The era was marked by mysterious envelopes.
When opened, the official-looking documents inside informed the reader that, because he owned three shares of, say, Microsoft stock some years ago, he was part of a class of plaintiffs. The class had already brought a lawsuit against Microsoft for a problem the reader had never noticed. Now the settlement was being divided and the reader might be entitled to something. But the reader, disheartened by the sheaf of forms asking for details about a barely remembered transaction, usually tossed the notice in the trash and started flipping through that day's Pottery Barn catalogue.
Those envelopes are disappearing. Securities class actions are on the wane. For decades, corporate America fought them hard, writing checks to settle cases with one hand and checks to lobbyists with the other. But the plaintiffs proved tenacious and the cases kept coming.
Until recently, that is. Last year, plaintiffs filings were down nearly 40% from the previous year, to the lowest level of securities class actions in more than a decade. The downward trend is expected to continue this year. Why? Take your pick from several explanations. The stock market is near an all-time high and fraud tends to be discovered when the market is down. The field's most prolific plaintiffs firm, Milberg Weiss, has been reduced to a shadow of its former self. Recent appellate court rulings, including a couple at the US Supreme Court, have made it tougher on plaintiffs. And no one can rule out the possibility that the Sarbanes-Oxley Act and increased enforcement by the Securities & Exchange Commission (SEC) and the US Department of Justice have made corporate America more honest.
This fantasy-come-true for corporate America means bad news for the law firms that represent it. Since 1997, defense firms could expect around 200 new cases a year. Scandals at companies like Enron and WorldCom super-sized the stakes - and the fees.
The prosperous defense bar owes a good chunk of its fortune to its antagonist, Melvyn Weiss (pictured above). In the 1960s Weiss was one of a handful of attorneys who explored the commercial applications of new amendments to federal rules of procedures allowing for expanded class actions. Weiss distinguished himself by aggressively growing the business.
“He was willing to throw a lot money at the cases and take them further [than anyone else],” says Fred Isquith, a class action attorney at Wolf Haldenstein Adler Freeman & Herz. “He was prepared to build a bigger firm. Others were more ... risk-averse.”
Weiss created a lucrative practice for himself and others. Throughout the 1980s and 1990s, Milberg Weiss was to securities class actions what Wachtell Lipton Rosen & Katz is to M&A. The passage of the Private Securities Litigation Reform Act (PSLRA) in 1995 - legislation designed to curb the suits - hardly made a dent. From 1995 to 2003, Milberg served as lead or co-lead plaintiff in more than half the cases settled, according to a report by Cornerstone Research. At its peak, the firm had more than 200 lawyers.
In 2002, as the scandal wave hit, the firm filed 361 securities cases, according to Westlaw. But the firm has been diminished. After being indicted last year on charges that it illegally paid named plaintiffs, it has shrunk to less than 70 lawyers and last year filed only 59 cases. In July former name partner David Bershad pled guilty to conspiracy and agreed to cooperate with prosecutors. Observers see the plea as an inexorable step to the indictment of Weiss, who declined to comment for this article, and former partner Bill Lerach.
The sinking of Milberg, and securities class action litigation in general, is having an impact on the defense side. For example, in 2003 Skadden Arps Slate Meagher & Flom appeared on 155 federal and state dockets in securities cases, according to figures collected by Westlaw. Last year the firm appeared on 58. Similarly, Cadwalader Wickersham & Taft appeared on 49 new dockets involving securities cases in 2002 and only nine last year. Those firms are not alone in feeling a drop-off.
“Where we would get eight to 10 new cases [every year], maybe it's three to six now,” says Jeffrey Rudman, who co-chairs the securities department at Wilmer Cutler Pickering Hale and Dorr. Most defense lawyers feign indifference.
“It's not a concern,” says William Sullivan, a partner at Paul Hastings Janofsky & Walker. Sullivan and others express a deep and abiding faith in the creativity of the plaintiffs bar to overcome legal obstacles. History gives them comfort. After the PSLRA was enacted, plaintiffs lawyers showed resiliency in adapting to the new legal standards. After a dip in 1996, the number of filings shot back up. Plaintiffs lawyers also learned to court financial institutions as clients, which have become the vehicle to control cases and reap the lion's share of fees.
Defense lawyers say that other kinds of matters are keeping them busy. Backdating stock options investigations, for example. The SEC says that it has initiated more than 100 inquiries into the practice. Some firms, such as Wilson Sonsini Goodrich & Rosati, Quinn Emanuel Urquhart Oliver & Hedges and O'Melveny & Myers, have each landed more than a dozen cases.
Other defense lawyers are finding work on litigation arising from the current private equity buy-out boom. Just after the pipeline operator Kinder Morgan, announced a management-led buy-out, for example, Lerach Coughlin Stoia Geller Rudman & Robbins filed a suit against the buyers on behalf of shareholders claiming that the price was “grossly inadequate and unfair” to shareholders. Bernstein Litowitz Berger & Grossmann, another traditional plaintiff securities fraud firm, has also brought cases challenging the value of deals, like the Dolan family's buy-out of Cablevision Systems.
Of course, defense lawyers can be expected to put a positive spin on their business, but are they whistling past the graveyard? Backdating, for example, has limited potential. There are a few major investigations but many are relatively small matters, which can be handled by fewer than a half-dozen attorneys. And litigation over private equity deals tends to be shorter than securities class actions and doesn't require the massive amount of discovery. Nor is there a new Milberg on the horizon.
After several years, and several key court rulings, the PSLRA's goal of forcing plaintiffs to allege highly specific allegations appears to be working, according to both plaintiffs and defense lawyers. That makes a firm model based on filing lots of actions harder to maintain, since plaintiffs cases are more prone to dismissal.
A handful of major players in the practice - Bernstein Litowitz and Grant & Eisenhofer, for example - file the major cases that Milberg did at its peak, but do not bring the bevy of smaller cases that Milberg also did. Lerach Coughlin, a successor firm to Milberg Weiss, has the resources to be a major filer. It has nearly 180 lawyers. But the firm this week confirmed that its high-profile leader, Bill Lerach, is set to retire, fuelling speculation among competitors that the firm could splinter.
Patrick Coughlin, a co-founder of the firm, denies that a split is imminent. But he doesn't promise that the firm will maintain its current size. “If the market [for class actions] gets cut in half, we'll shrink,” says Coughlin. The new environment has not left every defense attorney sanguine about the future.
Cadwalader partner Gregory Markel believes the golden age of securities class actions has likely come to an end. When asked what the drop-off means for his business, Markel answers, “I think it means you diversify.”
Spoken like a true lawyer.
This article originally appeared in The American Lawyer, a US sister title of Legal Week.