Sean Coffey is the son of Irish immigrants, a graduate of the U.S. Naval Academy and the Georgetown Law Center.
His legal career includes eleven years – from 1998 to 2009 – at the plaintiffs’ law firm Bernstein Litowitz where he helped secure a $6 billion settlement with WorldCom and forced the outside directors of the board to pay twenty percent of their collective net worth.
Never before and never since have members of the board of directors of a public company been forced to pay a percentage of their net worth.
Coffey is now a partner at Kramer Levin.
“I am constitutionally neither a plaintiffs’ lawyer or a defense lawyer,” Coffey told Corporate Crime Reporter in an interview last month. “I’m an advocate. I will say that when I went to the plaintiffs’ bar, I had trepidation. I had some reservations. I spoke with a lot of people. But one of my closest friends was a lawyer at Kramer Levin – Barry Berke. Barry and I met when I was an AUSA and he was a federal defender. And he scared the hell out of everybody at the U.S. Attorney’s Office. He loved to take the client with the triable case.”
“People thought my move to Bernstein was counterintuitive. Barry said – people who make partner at these big firms don’t leave to go to small shops, but it sounds like you are into it.”
“I said – I do like holding people accountable. I did my diligence. While I had the typical defense bar attitude toward the plaintiffs’ bar, which is – they are scum, they are ambulance chasers – I learned that was unfair. And the more I read about Bernstein Litowitz and talked with them, they seemed like great people. And the managing partner at the time, and still, is Max Berger. He was one of the more intellectual people in my career. I love him like a brother. We haven’t always seen eye to eye.”
“He took a risk on me. And I took a risk on them. I was their first lateral partner. We built a juggernaut. They had 16 lawyers when I got there. When I left eleven years later, as co-managing partner, we had 50 attorneys, an office in California, we represented some of the most significant institutional investors in the world. I led teams that had recovered almost $10 billion, including the WorldCom case.”
What year did you join Bernstein and when did you leave?
“I joined December of 1998 and I left October 2009. I retired in 2009 in order to seek the Democratic nomination to be the Attorney General of New York. I had been very involved with Democratic politics, mostly as a fundraiser. I had met Barack Obama when he was a state Senator in Illinois. I met him through Barry Berke, who knew him from Harvard Law School. We had a good conversation. He learned about my Navy background, the son of Irish immigrants, the first to go to college. He said to me – you have to run for office some day.”
“I thought about going into the Obama administration. But Andrew Cuomo, the incumbent Attorney General, was going to run for Governor. It was going to be an open seat. I had made a ton of money as a plaintiffs’ lawyer. I was aching to get back into public service. I had retired from the Navy reserve in 2004. From the time I moved back to New York in 1987 until 2004, at least one weekend a month, I put on a flight suit and went flying for the Navy.”
“I retired from the Navy in 2004, because I was about to try the WorldCom case. I had three small kids. I had the biggest civil case in decades. And the Navy. And as my wife said, if you do all three, you are going to screw all three of them up. And she was right. So, I retired from the Navy.”
“Come 2009, I was aching to get back into public service. I threw my hat in the ring for Attorney General. I ran for eleven months. The primary was in September 2010. It was a five way race. I was the only non-office holder running. I came in third, but did affect the outcome. Eric Schneiderman won because I drew a lot of votes away from Kathleen Rice, who finished second.”
“After that race, I was retired with not much to do. One of my former Latham partners, who was a big supporter of my campaign, was doing something called litigation finance. He got me involved with that. Ultimately, I co-founded a litigation finance shop called BlackRobe Capital. We gave that a go. It was tough to raise money. I recruited a third partner, Michael Chepiga, a former senior partner at Simpson Thacher. We were quite a good team, but it didn’t work out. And we made the right decision to shut down the firm.”
“In early 2013, I found myself with nothing to do when Michael’s wife, Pamela Chepiga, a senior partner at Allen & Overy, called. She was defending Fabrice Tourre, or Fabulous Fab, as he was known in the press, against civil charges brought by the SEC. Ten weeks prior to trial, she asked me if I would help her. And I set up a solo shop, became co-counsel for Fabrice, embedded myself at Allen & Overy and took the case to trial with Pamela, who was extraordinarily generous to ask me in. We got a split decision. But he was found liable.”
“I realized two things. I loved trying the case. I loved it – right up until the time the jury kicked our ass. And the other thing was, I hadn’t lost a step. There was a lot of financial press in the room. They thought we had won. But the result was unfortunately consistent with our jury research. It was difficult on the heels of the great recession, in 2013, to persuade jurors to give a break to a French Goldman Sachs trader who made several million a year.”
“Once that trial was over, the phones started ringing. I talked to a lot of firms, Latham among them. It came down to Quinn Emanuel and Kramer Levin. And I’ve been at Kramer for five years.”
“When I was a plaintiffs’ lawyer, I loved it. I loved it because we were always underestimated. I learned that there is a wide spectrum of competence, integrity, ethics on the plaintiffs’ bar, particularly in securities, which I knew well. But that spectrum includes high end ethical, good business people, looking for the great result for their clients. And I was proud that Bernstein was there and I would like to think that I pulled it either further onto that high end side. I don’t recall us ever having a bullshit plaintiffs’ case. We were so busy, we had our choice of good cases.”
“But I also learned that the defense bar had a bunch of scoundrels as well. I won’t put them on the record. Some of these white shoe firms would pull stunts that were embarrassing. And they apparently were never called on it. Because I tended to do cases close to trial, they would have withheld something in discovery. But when we would get close to trial, they finally would reveal it. I would call them out. I learned that the defense bar had its spectrum as well.”
“Judges had their views as well. Once they saw that you could advocate for a position, that you weren’t slimy, that you knew how to try a case, they were pleasantly surprised. I enjoyed that. And I also felt we were performing a service. I developed a rather jaundiced view of the SEC, which was looking for a quick hit and a press release. And I still think that’s the case.”
“The WorldCom case to me was a great opportunity to change Wall Street and change the boardroom.”
Let’s go back to Bernstein and the WorldCom case in 2002. You were representing some major investors, including the New York State Common Retirement Fund.
“I had a view of how this case would evolve and be resolved that was dramatically different from everybody else.”
“As I went through the documents, I realized that WorldCom had the two largest corporate bond offerings in history in back to back years. It didn’t look like the banks had done any diligence. I thought they were vulnerable.”
“You are an investment banker and you are driving a bus that has the investors on it and you look ahead and there is a traffic light. The fact that the CFO lies to you and says – don’t worry, it’s a green light – that doesn’t relieve you of the obligation to look up yourself and see if it is red or green. While the CFO of WorldCom lied to the banks, the banks had an independent obligation to look up and ask – is that light red or green? And that is where I broke the case. I started to turn my own people around at the firm.”
“I learned that these mega-banks are a series of silos and act in different ways. In focusing on the investment bank piece, the analysts had a symbiotic relationship with the investment bankers. We will spin WorldCom as a positive stock if you agree to let our investment bankers do your next deal. That was pretty well known and that is what then Attorney General Eliot Spitzer brought to light.”
“You have the investment bankers saying – let’s go, deal, deal, deal. And you have the credit people at these big banks saying – this company is a mess. We can’t put our money at risk.”
“As a former partner at Latham, I knew how risk averse financial institutions were. They don’t want to go to trial. They don’t. The typical plaintiff’s lawyer look at a case and say – I can settle this case for $40 million. I can get a $15 million fee. I put in $5 million in time. This is a good settlement and we are going to take it. And that’s defensible.”
“My attitude, having represented clients was – wait a minute. Is this the best we can do? I believe we could get a lot more. One of the partners lead the Cendant case, which settled for $3.2 billion. That was by far the biggest cast in securities litigation history. And I remember saying to my partner at a partners’ meeting – Hey Dan, I think I can do better than that with WorldCom. And the partners in the room just guffawed.”
“We knew the banks had some exposure. We had a judge who was not going to be cowed by the Skadden and Paul Weiss firms of the world. We knew we had a judge who was going to let us develop our evidence and try out case.”
It eventually came down to a $6 billion settlement. Where did that come from?
“We had an assist from the banks. There were 17 banks in what they called the syndicate. And I just loved that the banks called themselves the syndicate. You can’t ask for anything better before you go to a jury.”
“The banks have a due diligence defense. If they can show they did a reasonable investigation, they don’t have to pay. But I had these memos that showed that the banks knew God damn well that there was a problem here.”
“The other banks in the syndicate cut loose Citibank. And Citibank wanted to get out of the case. Citi was represented by Paul Weiss – Brad Karp and Marti London. And by the way, Brad Karp, Max Berger and I speak at Columbia Law School every spring to Jack Coffee’s class about WorldCom. We have done it every year for years. And Brad Karp says they had done jury research that this could go very badly.”
“We picked off Citi in May 2004. It was on appeal to the Second Circuit. We were very concerned that the Second Circuit would overturn. We were eager to settle it. And Citi was eager to settle it. So, we settled it for $2.7 billion.”
“We insisted that every other bank pay at least the Citi formula.”
What was the WorldCom board of directors on the hook for?
“They had insurance, but they all had separate lawyers. I thought, this was the case to make directors pay personally. The board had approved multi-billion acquisitions on a board call with 24 hours notice and no paper distributed. They were rubber stamped. And that is an insult to rubber stamps. We wanted to make the world safe for the otherwise timid director to say – wait, not so fast. Early on, the directors agreed to that. Then it was a matter of how much. We came up with a idea – they would pay twenty percent of their net worth collectively, excluding their retirement and their primary residences, which we couldn’t have gotten anyway.”
These were the outside directors of WorldCom?
“The outside directors, yes.”
Has there ever been a case that took a percentage of wealth against directors of a corporation?
“Never before and never since.”
Whose idea was that – percentage of wealth?
“Mine. I thought an absolute number would be arbitrary. It might be significant for one director, but chump change for another.”
How much was it in total?
“The cash out of pocket was $20.25 million. We got an additional $35 million from insurance. The only people who know who paid what are two lawyers from Simpson Thacher and myself and Max. Not every director paid twenty percent. Some paid more to get out. We made it collective. We drew up financial affidavits, required them to fill them out. Their signatures and names were blacked out. It read – Director A, Director B and Director C.”
“I tried the WorldCom case to twelve mock juries. Twelve juries, three times. The first two times, I played the bank’s lawyer, because I like to get into the head of my adversary. I said to Max – we cannot lose the case. In our focus groups, the credit memos so pissed off the juries, we couldn’t figure out how we would get beat. The purpose of a mock jury exercise is to find out how you lose. It’s not to bomb the rubble.”
There was a Wall Street Journal article about the settlement with the WorldCom directors. It’s called – “WorldCom Directors Pay Steep Price for Failure.” This was from January 2005. The reporter writes this: “The WorldCom directors’ pact, part of an overall $54 million settlement, creates no legal precedent. But the insistence by the lawsuit’s lead plaintiff, the New York State Common Retirement Fund, that the former directors pay a significant portion of the settlement from their personal assets could mark a sea change in the prevailing view of when personal liability applies to corporate boards’ outside directors.”
But there was no sea change. You have never seen a settlement like that since.
“But let me tell you what impact it had. In the days after the settlement was announced, there were client alerts sent out by all the big firms. I was invited to speak at a lot of directors and insurance conferences. And I would pull out these client alerts. And I would say – here is what was being circulated. Pay attention at board meetings. Understand what you are voting on before you vote. Be wary of transactions between management and the company.”
“People were saying – I don’t want to have happen to me what happened at WorldCom.”
[For the complete q/a format Interview with Sean Coffey, 33 Corporate Crime Reporter 3(11), Monday January 21, 2019, print edition only.]