The collapse of investment portfolios has securities law firms trolling for clients eager to sue over lost money. State pension funds are major targets for the high-flying litigation shops.
North Carolina is in the cross-hairs of some 45 law firms. State Treasurer Janet Cowell will choose about 10 to serve as a pool for lawsuits. Representatives from Cowell’s office and the office of Attorney General Roy Cooper are evaluating proposals from the firms.
In lawyers’ parlance, the selection process is known as “the beauty contest.”
One of the firms targeting North Carolina is New York-based Bernstein Litowitz.
In 2005, the firm won a $6 billion settlement in the WorldCom case brought by investors over the accounting fraud that brought down the long-distance phone company. Attorney fees for that case were $336 million. The lead plaintiff was the comptroller for New York state, because of investments in WorldCom by the state’s pension funds.
Cowell has received more than $123,000 since 2007 in campaign contributions from employees and other people connected to the law firms that are trying to get the state’s business. The biggest contributors to Cowell were people connected to Bernstein Litowitz — which contributed at least $45,690, including in-kind contributions for catering and lodging.
Cooper received at least $76,825 in campaign contributions since 2007 from employees and others connected to the law firms seeking the state’s business. People connected to Bernstein Litowitz were also his biggest contributor, with $18,500 in contributions.
Tony Gelderman, who heads the Louisiana office of Bernstein Litowitz, contributed at least $8,000 to Cowell and provided lodging worth about $1,000. He contributed $5,500 to Cooper. Gelderman did not respond to a phone call and email seeking a comment for this story.
In Florida, which recently chose five law firms to represent the state in securities cases, the competition featured an anonymous letter about ethical questions, law firms that hired lobbyists, and former partners who had lost their jobs after criminal convictions.
“It really was a theater of the absurd,” said Edward Siedle, a former attorney with the U.S. Securities and Exchange Commission. “The hiring of plaintiff firms is the most controversial thing a public fund can do because of questions surrounding the merit of class action securities cases and also the bad conduct or behavior of these firms.”
James Cox, a professor at the School of Law at Duke University, said North Carolina shouldn’t be having people tied to elected state officers such as Cowell and Cooper choose the law firms.
“I think you should get it out of both those offices,” Cox said. “I think it should be in some more neutral body.”
Noelle Talley, a spokeswoman for Cooper, said that if a law firm is hired, “we will urge that the treasurer’s office selection process be insulated from outside influence by having a team of independent evaluators analyze the firms’ qualifications.”
Pension funds weren’t always big players in securities litigation, but that changed with a 1995 law intended to discourage frivolous lawsuits. At that time, the firm that first got to the courthouse controlled securities lawsuits.
The Private Securities Litigation Reform Act was intended to “empower investors so they, not their lawyers, control securities litigation.” It handed control of the suit, or the lead plaintiff status, to the investor with the biggest loss. In practice this typically meant public pension funds. The theory behind the switch was that institutions suffering big losses would better monitor the handling of the lawsuit.
The law was also known as the “Anti-Milberg Weiss Act,” after a dominant securities law firm. Top Milberg Weiss partner William Lerach was known as the “king of shareholder lawsuits” for his aggressive pursuit of shareholder losses through litigation.
But the law initially helped Milberg Weiss more than it harmed the firm. After its passage, law firms, including Milberg Weiss, began to woo pension funds with campaign contributions.
Adam Pritchard, who teaches corporate and securities law at the University of Michigan Law School, has studied the connection between campaign contributions and legal fees in class action cases. He found that large funds tend to negotiate lower fees, but that difference disappears once campaign contributions to state pension fund officials are accounted for.
“The political contributions are taking us back pretty much where we were before Congress adopted the law,” Pritchard said.
Milberg Weiss collapsed after revelations that the firm had paid more than $11.3 million in kickbacks to get clients to sue. Lerach and other partners from the firm went to prison. Two offspring of the original firm, Coughlin Stoia of San Diego and Milberg LLP of New York City, have expressed interest in doing business with North Carolina.
Another firm seeking North Carolina’s business is Bernstein Liebhard LLP of New York. It dropped out of the competition in Florida to handle securities litigation after a senior partner made inaccurate statements to a selection committee.
The firm was also the subject of an anonymous letter mailed to Florida’s attorney general raising ethical questions about the firm.
Bernstein Liebhard has hired two lobbyists in North Carolina, the only firm seeking North Carolina’s business that has done so, according to filings with the secretary of state. One of Bernstein Liebhard’s lobbyists is Jerry Meek, former chairman of the North Carolina Democratic Party. The firm also hired a lobbyist in Florida.
A few North Carolina firms are seeking to represent the state, including Blue Stephens & Fellers in Raleigh, which has submitted a joint proposal with Hagen Berman Sobol Shapiro of Seattle. Managing partner Dan Blue, chairman of Duke University’s Board of Trustees and a Democratic state senator from Wake County, told Carolina Journal his firm has not been involved in securities litigation, so “we teamed up with the best firm in the country to do it.”
Sarah Okeson is a contributor to Carolina Journal.