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Grand Jury Probe May Affect San Diego Lawyer Pressing Enron Lawsuit

The collapse of Enron Corp. should be a crowning moment for William Lerach, the king of shareholder class-action lawsuits.

The shady accounting at the heart of Enron's collapse is the kind of corporate wrongdoing Lerach has railed against in his successful — and notorious — career taking on the nation's biggest companies.

But a federal grand jury's investigation of the San Diego lawyer and his firm might hurt his chances of leading a shareholder lawsuit in one of the biggest corporate failures in U.S. history.

Any day now, U.S. District Judge Melinda Harmon of Houston is expected to select one name from a list of prominent law firms jockeying to represent Enron's shareholders. Lerach's firm, Milberg Weiss Bershad Hynes & Lerach, was involved in 60 percent of all such class-action securities lawsuits last year.

The company's clients also include the University of California Board of Regents, which lost $145 million when Enron's stock collapsed.

"They're regarded as one of the pre-eminent firms in this area," said university spokesman Trey Davis. "They have the resources and experience to pursue the litigation vigorously with a goal of substantial recovery."

The firm is suing 29 current and former Enron executives and board members, including Chairman Kenneth Lay and Texas Sen. Phil Gramm's wife, Wendy Gramm, an Enron board member.

Lerach, who did not return calls for comment for this story, created a stir last month when he walked into Harmon's courtroom with a box of shredded Enron documents.

Days later, the Los Angeles Daily Journal reported that a federal grand jury in Los Angeles was investigating Milberg Weiss for paying the people it represented in shareholder lawsuits.

The university is sticking with the firm in its case against Enron.

"Milberg Weiss has assured us there's no merit to the investigation," Davis said.

To some observers, the grand jury probe smacks of political payback.

Lerach (pronounced luh-RAHK) was a big supporter of President Clinton, who appointed him in 1998 to the U.S. Holocaust Memorial Council. He remains a major fund-raiser for the Democratic Party, giving more than $250,000 before the last presidential election, according to Federal Election Commission reports.

One of the attorneys working on the probe is Assistant U.S. Attorney Michael Emmick, who served under Independent Counsel Kenneth Starr during the Monica Lewinsky investigation.

"Political motivations?" said Beverly Moore, editor of Class Action Reports, a Washington legal journal that has Lerach on its board. "You think a Republican U.S. attorney would ever do a thing like that?"

Thom Mrozek, a spokesman for the U.S. Attorney's office, declined to confirm the investigation, but said the office does not use the courtroom to play politics.

"This office has never been involved in an investigation or a prosecution that was politically motivated," he said.

Few question the fact that Milberg Weiss looms large in securities litigation. The firm has collected more than $20 billion for its clients, some of which came from going after figures such as former Lincoln Savings and Loan executive Charles Keating and former junk bond dealer Michael Milken.

Among its current targets are Aetna Inc, Apple Computer Inc., 3Com Corp., Corning Inc. and Intel Corp. Between 1988 and 1999, the firm settled 259 lawsuits for an average of $8.3 million, according to a study in November by three Northern California economists.

Lerach's success has made him a reviled figure in corporate boardrooms, especially in Silicon Valley, where company stocks are more prone to volatility. T.J. Rodgers, president and chief executive officer of Cypress Semiconductor Corp. in San Jose, once remarked that class-action lawyers such as Lerach were "a low-life form, somewhere below pond scum."

When Lerach launched a California voter initiative that would have made it easier to sue for securities fraud, Silicon Valley executives raised huge sums to oppose the measure, which failed by a wide margin.

Companies tired of being targeted by Lerach also successfully lobbied Congress to pass the Private Securities Litigation Reform Act in 1995 — over President Clinton's veto. The law took aim at Lerach's business by requiring that lead counsels represent plaintiffs with the biggest losses, instead of whoever filed first.

The 1995 law could cost him the chance of representing Enron shareholders. Lawyers representing pension plans from the state of Florida, the city of New York and three states with bigger losses than Lerach's clients may nudge him out for lead counsel status.

"He's been the victim of his own success," said Sai Prakash, who teaches securities law at the University of San Diego. "All these things have been enacted to limit his ability that have brought him such notoriety and success."