When Time Warner Inc. (TWX) said it would spend $2.4 billion to settle an investor class action alleging securities violations, Chairman and CEO Richard D. Parsons crowed that the company had made swift work of its litigation woes. "By acting now to put these matters behind us, we avoid the costs and distractions of protracted litigation," he said in August.
Not so fast. Even as a federal judge prepares to give final approval to the deal on Feb. 22, it could be some time before Parsons can rest easy. Giant shareholder Janus Capital Group Inc. (JNS), which owned over 10% of Time Warner and over 3% of America Online (TWX) when the companies announced their merger in September, 2000, is pursuing its own settlement, BusinessWeek has learned. So are several state pension accounts and more than 100 other institutional investors with alleged losses ranging from less than $50,000 to more than $500 million. All are exercising their right to opt out of a class settlement in hopes of winning more money by going it alone.
Plaintiffs' attorney William S. Lerach is at the forefront of what has become the latest headache for defendants in securities cases. No hard statistics are available, but opt-outs appear to be a more popular tactic for plaintiffs' lawyers. "There's no doubt that the numbers are up," says Stanford Law School's Joseph A. Grundfest, who monitors the litigation.
Lerach, founding partner of San Diego's Lerach Coughlin Stoia Geller Rudman & Robbins LLP, was among a handful of lawyers dominating such suits more than a decade ago, when firms seeking to win control of a big case -- and the resulting fat paycheck -- simply had to race to the courthouse to be the first to file a suit. Lerach and a few others had the practice down to such a science that the Justice Dept. is investigating whether they paid kickbacks to plaintiffs. Lerach has denied wrongdoing.
In 1995, Congress rewrote the rules, making it harder for the small coterie of securities fraud plaintiffs' attorneys that had dominated the business to continue doing so. That's one key reason why Lerach is frequently trying another tack: detaching from class action settlements negotiated by others and striking out on his own.
While Lerach has helped hammer out plenty of class-wide deals in his time, he now lauds the virtues of opting out. "Why should investors sit passively by and take a couple cents on the dollar?" he says. "This is an extraordinarily powerful tactical weapon."
The trend is causing concern in courtrooms and boardrooms. On Feb. 8 a federal judge in New Jersey postponed approval of a $195 million settlement between KPMG International and tax shelter investors because more than 60 of the 284 investors had chosen to pursue their own litigation. Cheryl L. Evans, special counsel for the U.S. Chamber Institute for Legal Reform, says opt-outs increase costs for companies. "When you have this fragmentation, companies are paying to settle several cases when it's more efficient to work on one front," she says.
Last year, Lerach got 65 clients, including several state pension funds, to bypass a $6.1 billion settlement of claims against banks for WorldCom Inc. The group reached a $651 million deal. Now he's persuaded 93 funds to seek separate lawsuits against Time Warner.
Edward I. Adler, executive vice-president of Time Warner, calls the number of opt-outs "very, very small." Lead class counsel Samuel D. Heins of Minneapolis-based Heins Mills & Olson PLC says the settlement has drawn a negligible number of complaints from class members. Time Warner has set aside $600 million to wrap up its remaining liability, but the growing roster of opt-outs could force that number up.
There's always a risk that breakaway investors could do worse by striking out on their own, but there's enough evidence to the contrary to keep fueling the trend. When the California Public Employees' Retirement System quit the WorldCom deal, it recovered $187 million, or 67% of its claimed bond losses, Lerach says. New York City Pension Funds also opted out of WorldCom, recovering close to 100% of losses, its lawyers say. The final return for WorldCom class members remains to be seen, but it's expected to be far less.
By Lorraine Woellert