SEC to Side With Enron Plaintiffs

By Carrie Johnson
Washington Post Staff Writer
Saturday, June 2, 2007

Federal securities regulators will throw their weight behind investors in a big-money dispute that could resolve whether shareholders can sue bankers who enabled their corporate clients to engage in fraud, two people familiar with the decision said yesterday.

The Securities and Exchange Commission has asked the U.S. solicitor general to file court papers supporting investors in an upcoming Supreme Court case, an action that has not been made public. The agency's decision follows intense lobbying by industry groups, unions and plaintiff lawyers, including well-known California attorney William S. Lerach.

The move is a significant victory for Lerach, who won $7.3 billion in settlements with banks and law firms that helped Enron disguise its financial problems. If the Supreme Court adopts the agency's position, it could breathe new life into a stalled case filed by Enron shareholders against Merrill Lynch and Barclays Bank. But the SEC backing comes at a bittersweet time for Lerach, whose own future is in question because of government scrutiny.

Earlier this week, Lerach, 61, told partners and clients he might leave his three-year-old San Diego law firm, Lerach Coughlin. The news came at about the same time a former law partner began to explore a plea agreement with federal prosecutors.

For seven years, the U.S. attorney's office in Los Angeles has been investigating the role of Lerach and his former law firm partners in a system they allegedly used to funnel improper payments to people in exchange for serving as plaintiffs in large class-action cases. Prosecutors obtained indictments in 2006 against Milberg Weiss, Lerach's former law firm, and partners David J. Bershad and Steven Schulman.

Lerach and his former partner Melvyn I. Weiss, among the most well-established and wealthiest plaintiff lawyers in the nation, have not been charged with wrongdoing, but lawyers involved in the case say they are government targets.

In a written statement issued by Lerach Coughlin yesterday, the firm said it was not a target of investigators. But it pointedly did not address whether Lerach himself faced legal jeopardy. "Mr. Lerach is cognizant of the fact that . . . the investigation should not become a distraction to our firm and its ongoing work," the statement said.

Bershad, who for years was principally responsible for the Milberg Weiss firm's finances, and Schulman have been fighting criminal conspiracy charges. In recent weeks, however, Bershad's lawyers have held discussions with prosecutors, raising the prospect that he could plead guilty and implicate others under investigation in exchange for leniency from the government. No action is imminent, according to four people briefed on the probe who spoke on condition of anonymity because the investigation is ongoing.

Representatives for Milberg Weiss met Wednesday with officials in the Los Angeles U.S. attorney's office to discuss settlement possibilities and financial terms. The urgency of negotiations is heightened because a guilty plea by Bershad or a similar high-ranking official could affirm the guilt of the law firm under a legal principle known as vicarious liability. Similar talks between Milberg Weiss and prosecutors collapsed last year, shortly before the indictment. A trial of the firm and the two partners is scheduled for January.

Lawyers for Lerach, Weiss, Schulman and Bershad did not return calls yesterday. A spokeswoman for Milberg Weiss declined to comment.

The investigation is being watched closely by business groups and corporate lawyers, some of whom have excoriated Lerach for his aggressive and often successful tactics that have wrested billions from corporate America and prompted Congress to pass limits on securities class-action cases a dozen years ago. Rival plaintiff firms, too, are following the buzz for opportunities to poach partners and clients from Lerach Coughlin and Milberg Weiss.

Lerach Coughlin nodded to that possibility in its statement, attesting to its experience and pointing out that 175 lawyers would remain even if Lerach departed.

Securities class-action lawsuits can be lucrative for plaintiffs' lawyers, underscoring the importance of the SEC's position to companies and the lawyers who sue them. Lerach and his firm have not yet collected their share of the $7.3 billion in Enron settlement proceeds, estimated to be 8 to 10 percent, and Lerach could have to forfeit his portion as part of a criminal case or plea agreement.

The University of California, the lead plaintiff in the Enron case, issued a statement yesterday saying it would move ahead with the same legal team even if Lerach departs.

An SEC spokesman declined to comment on the agency's decision yesterday. But last month, SEC Chairman Christopher Cox told lawmakers the government "would do its very best to make sure that injured Enron investors receive the full amount of recovery to which they are entitled in our legal system."

The Supreme Court will hear the case, over an issue called scheme liability, in its next term.

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