Class-Action Law Firm Indicted in Fraud Case

A New York law firm that has helped investors recover more than $45 billion in corporate fraud cases was indicted Thursday along with two of its partners on criminal charges of paying illegal kickbacks to clients.

The charges of fraud, racketeering and conspiracy, brought by a federal grand jury in Los Angeles, could ruin Milberg Weiss Bershad & Schulman, one of the nation’s wealthiest and most powerful law firms.

Legal experts noted that accounting giant Arthur Andersen collapsed after it was indicted in the Enron Corp. scandal. Vowing not to follow that example, Milberg Weiss predicted it would “beat back these charges.”

The case also could have broad implications, potentially casting a cloud over class-action lawsuits and giving ammunition to pro-business groups seeking legislation to limit fraud damages and make it harder for shareholders to sue companies.

In a 20-count indictment, prosecutors contended that Milberg Weiss and partners David Bershad and Steven Schulman paid at least $11.3 million over a 25-year period to clients who agreed to act as plaintiffs.

Milberg Weiss often concealed the payments, prosecutors alleged, by paying the plaintiffs in cash or through intermediary law firms. Prosecutors said the “paid plaintiffs” were recruited to buy stocks in anticipation that they would fall in value, positioning themselves and Milberg Weiss to take the lead in securities-fraud cases and collect extra fees.

Paid plaintiffs, including Palm Springs resident Seymour M. Lazar, 78, allegedly recruited friends and family members to serve in similar roles.

“This case is about protecting the integrity of the justice system in America,” said Debra Wong Yang, the U.S. attorney in Los Angeles. “Class-action attorneys and named plaintiffs occupy positions of trust in which they assume responsibility to tell the truth and to disclose relevant information to the court. This indictment alleges a wholesale violation of this responsibility.”

The alleged kickbacks gave the paid plaintiffs “financial interests that differed from those of the class,” Yang said.

Bershad and Schulman denied wrongdoing and said they would fight the charges. Schulman was the lead attorney for shareholders in a trial last year involving the hiring and firing of former Walt Disney Co. President Michael Ovitz.

Milberg Weiss has been the dominant representative of class-action plaintiffs in the U.S. for the last decade, with recoveries that include $600 million for Lucent Corp. shareholders, $460 million for Raytheon Co. investors and more than $4 billion for policyholders of Prudential Insurance Co.

The indictment, resulting from a seven-year investigation, renewed questions about the future of class-action lawsuits that accuse corporations of defrauding shareholders, knowingly marketing dangerous products and other wrongs involving thousands of victims.

Melvyn I. Weiss, a founder of the law firm, said class-action suits brought justice to “victims of corrupt corporations.”

But a business lobbyist, Lisa Rickard of the U.S. Chamber of Commerce, described the lawsuits as often fraudulent and “simply a way to put legal fees in attorneys’ pockets.”

Plaintiffs in such class actions legally must have grievances that coincide with all the victims and are supposed to be motivated to serve as representatives of the class. But critics such as Rickard contend that law firms like Milberg Weiss instead engage in “plaintiff shopping” and encourage named plaintiffs to accept settlements designed to enrich them and the lawyers at the expense of the rest of the class and the target company.

The investigation gained momentum in 2001, when Steven G. Cooperman, a former Beverly Hills eye surgeon who had been a plaintiff in about 60 Milberg cases, became a government informant. He faced up to 10 years in federal prison for faking the theft of a Monet and a Picasso from his home, then swindling insurers out of $17.5 million. In return for his help in the Milberg probe, Cooperman wound up serving 21 months.

In April, another Milberg client, retired mortgage broker Howard J. Vogel, agreed to cooperate with prosecutors and plead guilty to a charge related to claims that he took more than $2.4 million in kickbacks.

Palm Springs resident Lazar, who was charged in the case last year, allegedly benefited from $2.4 million in kickbacks, prosecutors say.

Lazar and his relatives, including his wife, mother-in-law, son and daughter, allegedly received kickbacks ranging from $8,000 to $250,000 for their roles as named plaintiffs in a string of suits against such targets as Genentech Inc., United Airlines and W.R. Grace & Co. Many of the payments were transmitted through lawyers in Palm Springs, Los Angeles, Santa Ana, Portland, Ore., and Kansas City, Mo., the indictment alleges.

Schulman, 54, and Bershad, 66, were indicted on multiple felony counts, including mail fraud and conspiracy. They took leaves of absence from the firm this week.

Bershad’s attorney, Andrew M. Lawler, said his client “has been instrumental in achieving unprecedented recoveries on behalf of investors wronged by corporate malfeasance” and “categorically denies the allegations of the indictment.” Bershad will fight and is confident he will win, Lawler said.

Schulman’s attorney, Herbert J. Stern, said his client “will plead not guilty because he is not guilty, and we look forward to his ultimate vindication.”

In a statement, Milberg Weiss said it was “particularly incensed that the prosecutors decided to indict the firm itself. The firm has 125 attorneys and another 240 employees who, even according to the government, did not participate in or know anything about the matters at issue. But they will inevitably suffer serious personal and professional harm as a result of the government’s actions.”

John C. Coffee, a Columbia Law School specialist in securities law, said the indictment could motivate judges to avoid using Milberg Weiss as the lead firm in class actions. Likewise, he said, big public pension funds, which are subject to public scrutiny, may also decide it’s best not to be associated with a firm facing criminal charges.

“I think that we will see a replay of the Arthur Andersen experience, with clients backing away from Milberg Weiss,” Coffee said. “That’s Step 1. Step 2 is when Milberg Weiss is embarrassed, many partners will jump ship. Professionals can move to other firms very easily, and that’s what happened with Andersen.”

Ironically, Coffee added, a prime beneficiary of Milberg’s woes is likely to be the San Diego-based law firm headed by William Lerach. He joined Milberg Weiss in 1976, 11 years after it was founded, and became its most prominent attorney before leaving to found his own firm, Lerach Coughlin Stoia Geller Rudman & Robbins, in 2004.

The split appears to have occurred in part because of personal differences but also because prosecutors investigating the kickback case had initially focused on Lerach along with Melvyn Weiss, Coffee said. In February, a source told the Los Angeles Times that prosecutors had told Lerach and Weiss that there was not enough evidence to indict them at that point, although they might face charges if additional evidence emerged.

Lerach and other attorneys at Milberg Weiss, like many plaintiffs’ attorneys, have been strong supporters of the Democratic Party, pitted against business groups that frequently side with Republicans.

Jamie Court, president of the Foundation for Taxpayer and Consumer Rights in Santa Monica, characterized the lengthy investigation as “clearly a politically motivated move by the Bush administration.”

Yang, the U.S. attorney in Los Angeles, denied that such considerations played a role.

“I can tell you with absolute certainty this was not politically motivated,” she said. “If it broke in a different direction, we would have been fine with that too.”

Times staff writers Myron Levin, Molly Selvin and Richard Verrier contributed to this report.