By Roger Parloff
May 14, 2007

Warning: We are about to peek inside the class-action sausage factory; it’s not a sight for the squeamish.

Last October, three clients of the nation’s preeminent class action lawyer, Bill Lerach, got some good news and some bad news. The good news was that Lerach had won a $10 million settlement in the class-action case he’d filed for them back in 2001. The bad news was that he had won it two years earlier, had never told them about it, and that all the money from it had already been doled out, according to a motion the three clients filed in federal court May 4.

Lerach and partner Darren Robbins did not respond to emails sent Thursday seeking comment, nor did Lerach respond to a phone message left Friday. (Lerach is a big deal; he is currently the lead counsel for Enron securities holders who are suing Enron’s banks. He has won $7.3 billion in settlements so far in that case, and is now seeking U.S. Supreme Court review of a court’s dismissal of the remaining defendants: Merrill Lynch (MER), Credit Suisse First Boston (CS), and Barclays (BCS). Lerach is also currently under criminal investigation in connection with matters that have already led to the indictment of his former law firm, Milberg Weiss, and two name partners there. For details on that, see this award-winning feature story by my colleague Peter Elkind.)

The new claims about Lerach arise in a securities class action called Yusty v. Tut Systems, which Lerach filed in July 2001 on behalf of named plaintiffs Carlos Horacio Yusty, Andres Jaramillo, and Rodrigo Jaramillo. The case was brought in federal district court in Oakland, California. (The defendant tech company, Tut Systems, was acquired by Motorola (MOT) in March 2007).

In May 2004, the case was settled for $10 million, with 25% of that — $2.5 million — going for attorneys fees.

About 29 months later, in October 2006, named plaintiff Andres Jaramillo emailed his local lawyer, Bruce Murphy of Vero Beach, Florida, to ask about the status of his case. Murphy, who was the lawyer who had originally referred the case to Lerach’s firm, then forwarded Jaramillo’s email to Dave Walton, an attorney he dealt with there. Walton informed Murphy that the case had ended two years earlier, according to the May 4 filing, which Murphy submitted on behalf of Yusty and the two Jaramillos. (Walton did not respond to an email sent Thursday seeking comment.) Apparently all the settlement money had been distributed by then. (The three named plaintiffs’ stock losses together had come to $24,855, according to Murphy’s filings.)

Obviously, lawyers have an ethical duty to inform clients about a proposed settlement, so that the clients have an opportunity to object to it or, if they’re okay with it, file a claim form and get their share of the money. In an affidavit, Yusty and the Jaramillos claim they never got any notice of any kind. (According to court documents filed in 2004, the plaintiffs lawyers promised to send “individual notice” of the settlement to all class members “who could be identified through reasonable effort.” An outside claims administrator then certified that more than 5,500 class members were sent such notice, and that an announcement of the proposed settlement had also been published in one issue of Investor’s Business Daily.)

There’s a bit more. Murphy also says the Lerach firm stiffed him on a “referral fee” he was owed in the case — 10% of the attorneys fees, or, in this instance, $250,000 plus interest. In 1998, Murphy writes, he made an agreement with Lerach’s then firm, Milberg Weiss Bershad Hynes & Lerach, that he’d refer them shareholder cases in exchange for 10% of the fee. (The west coast office of Milberg Weiss — including all the lawyers handling the Yusty case — split away from that firm in May 2004, forming the firm now known as Lerach Coughlin Stoia Geller Rudman & Robbins.)

Murphy writes that Lerach’s firm paid him referral fees in least 16 cases over the years. (Referral fees are ethical if they are disclosed and the referring lawyer does some actual work on the case.) Murphy’s name appears as co-counsel with Lerach’s on the original complaint in the case, but Murphy alleges in his motion that Lerach’s firm “cut [him] off the service list” at some point, meaning that Murphy stopped receiving copies of the papers filed in the case.

You might think that with a dispute this unseemly, lawyers would try to settle it quietly and far from public view. Well, in an amusingly blunt footnote on the last page of his motion, Murphy offers a theory about why the Lerach firm hasn’t been willing to do so, though the theory may be being offered tongue-in-cheek. In the footnote, Murphy reminds the court that Lerach is currently under criminal investigation and that his former firm is under indictment for allegedly “paying illegal kickbacks to clients in class actions.” In that context, Murphy writes, “Lerach Coughlin needs the cover of an order to pay damages and sanctions” to Yusty and the Jaramillos.

To read the 18-page memorandum accompanying Murphy’s motion, click here.

UPDATE (ADDED 6/3/07)

On Thursday, May 31, Lerach Coughlin filed response papers to Murphy’s motion, which do cast the dispute in a very different light, though they still do not inspire confidence in class action notification procedures. Though Lerach Coughlin was listed as counsel for Yusty and the two Jaramillos in court records, the firm states that it “has never had direct contact with these three individuals and does not have addresses or telephone numbers for them.” It contends that only Murphy, who was originally listed as co-counsel for those three plaintiffs, had their contact information, and it suggests that Murphy did not want to share that information with the Lerach firm. The Lerach firm effectively contends, therefore, that Murphy should have monitored the case more closely — perhaps by looking in the electronic docket sheets online — even if he had been somehow cut off the service list in 2001, as he contends.

More significantly, the firm says that Murphy was told in April 2007, by the claims administrator for the Tut settlement account, that, even though the settlement funds had been fully “distributed,” there was still enough money in the account, due to interest earned, to pay Yusty’s and the Jaramillos’ claims, if Murphy simply filed the necessary paperwork on their behalf with the claims administrator. Inexplicably, the Lerach firm contends, Murphy has still failed to do so. (Murphy has yet not returned email and phone messages I left for him Friday, June 1, seeking comment.)

Accordingly, the Lerach firm contends, the dispute is not really about the plaintiffs’ recovery, but simply about the 10% referral fee Murphy claims to be owed. Lerach Coughlin claims there was never any such agreement. It acknowledges that Murphy referred the Yusty case to the Lerach firm, but says he played no role in litigating it beyond reviewing a copy of the complaint before it was filed. The firm has offered him $15,000 to settle his demand, the Lerach lawyers say, but Murphy refused. It notes that Murphy made a similar demand in a different case in 2004, and did ultimately settle that claim for $15,000.

FOR FOLLOW-UP POST, CLICK HERE.

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