Class Actions Are Here to Stay

The law firm of Milberg Weiss Bershad & Schulman may not survive its recent indictment, but legal experts say the multibillion-dollar shareholder class actions that it pioneered will continue to proliferate as other firms enter the lucrative field.

Although Milberg spokesmen insist that the 20-count federal indictment involving fraud and conspiracy is groundless and does not jeopardize the firm’s future, some partners have announced their departures, and the New York firm’s own clients and its adversaries are challenging its credentials in litigation.

In last month’s indictment, believed to be the first involving a law firm of its size, prosecutors charged Milberg Weiss and two of its partners with paying at least $11.3 million in illegal kickbacks to clients over a 25-year period.

The government alleged that Milberg lawyers recruited “paid plaintiffs” to buy stocks in anticipation of a drop in value, positioning themselves and Milberg Weiss to take the lead in securities class actions, which entitled them to extra fees. The firm concealed the kickbacks by paying plaintiffs in cash or through intermediary law firms, according to the indictment.

In a videotaped statement, Milberg co-founder and partner Melvyn Weiss predicted, “We will be vindicated.”

If convicted, however, “Milberg Weiss can’t survive,” said Stephen Gillers, who teaches legal ethics at New York University Law School. But “we’re far away from that, if it ever happens,” he added.

Still, fallout from the indictment has begun.

Eight partners from the 120-lawyer firm have reportedly announced their departures, and other Milberg lawyers are shopping their resumes.

Thursday, New York state’s pension fund asked a federal judge to dismiss Milberg Weiss as lead counsel in its shareholder suit against drug maker Bayer over the safety of the cholesterol medication Baycol. Ohio Atty. Gen. Jim Petro last month dumped the firm from representing the Ohio Tuition Trust Authority in another federal class action.

Delaware’s Office of Disciplinary Counsel has opened its own investigation into the firm’s activities in class actions filed in that state.

These may be the first of many tests for the 40-year-old firm that claims to have wrested $45 billion for investors and consumers from such corporate quarry as Lucent Technologies Inc., Raytheon Co., Lincoln Savings & Loan Assn. and insurers Prudential Financial Inc. and Metropolitan Life Insurance Co. In the process, Milberg has collected billions in legal fees.

But corporate scandals and tighter accounting rules will continue to provide plenty of targets for litigation, observers say. Other law firms will simply absorb whatever business Milberg might lose.

Consumer advocates hail shareholder litigation as deterring corporate misconduct, while executives and pro-business groups say the suits amount to extortion -- with a disproportionate share going to lawyers. Yet experts say legislation has outlawed the worst abuses.

Big institutional investors, such as the University of California, now have more power in class-action litigation. They closely manage suits brought on their behalf and have the heft to force lawyers to accept proportionately lower fees. They also tend not to pursue the type of litigation that critics label as frivolous.

“Shareholder litigation will be dead when executives stop trying to backdate stock options, when [chief financial officers] stop trying to cook the books ... and when auditors, bankers and accountants start doing their jobs,” said Sean Coffey, a New York plaintiffs’ lawyer.

Despite Milberg’s success, big investors considering fraud suits may hesitate to retain the firm.

Public pension funds, for example, “have a greater duty to make sure they’re hiring someone that is without any kind of stain,” said Laura Christa, a Los Angeles defense lawyer. “They may be better off trying to get someone who doesn’t have an indictment against them.”

Gillers said judges might also balk at appointing Milberg as lead counsel, particularly if other lawyers objected. But he termed such decisions “a serious overreaction,” adding, “I hope judges will remember that an indictment is just a charge.”

Increasing competition for lead-counsel status indicates that shareholder litigation is not tied to Milberg’s fate, said Deborah Hensler, a Stanford Law School professor who studies class actions.

“Securities litigation is a result of economic behavior in the marketplace,” she said.

Hensler and others agreed that a 1995 federal law largely curbed practices of the type that gave rise to last month’s indictment.

Before the Private Securities Litigation Reform Act, the lead plaintiffs’ firm was the one that won the race to the courthouse filing window, even if the plaintiffs it represented owned just a few shares. Now to win that appointment, the lead firm must represent a client with what plaintiffs’ lawyer Coffey called “more skin in the game.”

“It’s changed the world,” he said, because institutional clients, unlike “five-share investors,” closely monitor the lawyers they hire and force lawyers to compete for their business.

“That’s certainly true,” said Christopher Patti, a lawyer for the Regents of the University of California, the lead plaintiff in shareholder fraud suits against Enron Corp. and Dynegy Inc.

Large plaintiffs have also muscled attorneys into lowering their fees in recent years, he said, from as much as 40% of recoveries to as low as 10%.

The 1995 act probably has “winnowed out an awful lot of frivolous litigation,” said Eric Talley, a UC Berkeley Boalt Hall law professor.

Nonetheless, the number of fraud suits has exploded, Talley said, largely because of the accounting scandals of recent years. Nearly 500 shareholder class actions were filed in 2001, almost twice as many as during the years before and since. Talley said last year’s total was “in the mid-200s.”

That growth has created opportunities for new law firms to get into the game. William S. Lerach, once one of Milberg’s heavy hitters, left the firm in 2004 to head up his own firm, headquartered in San Diego. To date, Lerach has won settlements for Enron shareholders totaling $7.2 billion.

Milberg Weiss still dominates the field, Talley said, “but it’s not nearly the big fish it used to be.”

And if the firm dissolves, NYU’s Gillers said, there’s nothing to stop Milberg lawyers from reappearing with a new name.

“A firm is fiction, an idea, a metaphysical concept,” he said. “What really matters is the skill of the lawyer, and he or she can practice anywhere.”