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Sometimes it pays to go to trial, even when popular opinion seems to be against you. That was the lesson Latham & Watkins partner Peter Wald learned last week when his trial team scored a big victory on behalf of client Ernst & Young in Northern District of California court. Wald defended the Big Four accounting firm in a securities fraud class action filed by Bernstein Litowitz Berger & Grossmann in connection with audit work at Clarent Corp., a Redwood City, Calif.-based computer networking company. “My takeaway is that it’s possible in 2005 to put on a merit-oriented defense and ask jurors to grapple with auditing issues, even though fraud has occurred,” Wald said. Shareholders filed the class action after accounting irregularities first came to light in 2001. The plaintiffs accused Clarent of overstating revenue by $130 million. Their suit was originally against the firm and its corporate officers, but proceedings were stayed after the company filed for bankruptcy. Ernst & Young was roped into the case in 2003 as was Cooley Godward. Former Cooley partner Deborah Ludewig had served as Clarent’s corporate counsel. The law firm, represented by Keker & Van Nest, settled with plaintiffs before the start of trial under confidential terms. Ludewig is now a partner in Pillsbury Winthrop’s Palo Alto, Calif., office. Wald’s victory came Wednesday when a unanimous, nine-person jury found Ernst & Young wasn’t liable for any fraud at Clarent. Trials are extremely rare in the high-stakes realm of securities fraud class actions. Ernst & Young’s was only the third trial nationwide in the last decade, according to Bernstein Litowitz. Wald said the specter of Enron, WorldCom and other high-profile corporate meltdowns still makes many defense attorneys think twice about going in front of a jury. “It’s certainly true that this is a difficult environment in which to defend accountants’ liability,” Wald said. He added that the verdict affirmed his belief that juries are willing to work hard to understand a case, even when there are complicated accounting issues. The trial kicked off in front of Judge Charles Breyer on Jan. 24. After about three weeks of testimony, jurors deliberated for two days. Also on trial was former Clarent Chief Executive Officer Jerry Chang. The jury returned a mixed verdict on Chang, acquitting him of one allegation of fraud but finding him liable for an accounting omission or misstatement. He immediately settled with plaintiffs, so there won’t be a damages phase. The plaintiffs had claimed that Ernst & Young was liable for about $125 million. Even though the plaintiffs won’t get that money, Bernstein Litowitz also claimed victory. In a press release, the firm, a leader in securities class actions, said the case sends “a stern message to corporate America that public companies and their auditors will be held accountable for misinforming the public.” “We don’t view it as a loss at all,” said Bernstein Litowitz partner Blair Nicholas, who helped litigate the case. “Even though disappointing, this is a message that we aren’t going to accept pennies on the dollar in settlements.” The case is In re Clarent Corporation Securities Litigation, 01-3361.

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