Legal Feeding Frenzy Builds on Wall Street - TheStreet

What a fun time to be a securities lawyer.

In the aftermath of

Enron

,

WorldCom

and the conflicted-research scandals, attorneys are falling over each other to represent the masses of disgruntled investors who now want their pound of Wall Street flesh.

While the cases could be mouth-wateringly profitable, lawyers are also attracted by the help they're getting. A wave of regulatory actions against corporate evildoers and the Wall Street investment banks that financed them is producing a mountain of free evidence for class-action attorneys. In the legal world, all the information being dug up by regulators is the equivalent of gold discovered without the aid of an ax.

Thanks, Friend

The latest instance in which trial lawyers could piggyback on the work of regulators involves allegations that Wall Street firms illegally manipulated the market for initial public offerings during the waning days of the bull market.

The

Securities and Exchange Commission

, according to

The Wall Street Journal

, is looking to expand its investigation into allegations

Morgan Stanley

(MWD)

and other Wall Street firms engaged in a practice called "laddering," in which clients seeking shares in hot IPOs are pressured to support the issue once it starts trading. The goal of laddering is to quickly inflate the price of a stock in order to attract new buyers.

If the SEC's investigation ends with fines being paid by Morgan Stanley and other firms, it could provide a lift to a class-action suit pending against more than four dozen Wall Street firms, charging them with rigging the IPOs for hundreds of failed dot-coms.

Even before news that the SEC may be stepping up its laddering investigation, Wall Street already was beginning to worry about that class-action. Last week a federal judge in New York rejected a motion to dismiss the case, which in addition to Morgan Stanley names

Goldman Sachs

(GS) - Get Report

,

Merrill Lynch

(MER)

,

Citigroup

(C) - Get Report

and Credit Suisse First Boston, a division of

Credit Suisse Group

(CSR)

.

Getting Costly

Securities experts say the 238-page ruling by District Court Judge Shira Scheindlin coupled with the SEC investigation will put pressure on Wall Street to settle. A Prudential Securities brokerage analyst estimates the cost of resolving the laddering case could range between $1 billion to $3 billion.

"A win on a motion to dismiss substantially raises the value of a case," said Michael Perino, a securities professor at St. John's University School of Law. "With so much attention focused on the wrongs of Wall Street, there's a big incentive to get these stories out of the media."

Indeed, the combination or regulatory action and class-action lawsuits could prove a powerful one-two punch. Some estimate that the total damages Wall Street will pay out over its involvements in tainted IPOs, tainted stock research and the accounting scandals at Enron and WorldCom could eventually exceed $10 billion.

In fact, the regulators involved in the $1.5 billion tainted research deal with a dozen Wall Street firms have all but invited trial lawyers to go to court with the information regulators intend to release as part of the final settlement decrees. The planned document dump reportedly will provide lawyers with the ammunition to bring hundreds of lawsuits and arbitration claims alleging that Wall Street firms dishonestly hyped stocks to their unwitting customers.

"The private actions are duplicating and feeding off the public enforcement actions," said Jill Fisch, a corporate law professor at Fordham University School of Law. "One of the reasons I think you are seeing public enforcement lead the way in these current cases is due to the novelty of some of the legal issues involved."

Yet critics of the trial lawyers say the main beneficiaries of the private litigation will be the lawyers themselves, not investors. The critics note that trial lawyers generally get to keep at least one-third of any recovery in a securities class action. And in most instances, the most an investor can hope to recover is 10 cents for every dollar lost on a stock.

Another criticism is that it's not clear how much of a deterrent these class-actions will be on bad corporate behavior -- even in those cases that end with big payouts. For one thing, insurers cover a lot of the settlement. And ultimately, because the payout comes from earnings, it's the shareholders of the settling companies that lose out, not the managers.

"Plaintiffs' lawyers do provide some compensation to investors and do help deter some fraudulent activity," said Perino. "But the question is: Is the benefit they provide worth the cost that comes along with it."