Posted Dec 25, 2006 07:54 am CST
The New York City based firm—which has been both celebrated and vilified for its ferocious attacks on alleged corporate wrongdoing—lost about 40 percent of its 128 lawyers in the five months after its indictment and may be fighting for its very existence.
Lost in the spectacle, according to critics of the government’s case, is the question of whether prosecutors have gone too far. Even if Milberg Weiss is found guilty, indicting an entire law firm causes more harm than good, they contend.
The federal government’s controversial tactic of getting corporations that are under investigation to surrender their attorney client privilege in order to avoid prosecution is now being applied to law firms, with disastrous results for the legal profession and clients, the critics say.
And they are concerned that more law firms will be viewed as fair game for the same kind of aggressive criminal prosecutions the U.S. Department of Justice has pursued against a number of high profile corporations in the post Enron era.
A 20 count indictment filed on May 18 in U.S. District Court in Los Angeles charges the firm and two of its name partners, David J. Bershad and Steven G. Schulman, with conspiring to obstruct justice and commit bribery, perjury and fraud. United States v. Milberg Weiss Bershad & Schulman, No. CR 05 587(A) DDP (C.D. Cal.). Milberg Weiss, through the two partners, engaged in a multidecade, multimillion dollar scheme to make illegal payments to hand picked clients serving as lead plaintiffs in class actions handled by the firm, prosecutors allege. All the while, lawyers from the firm denied in court filings in the underlying cases that any undisclosed payments were made to plaintiffs, prosecutors say.
Counsel for Bershad and Schulman, who are on leaves of absence from Milberg Weiss, assert their clients’ innocence, and the firm itself vehemently denies the charges. Even if the allegations are proven, the government has failed to exercise appropriate prosecutorial discretion, according to Stephen Gillers, a professor of legal ethics at New York University School of Law. “The government obtains little or nothing by indicting the firm, when only a small number of attorneys allegedly were involved in the wrongdoing,” he says.
If the Justice Department is concerned about deterrence, says Gillers, “the threat of criminal prosecution and the indictment of two prominent plaintiffs class action lawyers is plenty chilling. I don’t think you have to indict the firm to bring home the point that lawyers are at risk for this kind of conduct or alleged conduct.”
Debra Wong Yang, the outgoing U.S. attorney for the Central District of California, whose office is prosecuting Milberg Weiss, says she’s just following the facts, as prosecutors would in any case.
“I think the part of this case that was particularly egregious was that a fraud was being perpetrated on the court,” Yang says. “You have to respect the rules and the confines of the system in which we work, and can’t ‘game’ it.”
Just before press time, Yang announced plans to leave her job and accept a partnership at Los Angeles based Gibson, Dunn & Crutcher. Her replacement had not yet been named, but Yang says her departure should make no difference to the Milberg Weiss prosecution, which has “always been driven by the facts.”
Notoriety is nothing new to Milberg Weiss, which was established four decades ago. Under the leadership of founding partners Lawrence Milberg, who died in 1989, and Melvyn I. Weiss, who still is an active partner, the firm pioneered class action lawsuits on behalf of shareholders alleging violations of securities law by corporations.
By the 1980s, Milberg Weiss was widely recognized as the most influential plaintiffs securities firm in the United States. Since its formation, the firm estimates, it has been responsible for more than $45 billion in plaintiff recoveries. Many of the firm’s cases also have established important precedents affirming the rights of shareholders and consumers to pursue class actions against corporations for securities fraud.
A track record like that hasn’t always sat well with the business community. Critics such as the U.S. Chamber of Commerce have complained that class actions are little more than a money machine minting attorney fees for lawyers while the plaintiffs themselves receive little more than token recoveries. Proponents of class actions, however, contend that they often are the only practical means of redress for shareholders and consumers victimized by corporate wrongdoing.
The Justice Department alleges that two of the firm’s partners found a way to manipulate the class action process illegally.
Under recent federal legislation, the shareholder in a class action who holds the largest block of shares generally is designated lead plaintiff—in effect, the representative for the class. As a result, lead plaintiffs now often are institutional investors, such as pension funds.
For decades, however, the first plaintiff to file, or an individual agreed upon by class counsel, was commonly put in the position of lead plaintiff. Because the lead plaintiff helps make strategic decisions about the direction of the case, such as what settlement terms would be desirable, he or she may have a considerable role in deciding whether a quick settlement—and hence speedy payment of attorney fees—is appropriate.
The Justice Department contends that Milberg Weiss partners Bershad and Schulman paid friends of the firm secret fees to serve in the lead plaintiff role in numerous cases—and then misrepresented to courts that no such payments had been made.
Although at least some of these illegal kickbacks were disguised as attorney fees paid to “local counsel” representing the lead plaintiffs, the money actually was being paid to lawyers who did virtually no work on the case, according to federal prosecutors. Instead, the so called local counsel served as conduits to funnel these secret kickbacks to the lead plaintiffs chosen by Bershad and Schulman, the indictment alleges.
The Justice Department contends that Bershad and Schulman, along with their firm and two Southern California men who served as a paid plaintiff and an intermediary lawyer funneling funds, were responsible for some $11 million in secret kickbacks. They allegedly were paid to be lead plaintiffs in more than 150 class action and shareholder derivative suits during a period of more than two decades. The payments—which the Justice Department says ended only in 2005—were required to be disclosed to the courts hearing the class actions, but were not, according to the indictment.
These alleged kickbacks, by providing Milberg Weiss with “a stable of individuals ready and willing to serve as paid plaintiffs,” benefited the firm “by, in many cases, allowing the firm to be among the first to file a lawsuit on behalf of shareholders,” Yang said in a written statement distributed at the time of the indictment in May.
But the payments created a conflict of interest between the named plaintiffs and the other plaintiffs in the class action, Yang said in her statement. The payments gave “the paid plaintiffs a financial interest that differed from that of the class,” said Yang. “In particular, pursuant to their secret arrangement with Milberg Weiss, the named plaintiffs expected to receive a percentage of Milberg Weiss’ legal fees, a payment not available to the other class members.”
Key factors in deciding to prosecute, Yang told the ABA Journal, included Milberg Weiss’ central role in orchestrating alleged misconduct and in filing what prosecutors contend were fraudulent pleadings. There was no motivation for the indictments beyond the four corners of the case itself, she says. “You’ve got hardworking prosecutors who have really just followed the facts.”
The individual defendants as well as the firm itself have denied the Justice Department’s charges, and indications are that they intend to slug it out with the government all the way to trial.
Bershad “absolutely denies the charges and expects to be vindicated at trial,” says his attorney, Robert D. Luskin of Washington, D.C., who otherwise declines to discuss the case. Schulman’s attorney, Herbert J. Stern of Roseland, N.J., also declines to comment on the case.
Meanwhile, Milberg Weiss is telling its side on a Web site devoted to the case at www.milbergweissjustice.com.
“The Justice Department’s case against Milberg Weiss is based on unprecedented legal theories, unsubstantiated allegations, and a dubious interpretation of how class action litigation is adjudicated,” the firm states. “The Justice Department’s misguided case is a major blow to consumer rights and not in keeping with its commitment to serve the public good.”
Milberg Weiss also maintains the Justice Department has charged the entire firm even though the actions of only a few individuals are in question. Moreover, the firm says it has given “extensive cooperation” to the government’s investigation. The firm “has willingly turned over hundreds of thousands of documents and made dozens of current employees available to the Justice Department for examination and questioning,” states the Web site. “The firm has also volunteered to develop industry leading best practices for use of referral fees.”
Milberg Weiss is the largest and most prominent U.S. law firm to be indicted on criminal charges, say experts who are watching the case.
“I can’t remember, and no one I’ve talked to can remember, another instance in American history in which an entire law firm has been indicted,” says New York University’s Gillers. “It’s hard to prove a negative—there may be one—but it’s certainly not a firm of this size and reputation.”
Milberg Weiss, however, is far from the first prominent law firm to face potential sanctions by the federal government. The difference is that, up until now, those cases have been handled as civil matters.
In recent years, for example, the Equal Employment Opportunity Commission has alleged in an ongoing case that Chicago based Sidley & Austin violated employment discrimination laws when it let go a number of its older partners.
Prior to the Milberg Weiss prosecution, perhaps the most daunting federal action against a major U.S. law firm was an administrative enforcement action brought by the U.S. Office of Thrift Supervision against Kaye, Scholer, Fierman, Hays & Handler, based in New York City. The government sued the firm for $275 million in 1992 over its role as counsel in the late 1980s to a failed savings and loan institution with questionable business and accounting practices.
What really made other lawyers sit up and take notice, though, was when the government upped the ante by freezing the then-400-lawyer firm’s assets. Unable to do business without access to its bank accounts, Kaye Scholer voluntarily agreed to pay a $41 million fine a short time later.
But Kaye Scholer stayed in business, and now numbers 500 lawyers.
Milberg Weiss likely will have to deal with potential civil liability arising out of the Justice Department’s charges, but experts say it is the government’s criminal charges that pose the greatest threat to the firm.
Comparisons are being made to the federal government’s 2002 indictment of Big Five accounting firm Arthur Andersen on obstruction of justice charges for allegedly destroying key documents relating to the financial condition of Enron Corp. Arthur Andersen quickly disbanded in the wake of the indictments, even though the U.S. Supreme Court in 2005 overturned the conviction because jury instructions were improper.
Under U.S. law, a business entity, such as a corporation or law firm, can be held vicariously liable for criminal misconduct by its employees even if management was unaware of the adverse activity, notes Columbia University law professor John C. Coffee Jr.
But Coffee says a key distinction between the two cases is that, unlike the Arthur Andersen case, the partners charged in the Milberg Weiss case are members of the firm’s senior management.
“So I think this is the opposite end of the continuum from indicting a corporation because of one allegedly rogue employee,” Coffee says. “If you’re ever going to indict and convict a corporation or partnership, it would be in a case where the senior most management is believed by the government to be involved.”
UCLA law professor Stephen M. Bainbridge doesn’t foresee the Arthur Andersen scenario playing out for Milberg Weiss. “There’s absolutely no reason to think we’ll have the kind of massive, immediate demise that you got with an Arthur Andersen,” Bainbridge says. He notes that law firms, unlike accounting firms, are not prohibited by federal government regulators from representing clients while under indictment.
Nevertheless, says Bainbridge, “as long as this thing is hanging over Milberg’s head, as a business matter, they are going to have problems getting appointed as lead counsel in these class actions.”
Moreover, Bainbridge says, “this is the kind of thing that can put a lot of stress on intrafirm relationships. Partnership—particularly in a smaller firm like Milberg Weiss, which by today’s standards is relatively small—that’s a real trust relationship. You want these people to have your back. If you’re spending a lot of time worrying about your partners—‘Are they going to jump ship?’ and whether they’re going to be there when you need them—that’s really not very healthy.”
Professional firms, says Coffee, “are fragile.” If Milberg Weiss is convicted, “I think it will have to disband.”
New Twist on Thompson Memo
But it isn’t the future of Milberg Weiss that most concerns others in the legal profession.
There already is widespread consternation within the legal profession and corporate America about Justice Department policies that restrict the traditional defense rights of businesses charged with crimes and those who work for these businesses. As a result, lawyers who represent these businesses are restricted in their ability to defend them.
And now, with the indictment of Milberg Weiss, concern about overzealous federal prosecution of corporate America has been ratcheted up a few notches, as lawyers realize these controversial policies could be applied directly to their own profession.
Policies at issue include not only pressuring companies to cooperate with prosecutors by waiving attorney client privilege and the work product doctrine, but also pressuring companies to encourage corporate officers and senior employees to cooperate, says R. William Ide III of Atlanta. He is a past ABA president who chairs the ABA Task Force on Attorney Client Privilege.
Such policies effectively eliminate many traditional defense rights such as the right to consult a lawyer, Miranda warnings, the Fifth Amendment right to remain silent, and even the right to a criminal defense, Ide says.
At the heart of these concerns is a memorandum issued in January 2003 by then Deputy Attorney General Larry D. Thompson. Drafted in the wake of the wave of corporate scandals that followed the fall of Enron, the Thompson memo sets forth a list of nine factors that federal prosecutors should take into account in deciding whether to file criminal charges against business entities.
Particularly troubling to businesses and the lawyers who represent them is the Thompson memo’s guideline stating that prosecutors should consider a corporation’s “willingness to cooperate in the investigation of its agents, including, if necessary, the waiver of corporate attorney client and work product protection.”
Requests by federal prosecutors for privilege waivers from corporations facing potential criminal charges are increasingly common, says Lawrence J. Fox of Philadelphia, a past chair of the ABA Section of Litigation. He cites recent surveys on the issue indicating that federal prosecutors are seeking privilege waivers in up to 20 percent of cases involving corporations.
The ABA has played a leading role in opposing application of Thompson memo factors in a way that forces potential defendants to waive their protections under the attorney client privilege and work product doctrine.
In recent testimony before the Senate Judiciary Committee, ABA President Karen J. Mathis of Denver urged Congress “to send a strong message to the Department of Justice that the attorney client privilege and the work product doctrine are fundamental principles of our legal system that must be protected.” If corporations resist pressure to waive their privileges, they risk being labeled as uncooperative, said Mathis, which can trigger “a profound effect not just on charging and sentencing decisions, but on each company’s public image, stock price and creditworthiness.”
Just before the hearing, a bipartisan group of former senior officials at the Justice Department submitted a letter objecting to the “culture of waiver” being promoted by the Thompson memo. The letter calls for the Justice Department to “state affirmatively that waiver of attorney client privilege and work product protections should not be a factor in determining whether an organization has cooperated with the government in an investigation.”
(Among the signers is Carol E. Dinkins of Houston, who served as deputy U.S. attorney general in 1984 85. She now chairs the ABA Journal Board of Editors.)
The concern raised by the Milberg Weiss indictment is that, if it’s a sign that more criminal actions against law firms may be in the offing, then more firms will be put in the position of compromising their own protections under the attorney client privilege and work product doctrine.
In her interview with the ABA Journal, then U.S. Attorney Yang said her office in Los Angeles “complied with all the necessary steps under the manual” of standards for prosecutors, which incorporates the Thompson memo and a 1999 memo that relates to prosecutions of attorneys and law firms. “We have to get approval anytime we do something like that, which we did,” she said.
Milberg Weiss’ Web site relating to the case states that the Justice Department raised the possibility of privilege waivers before indicting the firm.
“The Justice Department informed Milberg Weiss that, if the firm wanted to avoid indictment, it had to agree to broad waivers of the firm’s attorney client privilege and work product protection,” states the Web site. “According to the government, Milberg Weiss could not truly ‘cooperate’ with the investigation unless it waived these time honored privileges.”
An Offer Spurned
It was an offer Milberg Weiss says it had to refuse. “As members of the bar, the attorneys who work at Milberg Weiss feel strongly that they cannot, in good conscience, contribute to the erosion of the attorney client privilege by knuckling under to the government’s blackmail,” states the firm’s Web site. “The firm therefore elected to reject the government’s demands for broad privilege waivers and will fight the case in court.”
A law firm may be in a better position to take that kind of stand than most corporations, Ide says.
“Particularly corporations, the scenario is, if they’re indicted—look at Arthur Andersen; it’s gone,” Ide says. “Because the shareholders walk away and your stock starts going down, and then you get sued by the plaintiffs’ lawyers. It’s such a huge risk that you’ll find very few scenarios that a company’s willing, like Milberg did, to run the risk of indictment.”
Milberg Weiss is far from out of the woods, but lawyers at the firm are confident it will come out of its ordeal intact.
There were 128 lawyers at Milberg Weiss when the Justice Department indictment was announced in May. (Including support staff, a total of 363 people worked at the firm.) By the end of September, the number of lawyers at the firm had dropped to 78.
“While a number of lawyers have left in recent months, virtually all of the senior lawyers have stayed, along with a significant number of younger attorneys,” said Weiss in a written statement to the ABA Journal. “Their combined capabilities have [been] and are being enhanced by the addition of key new hires.”
But departures are outpacing new hires. When Matthew Gluck, a 63 year old partner at New York City’s Fried, Frank, Harris, Shriver & Jacobson, came aboard in October, the New York Times headlined its story, “Against Tide, Lawyer Joins Milberg Weiss.” According to news reports, the firm filed 114 securities class action lawsuits in 2004, 91 in 2005, and 17 through mid May in 2006, but it has filed no new cases since being indicted. On its Web site, however, the firm says it has some 560 ongoing cases. Nationwide, class action filings related to securities have dropped to a 10 year low, according to a report issued in July by the Securities Class Action Clearinghouse at Stanford Law School.
In the meantime, Milberg Weiss is continuing to aggressively seek out cases in new practice areas, says senior partner Ariana J. Tadler.
“The firm has always been extremely entrepreneurial in the areas we reach out to,” Tadler says. “We continue to have people call us every day asking for us to represent them. Likewise, there are certain firms that continue to call us and say, ‘Hey, we want to partner up with you,’ because we continue to be the best resourced.”
The case against Milberg Weiss may have a chilling effect on private enforcement of securities laws in the U.S., says Lawrence Rosenthal, a former federal prosecutor in Chicago who now teaches at Chapman University School of Law in Orange, Calif.
Milberg Weiss has been “the single most effective securities regulator in the country,” Rosenthal says, taking on major cases that federal regulatory agencies haven’t pursued. “I don’t want to speculate on anyone’s motives who I haven’t even met, whose names I don’t even know,” Rosenthal says of the Justice Department decision to prosecute the firm. “I’m just talking about the effect. It’s hard to understand how the incremental deterrent value of pursuing the law firm could possibly exceed the value as a securities regulator that this law firm has had.”
Considering Milberg Weiss’ history, the firm is getting support from some surprising allies, says Fox.
“The delicious irony here is that we actually had the U.S. Chamber of Commerce come out and decry the fact that Milberg Weiss was indicted, even though the chamber hates Milberg Weiss,” Fox says. “Because the Chamber of Commerce understands that the same sledgehammer that was used on Milberg Weiss is being used on corporations every day.”