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The news that Bill Lerach, the famed US plaintiffs’ lawyer, is retiring amid a Department of Justice inquiry draws a line under an era when securities class action lawyers could make a bundle by racing to the courthouse at the first inkling of bad news.

Mr Lerach and Mel Weiss, partners who parted ways in 2004, virtually invented the securities class action industry. They recruited small investors and filed fraud claims at the slightest sign of trouble. Many companies paid up even when they believed they were blameless, saying the cost of fighting was too high. The tactics, which included contingency fees of up to 30 per cent, made Mr Weiss and Mr Lerach names to be feared. Some of these practices may also have been illegal. The DoJ has indicted Milberg Weiss, the firm they founded, alleging it paid illegal kickbacks to lead plaintiffs. Neither man has been charged and the firm has pleaded not guilty.

The class action world has changed. A 1995 reform law transferred the power to pick the lawyers from the first filer to the plaintiff with the largest holding of securities. These institutional investors demand lower fees and gravitate towards firms that get results.

The reforms also shifted lawsuits to federal courts and made it easier for judges to toss out weak claims. Class action filings tumbled to a low last year of 110 and have not recovered, according to Stanford Law School. But the average payout has shot up, suggesting that the cases that are filed are stronger.

Several firms are thriving in this new era, including Mr Lerach’s last home, Coughlin Stoia Geller Rudman & Robbins. It topped the charts in 2006 with 30 settlements worth $7.3bn. Upcoming Bernstein Litowitz Berger & Grossman, which represented WorldCom investors, also prospered with nine settlements totalling $2.6bn. With the subprime meltdown and resulting market turmoil likely to send investors scurrying to the courthouse, things can only get better.

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