Lerach Costs Former Firm $45 Million in Fees

Dan Levine

The Recorder

According to one very irate federal judge in Minnesota, jailed plaintiffs lawyer William Lerach just helped his former colleagues lose about $45 million in fees.

Yet the judge still awarded Coughlin Stoia Geller Rudman & Robbins a hefty $65 million for its work on a securities class action against UnitedHealth Group.

U.S. District Judge James Rosenbaum, in an order filed Tuesday , approved a mammoth $925 million settlement against UnitedHealth and its former executives over backdating the grant dates on stock options. The deal has been described as the largest securities class action payout related to backdating ever struck.

Lerach pleaded guilty in 2007 to conspiracy due to illegal payments to lead plaintiffs during his time at Milberg Weiss Bershad Hynes & Lerach. He is currently serving a 24-month sentence in federal prison.

In August 2006, Lerach's firm, then known as Lerach Coughlin, told Rosenbaum that the government "has notified Mr. Lerach that it does not intend to take any action against him."

Then, in 2007, lead plaintiff CalPERS agreed that Lerach's firm should be compensated on a sliding scale: the bigger the recovery, the bigger the fee. The attorneys would get 11 percent of any recovery up to $250 million, 12 percent of any money between that and $750 million, and 13 percent of anything over that. Thus the firm sought $110 million in fees, which represents 11.92 percent of the UnitedHealth settlement, according to its papers.

However, at the time CalPERS and the firm negotiated their fee deal, Lerach was under federal investigation, the judge found.

"The court recognizes lead counsel's history of securing large recoveries for its clients, earning it the reputation of the 'most feared' adversary in securities litigation," Rosenbaum wrote. "At the same time, its previous first-named partner neglected a significant obligation to the class: He failed to timely and fully inform the court of his role in the Milberg Weiss debacle."

Added the judge: "Had the truth been timely and fully disclosed to the court, in all likelihood the court would never have appointed his firm as lead counsel."

In response, Coughlin Stoia name partner Patrick Coughlin says that the government told Lerach he was not a target, but then changed its mind and decided to pursue him.

"I guess he could have confessed, but who knows," Coughlin said. "He was just telling the judge what the government was telling him at the time."

The $65 million attorney fees figure is still higher than many of the total settlement amounts for backdating cases, Coughlin said, and the judge cited the firm's good work.

Coughlin Stoia had asked the judge to defer to the firm's deal with CalPERS in determining attorney fees. As backup, the firm supplied a report from a professor stating that the fee arrangement was reached in a free market of "buyers and sellers."

Rosenbaum scoffed.

"Seldom have the groves of academe and the ivory towers sheltered within their leafy bowers seemed farther from reality," he wrote. "A lecture on the virtues of the unrestrained free market sounds a bit hollow in light of the parties', this Nation's, and indeed the world's, experiences with the beauties of self-regulated financial markets during a period remarkably coterminous with the existence of this case."

Rosenbaum also took sides in an unresolved debate within class action circles about what type of fee structure is best: the kind Coughlin Stoia negotiated with CalPERS, or the opposite, in which the plaintiff firm is paid a lower percentage as the settlement figure goes up.

"There are arguments on both sides about which is better," said Bruce Simon, a partner at Pearson Warshaw Simon & Penny who was not involved in the UnitedHealth case.

Speaking in general, Simon said that if a firm's fee percentage goes down as the settlement dollars increase, some believe the lawyers have less of an incentive to get a bigger award for the client.

"On the other hand, if the sliding scale goes up, there could be a tendency to just [unreasonably] keep it going until you can get more money," Simon said.

Rosenbaum opted for the decreasing model.

"First, it recognizes that the amount recovered owes at least as much to the defendant's size and solvency, as to counsel's skill," he wrote. "Second, the court finds any risk that declining percentages will force class action counsel to settle 'too early and too cheaply' is overstated."

Coughlin Stoia sunk more than 45,000 hours into the case, and the judge arrived at his final fees number using Minnesota rates: $500 an hour for partners, $200 for all other attorneys, and $100 for paralegals.