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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.

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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.

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More on Milberg Weiss Indictment:

Here is the federal government's press release announcing the indictment.

For commentary on the indictments, see these posts by Professor Bainbridge, Christine Hurt at Conglomerate, and Miriam Cherry at Concurring Opinions.

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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.

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