The Association of U S West Retirees



Investor suits down, yet lawyers reap
By Al Lewis, Staff Columnist
Denver Post
Sunday, January 22, 2006

First, Qwest's former management got rich.  Now, it's the lawyers' turn.

Of the $400 million Qwest has agreed to pay shareholders to settle civil-fraud allegations, the lawyers representing shareholders are expected to ask for as much as $101.2 million, according to documents filed this month in U.S. District Court in Denver.

That includes 24 percent of the settlement, or $96 million, plus $5.2 million for expenses.  The money would go to investor-lawsuit king William Lerach and his 160-lawyer firm, Lerach Coughlin Stoia Geller Rudman & Robbins in San Diego.

Qwest shareholders, meanwhile, will get about 19 cents on the dollar.

I wasn't able to get ahold of Lerach last week, but members of his firm have previously said they may not ask for the full amount.  I don't know why they would do this, being such shrewd negotiators.  Are they worried about the objections from a few Qwest shareholders?

"I'm going to be right in their face arguing that these attorneys' fees are obscene -- that this is just gluttony," said Curtis Kennedy, an attorney representing retirees of Qwest predecessor US West.

Last year, Kennedy filed a similar objection regarding a $50 million settlement that Qwest reached with shareholders over a dividend cut.  In that case, a state judge ruled that Lerach's firm and others were entitled to up to 30 percent, or $15 million, saying such fees were customary.

Bear in mind, it's also customary for Fortune 500 CEOs to pay themselves as much as $10 million a year.  Perhaps some class-action lawyers hope to be worth at least as much as the people they sue.

Legal fees in class-action lawsuits commonly run between 20 percent and 33 percent, said Joseph Grundfest, a former Securities and Exchange commissioner and now director of Stanford Law School's Securities Class Action Clearinghouse.

Perhaps, like outrageous CEO pay, it doesn't have to be this way.

"In a small percentage of these cases that involve very large dollar amounts and have sophisticated institutional investors as lead plaintiffs, (shareholders) can negotiate (legal) fees of 10 percent or less," Grundfest said.

Imagine Lerach's firm asking for only 10 percent.  What's wrong with $40 million?  Well, frankly, it's not $100 million.

Besides, where would we be without class-action lawyers?  Auditors and securities regulators slept through the 1990s.  When the market tumbled, all investors could do was sue.  Lawyers, including Lerach's firm, bore most of the costs of litigation.  Now they are reaping the rewards.

Today, class-action shareholder lawsuits remain a vibrant, albeit declining, industry.  From 1996 through 2004, shareholders filed an average of 195 lawsuits a year, according to a recent study by the Securities Class Action Clearinghouse and Cornerstone Research.  Those cases were associated with an average annual loss in market capitalization of $127 billion among all the companies sued.

Last year, the number of class-action lawsuits declined to 176, with market-cap losses of $99 billion.  That represents a 17 percent decline from the 213 cases in 2004, when $147 billion was lost.

Grundfest said it's too early to tell if this is the beginning of a trend, but he attributes the decline to three factors:

1)  The boom and bust that led to most of these lawsuits is over.  2)  There's better corporate governance now.  3)  The stock market "became less volatile in 2005 than at any time since 1996," so fewer investors are losing money.

Most shareholder claims involve misrepresentations made in financial documents and in statements from company officials about business prospects, the study said.  Yet the decline in shareholder litigation comes amid a sharp increase in corporate financial restatements.

Last year, there were 1,107 financial restatements at U.S. companies, up from 514 in 2004 and 330 in 2003, according to Glass Lewis & Co., an investor advisory firm.  The surge in restatements comes amid tough new reporting requirements.

"Not every earnings restatement is the result of fraud," said Grundfest.  "It's hard for some people to believe, but sometimes there are honest accounting errors that need to be fixed."

And when the errors are less than honest?  Well, we can always count on the lawyers to work for a piece of the action.

Al Lewis' column appears Sundays, Tuesdays and Fridays. Respond to Al at, 303-820-1967 or