For people looking for distractions from the fact that their 401k’s have recently vanished, here are a couple odds and ends.

Dan Levine at Cal Law’s Legal Pad (no affiliation to this site and, mea culpa, they were apparently using the Legal Pad name first) has this update on class-action impresario Bill Lerach’s rocky adjustment to life in the federal prison system. Lerach’s been transferred to a medium-security institution in Phoenix, Levine reports, after an incident at the minimum-security camp in Lompoc, Calif., in which he allegedly offered a guard the use of his San Diego Chargers tickets.

For a very unrelated curiosity, try this Web site called beautifullawyers.com, where you can buy a calendar displaying 12, physically attractive Massachusetts lawyers. (Should that be the 12?) They include both men and women, and the clothing is revealing only in a socioeconomic sense. Proceeds allegedly go to charity.

The “Beautiful Lawyers” logo includes, as the “i” in word ‘beautiful,’ a statuette of a statuesque woman holding something; I’m not sure, but it seems to be a hand-mirror, of the “Whose the fairest of them all?” variety. I’ve been badly scooped on this story, I should admit; Karen Donovan at Portfolio.com did this item on it three months ago.

For people looking for distractions from the fact that their 401k’s have recently vanished, here are a couple odds and ends.

Dan Levine at Cal Law’s Legal Pad (no affiliation to this site and, mea culpa, they were apparently using the Legal Pad name first) has this update on class-action impresario Bill Lerach’s rocky adjustment to life in the federal prison system. Lerach’s been transferred to a medium-security institution in Phoenix, Levine reports, after an incident at the minimum-security camp in Lompoc, Calif., in which he allegedly offered a guard the use of his San Diego Chargers tickets.

For a very unrelated curiosity, try this Web site called beautifullawyers.com, where you can buy a calendar displaying 12, physically attractive Massachusetts lawyers. (Should that be the 12?) They include both men and women, and the clothing is revealing only in a socioeconomic sense. Proceeds allegedly go to charity.

The “Beautiful Lawyers” logo includes, as the “i” in word ‘beautiful,’ a statuette of a statuesque woman holding something; I’m not sure, but it seems to be a hand-mirror, of the “Whose the fairest of them all?” variety. I’ve been badly scooped on this story, I should admit; Karen Donovan at Portfolio.com did this item on it three months ago.

I don’t usually do pure “aggregation” type referrals on this column/blog, but I’ll make an exception this morning. In the character-is-destiny department, people may not want to miss today’s update in The Recorder (a San Francisco-based daily affiliated with The American Lawyer) about erstwhile class-action impresario Bill Lerach, who is now, of course, imprisoned at the U.S. Penitentiary in Lompoc, California. The Recorder reports that Lerach was sent to administrative segregation (23-hour lockdown, also, I think, known as “the hole”) earlier this summer after allegedly offering San Diego Chargers tickets to a prison guard. The Recorder said Lerach’s lawyer, John Keker, was not available to comment.

I don’t usually do pure “aggregation” type referrals on this column/blog, but I’ll make an exception this morning. In the character-is-destiny department, people may not want to miss today’s update in The Recorder (a San Francisco-based daily affiliated with The American Lawyer) about erstwhile class-action impresario Bill Lerach, who is now, of course, imprisoned at the U.S. Penitentiary in Lompoc, California. The Recorder reports that Lerach was sent to administrative segregation (23-hour lockdown, also, I think, known as “the hole”) earlier this summer after allegedly offering San Diego Chargers tickets to a prison guard. The Recorder said Lerach’s lawyer, John Keker, was not available to comment.

Yesterday a special master in a federal shareholders class-action suit against The Coca-Cola Company (KO) recommended that the law firm of Coughlin Stoia Geller Rudman & Robbins be barred from serving as class counsel because it had purchased “stolen” company documents from a disgruntled former Coke executive.

“Class Counsel engaged in extremely troubling conduct,” wrote Special Master Hunter R. Hughes, III, “by paying for documents stolen from Coke, and then exacerbated the [situation] by refusing to accept responsibility for that conduct and by continuing, to this day, to defend that conduct through the use of arguments that appear to be pretextual.” Hughes’s ruling is here. (The pertinent pages are 49-69.)

Hunter’s recommendation was submitted to U.S. District Judge Willis B. Hunt, Jr., of Atlanta, who will wait to receive comments from the parties before deciding what action to take.

Hunter acknowledged that Coughlin Stoia’s lawyers had “vigorously and skillfully prosecuted this case for now seven years,” and said that “had they addressed this issue head-on, recognizing the impropriety of the arrangement they made . . . that might well have served to mitigate the circumstances. But they did not. Instead, they turned a blind eye to the terms of the consulting agreement pursuant to which they paid for the company documents and continue even now to make unfounded arguments which only obfuscate the issue.”

Coughlin Stoia partners (on the West Coast) were not immediately available to respond to email inquiries sent early this morning (from the East Coast), but any comment received will be inserted when it arrives.

(Coughlin Stoia, formerly known as Lerach Coughlin, is the firm founded by William Lerach in 2004, when he split away from Milberg Weiss and took that firm’s West Coast office with him. Lerach began serving a two-year federal prison term earlier this month after pleading guilty to conspiring to obstruct justice in connection with an unrelated kickback scheme at Milberg Weiss. Milberg Weiss has pleaded not guilty to the same charges, and is scheduled to go to trial in August.)

The case against Coke, filed in October 2000, alleges that the company artificially inflated its revenues through “channel-stuffing.” (A company channel-stuffs when it cajoles distributors into buying more product than they really need, to make it look to shareholders like consumer sales are brisker than they are.)

About four months after the case was filed, two former Coke executives approached the class’s law firm (then still known as Milberg Weiss) to offer help on the case, according to Hughes’s report. One of the two former execs, Greg Petro, told class counsel that he’d taken about 3,000 Coke documents with him when he had been terminated. The law firm then signed a “consulting agreement” with the two former executives, agreeing to pay them $200 an hour but, in any event, no less than $75,000, if they would provide information to the firm “including . . . documentation in any form, written or electronic, concerning Coke.” Petro then turned over 3,023 company documents, including many marked “confidential.” Some were then used in connection with an amended complaint filed in the case.

When the consulting agreement came to light more than a year ago, Coughlin Stoia lawyers backed Petro’s claim that neither he nor they had thought he was taking Coke documents without authority because, among other things, Petro had been ordered, when terminated, to “clean out his office.” Special Master Hughes found that such a command could not “rationally be construed to authorize Petro to walk off with company documents, any more than it authorized him to take the company’s desk, chairs, and computer.”

Hughes also rejected arguments that the firm was not really buying the documents, just entering into a consulting agreement, and a public-policy style argument that Petro’s conduct should be condoned because he was a whistleblower trying to expose corporate wrongdoing.

In a footnote, Hughes found that public policy arguments weighed in the other direction: “On a very practical level, for the Court to give Plaintiffs’ counsel a pass on this conduct, would simply invite terminated employees, particularly of public companies, to on a wholesale basis remove company documents following their termination in hopes they can sell them should the company be sued.”

In the silver-lining department, Special Master Hughes did find that the mere past involvement of Bill Lerach in the case, and Lerach’s subsequent admission of unrelated criminal conduct, did not warrant barring Coughlin Stoia from serving as class counsel.

Correction: Earlier version of this story had wrong the wrong month for when Milberg Weiss is set to go to trial. Correct month is August. Regret the error.

Yesterday a special master in a federal shareholders class-action suit against The Coca-Cola Company (KO) recommended that the law firm of Coughlin Stoia Geller Rudman & Robbins be barred from serving as class counsel because it had purchased “stolen” company documents from a disgruntled former Coke executive.

“Class Counsel engaged in extremely troubling conduct,” wrote Special Master Hunter R. Hughes, III, “by paying for documents stolen from Coke, and then exacerbated the [situation] by refusing to accept responsibility for that conduct and by continuing, to this day, to defend that conduct through the use of arguments that appear to be pretextual.” Hughes’s ruling is here. (The pertinent pages are 49-69.)

Hunter’s recommendation was submitted to U.S. District Judge Willis B. Hunt, Jr., of Atlanta, who will wait to receive comments from the parties before deciding what action to take.

Hunter acknowledged that Coughlin Stoia’s lawyers had “vigorously and skillfully prosecuted this case for now seven years,” and said that “had they addressed this issue head-on, recognizing the impropriety of the arrangement they made . . . that might well have served to mitigate the circumstances. But they did not. Instead, they turned a blind eye to the terms of the consulting agreement pursuant to which they paid for the company documents and continue even now to make unfounded arguments which only obfuscate the issue.”

Coughlin Stoia partners (on the West Coast) were not immediately available to respond to email inquiries sent early this morning (from the East Coast), but any comment received will be inserted when it arrives.

(Coughlin Stoia, formerly known as Lerach Coughlin, is the firm founded by William Lerach in 2004, when he split away from Milberg Weiss and took that firm’s West Coast office with him. Lerach began serving a two-year federal prison term earlier this month after pleading guilty to conspiring to obstruct justice in connection with an unrelated kickback scheme at Milberg Weiss. Milberg Weiss has pleaded not guilty to the same charges, and is scheduled to go to trial in August.)

The case against Coke, filed in October 2000, alleges that the company artificially inflated its revenues through “channel-stuffing.” (A company channel-stuffs when it cajoles distributors into buying more product than they really need, to make it look to shareholders like consumer sales are brisker than they are.)

About four months after the case was filed, two former Coke executives approached the class’s law firm (then still known as Milberg Weiss) to offer help on the case, according to Hughes’s report. One of the two former execs, Greg Petro, told class counsel that he’d taken about 3,000 Coke documents with him when he had been terminated. The law firm then signed a “consulting agreement” with the two former executives, agreeing to pay them $200 an hour but, in any event, no less than $75,000, if they would provide information to the firm “including . . . documentation in any form, written or electronic, concerning Coke.” Petro then turned over 3,023 company documents, including many marked “confidential.” Some were then used in connection with an amended complaint filed in the case.

When the consulting agreement came to light more than a year ago, Coughlin Stoia lawyers backed Petro’s claim that neither he nor they had thought he was taking Coke documents without authority because, among other things, Petro had been ordered, when terminated, to “clean out his office.” Special Master Hughes found that such a command could not “rationally be construed to authorize Petro to walk off with company documents, any more than it authorized him to take the company’s desk, chairs, and computer.”

Hughes also rejected arguments that the firm was not really buying the documents, just entering into a consulting agreement, and a public-policy style argument that Petro’s conduct should be condoned because he was a whistleblower trying to expose corporate wrongdoing.

In a footnote, Hughes found that public policy arguments weighed in the other direction: “On a very practical level, for the Court to give Plaintiffs’ counsel a pass on this conduct, would simply invite terminated employees, particularly of public companies, to on a wholesale basis remove company documents following their termination in hopes they can sell them should the company be sued.”

In the silver-lining department, Special Master Hughes did find that the mere past involvement of Bill Lerach in the case, and Lerach’s subsequent admission of unrelated criminal conduct, did not warrant barring Coughlin Stoia from serving as class counsel.

Correction: Earlier version of this story had wrong the wrong month for when Milberg Weiss is set to go to trial. Correct month is August. Regret the error.

Last month the New York City Bar Association announced that it had nominated Patricia Hynes to become its next president. The press release identified her as senior counsel at Allen & Overy’s New York office, a federal prosecutor from 1967 to 1982, the recipient of a boatload of laureates and accolades, and a person with a stellar record of public service.

What the release does not mention is where Hynes spent the bulk of her career. For about 24 years she was a partner at the now-indicted law firm that was known, from mid-1993 to mid-2004, as Milberg Weiss Bershad Hynes & Lerach. She’s that Hynes. She left the firm in late August 2006, about three months after the indictment came down. For more than ten years, from the late 1980s until she took “of counsel” status in 2000, she also served on Milberg Weiss’s executive committee. (The Wall Street Journal Law Blog noted the omission at the time in the last paragraph of this post.)

The firm, now known simply as Milberg Weiss, has been charged with conspiring, from at least 1979 through 2005, to obstruct justice and make “false material declarations under oath” in federal court proceedings. In other words, the case is about lying. It alleges lying day-in and day-out, year after year, decade after decade, to federal judges, to opposing counsel, and to absent class members — i.e., the firm’s clients. The lies were allegedly intended to conceal $11.3 million in secret payments and kickbacks that the firm is said to have paid to named plaintiffs in more than 225 class actions.

The firm and its co-founder, Melvyn Weiss, have each pleaded not guilty. But former name partners David Bershad and William Lerach, as well as Hynes’s successor on the firm name plate, Steven Schulman, have all pleaded guilty. (Firm co-founder Lawrence Milberg died in 1989.) Four other non-Milberg defendants have also pleaded guilty, including three named plaintiffs who say they took secret payments from the firm. The government also alleges in the indictment that over the course of the conspiracy three other “senior partners” at the firm, identified only as Partners E, F, and G, were also participants. To be clear, I’m not suggesting that Hynes might be one of them. On the contrary, I assume she wasn’t.

Last July, before her nomination, I called Hynes to ask what, if anything, she’d known about the wrongdoing alleged at her firm. She said: “I have no comment. I’m not talking to any press on the Milberg Weiss situation. Thank you.”

When I learned she’d been nominated to become president of the City bar I assumed that, surely, that policy had changed. But evidently it hasn’t.

Hynes has not responded to a detailed e-mail and two phone messages left Wednesday and Thursday seeking comment on what she knew about wrongdoing at her former firm. If she responds, either to that question or to what I’ve written here, I’ll print her response.

Alan Rothstein, the City Bar’s general counsel, said in an interview that “the nominating committee did it’s due diligence with regard to that and was fully satisfied that Pat Hynes had absolutely nothing to do with the events that happened at Milberg.” When I asked for additional detail, he said, “That’s pretty much what I can tell you.”

Asked about why the press release did not mention Hynes’s career at Milberg Weiss, Rothstein said that the release follows the standard protocol for such announcements; “the usual form is to indicate where the person is now and their public service. We don’t go through their firm histories.”

I have qualms about what’s happening here. In addition to all the wonderful things that Hynes unquestionably is, she also appears to have been a major-league dupe. While being a dupe is not unethical, and certainly not illegal, it’s no badge of honor, either. For idealistic young law students making their career choices, it must have been reassuring if not inspirational to see former Manhattan executive assistant U.S. attorney Pat Hynes’s name so prominently displayed on Milberg’s letterhead. It vouched for the integrity of the whole operation. Whether she knew it or not, part of what she was being paid to do there for 24 years was to lend the firm an aura of integrity that, judging from three top partners’ guilty pleas, it didn’t deserve.

Assuming the nominating committee’s right, and that Hynes knew nothing about the wrongdoing occuring at the firm, she still gravely misjudged the character of at least three of her most powerful colleagues. (If the indictment is right, she misjudged seven of them!) The very fact that the government has chosen to indict the whole firm suggests that the U.S. Department of Justice, unlike the City Bar, regards what happened there as much more than the aberrational acts of a few bad apples.

Silence cannot be used against one in criminal proceedings. But silence can be used against one in many civil proceedings, and it most certainly can — and ought to be — used against anyone who is affirmatively seeking some extraordinary honor or high office.

The questions I would like to ask are basic things: When did she first learn of the criminal investigation? What inquiries did she make at that time? What responses were provided to her, and by whom? When she was on the executive committee, was she ever asked to leave the room while others stayed behind to engage in further discussions? If so, what did she make of that?

If she answered such questions for the nominating committee — and I assume she must have — why can’t she answer them in public?

Again, to be clear: I don’t think Hynes’s tenure at Milberg Weiss necessarily disqualifies her from serving as president of the City Bar. Maybe if the public had heard her say whatever she told the nominating committee, it would understand why the City Bar feels comfortable choosing her as its next president. But the public hasn’t heard any such thing.

The City Bar takes itself seriously. It issues reports opining on the proper treatment of detainees in the war on terror, on the plight of lawyers in Pakistan, the death penalty, reporter-shield laws, campaign finance laws, and class-action reform. What sort of moral authority will the City Bar’s voice carry over the next two years while its president’s former firm goes on trial (set to begin August 12, 2008) for allegedly having made a mockery of attorneys’ most basic obligations of candor to court, adversaries, and clients, and she is unwilling to discuss what she knew or didn’t know about it.

This nomination should have been postponed until such time as Hynes feels free to answer questions in public about the nearly quarter century she spent at Milberg Weiss.

Mine is evidently a minority view, though. The members of the nominating committee — each a titan of the New York bar — all disagree with me. (Rothstein told me the committee’s vote was unanimous.) They were E. Leo Milonas, chairman (former City Bar president and former state supreme court justice, Appellate Division); Preeta D. Bansal (the head of Skadden Arps’s appellate practice); Robert B. Fiske, Jr. (partner at Davis Polk and former U.S. Attorney for Manhattan); Sara Moss (Estee Lauder’s general counsel); Carlos G. Ortiz (Goya Foods’ general counsel); Milton L. Williams (state supreme court justice, Appellate Division); and Mary Marsh Zulack (Columbia law professor). Nominating committee chairman Milonas did not return two phone messages.

Under the City Bar’s by-laws, any member can theoretically petition for permission to run against Hynes, but if no one does so by February 8 — and typically no one does — Hynes will be declared the 63rd president of the 137-year-old association at its annual meeting on May 20, taking her place alongside the likes of Cyrus Vance, Whitney North Seymour, and Charles Evans Hughes. (Disclosure: I’m a member of the City bar, though not a very active one.)

What do readers think about this situation?

[Correction: An earlier version of this post noted that two named plaintiffs used by Milberg to bring class actions had pleaded guilty to accepting secret kickbacks from the  firm; actually three have.]

Steve Schulman, a former top Milberg Weiss partner who agreed to plead guilty to racketeering charges in September, has sued his former firm for nonpayment of his criminal defense attorneys’ fees. The complaint is here.

Schulman seeks an injunction that would force the class-action law firm — which is still defending its own indictment on related charges — to continue to pay the attorneys’ fees Schulman is incurring while cooperating with the government against the firm and its founder, Mel Weiss. The firm and Weiss have pleaded not guilty.

Schulman has also sued the law firm of Coughlin, Stoia, Geller, Rudman & Robbins (formerly Lerach Coughlin, etc.), the spin-off firm formed by former Milberg partner Bill Lerach in May 2004. Bill Lerach agreed to plead guilty in September in a deal in which the government agreed not to prosecute Coughlin Stoia or its top partner Patrick J. Coughlin.

Schulman says that until September, Milberg Weiss and Coughlin Stoia had been splitting his defense costs 50/50.

Until 2004, Milberg Weiss was the leading class-action plaintiffs firm in the nation; Coughlin Stoia is still one of the leaders today.

“Acting maliciously and in flagrant bad faith,” the complaint asserts, the two law firms “have wrongfully stopped paying petitioner’s legal fees in retaliation for his agreement to plead guilty and cooperate with the Government in its ongoing investigation and prosecution of Milberg Weiss and its founding partner, Melvyn I. Weiss.”

Schulman characterizes his former partners as attempting to “punish” him “for agreeing to cooperate with the government,” and calls the effort “a gross violation of public policy and a flagrant breach of . . . contractual obligations.”

Milberg Weiss partner Sanford Dumaine said he could not comment, but would be filing papers responding later this afternoon. Dan Newman, a spokesman for Coughlin Stoia, did not immediately return a voicemail seeking comment. I’ll post his comment when received. (In the meantime, I’ll note that the law firms very likely will have some nontrivial arguments on their side for not reimbursing Schulman once he acknowledged criminal wrongdoing. Contracts to reimburse people for costs incurred in connection with criminal acts are often void as against public policy.)

Schulman claims that without the firms’ subsidization of his fees, he faces “imminent risk of being deprived of his constitutional right to criminal counsel of his choice guaranteed by the Sixth Amendment.”

Under Milberg Weiss’s 1991 partnership agreement the firm agreed to reimburse partners for attorneys’ fees “for which a partner becomes liable in connection with the rendition of services to a client,” according to the complaint.

When Bill Lerach split away in May 2004 and formed Lerach Coughlin, the complaint continues, the two firms entered into a “joint defense agreement” and agreed to “retain joint counsel in connection with the pending grand jury investigation.”

Then on May 11, 2006 — seven days before Schulman was indicted — Schulman signed a “leave of absence agreement” with Milberg Weiss in which that firm specifically committed to reimburse him for legal fees “even in the event [Schulman] were to be convicted of a felony, until such time as such conviction has been upheld by a final non-appealable court order.” Schulman says he bargained for this valuable clause, and in exchange passed up the opportunity to share in fee awards from pending Tyco (TYC), Nortel (NT), Sears, and Enron class actions.

From May 2006 until September 2007, Schulman says, Milberg Weiss and Coughlin Stoia had split the costs of his civil and criminal attorneys fees 50/50, paying about $4.5 million to his defense lawyers at Stern & Kilcullen and McDermott Will & Emery.

Schulman agreed to plead guilty on September 20, 2007, the same day that Milberg Weiss co-founder Mel Weiss was indicted. But upon agreeing to plead guilty, he says, both firms stopped paying his fees.

Though Schulman did plead guilty on October 9, he contends that he is still entitled to payment under his Leave of Absence Agreement, since has not yet been formally “convicted.” That event will not occur until his sentencing, which is currently scheduled for June 23, 2008, he argues. He has already run up about $1.2 million in unreimbursed fees since September, according to his complaint.

Schulman filed the suit in state supreme court in Manhattan on November 27. Though Schulman has already initiated arbitration proceedings against Milberg Weiss and, the complaint says, will soon do so against Coughlin Stoia, Schulman has gone to court to seek an emergency order that the firm keeping paying his fees while the arbitrations are pending.

In passing, Schulman notes that as a partner at Milberg Weiss he earned $15 million in 2005. He says his equity share that year was 15.5 percent, which was third behind founder Mel Weiss (17 percent) and David J. Bershad (16 percent). Bershad was the first Milberg Weiss partner to agree to plead guilty.

In his 1,500 word sermon in Sunday’s Washington Post, shareholder class-action impresario Bill Lerach argued that “the legal system is a lot tougher on shareholder lawyers than it appears to be on Wall Street executives.” He was referring to the fact that neither Citigroup (C) CEO Chuck Prince nor Merrill Lynch (MER) CEO Stan O’Neal are headed to jail, while Lerach is. (For his article, click here.)

I’m not going to spend much time addressing the thrust of that argument, except to note in passing that the sparse dataset he relied upon did not seem sufficient to prove his thesis. Neither Prince nor O’Neal, who each presided over subprime mortgage debacles at their companies, has (yet) been accused of much more than stupidity or mismanagement, which aren’t crimes. Lerach, on the other hand, has pleaded guilty to conspiring to make intentional false statements and obstruct justice in more than 150 court cases during a two-decade period, for which he stands to serve — if a judge accepts on January 14 the terms of his breathtakingly lenient plea agreement — a maximum of only two years. (Former Enron CEO Jeff Skilling is serving 24 years; former Tyco (TYC) chief Dennis Kozlowski is doing 8 1/3 to 25; and former WorldCom CEO Bernie Ebbers is looking at 25.)

Nor was I going to focus on Lerach’s apparently misguided belief that he’s being incarcerated because, as he puts it, “in my zeal to stand up against this kind of corporate greed over the years, I stepped over the line.” In fact, of course, the crimes he has pled guilty to have nothing to do with standing up to corporate greed. They relate to undermining the rights of the investor classes he ostensibly represented (by providing secret payoffs to their named representatives) and using illegal means to gain a competitive advantage over rival firms in the plaintiffs bar (who were also theoretically trying to fight corporate greed).

I was writing instead to focus on a telling and refreshing concession in the piece. After discussing how big O’Neal’s and Prince’s salaries were (unconscionably large, but fully disclosed), he recounts how much money their inattentiveness or incompetence has cost shareholders. “The previously reported profits have been wiped out,” he writes, “and rumors of billions more in coming write-offs abound.” Then comes the capper: “Who knows what the class-action suits against Merrill and Citi for stock fraud will cost?”

Well, exactly. But let’s drill down on that last insight. What he’s saying is that the innocent Citi and Merrill shareholders whose fate he is bewailing are about to lose even more money because they will have to foot the bill for the defense attorneys fees and settlement payments and increased insurance premiums being brought down upon those companies by the shareholder class-action suits that are reflexively coming down the pike. Shareholder suits brought by lawyers who aspire to become the next Bill Lerach.

Getting confused? You should be. You’re noticing something distinctive about Lerach’s life’s work, and it’s something that’s true even if you were to assume, for the sake of argument, that all of his cases were actually nonfrivolous — i.e., arguably had merit. The weird thing about those cases is this: Most of them probably didn’t benefit most of the people for whom they were brought.

There’s actually a remarkable consensus about that fact in legal academia today. Here’s why.

In the typical fraud suit prompted by a sudden drop in stock price, the vast majority of investors who get hurt—i.e., the ones who bought when the stock price was allegedly inflated by the fraud, and sold after it had fallen back to true value—purchased their stock from other innocent investors. Those innocent sellers inadvertently benefited from the fraud (i.e., they sold at an artificially inflated price), but the law does not require them to cough-up their windfalls. Instead, the injured investors go after the corporation itself for their reimbursement. But everything the corporation pays as a consequence—attorneys fees, insurance premiums, settlements, judgments—ends up hurting its current shareholders, who also happen to be innocent of any wrongdoing.

It gets worse. In real life, most diversified investors, like pension funds and mutual funds, aren’t harmed by most securities frauds to begin with. If a pension fund holds a portfolio of 1,000 stocks, and 100 of those companies are accused of fraud in a given year, the fund most likely will be a net buyer (i.e., loser) as to 50 of those inflated stocks, but a net seller (i.e., winner) as to the other 50. Empirical studies appear to confirm that the majority of diversified investors—which is the vast majority of all investors—don’t suffer net damages. Any compensation they receive from lawsuits is overcompensation.

What about the undiversified investors—the widows and orphans? Too often private shareholder suits don’t help them either. Undiversified investors are typically “buy-and-hold” investors. To be a class member, though, investors must have bought their stock during the period when the alleged fraud was in effect, which is usually less than a year before the date of the price drop. Buy-and-hold investors will often have bought too early to qualify.

In August six influential law professors—four of whom are generally considered moderate-to-liberal on shareholder issues—wrote SEC chairman Christopher Cox urging him to convene a series of roundtable discussions on these subjects with a view to proposing reforms. The letter, authored by Donald Langevoort of Georgetown University Law Center, emphasized the professors’ unanimous concern about the “immense amount of ‘pocket-shifting’” that is currently occurring (i.e., innocent investors senselessly paying innocent investors, with much of the money being lost to attorneys fees en route), and the need to pay “more attention to the burden imposed on smaller investors whose inactive trading makes it more likely they will be funding the pay-outs than receiving them.” The professors’ letter is available here.

The SEC general counsel Brian Cartwright wrote back indicating that these were just the sorts of issues the Commission hopes to look into in an upcoming “formal roundtable” it wants to convene “to explore the topics of private securities litigation, its relationship to Commission enforcement efforts, and its effects on U.S. capital markets, competitiveness, shareholder value, and investor protection.” (The precise schedule and agenda has not yet been announced.)

It’s a welcome development. Too bad it won’t come in time to protect those poor Citi and Merrill shareholders from the drubbing Lerach acknowledges they’re about to sustain from benefactors like him.

In his 1,500 word sermon in Sunday’s Washington Post, shareholder class-action impresario Bill Lerach argued that “the legal system is a lot tougher on shareholder lawyers than it appears to be on Wall Street executives.” He was referring to the fact that neither Citigroup (C) CEO Chuck Prince nor Merrill Lynch (MER) CEO Stan O’Neal are headed to jail, while Lerach is. (For his article, click here.)

I’m not going to spend much time addressing the thrust of that argument, except to note in passing that the sparse dataset he relied upon did not seem sufficient to prove his thesis. Neither Prince nor O’Neal, who each presided over subprime mortgage debacles at their companies, has (yet) been accused of much more than stupidity or mismanagement, which aren’t crimes. Lerach, on the other hand, has pleaded guilty to conspiring to make intentional false statements and obstruct justice in more than 150 court cases during a two-decade period, for which he stands to serve — if a judge accepts on January 14 the terms of his breathtakingly lenient plea agreement — a maximum of only two years. (Former Enron CEO Jeff Skilling is serving 24 years; former Tyco (TYC) chief Dennis Kozlowski is doing 8 1/3 to 25; and former WorldCom CEO Bernie Ebbers is looking at 25.)

Nor was I going to focus on Lerach’s apparently misguided belief that he’s being incarcerated because, as he puts it, “in my zeal to stand up against this kind of corporate greed over the years, I stepped over the line.” In fact, of course, the crimes he has pled guilty to have nothing to do with standing up to corporate greed. They relate to undermining the rights of the investor classes he ostensibly represented (by providing secret payoffs to their named representatives) and using illegal means to gain a competitive advantage over rival firms in the plaintiffs bar (who were also theoretically trying to fight corporate greed).

I was writing instead to focus on a telling and refreshing concession in the piece. After discussing how big O’Neal’s and Prince’s salaries were (unconscionably large, but fully disclosed), he recounts how much money their inattentiveness or incompetence has cost shareholders. “The previously reported profits have been wiped out,” he writes, “and rumors of billions more in coming write-offs abound.” Then comes the capper: “Who knows what the class-action suits against Merrill and Citi for stock fraud will cost?”

Well, exactly. But let’s drill down on that last insight. What he’s saying is that the innocent Citi and Merrill shareholders whose fate he is bewailing are about to lose even more money because they will have to foot the bill for the defense attorneys fees and settlement payments and increased insurance premiums being brought down upon those companies by the shareholder class-action suits that are reflexively coming down the pike. Shareholder suits brought by lawyers who aspire to become the next Bill Lerach.

Getting confused? You should be. You’re noticing something distinctive about Lerach’s life’s work, and it’s something that’s true even if you were to assume, for the sake of argument, that all of his cases were actually nonfrivolous — i.e., arguably had merit. The weird thing about those cases is this: Most of them probably didn’t benefit most of the people for whom they were brought.

There’s actually a remarkable consensus about that fact in legal academia today. Here’s why.

In the typical fraud suit prompted by a sudden drop in stock price, the vast majority of investors who get hurt—i.e., the ones who bought when the stock price was allegedly inflated by the fraud, and sold after it had fallen back to true value—purchased their stock from other innocent investors. Those innocent sellers inadvertently benefited from the fraud (i.e., they sold at an artificially inflated price), but the law does not require them to cough-up their windfalls. Instead, the injured investors go after the corporation itself for their reimbursement. But everything the corporation pays as a consequence—attorneys fees, insurance premiums, settlements, judgments—ends up hurting its current shareholders, who also happen to be innocent of any wrongdoing.

It gets worse. In real life, most diversified investors, like pension funds and mutual funds, aren’t harmed by most securities frauds to begin with. If a pension fund holds a portfolio of 1,000 stocks, and 100 of those companies are accused of fraud in a given year, the fund most likely will be a net buyer (i.e., loser) as to 50 of those inflated stocks, but a net seller (i.e., winner) as to the other 50. Empirical studies appear to confirm that the majority of diversified investors—which is the vast majority of all investors—don’t suffer net damages. Any compensation they receive from lawsuits is overcompensation.

What about the undiversified investors—the widows and orphans? Too often private shareholder suits don’t help them either. Undiversified investors are typically “buy-and-hold” investors. To be a class member, though, investors must have bought their stock during the period when the alleged fraud was in effect, which is usually less than a year before the date of the price drop. Buy-and-hold investors will often have bought too early to qualify.

In August six influential law professors—four of whom are generally considered moderate-to-liberal on shareholder issues—wrote SEC chairman Christopher Cox urging him to convene a series of roundtable discussions on these subjects with a view to proposing reforms. The letter, authored by Donald Langevoort of Georgetown University Law Center, emphasized the professors’ unanimous concern about the “immense amount of ‘pocket-shifting’” that is currently occurring (i.e., innocent investors senselessly paying innocent investors, with much of the money being lost to attorneys fees en route), and the need to pay “more attention to the burden imposed on smaller investors whose inactive trading makes it more likely they will be funding the pay-outs than receiving them.” The professors’ letter is available here.

The SEC general counsel Brian Cartwright wrote back indicating that these were just the sorts of issues the Commission hopes to look into in an upcoming “formal roundtable” it wants to convene “to explore the topics of private securities litigation, its relationship to Commission enforcement efforts, and its effects on U.S. capital markets, competitiveness, shareholder value, and investor protection.” (The precise schedule and agenda has not yet been announced.)

It’s a welcome development. Too bad it won’t come in time to protect those poor Citi and Merrill shareholders from the drubbing Lerach acknowledges they’re about to sustain from benefactors like him.