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Class Action And “Opt Out” Lawyers Duke It Out

By Stephen Taub — November 8, 2005

WELCOME

Welcome readers of Bruce Carton's "Securities Litigation Watch!" Compliance Week is a newsletter and magazine on governance, compliance, ethics and risk. Subscribers include thousands of public company executives, who turn to us for the latest news and commentary. We always provides source data for our stories, and this column below includes resources related to the article at left. To subscribe to Compliance Week, simply call us at 888-519-9200. Mention "The Bruce Carton Discount" and you'll get up to 20 percent off our annual subscription rates. Related Resources View The Spreadsheet Detailing The "Recovery Premium" Lerach Claim It Won More Than $651 Million In WorldCom Suits Lerach Subsequent Assertion That Premium Recovery Was Accurate New York State Comptroller Hevesi Accuses Lerach Of "Distortion" Related Coverage WorldCom Settlement With “Opt Out” Plaintiffs Expected (Oct. 2005)

hen Bill Lerach announced that his law firm recovered more than $651 million for investors who were not part of the class action lawsuits arising from the financial collapse of WorldCom, the high-profile lawyer hailed the recoveries as “unprecedented.”

Lerach

“Recoveries represent premium over class action settlement,” screamed part of the headline announcing the settlement. “Our clients’ net recoveries on their WorldCom bond losses are substantially higher than the estimated recovery for the same bond losses in the WorldCom class action,” asserted Lerach, partner of Lerach Coughlin Stoia Geller Rudman & Robbins, in the press release. “Our clients are also recovering millions of dollars for December 2000 bond offering claims the class action did not pursue. They will also get a higher recovery than what class members are estimated to receive for their WorldCom stock losses.”

The self-promotional message: institutions would benefit greater by opting out of high-profile class-action lawsuits and hiring his firm instead.

Not everyone sees it the same way as Lerach, however, including the lead lawyer of the class and its lead plaintiff. “It [Lerach’s assertions] is rife with distortions and flat out falsehoods,” asserts John Coffey, partner with Bernstein Litowitz Berger & Grossmann, the lead trial counsel in the WorldCom class action.

“We got a good return,” said New York State Comptroller Alan G. Hevesi, whose New York State Common Retirement Fund was lead plaintiff in the WorldCom class action suit. “Mr. Lerach got a good return. It’s sad he has to distort what we accomplished to try to promote himself.”

Lerach issued a separate analysis detailing the recovery enjoyed by the class plaintiffs, the opt-out plaintiffs and then what he calculates to be the “recovery premium” for his clients (see box above, right).

For example, he asserts his clients received 76 percent more, on average, than the class on a May 2001 bond claims, and 29 percent and 76 percent more on separate claims stemming from May 2000 bond claims.

On other claims, Lerach asserts his group received 142 percent and 353 percent more than the class received, based in part on what he estimates to be the Class Member Claim Rate.

“Absurd Assumption”

Coffey

Hevesi and Coffey at Bernstein Litowitz Berger & Grossmann, however, don’t compute the recoveries, or the losses for that matter, the same way as Lerach.

For one thing, according to Lerach’s work sheet, the class lost $12.2 billion on their bond investments. But Coffey asserts this is not true. “It [the loss figure] is for all bondholders, including his people,” he says. Rather, the class’s bond damages were closer to $10.6 billion, insists Coffey. “He increased our denominator to drive down the recovery,” he charges.

“On that basis, the recovery for bond holders in the Class after costs is about 43 percent—assuming every Class member files a claim,” Hevesi’s report points out. Historically, not every Class member files a claim, meaning that those who do file will recover more, Hevesi’s report adds. “While we expect that the claims rate will be higher than usual, given the size of the Class recovery and the publicity about it, we note that in order to draw his comparison, Lerach makes the absurd assumption that virtually every Class member filed a claim.”

Coffey asserts that Lerach’s characterization of the stock damages “is even more egregious.” Hevesi adds: “While he cited the Class’ expert report for the bond damages, he ignored the same report for the stock damages.”

Coffey points out that in his conference call, Lerach claimed Class stock damages were $160 billion. In the table attached to his press release, Lerach says it’s $100 billion. Yet, the expert report and court testimony put the damages at $30 billion for all WorldCom investors, including those who opted out of the Class, according to Hevesi.

EXCERPTS

He Said, He Said The excerpts below are from statements released by the law firm of Lerach Coughlin Stoia Geller Rudman & Robbins, and the New York State Office of the State Comptroller: From the Office of the New York State Comptroller The settlements in the WorldCom case have produced excellent returns for investors, especially considering that the company was bankrupt. The cases established that corporate executives and directors would be held personally liable for gross misconduct and that underwriters and accountants would be held accountable for failure to perform thorough due diligence and sufficient audits. The New York State Common Retirement Fund’s role as lead plaintiff in the WorldCom class action suit and in spearheading efforts on behalf of defrauded WorldCom investors has been well documented. Unfortunately, one of the beneficiaries of the Fund’s success, attorney William Lerach, was not satisfied with just announcing his own good settlement, but chose in a conference call today to distort and disparage the Class’ achievements... There were several major inaccuracies in Lerach’s presentation in his conference call. In sum, he manipulated the amount of the Class’ damages and the anticipated claims rate for the Class, and he presented figures for his own group’s damages that are a fraction of what he has previously claimed in court and in writing. Lerach also plays games about where his fees come from... ...“Mr. Lerach’s use of numbers would not meet any standard of accuracy, transparency or professional integrity. If this were an audit, his facts and figures would be dismissed as lacking a sound foundation,” Hevesi said. From Lerach Coughlin Stoia Geller Rudman & Robbins Lerach Coughlin Stoia Geller Rudman & Robbins LLP, the nation’s leading law firm representing institutional investors in securities litigation, announced earlier today that it had recovered more than $651 million for institutional investors in individual non-class action lawsuits arising out of the financial collapse of WorldCom Inc. Following this announcement and subsequent conference call, the lead plaintiff in the class action lawsuit issued a press release attacking the firm’s analysis of its clients’ recovery. “We were saddened to read the attacks on our analysis of the unprecedented recovery for our clients in the WorldCom matter by the class action lead plaintiff,” said William S. Lerach. “We went out of our way in the press conference this morning to compliment the class on their excellent recovery. However, when the numbers are properly understood, our clients’ recovery is substantially better than what they would have recovered in the class action. We have attempted to be as transparent and accurate in our analysis as possible...” Source: Lawyer Distorts Results Of Worldcom Class Action To Make Himself Look Better Lerach Coughlin Announces That Assertion Of Premium Recovery By Institutional Investors In WorldCom Settlements Is Accurate

The stock damages actually claimed by the Class are $24 billion, Hevesi adds.

“Correcting this one distortion alone would result in a Class recovery on its stock damages that is four times what Lerach falsely reports and is then higher than his claimed stock recovery,” Hevesi’s report continues.

“...And Other Distortions”

Coffey and Hevesi also challenge a number of Lerach’s assertions when it comes to the damages incurred by his clients. For example, they point out that in a May 2003 letter soliciting clients, Lerach claimed that his group had bond losses of $1.4 billion. These days, Lerach claims the losses were $920 million. “The lower the damages, the better his recovery looks,” Hevesi reminds observers.

Coffey and Hevesi also assert that in December 2002, Lerach told U.S. District Judge Denise Cote in open court that his clients had $3 billion in claims. Now, Lerach says his total bond and stock damages are $2 billion. “Claiming lower damages today inflates his purported recovery rate,” says the Hevesi report.

If the $1.4 billion figure is correct for the bond damages, his recovery of $620 million for bond damages only works out to about 43 percent, about the same as the Class recovery. And this assumes a 100 percent claim rate by all Class members.

Hevesi

Hevesi also asserts that Lerach’s claim that his group would only receive $352 million if it were in the Class, compared to the $651 million it actually received, “is based on all these and other distortions.” Hevesi says Lerach uses a low recovery percentage for the Class by assuming his inflated Class damages and is based on his unreasonably high claims percentage and his shrunken damage figure. “In sum, the $352 million is a made-up number designed to make Lerach look good,” adds Hevesi.

Then there is the matter of fees. Lerach asserts in his press release that the banks paid the fees. “That is pure spin,” says the Hevesi report. He elaborates that the banks agreed to a total payout, in this case $745 million. Lerach took his fee of $85 million and costs of $9 million out of that total, the report adds. “It is simply not true that the banks added more for Lerach,” Hevesi adds.

In fact, Hevesi asserts that the Class paid its lawyers 5.5 percent, while Lerach is getting twice that in attorney’s fees. Says Hevesi: “Lerach’s use of numbers would not meet any standard of accuracy, transparency or professional integrity. If this were an audit, his facts and figures would be dismissed as lacking a sound foundation.”

Tickled To Death

Not surprisingly, Lerach strongly disputes the analysis of Coffey and Hevesi. “I have 70 clients who are tickled to death,” he asserts. “I don’t care to engage in a public debate with Coffey and Hevesi.”

He then disputes a number of their assertions.

For example, he says the $3 billion damages figure he is said to have used several years ago was not “inflated,” but rather a correct number before a number of potential clients chose to subsequently join the class action, after adverse rulings by the federal court. "Our comparisons are based on the clients who actually participated in our settlement," he said.

Lerach also said that Coffey and Hevesi mixed up the difference between damages—which are caused by fraud—and losses—which are caused by a number of factors—when they accused Lerach of overstating stock damages. Lerach maintains that the class had $160 billion or so in stock losses and $30 billion in stock damages. He equates this to $1 billion in stock losses for his clients, or $200 million in stock damages. "So long as you compare apples to apples, our clients did much better," Lerach said.

Lerach also defends his assertion that his group would only receive $352 million if it were in the Class in general, compared to the $651 million it actually received. He says he actually understated the actual total class-action claims rate, which he insists is between 95 percent and 98 percent. “Our comparison figure included [assumed] 90 percent,” he explains. “So, actually the recovery [for the class plaintiffs] is even lower. But we haven’t changed our official comparisons.”

Lerach also defends using the $12.2 billion figure for total bond damages because that is the figure Coffey put forth in his expert's report filed with the federal court.

As for the fees, he still asserts that his fees came on top of the recovery and that $651 million is his clients' recovery, net of fees. “We did more than twice as good a job and don’t deduct the fees,” he adds. He doesn’t dispute that his clients paid a higher percentage in fees. Rather, he says, “I like to compare fees. Sophisticated clients will allow larger attorneys fees when lawyers produce superior results for clients.”

Neutral observers say they are not surprised the two powerful law firms are sparring over the issue and trying to spin the analysis in their favor. Afterall, Lerach has been credited in general with getting dozens of institutions to opt out of the class-action.

“This is kind of the report card,” asserts Bruce Carton, vice president of ISS of its Securities Class Action Services, adding, “calculating losses is an art, not a science.”

Hecht

But, does any one really care whether the opt out group fared better than the plaintiffs who joined the class? Actually, yes. Steven Hecht, a member of the Litigation Department and the Securities Litigation and Enforcement Practice Group at Lowenstein Sandler, says companies in general don’t like shelling out more to the opt outs. “They would rather get everyone in the class,” he insists.

Carton adds that it is important for future potential plaintiffs and would-be defendants to know whether the opt-out group fared better. “There will be another WorldCom one day,” Carton adds, and the lead counsel and some outside counsel will be trying to make the case that they will fare better in a lawsuit or settlement.

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