Discredited securities lawyer William Lerach recently wrote from his prison cell that nobody was “disadvantaged or harmed” by his actions. And his fees were “earned … won through hard work,” he said.
Others would beg to differ.
One of Lerach’s biggest paydays will come as he sits in the federal penitentiary when he collects his ample portion of the $688 million in attorneys’ fees in $7.2 billion settlements with banks he sued in the Enron scandal.
But Texas Attorney General Greg Abbott, who earlier had supported Lerach’s legal claims in the Enron cases, has since challenged the $688 million, arguing that such generosity would be a “windfall” for Lerach and other lawyers.
The Enron settlement demonstrates how class-action securities plaintiffs lawyers can walk away with millions, while the shareholders they represent get only a few dollars per share they own.
Lerach, for example, won a $5 million settlement against Seagate Technology. The $5 million was split among 17,000 Seagate shareholders, or about $294 per shareholder, compared with Lerach’s fees of approximately $1.5 million.
American Enterprise Institute Fellow Ted Frank said that class-action securities litigation, “for all its faults, at least [is] restricted to federal court with the sort of oversight that tend[s] to keep fee recoveries within a reasonable range of actual settlement dollars.”
He noted, however, that “the unique problem with securities fraud litigation is [with the exception of lawsuits against inside traders] those recoveries are coming out of the pockets of other shareholders.
“Thus, if you own a diversified portfolio of investments, sometimes you’ll be a plaintiff, sometimes you’ll be a defendant,” Frank said. “You’re effectively being represented by Lerach to sue yourself, and Lerach [and the defense attorneys] take a cut as the money goes from your right-hand pocket to your left-hand pocket.”
St. John’s University law professor Michael Perino found in his data-driven analysis that in the cases for which Lerach and his former partners were convicted of fraudulent behavior, their fee requests were greater “even though there is no evidence [they] obtained superior results.”
Put another way, the shareholders on whose behalf Lerach sued had a smaller net recovery in those cases than they otherwise would have. Some would even say those results are indeed evidence of “harm.”