Saturday, February 16, 2002

Did US Law Firm pay plaintiffs to file class action suits?

Milberg Weiss Bershad Hynes & Lerach, the top law firm in the US, specializing in shareholder suits, is under a federal grand jury investigation for having allegedly employed improper tactics to recruit plaintiffs, including paying kickbacks to lawyers and brokers for referrals. The full text is here.

Milberg has made its reputation by filing suit on behalf of investors against thousands of corporations, accounting firms and investment bankers, alleging shareholder fraud in connection with precipitous drops in stock prices. The firm is seeking to become the lead plaintiffs' counsel in litigation over the collapse of Enron. It has also filed an enormous number of suits against Wall Street firms over allegations of improper IPO allocations and "laddering" stock prices to give them a false appearance of increasing value. In the world of corporate finance, especially among company management, Milberg is viewed as an opportunistic firm that has made a cottage industry of filing "cookie cutter" lawsuits whenever stocks drop by a certain percentage and growing fat on the settlement fees.

In the Philippines, no class action on the basis of securities fraud has ever been filed. Thus, I've often viewed the Philippine securities business as the arena for snakes with no hope for redemption. Sometime in 1997, a group of international banks gathered to file the first major class action suit against SGV & Company (the Philippine affiliate of Andersen Consulting -- think Enron). SGV is the external auditor of many publicly-listed companies. The basis for the proposed class action was the window dressing that the auditing firm made on the financial statements of Victorias Milling Corp. (a publicliy-listed company). The banks relied upon the financial statements to lend money on the cash strapped sugar miller and it turned out that the corporation did not have enough assets to cover its liabilities and the financial statements did not reflect the discrepancy. There was no sugar to support the quedans -- as it were. Eventually, Victorias declared bankruptcy. The banks tried to look for a major law firm to get the case started, but the major law firms declined engagement because of business affiliations with SGV. When they finally got the law firm to represent them, they got too tired and decided to just forget it -- aware of the backlash that they might face if they filed the case against the giant auditing firm. That is why I will never trust my money on Philippine securities. If nobody can take on an auditing firm such as SGV for a malfeasance such as false financial statements, there is no hope for the Philippine securities market.

Which brings us back to the above story -- it is quite sad that the law firm has been implicated in the scandal. But for the Philippines, I wish they establish a local counterpart here just to teach the snakes in the Philippine securities market a lesson.

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