HEALTHSOUTH ILLS BOOST D.C. CRIMINAL BAR

A battalion of D.C. lawyers is gearing up to defend the HealthSouth Corp. and a group of its executives as investigations into alleged financial irregularities at the company unfold.

HealthSouth’s chosen legal heavyweights include lawyers from Skadden, Arps, Slate, Meagher & Flom, who will coordinate counsel for the nation’s largest for-profit health care company. HealthSouth has been hit with Securities and Exchange Commission allegations that it deliberately overstated earnings by at least $1.4 billion since 1999. It also faces a congressional inquiry launched last week, shareholder suits, and potential bankruptcy and corporate restructuring issues. The Department of Justice is also expected to file charges against the Birmingham, Ala.-based company

High-profile litigator Robert Bennett, who calls Skadden’s work on behalf of HealthSouth a “very substantial undertaking,” leads the firm’s efforts, along with Wilmington, Del., partner Steven Rothschild. D.C. partner and former SEC official Colleen Mahoney and New York partner Jonathan Baker round out the team.

Latham & Watkins D.C. partners William Baker and DeMaurice Smith are representing HealthSouth’s general counsel, William Horton. HealthSouth founder and former CEO Richard Scrushy tapped Thomas Sjoblom, a D.C.-based partner at Chadbourne &Parke, and Jones Day D.C. partner Jonathan Rose. And ex-CFO Michael Martin hired Steptoe & Johnson partner Robert Fleishman.

Meanwhile, an inquiry by the House Energy and Commerce Committee could put a firm that briefly counted HealthSouth as a client in the hot seat. Among the HealthSouth documents demanded by Chair Billy Tauzin (R-La.) are “all records relating to” a report prepared last fall by Houston’s Fulbright & Jaworski on allegations of insider trading at the company. The committee, which has investigated the Enron Corp. and ImClone Systems Inc., also requested a list of all HealthSouth matters handled by Fulbright since 1996, as well as the names of all partners who worked on those matters.

Richard Beckler, a Fulbright partner in D.C. who worked on HealthSouth matters beginning last fall, says his firm had a limited relationship with the health care giant. “We didn’t structure any transactions for HealthSouth,” says Beckler. “We were not their corporate lawyers, we were not their health care lawyers.” Aside from the internal review, Beckler says the firm worked on a minor real estate transaction for HealthSouth “many years ago.”

Tauzin spokesman Kenneth Johnson says Fulbright isn’t the primary target for questioning, which began last week. “HealthSouth is the sole focus of the investigation, but to the extent that outside auditing or legal firms provided advice, we want to talk to them as well.”

— Lily Henning

D.C. CIRCUIT ROILS ROYCE

After enduring years of scathing criticism from D.C. District Judge Royce Lamberth in the massive Indian trust case Cobell v. Norton, Justice Department lawyers finally won a round last week. With the trial in Cobell set for May 1, the three-judge D.C. Circuit panel of Chief Judge Douglas Ginsburg and Judges A. Raymond Randolph and Karen Henderson put a halt to the work of court monitor and special master Joseph Kieffer III, pending further review. The April 24 order came just hours after oral arguments ended in an appeal of Lamberth’s contempt ruling against Interior Secretary Gale Norton. At issue in Norton’s appeal: whether Lamberth’s ruling holds Norton accountable for misconduct of former officials and whether Lamberth has the authority to hold Cabinet members in contempt. Deputy Attorney General Larry Thompson, Solicitor General Theodore Olson, and Acting Associate Attorney General Robert McCallum Jr. attended the arguments. “I have been practicing before this court for over 40 years, and I have never seen the court enter an order so quickly after oral arguments. The judges were clearly very unhappy,” says McKenna Long & Aldridge partner Herbert Fenster, who represents Norton. Kieffer was appointed in 2001 to monitor the Interior Department’s trust reform efforts. His reports provided the basis for the Norton contempt allegations. Government attorneys have argued that Kieffer should be removed because he is biased. Fenster alleged in his brief that Kieffer told Interior officials that appealing Lamberth’s ruling “would be futile” because Lamberth “is a good friend of the chief judge of the appellate court.” The one-paragraph order signed by all three judges stays Kieffer’s authority in the case. Dennis Gingold, counsel for the Cobell plaintiffs , said in an April 24 statement that he believes the order should not impact Norton’s contempt conviction or the underlying litigation .

— Vanessa Blum

CELL PHONE PUSH AT FCC

As a member of the National Council on Disability during the Clinton years, Bonnie O’Day helped push Section 255 — a part of the Telecommunications Act of 1996 that requires companies to make their products accessible to disabled people. Now, she’s relying on the law as a private citizen to try to prod telecom giants Verizon Wireless and the Audiovox Communications Corp. to offer a cell phone that is user-friendly for the blind. “I was just a consumer out there who bought a [cell] phone and realized it didn’t work,” says O’Day, who is blind. She says she can turn on and dial the phone, but is unable to access many features, including caller I.D. and programming, because those features involve text messages that she is unable to read. O’Day says software exists that allows cell phones to translate those text messages into audible announcements. With pro bono help from Spiegel & McDiarmid partner Scott Strauss and associate Allison Driver, O’Day in February filed a formal complaint — the first of its kind under Section 255 — against Verizon and Audiovox. Verizon in-house counsel Andre Lachance contends that Audiovox, which made the phone at issue, is responsible for developing such capabilities. Audiovox, in an answer, states that O’Day hasn’t shown that it was “readily achievable” for the manufacturer to “incorporate particular accessibility improvements” when the phone was designed. Both companies have filed motions to dismiss. Kurt Schroeder, a deputy chief in the Federal Communications Commission enforcement bureau, says the three parties will meet with commission officials on May 1. If a settlement cannot be reached, the parties will submit final briefs. The dispute may ultimately be decided by the full commission, given the complaint’s novelty, Schroeder says.

— Alicia Upano

ARONICA ARRIVES AT DUANE MORRIS

Duane Morris is making a push into the burgeoning field of white collar criminal defense. The firm’s D.C. office recently snagged partner Joseph Aronica, former assistant U.S. attorney for the Eastern District of Virginia, and associate Bryan Schilling from the D.C. office of Porter Wright Morris & Arthur. Aronica, 58, has defended corporations, executives, government officials, and attorneys in white collar matters. He’ll handle complex civil litigation as well as white collar work at Duane Morris. Schilling, 30, has spent the past year and a half in Porter Wright’s litigation department, focusing on white collar crime and government investigations defense. Schilling will also handle white collar and complex civil litigation at Duane Morris. “This is an exciting move for us,” says Aronica. “Duane Morris is a vibrant, expanding international law firm with an impressive national footprint.” The firm has a white collar practice in Philadelphia, San Francisco, and elsewhere, but not in D.C. until the addition of Aronica and Schilling. “D.C. had not yet made a move in that area,” says D.C. managing partner Sheila Slocum Hollis, “which is why we’re thrilled to have them.”

— Tiffany Hamilton

WHAT’S A FEW MILLION BUCKS BETWEEN AGENCIES?

The practice of diverting fees paid by U.S. Patent and Trademark Office users into the general Treasury regularly inspires much Sturm und Drang in the IP bar. PTO users complain that appropriators are siphoning off gazillions of dollars each year that ought to fund the PTO, and the agency, in turn, blames much of its shortcomings on the shortfall. But it turns out the government isn’t diverting anywhere near as much money as anyone expected. A new study by the Intellectual Property Owners Association shows that while the U.S. Treasury was budgeted to pocket $207 million in PTO user fees in 2002, it actually only netted $23 million. Likewise, in 2001, the Treasury wound up $67 million short, taking in just $46 million in fees. That’s because the PTO in the last few years has been overly optimistic in its growth projections, expecting patent applications to continue to grow at 10 percent to 12 percent each year, just like in the late ’90s. Instead, applications in FY 2002 were up just 3 percent, and are flat year to date in FY 2003. When the projections come up short, it’s the Treasury, not the PTO, left holding the bag. The PTO gets its money first — $1.127 billion in 2002 — and only then does the Treasury skim off additional revenue generated by the agency. Even though the PTO isn’t losing as much money as was widely believed, Herbert Wamsley of the Intellectual Property Owners Association says, “We’re still concerned about the future. It doesn’t really change the issue. Diversion is a major reason for the problems at the PTO.”

— Jenna Greene

MILBERG WEISS AND UNINTENDED CONSEQUENCES

When the Private Securities Litigation Reform Act was enacted in 1995, some observers thought the law would put Milberg Weiss Bershad Hynes & Lerach — and especially partner William Lerach, the lawyer corporate executives love to hate — out of business. Instead, according to a new study by Stanford Law School‘s Securities Class Action Clearinghouse and Cornerstone Research, Milberg Weiss is doing better than ever. The study found that the 200-lawyer firm has served as lead or co-lead plaintiffs counsel in more than half of all securities class actions settled since the law was enacted. The list of suits in which the firm is involved reads like a Who’s Who of corporate wrongdoing, including the Enron Corp., Tyco International Ltd., ImClone Systems Inc., and the case that could be the biggest of them all, the class action accusing Wall Street investment banks of illegally rigging more than 300 initial public offerings. Ironically, securities lawyers, including Milberg Weiss co-founder Melvyn Weiss, attribute much of the firm’s success directly to the 1995 reform act, which created a more concentrated securities plaintiffs bar dominated by big firms. Before the act, prosecuting a securities case was “unbelievably cheap” compared with other contingent fee cases, explains one plaintiffs lawyer who asked not to be named: “You’d spend maybe $20,000.” Under the new law’s heightened pleading standard, plaintiffs firms have to pony up huge sums of money to draft a complaint to withstand the inevitable motion to dismiss. Firms also have to spend big bucks marketing themselves to institutional clients, particularly pension funds, which are most likely to be lead plaintiff. With its size and resources, Milberg Weiss made “a conscious decision,” says Weiss, “to spend the money and provide the resources up front to come up with a really good complaint.”

— Tamara Loomis, New York Law Journal