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US: Indictment for Big Law Firm in Class Actions

by Julie CreswellThe New York Times
May 19th, 2006

The nation's leading class-action securities law firm, Milberg Weiss Bershad & Schulman, and two of its partners were charged yesterday with making more than $11 million in secret payments to three individuals who served as plaintiffs in more than 150 lawsuits.

The indictment is the first instance of a law firm with national reach facing criminal charges, and it could prove to be a fatal blow for the firm. The lawsuits cited in the indictment spanned two decades, occurring as recently as 2005, and generated some $216 million in legal fees for the firm.

Its lucrative business made Milberg Weiss a target for political critics who saw the firm as a symbol of a national litigation industry that had gone out of control. These critics said that many of the firm's lawsuits against corporations were frivolous, raising the cost of doing business.

The critics contended that investors, for the most part, saw only pennies on the dollar from any recoveries won by the firm. In the 1990's, Congress raised the legal hurdle for such lawsuits in large part in response to Milberg Weiss. Even so, the firm continued to thrive.

"There's never been a firm of their prominence that has been indicted," said Ralph C. Ferrara, a former general counsel with the Securities and Exchange Commission who is now a lawyer with the law firm of LeBoeuf, Lamb, Greene & MacRae. "This is a regrettable and remarkable thing."

In the 20-count indictment by a federal grand jury in Los Angeles yesterday, Milberg Weiss and two of its prominent partners, David J. Bershad and Steven G. Schulman, are accused of racketeering conspiracy, mail fraud, money laundering conspiracy and obstruction of justice.

The prosecutors are asking for the return of the fees earned by the firm and those named in the indictment. In addition, there is the possibility of prison for the two partners — up to 20 years for racketeering conspiracy, for example.

To disguise some of the secret payments to plaintiffs, which prosecutors referred to as kickbacks, the law firm moved cash through casinos and kept money in a credenza in Mr. Bershad's office, the indictment said.

"This case is about protecting the integrity of the justice system in America," said Debra Wong Yang, the United States attorney in Los Angeles. The firm and lawyers for Mr. Bershad, 66, and Mr. Schulman, 54, said they would fight the charges.

Feared and loathed inside boardrooms across the country, Milberg Weiss made hay out of the numerous accounting and management scandals that caused stocks to collapse in recent years. Sometimes bullying, sometimes screaming, sometimes speaking very softly, the firm's lawyers coaxed and cajoled what it has estimated to be $45 billion in recoveries from companies.

"The people who are going to be happy about this indictment are the hundreds and hundreds of companies that Milberg Weiss successfully sued and the political demagogues who rail about 'trial lawyers' running up the price of eggs," said William W. Taylor, a lawyer at Zuckerman Spaeder who represents Milberg Weiss.

"You could hear the cheering all the way from Wall Street to Pennsylvania Avenue, and it feeds right into the hands of people who want to prevent victims from being able to get the justice from big companies that they deserve," Mr. Taylor said.

Legal experts said the criminal case could sharply change the landscape of securities class-action litigation as one of its dominant participants struggles to survive. While Milberg Weiss lawyers can still legally represent clients, the indictment is likely to set off a race among competitors to unseat the firm from several high-profile lawsuits.

The indictment could also open the door to the prospect of settlements made decades ago being reopened or of lawsuits against the firm itself by shareholders contending they did not receive enough in a settlement or by a law firm that was jostled out of representing a lead plaintiff.

"Could there be a class-action lawsuit against Milberg over this? It can happen," said George M. Cohen, a law professor with the University of Virginia. Mr. Cohen and others, however, noted that given the firm's partnership structure, the personal assets of the partners would most likely be protected and the firm itself probably does not have much cash.

Shortly after the indictment was announced, the firm denied wrongdoing in a posting on a Web site it started, www.milbergweissjustice.com.

"We will not allow the indictment today to deter us from our watchdog role," one of the firm's co-founders, Melvyn I. Weiss, said in a statement. "We will vigorously defend ourselves and our partners against these charges and we will be vindicated."

Mr. Weiss was not named in the indictment. The man behind the firm's other top name, Lawrence Milberg, died in 1989.

Andrew M. Lawler, a lawyer for Mr. Bershad, said, "David Bershad categorically denies the allegations of the indictment."

Herbert Stern, a lawyer for Mr. Schulman, said his client "will plead not guilty because he is not guilty, and we look forward to his ultimate vindication."

Prosecutors have so far been stymied in efforts to charge the two primary targets of the investigation, Mr. Weiss and his former partner, William S. Lerach. In 2004, Mr. Lerach started his own firm on the West Coast. Both men were told in February that they would not be indicted at this time, although people involved in the talks say they remain targets of prosecutors.

Negotiations to avert an indictment of the firm stalled in recent days. In a last-ditch effort to stave off prosecutors, Mr. Bershad and Mr. Schulman agreed to take leaves of absence. Additionally, the firm said it hired Bart M. Schwartz, a former chief of the criminal division for the United States attorney in Manhattan, to monitor its procedures regarding payment of referral fees.

Companies that have been targets of criminal investigations in recent years, like the accounting firm KPMG and the drug maker Bristol-Myers Squibb, reached deferred-prosecution agreements.

Milberg Weiss, however, refused to sign such an agreement, which would have required it to waive attorney-client privileges. On its Web site, the firm called that condition a "derogation of one of the bedrock principles of American law."

Others said they were disturbed that the entire law firm had been indicted, especially as the Justice Department has been reluctant to take such an action since the 2002 indictment of the accounting firm Arthur Andersen. The firm went out of business, although its conviction was overturned by the Supreme Court.

"I don't understand what the harm was to the members of the class-action lawsuit," said Lawrence W. Fox, a lawyer at Drinker Biddle & Reath and a former chairman of the American Bar Association's ethics committee. "Milberg Weiss itself had every incentive to maximize the recovery as, to some extent, their fee was dependent on that. There was never any incentive for them to settle on the cheap."

Ms. Yang, the United States attorney, said: "We really had a situation where the firm was not accepting responsibility, was not making any substantial changes to the firm itself. We really were in a situation where we had no choice but to indict."

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 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.

One figure named as an unindicted co-conspirator in the indictment is a Beverly Hills ophthalmologist, Dr. Steven G. Cooperman. Dr. Cooperman or members of his family acted as plaintiffs in nearly 70 lawsuits, receiving approximately $6.5 million in payments, the indictment said.

It was testimony by Mr. Cooperman that led to the original investigation six years ago. His value as a potential witness, however, is tempered by the fact that he offered to provide evidence to prosecutors in hopes of receiving a reduced sentence on his conviction of art fraud.

In addition to Mr. Cooperman, another paid plaintiff, Howard J. Vogel, a retired mortgage broker, reached a plea agreement with prosecutors last month. He admitted to accepting $2.5 million in secret payments.



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