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Milberg Weiss Indicted

As some anticipated, one of the nation's most famous (or perhaps infamous) litigation firms has been indicted on a range of charges, including money laundering, mail fraud, conspiracy, racketeering, and filing false tax returns. For years Milberg Weiss has been the nation's dominant plaintiffs' firm in class-action securities cases.

From today's WSJ (subscription required):

The 102-page indictment details cases, reaching back more than two decades, in which partners in the firm allegedly conspired to pay clients who agreed to act as lead plaintiffs. This would give Milberg an edge in the scramble to be named lead law firm in a case by providing the firm with a "ready stable" of plaintiffs, the grand jury alleged.

The firm paid more than $11 million in kickbacks, the indictment charges, often going to great lengths to disguise the payments as referral fees or other legitimate payments. With the exception of expenses and incidentals, it is illegal for the lead plaintiff in a class action to be paid more than other members of a class.

"This case is about protecting the integrity of the justice system," said Debra Wong Yang, the U.S. Attorney in Los Angeles. "Class-action attorneys and plaintiffs occupy positions of trust in which they assume responsibility to tell the truth....This indictment alleges a wholesale violation of this responsibility." Officials said the investigation was continuing and that more indictments could be expected.

Melvyn Weiss, Milberg's co-founder, said in a statement that the firm and its employees are "outraged" at the indictment. "Our firm is the champion of consumers and investors. We provide access to the courts so that the victims of corrupt corporations can achieve justice." He added that over the years, the firm has recovered more than $45 billion for these victims. "We will vigorously defend ourselves and our partners against these charges, and we will be vindicated," he said.

Aside from the specific charges against Milberg Weiss and some of the firm's partners, this case is of particular interest given the government's aggressive prosecutorial tactics, including pressure to waive attorney client privilege. The WSJ also notes that former Bush Administration Justice Department official Viet Dinh is among the attorneys on the Milberg Weiss defense team, and that the firm launched a website to present its side of the case.

UPDATE: More on the specifics of the case from the New York Times:

The charges against the firm and the two partners were included in a revised indictment against a retired California lawyer and former Milberg client, Seymour M. Lazar, who was originally charged last summer.

From 1981 through about 2004, Mr. Lazar, 78, or members of his family served as plaintiffs in about 70 lawsuits for Milberg Weiss and got about $2.4 million in "secret and illegal kickback payments," the new indictment said.

According to the charges, the scheme involving Mr. Lazar and two other paid plaintiffs worked like this: Plaintiffs would buy securities anticipating that they would decline in value, hence positioning themselves to be named plaintiffs in the class actions.

After the court in a lawsuit awarded lawyers' fees, the firm and Mr. Bershad and Mr. Schulman [two Milberg Weiss attorneys] gave cash directly to the plaintiffs or to intermediary lawyers.

The firm also falsely accounted for the payments as referral fees or professional fees, the indictment said.

Under New York law, it is illegal for a lawyer to promise or give anything to induce a person to bring a lawsuit or to reward a person for having done so, the indictment said.

Furthermore, the payments created a conflict because the paid plaintiffs had a "greater interest in maximizing the amount of attorneys' fees awarded to Milberg Weiss than in maximizing the net recovery" to others in the class, the indictment said.

John (mail):
How can the law firm waive attorney client privilege? Only the client can. There must be some mis-reporting of what the government was asking here.
5.19.2006 3:23pm
Christopher Cooke:
I think there are likely to be two types of "clients" here. First, the law firm (Milberg Weiss) has been represented by counsel during the 4 or 5 years that the US Attorney in LA has been investigating this matter. Presumably, counsel interviewed people and gathered information during that investigation. So, first, I would imagine that the US Attorney asked Milberg Weiss to waive the privilege it holds as a client, vis a vis the attorneys it hired to represent it during the criminal investigation. That is standard prosecutorial tactics.

Second, the US Attorney also may have asked Milberg Weiss to waive privilege vis a vis those "clients" ultimately indicted in the case, Vogel and Cooperman, under a "crime-fraud" exception to the attorney-client privilege. Technically, I would imagine the US Attorney would say that the privilege didnt apply to these conversations, so it was not asking for a waiver. Resolving these issues would pose some fairly tricky problems under California law, as, last time I looked, you cant use the conversations themselves to show no privilege applied to them.
5.19.2006 3:33pm
blackdoggerel (mail):
I can't wait to see how the WSJ editorial page handles this one. Which wins out: hatred of government indictments of entire companies, or hatred of Milberg Weiss?
5.19.2006 3:45pm
alkali (mail) (www):
I would imagine that the US Attorney asked Milberg Weiss to waive the privilege it holds as a client, vis a vis the attorneys it hired to represent it during the criminal investigation. That is standard prosecutorial tactics.

That is very probably correct. Note that because Milberg's actual clients are typically individual shareholders or investors, their clients are generally not communicating any significant confidential information to them, and so there is very little attorney-client privileged stuff at Milberg vis-a-vis the firm's clients (although there's surely lots of attorney work product involving those cases).

Resolving these issues would pose some fairly tricky problems under California law, as, last time I looked, you cant use the conversations themselves to show no privilege applied to them.

I think federal common law would apply. Under U.S. v. Zolin, 491 U.S. 554 (1989), a court can conduct an in camera review to determine whether the exception applies.
5.19.2006 3:49pm
Steve:
Plaintiffs would buy securities anticipating that they would decline in value, hence positioning themselves to be named plaintiffs in the class actions.

I wonder how this part of the scheme is accomplished. It seems like if you could anticipate which securities will decline in value, you wouldn't need to engage in illegal activity to make lots of money.
5.19.2006 3:56pm
Cheburashka (mail):
I wonder how this part of the scheme is accomplished. It seems like if you could anticipate which securities will decline in value, you wouldn't need to engage in illegal activity to make lots of money.

Not if you buy on the announcement of the bad news.
5.19.2006 3:59pm
John Jenkins (mail):
If you buy after the announcement, I'm not sure you have much of a securities fraud claim (you knew the bad news and bought in the face of it), though I have forgotten a lot of it (and there are some strict liability ones, as I recall).

You buy a lot of stocks, but not many of each, and that allows you to get the most bang for the class action buck.

I don't know whether this firm is a partnership, or a PLLC or some other entity, but if it is a partnership, how do the rules on statements by a party opponent work? Is any statement of any partner considered a statement by the entity? Or does the partner have to be speaking in an official capacity (like an emloyee)? Anyone know?
5.19.2006 4:05pm
Grant Gould (mail):
One could simply buy securities in high-volatility sectors and then sell those that increase in value or retain their value. Having to sell securities that have increased in value is not exactly a flaw in any strategy.
5.19.2006 4:17pm
Houston Lawyer:
I wait with baited breath the indictment of those firms that filed the fraudulent silicosis lawsuits as well. It's about time that prosecutors began paying attention to those who abuse the legal system.
5.19.2006 4:22pm
Steve:
If you buy after the announcement, I'm not sure you have much of a securities fraud claim (you knew the bad news and bought in the face of it), though I have forgotten a lot of it (and there are some strict liability ones, as I recall).

You buy a lot of stocks, but not many of each, and that allows you to get the most bang for the class action buck.


The first part is correct. You don't get to sue if you bought after the fraud was disclosed.

The problem with the second part is that you can't do this in the PSLRA era, since the presumptive lead plaintiff is the investor with the largest loss. Owning 10 shares of stock won't cut it any more. And since the PSLRA was passed in 1995, and apparently the scam continued through 2004, the client must have been pretty heavily invested in some of these stocks in order to get a lead plaintiff position.
5.19.2006 5:02pm
MCO:
I am not an expert on securities fraud litigation, but I don't think there is any economic incentive to buy a stock in the hopes that you are being defrauded. The most the average class member can expect to receive is the amount he/she lost, less the lawyer's cut. That is the whole reason MW was paying kickbacks to the lead plaintiffs -- without the kickbacks, it is not worth the while of Joe Shareholder to take on the burden of being the lead plaintiff.
5.19.2006 5:11pm
Observer (mail):
According to the NYT above, "Under New York law, it is illegal for a lawyer to promise or give anything to induce a person to bring a lawsuit or to reward a person for having done so, the indictment said." If true, one must wonder why Attorney General Spitzer, who has shown such enthusiasm for pursuing the rich and powerful, has neglected this abuse. I wonder if it could have anything to do with his dependance on trial lawyer funding for his campaigns?
5.19.2006 5:33pm
Bpbatista (mail):
If I'm a greedy investor, with wide ranging stock holdings, another way to increase my returns is by shopping my services to plaintiffs firms as a shareholder in a company whose stock drops. None of the plaintiffs who received kickbacks were Joe Sixpack investor. Plus, Milberg paid these guys well so that Milberg would win any race to the courthouse and thus have a strong leg up on being designated class counsel. Not a fool-proof system but one that apparently worked pretty well.
5.19.2006 5:37pm
cfw (mail):
The practical, economic long-term resolution for society as a whole seems to be a rule calling for disclosure of any and all payments (or promises of payment) to plaintiffs, plus court approval.

Let the jury see what is being paid to the plaintiff for his or her time and use that information to determine credibility. That works in criminal cases with paid informants, except when prosecutors are less than honest abou their deals.

When it comes to compensation, why treat the plaintiff worse than the fact witness (paid for his time) or the lawyer, or the expert witness?

If referal fees to lawyers are ok, are we really going to tamp down litigation by saying no one can pay anything to a plaintiff in a class action except expenses and incidentals?

If the litigation is worth sanctioing, why do we care who ends up getting paid what for the time spent pursuing the case?

If we do not think the litigation is worth sanctioning, why not change the substantive law (like the caps on damages in Med Mal cases in California)?

I would not bet on Milberg getting out of this pickle with an acquittal, though I have a hard time seeing that what they are alleged to have done is obviously malum in se.

Did Lerach split off from Milberg to avoid this suit? Is Lerach also going to get sued? If Lerach walks away unscathed, he will look like he made the right choice when he split up the firm.

Most likely, if the US Atty has her way, this will all get resolved promptly for a big pile of cash, as in NY with Spitzer.

Is the underlying dispute covered by the malpractice policy of Milberg? Could be some interesting duty to defend questions. Is Milberg being taken care of now by insurance-funded defense counsel? Under a reservation of rights?
5.19.2006 5:47pm
Christopher Cooke:
I read the indictment, as I used to depose class representatives (on behalf of defendants in the class actions), and worked on cases filed by the Milberg firm, and wanted to see if any cases that I worked on were mentioned or if any of the witnesses whom I deposed were involved (no).

Some of the conduct alleged is pretty straightforward "bad" white collar stuff--lying at depositions and in declarations, and not reporting the extra income to the IRS---but that is mostly directed at the named plaintiffs who were indicted (Lazar, Vogel, Cooperman). Milberg is charged essentially for promising portions of their fees to the class reps, and taking elaborate measures to disguise these payments as "referral fees" paid to the named plaintiffs' attorneys.

The more interesting question to me is whether anyone is going to bring the class action against the Milberg firm alleging the firm defrauded the class members it was purportedly representing in the cases identified in the indictment. The theory would be that the firm allegedly breached its fiduciary duty to these absent class members when it failed to disclose its deals with the class reps to the absent class members and the court.

As far as Lerach, he is supposedly, according to news accounts, identified as "Partner B" in the indictment ("Partner A" is apparently Mel Weiss), so I wouldn't say he gets a "Get out of Jail Free" Card just yet, but supposedly the information provided by Cooperman against him was problematic because it (1) involved very old conduct; and (2) not corroborated by other people who haven't been indicted for art fraud. My guess is the USAO in LA wants to indict Lerach, but will wait to see if someone else at the Milberg firm pleads and rats him out (e.g, Bershad or Schulman), so they can have a stronger case.
5.19.2006 6:06pm
Steve:
The theory would be that the firm allegedly breached its fiduciary duty to these absent class members when it failed to disclose its deals with the class reps to the absent class members and the court.

I'm not sure what your damages would be under such a theory. It would be hard to argue that a different class rep would have gotten you a bigger settlement, not only because such damages are difficult to establish with any degree of certainty, but also because the settlement was approved by the court and ratified by each class member when he or she agreed to participate. It seems like Milberg's competitors might have the better case; for example, someone who Milberg beat out in a lead plaintiff fight by virtue of their bought-and-paid-for class rep.
5.19.2006 6:13pm
Christopher Cooke:
The damages could be that the class members paid too much in fees by biased class reps who approved the settlements and, specifically, the large fees awarded to Milberg, to get their share of these fees. It is true that the courts also approve the class settlements, so that is one problem with this theory, but many judges will say that they assume that the class representatives are supposed to be looking out for the best interests of the absent class members when they approve these settlements. That was one of the real problems the PSLRA was supposed to fix: getting people with the most at stake to supervise these lawsuits and the plaintiffs attorneys who file them, because they were so "lawyer-driven."

Or, you could file a state unfair competition claim in California to seek a return of the firm's "illgotten" gains, i.e, the attorneys fees procured through the conflicted representations.
5.19.2006 6:58pm
Steve:
That's an interesting point. Sometimes the fee arrangement is negotiated up front; for example, if CalPERS suffers a big loss on a stock, they may have a bidding war between several plaintiffs' firms in order to get the cheapest fee arrangement. Of course, the fee arrangement still has to be approved by the court as reasonable at the end of the day.

You'd have to look at the class notice that was mailed out in the affected cases and also at the motion papers requesting approval of the settlement. If Milberg suggested that the fee arrangement was the result of an arm's-length negotiation, that would be a serious problem.
5.19.2006 7:07pm
Ming the Merciless Siamese Cat (mail):
One would certainly hope that judges, when appointing the law firm to serve as plaintiffs' counsel in class action securities cases, will take Milberg's indictment into account. If an indicted Arthur Andersen was unable to function as an auditor, and indicted Milberg should be similarly find it impossible to function as court approved plaintiff's counsel.
5.19.2006 7:20pm
twwren:
May they all rot in Hell.
5.19.2006 7:28pm
cfw (mail):
I would be surprised if there are no suits yet for unfair competition, at least in California. Best suit would probably be sponsored by the CA AG's office (except the AG is probably financed by Lerach and Milberg).

There may be statute of limitations issues - 3 years from discovery, as I recall.

Could be significant exposure for the firm, assuming $45 billion has been recovered for shareholders.

If the law firm netted say $5 billion in relevant fees, and the law firm would have had 20% less of the relevant fees, except for side deals (wink and nod type) with reps, then a $1 billion exposure for unfair competition might be possible. Ouch for the firm!

In due course, putting the firm in bkcy might help resolve the dispute and take the bulk of the lawyers out from under a cloud of bad publicitry. Why keep the firm up and running under its old name? Most of the assets of the firm (lawyers) leave each day by the elevators.

Republicans probably do not want to have another Arthur Anderson type blow-up, though blowing up a rich law firm may be less frowned on than blowing up a CPA firm (especially a law firm that specializes in class actions).

Bkcy could help squash run-of-the-mill billion dollar unfair competition cases.

I have not heard a lot of grumblings from old AA partners about their decision to go through bkcy. Lots of AA folks seem to have landed on their feet at new firms.

Now we may find out what good comes from setting up an LLP versus some other form of entity, and splitting a firm to step away from liabilities.
5.19.2006 7:47pm
Bruce Hayden (mail) (www):
Maybe not in D.C., but outside there, I would expect a lot of Republicans would probably rejoice in putting this firm into bankruptcy. Where has all the money the firm made come from in the first place? Often, from the companies being sued, and, thus, from the stockholders. This whole thing was mostly a way to transfer wealth from stockholders to attorneys.
5.19.2006 8:44pm
twwren:
Any payment to an attorney out of a damages award is a tranfer of wealth.
5.19.2006 9:31pm
cfw (mail):
Bruce:

"This whole thing was mostly a way to transfer wealth from stockholders to attorneys."

A good bit of truth here.

A world without the Lerach firm could be considerably worse than what we have now, though.

If the regulatory influence of Lerach went away (leaving a vacuum), we could see the sort of corruption and non-transparency hampering places like Mexico, Russia, China, Africa, and the Middle East. Corporate execs would probably take even more inflated sums as "compensation."

Another risk would be shifting of corporate regulation into more criminal prosecutions by the LA US Atty and her ilk.

Most corporate execs hate the idea of facing Lerach, but they like even worse the idea of facing a 20 year jail sentence. They can more readily insure against the Lerachs than the Yang-Wongs.

The $45 billion of shareholder recoveries over 20 years or so sounds like a lot, but it is but a small fraction of the damage done from corporate fraud (including gouging in the pay area) over that time period, yes? The Enron loss alone was well north of $45 billion, as I recall.

To the extent Lerach put some steel in the spine of some outside directors, lawyers and CPA firms, he probably served a useful purpose.

The defense law firms probably made twice what Lerach made in fees. Is that a sort of welfare for attorneys? Perhaps, but a reasonable dose of deterrence of corporate fraud by folks like Lerach may be more benign than nothing, or than heavy-handed "blow up the company" criminal prosecutions of the sort started by Yang-Wong.

It seems criminal prosecution risks from SOX drives companies out of the public sector (to private equity) and out of the US to places like England more than risks from Lerach and his ilk.

If SOX remains as it is, I suspect compliance with SOX will eat up well over $45 billion in extra CPA fees in the next 20 years, and probably drive away more good US public firm business to places like London.

Even as red-state capitalists, perhaps we need to be careful what we wish for when we bemoan the supposed frivolous regulation by Lerach-type civil lawsuits.
5.19.2006 9:59pm
tsotha:
cfw,

I don't see where a civil lawsuit and a 20-year sentence intersect.

In any event, it's not company management that pays out on damage awards. What's really happening is a shift of money from current shareholders to lawyers and former shareholders.

A shareholder who's held on to the stock is paying to both sue an defend himself. This just makes no sense.

100% agreement on SOX, though.
5.19.2006 10:19pm
Mahlon:
I was, in a prior life, a consumer rights attorney. The class action is one of the most valuable tools available to address the egregious wrongs sometimes worked by corporations on the public. They have also been abused, wielded by unscrupulous counsel as a means to generate fees.

In the consumer arena, script settlements have long plagued those consumer attorneys who have tried to right real wrongs. A script settlement is one in which the class members get a coupon for $10.00 off (or something) their next transaction with the big bad corporation that allegedly ripped them off the last time they did business with it. The attorneys get paid in real money. See the problem?

If Milberg improperly paid "clients" to act as class representatives, hang 'em high. There is a mechanism by which class reps can get a little more than the average class member. But the Court approves it. Cheaters should not be tolerated.
5.19.2006 10:30pm
vic:
The more we chip away at the large scale extortion of wealth by trial lawyers from the rest of america the better we will be.

Yes, there is corporate malfeasance, and the class action lawsuit acts as a check and balance. However, consequent to the systematic nonapplication of commonsense and common law ( consequent perhaps to campaign contributions and a good old boy network) by the circuit judiciary, the trial lawyer has replaced the local mafia / black hand thug as the prinbciple extortionost in americam society.

the checks and balances have been steadily eroded ( possibly in acrimainal manner) to give plaintiffs lawyers free rein to act as extortionists.

I would love to see some serious fines and jail timew and let the process not stop with this firm. lets get some more big guns too and restore the commonsense checks that we had 30 years ago.
5.20.2006 10:31am
Bruce Hayden (mail) (www):
Medis,

The problem with equating consumer suits with stockholder suits is that in both cases, the stockholders pay. So, in sharehold suits, to some extent, they are suing themselves, with the attorneys on both sides raking off a big piece as their part of the transaction. But when consumers sue and win, it is a transfer from the stockholders to the consumers.

My problem with the script settlements is that in many cases, they are constructed so that the companies can view the script as a marketing cost. Indeed, when a product has been pummelled by this sort of litigation, it is a way to get back customers. So, the attorneys then are the only ones walking away with cash.

I do agree that there is a place for contingency fee class action suits - I just think that they can be much more easily justified for consumer suits than shareholer suits, and that even many of the consumer suits end up looking like being primarily for the benefit of the attorneys.

You also mention that the defense firms often end up with more money than the plaintiff firms. Not sure if I buy it, but my problem with a lot of class action suits is that, after taking into consideration the risk involved, the payout is often far in excess of what is reasonable on a per hourly basis. Not always, but sometimes, and esp. in the most egregious cases, like tobacco and asbestos (esp. now that we are talking teritiary tortfeasers and totally speculative damages).
5.20.2006 11:41am
cfw (mail):
tsotha:

"I don't see where a civil lawsuit and a 20-year sentence intersect."

My suggestion is that if we get rid of private regulation (via Lerach), we have a void or we have public regulation (via criminal prosecution, as with Enron).

"In any event, it's not company management that pays out on damage awards."

True, rarely does management pay. But look what we have happening with Delay and Skilling. We want some risk taking, yes? Every start-up can be called a Ponzi scheme if it fails. If we clamp down too much, we are saying there can be no publicly-funded start-ups that might fail. That seems less than ideal.

"What's really happening is a shift of money from current shareholders to lawyers and former shareholders."

Some of that, yes. But lots of current shareholders are also former shareholders. And lots of former shareholders are controllers who perpetrated the fraud, or their friends and family. Also, lots of the $45 billion Lerach brought in for shareholders came from insurance carreirs, banks, investment bankers, CPA firms, etc.

"A shareholder who's held on to the stock is paying to both sue an defend himself."

True. But recoveries on a percentage basis (or on an hourly basis) by Lerach in shareholder class actions are not that high. He had a huge market share becasue he was pretty damned efficient, especially compared to the Cravaths, Sullivan and Cromwells, etc.

Part of the reasonable expenditure of a big corportation is some money for corporate controls, getting rid of dud managers, getting rid of defective business practices.

When a corporation settles a sex discrimination case, it pays for the defense fees and the legal fees of the plaintiffs. Occasional expenses of that sort (covered in part or entirely by insurance) are a reasonable part of doing business in the USA, yes?

"This just makes no sense."

The alternatives are what? Ignore fraud? Expect adequate policing by the SEC and DOJ? Have Yang-Wong and her ilk bring crimninal charges in all cases where big public companies fail?
5.20.2006 9:26pm