Judge Orders Bidding Be Used to Pick Lawyers in Big Class Action
New York Times - Business - 08.08.98
By Diana B. Henriques
There were actions on two fronts yesterday in the battle against the genteel
back-scratching arrangements known as "paying to play," in which lawyers
make campaign contributions to the public officials who hire lawyers for lucrative
public work.
In Newark, a Federal judge decided to conduct a silent auction to select the
law firms that will represent several public pension funds, including those
overseen by New York State Comptroller H. Carl McCall, in the huge shareholder
lawsuit against Cendant Corporation, whose shares plunged after accounting irregularities
were announced in April.
The decision by Federal Judge William H. Walls came after a lawyer representing
another plaintiff in the case argued that the law firms the pension funds had
selected should be disqualified because of their substantial contributions to
Mr. McCall's political campaign.
And in Toronto, delegates of the American Bar Association voted to instruct
the association's ethics committee to prepare an ethics rule, to be considered
at next year's annual meeting, that would bar lawyers from making political
contributions "for the purpose of obtaining or being considered for a legal
engagement."
The association also voted to urge all state and local bar associations to
"unequivocally condemn" any pay-to-play arrangements and to insure
that campaign contributions by lawyers are fully disclosed. And they encouraged
individual state bar associations to take a more restrictive action "where
local circumstances warrant" - a clear victory for the efforts by lawyers
in New York State to enact some of the toughest pay-to-play prohibitions in
the nation.
"This is an enormous victory for the bar," said Michael A. Cardozo,
a partner at Proskauer Rose and former president of the New York City bar association.
The proposals under consideration in New York would largely prevent lawyers
from accepting work from public officials to whom they have made campaign contributions.
The Cendant case in Newark is considered by lawyers to be the largest shareholder
class-action lawsuit in history. Shareholders lost an estimated $14 billion
when Cendant's accounting problems sent its shares plummeting 46 percent on
April 16. The company has undertaken an investigation that suggests that deliberate
deception was involved, making the shareholders' case stronger. Legal fees in
the case are expected to be many millions of dollars.
Federal securities laws give a leading role to shareholders who have sustained
the largest losses, which in this case would be New York State's pension funds
and two co-plaintiffs, the California public employees retirement system, known
as Calpers, and New York City's pension funds. Those funds had hired Bernstein,
Litowitz, Berger & Grossman of New York and Barrack, Rodos & Bacine
of Philadelphia, both of which were substantial contributors to Mr. McCall.
That arrangement was attacked last month by Howard Sirota, a New York lawyer
seeking a spot on the legal team. Mr. Sirota argued that the only way to eliminate
the appearance of political influence from the case was for the lawyers to be
selected by competitive bidding.
Judge Walls did not specifically address the pay-to-play issues yesterday.
But his competitive bidding process has made the issue moot. Mr. Sirota said
last night, "It is now a level playing field. It no longer matters who
you know - what matters is what you know and what you charge," he said.
There is a curious wrinkle to Judge Wall's auction method: After he has reviewed
the sealed bids, which are due Sept. 17, he will give Bernstein, Litowitz and
Barrack, Rodos the opportunity to match the low bid.
In another unusual step, Judge Walls also tapped the Connecticut state pension
funds, overseen by State Treasurer Paul J. Silvester, as one of the lead plaintiffs
for investors who purchased derivative Cendant securities called Prides, marketed
by Merrill Lynch & Company.
A. Richard Ross of Carella Byrne said the judge concluded that Calpers and
its CO-plaintiffs could not adequately represent those investors because Calpers
has a sizable investment in Merrill Lynch stock.
Connecticut's choice of counsel - Milberg Weiss Bershad Hynes & Lerach
- will have to be the lowest bidder to keep the assignment, Connecticut's Attorney
General, Richard Blumenthal, said.
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