In investor lawsuits, law firms emerge as true victors

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A corporate governance battle is flaring up in Calgary, with two individual investors behind lawsuits that are alleging shoddy practices with respect to compensation for executive insiders.

But what's in it for these investors? David Lester has filed allegations of backdating options against Penn West Petroleum Ltd.

That case is winding its way through the legal system. John Paquette's fight against Ensign Energy Services Inc. has been settled.

Millions of dollars changed hands in the settlement, but only a trickle of the cash ended up in Mr. Paquette's pocket. Mr. Lester may end up in a similar situation.

Mr. Lester, who has been described as independently wealthy, sells financial advice and has a website and book (I Heart Money).

He declined to comment because his case against Penn West is continuing. Mr. Paquette could not be reached. Penn West last week declined to discuss the suit, filed last year.

Whatever the investors' motivation is to lead the lawsuits, the law firms handling the cases stand to win the most. Shareholders stand to benefit only modestly in the long run, as some cash is returned to the companies they own.

But the law firms, Mr. Seyhun said, will benefit. "The judge will award some portion of the recovered illegal profits to the law firm" leading the cases, he said. "The rest goes to the company and becomes the shareholders' money again."

The Ensign civil suit, settled in April, is an example. The "core insiders" involved paid $4.375-million to the company, inclusive of investigation costs. (That cost about $1.6-million).

Ensign then had to pay $1,093,750 for "fees plus applicable taxes" to Mr. Paquette's counsel – Jensen Shawa Solomon Duguid Hawkes LLP in Calgary, and Siskinds LLP in London, Ont. Ensign also had to pay the investor's lawyers $118,260.27 for "disbursements and other charges incurred by or on behalf" of Mr. Paquette, the judgment said. The judge granted Mr. Paquette an honorarium of $7,500, paid out of Mr. Paquette's legal fees.

Kai Li, a finance professor at the Sauder School of Business at the University of British Columbia, said law firms also benefit as their profile increases when they are involved in big cases involving alleged wrongdoing against high-powered executives.

Jensen and Siskinds are also handling the Penn West case. Siskinds made a name for itself when it led the charge against Research In Motion Ltd., now BlackBerry Ltd., and its executives for backdating options.

Dimitri Lascaris, a lawyer with Siskinds, says his firm and clients are disappointed that Canadian regulators have done "so little" to impose penalties for backdating, an illegal practise were executives are awarded options using hindsight to set the strike price, save for the BlackBerry case.

"Apart from that proceeding, Canadian securities regulators have effectively ceded the enforcement field to private litigants in the backdating context," he said.

"This has been a large part of our motivation for doing backdating cases," Mr. Lascaris said in an e-mail. "The fees we earn in these cases have been quite limited relative to the fees we have earned in large securities class actions, but it is fundamentally wrong for shareholders to be deceived about the amount of stock-based compensation that directors and officers of Canadian public companies have been paid and given the remarkable passivity of Canadian securities regulators and criminal authorities in the backdating context, we and our clients have felt that it."