1995 Suit May Be Focus in Milberg Weiss Probe

It was a seemingly routine shareholder lawsuit that attracted little attention when it was filed in 1995. Investors claimed that a Downey-based medical group had offered shares to the public without warning that its plans to buy another company were falling apart.

Settled years ago, the suit has become a focus in the federal government’s probe of lawyers who represented the plaintiffs -- top class-action law firm Milberg Weiss Bershad & Schulman of New York.

People familiar with the Milberg investigation, speaking on condition of anonymity, say the government has granted immunity to several participants in the 1995 lawsuit to gain their cooperation. Prosecutors have declined to say why the 1995 case has drawn their interest, or even to confirm that it has.

The U.S. attorney’s office in Los Angeles has been investigating allegations that Milberg lawyers paid kickbacks to people who served as ready-made plaintiffs in securities class actions, and that participants also may have lied in court proceedings or tax filings to cover up the practice.

No one at Milberg has been charged. But prosecutors have informed top partners Melvyn I. Weiss and David Bershad and ex-partner William S. Lerach that they are targets, say people close to the investigation.

Lerach, the country’s best-known class-action lawyer, left Milberg in 2004 and now heads Lerach Coughlin Stoia Geller Rudman & Robbins in San Diego, also a top class-action firm.

The law firms declined to discuss the federal probe apart from reiterating earlier statements that Milberg “and its past and present partners ... always acted in an appropriate way in fighting on behalf of victims and consumers to hold companies accountable for their wrongdoing.”

The Milberg investigation began late in 2001 when informant Steven G. Cooperman, a plaintiff in as many as 60 Milberg cases, struck a deal with the government to win a lighter sentence in an unrelated case. The former Beverly Hills eye surgeon faced as many as 10 years in federal prison for faking the theft of a Monet and a Picasso from his home and then swindling insurance companies out of $17.5 million. In return for his help in the Milberg probe, Cooperman wound up serving 21 months.

In addition to serving as a frequent plaintiff for Milberg lawyers, Cooperman also scouted out new lawsuits. This was the role he played in 1995 when he alerted Milberg to a possible lawsuit against AHI Healthcare Inc., a group of physician networks then based in Downey, say lawyers familiar with the case.

Cooperman learned about AHI through a friend with inside information: Dr. Ronald A. Fischman.

Fischman had been a lead plaintiff in a 1990 Milberg class action stemming from the collapse of Lincoln Savings & Loan, and in the same year he and Cooperman had been co-plaintiffs in Milberg litigation against Del Webb Corp.

Fischman also was president of Lakewood Health Plan Inc., a Long Beach medical group that AHI had planned to acquire, court papers show.

The AHI suit involved a September 1995 initial public offering of more than 4 million shares of AHI, court records show. The prospectus described AHI’s growth potential and cited plans to buy Lakewood.

According to the suit, filed in U.S. District Court in Los Angeles, AHI knew that the Lakewood deal was in trouble but failed to amend the prospectus or delay the sale. By the time word got out that the deal had tanked, the stock price did too. But because of the “materially false and misleading” prospectus, AHI insiders received nearly $50 million from the sale of their shares after the IPO, the lawsuit said.

Milberg lawyers were under pressure to file the case quickly. Under rules in effect at the time, the first law firm to file a potential class action won lead counsel status -- even if its clients held little stock. But that was about to change under a federal law aimed at ending the race to the courthouse that conferred lead status on firms whose clients were institutional investors or others with large blocks of stock.

“There was a huge push to get cases on file” before the law took effect, said a former Milberg lawyer, who asked not to be identified for fear of attracting attention. “The idea was that we had to build up inventory -- like squirrels storing nuts for the winter -- so that we would have cases to work on, because nobody quite knew what ’96 was going to bring.”

Serving as lead plaintiff in the AHI case was another Cooperman associate and repeat client of Milberg, Melvyn Kinder. A Beverly Hills psychologist and author of the bestseller “Smart Women, Foolish Choices,” among other titles, Kinder purchased 200 shares of AHI for $2,542.89 on Dec. 1, 1995, court records show. He was told to make the purchase by Cooperman, said a lawyer familiar with the case.

Milberg got in just under the wire by filing the case on Dec. 20, 1995 -- three days before the effective date of the federal law.

Had the suit gone to trial, Fischman -- as Lakewood’s president -- would have been expected to testify that AHI knew when it issued the prospectus that the deal was in trouble, said a lawyer familiar with the case. Fischman did not return phone calls.

The suit was settled in 1998 for $6.8 million -- including about $840,000 in fees for Milberg and other plaintiffs’ firms.

Supervising Milberg’s team in the AHI case was Alan Schulman, a former managing partner for Milberg in San Diego who now heads the West Coast office of Bernstein Litowitz Berger & Grossmann, a top Milberg rival. Prosecutors have given Schulman immunity and he is cooperating in the Milberg probe, according to a lawyer familiar with the situation. Schulman did not return phone calls.

Kinder also got immunity and testified before the grand jury in late September, said his lawyer, Peter Morris of Altman & Morris.

Also involved in the AHI case was John B. Torkelsen, an expert witness Milberg retained to estimate shareholder losses in this and many other securities fraud cases. On Nov. 3, Torkelsen pleaded guilty in federal court in Washington to a charge of making false statements in connection with a Small Business Administration loan. As part of his plea bargain, he is expected to be sentenced to nearly six years in prison.

Torkelsen is seen as a fount of information on Milberg, and legal observers have speculated that he will cooperate in the Milberg probe. But he has refused, people familiar with the situation say. Torkelsen’s lawyer did not return phone calls.

For the AHI case to be incriminating, lawyers say, there would have to be evidence of deliberate under-the-table payments by Milberg to participants -- such as Kinder, Cooperman or others -- and possibly false statements to cover them up.

In his divorce trial last fall in Connecticut, Cooperman testified that he had received about $5 million from his arrangement with Milberg from 1988 through 1997, but he did not name the cases involved.

Milberg has said it frequently paid referral fees to lawyers who sent clients to the firm. Such referral fees are widely regarded as a legitimate way to ensure that clients find their way to lawyers with expertise in handling their particular claims.

But in the lone indictment that has been filed in the case, authorities charged that illegal payments were disguised as referral fees to a lawyer who funneled them to his client.

The indictment in June charged frequent Milberg client Seymour M. Lazar, 78, of Palm Springs with taking $2.4 million in “secret and illegal kickbacks” from an unnamed “New York law firm” -- which Milberg acknowledged was a reference to itself.

Indicted with Lazar -- a once-prominent entertainment lawyer and shareholder activist -- was Paul T. Selzer, 65, an attorney for Lazar who allegedly served as a conduit for the payments.

Attorneys for the men said they were indicted after refusing to cooperate in the Milberg probe. Both have pleaded not guilty.

Although the probe has been a serious distraction, people close to the law firms say they have continued to get notable results.

Lerach Coughlin has won a record $7.1 billion in settlements through litigation over the collapse of energy giant Enron Corp. And last month, Lerach announced additional settlements of $651 million for plaintiffs in the WorldCom Inc. accounting fraud case.