The Work

November 14, 2008 9:00 AM

The Am Law Litigation Daily: November 14, 2008

Posted by Ed Shanahan

Edited by Andrew Longstreth and Alison Frankel

Michael Hausfeld of Hausfeld

Precisely why Michael Hausfeld left the firm he practiced at for 37 years remains a mystery, but the plot continues to thicken. As you'll recall, we broke the news at The Am Law Daily on Monday that Hausfeld had sent an e-mail to colleagues saying he had been "expelled" from Cohen, Milstein, Hausfeld & Toll. Hausfeld later told the Financial Post that he found out about his ouster when he returned from a settlement negotiation to find a note on his office chair. "Pretty cold," said Hausfeld, who described his expulsion as "abrupt and unceremonious."

But was it? When we spoke yesterday with name partner Steven Toll of the firm now known as Cohen, Milstein, Sellers & Toll, he declined to explain Hausfeld's departure but disputed his former partner's depiction of events. "This is not something that happened overnight," said Toll. "It's hard to believe he viewed this as a shock," new name partner Joe Sellers told the Financial Post.

We may soon learn a lot more about what really happened at Cohen Milstein. On Wednesday, Hausfeld told Legal Times that he has hired Venable to represent him "in considering what legal claims we might have for [Cohen Milstein's] conduct, or misconduct." If a lawsuit emerges--and Hausfeld did not say definitively that he would file one--all the details could come into plain view. Toll has said there is "no basis" for such a suit. (A majority of Cohen Milstein partners, however, have hired Hogan & Hartson to represent them in discussions with Hausfeld.)

Hausfeld, our Litigator of the Week for the commotion he has stirred, is no stranger to controversy. The class action pioneer, with top-of-the-bar expertise in antitrust, human rights, and environmental cases, has long had a reputation for being brainy but also mercurial. In a 2005 profile in The Lawyer, Covington & Burling partner Stuart Eizenstat, who worked with Hausfeld in the Holocaust restitution litigation against Swiss banks, said he "could be sweetness and light one moment, anger and darkness the next." In the Texaco racial discrimination case, Hausfeld inflamed public sentiment against Texaco by releasing an audiotape transcript that quoted a Texaco official calling African American employees "niggers"--even though that part of the transcript was later shown to misquote the official.

Hausfeld has big ideas for his new venture, which will presumably include a number of fellow defectors (and clients) from Cohen Milstein. He told us this week that Hausfeld LLP will be based in Washington, D.C., but will also have an office in London; a "presence" in India, Korea, and Japan; and a joint venture partner in China. Obviously, Hausfeld believes plaintiffs firms need a global footprint. Did that view create tension with his former partners?

"Clearly they didn't have the same vision," said Hausfeld, in what has to count as one of the week's biggest understatements.

Refco Prosecutor Is Leading Candidate for Special Inspector of Bailout Fund

On Wednesday, The Washington Post ran an interesting story about the lack of oversight of the Bush administration's $700 billion rescue plan. The bailout plan called for the White House to appoint a special inspector general, who is charged with making sure the $700 billion isn't wasted, but no one has yet been nominated for the post.

There is, however, a leading candidate: Neil Barofsky.

We at the Litigation Daily know Barofsky's name because he's the Manhattan assistant U.S. attorney who is leading the prosecution of former Refco officers and advisers, including Mayer Brown partner Joseph Collins. In this month's issue of The American Lawyer, our own Susan Beck details the case against Collins. If Barofsky, a former white-collar attorney at Morvillo, Abramowitz, Grand, Iason, Anello & Bohrer, is picked and confirmed as the bailout IG, that could be good news for Collins, who is scheduled to go to trial in April.

Justice Reaches $585 Million Antitrust Plea Deal with Computer and Video Screen Makers

Thomas Barnett, who has announced that he's leaving his post as assistant attorney general for the Justice Department's antitrust division on November 19, is certainly not slacking off in his final month on the job. Last week his office killed the Google-Yahoo advertising deal. And Wednesday, the antitrust division announced corporate guilty pleas with three manufacturers of LCD computer and video screens. The hardest hit, South Korea's LG Display, will pay $400 million--the second-biggest criminal antitrust fine ever levied by the Justice Department.

Barnett hailed the antitrust division's work in remarks prepared for his press conference announcing the deals. "The crimes committed by LG Display, Sharp, and Chunghwa and their coconspirators are among the largest and most far-reaching price-fixing conspiracies the antitrust division has ever detected," he said.

The Recorder had an intriguing piece yesterday on which of the LCD companies had taken advantage of the Justice Department's antitrust amnesty program. The likeliest candidate: Samsung, which The Recorder says is a huge player in the LCD market but was not named as a target of this investigation. The Recorder speculated that Samsung, which paid $300 million in a previous Justice Department antitrust probe, had taken advantage of Justice's "amnesty plus" program, in which a company targeted in one antitrust case can receive a discounted fine and future immunity if it provides evidence of a separate conspiracy. Samsung's lawyer, James McGinnis of Sheppard, Mullin, Richter & Hampton, did not return The Recorder's call.

There's also talk that Chunghwa Picture Tubes is an amnesty program beneficiary. The company is thought to be coughing up information in an antitrust investigation of the cathode ray tube market, which would explain why its fine in the plea deal announced Wednesday--$65 million--represents a smaller percentage of revenues than the fine LG is paying. Chunghwa was represented by Gibson, Dunn & Crutcher partner Gary Spratling, who happened to have designed the antitrust amnesty program as part of the Clinton Justice Department.

The third company to plead guilty on Wednesday, Sharp, will pay a $120 million fine. Sharp was represented by Pillsbury Winthrop Shaw Pittman. LG was represented by Cleary, Gottlieb, Steen & Hamilton.

False Claims Act Recoveries Way Down in 2008

This week the Department of Justice announced that it had recovered $1.4 billion in False Claims Act settlements in 2008. Justice trumpeted the $361.5 million the feds collected from Merck last February, the $258 million fine paid by Cephalon in September, and the $225 million recovery from Amerigroup in August. In the 22 years since the False Claims Act was signed, the press release notes, the federal government has taken in more than $21 billion from corporations that have defrauded the United States.

But what the press release doesn't say is that this year's $1.4 billion is a steep drop from the $2 billion in recoveries in 2007--and the $3.1 billion the government collected in 2006.

Why the big decline? The Litigation Daily checked in with John Phillips of Washington, D.C.'s Phillips & Cohen--one of the biggest and oldest whistle-blower litigation shops in the country--for an explanation. Phillips confirmed what we've reported previously: There's a backload of about 900 whistle-blower cases at Justice, waiting for government lawyers to decide whether to intervene. "The Justice Department just doesn't have the resources and things got backed up," said Phillips, who estimates the backlog in pending pharmaceutical cases alone has increased from 150 to 250 in recent years.

Jeb White, the president of Taxpayers Against Fraud, told us there's also another reason for the backlog. According to White, whose group closely monitors False Claims Act litigation, the Justice Department has actually dedicated the same number of lawyers (about 80) to these cases for several years. What changed this year, White said, is the Supreme Court's June 9 ruling in the Allison Engine case, which limited the reach of the False Claims Act over subcontractors. (Here's an analysis of the ruling from Fried, Frank, Harris, Shriver & Jacobson.)

But according to White, both the House and the Senate are considering legislation to plug what he called the "loopholes" in the False Claims Act that led to the Supreme Court's ruling. He told us that Justice is waiting for Congress to act before it makes decisions about cases that might be barred by the Allison decision.

At a time when the federal government can use every dollar it can scrape up, False Claims Act litigation would seem to be a good investment. Reports commissioned by White's group claim that the government takes in between $8 and $15 for every dollar it spends on these cases.

Talkin' FCPA at the PLI

Yesterday we headed back to the Hilton in midtown Manhattan for some more fun at the PLI's 40th Annual Institute on Securities Regulation. We were drawn by the all-star panel at "Criminal Enforcement and Internal Investigations," which included moderator Bruce Yannett of Debevoise & Plimpton; Credit Suisse in-house attorney Pierre Gentin; former Brooklyn U.S. attorney and current Hogan & Hartson partner Loretta Lynch; Skadden, Arps, Slate, Meagher & Flom enforcement guru Colleen Mahoney; Paul, Weiss, Rifkind, Wharton & Garrison standout trial attorney Theodore Wells, Jr.; and Hank Walther, assistant chief of the fraud section in the Justice Department's criminal division.

The hour-long session was devoted to one of the fastest-growing areas of litigation: Foreign Corrupt Practices Act investigations. Yannett, who is representing the Siemens audit committee in connection with the gigantic worldwide bribery probe of the company, set up an interesting theoretical for the panelists: Global Finance is an American company with 80,000 employees spread over subsidiaries in 40 countries, and you've just been hired as associate general counsel for overseas operations. On your first day, you hear that employees in four regional subsidiaries have been paying bribes to win contracts and regulatory approval, and the bribes have been booked as entertainment expenses. What do you do?

"If on day one you learned [employees are making bribes], you may want to think about if you have any open job offers," joked Gentin.

Unfortunately, discussion strayed from the facts of the scenario. But the panelists talked about some of the fascinating issues that arise in these investigations.

Wells, for example, posed the question of whether it's appropriate to consider the cost of an investigation in deciding whether to pursue a rumor that employees are making bribes in, say, Nigeria. Prosecutor Walther responded that if a CEO gets a tip of bribery, he or she has a duty to at least look into it. Then, Walther said, the CEO has to consider the specific facts before deciding if the company should pay Wells millions of dollars to conduct an investigation. Wells quickly responded: "No, you would have to pay me millions of dollars to go to Nigeria."

Yannett said one of the scariest aspects of the FCPA is a books and records provision that gives the SEC global jurisdiction over companies listed on exchanges in the United States. If accounting violations occur in Nigeria as a result of bribery, for example, and all the key players are Nigerian, the SEC still will assert jurisdiction if the subsidiary's books are rolled up into the parent company listed in the U.S.

Mahoney discussed the myriad challenges that lawyers face when trying to conduct an FCPA investigation abroad. Many of them are practical problems, such as gathering evidence in countries that don't have the same record-keeping practices as the U.S. It's also tough to find lawyers and forensic accountants who are willing to go to countries where the rule of law is not especially well respected.

Lawyers also face cultural and language barriers when they're conducting internal investigations abroad. Wells asked Mahoney what lawyers should do when they're giving the usual warning--that they represent the company and not individuals--to a foreign employee, and it's obvious that the employee doesn't quite get it.

"It's very hard," conceded Mahoney. "You try to make sure you've documented your effort and try to explain it at a very basic level."

Mahoney said that she sometimes insists that individual employees hire a lawyer. But that, of course, means that they may not talk.

Frankly, we're relieved not to be in that line of business.

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