23: Don't Kill All the Trial Lawyers

When regulators fall short, it's up to plaintiffs' attorneys to put the hurt on corporate miscreants

How bad are things right now? So bad that plaintiffs' lawyers are starting to look good.

At a time when regulators are a step behind public anger and self-policing is a joke, the attorneys who make a living suing Corporate America have become one of the most powerful forces compelling executives to behave. The scandals have given them a unique chance to pose as Robin Hoods. Consider stock fraud litigator Bill Lerach--who was so widely demonized in the '90s that he all but stopped talking to the media. Lately he has been defending Enron shareholders, airing his own agenda for cleaning up executive suites, and has even been dubbed America's "top corporate crime fighter" by the left-leaning The Nation magazine.

Can plaintiffs' lawyers really stand in for spineless politicians and weak Securities & Exchange Commission chairmen? Yes and no. Numbering about 150,000 strong nationwide, the plaintiffs' bar constitutes a de facto army of private attorneys general charged with enforcing our securities, product safety, and workplace laws. "I'm a middle-of-the-road Republican," says Henry T.C. Hu, a corporate and securities law professor at the University of Texas at Austin. "And I have no doubt that if we didn't have the private securities bar, executives would lie more often."

At the same time, there's no way Lerach can ever sub for SEC Chairman Harvey L. Pitt or the head of a consumer protection agency. Plaintiffs' lawyers simply don't have the training, legal authority, or financial incentive to be true corporate cops. They're private businessmen. That means they're good at doing things that earn them money, such as winning big awards for victims, and bad at things that don't, such as devising regulations and compliance programs to ensure that corporate wrongdoing isn't repeated.

Consider the fight against Big Tobacco--the epic battle usually at the top of the Association of Trial Lawyers of America's greatest-hits list. A coalition of tort attorneys, working for state attorneys general on a contingency-fee basis, took on a powerful industry that had defanged the White House, Congress, and the Food & Drug Administration. They managed to win a $365 billion settlement that forced Philip Morris Cos. (MO ) and other tobacco companies to change the way they marketed and distributed their product, while pocketing over $10 billion themselves.

Under the deal, tobacco companies are now handing over about $10 billion annually to the states. That has driven the cost of cigarettes up by more than $1 a pack and driven down teen smoking by an estimated 8%--a public health victory.

But nearly every other feature of the deal has disappointed. Money that was supposed to go to antismoking programs has been diverted into general funds. Billboard ads are gone, but manufacturers have compensated with new ways to promote their brands. "It was a good first step, but I think we could have done much better," says Richard Daynard, chairman of the Tobacco Products Liability Project in Boston.

Look for the same mixed results in the coming attack on companies caught in the scandals. Plaintiffs' attorneys will be aggressive about pursuing anyone proven to have cooked the books at Enron Corp., WorldCom Inc., and elsewhere. But they probably won't be helping small investors who took Merrill Lynch & Co.'s (MER ) questionable advice to put money into the firm's investment-banking clients. Why? Because many of those investors lost less than $100,000, not enough for an attorney working for a one-third take. And any nonmonetary penalties that plaintiffs' lawyers insist upon are likely to be window-dressing.

So tort lawyers are a mixed blessing. They can seem like parasites when regulators are doing their job. But when government stops minding the store, they don't look half bad.

By Mike France

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