By Walter Olson
(Reprinted from The Wall Street Journal, 6-22-06)
As the nation's premier filer of class action lawsuits, Milberg Weiss Bershad & Schulman LLP has long presented itself as a fearless watchdog of America's financial markets. Milberg lawyers are famed for their skill at seizing on missteps by the businesspeople they suea missed earnings projection, an omitted disclosure, a too-rosy accounting practiceand portraying them as evidence not of inadvertent or technical slip-ups, but of systematic and brazen crookedness.
All the while, if one is to credit the 102-page indictment by a federal grand jury in Los Angeles last week, Milberg Weiss was passing at least $11 million in payoffs under the table to plaintiffs in its suits. Since such payoffs are baldly illegal, prosecutors claim the firm took elaborate steps to keep them concealed from judges and others. They say Milberg funneled much of the money through law-firm cut-outs and other channels, including casinos, and drew on a stash of money kept in a safe located in a credenza in partner David Bershad's New York office, "to which access was strictly limited." Again and again, prosecutors add, the firm submitted sworn statements on behalf of its clients denying any receipt of the sorts of payments they were in fact receiving. The payoffs helped Milberg reap some $216 million in attorneys' fees from the cases prosecutors say they know about; others remain under investigation.
Milberg and partners David Bershad and Steven Schulman (who have taken leaves of absence from the firm) flatly deny the charges and say they're victims of overzealous prosecution. There's irony in thissince the firm is known for zealous tactics akin to those it's now facing, such as the use of charges under the RICO (Racketeer Influenced and Corrupt Organizations) law. Even so, some of the firm's complaints will resonate with critics of today's trend toward criminalizing business practice. The firm's defense Web site, MilbergWeissJustice.com, goes so far as to link approvingly to editorials in this newspaper.
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When is a cash payment to someone an improper "kickback" or "payola"? Sometimes it is hard to discern the line. If you're a record producer who pays radio execs to spin a Jennifer Lopez disc, Eliot Spitzer will land on you with full force. But if you're a publisher who pays book chains to give prime display to your new hardcover thriller, you're safe. Economists and legal analysts typically consult a range of factors, including whether the person taking the payment owes some third party a duty of loyalty or independent judgment, whether an agent discloses his acceptance of a payment to his principal, whether a type of payment is accepted as customary in a given trade, and so forth.
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 lawyersspecifically, 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 haulincentivizing the named plaintiff to side with Milberg's interests should the two clash.
Every so often someone will suggest that since the named plaintiff operates as the lawyers' tool 99% of the time, why not dispense with the rigmarole and let law firms seek class action status without having to qualify any particular client as representative? But imagine for a moment a defendant's trying to argue that, because certain legal rules are economically inefficient, it should be okay to break those rules. Imagine what a skilled plaintiff's lawyer, like those at Milberg, would say in response to such an argument. Lawyers, of all professionals, are the last ones who should claim a privilege of ignoring the law.
A more likely source of sympathy for Milberg is its complaintin common with that of many business defendantsof rough handling by prosecutors. To begin with, the Justice Department, following the line laid down by the now-infamous Thompson memorandum, insisted that Milberg waive attorney-client confidentiality if it wanted a favorable plea deal. The business community is in an uproar over the Thompson rules, with the U.S. Chamber of Commerce joining with groups like the ACLU and National Association of Criminal Defense Lawyers to challenge the waiver provisions as unfairly arm-twisting defendants into yielding up their employees' rights.
As a talking point for Milberg's defense, however, this one is likely to fadeprecisely because the firm did hold out rather than cave. Nor is there an issue of favoritism, since the Justice Department subjects conventional businesses to the same unseemly pressure daily.
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Should the feds have indicted the firm as distinct from individual partners? Memories are fresh of the indictment of Arthur Andersen, the accounting giant whose conviction was overturned by the Supreme Court three years laterfar too late to save the firm, given the reluctance to let an indicted accountant do a company's books. Defending her Milberg decision, U.S. Attorney Debra Wong Yang cited the firm's lack of repentance: Not only had the "pattern of deception" gone on for decades, but "the conduct occurred all the way up to last year, when they knew we were looking at them."
The probe, in fact, had dragged on for six years, having met with implacable resistance from the Milberg side; prosecutors finally got their break this spring, in the person of businessman Howard Vogel, who, with his family members, had acted as plaintiff in about 40 suits. Mr. Vogel sang, admitting to more than $2.4 million in Milberg payments in a guilty plea, and others have reportedly begun to sing, too, which means further indictments are possible.
In short, the prolonged lack of interest in cooperating with law enforcement may cost the firm as dearly in the long run as the underlying offense. (Yes, now that you mention it, Milberg was the lead counsel in the suits against Martha Stewart.) The two celebrity lawyers who made Milberg famous, Melvyn Weiss and the now-departed William Lerach, have thus far escaped indictment: Of course, if they were prosecuting such a case, they would miss no opportunity to insinuate that misconduct by part of a team of top executives must have been at least tolerated by the others, that the rot goes straight to the top, that senior partners turned a convenient blind eye to signs of misconduct because they profited handsomely from that misconduct, and so forth. Messrs. Weiss and Lerach must count themselves lucky that such reasoning did not lead to their inclusion as defendants.
If they are consistent, those who cherish due process for white-collar defendants should spare some pangs for the many talented lawyers at the Milberg firm who, like Arthur Andersen accountants, may face professional shipwreck even though no one has charged them with the least bit of complicity in legal wrongdoing. And if they are consistent, those who applaud the crackdown on business misconduct of recent years should acknowledge that the Milberg prosecution embodies, for better or worse, many of the premises of that crackdown. Those are big "ifs."