A Wall Street Journal subscription-only editorial has a useful overview of what shareholder “strike” suits are about, what the two indicted partners at Milberg Weiss allegedly did, and how they did it:
The 102-page indictment out of the Los Angeles U.S. Attorney’s office is a remarkable account of mass-tort corruption that has long been suspected by anyone paying attention. It accuses Milberg Weiss, as well as partners David Bershad and Steven Schulman, of paying off their class-action plaintiffs. The accused say they’ll fight the charges. But this exercise has already done a public service by turning over a rock to expose the dirty world of securities “strike” suits that Milberg Weiss helped pioneer.
At best these are acts of legal extortion, with law firms jumping on a company with a falling share price to allege fraud on behalf of shareholders — whether or not there has been any bad behavior. The law firms claim to represent so many investors that most companies settle rather than keep paying legal fees to fight in court. Shareholders typically receive only token payments, while the likes of Bill Lerach and Melvyn Weiss have become rich as Croesus. Even Congress has recognized this as a racket, passing a 1995 reform over Bill Clinton’s veto that has moderated some abuses but failed to stop the shakedowns.
This indictment breaks new ground, however, in alleging that many of these suits aren’t just unethical but have been illegally manufactured. In order to file a securities suit, tort firms require a “lead plaintiff” who was actually harmed and seeks to represent thousands of other unnamed shareholders. According to prosecutors, Milberg Weiss was paying millions of dollars in kickbacks to its lead plaintiffs.
For some of these “investors,” filing lawsuits seemed to be a full-time job. Howard Vogel, a New Jersey businessman who turned state’s evidence in April, served, or had his relatives serve, in 40 suits. Retired Palm Springs lawyer Seymour Lazar is accused of taking part, or having his family take part, in 70 suits. All told, the indictment claims Milberg Weiss raked in some $216.1 million from lawsuits in which they kicked back cash to plaintiffs.
The indictment also asserts that the accused didn’t just happen to be invested in these stocks. Rather, “the Paid Plaintiffs purchased the securities at issue anticipating that the securities would decline in value, in order to position themselves to be named plaintiffs in securities fraud actions and to obtain kickback payments. . . .”
The Journal is worried about the unfairness of indicting the firm: “The threat of a corporate death sentence is an abuse of prosecutorial discretion against any but the most corrupt criminal enterprises — namely, the mob.” I believe that if the firm has done what is alleged, it has essentially been operating a mob-like protection racket under the false pretense of protecting shareholders. The only thing missing is “contracts” on those who resist.
Meanwhile, the fallout from the indictment of the leading firm in shareholder class-action “strike suits” and two of its partner has been widespread, and there is surely more to come:
- According to the New York Sun, current New York Attorney General and gubernatorial candidate Elliot Spitzer is returning “tens of thousands of dollars” in campaign contributions from the firm and its partners.
- Ohio Attorney General Jim Petro has removed Milberg Weiss as his “special counsel,” and as lead counsel in its suit against Putnam Funds and that firm’s alleged mismanagement of Ohio Tuition Trust Authority funds.
- Milberg Weiss partner David Bershad is taking a leave of absence.
- So is partner Steven Schulman.
- For our ongoing entertainment, the firm has set up a self-defense web site.
Finally, the New York Sun has lots of uncomfortable information on Milberg Weiss’s relationship with Spitzer and other New York lawmakers in a Friday editorial:
If this indictment makes an eloquent case for tort reform, other related circumstances, especially right here in New York, highlight how difficult that reform can be to achieve. Consider all the New York politicians who have taken contributions just from the members of the plaintiff’s bar implicated in this particular case. The state’s comptroller, Alan Hevesi accepted $100,000 from the firm for his 2002 campaign, as well as $13,500 each from senior partners Melvyn Weiss and William Lerach. Mr. Lerach later left the firm, but was still a partner during part of the time covered by the indictment. He was certainly at the firm when he donated $12,000 to the Friends of Pataki committee in 2001 and 2002.
The gubernatorial campaign of the attorney general, Eliot Spitzer, accepted $35,000 from the firm, of which $20,000 came in during the past year as the legal cloud darkened, and another $35,000 from Mr. Weiss. Mr. Schulman donated $9,000 to Mr. Spitzer’s 2002 attorney-general and 2006 gubernatorial campaigns. Mr. Bershad gave Mr. Spitzer $13,000 in 2002 and $10,000 for 2006.
It’s worth asking whether that money might have played some role in one interesting little trill in the indictment: The federal indictment notes that some of the behavior it alleges also violates New York law. Yet Mr. Spitzer, who normally interprets New York law to expand his jurisdiction, doesn’t seem to have taken much interest in pursuing Milberg Weiss before or during the federal investigation. Likewise, after winning re-election in 2002 in part with a cash infusion from Milberg Weiss, Mr. Hevesi just happened to hire the firm to represent the state’s public-employee pension fund in – you guessed it – a shareholder suit against Bayer AG.
….. We’re all for campaign contributions as a form of free speech, but trial lawyers’ exercise of their First Amendment rights doesn’t absolve politicians of their responsibility to put an end to abusive litigation like that alleged in this indictment. No matter how much money these New York politicians, or other beneficiaries of trial lawyer largesse, return, the fundamental problem of the abuse of civil litigation will remain. This indictment shows just how big that problem may turn out to be.
UPDATE: How sleazy is this? — “Prosecutors asserted in court filings that Mr. Bershad used cash from a safe in a credenza in his office to pay kickbacks to plaintiffs. Access to the safe ‘was strictly limited,’ according to the indictment.”
- May 19 — Milberg Weiss: At Long Last, Two Partners, and the Firm Itself, Are Indicted
- April 30 — Is the Jig Finally Up on Milberg Weiss?
- Dec. 14, 2005 — Quebecâ€™s Lawyers Are Mimicking Milberg Weissâ€™s US Class-Action Tactics
- Nov. 18 — Update: Investigation into Illegal Payments to Shareholder-Suit Plaintiffs
- Aug. 19 — Update: The Multi-Billion Dollar Shareholder-Suit Payoffs Investigation Is Gaining Steam; Only the WSJ Cares
- June 27 — Payoffs to Shareholder Suit Plaintiffs Alleged