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Will Milberg Weiss Be Indicted?

This NYT story suggests an indictment is on the way.

Negotiations to avert an indictment of the firm have stepped up in recent weeks. But by this week, hopes for a settlement were quickly fading as both sides remain far apart on several crucial points surrounding any so-called deferred prosecution agreement, including the waiver of client-attorney privileges; new compliance and monitoring systems and personnel the firm would be required to put in place; and the size of any potential payments, according to several lawyers involved in the talks.

Federal prosecutors were initially seeking a payment of more than $100 million, the lawyers said. A payment of that size would either require individuals inside the firm to put up the cash themselves or the firm to commit to pay it from future earnings, the lawyers said.

The talks have been complicated by the Justice Department's reluctance to indict a firm since it came under fire for putting the accounting firm Arthur Andersen out of business after it was indicted on obstruction of justice charges in 2002. (The firm's conviction was later overturned by the Supreme Court.) Since then, the accounting firm KPMG and the drug maker Bristol-Myers Squibb, among others, have reached deferred-prosecution agreements with Justice.

Furthermore, in the dog-eat-dog world of class-action securities law, Milberg Weiss has one of the biggest barks.

Anonymous This Time:
A very close personal friend who has a lot at stake in this matter has been quite sure, for some time, that there will be an indictment.
5.17.2006 9:28am
Observer (mail):
The indictment of Arthur Andersen was a mistake - it resulted in tens of thousands of employees losing their jobs although they did nothing wrong. The right solution is a heavy fine on the partners - they benefitted from the wrongdoing, let them pay it back. $100 million in this case may even be too low, given the hundreds of millions of dollars that the firm made through its illegal business practices over the years.
5.17.2006 10:06am
Per Son:
Observer:

How was the Arthur Anderson indictment Millberg Weiss' fault? Unless I am misunderstanding you, that supposes that Millberg Weiss has an ability to engage in criminal prosecutions.

Also, where is the proof that Millberg Weiss has been conducting illegal business practices over the years?
5.17.2006 10:15am
Nobody (mail):
If the quoted story is accurate, it's troubling that DOJ would be pressuring a law firm to waive the attorney-client privilege. It's elementary that the ACP belongs to the client, and is not the lawyer's to waive.
5.17.2006 10:44am
Cornellian (mail):
How was the Arthur Anderson indictment Millberg Weiss' fault? Unless I am misunderstanding you, that supposes that Millberg Weiss has an ability to engage in criminal prosecutions.

Observer was saying that the indictment of Arthur Andersen was a mistake by the government, and that the government was wary of making a similar mistake by indicting Milberg Weiss, though there are a lot of arguments to be made that the situations aren't similar at all.
5.17.2006 10:59am
Cornellian (mail):
If the quoted story is accurate, it's troubling that DOJ would be pressuring a law firm to waive the attorney-client privilege. It's elementary that the ACP belongs to the client, and is not the lawyer's to waive.

I assume that the government is aware of that, and that the negotiations referred to in the article include the client, to the extent that lawyers in class actions can be said to actually have clients. One would also think the crime/fraud exception to ACP would blow a big hole in any claims of privilege here.
5.17.2006 11:02am
Nobody (mail):
1. With the present administration, I wouldn't assume anything. We have seen the politicization of formerly nonpolitical (or apolitical) agencies such as the FDA and, yes, the DOJ.

2. If there was an applicable crime/fraud exception, we wouldn't be talking about a waiver--the privilege would be blown. One cannot waive what does not exist.

3. Of course lawyers in class action suits have clients.
5.17.2006 11:11am
Nobody (mail):
For more on the present DOJ's abuses of attorney client privilege, see the story on the front page of law.com today--

5.17.2006 11:20am
Nobody (mail):
Don't know why the link didn't work in my last post; it's
here
5.17.2006 11:22am
Nobody Special:
After the whole Torkelson thing with Bill Lerach (cliff notes version: contingency fee expert, a big no-no), I'm surprised it has taken this long for more stuff to surface about these people.
5.17.2006 11:31am
Steve:
If there was a prosecution, it seems obvious that the crime-fraud exception would apply, since Milberg is accused of (among other things) illegal kickbacks to its clients. You can't privilege that. But in the context of a negotiated plea, you have no adjudication of the issue, and thus a formal waiver of the privilege is required. That doesn't mean there would actually be a privilege if the issue were litigated.
5.17.2006 11:31am
Nobody (mail):
Steve,
That brings me back to my original point. If the lawyer is negotiating away his client's privilege to save his own hide, that's a problem, and an ethical violation that should not be abetted (much less demanded) by the government. The client is entitled to either (a) an adjudication that crime/fraud applies or (b) an opportunity to consent (actually, to make) the waiver of his own free will.
5.17.2006 11:39am
Ninomaniac:
This is weird—a Jonathan Adler at Millberg Weiss:

Adler_bio
5.17.2006 12:01pm
Steve:
Well, you seem to be assuming that it is the adjudication that vitiates the privilege, whereas I am of the belief that it is the fraud that vitiates the privilege, or more accurately prevents the privilege from attaching in the first place.
5.17.2006 12:02pm
Christopher Cooke:
As a young attorney working on the defendants' side in securities class actions, I used to wonder why some class representatives, especially those who had done it repeatedly, would essentially "volunteer" for the job. Now we apparently know why some of them did.
5.17.2006 12:10pm
Jonathan H. Adler (mail) (www):
Just for the record, he is Jonathan L. Adler, I am Jonathan H. Adler.
5.17.2006 12:18pm
Nobody (mail):
There's a presumption in favor of the privilege that can only be overcome by an adjudication of fraud. It's also not clear to me that the privilege would be waived or vitiated by the type of fraud alleged in the Milberg Weiss case. At worst, I would think that privilege might be waived or vitiated to the extent that privileged information touched on unlawful payments to the named plaintiffs in question. This would not be an excuse to throw open the lawyers' files on a wholesale basis. Remember, the named plaintiffs in question were legitimate plaintiffs--i.e., legitimate holders of the shares on which the shareholder suits were brought. The extent of the alleged fraud (as I understand it) is that these legitimate plaintiffs were receiving illegitimate and undisclosed payments from the lawyers in consideration of their service as plaintiffs. While this is certainly illegal, it doesn't strike me as the worst thing in the world.

For those looking for a bias in my posts, I would note that my practice consists primarily of defending corporations and their directors in suits brought by shareholders.
5.17.2006 12:23pm
Steve:
From the article, we don't know the actual position of the two sides regarding the privilege issue. I will agree that yes, if the government were asking Milberg to throw open its files on a wholesale basis, that would be absurd.

Paying off the lead plaintiff is not the worst thing in the world (the worst thing in the world is, of course, refusing to display the Mohammed cartoons), but it is pretty important, because the lead plaintiff is supposed to act in the best interests of the class as a whole. One of the principal reasons Congress passed the PSLRA in 1995 was to put shareholders in charge of litigation and let them direct the lawyers, rather than let the lawyers call all the shots, with visions of quick settlements dancing in their heads.

Legally, the lead plaintiff cannot receive any additional compensation beyond what the rest of the class receives, other than reimbursement of expenses. So why do major institutional investors bother? Why not just sit back and let someone else do all the work? Presumably it's because they have a lot at stake and they think that by directing the litigation, they can obtain a better recovery for the class and thus for themselves. But if the reason they're getting involved is not to obtain a better recovery, but simply because they've been promised a kickback, that destroys the underpinnings of the whole process. It's a pretty serious abuse of the system.
5.17.2006 12:44pm
Rational Actor (mail):
Nobody:

For those looking for a bias in my posts, I would note that my practice consists primarily of defending corporations and their directors in suits brought by shareholders.

I am not sure how that disclosure helps us determine your bias. I might assume that a strong Milberg Weiss is good for your business prospects, as your clients will need more of your services, whereas, if you were a trial attorney at a competing firm, you would want MilWeiss to be maximally burdened.... But in fairness, I did not detect any particular bias in your posts.
5.17.2006 12:50pm
legally naive (mail):
Maybe this is the place for someone to explain the theory of suits of the Milberg Weiss type. What I see as an investor when one of these is resolved is that the current owners of a company pay money to earlier owners (and their lawyers) who nominally controlled the company when it was supposedly mismanaged. Sometimes I get a check, sometimes I currently own the stock, but it always seems to me the current owners lose twice.
Actually most of the time they only lose once since the alleged fraud appears to have been nonexistent and the case is "settled" to make the accusers go away. When there was real fraud there usually isn't much left for anyone.
5.17.2006 1:29pm
Steve:
Let's say there was a fraud at a company that started in 2001 and wasn't discovered until 2003. The result is that the stock price was artificially inflated between 2001 and 2003, because people were relying on, let's say, fraudulent financial statements.

If you bought your stock before 2001 then you bought at an honest price. It's possible that you were tricked by the fraud into holding your stock longer than you would have, but that's a difficult claim to pursue in a class action, because you'd have to produce individualized evidence that you would have sold if you had known the truth. So these people are basically out.

If you bought between 2001 and 2003, but also sold during that period, both your purchase and sale price were inflated. Your actual damages, if they even exist, are therefore minimal at best.

The people who got screwed are the ones who purchased between 2001 and 2003 and still held their stock at the time the fraud was revealed. They bought at an inflated price and then took the hit when the stock fell to where it should have been all along. Therefore, they are entitled to be paid by the people whose fraud resulted in the inflated stock price.

These damages are not a transfer of wealth from the current set of stockholders, because those stockholders fall into one of two categories: (1) people who purchased their stock before the fraud was revealed, in which case they are among the folks getting money; or (2) people who purchased their stock after the fraud was revealed, in which case the stock price already reflected not only the bad news but also the potential exposure from the inevitable lawsuit. To the extent the money comes out of company coffers, it's possible that it may be passed on to CUSTOMERS (although, it's kind of hard to compete when your products carry a lawsuit premium that your competitors' products don't), but the company can hardly recoup its losses from the shareholders.

When there is "real fraud" there is typically money available in the form of insurance, most often the policies that insure the officers and directors of the company. After all, if there "isn't much left for anyone," you might reasonably question why the money-hungry plaintiff's lawyers are interested in suing.

Fewer and fewer frivolous cases are settled these days thanks to the heightened pleading standards of the PSLRA, which make it much harder to survive a motion to dismiss without actual evidence of wrongdoing, evidence the plaintiff has to develop without benefit of discovery.

It's also worth remembering, as I alluded to above, that the lead plaintiff under the PSLRA is very often a major institutional investor like CalPERS. These people are extremely sophisticated investors who don't play games. They're not interested in wasting their time participating in a bunch of frivolous cases in hopes of getting lucky, and they're not going to sign off on a quickie settlement that gets them pennies on the dollar while the lawyers walk away with a big payday. The PSLRA has been a spectacularly good reform in this regard; it takes the market actors who already possess the appropriate incentives, and puts them in charge. The results have been good for investors, good for plaintiff's lawyers who play by the book, bad for those who don't.
5.17.2006 1:48pm
Privilege issue:
As I read the article, Milberg would not be waiving the privilege as to its clients, but as in many criminal cases, Milberg would be waiving the privilege as to its communications with its own criminal defense lawyers.
5.17.2006 1:50pm
Jiffy:
Steve:

I think you will find that the allegations against Milberg Weiss generally involve pre-PSLRA era individual lead plaintiffs, not institutional lead plaintiffs in post-PLSRA cases.

Regarding institutional investors' motives to serve as lead plaintiff, you have correctly identified a potential "free rider" problem. Nevertheless, some institutional investors (mainly public pension funds) appear to recognize that it is to everyone's benefit if someone steps up and have been willing to take a "turn" as lead plaintiff--at least in the major cases arising from the Enron-era accounting scandals.
5.17.2006 1:55pm
Steve:
I think you will find that the allegations against Milberg Weiss generally involve pre-PSLRA era individual lead plaintiffs, not institutional lead plaintiffs in post-PLSRA cases.

Well, I took it as an article of faith that major institutional investors weren't the ones accepting payoffs, but I'm surprised to hear that this whole thing involves pre-1995 conduct, as it's been an awfully long time. I don't doubt your word, mind you. Milberg actually persisted with a pre-PSLRA business model for quite some time after the Act was passed; it took them several years to start building up a stable of institutional clients, many of whom were probably wary of Milberg's reputation for pushing quickie settlements.
5.17.2006 2:03pm
Nobody (mail):
Steve,
In your 12:48 post, you describe the plaintiffs' lawyers as "money-hungry," but fail to hang that epithet on any of the other players--shareholders, directors, managers, the corporation itself, its defense lawyers, accountants, etc. None of these players is working for his health. They (we) are all money hungry. It's called capitalism.
5.17.2006 2:26pm
Neither Nobody Nor Steve:
For what it's worth, I read a certain amount of sarcasm into Steve's use of the phrase "money-hungry;" given that the rest of his post is quite (in my opinion) fair and balanced, I would be surprised if he intended to single out the lawyers for this trait. But I should allow Steve to speak for himself.

By the way, you forgot to mention the investment bankers ;-)
5.17.2006 2:41pm
Nobody (mail):
The omission was intentional; the investment bankers actually are doing it for their health. God knows they don't need the money. ;)
5.17.2006 2:43pm
Neither Nobody Nor Steve:
Nobody:

You clearly have not been checking your Hamptons real estate listings:
East Hampton Point

$55,000,000 doesn't get you what it used to :-(
5.17.2006 2:51pm
Dave H. (mail):
If a securities fraud case goes to trial and the plaintiff proves "actual fraud" with actual intent to defraud, there is no insurance money to cover it. It is against public policy in all states to allow insurance coverage for actual fraud.

As long as the case is being litigated, however, there remains the possibility that the statements were "merely" reckless, that the defendants "should have known" that there was no basis in truth to them, and the defendants' insurance carrier is still on the hook.

That's why these cases always settle, because neither side has much incentive to go to trial. The plaintiff's attorney must convince the jury that the defendant is really really bad, but not evil - a fine line that, not surprisingly, most jurors don't get. The defense, of course, can't risk that the jury will only find them to be bad, not evil, either.

The reason it takes so long to reach a settlement is because the carrier's job is to say no as long as possible, waiting until it gets to the proverbial court house steps to commit itself. At that point, the carrier is typicaly compelled to settle in order to avoid a subsequent bad faith case against it by the insured defendants.

In most cases, all the plaintiff's lawyer was after was the insurance money anyway.

Just wanted to let you all know why there's so much litigation and so few verdicts (literally, statements of truth), in securities fraud cases.

BTW: I am extremely biased against Milberg Weiss and believe that Bill Lerach is the Devil incarnate.
5.17.2006 3:35pm
Steve:
For what it's worth, I read a certain amount of sarcasm into Steve's use of the phrase "money-hungry;" given that the rest of his post is quite (in my opinion) fair and balanced, I would be surprised if he intended to single out the lawyers for this trait. But I should allow Steve to speak for himself.

Thanks for the defense. You are quite right about my meaning. The purpose of my sarcasm was to call into question another poster's premise that in cases of massive fraud, there is not much money left in the kitty. The fact that the entire plaintiff's bar gets involved in filing such cases belies the notion that there is no money available.
5.17.2006 4:17pm
Bpbatista (mail):
It's about time. These plaintiffs' firms -- including those involved in the breast implant, asbestos and silicosis cases -- have been acting unethically, if not criminally, for years. Everyone knew it before, including defendants, defense counsel and courts, but no one did any thing about it. Apparently, times are changing. Couldn't happen to a nicer group of people.
5.17.2006 5:28pm
Steve:
Well, actually, it's one firm that it's happening to. But yes, the asbestos law firms are all a bunch of criminals, as opposed to, say, the companies they sue.
5.17.2006 5:55pm
Christopher Cooke:
The only addendum I will make to Steve's description of shareholders' damages is that the issue of in-and-out shareholders, i.e., those who buy and sell before the "fraud" is revealed, is actually more complicated than saying simply that they suffered no damages. The 9th Circuit, in Green v. Occidental Petroleum, (a leading damages case in class actions), talks about these shareholders as among the possible "damaged" shareholders, because they nonetheless bought and sold at prices that were distorted by the fraud. In one case I worked on, this point was made vividly clear: the company essentially faked all of its sales by creating phony customers for its products and then created "sales revenue" by using proceeds generated from the sales of stock in private placements. The market for the stock was truly distorted throughout the class period because the shareholders thought the company had a "hot" product it was selling, so much so that when the company lost a patent suit over the product, its share price plummetted. In reality, the company had no such sales and the product was not hot. Who knows what the true share price should have been. The case settled before we could test out our alternative theory (we represented the auditors; the company went into bankruptcy and the executives went to jail). Anyway, for these reasons, it is hard to exclude "in and out" shareholders from the classes of "damaged" shareholders in any class action. I only know of one opinion where the judge did this (In re Seagate Technology Sec. Litig, opinion by Judge Walker).

As for why these cases settle, there are 2 main reasons, apart from the merits of a particular case: (1) the availability of D&O insurance money to pay for the settlement; and (2) the huge downside risk of going to trial for both sides: for the plaintiffs' firms, who take nothing if they lose after years of work putting together these complex cases (which take months to try) and for the individual defendants, who can experience a financially ruinous verdict if they are found liable, given how easy it is to blackboard huge (hundreds of millions of dollars) damages numbers.

The discussion as to insurance policy not covering "actual" fraud is correct but I would argue that a jury verdict finding liability in a 10b-5 case may not be collateral estoppel that would preclude a defendant from litigating over the coverage issue later, because reckless conduct (see Hollinger v. Titan Capital Corp.) usually suffices to establish 10b-5 liability for everyone while knowing or intentional conduct is generally required to bring in th exclusion in a D&O policy. So, I think the impact of these exclusion clauses on settlement may be somewhat less than what Dave H. states (there is still some impact, which is namely, the longer the case goes on, with discovery etc., the more the plaintiffs may be uncovering evidence for the insurer's counsel to use later in trying to deny coverage).

As for the social utility of these cases, and the righteousness of indicting the Milberg firm, I leave that for others to decide. Having defended these suits and, while at the SEC, filed similar suits against companies and their officers, I think the issue is more complicated and the deterrent effect of these suits on corporate conduct is harder to gauge. Some very experienced defense attorneys think that the D&O carriers can have a huge impact on changing corporate behavior, if they want to (but largely do not because of the competitive market for selling D&O insurance). I can tell you that Sarbanes-Oxley has had a huge impact on corporate behavior.
5.17.2006 6:05pm
Nobody (mail):
Mel Weiss gave me cancer.
5.17.2006 6:06pm
Christopher Cooke:
Well, Nobody, I would represent you in a suit over the cancer but I think Mr. Weiss' assets may be tied up during the foreseeable future (paying his criminal attorney, the government and others), and thus the chances of collecting on a recovery are reduced. Why not ask one of those plaintiffs' firms that represent persons exposed to asbestos? Perhaps they can sue, as aiders and abettors, all of the D&O carriers who settled the frivolous shareholders suits filed by Milberg, and thereby enable Mr. Weiss to prosper and give you cancer? Just a thought. If it is a "second-hand" smoke situation, of course, there are always the tobacco companies to beat up on, in addition to Mr. Weiss.
5.17.2006 7:02pm
Steve:
Is Weiss actually facing personal liability here? I had gathered that Bershad and Schulman were the alleged "bad guys."

It's worth remembering that the breakup between Weiss and Lerach was essentially precipitated by a sleazy tactic of Lerach's that Weiss wanted no part of.
5.17.2006 8:26pm
Nunzio (mail):
I'm still waiting for my Enron Securities Fraud check.
5.18.2006 12:53am
hey (mail):
CalPERS and all government and union pension funds are NOT good faith plaintiffs. As evidenced by the imbroglio over Ron Burkle's investment fund and the coincidental timing of state investment and campaign donations, the widespread criminality of Union pension trustees (ULICO et al.), and the leverage of state monies into political causes by investment trustees, these organisations are definitionally harmful. The only reason they are involved is because the trustees see some political benefit to their activities, either for the trustees or for their ideological projects.

Nearly every union and government pension trustee has not performed their fiduciary duty and is guilty of numerous felonies. It is a sad fact that no one will pursue these people for their felonious conduct and disastrous damage to their beneficiaries as they had "good intentions" or were pursuing "progressive interests" through their felonies and are thus immune from prosecution thanks to the media, academia, and self serving politicians. This accumulation of capital controlled by people actively disinterested in the performance of their funds damages society and the economy and is but one more reason why defined benefit pension schemes should be as illegal as the Ponzi schemes to which they are so closely related.

To choose to have your money invested to pursue non-financial goals (I'll deplore the politics but respect the choice) is one thing, but to have mandatory contributions given over to the control of people who want to use your money as a lever for their political or social ambitions is deeply evil.

As to Millberg... Whole heartedly agree that Bill Lerach also answers to Beezelbub, Old Sam, Satan... AA was a global organization of thousands of partners, while MW barely has 100 lawyers. The partners are intimately involved in the felonious conduct and are either parties to the misconduct or should have known about it. WIRED was writing about MW and Bill Lerach's crooked practices years ago, so firm lawyers, never mind the partners, had to have known about this activity. They all should be spending the rest of their lives at Club Fed, and it is disgusting that Bill Lerach has somehow escaped prosecution.
5.18.2006 2:05am
Steve:
Wow. Print that up on a pamphlet and pass it out by the courthouse.
5.18.2006 3:36am
Christopher_King (mail) (www):
Steve at 7:26 to what Lerach tactic are you referring? This is a fascinating case.

Meanwhile:

I will watch this case in all of my "spare" time while I deal with my own white-collar indictment for attempted felony extortion for writing a Civil Rights Demand Letter in Jaffrey, NH.

Check out the Milberg/King indictment comparison story from today, 18 May 2006:

http://christopher-king.blogspot.com

Peace.
5.18.2006 9:32am
Christopher_King (mail) (www):
Steve at 7:26 to what Lerach tactic are you referring? This is a fascinating case.

Meanwhile:

I will watch this case in all of my "spare" time while I deal with my own white-collar indictment for attempted felony extortion for writing a Civil Rights Demand Letter in Jaffrey, NH.

Check out the Milberg/King indictment comparison story from today, 18 May 2006:

http://christopher-king.blogspot.com

Peace.
5.18.2006 9:32am
Dude (mail):
Just out of curiosity, what law did MW supposedly break? Is it really illegal to pay the plaintiffs? I know it's unethical and they would be subject to disciplinary action, but that's not the same thing.
5.18.2006 6:33pm