The collapse of investment portfolios has securities law firms trolling for clients eager to sue over lost money, with state pension funds becoming major plaintiff targets for the high-flying litigation shops—and state officials are benefiting from campaign contributions from the firms.
North Carolina is in the crosshairs of some 45 law firms. State Treasurer Janet Cowell (D) will choose about 10 to serve as a pool for lawsuits. Representatives from Cowell’s office and that of Attorney General Roy Cooper are evaluating proposals from the firms.
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.
Law Firms’ Campaign Largesse
Cowell has received more than $123,000 since 2007 in campaign contributions from employees and other people connected to law firms 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 has received at least $76,825 in campaign contributions since 2007 from employees and others connected to the law firms seeking the state’s business.
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.
‘Theatre of Absurd’
“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 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 have 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 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 federal law intended to discourage frivolous lawsuits. At that time, whichever firm got to the courthouse first 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—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. After the law was passed, law firms, including Milberg Weiss, began to woo overseers of government pension funds by making 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 large funds tend to negotiate lower fees, but that difference disappears once campaign contributions to state pension fund officials are accounted for.
‘Back Where We Were’
“The political contributions are taking us back pretty much where we were before Congress adopted the law,” Pritchard said.
Milberg Weiss collapsed after revelations of the firm having paid more than $11.3 million in kickbacks to get clients to sue. Lerach and other partners of 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.
Bernstein Liebhard 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, and is 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.
Sarah Okeson ([email protected]) is a contributor to Carolina Journal, published by the John Locke Foundation in Raleigh, N.C., where a version of this article first appeared.