Securities fraud suits down – but who was committing the fraud?

By William Trent, CFA of Stock Market Beat

CNN Money reports Securities fraud suits down by 38 percent, study says:

Securities fraud suits dropped 38 percent from 2005, the report from Stanford Law’s Securities Class Action Clearinghouse said. The number of suits fell from 178 in 2005 to 110 in 2006, putting the total down almost 43 percent from the 10-year historical average of 193, the report said.
“These numbers are potentially indicative of a new era in the securities litigation arena,” John Gould, vice president of Cornerstone Research and a contributor to the study, said in a statement.

The study pointed to tougher federal enforcement on securities fraud, a stronger stock market with lower price volatility and the settlements of the slew of securities fraud lawsuits filed in the late 1990s and early 2000s as key reasons for the decline.

“These are unprecedented numbers, and my bet is that the private securities fraud litigation market is shrinking because corporations are engaging in less activity that gives plaintiffs an excuse to file a complaint alleging fraud,” said Joseph Grundfest, a Stanford Law professor.

Of course, CNN Money need only look back in their own archives a couple of Fortune issues ago to find another potential reason for the decline in securities fraud suits: less fraud by those suing for fraud.

For decades, few things have inspired as much fear and loathing in the executive suites of corporate America as the law firm of Milberg Weiss and the two outsized personalities who ruled the place, Mel Weiss and Bill Lerach. Through creativity and ruthlessness, they transformed the humble securities class-action lawsuit into a deadly weapon.

Always, Milberg Weiss cast itself as the champion of the little guy. In media interviews Lerach has spoken evocatively about fighting for the honest, struggling blue-collar worker who, through no fault of his own, had lost his hard-earned savings to corporate perfidy. The firm boasts of having collected $45 billion for cheated investors since its founding in 1965.

But somewhere along the way, the work made its ruling partners a little like the CEOs they sued. In an especially profitable year, both Weiss and Lerach personally made more than $16 million. Weiss, 71, is a high roller at casinos who collects Picassos, owns a five-acre waterfront estate on Oyster Bay, Long Island, and has a vacation condo in Boca Raton.

The Brillo-haired Lerach, 60, who bitterly split with Weiss in 2004, taking Milberg’s San Diego-based West Coast operation along with him in a new firm, owns a home in Rancho Santa Fe, Calif., and vacation properties in Steamboat Springs, Colo., and Hawaii. Lerach travels the country in a chartered jet, says his exercise is drinking Scotch, and will be married this month for the fourth time, to a partner at his firm.

Weiss and Lerach have also found themselves in the cross hairs of federal prosecutors. In the most extraordinary federal case now afoot in the land, Milberg Weiss has been indicted for allegedly paying three plaintiffs $11.4 million in illegal kickbacks in about 180 cases spanning 25 years – and then repeatedly lying about it to the courts.

The government says Milberg kept paying kickbacks into 2005, long after the firm knew it was under investigation. Name partners David Bershad, 66, and Steven Schulman, 55, have also been charged. (Both have pleaded not guilty, as has the firm.) The criminal probe has triggered an exodus of lawyers and clients. Once a veritable lawsuit factory – the firm averaged more than one new case a week during 2005 – Milberg has filed just a handful of suits in the five months since the bombshell landed.

So the lawsuits are down. What we don’t know is whether they are down because corporations are committing less fraud, plaintiffs are committing less fraud, or some combination of both (or neither.)

The author may hold a position in the securities discussed. The author’s current holdings are as follows: Long: Union Pacific (UNP) put options; Air Products (APD) put options; Nasdaq 100 (QQQQ) put options; FedEx (FDX) put options; Intuit (INTU) put options; Bookham (BKHM; Ballard Power (BLDP); Syntax Brillian (BRLC); CMGI (CMGI); Genentech (DNA); Ion Media Networks (ION); Three Five Systems (TFS); IShares Japan (EWJ); StreetTracks Gold (GLD); Starbucks (SBUX); U.S. Oil Fund (USO); Plantronics (PLT) call options; Short: Landstar (LSTR) put options; Ceradyne (CRDN) put options; Dell (DELL) put options; Plantronics (PLT) put options;

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