Making ambulance chasers look good
The indictment of Milberg Weiss may be a death sentence for the firm, penalizing innocent employees.
By Roger Parloff, FORTUNE senior writer

(FORTUNE Magazine) - When class-action law firm Milberg Weiss Bershad & Schulman was indicted last month, along with name partners David Bershad and Steven Schulman, the Wall Street Journal editorial board and many other prominent conservatives refrained from popping the champagne corks - at least publicly.

Instead they expressed solemn concern that Milberg Weiss might be getting Arthur Andersened. Notwithstanding the presumption of innocence, the indictment alone might act as a death sentence for the firm, punishing hundreds of innocent employees for the alleged wrongdoing of a few.

Milberg Weiss faces charges of paying kickbacks to puppet plaintiffs.
Milberg Weiss faces charges of paying kickbacks to puppet plaintiffs.

That's a commendably principled position. But not a persuasive one.

The indictment of Milberg Weiss is aimed straight at the firm's leadership and at the guts of its longstanding controversial business model. Comparisons to Arthur Andersen only hammer home the stark differences between the two situations.

In 2002, Arthur Andersen, then a worldwide firm employing 28,000, was indicted, largely because of the conduct of one partner and one in-house lawyer, neither of whom played a high-level executive role at the company. The two had supervised the shredding of Enron-related documents over a period of about a month in late 2001.

Milberg Weiss's predicament is diametrically different. "There are four name partners" at Milberg Weiss, observes Columbia Law School professor John Coffee. "One is dead, two are indicted, and the fourth [firm co-founder Mel Weiss] is targeted. That's as much as you can possibly have of the head of an organization covered in the indictment." (The charges refer to conduct by partners "A" and "B," who are reportedly Weiss and former name partner Bill Lerach.)

Bershad and Schulman together own 32% of the firm's equity, and a firm spokesman declines to disclose Weiss's stake.

Furthermore, Milberg Weiss is not accused of an isolated crime of short duration, as Arthur Andersen was. Rather, it's charged with systematically paying kickbacks to three individuals (two of whom are cooperating with prosecutors) for serving as puppet plaintiffs in more than 150 lawsuits from 1981 through 2005.

Corrupt plaintiffs

The plaintiffs were allegedly paid percentages of Milberg Weiss's attorneys fees - as much as 14%. (The firm contends that it paid only lawful referral fees to other attorneys, and that a "small number" of those attorneys forwarded the fees to the plaintiffs without the firm's knowledge.)

But consider the deception occurring in those 150-plus tainted suits, under the government's theory. The plaintiff claims he was defrauded, but in reality he bought the stock specifically to position himself as a plaintiff. To win class certification, the firm argues to the judge that the plaintiff's claims are "representative."

However, the paid plaintiff has not only cut a deal with Milberg Weiss, according to the government, but in some cases is being secretly reimbursed by the firm for any loss he suffered in the value of his stock. Under oath, the plaintiff routinely denies being paid any special compensation.

When the suit settles, the judge inquires whether the representative plaintiff objects to the size of Milberg Weiss's proposed fee - which comes out of the recovery - and the plaintiff voices no objection.

But what the judge doesn't realize is that the representative plaintiff, unlike the other class members, has a secret incentive to maximize Milberg Weiss's fee, not minimize it: His kickback is computed as a percentage of that fee.

So, yes, there's a danger that judges, post-indictment, may be hesitant to appoint Milberg Weiss to serve as class counsel in new actions. And, yes, that may bring financial hardship to hundreds of innocent employees at Milberg Weiss.

But that circumstance stems inevitably from the nature of the accusations against Bershad, Schulman, and Partner A - regardless of whether the firm is named as a defendant. Either way, 25 years of alleged systematic mendacity is likely to strike many judges as all they are prepared to put up with. Top of page

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Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer LIBOR Warning: Neither BBA Enterprises Limited, nor the BBA LIBOR Contributor Banks, nor Reuters, can be held liable for any irregularity or inaccuracy of BBA LIBOR. Disclaimer. Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.