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Archive for Sunday, July 27, 2003

Top lawyer still wary of Wall St.

Securities law firm’s leader says abuses still likely

July 27, 2003

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— As Wall Street contends with lawsuits brought by investors who suffered massive stock market losses in recent years, perhaps no name is more prominent than the law firm Milberg Weiss Bershad Hynes & Lerach LLP.

Since opening in 1965, the firm has come to dominate the civil class-action field alleging securities fraud. Among its biggest cases are a $1.3 billion settlement with junk-bond king Michael Milken in 1992 and recent accounting fraud cases against companies such as Enron, Tyco and ImClone.

Major corporations have bitterly complained about the law firm's litigation, which they say amounts to "legalized blackmail" since it often costs less to settle a lawsuit than engage in a costly defense to prove their innocence.

Milberg Weiss' influence hasn't escaped the notice of lawmakers. In 1995, Congress passed legislation making it tougher to file securities lawsuits, a move many said was directly aimed at hobbling the law firm.

Milberg Weiss also has grappled with internal partner disputes regarding legal tactics and compensation as it grew in size. Last month, the 200-lawyer firm said it would split off its West Coast offices, which represent half of its practice and are handling high-profile suits against Enron and AOL Time Warner. The breakup is pending.

Yet the firm continues to push forward. A recent study by Stanford Law School's Securities Class Action Clearinghouse and Cornerstone Research found Milberg Weiss was a lead counsel in more than 50 percent of class-action securities lawsuits settled since 1995.

And the East Coast practice, led by co-founding partner Melvyn Weiss, recently announced a settlement of $1 billion with insurers for 300 companies that staged hot initial public offerings, including Global Crossing, Ask Jeeves and Red Hat. The case alleged that the firms conspired with 55 brokerage firms to illegally rig stock sales. The case against the brokerages is continuing.

The class-action suit charges that Wall Street firms unjustly profited by inflating the prices paid by individual investors for stocks after the IPOs launched, leading to bigger losses after the IPO bubble burst. Some analysts have said the lawsuit could result in a total recovery of between $1 billion and $3 billion.

In an interview with The Associated Press, Melvyn Weiss chatted about his legal crusade against Wall Street and why investors shouldn't feel safe even as the stock market starts to recover.

AP: How big was the $1 billion settlement for ordinary investors in the IPO fraud case in your view? How much do you hope to get from the brokerages?

Weiss: The billion dollars is an expression of concern that these allegations are real and could give rise to staggering liability.

It simplifies the litigation in that we can focus our attention on the conduct of the investment banks. The interesting part here is how much broader our inquiries will be than the government's has been because we're covering 55 banks, not 10. It's going to be far more fascinating to demonstrate that the conduct we allege to be serious violations of the law was widespread throughout the entire industry. ...

I would be very disappointed if we don't achieve multiple billions (in recovery).

AP: Do you expect to uncover the level of apparent fraud and analysts' conflicts of interest as seen in documents exposed in the government investigation led by New York Attorney General Eliot Spitzer?

Weiss: We have that and more already.

AP: Can you give examples or characterize the nature of the documents you've uncovered?

Weiss: At this point, everything is produced pursuant to a confidential order or stipulation with the understanding we will have (sessions) ... to isolate the ones that really are entitled to confidentiality.

I don't know everything that General Spitzer got -- his investigation was predominantly focused on the analyst conduct. That's only a small portion of what we're doing.

AP: New York federal judge Milton Pollack recently threw out an investor lawsuit against Merrill Lynch, saying he believed a natural bursting of the tech bubble, and not broker fraud, was to blame for investment losses. He also called the plaintiffs "high-risk speculators" who shouldn't "twist the federal securities laws into a scheme of cost-free speculators' insurance." Your firm wasn't involved in that lawsuit, but at what point should investors take responsibility for losses?

Weiss: There's no question about it -- bubbles are created in many different ways. Sometimes it's just hot air, and sometimes it's a manufactured, synthetic bubble. Sometimes the bubble is based on solid reasons. This bubble was the product of massive wrongdoing. ... It's one thing to take a risk in an honest market. It's another thing to take a risk in a fixed market.

Like somebody said in the past, "Nobody wants to shoot craps with crooked dice."

Now I am a great admirer of Judge Pollack ... but I have to respectfully disagree with some of his characterizations in that decision as to what happened or who's at fault.

AP: One criticism of the government's $1.4 billion Wall Street settlement is that none of the $387.5 million set aside for compensating victims will likely go to mutual fund investors, in part because of procedural difficulties. Does the settlement go far enough?

Weiss: The $400 million ... is not nearly enough to compensate victims. But (regulators) knew we were there all along with the civil litigation to do that, and also a lot of individual claims are being asserted through the arbitration process. So I don't think the measure of the $400 million is inadequate, because it wasn't intended to be a final solution.

(As to everyday investors,) mutual funds are members of our (class-action lawsuits). If they bought during a class period, and there's no evidence they engaged in wrongful practices, the funds themselves will be able to make claims in any recovery that we accomplish.

Any stockholder actions, whether Tyco, Martha Stewart or Enron or whatever, the biggest checks we make out to, are institutional investors -- mutual funds -- because they're the biggest investors. The problem is, if I own the mutual fund at the time the wrong took place, and I no longer have my position in the mutual fund, I can't share in that redress, because only the present fund holders would have that advantage. But if I am a long-term fund holder, I will get the advantage of all those recoveries.

AP: The stock market is now showing signs of a recovery. In light of reforms such as Sarbanes-Oxley, can investors jump back into the market with greater faith in its integrity?

Weiss: No. ... There was an epidemic of bad ethics and bad moral conduct and people got used to making huge amounts of money from working in that industry. ... A lot of them are very young people who are used to walking into restaurants and buying $500,000 bottles of wine and taking expensive places out in the Hamptons and taking trips to the south of France, buying Maseratis.

A lot of these people were never really mentored in any proper way to be ethical and upstanding in the way they conducted themselves. I don't know what's going to happen to those people. I don't know if they will go through a lifetime of questioning, or the same kind of lifestyle and not caring about how they go about getting it. I think we have to be very careful. There are a lot of bright people out there whose minds have been tortured in their moral compasses.

AP: You seem to be characterizing Wall Street as a decadent, corrupt institution.

Weiss: There's no doubt about it. I think they infected accounting firms and corporate management. ...You had the M&A business -- Wall Street taught them how to get mega-rich fast by mergers and acquisitions, with golden this and golden that. When that blew up, they found stock options as a way to create that sudden wealth, and stock options can only create sudden wealth when stocks go up. You have to create ways to make them go up. It's a self-fulfilling prophecy.

AP: So what can investors do to protect themselves?

Weiss: I think that it would be wise for investors to try and document in a better way how they get into these investments -- who gives them the advice. So they don't have to be challenged later on, "Why did you buy this stock?" Speak to your broker, get him to send you some reports that he's relying on and put it into your file and keep it there. So that if something goes wrong in that situation, they can't just say you didn't protect yourself. And the more information you ask for, the more burden you're putting on the other side to do due diligence.

The other thing I would do is be very careful about overconcentration -- excessive concentration in any particular industry or any particular stock. ... You have to be diversified. You never know whether a particular company is going to be a subject of fraud or a whole industry for that matter.

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