Untitled Document

Trial Lawyers Inc.


  Trial Lawyers Inc.: Attorneys General
   A Report On The Alliance Between State AGs And The Plaintiffs' Bar 2011

 

Trial Lawyers Inc.: Attorneys General
A Message from the Director
Introduction: Tobacco
Pharmaceuticals
Securities and Finance
Public Nuisance
Insurance
Leadership Team
Conclusion
Other Resources
Media
Download PDF
Or request a hardcopy

ARTICLES

State-Sponsored Lawsuits Are Trial Bar's New Cash Cow, James Copland, Washington Examiner, 10-25-11
Obama's CFPB Nominee Abused Private Attorney Contracting in Ohio, James Copland, Washington Examiner, 10-25-11


WEBCAST INTERVIEW

James Copland on Wall Street Journal Live
He discussed his new report, Trial Lawyers Inc.: Attorneys General on 10-27-11.


RADIO

James Copland appeared on the following radio programs to discuss his new report, Trial Lawyers Inc.: Attorneys General:
FM News Talk 97.1's "Randy Tobler Show," 10-29-11
WABC's "John Batchelor Show," 10-27-11
WTPL's "Bulldog Live with Brian Tilton," 10-26-11
SBA's "Small Business Advocate with Jim Blasingame," 10-26-11


VIRTUAL EVENT

Honorable Edwin Meese, James Copland, and Professor Lester Brickman discussed Trial Lawyers Inc: State Attorneys General in a nationwide conference call. View the event.


IN THE NEWS

Hood's No-Bid Contracts Criticized, Madison County Journal, 10-27-11
Report Details The Ties That Bind AGs, Trial Lawyers, Forbes, 10-25-11
Miller Denounces Report Ranking Him Among Friendliest To Trial Lawyers' Agenda, IowaPolitics.com, 10-25-11
Politics New Report Exposes Cozy Relationship Between State AGs and Trial Lawyers, The Blaze, 10-25-11
McGraw Criticized in National Report on State Attorneys General, West Virginia Watch Dog, 10-25-11
Hood Says Political Foe Abused His Office at DPS, Picayne Item, AP, 10-25-11
Report: Obama Nominee, Some AGs Too Close To Plaintiffs Bar, Legal News Line, 10-25-11
State Attorneys General Rake in Trial Lawyer Cash, Dole Out Contracts, Watchdog.org, 10-25-11

Join our mailing list!
The Manhattan Insitute's Center for Legal Policy.
PointOfLaw.com.
Walter Olson's OverLawyered.com.
 

 

 

SECURITIES AND FINANCE

CASHING IN

Securities Firms Pony Up Big Dollars to State Attorney General Allies

 

The bread and butter of Trial Lawyers, Inc.’s class-action line of business is lawsuits premised on “securities fraud,” that is, suits alleging that a drop in a company’s share price was caused by some fraud—usually, a failure to disclose material information to all shareholders—on the part of management. By stringing together thousands, or millions, of shareholders, lawyers are able to drive a hard bargain with companies, which pay hefty sums to make avaricious attorneys go away.


Unlike most tort litigation, shareholder suits originate under federal securities law. State-employee pension funds have emerged as the dominant force behind such suits, largely as an unintended consequence of a federal lawsuit reform passed in 1995, the Private Securities Litigation Reform Act (PSLRA) (see “Unintended Consequences Empower State Attorneys General” box below). Because state attorneys general are, at least in some states, vested with authority to file suit on state-employee funds’ behalf—and to select private attorneys to manage the cases—the PSLRA was, along with the tobacco litigation, a key driver of trial lawyer–attorney general collaboration at the beginning.


But even state AGs who do not or cannot instigate such suits on behalf of their state’s pension funds can raise the value of private claims by taking aggressive actions purporting to enforce regulatory or criminal violations. Little wonder that securities-class-action plaintiffs’ firms have become among the litigation industry’s most enthusiastic sponsors of state attorney general campaigns (see graph).

 

The Class Action Cash Machine


When Marc Dann ran for attorney general of Ohio in 2006, his campaign promised plaintiffs’ firms that he would bring new shareholder suits if elected.[64] Plaintiffs’ firms responded enthusiastically, with out-of-state securities firms dropping almost $60,000 into his war chest.[65] Dann made good on his promise by contracting with some of the firms that contributed to his campaign. Those firms filed four securities lawsuits on behalf of Ohio’s state pension funds.[66]


Dann resigned from office after only 18 months, having become embroiled in a sex scandal involving female staffers and campaign funds,[67] but his sue-happy policies intensified under his successor, Richard Cordray, who contracted with private law firms to bring at least six more securities class action lawsuits for state pension funds.[68] The Ohio legislature tried to block such behavior by passing a law forbidding any firm to enter into business dealings with the state if it had donated over $2,000 to the campaign of an official with oversight of the contract in question,[69] but the courts struck it down.[70] Even before that judicial action, however, Trial Lawyers, Inc. found a way around the law: plaintiffs’ attorneys poured their money into the Ohio Democratic Party,[71] which, in turn, backed Cordray’s candidacy. In 2007 and 2008, out-of-state plaintiffs’ firms donated $830,000 to the Ohio Democratic Party, led by the New York firms Kaplan Fox & Kilsheimer and Bernstein Litowitz Berger & Grossmann—both shareholder-class-action specialists—which contributed $270,000 and $175,000, respectively.[72]

 

UNINTENDED CONSEQUENCES EMPOWER STATE ATTORNEYS GENERAL

Scholars have long understood that the merits matter little in determining settlement values for securities-class-action lawsuits:[73] with sky-high discovery costs and potential damages in the billions for large companies, securities claims almost always settle.[74] Moreover, in the 1980s and early 1990s, securities-law practice was known for its “race to the courthouse door”: despite there being thousands upon thousands of shareholders in the companies being pursued, big securities plaintiffs’ firms called upon the same stable of plaintiffs, with ready-made complaints, to try to file a case first and grab control of a lucrative business opportunity.[75] In 1995, Congress passed a law intended to clean up the securities-litigation business: the Private Securities Litigation Reform Act (PSLRA), which raised the threshold for pleading one’s initial case and ended the race to the courthouse by ordering judges to determine the lead plaintiff not on the basis of who filed first but rather who was claiming to have lost the most.[76]


While the PSLRA did work to weed out the most abusive securities-class-action suits, it also created a new avenue for state AGs to work with their Trial Lawyers Inc. allies. By enabling the largest investors in the market to control litigation, the statute effectively gave states and their public-employee pension funds—the largest investors in the marketplace—the levers to control the litigation industry’s lucrative securities-suit business line. And in states with cooperative rules, state AGs emerged as the real kingmakers.


 


Far from limiting itself to Ohio, Bernstein Litowitz was also the biggest contributor to the DAGA from 2003 to 2010, giving $275,150 to bolster the cause of aspiring AGs (see graph). The firm also made direct contributions to state AG candidates, sometimes with eyebrow-raising timing. Between February 14 and February 17, 2006, Douglas McKeige and four other Bernstein Litowitz partners gave a combined $25,000 to Mississippi attorney general Jim Hood’s reelection campaign.[77] In short order—between February 21 and March 14—Hood entered into signed contracts hiring Bernstein Litowitz on a contingency-fee basis to lead securities-fraud lawsuits on behalf of Mississippi, against Converium Holding AG, the Delphi Corporation, and the Mills Corporation, with McKeige appointed as Mississippi’s special assistant attorney general for the cases.[78] On May 17 of the same year, Hood again contracted with Bernstein Litowitz on a contingency-fee basis to sue UnitedHealth Group for alleged securities fraud, this time deputizing firm partners Chad Johnson and Gerald Silk;[79] the following year, Johnson, Silk, and other Bernstein Litowitz partners donated thousands of dollars more to Hood’s campaign.[80]

 

It’s Not Only Fee-for-Hire


Even in states such as New York and California, in which it is officials other than the AG who decide whether to file suit on behalf of public-employee pension funds, securities law firms have an interest in supporting AGs who take an aggressive stance toward companies whose dealings might be the basis for a securities-fraud class-action suit. When former New York attorney general Eliot Spitzer launched an aggressive campaign against a virtual who’s who of companies in the financial sector, he not only arrogated to himself broad national regulatory powers but also facilitated private securities-fraud class actions against the same firms that he was chasing under civil and criminal theories: merely by announcing an investigation with a fraud allegation, an attorney general like Spitzer drives down share prices—and generates a shareholder cause of action in the process.[84] (Spitzer’s weapon of choice was New York’s decades-old Martin Act, which predates the creation of the U.S. Securities and Exchange Commission and vests the attorney general with sweeping but, until Spitzer, unused authority over securities markets.)

 

DELEGATES OF THE FEDS?

State attorney general actions, from securities suits to Eliot Spitzer’s investigations to Tom Miller’s multistate inquiry, have not only misallocated funds that are rightly either companies’ or the public’s; they have often seized effective regulatory control over a stream of national commerce. Invariably, the most aggressive attorneys general drive policy—and other AGs are impelled to sign up or face being excluded from negotiations, and thus a share of the settlement proceeds.


Unfortunately, such “reverse federalism” is now being pushed by the federal government itself, at least in the financial sector. In July 2011, the new Consumer Financial Protection Bureau (CFPB), created by the 2010 Dodd-Frank financial reform law, assumed control of national consumer financial regulations previously vested variously with the Federal Reserve, the Office of the Comptroller of the Currency, the Office of Thrift Supervision, the Federal Deposit Insurance Corporation, and the Federal Trade Commission.[81] Dodd-Frank expressly gives state AGs power to enforce state laws against national banks, as well as to enforce federal laws against state and federally chartered banks alike.[82] State AGs will be, in essence, the new federal law’s enforcement arm—a role sure to be strengthened under the leadership of President Obama’s pick for CFPB director, Richard Cordray, who regularly contracted with private law firms to file securities-class-action suits when he was Ohio AG.[83]


 

The year 2010 offered up a case study in just this effect, when Iowa attorney general Tom Miller—the nation’s longest-serving attorney general—launched an investigation of various lenders and their housing foreclosure practices. On September 24, Miller announced an initial investigation of Ally Financial, an automobile mortgage lender affiliated with General Motors, followed within two weeks by expanded inquiries into Bank of America and JPMorgan Chase.85 Miller announced that he was coordinating his investigation with other state AGs, and on October 13, he formally assumed control of a 50-state AG action.[86] Between then and election day, the money poured in—with $338,223 in campaign contributions arriving in just three weeks.[87] From September 30 through the election, Miller received over $170,000 from out-of-state law firms—both plaintiffs’ and defense firms[88]—more than twice his out-of-state lawyer support during the rest of the fund-raising cycle,[89] including donations from plaintiffs’-side securities law firms Kirby McInerney ($25,000), Kaplan Fox ($11,000), and Milberg LLP ($7,500), each of which is involved in its own private mortgage-related suit, although independently of the state AGs.[90]


<<previous section | next section>>


64. See Mark Maremont et al., Trial Lawyers Contribute, Shareholder Suits Follow, Wall St. J., Feb 3, 2010, http://online.wsj.com/article/SB10001424052748703837004575013633550087098.html.
65. See id.
66. See id.
67. See Financial Relationships Uncovered between Dann’s Friends, 10TV.Com (May 27, 2008, 5:11 PM) available at http://10tv.com/live/content/teninvestigates/stories/2008/05/27/dann_money.html.
68. See Maremont, supra note 64.
69. See H.B. 694, 126th Gen. Assem., Reg. Sess. (Ohio 2006).
70. See United Auto Workers v. Brunner, 182 Ohio App. 3d 1 (10th Dist. Franklin County 2009).
71. See Maremont, supra note 64.
72. See FollowTheMoney, Kaplan, Fox & Kilsheimer, http://www.followthemoney.org/database/topcontributor.phtml?u=10353&y=0&incs=0&ince=1&incf=0&incy=0 (last visited Sept. 29, 2011); FollowTheMoney, Bernstein, Litowitz, Berger & Grossmann, http://www.followthemoney.org/database/topcontributor.phtml?u=10353&y=0&incs=0&ince=1&incf=0&incy=0 (last visited Sept. 29, 2011).
73. Janet Cooper Alexander, Do the Merits Matter? A Study of Settlements of Securities Class Actions, 43 Stan. L. Rev. 497-598 (1991) (“According to the general assumption that outcomes reflect the parties’ estimates of the strength of the case, the results in these cases should vary, reflecting differences in the merits. Instead, the cases settled at an apparent ‘going rate’ of approximately one quarter of the potential damages.”).
74. See Bernadette Tansey, Rise in Biotech Lawsuits Industry Blames Law Firms Looking for New Targets, S.F. Chron., Jan. 26, 2004, at E1.
75. See Article, New York Attorney Sentenced in Kickback Scheme, N.Y. Times, Nov. 1, 2008, available at http://www.nytimes.com/2008/02/11/business/worldbusiness/11iht-kickbacks.5.9951917.html (last visited Sept. 29, 2011) (“Before the Private Securities Litigation Reform Act of 1995, shareholder lawyers seeking to lead class action lawsuits against companies whose stock dropped needed simply to be the first to file. Law firms had stables of clients who owned shares in huge companies considered susceptible to such litigation.”).
76. See Private Securities Litigation Reform Act, Pub. L. No. 104-67, 109 Stat. 737 (1995).
77. See Y’all Politics, Hopkins Accuses Hood of Pay for Play - And Provides His Evidence, http://www.yallpolitics.com/index.php/yp/post/5075/ (last visited Sept. 29, 2011); see also FollowTheMoney, Mississippi Attorney General Jim Hood, http://www.followthemoney.org/database/StateGlance/contributor_details.phtml?&c=94660&i=98&s=MS&y=2007&summary=0&so=a&filter[]=&filter[]=&filter[]=&filter[]=&filter[]=02/17/2006#sorttable (last visited Sept. 29, 2011), and similar sorted search results for February 14 and 16, 2006.
78. The contract to sue Converium is available at http://www.yallpolitics.com/images/Bernstein-Converium.pdf; the contract to sue Delphi is available at http://www.yallpolitics.com/images/Bernstein-Delphi.pdf; and the contract to sue Mills is available at http://www.yallpolitics.com/images/Bernstein-Mills.pdf (last visited Sept. 29, 2011).
79. The contract to sue UnitedHealth is available at http://www.yallpolitics.com/images/Bernstein-United.pdf (last visited Sept. 29, 2011).
80. See FollowTheMoney, Mississippi Attorney General Jim Hood, http://www.followthemoney.org/database/StateGlance/contributor_details.phtml?&c=94660&i=98&s=MS&y=2007&summary=0&so=a&filter[]=&filter[]=&filter[]=&filter[]=&filter[]=04/26/2007#sorttable (last visited Sept. 29, 2011).
81. See Consumer Federation of America, The Dodd-Frank Act: How States and the Consumer Financial Protection Bureau Will Work Together to Protect Consumers (Nov. 2010), http://www.consumerfed.org/pdfs/Fact%20Sheet%20CFPB%20and%20the%20States%20Nov%202010%20_3_.pdf.
82. See The Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203, 124 Stat. 1376, 2012-2015 (2010) [hereinafter Dodd-Frank Act].
83. See Maremont, supra note 64.
84. See James R. Copland, What’s Wrong-And Right- With New York Criminal Law, in One Nation Under Arrest: How Crazy Laws, Rogue Prosecutors, and Activist Judges Threaten Your Liberty 173 (Paul Rosenzweig & Brian W. Walsh eds., 2010).
85. See FollowTheMoney, Iowa Attorney General Tom Miller, http://www.followthemoney.org/press/ReportView.phtml?r=447 (last visited Sept. 29, 2011).
86. See id.
87. See id.  
88. Defense-side as well as plaintiffs’-side firms regularly contribute to state attorney general campaigns. While plaintiffs’ firms benefit most obviously through the awarding of contingency fee cases by the state AGs, defense firms as well as plaintiffs’ firms benefit from more state-AG-sponsored lawsuits and other legal actions, since they obviously bill their clients to defend against any cases either initiated or facilitated by activists. See id.
89. See id.
90. See id.

 


 

 


[Home] [Trial Lawyers Inc. Original Report] [Media Inquiries/Press]

 

Center for Legal Policy.

 

Copyright The Manhattan Institute 2014