Preying on the Misery of Others – Part III

Right From the Start

I am a lawyer by education, training and practice. My father was a lawyer. I have a brother and a sister each of whom is a lawyer. I am proud to be a lawyer (even though I have not practiced for nearly two decades) and I believe that lawyers provide a valuable service – in defense of your rights, in securing your assets, as a guide through increasingly complex rules and regulations promulgated by governments at all levels and in resolving disputes between parties. For most lawyers this is still the ethos that drives their practice.

But there are groups of lawyers today whose conduct and billing practices embarrass me and for whom I can find no justification economically, ethically or morally. The first such group is that cluster of bottom feeders known as the class action tort lawyers. In August of 2005 in my column in the Medford MailTribune, I wrote:

“In this world there are four kinds of lowbrows. There are burglars who take your property when no one is looking, robbers who take your property by force when you are looking, embezzlers who take your property by manipulation…and there are class action tort lawyers who take your property with the court’s permission. For those of you who want a real lesson in sleaze, I invite you to read John Grisham’s “King of Torts,” an all too accurate revelation of today’s class action tort industry and the lawyers who inhabit its lucrative slag heap.”

The second group consists of the lawyers, usually from silk stocking multi-state firms, that take advantage of the lack of competent oversight in the aftermath of a tragedy. Often times they are hired by the government or appointed by the courts. Prime examples are the lawyers hired to recover assets from scam artists such as Bernie Madoff and Allen Standford.

In August of 2009, I wrote of Ralph Janvey, an attorney appointed to recover assets from the nearly $7 Billion Mr. Standford bilked his clients

“An August 14 Associated Press report notes that attorney Ralph Janvey has submitted bills for $27 Million to the United States District Court in Texas. Janvey has been appointed by the court to find as much of Stanford’s missing $7 Billion as possible. Janvey’s first bill was for $20 Million through April 12 and another $7.6 Million for the seven weeks ending May 30 – a million dollars per week – nice work if you can get it. And God knows how much more he has stacked up for the months of June and July.

“Thus far, Janvey has recovered $81.1 Million and you have to assume that it represents the “low hanging fruit” – the amounts easily discovered such as bank accounts, real estate, and balances in the funds Stanford managed – you know, the kind of funds that any first-year accounting student could find. The $81.1 Million represents slightly more than one percent of the amount lost by investors. In other words, if you had invested $10,000 with Stanford, Janvey’s efforts would have recovered $116. But after Janvey takes his cut, you would be left with $77.50 – and that’s only until Janvey submits his next bill.”

And then there are the third kind – those class action lawyers who pursue a claim whether there is real damage or not. These usually occur in the immediate aftermath of a corporate stumble that is made public. For instance, in July of 2012, Duke Energy – a multi-billion dollar utility and energy producer headquartered in Charlotte, NC – completed a merger with a smaller entity identified as Progress Energy. In the immediate aftermath of the merger a series of class action lawsuits was filed alleging that Duke and Progress failed to disclose some elements of the merger. In March of this year, Duke agreed to a settlement of about $146 Million.

Let’s put this into perspective. First, Duke Energy was valued at approximately $41 Billion prior to the merger, and the acquisition of Progress created the largest private power utility in the United States valued at nearly $65 Billion. The resulting merger reduced costs to consumers by about $650 Million. Second, the accusations of withholding information did not relate to financial information but rather to an “end run” about which of the two previous CEOs would run the merged utility – Duke’s representatives on the board won and surprised Wall Street analysts. As the Wall Street Journal noted:

“The surprise dethroning of Duke Energy Corp.’s chief executive [the former CEO of Progress] set off angry responses Friday, with former directors at Progress Energy Inc. saying they never would have approved the $26 billion merger of the two utilities if they had known what would happen with the top job.”

As is often the case in such mergers, more time is spent negotiating the titles and compensation for the senior executives than on maximizing the benefit for shareholders or customers. [Note that the directors from Progress seem to be primarily concerned about the position “their guy” would get.]

Institutional investors overreacted at the surprise move by Duke’s members of the new board of directors and the stock dropped by less than six percent in the following couple of days – a not uncommon result in the aftermath of utility mergers. On July 2 – the merger date – Duke closed at $69.84. Five days later it had dropped to $65.31 thereafter it ranged from about $66.00 to $68.50 with the normal daily variations. Duke closed at about $72.50 on Friday of this past week.

At worst, shareholders lost $4.53 per share, one-third of which was recovered in the week following the price nadir. While that is a real loss, it is not unusual in the aftermath of mergers. Unfortunately it is those “not unusual decreases” that are fodder for the third group of lawyers.

Finally there is a group of lawyers that are all too consistently present in the litigation initiated by the first three groups. This group consists of those lawyers primarily from the silk stocking law insurance defense firms that throw armies of bodies at exorbitant rates in defense of these cases that could and should be settled through negotiation and compromise – the process by which they are ultimately settled after these law firms have exhausted their respective clients’ funds and patience. At the commencement of litigation these law firms talk ebulliently of the opportunity for success and paint a rosy picture of the ultimate outcome. This will change gradually as the process progresses.

These firms engage in what is referred to as “motion practice.” They file reams of standardized interrogatories – each time billed as if originally created. When receiving the same type of standardized interrogatories from the other side, they object, parse, obfuscate or bury material in truckloads of documents. In each instance, such conduct results in endless rounds of motions to compel, briefs, arguments, orders and requests for reconsideration – all of which are billed out at the extraordinary rates charged by these firms.

Understand that very little of this “motion practice” relates to the substance of the litigation. Rather it is principally designed to increase the number of hours that can be billed. In most of these law firms there are associates who do the work and then partners who review the work. There are computer files full of discovery requests (interrogatories, requests for documents, and depositions) that are developed for each type of litigation. Though these forms of discovery requests are utilized repeatedly, many of these firms bill them as if they newly created for each succeeding contest.

There are repeated motions for judgment on the pleadings (almost never granted) and subsequent motions for summary judgment (rarely granted because there are always facts at issue). And when the deadline for trial looms the attorneys for both sides begin to urge their respective clients to consider settlement; warning each of the vagaries of trial and the catastrophic consequences of a loss. The clients, having already spent extraordinary sums to pay their respective lawyers, now face the prospect of additional amounts if they should lose – or the now cautionary prospects of winning (severely diminished since the onset of the litigation). In the end a compromise is reached – more than likely the same compromise that could have been reached at the outset if the lawyers focused on resolution rather than the riches that come from encouraging litigation.

This type of conduct is the exception to the rule for most lawyers. But the practice of law for those who engage in such conduct has become much like the excesses of government officials and corporate executives who spend other people’s money without reservation or conscience.

In the Duke case, the very limited number of shareholders who lost $4.53 per share at most will recover $.50 per share. Well not really $.50 per share because from that piddling amount will be deducted the attorneys’ fees – slightly over $36 Million dollars.

This suit was settled for what Duke described as “nuisance value.” Although the sum of $146 Million is substantial it represents less than 0.25 percent of the total market value of the company upon completion of the merger. Of that amount Duke will pay only $26 Million and its insurers will pay the rest. Also the $146 Million represents the amount that will be paid if every shareholder files a claim – they won’t. However the $36 Million awarded to lawyers is cast in stone regardless of how much is ultimately paid out to shareholders.

While I believe that the practice of law is an honorable profession, the mere fact that you are a lawyer does not make you an honorable professional.

P.S.

Tuesday’s Wall Street Journal carried a story about the United States Supreme Court denying an additional $5 Million to Baker Botts LLP in a bankruptcy proceeding involving Asarco LLC. WSJ noted:

“The U.S. Supreme Court said Monday that bankruptcy courts can’t award fees to a law firm for the time its lawyer spent defending its fees in a nasty billing dispute.”

That $5 Million was in addition to the $114 Million the law firm was already paid in the bankruptcy proceeding.

Will it never end.