Trouble continues to follow former Milberg Weiss lawyers, and the latest rebuke may lead all plaintiff lawyers to wonder whether they may find themselves personally liable for their opponent’s legal fees if a court finds their claims to be frivolous.
On November 30, 2006, the U.S. District Court for the Southern District of Texas dismissed an Enron-related class action lawsuit and ordered the lead plaintiff’s counsel to pay the attorney fees and costs that Alliance Capital Management L.P. incurred in bringing a summary judgment motion. While dismissing the case, Judge Melinda Harmon held that plaintiff’s attorneys, rather than their clients, were in a better position to determine that discovery showed the case to be frivolous. Therefore, they should pay the attorney fees and costs awarded pursuant to Section 11(e) of the Securities Act of 1933, 15 U.S.C. § 77k(e). In re Enron Corp. Securities, Derivative and “ERISA” Litigation, F. Supp. 2d, 2006 WL 3474980, *5 (S.D. Tex. 2006).
Section 11(e) of the 1933 Act gives courts discretion to award costs to the prevailing party in a case brought under the 1933 Act, if the court finds that the case or a defense was without merit. Judge Harmon noted that the Second Circuit has interpreted §11(e) differently, to authorize an award against a party litigant but not against its attorney. Healey v. Chelsea Resources, Ltd., 947 F.2d 611, 624 (2d Cir. 1991). But the judge also said she found no other circuit that had adopted the Second Circuit’s interpretation of Section 11(e).
The lead plaintiff in the action, the Regents of the University of California, was represented by Lerach Coughlin Stoia Geller Rudman & Robbins LLP. Lerach Coughlin has brought a number of Enron-related claims on behalf of plaintiffs and has reached settlements totaling over $7 billion. The firm was formed in 2004 by William S. Lerach and others who had left the firm now known as Milberg Weiss Bershad & Schulman LLP. Milberg Weis and two of its partners were indicted by federal prosecutors last May for allegedly making illegal payments to class action plaintiffs.
The claims against Alliance alleged that Frank Savage, an employee of Alliance and an officer of one of its affiliates, signed a false and misleading registration statement for $1.9 billion in convertible notes issued by Enron while he served as an outside director of that company. They further alleged that Alliance was a “controlling person” of Mr. Savage under Section 15 of the 1933 Act and could therefore be held liable for the losses they suffered on the convertible notes.
Alliance moved to dismiss the suit in May 2002. The court denied that motion, but noted that the plaintiffs’ allegations against Alliance seemed “somewhat speculative.” In re Enron Corp. Securities, Derivative and “ERISA” Litigation, 258 F. Supp. 2d 576, 648 (S.D. Tex. 2003). When Alliance moved for summary judgment last May, it asserted that the plaintiffs failed to conduct any significant discovery in connection with their claim against Alliance and only deposed one person: Mr. Savage. Alliance alleged that the plaintiffs refused to withdraw their claim against it, despite a lack of evidence that Alliance controlled Mr. Savage. Among the relief Alliance requested in its summary judgment motion was an award of the attorney fees and costs it incurred in defending against the plaintiffs’ claim. It did not, however, specify whether the plaintiffs or their counsel should pay their attorney fees and costs.
The plaintiffs asserted, in response to Alliance’s request for attorney fees and costs, that their claim against Alliance was not frivolous, that they had presented enough evidence to take the claim to a jury, and that similar claims against Alliance had been tried before a jury in another case.
The court granted Alliance’s motion for summary judgment, finding that no evidence had been presented to support the plaintiffs’ allegations that Alliance had the power to control Mr. Savage’s actions as an outside director of Enron or that Mr. Savage served Alliance’s interests in that capacity. The claim against Alliance was not frivolous from its inception, according to the court. However, it should have been dropped before the summary judgment motion was filed by Alliance. As a result, the court awarded Alliance only its attorney fees and costs incurred in making the summary judgment motion. Lerach Coughlin has stated that it intends to appeal the court’s ruling.
Karl Schaffer is an associate at Carter Ledyard & Milburn LLP in New York City. He practices in the litigation department, specializing in insolvency and creditors’ rights.
Reproduced with permission from the January 2007 issue of Litigation Update.
© 2007 Section of Litigation, American Bar Association.