A dozen plaintiffs firms filed into Judge Charles Breyer’s San Francisco courtroom last spring to fight for control of a proliferation of securities suits against Hewlett-Packard Co. over its botched acquisition of British software firm Autonomy.
The minutes dragged as one by one the attorneys stated their names for the court reporter.
Before selecting lead counsel, Breyer narrowed the field to a trio of firms—Kessler Topaz Meltzer & Check; Bernstein Litowitz Berger & Grossmann; and Kaplan Fox.
Who wasn’t in the running? Milberg and Robbins Geller Rudman & Dowd, descendants of the once-dominant Milberg Weiss.
“The market really has changed,” said Kevin Muck, chairman of the Fenwick & West securities litigation group. “There are just a lot more players in that field.”
It took an act of Congress, two decades of case law interpreting the Private Securities Litigation Reform Act, and a spate of criminal indictments that felled Milberg Weiss and its notorious California partner William Lerach. The result is a fundamental reordering of the securities plaintiffs bar, an ecosystem now dominated by a handful of firms with ties to institutional investors. Among them are New York’s Bernstein Litowitz and Labaton Sucharow, and Radnor, Pa.-based Kessler Topaz, which got the nod from Breyer in the HP case.
Smaller firms unable to compete for the pension-fund clients that drive lead counsel appointments under the PSLRA have gravitated to less lucrative, but still viable, areas of litigation, such as merger and derivative suits.
The fragmentation of the bar is a headache for public company general counsel, who have learned to anticipate suits in the wake of any significant merger or acquisition and are often forced to respond in multiple jurisdictions, according to defense attorneys.
Facebook’s 2012 initial public offering, for instance, spawned more than 50 actions against the company, its underwriters and Nasdaq in at least four federal and various state courts.
But overall, securities complaints against technology companies don’t seem to be the cudgel they were in previous decades. Suits in the tech sector, which peaked after the dot-com crash, have not rebounded to their previous levels, according to data on federal litigation collected by Stanford Law School’s Securities Class Action Clearinghouse.
Today, Valley executives are facing a more diffuse threat from a less colorful enemy, defense lawyers say.
“I don’t think that we’re going to see another Bill Lerach, certainly any time soon,” Fenwick’s Muck said. “I don’t see anybody who has assumed that mantle.”
Lerach led West Coast operations for Milberg Weiss, and those on the receiving end of his fine-tuned class action machine coined a term for their predicament—”getting Lerached.” He made a lot of enemies, including 3Com and Intel. In 1993, The New York Times dubbed him “the most hated man in high tech.”
Milberg Weiss, which had a stable of individual investor clients, was slow to sign up the institutional investors that the 1995 PSLRA empowered to select lead counsel. Still, the firm was lead or colead counsel in more than half of all securities suits settled from 1995 to 2003, according to Cornerstone Research data. By the time Lerach officially split from Milberg Weiss in 2004 to form Lerach Coughlin Stoia Geller Rudman & Robbins, he’d enlisted CalPERS and a host of pension funds, which led to lead plaintiff status in suits such as the one against Enron that ultimately settled for $7 billion.
But the firm’s pre-PSLRA tactics caught up to Milberg Weiss in 2006, when the law firm and two high-ranking partners were indicted for allegedly paying kickbacks to named plaintiffs in more than 150 class actions. The investigation later snared Lerach, who went to prison in 2008.
He may have been playing dirty in the eyes of the U.S. Department of Justice, but Lerach was also a brilliant strategist and an aggressive adversary.
“He was probably the most creative person in the history of the plaintiffs securities bar,” said Wilson Sonsini Goodrich & Rosati partner Boris Feldman, who litigated opposite Lerach and later sent him novels in prison.
The securities giant also bullied CEOs, Feldman said.
“Lerach would be there in their face screaming, ‘I’m going to take away your fucking condo in Maui,’” he said.
The PSLRA was supposed to make it harder to bring meritless suits and make it easier for the institutional investors with the biggest losses to direct the litigation.
Milberg Weiss was resistant to change, according to former partner Alan Schulman, who jumped ship for rival Bernstein Litowitz in 1999 and now teaches at the University of San Diego School of Law. Instead, the firm continued to file first and issued press releases, trying to attract multitudes of individual investors in order to amass the biggest losses.
Meanwhile, competitors such as Bernstein Litowitz and Labaton Sucharow turned the new playing field to their advantage, developing relationships with institutional clients that allowed them to score lead-counsel appointments. (Click here to view graphic.)
THE NEW GUARD
Max Berger, founding partner of Bernstein Litowitz, is one of the first names to come up in almost any conversation about the new securities landscape.
Bernstein Litowitz has served as lead or colead counsel in 34 of the 100 largest settlements since the PSLRA, placing it at the top of the heap in traditional, large-dollar, securities class actions. Recent wins include a $6 billion deal with WorldCom Inc. in 2012 and a $2.4 billion settlement with Bank of America in 2013.
Pre-PSLRA, Bernstein Litowitz attorneys were often shut out of lead roles because Milberg Weiss beat them to the courthouse, Berger said, adding, “We had to claw our way into it.”
Since the law’s passage, New York-based Bernstein Litowitz has grown from 15 lawyers to more than 100, according to partner Gerald Silk. The firm, which also has offices in San Diego, New Orleans and Chicago, represents a few hundred public pension funds, including the California State Teachers’ Retirements System, the New York State Common Retirement Fund and the Los Angeles County Employees Retirement Fund.
Bernstein Litowitz’s strategy, according to Silk, has always been to develop in-depth relationships with its clients and take its time filing, an approach rewarded under the PSLRA. Institutional clients require a lot of hand-holding, Berger said. The firm has to monitor its portfolios and provide feedback continually.
“It takes a big infrastructure to do that,” Berger said.
Labaton Sucharow also invested to attract pension-fund clients. The firm installed a specialized computer system to monitor its clients’ portfolios and produce quarterly reports. Labaton Sucharow employs seven private investigators, including former FBI and New York City police officers, to uncover evidence that can be used to file a securities suit that will hold up under the strict post-PSLRA pleading requirements.
“We decided we wanted to stay in the field, and we figured out what needed to be done to do it,” firm Chairman Lawrence Sucharow said.
But to equate either Berger or Sucharow’s success to that of Lerach is a dubious honor.
“I’d rather not be compared with him at all,” Berger said. “We’ve had to live with the aftermath of what they did. We’ve had to live with people saying to us, ‘Don’t you do that too?’”
Berger won his place on top without the intimidation tactics Lerach employed, according to Sucharow, who likens Berger to a teddy bear outside the courtroom and a grizzly bear inside.
“[Berger] might be the dean of our bar, if there was a poll taken,” Sucharow said.
Kessler Topaz is also a force in the new bar. Breyer selected Kessler Topaz as lead counsel for the Hewlett-Packard shareholder litigation based on its representation of Dutch pension funds manager PGGM Vermogensbeheer. The firm served as colead counsel in litigation against Tyco International Ltd. and auditor PricewaterhouseCoopers that settled for $3.2 billion in 2007 and raked in $3.4 billion as lead or colead counsel in settlements last year.
THE LEGACY OF MILBERG WEISS
The fortunes of the two Milberg Weiss heirs—Milberg in New York and Robbins Geller Rudman & Dowd in San Diego—have diverged.
“Milberg has been, I don’t want to say irrelevant, but Milberg has not been a force” in securities fraud class actions for the last decade, Sucharow said, adding many of the firm’s sizable settlements stem from old cases. He speculates large institutional clients may be hesitant to work with the Milberg Weiss descendants because of the scandal attached to that name.
Milberg has filed four federal complaints in the past five years, according to Stanford’s Securities Class Action Clearinghouse. The returns from old cases are also drying up. Milberg resolved just five securities cases last year and the firm’s last billion-dollar settlement was in 2006, according to securities data.
Milberg partner Sanford Dumain said the firm has been putting more resources into nonsecurities areas, including antitrust, consumer law and whistleblower suits. About five years ago, the firm also began contracting out its electronic-discovery services to help other firms with data collection, retention and analysis for their cases.
“Due to recent Supreme Court decisions, securities litigation just isn’t what it used to be,” Dumain said.
Robbins Geller has emerged as the volume leader in securities litigation, filing more than 200 suits since Lerach’s departure. Late last year, the firm won a $2.5 billion judgment following a securities class action trial in Chicago against Household International, now part of HSBC Finance Corp. That blockbuster case dates back to 2002. Robbins Geller’s median cash settlement last year was roughly $11 million.
Data tracked by Stanford’s Securities Class Action Clearinghouse shows an overall decline in securities litigation, according to founder Joseph Grundfest. As a result, he said, many firms are moving away from traditional class actions.
Lieff Cabraser Heimann & Bernstein’s securities practice has changed in the past decade, according to managing partner Steven Fineman. Leaving large-scale class actions to other firms, Lieff Cabraser is now representing a lot of institutional investors in direct, nonclass cases, or class opt-out cases.
“As more and more firms started to get involved in securities class action cases and hoping to be retained by the kinds of institutions that would retain class counsel,” Fineman said, “we find ourselves increasingly retained by institutions when they want to go it alone.”
Laurence Rosen of the Rosen Law Firm has built a business litigating securities cases involving Chinese companies, where the evidence of wrongdoing is often in China, and a U.S. subpoena holds no power.
“Other people find them very difficult,” said Rosen, who founded the firm in 2001. “They’re less profitable” and take more time.
Last year, Rosen settled six suits for roughly $15 million; so far in 2014, the nine-lawyer firm has exceeded $20 million in settlements.
Robbins Arroyo, a roughly 25-lawyer San Diego firm, has become the dominant force in derivative securities suits, where investors sue officers and directors on behalf of the company. Brian Robbins, the brother of Robbins Geller’s Darren Robbins, cofounded the firm in 2002 to fill what he saw as a niche, he told the alumni publication of Vanderbilt University Law School last year.
“Early on, the firm bucked traditional notions of the utility of derivative suits and how to litigate them,” Robbins Arroyo spokeswoman Davia Hayward said in an email.
Other firms that used to file frequent securities suits have shifted course. Wolf Popper, which filed more than 40 federal complaints in the five years after passage of the PSLRA, has filed just two federal suits in the past five years; Weiss Law, which filed more than 60 suits in the five years after the law, filed its last complaint in federal court in 2009, according to Stanford’s Securities Class Action Clearinghouse.
“We do other kinds of work where you don’t need institutional plaintiffs,” said Joseph Weiss, the founding partner of the firm, which has been known by different names over the years. “We’re doing more mergers-and-acquisitions work. We’re doing more derivative cases.”
Neither mergers-and-acquisitions nor derivative suits typically produce the big payoffs sometimes secured by more traditional securities fraud suits, but they also don’t require a pension-fund client. Settlements typically involve tweaking deal terms or corporate policies, instead of cash, and yield more modest attorney fees. Fees requested by plaintiffs attorneys in nonmonetary settlements have declined from an average of $953,000 in 2008 to $500,000 last year, according to Cornerstone Research.
But the suits have persisted. Last year, plaintiffs attorneys sued companies in 94 percent of all mergers or acquisitions valued at more than $100 million, according to Cornerstone Research. Although the suits can be an annoyance, they cause few GCs to lose much sleep.
“They understand that there will be an M&A suit and that it’s not a big deal,” Feldman said.
As competition over suits increases, litigation has become more sprawling, many defense attorneys say.
Venue wars are increasingly common. Firms are filing on top of each other in different courts in an attempt to gain the upper hand, which has added extra expense and uncertainty for companies. Duplicative filings are a particular aggravation in merger-and-acquisition suits. Last year, more than 60 percent of deal litigation was filed in more than one place, according to data reported by Cornerstone Research, with an average of five lawsuits filed for each deal of more than $100 million.
Fenwick’s Muck said fighting multiple-jurisdictional cases places an unfair burden on a company. “There’s no reason my client should have to pay for my firm to defend claims in three different courts,” he said.
To Stanford’s Grundfest, venue wars just reflect the ongoing competition for business. “The plaintiffs and defense firms, they’re all for-profit organizations and you can explain their behavior as profit-maximizing activity.”
The litigation over Facebook’s 2012 IPO, initiated in four federal courts, was centralized in the Southern District of New York as an MDL later that year.
Other battles take longer to streamline. After Allergan Inc. pleaded guilty in 2010 to criminal charges for misbranding Botox, the Valley drug company was swiftly hit with three derivative suits in the Central District of California and one in the Delaware Court of Chancery. The California judge dismissed the case, but the Court of Chancery ruled the Delaware suit could proceed. Allergan’s lawyers at Gibson, Dunn & Crutcher took the case to the Delaware Supreme Court, which ruled last year that dismissal of the California case precluded relitigation in Delaware.
“In the old days,” Feldman said, “Mel Weiss would have picked up the phone, or Lerach would have picked up the phone, and said, ‘Look guys, this is bullshit. This case is going to be in California.’ And hung up.”
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