Enron Shareholder Suits? Not So Fast

Champions of securities-litigation reform should have been more careful about the law they managed to get passed in 1995

By Dan Carney

For most of the 1990s, Bill Lerach, the whirling dervish of securities litigators, was Corporate America's Public Enemy No. 1. His mass production of shareholder class actions, filed against just about any company that had suffered a big drop in its stock price, made him "lower than pond scum" in the eyes of business, according to Cypress Semiconductor CEO T.J. Rogers. Worse, from his many detractors' point of view, he actually won a few big settlements. Soon some members of Congress were calling him an "extortionist."

None of this ever fazed Lerach much. He now says he wants to be named lead counsel in the Enron case. To advance his cause, Lerach has been running around posing with boxes of shredded documents. That's bitter fruit for his critics to chew on, but they may have brought some of this on themselves.


  In 1995, Lerach's enemies helped persuade Congress to enact the Private Securities Litigation Reform Act. The idea was to shield "decent" executives, accountants, and lawyers from Lerach's type of all-purpose lawsuit. To get the law passed, probusiness conservatives teamed up with lawmakers from the then-booming areas around Silicon Valley and other high-tech meccas, where Lerach was regarded as a royal pain.

The idea of protecting entire classes of people from suits was controversial: The proposal passed only after two-thirds of both houses of Congress overrode President Bill Clinton's veto. Probably no one anticipated, however, how quickly the let's-get-Lerach legislation might backfire. Thanks to that law, it's now going to be much more difficult than before for shareholders to exact any satisfaction in the wake of the Enron disaster.

Take the law's "safe harbor" provision, which shields from liability any executive who offers wildly inflated -- even untruthful -- guidance on future prospects as long as that guidance includes certain boilerplate language on the risks of investing in any company. At the time, it looked like a safe harbor for well-intentioned company heads.


  Now, experts say this section of the law will make it harder to win a judgment against Enron or its top brass, who continued to issue rosy prognostications about the company's future as late as last August, when its off-the-book transactions first began to surface publicly. Unintentially, "Lerach was essentially the father of the safe harbor," says Columbia Law School Professor John C. Coffee Jr.

Another section of the law that doesn't look like such a good idea in hindsight deals with "joint and several liability." This bars a plaintiff from suing multiple parties and demanding that each be held 100% liable. Instead, under the '95 law, the judge assigns proportional liability to the various defendants that adds up to 100%.

The provision does have its logic: It prevents lawyers from collecting from deep-pocketed companies that are only tangentially involved in a lawsuit. But in the case where the primary company is protected from litigation through bankruptcy, it effectively means that little or no money can be paid out to shareholders. "What happens," says one attorney involved in the case, "is that everyone points to the empty chair."


  What wasn't included in the law can also be a problem. In 1994, the Supreme Court ruled 5-4 that outside advisers such as accountants and lawyers couldn't be held liable for damages if they only "aided and abetted" a securities fraud. While the '95 bill was being debated in Congress, those who opposed the changes nonetheless offered language that would have overruled the Supreme Court ruling. But they were outvoted. The upshot: If it turns out that auditor Arthur Andersen is liable in some way for the Enron mess, it may be very difficult to collect much from the firm.

Given all this, Lerach is acting uncharacteristically low-key. "I wouldn't use the word 'vindication,'" he says. "But we've warned for many years" of the problems this law presents.

Perhaps the biggest irony is that Congress didn't even succeed in ridding the corporate world of Lerach. After a brief lull, he has been operating at full tilt. Since 1995, his firm of Milberg Weiss, Bershad, Hynes & Lerach has been involved an astounding 60% of all shareholder class-actions nationwide. In California, home to many of the high-tech startups he has targeted over the years, his firm has been involved in 85% of such cases.


  Now, Lerach says he wants to be named lead counsel in the Enron case -- and to advance his cause, he has been posing with boxes of shredded documents. The lawyer has problems, however. Lerach is the subject of a grand jury probe in California over allegedly aggressive tactics in recruiting clients. So, some handicappers of the Enron case think he's likely to lose out to one of two other teams competing for the business.

Still, by pushing through the 1995 law, Lerach's enemies have done something he was never able to do himself: They've made him look smarter than they were five years ago. Too bad that the people who'll likely pay for that now are Enron's shareholders.

Carney covers legal affairs for BusinessWeek in the Washington bureau

Edited by Beth Belton

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