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Here's what life is like for Max W. Berger these days: The maitre d' at Manhattan restaurant Cit? prances around the 58-year-old founding partner of plaintiffs' law firm Bernstein Litowitz Berger & Grossmann LLP (BLBG) as Berger is delivered to his favorite corner table. He is offered a sampling of fine wine, and his filet mignon is on the house after he complains that the first one is too fatty. Berger soaks up the attention. But the real treat arrives with dessert. Jonathan J. Lerner, a partner at venerable law firm Skadden, Arps, Slate, Meagher & Flom LLP, who opposed Berger in a massive shareholder lawsuit five years ago, saunters up and says to his dinner companion: "This guy took $3 billion from me. He's the best lawyer in New York."
Berger and his partner, senior trial attorney John P. "Sean" Coffey, are feeling pretty good about themselves these days. Coffey, 49, has just finished up a $65 million settlement with accounting firm Arthur Andersen LLP over its dubious number-crunching at disgraced telecom company WorldCom Inc. That's a paltry amount, but it marks the end of an exhausting two-year battle against WorldCom on behalf of a group of investors led by the New York State Common Retirement Fund. Coffey and Berger's real achievement, and the main reason for their newfound prominence, came in March, after the two persuaded 17 financial titans, including Citigroup (C
) and JPMorganChase & Co., to pay investors $6.2 billion for pushing WorldCom bonds when the banks allegedly knew the company's financial condition had deteriorated. The banks all denied liability. BLBG will get about $100 million for the partners' efforts.
It has been an exceptionally rich time for plaintiffs' lawyers, and for Berger and Coffey in particular. BLBG has helped win the five largest securities litigation settlements ever and more than $15 billion in damages for investors over the past decade. On May 1, Securities Class Action Services, a unit of Institutional Shareholder Services, named the firm the top shareholder litigators in 2004, with settlements worth $3.5 billion, almost four times the amount won by well-heeled competitor Milberg Weiss Bershad & Schulman LLP. The fees from all those cases amount to some $200 million for BLBG.
With that success comes more scrutiny. Berger still keeps his credit cards wrapped in a green rubber band, and he and Coffey still ride the subway to court in Manhattan. They say they never chase frivolous cases and are always prepared to make good on the threat of going to trial. But they can't avoid the charge that their fees are excessive; in fact, after their case against travel and real estate company Cendant Corp. (CD
) in 1999 a judge ordered them and their co-lead counsel, Barrack, Rodos & Bacine, to cut their take from $262 million to $55 million. And there's not a plaintiffs' attorney around who wouldn't say he's trying to restore integrity to his besmirched profession. For the record, Berger says he would never take a lousy case just for the fee: "We will never practice law on an eat-what-you-kill basis."
Plaintiffs' lawyers are also criticized for being too cozy with big institutional shareholders, especially the public pension funds they often represent. Berger and Coffey get grief for political contributions Berger gave to New York politicians who control the state's pension fund, in what is commonly regarded as an unsavory "pay-to-play" arrangement. Before being hired in the WorldCom case, Berger raised $10,000 for H. Carl McCall, New York's former comptroller, who did in fact hire BLBG after the fund lost more than $300 million when WorldCom collapsed. Berger has also raised money for Alan G. Hevesi, the current comptroller. Berger calls these contributions "getting a foot in the door" and insists that his firm's record of big settlements for investors speaks for itself. Hevesi says the allegations of favoritism are "nonsense."DIVIDE AND CONQUER
There's no denying that the WorldCom case is what allowed BLBG to enter the upper echelon of plaintiffs' law firms. After WorldCom tumbled into bankruptcy in July, 2002, amid an $11 billion accounting scandal, oodles of shareholder suits alleging fraud against former Chairman Bernard J. Ebbers, execs and directors, as well as Arthur Andersen, followed. Working with lead plaintiff Hevesi and Barrack Rodos again, Berger and Coffey devised a plan to go after the 17 banks that helped WorldCom raise $17 billion in bonds.
Their strategy relied in large part on the complex liability system for investor lawsuits. Under the Securities Act of 1933, a defendant can be held "jointly and severally liable" for damages sought by the plaintiffs. That meant that as banks settled individually, those left could be held responsible for all remaining damages, even if the amount would be higher than the corresponding percentage of bonds they actually sold. The defendants also faced the very real prospect of a trial -- and former New York prosecutor Coffey, unlike many plaintiffs' lawyers, relished that. "It wasn't going to get any easier for them," he says.
Lawyers for the 17 banks initially offered to settle for just $35 million, according to sources familiar with the talks. Berger and Coffey considered that an insult. They demanded $10 billion. Then, one by one, they picked off defendants. Citigroup, dogged by allegedly tainted research from telecom analyst Jack B. Grubman and suggestions that it may have used his reports to win business from WorldCom, recognized that it risked losing a trial. It settled for $2.65 billion last May. Then, in January, 11 WorldCom directors agreed to pony up $54 million (later reduced to $20.25 million) in personal funds, while denying liability. By the end of March, the 16 other banks had hammered out deals. JPMorganChase was the last to give in and, as a result, ended up paying $2 billion -- which, measured against the share of WorldCom bonds it underwrote, was about 45% more than Citigroup agreed to.
It was a divide-and-conquer strategy aimed squarely at Jay B. Kasner, lead counsel for the group of 17 banks as well as JPMorgan Chase individually -- and widely blamed for bungling the case. Those near Kasner, in turn, accuse Berger and Coffey of distorting public accounts of the negotiations and call the news leaks "dirty pool." They say Kasner was hamstrung by the difficulty of coordinating strategies among 17 different banks.
Berger and Coffey do share a street-tough attitude. Born in a Bronx housing project, Berger grew up sharing a bedroom with his sister in a Queens tenement. His father, Izzy, managed the RKO Palace Theater and, Berger says, "never made any money." Berger earned an accounting degree from City College of New York and got through Columbia Law School on a scholarship and by working three jobs. He and three partners founded BLBG in 1983.
Coffey, the eldest of seven children, grew up a self-described B.I.C. -- Bronx Irish Catholic. Both parents came to the U.S. in the 1950s and sent the kids back to Ireland each summer. Coffey's dad, a janitor and guitar player, drank hard and worked little. His mom, Mary, ran the family with a wry sense of humor, once joking she may have used boric acid instead of baking soda in the bread she made for Coffey's boss, then-Vice-President George H.W. Bush. Coffey attended the Naval Academy and became a spotter on the P-3C Orion plane, a submarine chaser that hunted Soviet vessels in the Atlantic. Later, while serving as Bush's personal aide, Coffey attended Georgetown Law School at night. "I am proud of his accomplishments and his reputation," Bush told BusinessWeek.
Next on the docket: HealthSouth Corp. (HLSH
) BLBG and another firm represent Retirement Systems of Alabama, the state employees' pension fund, in a class action against the troubled hospital chain; its founder, Richard M. Scrushy, is on trial for fraud. Coffey and Berger say they'll ask for billions in damages in the civil case. If they prevail, the lawyers of the moment will earn more bragging rights -- along with some $10 million in fees.
Corrections and Clarifications
"The kings of class actions" (Legal Affairs, May 16) said that Sean Coffey's father was a janitor and a guitar player. In fact, he was a carpenter and played the Irish button accordion. By Brian Grow in New York