Group of UC Economists Hope to Cash In on IPO (SF Chronicle, Oct 1997)

by Jonathan Marshall, Chronicle Staff Writer

BERKELEY--A group of economics professors at the University of California at Berkeley hope to become multimillionaires by selling stock in their Emeryville consulting firm to the public. LECG, Inc. -- formerly known as Law and Economics Consulting Group -- announced plans for a $60 million initial public offering of 5 million shares at $12 a share. At that price, the firm's 13.4 million outstanding shares would be worth $160 million. The firm offers expert advice and legal testimony on behalf of major corporations and government agencies on antitrust, intellectual property, deregulation and environmental and health economics. LECG was founded in 1988 by economists Richard Gilbert, Gordon Rausser and David Teece and law professor Thomas Jorde, all of whom still teach at UC Berkeley. UC's Laura Tyson joined this spring after leaving the White House as President Clinton's top economics adviser.

Teece, LECG's chairman, plans to sell 459,000 of his 2.8 million shares. At $12 per share, his holdings would be worth $33.6 million.

Although academic scientists and engineers often found new companies, it is unusual for professors to remain on university payrolls while also making millions of dollars running large public companies. LECG will not be sharing any windfall with UC. "They aren't using patented technology, just brains," said Bill Hoskins, director of UC's Office of Technology licensing. Some critics charge that the handsome consulting income made by some of LECG's principals -- such as the $1.3 million earned last year by Rausser -- compromises their academic objectivity. "The conflict of interest is massive," said Charles Ferguson, a visiting professor last year at the Haas School of Business. When business clients pay fees that dwarf academic salaries, some professors may be inclined to "lessen their propensity to speak out on antitrust concerns or changes in policy that might be warranted," he said. Ferguson and other critics also charge that students often get shortchanged by their professors' busy consulting schedules. In general, full-time UC professors are not allowed to consult more than one day a week.

But LECG's Gilbert said his consulting is a win for students and the university as well as for himself. "I enjoy consulting because for me it's an opportunity to contribute to public policy debates in a way you can really be effective," Gilbert said. "You just can't do it as an independent academic. Also, it provides really valuable material for teaching." Other LECG principals include Jorde and Rausser, who both hold 1.5 million shares, worth $18 million at the expected offering price. They plan to sell 244,000 shares each.

Two other economists, Gilbert and Robert Harris, have 1.2 million shares each, worth $14 million at the offering price. They plan to sell 192,000 shares. Harris taught at UC from 1977 to 1996. Yet another UC economist, Daniel Rubinfeld, owns half a million shares, which could be worth $6 million. He is currently serving as chief economist in the Justice Department's antitrust division, a job formerly held by Gilbert.

LECG's principals also include academics from other universities, including Harvard, Princeton, Yale and Stanford, but most have no equity. The company now has 10 offices in the United States, Canada, New Zealand and England. Its revenues last year were more than $31 million, up about 26 percent over 1995, according to a filing with the Securities and Exchange Commission. Firms typically pay $300 to $400 an hour to LECG's principals, and about half that much to the many dozens of staff Ph.Ds and MBAs who work under them. Its clients include Apple Computer, Chevron, Intel, Pacific Bell, PG&E, the Department of Justice, Federal Communications Commission and Federal Trade Commission. Among other jobs, LECG helped persuade California regulators that the merger of Pacific Telesis Group and SBC Corp. would not be anti-competitive, and provided expert guidance to Ernest and Julio Gallo Winery in a lawsuit brought by Kendall-Jackson Winery for anti-competitive practices.