Payoffs to Shareholder Suit Plaintiffs Alleged

The Wall Street Journal (link requires paid subscription) has a front-page story that I expect will be ignored by the mainstream business press (bolds are mine):

Federal prosecutors are investigating one of the nation’s most aggressive class-action law firms, Milberg Weiss Bershad & Schulman, for alleged fraud, conspiracy and kickbacks in scores of securities lawsuits, and could seek criminal charges against the firm itself and its principals.

The three-year investigation focuses on allegations that the New York-based firm routinely made secret, illegal payments to plaintiffs who appeared on securities class-action lawsuits brought by the firm, according to court documents and lawyers close to the case. A grand jury in Los Angeles convened last October has been hearing evidence of alleged illegal payments in dozens of suits filed against oil, biotechnology, drug and chemical companies during the past 20 years, the lawyers close to the case said.

Prosecutors offered a glimpse of the broad investigation in an indictment filed in federal court in Los Angeles on Thursday against a single plaintiff, Seymour M. Lazar, a retired Palm Springs, Calif., entertainment lawyer who is 78 years old.

The charges don’t name Milberg Weiss, but Milberg Weiss officials confirm that it is the firm cited in the indictment. The firm has been told that senior partners alleged to have authorized payments to the plaintiff and the firm itself could face indictment, the lawyers close to the case said.

Milberg Weiss has brought hundreds of class-action cases over 30 years and won tens of billions of dollars in settlements and judgments against businesses. Some corporate and Wall Street executives say the firm exemplifies abuses in class-action litigation that burdens the courts. In Washington, Milberg Weiss has often been cited in Republican-led efforts to curb class-action suits and in congressional debate that led to 1995 legislation to limit securities litigation.

Class-action lawyers said they feared that an indictment of Milberg Weiss could have far-reaching impact and hamper efforts to recover damages for shareholders and consumers. Michael Hausfeld, a prominent Washington plaintiffs’ lawyer, said such a case “could taint private civil enforcement of securities law” and deflect attention from “the egregious corporate misconduct at issue in these suits.”

Last week’s indictment charged Mr. Lazar with fraud, conspiracy, money laundering and obstruction. It alleges that a New York law firm paid “millions of dollars in secret and illegal kickbacks” to Mr. Lazar.

The indictment alleges that Mr. Lazar or a member of his family appeared as a plaintiff in more than 50 Milberg Weiss securities cases during a period running from 1981 to 2004. Mr. Lazar and family members together received more than $2.4 million in secret payments from the law firm, the government charges. During this period, Milberg Weiss earned at least $44 million in legal fees from cases in which Mr. Lazar or a family member was a plaintiff, according to the indictment.

Investigators allege that Mr. Lazar was illegally promised a share in the legal fees that would result from the cases in which he was a plaintiff, according to the indictment. Named plaintiffs in class-action cases can’t have a special interest or concealed inducements beyond others in the class.

The indictment confirms what many public company executives and their legal counsel have believed or known for years: that individuals, in return for under-the-table compensation, have bought minor equity positions in companies for the express purpose of helping a law firm they are cozy with sue if the stock price drops on bad news. I personally know someone who I suspect was doing this for a time; his target was Michael Milken.

Mr. Hausfeld’s crocodile tears about the supposed greater good and corporate evildoers notwithstanding, the actions described are illegal, and support an organized racket that distorts the securities markets, discourages companies from going public, encourages public companies to go private, and in the long run stifles innovation and economic growth.

If Mr. Lazar is guilty, please reserve him a space next to Mr. Rigas of Adelphia, and for an equivalent amount of time. As to Milberg Weiss, if the government can put Arthur Andersen out of business for Enron, the least it can do is disbar and imprison the offending partners for brazenly illegal payments in these mostly frivolous “strike suits.” These suits’ cumulative dollar amounts not only dwarf those involved in Enron, but in most cases are situations where the companies sued did no wrong, and simply paid money to make the problem go away and to avoid years of costly attorney and executive time.
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UPDATE: Forbes.com has stories on the investigation and indictments (plural). I don’t see any others.