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Olson & WSJ on Milberg Weiss:

The Manhattan Institute's Walter Olson has a subscription-only op-ed on the Milberg Weiss indictment in today's WSJ. Olson writes:

Milberg Weiss lawyers have been in the forefront of efforts to define kickbacks broadly and punish them with rigor. The firm's Web site boasts that it "has sued major providers of private mortgage insurance for kickback violations, resulting in substantial settlements." Melvyn Weiss and others at the firm have expressed indignation at, and filed lawsuits over, alleged kickbacks in the contexts of Wall Street initial public offerings, mutual fund sales, insurance brokerage commissions and doctors' prescribing of pharmaceuticals.

Although there are many debatable cases, concealed payoffs to named plaintiffs in class actions aren't one of them: They're clearly improper under virtually any analysis. As the indictment states, both plaintiffs and their lawyers are under obligation 1) not to place a named plaintiff's interests above those of absent class members; 2) not to behave deceitfully or unethically toward the court or absent class members; and 3) not to withhold from the court "any fact" that might call into question the representativeness of the plaintiff (a financial dependence on the lawyer would be one such fact). As a class action proceeds, plaintiffs repeatedly swear under oath to these matters. Bonus payments to compensate named plaintiffs for their time and trouble are permitted at settlement, but they must be disclosed to absent class members and approved by the judge.

These rules have a purpose. With other class members absent, named plaintiffs are one of the few watchdogs against self-dealing or misconduct by the lawyers -- specifically, the pursuit of settlements that result in high legal fees, whether or not they serve the interest of the class. It's true that law firms do seek docile, loyal or merely clueless persons to serve as their named plaintiffs, which means it's rare (though not unheard of) for them to contribute an independent point of view in a case. But if the Justice Department's allegations are correct, Milberg was taking no chances on the watchdogs staying pacified: It threw regular chunks of raw liver into their cages. Significantly, Justice alleges that payoffs were computed not as a share of the class's eventual recovery, but as a share of Milberg's own fee haul -- incentivizing the named plaintiff to side with Milberg's interests should the two clash.

There's more at Overlawyered.com.

The WSJ itself also has a subscription-only editorial on the matter, titled "Very Rough Justice." The editorial is of mixed minds on the indictment, and begins:

Let's all admit it. Across the country last week, millions of Americans were indulging in Schadenfreude -- the enjoyment of another's misfortune -- at the indictment of class-action tort giant Milberg Weiss. Yet even the many victims of Milberg Weiss should think twice about cheering the Justice Department's blunderbuss tactic of indicting the entire law firm.
The editorial continues, noting that the evidence against Milberg Weiss attorneys seems to be quite strong, but the Justice Department's tactics were excessively heavy-handed.
Despite the impressive evidence, the problem with this case is that Justice has chosen the nuclear option of indicting the entire Milberg Weiss firm. As in the Arthur Andersen case, this may well mean a death sentence for the law firm whether or not it is convicted. More troubling is that, even if Milberg is convicted, the larger cause of justice and deterrence may not be served. . . .

. . . The Justice Department essentially held a gun to Milberg Weiss's head and threatened to indict unless the firm waived attorney-client privilege and agreed to label its own partners criminals. Never mind the irony that this is similar to the methods that Milberg Weiss has used itself against countless law-abiding businesses.

The practice is still a dangerous precedent that can be used -- and surely will be -- against more honest business enterprises. Justice played the same rough game with KPMG, deciding not to indict that accounting firm only after it agreed to renounce the tax shelters it had been selling and throw many of its partners over the side. The threat of a corporate death sentence is an abuse of prosecutorial discretion against any but the most corrupt criminal enterprises -- namely, the mob.

AppSocRes (mail):
I feel about this the same way I did about the Iran-Iraq War: No good guys; all bad guys; and as long as they're chewing each other up, the innocent can breath easier.
5.22.2006 1:02pm
Tyrone Slothrop (mail) (www):
Olson suggests that the (alleged) kickbacks were designed to ensure that named plaintiffs were loyal to Milberg. I don't understand this market very well, but I always assumed that kickbacks were designed to ensure that Milberg prevailed in the competition among plaintiff-side firms to be lead counsel. Isn't that what's going on here? If so, how does it work?
5.22.2006 1:15pm
scepticalrepub:
I'd be interested in a follow up in a year or so, to see if the supine Bar Associations have taken any action against the individual attorneys involved.
5.22.2006 1:22pm
Houston Lawyer:
Don't count on much action from the Bar. They are not often successful when they go after a wealthy attorney. Most attorneys who have become wealthy practicing law as trial lawyers have rhetorical skills much greater than those the bar will employ to go after them. They also have the resources to hire the best defense. The bar is pretty good going against petty thief solos and those who have sunk into drug addiction, but that's about the extent of their abilities.
5.22.2006 1:33pm
Freder Frederson (mail):
The threat of a corporate death sentence is an abuse of prosecutorial discretion against any but the most corrupt criminal enterprises -- namely, the mob.

Well, other than the use of physical violence, I don't see that there is any difference between the mob and say MCI and Enron. MCI and Enron were nothing more than huge pyramid schemes, aided and abetted by compliant regulators, banks, accounting firms, and the targets of their schemes to keep the pyramid growing (MCI was brought down when the pyramid collapsed because of the rejection of the Sprint merger on anti-trust grounds, not on the actual revalation of the fraud: that came after the collapse). They certainly destroyed more lives with their criminal activities and the Bernie Ebbers and Ken Lays of the world are just as unrepentent as the most loathesome mob boss.
5.22.2006 1:34pm
NYCLawStudent:
Even partners without direct involvement in the lead pltf payment scheme had a duty to report misconduct by partners to the proper authorities. I don't think it is very credible that any but the most naive of junior pro bono partners would be ignorant of how the firm achieved the lionshare of its revenues. Thus I have no sympathy for the collateral damage shoud the firm go bust. From the standpoint of the larger legal market, this is exactly how reputational incentives function to keep most businesses in line without ever being investigated by the DOJ or state AG. If the DOJ in this case were more circumspect in their selective prosecution, the signal to the legal market would be--do what you want, because the expected cost of prosecution X the likelihood of being picked out of a large plaintiffs' bar field is much lower than the value of our business model.
5.22.2006 1:45pm
Freder Frederson (mail):
I, of course should have said WorldCom, not MCI. WorldCom was nothing more than a pyramid scheme that used its legitimate business (telecommunications) as a front to hide its criminal activites (pumping up its stock price through ever larger leveraged buyouts while reporting fictional profits on its legitimate businesses by reporting the money it borrowed to purchase other companies as "profits").
5.22.2006 1:54pm
PersonFromPorlock:

The Justice Department essentially held a gun to [ ] head and threatened to indict unless [ ] waived ...


So, how is this different from the pressure prosecutors put on any defendant? It may not be fair, and it may take the indictment of a law firm to get the legal establishment to notice it, but it sure ain't uncommon.
5.22.2006 1:55pm
DJ (mail):
I must have missed this is law school: What's the theory behind holding a corporate or other business entity liable for violating criminal laws? I mean, it makes sense in the civil context on the basis of respondeat superior, but that doctrine doesn't apply in criminal law (where the standard of proof and mens rea requirements are typically higher). And don't get me started on the fiction of imputing knowledge or intent to a non-corporeal being. I mean, why wouldn't a simply conspiracy charge against a firm's malefactor members do the trick--unless, of course, the entire point is to give prosecutors the power of the corporate death sentence in order to force managers to cooperate.

Can someone help a brother out? Is there a case or treatise that makes a good argument as to why corporations and other business organizations can be the subject of a criminal indictment?
5.22.2006 2:00pm
Steve:
I understand the arguments against holding a farflung entity like Arthur Andersen criminally responsible for the acts of a few partners or a single branch office, although I consider it a debatable matter. But in the case of Milberg, this was basically the business model. Not that every client was paid off, of course, but these allegations, if proven, relate to conduct that was approved and carried out at the highest level of the firm. I really don't see an argument for why the firm as a whole should be let off the hook, other than the WSJ's reflexively pro-business position.
5.22.2006 2:04pm
Bpbatista (mail):
These people are the Legal Community's Mafia. They have been leeching off the productive economy for decades. Any benefits provided to their clients and/or the economy in general were merely incidental to their own criminal enrichment. I understand the danger of indicting corporate entities, but the fraud alleged here was, indeed, the business model for the entire entity. The entity encouraged and benefitted from the illegal conduct to such a great extent that it should be indicted.
5.22.2006 2:27pm
Christopher Cooke:
The argument for not indicting the firm is that many partners were perhaps unaware of, and did not participate in, the alleged kickback scheme. There is some slight support for this view in the indictment, which mentions a safe in Bershad's office accessible only to a few. I have to believe that, if the allegations are true, other senior partners at the firm must have known about the payments and that the firm may have been making these types of payments for a long time, even longer than the time specified in the indictment.

Why would the firm make these payoffs?

In the pre-Reform Act days (i.e., any case filed before Dec. 1995, or thereabouts), the first firm that filed a lawsuit frequently was appointed class counsel and its client was the lead plaintiff. So, the indictment alleges, Milberg apparently encouraged some plaintiffs to buy a few shares of many different stocks, so they could be ready to file suit against these companies and appoint Milberg as counsel on a moment's notice. Having a stable of "ready to go" plaintiffs explains one of the biggest mysteries to me, as a former defense counsel, which is how the firm managed to find someone and file suit within a few hours' notice of a company's bad news announcement. I had thought, naively it turns out, that perhaps the firm had simply paid off stock brokers to refer clients to them whom the brokers knew were invested in the companies that suffered large loss (a relatively minor ethical transgression, compared to the payoff scheme alleged in the indictment.

The conduct is harder to understand in the post-Reform Act era, because the lead plaintiff is supposed to be the plaintiff who lost the most money on the investments, so the strategy of having one plaintiff "ready to go" wouldn't work. I will say that, for a few years after the Reform Act passed, Milberg followed a practice of creating plaintiff "groups", i.e., grouping many named plaintiffs together, and counting the groups' losses as one, to argue for lead counsel statuts. This practice would be open to the kickback scheme alleged in the indictment, but only on a watered down level.

Maybe the post-Reform Act cases in which alleged kickbacks were paid are all shareholder derivative actions, or non-stock consumer cases.
5.22.2006 2:39pm
DJ (mail):
Wait a second. Who says that the kickback scheme alleged here was the "business model for the entire entity"? If I'm not mistaken, the business model for Milberg Weiss was to, among other things, find plaintiff shareholders to represent classes in derivative suits. Then the shakedown would begin. But as far as I've seen, it's only alleged that a handful of the plaintiffs in what must be hundreds or thousands of derivative suits received improper remuneration. Hardly a firmwide business model, right?

And, even if it was an integral part of the business, I still don't understand why EVERYBODY at the firm--from copy guy on up--must suffer the consequences of a criminal indictment against the firm itself. Sure, disgorging profits makes sense. Put the firm shareholders and employees who knowingly devised and ran the conspiracy in prison. But "Milberg Weiss" is not a person, it doesn't have a brain or the ability to conspire or set a business model, and it's composed of a lot of workers who, in my view, shouldn't lose their jobs or suffer adverse reputational costs because of the malfeasance of their employers.
5.22.2006 2:48pm
JosephSlater (mail):
Somebody in another thread on this subject on this blog predicted -- absolutely accurately -- that the conservative press would be torn between its reflexive "plaintiffs' firms are bad" position and it's reflexive "letting the government aggressively prosecute businesses is bad" position. The WSJ stepped up and played their role perfectly.
5.22.2006 2:54pm
TJIT (mail):
Without commenting on the specifics of this case I will say it pays to remember that prosecutorial powers / techniques/ abuses developed and deployed against large, loathsome defendants will inevitably be used against smaller, more sympathetic defendants.
5.22.2006 3:36pm
Kazinski:
Milberg Weiss deserved the indictment because they refused to co-operate with DOJ. If they are innocent, then of course there is no obligation to co-operate and they can make their case in Court. However if the allegations are true then there are two possibilities, one that Milberg Weiss is sheltering the guilty, making them at least accessories after the fact, or that the criminal conduct was integral to the operating practices of the firm.
5.22.2006 4:00pm
Bruce Hayden (mail) (www):
The reason to hold the entire firm responsible is that presumably the entire firm, or at least its partners, benefitted to at least some small extent in the scheme, if proven. If not in a regular cut of the profits, then in the year end bonuses.

The alternative would be to encourage a wink-and-a-nod sort of law firm administration, where the partners are wilfully ignorent of questionable doings, on the grounds that what they don't know about won't hurt them, but if they make a little extra money because they closed their eyes, then fine. Not a good incentive for the legal profession.

I am not suggesting that a low level partner or, worse, an associate, should be able to take down a firm, but you do have to draw the line somewhere, and, IMHO, it has to be a lot higher for attorneys and CPAs. This case doesn't appear to be that of low level attorneys, but rather, of fairly major players in the firm. And, if nothing else, that means that they were presumably bringing a lot of money to the bottom line of the firm.

Also note that these guys have the money to buy the best attorneys money can buy, a couple times over. If they or the firm are convicted, that means, at least to me, that justice has been done. I have a lot more sympathy for the average felon, who can't afford adequate representation, is significantly charged up well over what the DA/U.S. Atty. can prove, and then has his PD convince him to a plea deal on one or two charges, when some of these guys are innocent of any charges. These attorneys are not going to be convicted unless the prosecution has a slam dunk case against them.
5.22.2006 4:51pm
Tyrone Slothrop (mail) (www):

The reason to hold the entire firm responsible is that presumably the entire firm, or at least its partners, benefitted to at least some small extent in the scheme, if proven.

Usually it takes a whole lot more -- say, scienter -- to bring a criminal charge against someone.
5.22.2006 5:27pm
Dick Eagleson:
I think the legal theory here is the one used by the French Army in WWI as memorably portrayed in Stanley Kubricks 'Paths of Glory' - it is necessay to shoot a few pour encourager les autres. CPA's still wander past the huge smoking hole in the ground where Arthur Andersen used to be, shudder a bit, and, chastened, move on. High time the weasel class action tort shysters got the same treatment, say I.
5.22.2006 6:20pm
Christopher Cooke:
My wife is a CPA and she didn't "shudder" at Andersen's demise. She thought the firm was arrogant and it got what it deserved (and she used to work for KPMG). The main reason AA was indicted was that it had already agreed in two separate SEC consent decrees not to violate or aid and abet violations of the federal securities laws and yet, once again, it was doing precisely that with Enron. (The prior decrees were in Waste Management and Sunbeam cases). Also, it didn't help, in the DOJ's eyes, that AA's senior management "punished" the Waste Management audit partner (whom the SEC found to have knowingly aided and abetted Waste Management's fraud) by having him be put in charge of revising AA's document "retention" policies, apparently so AA wouldn't get caught again by its emails. Ironically, these were the very same policies that the firm claimed it was trying to implement when its Houston office began its overtime shredding of Enron records.

I can tell you, when I was at the SEC, we had numerous accounting fraud investigations after AA went under and its former clients retained new auditors, who then uncovered many problems that AA had either missed or had tolerated.

That said, I don't think DOJ should have indicted AA if the firm had gone through with its promised reforms. I agree that many innocent people lost jobs as a result of senior management's wrongful conduct and the DOJ's decision to indict the firm over that conduct.

I think the Milberg situation is similar, except maybe the senior management at Milberg (at least, 2 named partners) were allegedly very deeply involved in the wrongful conduct charged in the DOJ's complaint. That would justify the indictment more, in DOJ's eyes.

I think the firm is toast, and won't survive the fallout from the indictment because its senior partners and clients will begin leaving in droves.
5.22.2006 7:14pm
nolo:
Why is this any different than the fallout from S&L scandals that took place in the early '90s? Back then public accounting firms were accused of malpractice and issuing clean audits for companies moments away from bankruptcy. They weren't accused of kickbacks or bribes like Milberg Weiss, just improper audits and faulty work product. The accounting firms themselves — not the partners working on the banking client's audits — were sued by the FDIC, OTS, etc. In the end the firms agreed to hundreds of millions of dollars worth of fines which were paid by insurance and from the partners in the firms.

Thus, my question: Why is the Milberg Weiss situation any different? For example, Deloitte &Touche was sued for $1.8 billion in 1993. Deloitte settled in 1994 for $312 million without admitting or denying wrongdoing. Deloitte had about 1400 partners at the time and each of them was responsible for their share of the fine even if they did not work with an S&L client. Did all the partners who had no knowledge of any wrongdoing really deserve to lose life savings, etc. due to the actions of a few rogue partners? Had a judgement for $1.8 billion come done against Deloitte wouldn't that have been a death knell for the firm? Isn't suing the firm itself for such a large amount akin to putting a gun to the accused's head?

I am not an attorney, nor am I an accountant. Pardon my cynicism, but it seems to me what is a common prosecutorial practice takes on more import to attorneys when other attorney are being sued.
5.22.2006 8:39pm
Bpbatista (mail):
The partners implicated at Milberg Weiss were not just a few "fairly major players" at the firm. They were name partners. And it appears that Mel Weiss was involved, even if he has not yet been indicted. These guys were the firm. Anyone who has dealt with Milberg knows that younger partners, and certainly associates, don't have authority to do anything without the OK of Mel Weiss, Bershad, Schulman, or Milberg. Saying these guys were "fairly major players" at the firm is like saying Bill Gates and Steve Balmer are middle management at Microsoft.
5.22.2006 9:59pm
Tom Tildrum:
How does this affect the ability of Milberg Weiss attorneys to appear as counsel for some party in litigation involving the United States? Are there conflict issues?
5.22.2006 11:13pm
Robert Schwartz (mail):
Hoist by their own petard, eh? Serves 'em right to suffer.

Schadenfreude. Such an ugly word for such a beautiful emotion.
5.22.2006 11:24pm
Christopher Cooke:
To Nolo: You asked, "how is this different from the accouting firms sued during the S&L crisis?" Well, none of those firms was indicted by the US Department of Justice, nor charged with criminal violations, they were just sued. No company has ever survived a federal criminal indictment, supposedly. In practical effect, an indictment is a death sentence for a law firm who depends upon federal judges and pension fund fiduciaries to appoint them as lead counsel.

To Tom Tildrum: I could not foresee any conflict in cases where the US is the opposing party; Milberg Weiss would be on the opposite side in those cases, just as the firm is in the criminal indictment. The only conflict would be if the Milberg firm were representing the US in some fashion.
5.22.2006 11:33pm
Justin (mail):
The threat of a corporate death sentence is an abuse of prosecutorial discretion against any but the most corrupt criminal enterprises -- namely, the mob.

Human beings, though, are a different, and entirely less important, classification of legal people...
5.23.2006 12:14am
Zach (mail):
If the firm was really paying _millions_ in kickbacks to named plaintiffs, doesn't the size of the kickbacks indicate pretty strongly that the kickbacks were firm policy (as opposed to some variant of rogue partners being at fault)? Is it really credible that a small group of lawyers could hide an expense like that from the rest of the partners? If so, how would this be done?

I have absolutely no experience with the practices of big law firms, but do they really have enough non-salary expenses to mask anything of the kind? (I say non-salary because presumably the firms all have very tight records of who gets paid what for how many hours of work, and because I doubt the hypothetical partners paid the kickbacks out of pocket).
5.23.2006 1:12am
markm (mail):
The problem with the "corporate death sentence" is that the effective dissolution of the firm generally precedes the trial, if there ever is one. I sure hope I don't have to explain why that is wrong to all you lawyers...
5.23.2006 5:40pm