University of California Hires Top Securities Law Firm to Recoup Enron Losses

The Sacramento Bee ^ | 1/31/02 | Dale Kasler and Terri Hardy

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Jan. 29--Facing an uphill battle to recover $144.7 million lost investing in Enron Corp., the University of California has hired America's most successful and controversial securities-fraud law firm -- a firm that has recovered billions of dollars for shareholders but is reportedly under investigation for improper tactics.

The firm of Milberg Weiss Bershad Hynes & Lerach has a phenomenal history of recouping money for investors. But some experts say the sheer magnitude of Enron's collapse -- billions gone, relatively few dollars available and a slew of people demanding their money back -- could make it difficult for any shareholder to make a substantial recovery.

"It's a winnable case -- the question is how much you can collect," said Jim Newman, publisher of the newsletter Securities Class Action Alert.

Christopher Patti, a lawyer with the UC general counsel's office, said it's "unlikely we'll get 100 cents on the dollar, but we're hopeful for a large and meaningful recovery."

Milberg Weiss and its most prominent partner, William Lerach of San Diego, are considered the best in the business. The firm made a big publicity splash in the Enron case last week when Lerach (pronounced "la-ROCK") was photographed hauling a carton of shredded Enron documents into the federal courthouse in Houston.

"He's tough as nails," said a friend, UC Irvine economist Peter Navarro. "If there's anybody who can get some money out of them, he's the guy."

After interviewing several firms, UC hired Milberg Weiss because it has "the most experience and best resources to vigorously litigate this huge and complex case," Patti said.

Milberg Weiss last month filed a class-action securities-fraud suit against Enron officers and directors, plus the accounting firm Arthur Andersen, in U.S. District Court in Houston. It didn't sue Enron itself because the bankruptcy filing shields it from litigation.

UC's losses are the second highest of any single shareholder in the Enron scandal, after a $325 million loss at Florida's state pension fund. UC said its $144.7 million loss, including $94 million in the retirement system, represents three-tenths of 1 percent of its investment holdings and won't affect operations.

UC began buying Enron shares in May 2000, shortly after the Board of Regents adopted a new policy requiring a more-diversified investment portfolio.

"Enron was among the top 10 largest companies in the country based on the financial data it was putting out," UC spokesman Trey Davis said. "Enron allegedly gave out false information, and based on that information, UC and hundreds of thousands of people bought Enron stock."

The earliest purchases were made under the direction of then-Treasurer Patricia A. Small, UC spokesman Chuck McFadden said. Current Treasurer David H. Russ wouldn't comment.

"He's mortified the press is viewing the Enron loss as something that he personally is responsible for," McFadden said.

In Milberg Weiss, the university has hired a firm known for its political connections. Lerach is a major Democratic contributor who's hosted fund-raisers in his home for Bill Clinton and Missouri Rep. Dick Gephardt, Navarro said.

Lerach also led a 1996 California voter initiative to make it easier to win securities-fraud suits. At the time, Proposition 211 was the costliest initiative ever, totaling $52 million. It lost badly.

But Milberg Weiss still is reviled in many California business circles, especially in Silicon Valley. John Doerr, the valley's premier venture capitalist, once called Lerach an "economic terrorist" in an interview with Wired magazine.

But admirers say Lerach helps keep financial markets honest.

"I view what Bill does as a healthy policing mechanism," Navarro said.

"They're an aggressive firm, and their aggressiveness has created a lot of enemies for them," Newman said. "They are the 900-pound gorilla."

Still, the firm could wind up playing second banana in the Enron case. Two other shareholder groups are battling with UC to be designated as lead plaintiff representing all shareholders. A federal judge in Houston will determine who will lead.

Lead status could be important to UC, giving it broad authority on big decisions such as whether to take a settlement offer, said securities-law expert Joel Seligman, dean of the Washington University law school.

It's also important to the attorneys. The lead firm collects the biggest fees. In an effort to secure lead status in the Enron case, Milberg Weiss substituted UC for the original plaintiff, a New York bank, because UC lost more money.

Milberg Weiss specializes in class-action suits, in which a handful of plaintiffs represent the interests of thousands of people or institutions. It files 60 percent of all the class-action securities-fraud cases filed in the United States, Newman said.

Milberg Weiss' foes have included Apple Computer Inc., Intel Corp., Nike Inc. and Coca-Cola. It was co-lead counsel in a $1 billion settlement with Nasdaq. Years ago, it sued disgraced pop group Milli Vanilli for defrauding fans by lip-synching.

"It was a slow week in securities fraud, I guess," Newman said.

The firm takes most cases on contingency, meaning it only gets paid if its clients win money. It reportedly takes the standard 30 percent cut in most cases, although its percentage in the Enron case "is still being negotiated," Patti said. "It's going to be way less than (30 percent)."

Last week, Milberg Weiss was rocked by a report in the Los Angeles Daily Journal, which covers the legal world, saying the firm was the target of a federal grand jury investigation in Los Angeles. The grand jury was looking into allegations that Milberg Weiss paid people to be plaintiffs.

Patti said UC contacted Milberg Weiss and was told the law firm is cooperating.

"We're still going forward with them because we believe they are the most competent firm for the job," Patti said. "We don't have enough information on this other thing to assess it at this time."

Milberg Weiss didn't return calls seeking comment.

In the Enron case, the UC suit accuses the defendants of disseminating phony financial results while officers and directors were dumping about $1 billion in personal holdings of Enron stock.

Enron's acknowledgment Nov. 8 that it inflated profits makes the suit "pretty much a slam-dunk case," Newman said.

But collecting could be tough. Arthur Andersen is one potential deep pocket, but the accounting firm could be helped by a 1994 Supreme Court ruling that makes it harder to collect from so-called collateral defendants, said Seligman, the law school dean.

Another source of dollars is the liability insurance Enron purchased for its officers and directors, but Newman said the policy could become property of the bankruptcy estate. If that happens, the proceeds would be used to pay off lenders and other creditors first; shareholders get paid last in a bankruptcy.

"They might have a very successful lawsuit, but they might be behind a long line of creditors," said Navarro. "My sense is that when it's all said and done, there's not going to be a lot of money left to recover."

He criticized UC for not selling its Enron stock sooner.

Spokesman Davis said the university contacted Enron several times as the stock price slid, "but calls were returned late, and they were not forthcoming on a number of the more important financial issues."

UC sold much of its Enron stock in November but kept some shares when it seemed Enron would be rescued by a merger with Dynegy Inc., Davis said. When the merger started faltering, and more damaging information came out, UC dumped all its shares about two weeks before the bankruptcy filing. The sale enabled UC to avoid about $8.7 million in additional losses, he said.

"It's easy in hindsight to look at the overall portfolio and say, 'Gosh, we should have gotten out four months ago,' but it's hard to know at any one particular time," Davis said. "Plenty of people who are successful in the market stayed with Enron."

By Dale Kasler and Terri Hardy