Wednesday, March 16, 2005

 

Shaw's SEC Problem Drew Attention - But What Has the SEC Discovered?

Under attack
July 6, 2004
By Sara Bongiorni,
Business Report staff

An SEC inquiry at Shaw draws out-of-state law firms that specialize in shareholder litigation.
There's a reason their critics sometimes describe trial attorneys as sharks. Mix a little blood in the water, and they come zooming in for the kill.

As with sharks, some litigators are more dangerous than others. The most lethal and best-known shareholder litigation firm is now doing business in Louisiana, drawn here by a federal probe into The Shaw Group's accounting practices.

The New York law firm Milberg Weiss is the "great white" of shareholder litigation. It handles upwards of 1,000 suits at a time. Its top lawyers make a reported $10 million a year.

At one point over the past 10 years, Milberg Weiss was the lead counsel in over half of all class-action settlements in such cases, according to a report by Cornerstone Research and Stanford University Law School.

Detractors have described Milberg Weiss attorneys as "economic terrorists." One of its top lawyers was dubbed the "King of Pain." The firm is credited- and disparaged- for its creation of "strike suits," in which plaintiff's attorneys sue on behalf of shareholders after a drop in a firm's stock price.

But Milberg Weiss also has admirers. The left-leaning magazine "The Nation" described a former partner at the firm as "America's Top Corporate Crime Fighter." Milberg Weiss has filed suits on behalf of shareholders against a long list of corporate defendants: Enron, Tyco, WorldCom, Martha Stewart.

Some of those cases highlight an uncomfortable fact for Milberg Weiss's critics: the firm has often been correct in its allegations of lying, cheating and stealing by corporate executives.

Yet the firm also has been stung by its own zeal on occasion. In 1999 it agreed to pay $50 million in punitive damages- on top of $45 million in compensation- after a jury decided it had abused the legal process in suing a Chicago consultant.

As in Shaw's case, the allegations in strike suits claim wrongdoing of some kind is behind a fall in shareholder value. The volatile stock of technology firms made Milberg Weiss a familiar, if detested, name in California's Silicon Valley. The targets of its suits in that region run the gamut from the well known- Intel, Apple- to the obscure.

Most strike suits never reach a jury; a majority are settled out of court well before the case reaches that point. As a result, whether or not a firm committed some sort of fraud is often a moot point in the resolution of the case, some observers say.

"The company's position is that it's too risky, that they had to settle even though they didn't do anything wrong," says Glenn Morris, vice chancellor at LSU's law school. "Of course, the plaintiffs' attorneys claim (a settlement) shows that they were right, that the companies need policing."

In Shaw's case, Milberg Weiss's class-action suit- along with actions filed by smaller firms- was filed days after the company's public revelation on June 10 that it was the subject of an SEC inquiry.

Shaw says it is cooperating with SEC investigators and is confident the inquiry will be resolved in the company's favor. Spokesman Chris Sammons declined to be interviewed for this story, saying Shaw does not comment on pending litigation. Milberg Weiss likewise did not respond to requests for an interview. And SEC spokesman John Heine says the agency doesn't disclose the names of firms being probed until it announces an action or penalty against them.

As is standard for class-action strike suits, the plaintiffs' firms file their suits first, then start vetting the defendant's public financial statements for evidence of possible wrongdoing. The firms also begin in earnest to search for aggrieved shareholders, though federal law puts limits on how aggressively they can advertise. Milberg Weiss and other firms have posted links on their Web sites inviting shareholders to join the class action.

Like the other firms suing Shaw, Milberg Weiss is recruiting shareholders who bought or held Shaw stock during the period of alleged fraud: Oct. 19, 2000, to June 10, 2004.

Other elements of the Shaw case are standard for this breed of litigation. Strike suits often follow word that federal regulators are taking a look at a firm's financial statements. Since Shaw's report of the inquiry, about a half dozen out-of-state firms have filed class-action suits against the company.

"It's not uncommon that these private actions follow an SEC action," says Edward Sherman, a professor at Tulane University's law school. "They are kind of tag-alongs to that kind of thing."

Big firms like Milberg Weiss typically do the heavy lifting, with smaller firms getting involved in the hope of a quick settlement. At some point, a judge appoints a lead plaintiff, often a pension fund or other institutional holder of stock in the defendant firm.

"The big class firms try to represent these big players," says Bruce Packard, a litigator with the Dallas firm of Davis Munck.

The fate of the class-action suits against Shaw doesn't hinge on whether the SEC inquiry evolves into a full-blown investigation. The right to file such suits is independent of the federal agency, in part because the SEC doesn't recoup money on behalf of shareholders.

In that sense, a government investigation is a "win-win" for plaintiff's firms, says Packard.

"If they find something, you get good discovery," he says. "If they don't, you can still find it on your own and be a thorn in the side of the company."

The next legal test for Milberg Weiss and other firms involved in the Shaw case is convincing a judge enough evidence exists to suggest at least an inference of wrongdoing on Shaw's part, says LSU's Morris.

The plaintiffs' firms will pore through public documents to build their case. If a federal judge is convinced that at least an inference of wrongdoing exists, the plaintiffs' attorneys will be granted the power to issue subpoenas for internal corporate documents to further their case, Morris says. Those documents are off limits for now.

Those developments are likely to take place over the next few months. Meanwhile, Shaw's attorneys will press for a judge to dismiss the case, Morris says. If the suit survives that step, the pressure on the company to settle grows dramatically.

"Generally speaking, if the suits survive that step, they settle," Morris says.

Copyright © 2004 by Louisiana Business Inc.
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