Milberg Weiss Gets Taken To Court
By Roger Parloff

(FORTUNE Magazine) – Did the ambulance chaser arrive before the accident?

That's the question U.S. district judge Marilyn Hall Patel of San Francisco is asking about Milberg Weiss Bershad Hynes & Lerach, the notorious class-action firm that's the scourge of corporate America. Milberg Weiss was co--lead counsel in a class-action stock fraud case before Patel, and in February she noticed that while the case had commenced on April 13, 2000, the day after defendant Terayon Communications Systems' stock had crashed, a plaintiff had signed his papers on April 11--the day before the plunge.

Judge Patel then discovered that two of the lead plaintiffs, who were represented by Milberg Weiss, had been massive short-sellers of Terayon stock, and she wondered whether Milberg Weiss had tried to conceal the fact that the plaintiffs--associates of George W. Bush crony Edward "Rusty" Rose III and his firm Cardinal Investment Co.--were not conventional investors. Based on evidence presented by Terayon, she determined that Cardinal had engaged in such an aggressive campaign to bring Terayon's price down that it may "have participated [in], if not perpetrated" fraud. (That campaign culminated with a Cardinal official posing as an analyst and using a false name to call in to a Terayon earnings conference call and ask questions on April 11.) In other words the Cardinal investors bet on Terayon's stock crashing, then sued when it did.

All that prompted Judge Patel to issue an extremely unusual order in February. She stripped the two short-sellers of their "lead plaintiff" status, and demanded that Milberg Weiss answer questions about its own fitness to proceed as co--lead counsel and whether it had "actively participated in or provided advice to plaintiffs regarding their scheme to cause a fall in Terayon's stock price." The U.S. Chamber of Commerce swiftly called for an SEC probe of Milberg Weiss. (The SEC declines comment.)

In late March, Milberg Weiss attorney Jeffrey Lawrence filed papers saying that he, his partners, and his clients had done nothing wrong: Though he knew that the lead plaintiffs had held short positions, he had not known their extent and regarded them as irrelevant; their nondisclosure had been unintended and innocuous; and the fact that one plaintiff had signed his papers before the April 12 stock plunge, wasn't surprising, because Terayon's stock had taken big tumbles in March as well. Finally, Lawrence argued, all Cardinal had ever done was to supply the market with true information about Terayon. In earlier rulings Judge Patel herself acknowledged that some of Terayon's statements during the period in question had been "plainly misleading."

Terayon's counsel, Paul Goldstein, would not comment on the Milberg Weiss submission other than to say that he plans to seek further discovery from the firm, as Judge Patel had earlier invited Terayon to do. Accordingly, Judge Patel is probably still months away from deciding what to do next. Her options include kicking the firm off the case, fining it, or deciding that it did nothing wrong after all, and allowing it to continue as co--lead counsel.

--Roger Parloff