The NY AG Race: Sean Coffey’s Fundraising Numbers

On October 30 of last year I commented on former Bernstein Litowitz lawyer, Sean Coffey’s decision to run for Attorney General in New York.  On several occasions I’ve mentioned the unseemly though commonplace practice of soliciting business with state pension systems while simultaneously acting as benefactors to the politicians tasked with running those same pension systems (e.g. here, here, here and here).  Mr. Coffey’s former firm (and others cut from the same cloth as Milberg) have collected billions of dollars in fees because they’ve had the good fortune of being retained by large pension systems like New York’s.

In that context, Elizabeth Benjamin’s piece today at the NY Daily News reporting that Coffey managed to raise $1.5 million over the past six weeks hardly came as a surprise to those who know this industry.  Benjamin reports:

This puts Coffey on near-equal footing with former state Insurance superintendent Eric Dinallo, the only other of the potential Democratic AG candidates (so far) who has never before held elected office. Dinallo reported raising $1.75 million.

To date, the contender with the most amount of cash is Nassau County DA Kathleen Rice, who reported raising $1.4 million over the past six weeks…

With his personal wealth, copious political connections and the class action industrial complex fully behind him, I’d be surprised if his campaign coffers were unable to keep up with his more well known competitors.  What I’m curious to see is whether he can spin that spigot of campaign cash into name recognition and ultimately, votes.

Filed under: Law & Politics, Opinion, Bernstein, Milberg, pay-to-play, pension funds, securities

Unethical Fee Splitting Par for the Course

For an illuminating look at improper fee sharing arrangements at plaintiffs’ firms, check out Edward Siedle’s commentary in Forbes.

An offer of $800,000 up front and 10% of any class action legal fees: That’s what law firm Milberg Weiss Bershad Hynes & Lerach proposed paying me in July 2003 to serve as its Marketing Director….

…After working for the Securities and Exchange Commission, I’d spent two decades advising pension funds on investigating financial wrongdoing among money managers and had connections to the union members, cops, firefighters and various others who oversee such funds. Milberg Weiss’ offer had obvious financial appeal. However, I wasn’t about to risk getting involved in criminal activity, regardless of the monetary incentive.

The practices described by Mr. Siedle are all too common among plaintiffs firms.  Additional documented examples of such unethical arrangements will be forthcoming on this blawg in the near future.

Filed under: Law & Politics, Opinion, fee splitting, Milberg, pay-to-play, pension funds

A Closer Look at M&A (“Takeover”) Securities Suits

My November 19 post referenced Dan Fisher’s recent Forbes piece on a securities suit filed against Berkshire Hathaway a few hours after it’s announcement of a $26 billion acquisition of BNSF.  This and similar lawsuits usually allege that the officers/directors negotiated/agreed to terms which failed to maximize shareholder value.

Unlike traditional securities class actions which allege violations of Rule 10b-5, or shareholder derivative cases which are brought by a shareholder in the name of the corporation, takeover suits are traditionally brought in state courts under state law and are not governed by the Private Securities Litigation Reform Act (the PSLRA).

The inapplicability of the PSLRA means the the “first to file” rule (and all it implies) still applies to takeover litigation. Indeed, Fisher argues that these lawsuits are filed without so much as a good faith belief in the very claims they advance, but are rather:

…designed to capitalize on the dynamics of acquisitions. To avoid further lawsuits companies frequently announce a takeover price that they later negotiate upward, providing strong evidence that the ultimate price was arrived at through arms-length bargaining.

If a substantial portion of takeover litigation is lawyer-driven and aimed at recovering fees for doing little more than filing a complaint with the court clerk faster than anyone else (not an Olympic event as far as I know) then the transactional inefficiencies on mergers and acquisitions generally could be quite significant.

However, even if the litigation costs associated with a single major acquisition can easily be shrugged off, the systemic inefficiencies cannot. A 2004 Vanderbilt Law Review Article by Robert Thompson and Randall Thomas highlights just how prevalent these suits are:

When we analyzed data that we had collected on all suits filed in 1999 and 2000 in the Delaware Chancery Court, the nation’s leading corporate trial court, we were surprised to find that approximately 80 percent of the breach of fiduciary duty claims, the vast bulk of state court representative litigation are class actions against public companies challenging director action in an acquisition.

These acquisition-oriented class actions dominate all other forms of state court shareholder litigation.  Moreover, in 1999 and 2000, the number of these class actions filed in Delaware alone equaled about half of the total number of federal securities fraud class actions filed in all federal district courts during that same two-year period.

Given the potentially unnecessary systemic litigation costs  involved,  this issue cries out for further empirical investigation.

Filed under: Litigation, Opinion, PSLRA, securities

Drive-By Litigation: “Takeover Lawsuits”

In the current issue of Forbes, Daniel Fisher takes a closer look at a lawsuit filed against Warren Buffett’s Berkshire Hathaway a few hours after its announcement that it would be acquiring Burlington Northern Santa Fe Corp for $26 billion:

Berkshire’s offer of $100 a share was a 31% premium to the previous day’s closing price and only a little below the railroad’s all-time high of $113 a share in May 2008. But according to the suits drafted within hours of the deal’s announcement, management could–and should–have gotten more.

Securities-litigation reform laws were supposed to end the race to the courthouse, an unseemly practice designed to win control over litigation by being the first to file. But when a takeover is announced, it’s business as usual. With a speed that stretches the bounds of credulity, lawyers file suits soon after a takeover is announced in hopes of settling the case for a generous fee…

Takeover-related litigation is a specialized niche of the larger securities class-action bar, but like other shareholder actions it is largely financed by settlements. In the case of takeovers, lawyers sue hoping the ultimate purchase price is increased. If it happens they can petition the judge for a percentage of the increase, claiming it is due to their litigation.

“If the price gets modified upward, there is no doubt the lawyers will ask for a fee based on it,” said Michael Perino, a securities litigation expert at the St. John’s University School of Law. Since most of these suits can be settled for less than the cost of discovery, the court-overseen process of going through corporate records in search of evidence, companies settle them rather than litigate…

The suit was brought by the Employees Retirement System of New Orleans, a frequent plaintiff in securities cases.  Jerry Davis, the fund’s chairman, explained that the suit was brought “to determine whether the Buffett offer is the best available deal, or whether other offers have been properly analyzed.”

Without any evidence or other indication that some party breached a fiduciary obligation to the shareholders by approving the deal, these suits are attempting to use civil discovery rules to investigate whether some purely theoretical breach may have taken place.  I admit that I skipped a few days in law school, but I had no idea that particular power resided in the judiciary.

Filed under: Litigation, Opinion, document review, institutional investors, pension funds, securities

NVIDIA: Selecting Lead Counsel under the PSLRA

The PSLRA gives district court judges some latitude in their selection of class representatives in securities cases. It also vests in lead counsel the authority to select co-counsel for the class and the discretion to divide the contingency fee among its chosen co-counsel as it sees fit. Given such high stakes, the jockeying so often seen between competing plaintiffs firms for lead status should hardly come as a surprise.

But whose favor do the lawyers need to curry in order to attain this vaunted status; the lead plaintiff’s or the court’s? This was the question before the 9th Circuit Court of Appeals in the NVIDIA securities fraud litigation. (The underlying lawsuit alleges that NVIDIA improperly failed to disclose material defects in its manufacturing processes thereby inflating the company’s stock price which subsequently deflated once the information became public.)

The court’s discretion to select plaintiffs to represent the class is circumscribed by the PSLRA which states that the adequacy of a lead plaintiff should be determined by whether or not the individual or group “(a) has either filed the complaint or made a motion in response to the published notice; (b) in the determination of the court, has the largest financial interest in the relief sought by the class; and (c) otherwise satisfies the requirements of Rule 23 of the Federal Rules of Civil Procedure” 15 U.S.C. § 78u-4(a)(3)(B)(iii)(I).

In the NVIDIA case District Court Judge James Ware applied these factors, selecting two lead plaintiffs: the New Jersey Carpenters Pension and Annuity Fund and Mr. Roberto Cohen. But Judge Ware also selected Milberg LLP and Girard Gibbs LLP to serve as lead plaintiffs representing the class despite Roberto Cohen’s selection of Kahn Gauthier Swick, LCC to serve as his counsel. Mr Cohen appealed the order claiming the Court overstepped it’s authority by substituting its own judgment for that of the lead plaintiff.

The Court of Appeals, relying on In re Cavanaugh, 306 F.3d 726 (9th Cir. 2002), agreed with Mr. Cohen and remanded the issue back to the lower court.

…more on the decision after the jump

Filed under: Litigation, Opinion, document review, monitoring agreements, pay-to-play, PSLRA, securities

WSJ Calls Out Bernstein Litowitz

Today’s Wall Street Journal ran an opinion piece entitled Pay to Play Torts: Pension middlemen get investigated; lawyers get a pass. The column echoes many of the concerns outlined in this blog:

The Louisiana State Employees’ Retirement System is among the most litigious in the nation. John Kennedy, the state treasurer who helps decide when Louisiana’s major pension funds should bring a law suit, has received tens of thousands of dollars in political donations from Bernstein Litowitz, which has offices in New York, New Orleans and San Diego and was the country’s top-grossing securities class-action firm in 2008. The law firm has represented Louisiana’s public pension funds at least 13 times since 2004, and its partners donated nearly $30,000 to Mr. Kennedy’s two most recent campaigns, even though he ran unopposed both times.

In Mississippi, the state attorney general determines when the public employees retirement fund should bring a securities class action and which outside firms will represent the fund. Would you be shocked to learn that AG Jim Hood has frequently chosen law firms that have donated to his campaigns?

Mr. Hood is also partial to Bernstein Litowitz. On February 21, 2006, he chose the firm to represent the Mississippi Public Employees Retirement Fund in a securities class action against Delphi Corporation—just days after receiving $25,000 in donations from Bernstein Litowitz attorneys. The suit was eventually settled, and the lawyers on the case received $40.5 million in fees. Mr. Hood’s campaign would appear to deserve a raise.

 

 

Filed under: Law & Politics, Opinion, Bernstein, pay-to-play

Sean Coffey Running for New York AG: A Wolf in Sheep’s Clothing to Guard the Hen House?

The only thing I know about Sean Coffey’s political ideology is that he’s a Capitalist.  That said, his upcoming campaign to be New York’s next Attorney General is unlikely to emphasize the fortune he’s amassed as a senior partner of the law firm Bernstein Litowitz Berger & Grossman.  For those who don’t know, Mr. Coffey earns a living by collecting hundreds of millions of dollars in attorney fees for his part in bringing (and usually settling) lawsuits against companies (like WorldCom, for instance) over violations of securities laws.

I may be jumping the gun a bit but I’d give 20 to 1 odds that the central theme of Coffey’s campaign will be something along the lines of:  ”A tough fighter (and former Navy Captain) who has spent his career fighting corporate greed and corruption on behalf of the little guy.”  It sounds pretty good and some of it’s actually true!  Unfortunately the rest is a crock of shit.

I don’t question the propriety of punishing corporate malfeasance, but Sean Coffey is no Robin Hood. Unlike most attorneys in private practice, Mr. Coffey finds a defendant to sue before he finds a plaintiff to represent. And who are these plaintiffs willing to surrender outrageous fees to subsidize Mr. Coffey’s lifestyle?

Filed under: Law & Politics, Opinion, Bernstein, pay-to-play, pension funds

Are Securities Firms Pension Fund “Gatekeepers”?

We’ve discussed pay-to-play related issues, portfolio monitoring agreements and the lawyer-driven nature of securities suits where public pension funds are the nominal plaintiff. Edward Siedle’s recent article in Forbes is suggestive on these topics:

Another ethical swamp are the conflicts of interest that continue to surface involving the consultants who advise pension funds about which money managers to hire. The Securities and Exchange Commission, Department of Labor and state attorneys general are all investigating pay-to-play schemes involving these “gatekeepers.” At this point, there is absolutely no disputing that an unscrupulous pension consultant who corrupts the integrity of a fund’s investment process, for personal profit, can cause massive harm–far greater than the kickbacks he receives from the money managers. Yet I am perpetually amazed that most boards, even when confronted with the harm or damage will say, “We like him. He’s a good guy.”

Law firms may or may not advise their pension fund clients on which money managers to hire, but they certainly advise them on which class actions to pursue. Questionable campaign contributions along with contigency fee arrangements that leave the pension fund more or less where it was but earn the lawyers hundreds of millions in fees makes me wonder whether the firms themselves are the “gatekeepers” Siedle describes.

Filed under: Law & Politics, Opinion, institutional investors, monitoring agreements, pay-to-play, pension funds, securities

Investigating Securities Lawyers who Pay to Play?

Senator Bob Bennett hopes so. The NY Daily News reports:

A member of the powerful U.S. Senate banking committee wants to crack down on “pay-to-play” by law firms representing pension funds in mega-buck court cases.

“Pay-to-play by law firms … pose serious potential conflicts of interest that can harm the pension fund retirees who have spent their careers in public service jobs,” said Sen. Bob Bennett of Utah.

The Daily News reported last week that securities law firms gave nearly $1 million to three state controllers in the last 10 years. Class-action cases for the pension fund have yielded $520 million in legal fees.

Bennett asked the Securities and Exchange Commission to expand its investigation of “pay-to-play” involving investment firms to include securities law firms.

It’s nice to see this issue finally getting some attention.

Filed under: Law & Politics, Opinion, institutional investors, monitoring agreements, pay-to-play, pension funds

BofA’s Privilege Waiver may be Broader than Intended

Zach Lowe at The AmLaw Daily has done a great job covering the hullabaloo surrounding Bank of America’s waiver of attorney-client privilege in the Merrill Lynch merger case before Judge Jed Rakoff in New York’s Southern District.  As we reported last Wednesday, BofA wrote a letter to Attorney General Andrew Cuomo’s office in New York in which it relied on the newly revised Rule 502 of the Federal Rules of Evidence which it believed would prevent the otherwise privileged documents from being more widely disseminated (in particular, to plaintiffs’ firms in private securities suits against the bank).

On Friday Mr. Lowe reported on a fascinating conversation he had with Mr. Gregory P. Joseph, an attorney who helped draft the rule.  Mr. Joseph believes the bank’s lawyers’ misunderstanding of the rule may have the unintended consequence of extending the waiver to related lawsuits and investigations.

It turns out the bank’s first mistake is simple: They referred repeatedly to a “waiver” in their court order, and rule 502 does not deal with “waivers,” Joseph says. It gives corporations the ability to disclose privileged documents in a limited way under the terms of a court order, not a waiver. It may seem like a semantic distinction, and it is, but Joseph says its implications could be huge. Put simply, any privileged document the bank discloses to the SEC is now fair game for plaintiffs lawyers in those 58 cases we mentioned earlier, Joseph says. BofA’s order protects the bank against the SEC or those plaintiffs lawyers from getting their hands on documents the order doesn’t specifically cover. But what the bank turns over to the SEC is no longer protected, Joseph says. “They’ve waived the privilege” as it relates to documents the bank turns over to the SEC…”in this case and every other case.”

 

 

Filed under: Litigation, Opinion, document review, PSLRA, SEC, securities

How Broad is BofA’s Privilege Waiver?

Bank of America has waived its right to attorney-client privilege with respect to certain communications with its outside counsel leading up to its acquisition of Merrill Lynch.  The waiver is seen by many as an attempt to assert the “advice of counsel” defense which could leave the firm’s counsel, Wachtell, Lipton, Rosen & Katz, on the hot seat.  BofA’s waiver came in the form of a letter written to Attorney General Andrew Cuomo’s office in New York.

So how broadly does the privilege waiver extend?  Surely it doesn’t mean that Bank of America will hand over confidential emails with its outside counsel to plaintiffs lawyers in related private securities suits without a fight.  Losing that fight, however, is a real possibility.  The AmLaw Daily posted this yesterday:

We called Peter Henning, a professor at Wayne State University Law School and an editor of a widely-read blog on white-collar crime, and asked him about the privilege issue. Henning tells us the BofA waiver could be an interesting test case of two recent additions to the Rules of Evidence for United States Courts. Those new rules act to prevent a waiver in one federal proceeding from spilling over into other proceedings under certain circumstances, Henning says.

The old rule was that if you turn privileged documents over, the privilege is gone,” Henning tells us. “These new rules could offer [the bank] some protection.” Henning says. BofA’s case may become more difficult if they waive privilege in front of Congress, Henning says. State Rep. Edolphus Towns, chair of the House Committee on Oversight and Government Reform, has requested privileged documents form BofA as well, according to our prior reports.

 

 

Filed under: Litigation, Opinion, Bernstein, document review, SEC, securities

Discovery Stays and the PSLRA

Despite serious problems with the Private Securities Litigation Reform Act, some of its provisions actually do have positive public policy implications.  Micahel H. Gruenglas, Robert A. Fumerton and Patrick G. Rideout have a piece in the New York Law Journal which proposes that e-discovery in all civil litigation follow the rule set out in the PSLRA.  Under the PSLRA electronic discovery is stayed pending the outcome of the defendant’s motion to dismiss unless the plaintiff agrees to pay the costs associated with the production of electronic evidence where the motion to dismiss was granted:

This measure would prevent plaintiffs with legally insufficient claims from extracting settlements based on the threat of the costs and burdens associated with e-discovery. Indeed, when even the most frivolous complaint can require a defendant to expend millions of dollars responding to requests for e-discovery (often exceeding the real amount at issue), tremendous pressure is placed on defendants to immediately settle litigation.

 

 

Filed under: Litigation, Opinion, document review, PSLRA, securities

New Study on Cy Pres Awards

Nathan Koppel at the WSJ Law Blog reported today on a recent Northwestern Law School study which concluded that cy pres awards are really just an:

attempt to conceal “faux class actions,” which the study defines as a suit “where the individual damages are so minimal … that as a practical matter the function of the suit as a means of compensating injured victims is all but completely undermined.” In these cases, the argument continues, no one does well but the lawyers.

The existence of cy pres in the first place is yet more evidence of the lawyer-driven nature of so many class actions.  This new study conducted by the Searle Center on Law, Regulation, and Economic Growth is yet another brick the wall and helps shed some more light on the class action industry.

Click here to see a video the lead author of the study, Prof. Martin Redish, discussing the cy pres doctrine.

 

Filed under: Litigation, Opinion, cy pres

Law Firms Squeezing Out Money Managers in New York?

I thought Bloomberg’s coverage of a recent executive order by the New York State Comptroller was worth quoting:  (click quoted text for the full story)

Sept. 23 (Bloomberg) — New York State Comptroller Thomas DiNapoli, the sole trustee of the $116.5 billion state pension fund, signed an executive order forbidding the fund from doing business with money managers who contribute to candidates for the office. DiNapoli, a Democrat who’s running for re-election next year, said the step was needed to restore public confidence in the pension fund, which has been rocked by allegations of kickbacks. The order, which applies to donations to incumbents as well, prohibits the fund from hiring investment advisers within two years after a contribution. The ban takes effect in 45 days, DiNapoli said today in a conference call from Albany…

Unfortunately, the most noteworthy part came later:

DiNapoli’s donation ban doesn’t apply to those seeking other statewide offices, such as governor and attorney general… The contribution ban also doesn’t apply to law firms hired to represent the pension fund in securities fraud litigation. DiNapoli said he voluntarily instituted “blackout periods” prohibiting contributions from law firms and others while the comptroller’s office is soliciting proposals…  Securities class-action firm Bernstein Litowitz Berger & Grossmann LLP has contributed $35,000 to DiNapoli, while Kaplan Fox & Kilsheimer LLP donated $10,000. Kirby McInerney LLP has given $6,000, according to New York campaign finance records…

 

 

Filed under: Law & Politics, Opinion, institutional investors, pay-to-play, pension funds, securities

Spam: An Effective Tool for Attracting Pension Fund Clients?

Two weeks ago, I posted a redacted portfolio monitoring agreement between a law firm and its pension fund client.  Such agreements allow a firm to limit its solicitations to only those pension funds with significant investments in the potential defendant.  Today I thought I’d share an alternative approach taken by at least one law firm: mass email solicitation.

The mass email below sent by Barrack, Rodos & Bacine looks like a pretty desperate (and flimsy) attempt to identify a client with which to sue Best Buy for misleading investors. As you can see, it does not explicitly identify itself as an advertisement and may violate of a number of state disciplinary rules. But could spam like this really work?

Here’s the solicitation:

To Institutional Investors:

Barrack, Rodos & Bacine strongly recommends that institutional investors consider actively participating in the prosecution of the following case on behalf of investors. This case involves serious misrepresentations of the company’s business operations and prospects that have caused substantial investment losses.

COMPANY RELEVANT PERIOD CUSIP NO.

Best Buy Co., Inc. January 9, 2002 to August 7, 2002 086516101
(NYSE: BBY) Lead Motion Deadline: January 19, 2003

Attached to this email is a Barrack Bullet — our firm’s summary analysis of the claims made in this case and why we think the case merits institutional consideration.

Barrack, Rodos & Bacine would like to assist your fund in calculating the fund’s losses suffered in the securities covered by the lawsuit (at no charge to the fund). Once the losses have been calculated, the fund will be in a better position to determine the appropriate course of action with regard to this case. Because of the relatively short deadline for becoming an active participant in this case, I urge you to contact me as soon as possible to discuss the details.

Please feel free to call me if you have any questions about this important case or about any of the other services that Barrack, Rodos & Bacine can provide to your fund.

Sincerely,

Scott C. Freda
Director, Public Affairs
Barrack, Rodos & Bacine
sfreda@barrack.com
800/417-7305

It is hard to know if pension funds take spam like this seriously, but if anyone is interested in finding out, just ask one of the (many) recipients:

Filed under: Opinion, monitoring agreements, pension funds

The BacMerSaga – Agency Problems and the PSLRA

“Oscar Wilde once famously said that a cynic is someone “who knows the price of everything and the value of nothing.” Oscar Wilde, Lady Windermere’s Fan (1892). The proposed Consent Judgment in this case suggests a rather cynical relationship between the parties: the S.E.C. gets to claim that it is exposing wrongdoing on the part of the Bank of America in a high-profile merger; the Bank’s management gets to claim that they have been coerced into an onerous settlement by overzealous regulators.  And all this is done at the expense, not only of the shareholders, but also of the truth.” -Jed S. Rakoff (U.S.D.J.) in SEC vs. Bank of America 09 Civ. 6829 (JSR)

Judge Rakoff’s recent rejection of BofA’s $33 million dollar settlement with the SEC has the law blogs buzzing.  The WSJ Law Blog did an excellent job documenting what they have dubbed the “BacMerSaga” and followed up recently with a longer post entitled Looking at the Logic Behind Shareholder Class-Action Suits.  This piece was itself a follow-up to Michael Orey’s Sept. 17 noteworthy commentary in Businessweek, Do Shareholder Class Actions Make Sense?

Punishing current shareholders at the expense of previous (and sometimes still current) shareholders is like writing a check and putting it in your own piggy bank.  Others have documented this absurdity better than I can, but I take one of Rakoff’s points to be that such suits are an unlikely deterrent unless the actual human agents who made the false or misleading disclosures are held personally (or at least jointly) liable.

Filed under: Law & Politics, Litigation, Opinion, Bernstein, institutional investors, monitoring agreements, pension funds, PSLRA, securities

Investor Protection & Caviar: How Plaintiffs Firms Make New Friends

In major securities fraud cases against the likes Enron, WorldCom, Tyco and others, the plaintiffs’ lawyers who pocketed hundreds of millions of dollars in contingency fees were, for the most part, representing state and municipal pension funds.  Just to be clear, I’m talking about firms like Coughlin Stoia, Milberg, Bernstein Litowitz, Barrack, Rodos, Bernstein Liebhard, Berman DeValerio, and others, many of whom are mentioned in the 2008 SCAS Top 50.

So how did these law firms get themselves retained by the pension funds in the first place?  The answer, of course, is money and schmoozing (sometimes euphemized as “lobbying” or “marketing”).  This post is about the schmoozing.  The money is a much more complicated issue which we will continue to develop in future posts, but for a taste, see Neil Weinberg and Dan Fisher’s illuminating 2004 Forbes article, The Class Action Industrial Complex.

Unseemly and often improper relationships between state pension fund officials and money managers are no longer a very closely held secret.  The part played by securities class action firms in facilitating and profiting from these relationships, however, has remained more or less well-guarded.  Since the passage of the Private Securities Litigation Reform Act (PSLRA) in 1995, the courts’ selection of lead plaintiffs in securities class action lawsuits has been determined largely by the size of the prospective plaintiffs’ losses.

Pension Fund Monitoring Agreements
When equity or debt investments substantially decline in value, those holding the largest investments obviously lose the most.  Thus it should hardly surprise anyone that large institutional funds and investors have become the plaintiffs of choice for firms seeking lead counsel status (and therewith control over the distribution of enormous contingency fees).  And among these institutional investors, state and municipal pension funds are the most prolific lead plaintiffs in large securities class actions.

With a few exceptions, pension fund officials generally don’t decide sua sponte to pursue a class action lawsuit against a public company when in most cases the shares they own in that company comprise just a tiny percentage of their overall investment portfolio.  Instead, they hire these very same plaintiffs firms to “monitor” their portfolio for losses resulting from potential cases of securities fraud.  As it turns out, these law firms have monitoring agreements with many pension funds (see Judge Rakoff’s decision in the Merrill Lynch subprime case this May discussed on Law.com.

When they find a securities fraud case to pursue (which is generally just a matter of piggybacking on an SEC action), they rifle through the portfolios of the many funds they “monitor” to find the most attractive plaintiff or group of plaintiffs to bring to the court house.

Pay-to-Play
Everyone knows the plaintiffs firms are major fund raisers, bundlers and contributors to the campaigns of governors and senators.  Fewer people are aware of their substantial and unregulated contributions to organizations like the Democratic Attorney Generals Association (DAGA).  Because DAGA is a 527 PAC, contributions to these groups are uncapped and only get reported to IRS (and, conspicuously, not to the FEC or any other election oversight agency).  When DAGA holds an event, the big securities class action firms all attend and pay for this conference/soirée with very large checks.  I’m guessing the money is probably earmarked with the firm’s name on it to eventually trickle down to a particular attorney general’s reelection fund.

Partners at these law firms regularly attend such events, and also routinely hire former governors, retired pension fund officials, former comptrollers, ex-attorneys general, and others to schmooze with people they may know there on the firm’s behalf.  Other examples of State AG related political organizations that enjoy hosting such “conferences” are the National Association of Attorneys General (NAAG) and the Conference of Western Attorneys General.

And when all else fails, what do the law firms do when they want to be retained by a pension fund but don’t have anyone on the payroll with friends who have some influence over a state pension system?  They host their own gala, of course!

Law Firms’ “Investor Protection” Forums
The theme of the ball  is usually something generic like “protecting investors” and if you’re a government official why not stay at the Waldorf and eat caviar while listening to some big-name keynote speaker?  And since “investor protection” is in their job description, what’s so wrong about spending taxpayer money to schmooze with potential big campaign donors?  Junket… what junket?

So who does the firm invite to these events?  People they and their lobbyists met at other conferences for one.  High profile speakers will be there to lend the whole affair a whiff of credibility.  The guests of honor are obviously the state officials looking for campaign cash… Governors, Attorneys General, Comptrollers and others of this ilk.  Lest we forget, friendly investment managers will attend as well, and for a reasonable fee would be happy to manage a few billion of their pension fund’s dollars.  Like the law firm hosting the affair, these private fund managers would love to raise, donate and bundle cash for the campaigns of those who would entrust them with their pensioners’ cash.

So the plaintiffs’ lawyers are actually throwing parties which allow corruptible state officials to meet and socialize with corrupting money managers.  Plus they get to pitch their “investment monitoring” service as a way for these officials to fulfill their fiduciary obligations to protect the state’s money from corporate fraud.  And so generous are they that the lawyers will offer to access their pension funds’ investment portfolio whenever they want… pro bono!

Interested in attending one of these events yourself?  Then you better hurry up and get an invitation:  http://www.forumii.org/

Filed under: Law & Politics, Opinion, Bernstein, institutional investors, Milberg, pay-to-play, pension funds, PSLRA, securities