By his own admission, the collapse of Enron has been a boost for business for
Patrick Daniels, partner and head of business development at Coughlin Stoia
Geller Rudman & Robbins.
The American law firm has recovered more than $7 billion for investors in
class actions since the energy giant collapsed in December 2001. Last month,
they asked a court to approve a $700 (£339 million) bill for their services.
If approved, it will be the largest securities class action payday in
history.
But the fall of Enron, which Daniels calls a “worldwide phenomenon”, has
brought other, less tangible benefits — notably the firm's ability to sell
their style of shareholder litigation to European investors.
Coughlin Stoia is perhaps the best known of several American law firms
pitching for business from the UK’s professional investment community. But
unlike some of his competitors, Daniels is not hoping to represent pension
funds in British courts but to sign them up as participants in US
shareholder litigation.
The UK investment industry is generally conservative, litigation shy and
suspicious of the US legal system, and has been a tough nut to crack.
Daniels, who spends several days in the UK every month, has met fund
managers who are ideologically opposed to suing companies they have invested
in, even in the case of clear wrongdoing.
They are in "total denial", Daniels says, but he says his line of
business is gradually becoming accepted here. He now has 25 clients,
including Standard Life and Scottish Widows.
The reason for this, he says, is clear.
“What Enron did was short-circuit a lot of the educational process that would
be so difficult. Five years ago I was able to walk into a pension fund in
the Midlands and say, ‘I’m an Enron lawyer,’ and they could instantly
relate. They say, ‘I may not get the details of why an American lawyer is in
my office but I know what Enron is and I know it means shareholders getting
ripped off’.
“There is something about Enron that conveyed that message better than any
other scandal in recent history. Enron opened a lot of doors.”
But if Enron gets Daniels through the doors of UK institutions, how does he
convince old-fashioned British fund managers and trustees to hire him?
The first step, he says, is to explain that there are two sides to his
business. Although the headlines concentrate on Coughlin Stoia suing the
likes of GlaxoSmithKline and Dell, there is another side which has "nothing
to do with starting lawsuits”.
Many of Coughlin Stoia’s instructions from UK investors are for its portfolio
management services. These funds pay the firm to monitor their investments
and notify fund managers when a lawsuit has been filed against a company
that they hold, or have held, shares in.
This has nothing to do with encouraging fund managers to become more
litigious, Daniels says. Rather, it puts them in a position to make an
“informed decision”.
With this information, the fund or trustees have two main options. In a small
number of cases, they may opt to take an active role and join the litigation
upfront, as the Avon Pension Fund, a Coughlin Stoia client, has done in a
case against GlaxoSmithKline in which it is spearheading litigation on
behalf of all other shareholders.
But taking a lead role remains relatively rare. The more common outcome,
Daniels says, is for funds to sit out from the litigation but to apply for
their share of any subsequent payout. This relatively cheap and entirely
risk-free process is aimed at “investors claiming what is rightfully
theirs,” Daniels says.
But despite what he calls a definite trend towards greater acceptability for
his business, Daniels acknowledges that he still faces obstacles. Firms such
as Coughlin Stoia are accused of practising a sophisticated form of
ambulance chasing, waiting in the wings for corporate "accidents"
lining their own pockets by suing already reeling companies.
With Daniels and his partners about to get $700 million richer, these
allegations are coming harder than ever. But Daniels offers a passionate
defence when asked to explain why he is not simply profiting from Enron
investors' misfortune. “I’m trying to help him because nobody else is,"
he says. "I didn’t create this situation, I’m trying to remedy it. I’m
not making a living off of his misery. I’m making a living bringing the
people who created that misery to account. That’s different.”
So what about the money? Seven hundred million is a hefty legal bill by
anyone’s standards, but Daniels points out that firms like Coughlin Stoia
operate on a no-win no fee basis. This means Daniels and his partners invest
their time and money upfront. Since his firm tends to tackle complex
financial frauds, this can mean a lot of both — some cases cost up to $20
million, with no guarantee of a return.
“Everyone likes to skip to the money that the lawyers make and they forget
about all the money that we lose when valid cases get thrown out. No one
compensates us for those. People forget about all the time and effort and
cash that we put at risk. Just like venture capitalists, we put our own time
and money into a case and we are entitled to a return.”
But surely cases like Enron are easy pickings for lawyers?
“It’s easy to look back at Enron now and say ‘Oh yeah, Enron, sure, they’ll
collect $7 billion dollars’. But there are some people who thought that case
would go nowhere. It was a white knuckle decision to continue to pour our
money into that case.”
Daniels mentions a recent case his firm filed against a Texas company that
re-stated its financial results several times. It was one of many, he says,
that was dismissed.
“We collected evidence for four years and took $20 million dollars of
expenses. Every dime we put in is our money. There’s nobody paying our
bills”.
At least one investor agrees that $700 million is a fair reward for the
thousands of hours Coughlin Stoia put in to the Enron case. Rod Jordan,
chairman of the Severed Enron Employees Coalition, says: “When you look at
the lawyers on their team and the number of years they’ve spent, my opinion
is they probably earned it.”
Fees aside, no discussion with a senior partner at Coughlin Stoia would be
complete without exploring events leading up to its recent re-branding.
Before August, the firm was called Lerach Coughlin Stoia. It changed its name
shortly before Bill Lerach — the firm's co-founder — pleaded guilty to a
charge that he bribed individuals to bring class action cases while at
another law firm.
Daniels acknowledges that the saga, which is still to be played out, with
Lerach due for sentencing on January 14, prompted “many questions”, but he
insists the firm has yet to lose a single client over it.
“Our chairman Bill Lerach was under investigation for things he did in the
early 90s while he was a [partner] of the Milberg Weiss firm. That’s him as
an individual, not our existing firm.
“My firm is Coughlin Stoia. Even when the firm was Lerach Coughlin Stoia, the
firm was never under any investigation.”
But how can potential clients be sure, that what Lerach has admitted to, does
not still go on at the firm that he co-founded and until recently chaired?
“First, I’m the head of business development, dealing with most of the
clients, and I know it’s not going on. Second, we’ve had the US Attorney
crawling through our records for the last seven years and if there was
anything they would have found it. But they didn’t.”
Daniels is also keen to point out that the structure of the class action
business has changed fundamentally since the abuses of the early 1990s are
alleged to have taken place.
Prior to the Private Securities Litigation Reform Act of 1995, the first law
firm to sign up a client and file a class action lawsuit was typically
appointed to the lucrative role of lead firm on the case. This first mover
advantage — which Daniels accepts could encourage lawyers to devise ways of
incentivising clients to enrol quickly — was abolished in 1995. Since then,
the lawyers representing the client with the largest claim were appointed
lead firm, regardless of when they filed.
Despite Daniels’ efforts to put some distance between himself and what he is
careful to say Bill Lerach “may” have done at Milberg Weiss, it is obvious
he retains an enormous respect for his former chairman. Not to mention a
deep suspicion of what he calls the ”politically motivated“ investigation
that led to his downfall.
“Two years ago they [Lerach and another] were told by the local US Attorney,
‘We’re not going to proceed with this investigation’. Now whether that gets
run up to headquarters and the message comes back saying look harder, [I
can’t say]. There was nothing new that that fell out of the sky that hadn’t
been discovered in the previous five years.
“This is a highly, highly politicised Administration. [Alberto] Gonzales, the
[Attorney-General] was forced out for politicising the AG’s office. It was
his office, ultimately, that revived the case against Bill and charged Bill.
For two decades Bill was one of the top fundraisers for the Democratic party
and there are a lot of fingerprints and lot of indications that this
[Lerach’s prosecution] was part of a broader objective. That if you could
take out the funding you could hurt the [Democratic] party.”
Although he acknowledges the past, Daniels is happier talking about the
future. Earlier this year, the National Association of Pension Funds, an
influential British investment group, published guidance for its members on
how to handle calls from Daniels and his competitors.
While the guidelines stopped short of encouraging pension funds to embark on a
foreign litigation spree, they did recommend that investors should explore
the process and at least familiarise themselves with the options.
This and the firm’s success elsewhere means Daniels is confident his roster of
clients in the UK will climb from 25 to around 100 in the next five years.
Already, he boasts, he has more work here "than I know what to do with".
