.)

Lerach made plain that he runs a law firm, not a training school. He does the hiring for the San Diego office, and he does not cater to just-graduated rookies. "Your slip-and-fall case, your fender-bender, that's a few thousand bucks. Very little comes through the door here that isn't worth more than a million dollars. So you don't turn amateurs loose on that kind of playing field; there is too much money at stake, and investors who really need to get it back."   He looks for persons with extensive trial or investigative experience, and he keeps a close eye on them through their first cases. He especially likes former Federal prosecutors. One associate who left the firm told me that although he "worked my living butt off, almost 3,000 hours a year," he felt the experience of working with Lerach was "incomparable." Other associate, still at the firm, complained of being "late Friday bone-tired, and a weekend of work ahead of me." He was looking for another job.

A complete replay of our webcast last week entitled "Securities Class Action Litigation Moves Beyond U.S. Borders" is now available here.  It contains some very useful (and to my knowledge otherwise unavailable) information and commentary on the latest securities class action developments in Italy, South Korea, Australia, Israel, Sweden, The Netherlands, Canada and Germany.

Hey you--do you want to help run the SEC's Division of Enforcement in the high-level position of Associate Director?  Well, today's your last day to apply, so crank that resume out quickly.  And tell a friend, because there are two spots open.

Below is the second in a series of excerpts we will post at SLW from the new book The Money Lawyers, by Joseph C. Goulden.  In this excerpt, Lerach is explaining to the author "how it all started"--how although he had "defiantly written on his law school application that he did not intend to spend his life 'in a nine to five job,'" he started out doing just that by his choice for his first job with the big Pittsburgh firm of Reed Smith Shaw & McClay (at a then-"fantastic" $17,000 a year).   Lerach then explains to the author some realities he learned about the profession of law, and how he eventually met up with his future partner, Mel Weiss.

Excerpt #2 from The Money Lawyers
Chapter: "Lerach and Weiss: The Class Action Scourges of the West and East"
by Joseph C. Goulden

First, by Lerach's observation, many lawyers at Reed Smith cared nothing about the merits of a client's case. Even when the defendant corporation was wrong, they worked hard to get it out of trouble. He believed his fellow corporate lawyers could deflect discovery of evidence, often skirting close to flaunting the canons of ethics. Time and again he would hear colleagues joke about the strength of a plaintiff's case, and how they intended to win anyway. "I would find myself thinking, 'the poor bastard, if he only knew what he really had going for him.' Our clients knew they had done something wrong; we won by wearing them down." A local judiciary friendly to corporate interests helped.

Second, Lerach realized the raw power of resources. Reed Smith, with its deep pockets and well-paid lawyers, simply wore down and outlasted plaintiffs. "This was a very important lesson to me," Lerach says. "I knew that if I ever found myself on the other side, I was going to need money -- a helluva' lot of money."

But Lerach learned his way around the courtroom. His unhappy speciality was what he called "worms in the can of corn cases," which he defended on behalf of a food canners association. Lerach lived in a milieu of gray flannel suits and button-down collars, and he was so good at what he did that he soon was on the path towards a partnership.

Lerach even dabbled in securities law -- but on the side of corporations who came under attack by dissident shareholders. In 1972, Lerach co-authored an article in the University of Pittsburgh Law Review that later foes would cite with glee and accusation of hypocrisy. Lerach called class actions "procedural monstrosities" and argued in favor of requiring that pleadings be made with "great particularity" to prevent abuses by unscrupulous plaintiff attorneys. He noted that while such changes would be "a departure from the Federal principle of notice pleadings, the serious problem of the abuse of the class action justifies such innovations." Lerach went on to complain about strike suits, which he defined as "claims brought to coerce defendants into a settlement without regard for the merit of the action. Such suits are brought with the hope of obtaining large attorney's fees or private settlements with no intention of benefiting those on whose behalf the suit was theoretically brought." And, he wrote, the mere threat of a class action is useful to plaintiff attorneys "as a bargaining weapon." A decade later, defense lawyers would voice the same criticisms of Lerach suits.

Despite his success at Reed Smith, dissatisfaction tugged at Lerach. Did he really want to spend the rest of his life defending corporate poohbahs, many of whom he thought were incompetent businessman -- and liars as well? Frequently he would feel that the very men with whom he worked knew they were helping conceal corporate wrongdoing, but seemed totally unmoved by conscience. Lerach gulped unhappily and went along with the system and enjoyed the money. Then along came a case that dramatically changed Lerach's life.

"A trust department in one of the Mellon banks had invested about $7 million in a San Diego outfit named U. S. Financial which turned out to be a scam. Now the Mellon bank had zero interest in suing anybody; their mentality was that you didn't settle differences in court. Bankers who sued other people were considered undignified. But in this case, Mellon had no choice because trust money was involved. So it told Reed Smith to go after its $7 million, as part of a class action suit on behalf of other people U. S. Financial had screwed. The firm looked around and said, 'OK, Lerach, you are the firebrand, you handle this case.' I went out to Denver for a meeting of the lawyers who were handling the case."

So one evening in 1975 Lerach rode the elevator up to the presidential suite of the storied Brown Palace Hotel for a meeting of the various lawyers. Presiding was an intense New Yorker with a dense dark beard named Melvyn Weiss, who was emerging as the dean of the small group of lawyers who specialized in suits on behalf of bilked investors. A number of plaintiffs had joined the U. S. Financial suit, and the Denver meeting was to determine who would control the class action into which all the cases were folded.

Weiss explained what the case was all about. U. S. Financial was a self-contained real estate company which "left nothing to chance. It operated its own mortgage company, title insurance company and brokerage business. It built its own product by entering into joint ventures to build, providing all or most of the financing. It also sold most of its real estate to affiliated parties." As Weiss said, the suit "alleged that this company entered into transactions with its affiliates on the last day of every reporting period, thereby creating virtually all of the profit for the entire reporting period. In those situations, U. S. Financial was advancing the money to the buyers to make their down payments. [T]he transactions had no real economic substance." The churning resulted in millions of dollars being drained from the pockets of investors.

Lerach was impressed. "Mel sat there like the complete master of the universe. He was barking orders right and left, saying which lawyer would do what, laying out the scenario for what would happen in court the next day. He was in complete charge, and all of us sat there saying, 'Yes, Mel, you're right, whatever you want....' Man, I was impressed. Mel was the smartest lawyer I had ever seen. I was used to dealing with the uptight, stuffy defense lawyers. Now I was definitely on the other side of the spectrum."

A new book by Joseph C. Goulden called The Money Lawyers contains a very interesting and insightful chapter that examines the history and exploits of Bill Lerach, Mel Weiss and the now-divided Milberg Weiss Bershad Hynes & Lerach law firm.  This chapter of the book entitled "Lerach and Weiss: The Class Action Scourges of the West and East," focuses primarily on Lerach, and is based on Goulden's personal interviews with Lerach and many other individuals (the book also scrutinizes David Boies, Tommy Boggs, the lawyers involved in the breast implant litigation, and several other "Money Lawyers").  I finished reading this chapter last night, and feel like I learned a lot about Lerach and Weiss, both flattering and unflattering.

Thanks to Mr. Goulden, Securities Litigation Watch will over the coming weeks be posting excerpts of the Lerach/Weiss chapter of The Money Lawyers, starting today.  To kick things off, here is the opening salvo of this chapter:

Lerach and Weiss: The Class Action Scourges of the West and East

William S. Lerach and Melvyn Weiss

Milberg Weiss Bershad Hynes & Lerach

San Diego and New York City

by Joseph C. Goulden

My letter to William S. Lerach was candid. I wrote that I had read many nasty things about him in the press, and, especially in publications whose constituency is the high-tech companies of the Silicon Valley -- firms which had surrendered billions of dollars to him and his firm in class action securities suits over the years. I cited one particularly unkind item, a headline in Electrosphere that called him a "Bloodsucking Scumbag." That was just the headline; the text got worse. In any event, surely there must be another side of the story. Could we talk?

One meets "the most hated man in the Silicon Valley" -- another trade publication's depiction -- by riding an elevator to the 18th floor of the One America Plaza Building in downtown San Diego, hard by the harbor. Yachts and powerboats bob at anchor, backdropped by a view that seemingly stretches most of the way to Asia. The electric railroad terminal is a block distant, and the clang of car bells drifts up from the street. The visitors' room at Milberg, Weiss, Bershad, Hynes & Lerach is separated from the reception area by an L-shaped tank containing dozens of garishly bright tropical fish that flash through the water.

Seeing the fish reminded me of what a defense lawyer snarled as he left the Milberg Weiss offices one evening after name-calling negotiations: "It would be a hell of a lot more appropriate if Lerach would get rid of those cute little pets and fill the tank with piranha. Or sharks."

Enter Lerach, at the hurried pace I have learned to associate with busy lawyers, his pumping arms seemingly trying to coax more speed from his feet. He was dressed...well, let me say it this way: Lerach was dressed unlike any big city trial lawyer I have encountered on a working day, a study in casual white, from cotton shirt to cotton slacks, the monochrome broken only by the brown of his Topsiders. I asked later whether this is "dress down Friday." Lerach seemed puzzled, then he laughed. "No, no," he says, "remember, this is San Diego!" The Washington patent lawyer Bernard Meany had chuckled earlier when he told me of his first visit to Milberg Weiss as an expert witness. The receptionist, a "rather buxom woman, who stood about 38 across the top," was wearing a skimpy halter.

Lerach is a stocky fellow in his mid-fifties, his hair (also well on the way to being white) swept up in what seems an Afro slightly modified by a barber from the styling school who developed former President Clinton's distinctive tonsorial style. I had been warned to expect a man of temper, one who loses control of his tongue when talking about opposing attorneys and the high-tech executives they represent.

Stories of the temper are legion. An unfriendly adversary told me he once heard Lerach tell corporate executives during negotiations, "I don't give a f*** if I put your company into bankruptcy. I'm going to take away your beach house and your condo in Aspen by the time I'm finished with you." When he talks about high tech executives, he tosses around vitriol such as "scumbags" and "crime in the suites." He can be combative when dealing with other lawyers. One remembers hearing Lerach storm, "Your professional life is at an end. I am going to destroy you."

But he chose to open our talk with a grin. "So," he said, "some of those guys are saying nasty things about me, eh?"

Indeed they were, for Lerach and his firm are specialists in a type of class action lawsuit that bedeviled officers and directors of publicly held companies for more than twenty years. Lerach's reasoning is simple. If he feels that companies deceived investors with misleading statements, and insiders dump their stock before the truth emerges and the price drops, he sues them. More than a thousand times, Milberg Weiss lawyers have marched into state and Federal court and accused executives of chicanery. And often they have marched out again with settlements or verdicts including contingency fees totaling in the billion-dollar range over the years, leaving corporate bosses seething in their wake. Since the firm's founding 35 years ago, it claims to have been "responsible for more than $30 billion in aggregate recoveries." Profits for the firm twice topped $100 million a year during the 1990s.

Milberg Weiss handles more than half of all private securities litigation cases filed in the United States each year. The year 2000 was not untypical. Of the 204 shareholder class actions filed that year, 149, or 73 percent, came from Milberg Weiss, according to statistics kept by Woodruff-Sawyer & Company, an insurance broker specializing in liability policies for corporate directors and officers. In the five years ending in 2000, according to Lerach's accounting, he and his team gained almost $12 billion in court judgments and settlements. Most are the latter; only about five percent of Milberg Weiss cases actually go to a jury trial. (According to the Federal Judicial Center, roughly the same percentage of all Federal civil cases is decided by a jury.)

Lerach considers himself a private regulatory policeman, doing the job that the Securities and Exchange Commission cannot or will not do. He speaks scornfully of the lackadaisical attitude the SEC has taken towards securities cheats since the Reagan Administration, and continuing during the reign of President Bill Clinton -- a man he considered to be a friend, and for whom he raised hundreds of thousands of dollars from fellow trial lawyers.*

* Reflecting after I spoke with Lerach, I realized perhaps why he continued his friendship with Clinton even while deriding his attitude towards a vigorous SEC. If the SEC did its job as Lerach says it should, he and colleagues could suffer a near-terminal blow to their pocketbooks.

Google CEO Eric Schmidt is quoted in Time Magazine this week as saying:  "The company isn't run for the long-term value of our shareholders but for the long-term value of our end users." 

I found this statement to be a bit startling coming from a CEO, but it raises a fair question: What is the purpose  of a corporation?  Is it to maximize long-term shareholder value?  Is it to maximize value to the people the corporation serves?  Are these mutually exclusive?  Or are these just different ways of saying the same thing?

I'm just a recovering securities litigator and I admittedly don't know these answers, but I'd love to hear what folks like Prof. Bainbridge, Ideoblog, and The Quant think about this.

When you live-blog a trial as the Houston Chronicle's TrialWatch is doing, you get all of the important "behind the scenes" information.  For instance, in this post entitled "Odor in the Court," the TrialWatch blog reports that:

During this morning's session, there was a mysterious pause when the judge called the lawyers to his bench after the regular break. The three attorneys seemed somewhat amused but remained mum about the reason.

Judge Lake kindly told the audience that sometimes there were scheduling problems and we'd take an additional five minute break.

Turns out that five minutes was so Skilling's lawyer Daniel Petrocelli could scrub off his cologne. Apparently a juror in the front row found it overwhelming during his cross-examination of witness Mark Koenig this morning. She said she was gagging from the scent. She felt strongly enough to ask the court for an attorney fragrance correction.

The LA Times also has this article in which the "overwhelming" cologne is identified ("Chocolat") and Petrocelli is quoted as saying, "I get a lot of compliments on that cologne." 

Alistair Barr of MarketWatch has this article on AIG's mammoth $1.6 billion settlement with the SEC, New York Attorney General Eliot Spitzer and the New York State Insurance Department.  According to the article, half of this amount will be distributed to investors through the SEC.

The article observes that the SEC settlement

won't stop investors from continuing to pursue their own claims, said Anthony Sabino, a business law professor at St. John's University's Peter J. Tobin College of Business.

"There are a ton of investor lawsuits against AIG," he said. "Unless these parties have specifically agreed to stop pursuing their claims, today's settlement won't help."

Private securities litigation settlements often end up being larger than those negotiated with regulators, said Bruce Carton, a vice president at ISS' Securities Class Action Services, which tracks legal settlements. (See tables below).

For example, WorldCom settled with the Securities and Exchange Commission for $750 million, but securities class action settlements have topped $6 billion, according to data from Securities Class Action Services.

As widely discussed in articles such as this one, Nortel has agreed to pay $2.4 billion to settle securities class action lawsuits concerning accounting irregularities.  According to the SCAS database, the settlement will be the 5th largest ever, behind only Enron ($7.14B), WorldCom ($6.15B), Cendant ($3.18B) and AOL Time Warner ($2.65B). 

According to Nortel's press release on the settlement and published reports, the settlement will also include an interesting (especially if you work at ISS) corporate governance-related term.   In its press release, Nortel states that

The proposed settlement is also conditioned on Nortel and the lead plaintiffs reaching agreement on corporate governance related matters and the resolution of insurance related issues. 

Nortel is committed to benchmarking its corporate governance practices to those of companies ranked in the top quartile by Institutional Shareholder Services. "The Board of Directors strongly believes that sound and responsible corporate governance is integral to Nortel's future," said Harry Pearce.

While it is not completely clear from the quote above that the benchmarking to ISS' ranking is a term of the settlement, articles such as this one in the E-Commerce Times suggest that this is the case:

In addition to the payments, the agreement will likely include some requirements that Nortel adhere to certain corporate governance standards going forward....

***

Nortel said while details were still being hammered out on the corporate governance terms of the agreement, it was comfortable being compared to the top-ranked publicly traded companies in terms of corporate governance as measured by Institutional Shareholder Services.

You may recall that back in October I commenced a project researching the current state of securities class actions outside the U.S. That research has produced some interesting findings and has helped me to form relationships with lawyers around the world who have insight into securities class action developments in their countries.

On February 16 at 10 a.m. Eastern Standard Time, my company, ISS' Securities Class Action Services, will host a free webcast featuring lawyers representing seven countries in which securities class actions have emerged or are now emerging. Those countries and lawyers are as follows:

• Canada -- John Chapman; Miller Thompson LLP

• South Korea -- Timothy Trinka and Y.J. Cho; Bae, Kim & Lee

• Israel -- Avi Wagner; Glancy Binkow & Goldberg LLP

• Germany -- Martin Heinsius and Markus Mueller-Dott; DLA Piper Rudnick Gray Cary

• Sweden -- Claes Rainer and Kennedi Akdogan; DLA Piper Rudnick Gray Cary

• Italy -- Stefano Modenesi and Silvia Casano; DLA Piper Rudnick Gray Cary

• The Netherlands -- Ellen Soerjatin; DLA Piper Rudnick Gray Cary

I also will provide information during the webcast on securities class actions in Australia that was provided to me by the Melbourne law firm of Maurice Blackburn Cashman.

A copy of the invitation is pasted below. To attend the webcast, please visit the following link.

UPDATE:  ISS' press release with additional information about this webcast is available here.

Bloomberg reported on Friday, February 3 that the U.S. District Court for the SDNY appointed asset manager PIMCO and RH Capital Associates as lead plaintiffs in the securities class action lawsuit against Refco's underwriters and directors. Twelve shareholders reportedly filed motions to be appointed lead plaintiff, in what was a hotly-contested battle for control of the case. The court also confirmed the firms' choice of lawyers -- the law firms Bernstein Litowitz Berger & Grossmann and Grant & Eisenhofer -- as lead counsel in the case.

Based on the recent Stanford/Cornerstone report (discussed here), the NY Times and the WSJ Law Blog are now asserting and ruminating upon the meaning of the "sharp decline in the overall number of securities fraud class actions" in 2005.  It is amazing to me how many people have now written essentially the same, incorrect, thing based on the shall we say "imprecise" press release that accompanied the report.  According to Stanford's Prof. Grundfest himself, the noteworthy finding of the report was the significant decline in total market capitalization losses, not the insignificant decline in the number of cases filed.

Let me say this one final time, after which I'll stop because (a) no one is listening to me anyway, and (b) the geek-factor of this "debate" is off-the-meter:  nobody believes that there was a "significant" or "sharp" or "steep" decline in securities class actions last year.  That includes nobody from Stanford or Cornerstone, I believe. 

Please look at the chart below from page 3 of the report.  The number of filings goes up and the number goes down, within a very narrow range.  Did it go down slightly in 2005?  Yes.  Does the slight decline in 2005 look just like the slight declines in 1999, 2001, 2003?  You tell me. 

The next person who writes about the sharp decline in 2005 is On Notice.  I mean it.

Be my valentine
by: auntbetty1234

Happy Valentine's Day to my Nephew Smitmie. He'll be 12 ½ on thursday. When I take him shopping, he just wants to buy-out everything in the store. He's so cute and much smarter than most.

Love,
Aunt Betty

You'd never guess it from its face, but the bizarre message above actually was the basis for the SEC"s insider trading case filed and settled today against one William A. Day, a.k.a. "auntbetty1234." 

The SEC's litigation release explains that on February 14, 2002, London, England-based Smith & Nephew, plc. and Oratec Interventions, Inc. publicly announced that they had entered into an agreement for Smith & Nephew to acquire all outstanding shares of Oratec through a tender offer of $12.50 per share.   The SEC says that on February 13, 2002, approximately twenty-four hours before the acquisition was publicly announced, Day made the anonymous posting above using the online alias "auntbetty1234" on an internet message board dedicated to Oratec, the contents of which revealed that he possessed material, nonpublic information regarding the tender offer, including:

• the name of the acquiring company ("Nephew Smitmie");
• the price per share ("He'll be 12 ½");
• the tender offer structure ("buy-out ");
• and the offer announcement date ("Happy Valentine's Day").

"Much smarter than most?"  I don't think so.

Alix Nyberg Stuart of CFO Magazine has this insightful article entitled "Penalty Box" on the collection and distribution of Fair Funds settlements by the SEC's Division of Enforcement.   Some highlights/comments:

1. "All told, the SEC fined companies a combined $3.1 billion in its fiscal 2005, up from $313 million in 2003, the first year it started tracking such numbers."
2. "...only $302 million of the $1.6 billion in fines that the SEC collected last year went to investors."
3. "Between 1995 and 2001, [the SEC] collected only 14 percent of the $3 billion in fines levied during those six years, according to a 2002 Government Accountability Office report. After hiring some 20 full- and part-time staff and implementing a new software system, however, the agency was able to recover more than 70 percent in 2004 and 2005.  [Comment: This is no doubt true but the reason for this success may be that it is simply easier to collect money, in huge chunks, from corporations in the big financial fraud cases that the SEC has settled recently].
4. "...it may be too soon to say the system is broken. In contrast to private security settlements, SEC settlements do not include deductions for plaintiffs' lawyers fees, which generally consume about one-third of any windfall in private cases. Plus, in the last two to three years, there has been a "big focus on the fact that a lot of money has been left on the table," says Bruce Carton, securities class-action services vice president at Institutional Shareholder Services. This includes class-action lawsuits against 44 mutual-fund companies and investment advisers for their alleged failure to collect the recompense from private suits."  [Comment: Brilliant!]
5. "At least for now, a company that gets caught in the crosshairs of the SEC should brace itself for a substantial fine. "I don't think anyone's going to be made whole by them," says Carton, "but anyone who had a meaningful number of shares in a company is glad to get the money back."  [Comment: See Comment #4 above].

Chris Kentouris of Securities Industry News has this article entitled "Clearing Up Class-Action Settlements" that discusses my company (ISS' Securities Class Action Services) and the work we do for institutional investors to help them recover settlement funds.  As discussed in the article,

With ISS's outsourced service, investment advisers and custodian banks just have to provide a list of their clients' positions in an affected security; ISS will take care of all the paperwork necessary to retrieve funds--no small task considering the dozens of pages that must be filled out and sent to claims administrators. Multiply that by the several dozen lawsuits that a large fund or custodian bank needs to keep track of each year, and one could end up buried in a mountain of paper. And funds are not recovered automatically. It can take two to five years to retrieve funds, if at all.

"Some firms do the work through corporate actions departments, others have specialized units and yet others cobble together staff from different departments each time they need to process proof-of-claim paperwork," says Bruce Carton, vice president at ISS. "That work doesn't even take into account the need to maintain a database on pending settlements." Carton estimates that outsourcing to a firm such as ISS often saves the annual salaries of at least two full-time operations executives. Mellon Bank has a dedicated staff of 12 working within a specialized securities class-action lawsuit unit.

I recently recommended the now month-old "Let the Good Times Roll" blog written by venture capitalist Guy Kawasaki.  As I mentioned, his blog's amusing tag-line reads,

"Blogger. n. Someone with nothing to say writing for someone with nothing to do."

On the "nothing to say" part, Kawasaki is just being modest because he consistently writes thought-provoking posts about his experiences in the business world.  Yesterday, for instance, he wrote about the "Art of Schmoozing," and included the following definition of schmoozing that I found particularly interesting and even somewhat inspirational:

Understand the goal. Darcy Rezac in his book, The Frog and the Prince, wrote the world's best definition of schmoozing: "Discovering what you can do for someone else." Herein lies eighty percent of the battle: great schmoozers want to know what they can do for you, not what you can do for them.  If you understand this, the rest is just mechanics.

The following appears in the February 2006 SCAS Alert:

A Discussion With Professor Elliott Weiss

By Bruce Carton, Vice President, ISS' Securities Class Action Services

In late December, leading plaintiffs' securities class action law firm Bernstein Litowitz Berger & Grossmann LLP announced that Elliott Weiss, a prominent professor and securities law expert, had left academia to join BLBG. This announcement intrigued and somewhat puzzled many lawyers and others in the industry, who viewed Professor Weiss as a harsh, long-time critic of class action abuse and waste by plaintiffs' law firms. This reaction in turn puzzled Professor Weiss, who states that he is not at all hostile to class actions in general, and that his criticisms have been "directed at suits that have no merit and lawyers who exploit the process, neither of which advance investors' interests."

I interviewed Professor Weiss about his move from academia to private practice, as well as several other subjects.

Carton: Your 1995 article, "Let the Money Do the Monitoring: How Institutional Investors Can Reduce Agency Costs in Securities Class Actions" {104 Yale L.J. 2053 (1995)}, proposed reforms for the organization of securities class actions, and was the basis of the lead plaintiff provisions of the Private Securities Litigation Reform Act (PSLRA) of 1995. You have been a long-time critic of class action abuse and certain practices of the plaintiffs' bar. What led you to join a plaintiffs' law firm and, specifically, BLBG?

Weiss: After I retired from the faculty of the Rogers College of Law at the University of Arizona, I decided that I would like to remain active professionally. I also was interested in developing an ongoing relationship with a law firm. I had had several good experiences working with BLBG in the past, including, most recently, working on the brief on defendants' Rule 23(f) appeal to the Fifth Circuit of the class certification decision in the EDS litigation. The BLBG lawyers impressed me with their professionalism and their commitment to effectively representing their clients. I also was impressed by the results they had achieved in cases such as Baptist Foundation, Cendant and WorldCom, among others. We began discussing a possible relationship and things worked out.

Carton: Have the PSLRA's lead plaintiff provisions worked the way you envisioned?

Weiss: Not exactly. When we wrote our article, the Internet was in its infancy. We anticipated that most communications between law firms and investors would be face-to-face. The explosive growth of the Internet created a very different dynamic. However, especially in big cases where major institutional investors have served as lead plaintiffs, they have worked pretty much as we hoped they would. Recoveries are in a whole different league than was the case before the PSLRA was adopted and are much more reflective of the merits of the claims being litigated. Attorneys' fees are a much lower percentage of recoveries and reflect real bargaining between institutions and their lawyers. And, in at least a few cases, institutional investors have pushed for and obtained recoveries payable out of the pockets of corporate officers and directors, which has a potential major deterrent effect, but was not anything plaintiffs' lawyers were inclined to seek before institutional investors entered the picture.

Carton: What role will you serve with BLBG? Do you expect to actively litigate cases? To serve as an expert behind the scenes? Something else?

Weiss: My role at BLBG is still evolving. The relationship is very much a part-time one. I expect to be--and already have been-- involved in cases that the firm is actively litigating, but I do not anticipate assuming a lead counsel role. My guess is that I'll be more like an in-house consultant.

Carton: In May 2000, you filed a declaration in the Cendant case opposing the BLBG fee request to the extent it short-cut the "Lead Plaintiff's rightful participation in the process of formulating a request for attorneys' fees." What were the circumstances that led you to do so, and what are the lessons that can be taken from the Cendant case with respect to attorneys' fees?

Weiss: In Cendant, I filed a declaration as an expert retained by the New York City Pension Funds, which were one of three lead plaintiffs. The thrust of my declaration was that the district court should have deferred to the fee arrangement negotiated by lead plaintiffs, rather than taking over the fee-setting process. The fee agreement required lead counsel to obtain the approval of lead plaintiffs before submitting their fee request. I argued that the district court should require them to seek that approval before passing on counsel's fee request. That's almost exactly how the Third Circuit eventually ordered the district court to proceed. The lessons from that case seem self-evident.

Carton: What changes, reforms, or other shifts do you foresee in the securities class action process in the next five years? Ten years?

Weiss: I'm not sure my crystal ball is any better than that of anyone else. My impression is that courts have gotten more comfortable and more sophisticated when dealing with the lead plaintiff appointment process. For example, they're no longer appointing large "groups" of unrelated investors to serve as lead plaintiffs, which was a process that pretty much left control of the case in the hands of the lawyers who assembled those groups. I think we will see a steady evolution in that area. I also think courts will get better at using the pleading provisions of the PSLRA to winnow out those complaints that should be dismissed and to sustain those that address real instances of fraud.

Carton: What are you most excited about with respect to your new position in private practice?

Weiss: The opportunity to work with a group of smart, committed lawyers and the opportunity to seek meaningful remedies for investors who have been injured by fraud. I have always believed that the plaintiffs' bar can, and often does, play a very important, constructive role in our capital markets. In fact, in our article proposing the lead plaintiff process, we pointed out the flaws in work by Janet Cooper Alexander and others who suggested that the merits never matter in securities class action litigation. My goal as an academic was always to suggest ways to improve the manner in which the plaintiffs' bar can protect investors' interests. I'm excited to have the opportunity to become a more direct part of that process.