A Bid by Milberg to Avert Charges?

The departure of two of its top partners may signal an effort by class-action law firm Milberg Weiss Bershad & Schulman to mollify federal prosecutors and save the firm from indictment, legal experts said Tuesday.

But even an agreement that allows the firm to avert a “death sentence” could raise concerns among future plaintiffs, clouding the firm’s dominance if not long-term survival, the experts said.

David Bershad, 66, and Steven Schulman, 54, were told in February by prosecutors that they probably would be charged with participating in a scheme to pay illegal kickbacks to clients, Schulman’s former attorney said. Milberg Weiss announced Monday that the two men had decided to take a leave of absence.

The announcement is the latest development in a six-year probe that has led to the indictment of two California lawyers and a plea agreement by a retired real estate mortgage broker.

The departures may also signal a renewed flurry of negotiations between U.S. attorneys and Milberg lawyers aimed at keeping the firm afloat. Milberg Weiss would not survive an indictment, experts say.

“I imagine that the critical decision behind the scenes for the last six weeks has been whether the government will indict Milberg Weiss or agree to some form of deferred prosecution,” said John Coffee, a Columbia University Law School professor who studies class actions.

Under a deferred prosecution, a company could avoid indictment by cleaning up violations or taking other steps within a specified period.

The collapse of accounting giant Arthur Andersen after its 2002 indictment on Enron Corp.-related obstruction of justice charges may be instructive as to prosecutors’ thinking, he said. Andersen’s demise cost 28,000 employees their jobs and resulted in further consolidation among accounting firms.

Milberg Weiss, with 350 employees, is tiny by comparison. But its dominance in class-action litigation may make government lawyers skittish about provoking another firm’s collapse, Coffee said.

A deferred prosecution agreement involves what Coffee called “probation-like conditions.” Those could include admissions of responsibility by the firm’s partners, resignations, penalty payments and court appointment of an independent monitor to oversee operations.

In the Milberg Weiss probe, the U.S. attorney’s office in Los Angeles has focused on allegations that the firm’s lawyers paid illegal referral fees to people who served as ready-made plaintiffs in securities class actions, thereby enabling the firm to win lead lawyer status and extra fees. Prosecutors also are investigating whether participants lied in court proceedings or tax filings dating to the 1980s to cover up the practice.

A spokesman for the U.S. attorney declined to comment Tuesday on the investigation.

In a statement, Bershad said that he hoped his decision to take a leave would “improve the firm’s chances to avoid unfounded charges” and that it “should not be construed as anything else.”

Calls to Schulman’s lawyer were not returned.

A Milberg spokeswoman declined to discuss the probe Tuesday other than to say, “We continue to cooperate with the government.”

Headquartered in New York with offices in Los Angeles and other cities, Milberg Weiss helped pioneer what has ballooned into an industry generating billions of dollars by filing shareholder suits and other types of class actions.

The firm remains a Goliath, having served as lead or co-lead plaintiff in more than 50% of federal shareholder suits settled from 1997 to 2004, according to data from the Stanford Law School Securities Class Action Clearinghouse and Cornerstone Research, a consulting firm.

That dominance has made the firm a target of those who view class-action litigation as corporate shakedowns. Yet the view that Milberg may be too big to fail could help save the firm.

A lawyer close to the investigation said prosecutors probably would seek at least three concessions: the resignation of more lawyers, perhaps including founding partner Melvyn Weiss; an admission of responsibility by the firm; and an agreement to abide by restrictions on the payment of referral fees that go beyond those enacted by Congress.

But even if Milberg Weiss remains in business, such an admission could harm it as qualified counsel in future class actions, said David Peirez, a New York lawyer.

Class-action rules require a judge to certify the lead plaintiffs’ lawyers as qualified based on experience and reputation.

“A judge may now have some concerns about that based on objections from interested parties,” Peirez said.

“I see that as a real risk, and I’m not sure how they can protect themselves against it.”