Indictment Heats Up Probe of Law Firm
The recent indictment of two alleged participants in an illegal kickback scheme has added momentum to a three-year federal probe targeting the nation’s top class-action law firm, according to legal observers.
Milberg Weiss Bershad & Schulman wasn’t named in the charges unsealed June 23 against Seymour M. Lazar, a once-prominent entertainment lawyer from Palm Springs. But for many in the legal community, allegations detailed in the document make clear that the real targets are Milberg Weiss and former partner William S. Lerach, who heads a firm based in San Diego.
The 17-count indictment accused Lazar of receiving $2.4 million in “secret and illegal kickback payments” in exchange for serving -- or persuading his family members to serve -- as lead plaintiff in more than 50 class actions, most of them shareholder suits in the 1980s and 1990s. Also named as a defendant and co-conspirator was another lawyer, Paul T. Selzer, 64, who was accused of funneling the funds to Lazar.
Milberg Weiss has since confirmed that it is “the New York firm” accused throughout the document of participating in money laundering, tax evasion, conspiracy and mail fraud.
The firm has angrily denounced prosecutors, calling their allegations baseless and saying it has conducted itself properly. The class-action cases in which Lazar participated “resulted in many of the protections consumers enjoy today,” the firm said.
A spokesman for Lerach’s firm, Lerach Coughlin Stoia Geller Rudman & Robbins, declined to comment. Lawyers for Lazar and Selzer insist their clients have done nothing wrong.
The investigation began more than three years ago with information provided by Beverly Hills eye surgeon Steven G. Cooperman, who was lead plaintiff in many shareholder lawsuits Milberg Weiss filed. At the time, people close to the case said Cooperman tipped off authorities to get a more lenient sentence after he was convicted of staging the theft of a Picasso and Monet from his home to collect a multimillion-dollar insurance settlement. The investigation became public in 2002 but soon dropped out of public view.
“I had assumed that because nothing had happened for a couple of years ... they had lost confidence in Mr. Cooperman,” said Columbia University law professor John Coffee, an expert in securities law. The June indictment, however, shows the case is “heating up.”
“Once you go out and indict someone, you’ve gone out and crossed the Rubicon,” Coffee said. “Once you indict someone, you have put events irrevocably in motion.”
Another sign that prosecutors are moving forward was a court appearance last fall that received little notice at the time. Former stockbroker Paul L. Tullman pleaded guilty to a single count of tax fraud in an apparently unrelated case as part of a deal to cooperate with Los Angeles-based prosecutors in the Milberg Weiss probe, the Wall Street Journal reported June 28.
Prosecutors declined to confirm the report. But court records show that Richard Robinson, an assistant U.S. attorney who has been involved in the Milberg Weiss investigation since the beginning, was present at the plea hearing Nov. 12 in U.S. District Court in Central Islip, N.Y.
According to last month’s indictment, Lazar served as a ready-made lead plaintiff for Milberg, allowing the firm to be first to file dozens of class actions.
Until a 1995 change in federal law, the firm that won the race to the courthouse became the lead plaintiffs’ attorney for the class in shareholder cases, a designation potentially worth millions in extra fees. As a result, firms with a stable of clients who held diversified stock portfolios -- even if their holdings in the targeted companies were minute -- had an advantage.
Serving as lead plaintiff can involve extra work, such as sitting for depositions, responding to discovery requests and testifying at trial. The law allows payment of a bonus of, generally, a few thousand dollars to compensate these plaintiffs for their time and expense.
But lawyers bent on beating their competitors to the courthouse filing clerk can have trouble getting clients to agree to take on that role on a few hours’ notice. The kickbacks Lazar is alleged to have received -- higher than the typical court-approved bonuses -- would be illegal because by law extra payments to lead plaintiffs must be determined by the court after a case is over.
Headquartered in New York with offices in Los Angeles and other cities, Milberg Weiss helped pioneer what has ballooned into an industry that has generated billions of dollars filing shareholder suits and other types of class actions. Milberg Weiss’ lawyers have pursued some of the nation’s biggest corporate quarries, including Halliburton Co., Lucent Technologies Inc. and Tyco International Ltd.
Milberg Weiss and its best-known partner became so dominant in securities class actions that getting sued by them came to be known as being “Lerached.”
The firm remains a major player in class-action litigation, as does Lerach’s new firm in San Diego. Milberg Weiss’ reputation for hard-nosed tactics and getting good results is such that in March 2002, after word of the federal investigation spread, the firm was still named chief counsel in the Enron case. The judge in that case praised Milberg Weiss for the “breadth and depth of its research and insight.”
Advocates for shareholder suits say they are vital to punishing -- and preventing -- corporate misbehavior. But critics call them shakedowns by attorneys who sue reflexively whenever a company’s stock takes a dip.
Milberg Weiss has been so reviled in corporate boardrooms that Congress passed legislation specifically with the firm in mind. The 1995 Private Securities Litigation Reform Act largely ended the traditional race to the courthouse by requiring the lead plaintiff to be the individual or institutional investor holding the largest financial stake in the targeted corporation.
The law did not change the procedure for appointing lead plaintiffs in other types of class actions such as those alleging product defects or medical injuries.
But changes to federal rules in recent years give judges in those cases more responsibility to ensure that compensation paid to plaintiffs and fees paid to their attorneys are fair.
In the Milberg Weiss case, the money paid to Lazar was appropriate legal fee-sharing among lawyers, said Lazar’s attorney, Thomas H. Bienert. Denying that his client did anything wrong, Bienert called the indictment “a transparent attempt to put undue pressure on Mr. Lazar to become a government witness against his counsel.”
Indeed, although prosecutors declined to discuss their strategy in the Milberg Weiss investigation, several observers said it appeared to come straight from a well-thumbed playbook in which prosecutors target small fry to gain their cooperation in pursuing bigger fish.
“My suspicion is that the government wants the people they indicted to say that the senior partners at the law firm conspired with them to make false statements to the court,” said David A. Katz, a former federal prosecutor in Los Angeles. “And I imagine they went to the two defendants when they were still targets and said that their best deal would be before the indictment.”
Should it be successful, the Milberg Weiss probe could lead to a renewed crackdown on class actions generally, said Stanford University law professor Deborah Hensler. It could “pour fuel on the fire for legislators to go after class actions and limit the ability of consumers to bring them,” she said.
