A law firm is indicted, and now Mel Weiss and Bill Lerach, the kings of securities class actions, are feeling the pressure.
William Lerach and Melvyn Weiss have maintained they're not the targets of the criminal investigation that has thus far yielded indictments of the Milberg Weiss law firm and two of its name partners. That may be true--for now. But with each new court filing, the government draws another bead of sweat on the brows of these two kings of securities class actions.
In May a Los Angeles grand jury asserted in an indictment that law firm Milberg Weiss Bershad & Schulman, and partners David Bershad and Steven Schulman, directed millions of dollars in illegal kickbacks to people who agreed to serve as plaintiffs in the firm's lucrative securities suits. The three defendants deny the charges. Such payments are illegal because they might induce a named plaintiff to sell his fellow plaintiffs down the river in a settlement that yields a large sum for the lawyers and a pittance for each injured shareholder. The case is bolstered by guilty pleas from mortgage broker Howard Vogel, who was a plaintiff in 40 cases, and lawyer Richard Purtich, who served as an intermediary in the alleged scheme.
The indictment refers to an unnamed Partner A who "knowingly combined, conspired and agreed to commit" the crimes Bershad and Schulman are accused of. Our sources tell us that Weiss is Partner A. Response from his lawyer, Benjamin Brafman: "Mel should really be Partner O for 'Outstanding.'" At any rate, identifying a conspirator is a far cry from having proof that he committed a crime. Weiss could plausibly argue that he thought all the payments were perfectly legal referral fees paid to other law firms.
The indictment also lists a Partner B. This "senior partner" supposedly discussed the conspiracy with Steven Cooperman, a Los Angeles surgeon who, according to the indictment, accepted $6.5 million in payments to serve as a frequent plaintiff for Milberg Weiss. Who is B? Lerach attorney John Keker won't comment, but Purtich has pleaded guilty to funneling money to Cooperman, who worked mainly with Lerach's team in the West Coast office. Lerach split from the firm in 2004.
"Putting them in the room gets you close to putting them in the conspiracy," says Peter J. Henning, a white-collar-crime professor at Wayne State University and editor of the White Collar Crime Prof Blog. But it's not enough, Henning adds. The government needs to show Weiss and Lerach not only knew about the conspiracy but also approved of or participated in it. The best way to do that is to get testimony from another conspirator. Say, in return for a reduced sentence.
Will lesser conspirators talk, and do they have incriminating evidence? Schulman switched lawyers recently, dropping pugnacious New York criminal defense attorney Edward Hayes and hiring Herbert J. Stern, a former judge with a reputation as a skilled negotiator (he's a member of the College of Commercial Arbitrators). Stern declines to comment. Prosecutors applied more pressure by asking Bershad and Schulman to disgorge $36.1 million in fees earned from tainted cases.
There is little surprise here to readers of FORBES. We wrote about Milberg Weiss' looming legal problems in 2004 ("Mr. Class Action," Feb. 16, 2004). We've also exposed many of the schemes detailed in the Milberg Weiss indictment, from back-scratching deals with plaintiffs ("Dirty Money," Sept. 20, 2004; "Bedfellows," Feb. 13, 2006) to the suspiciously lucrative business of suing companies that mount tender offers ("Free Riders," Feb. 14, 2005).
The indictment will scarcely put a lid on the class-action-business honeypot. In this peculiar industry, law firms extract settlements from corporations whose stocks go down. A lot of the settlement money sticks to the lawyers' fingers; some of it filters down to the injured shareholders. But shareholders as a group also ultimately pay for a large part of the settlements, whether directly from corporate coffers or indirectly via insurance premiums.
Last year 2.4% of U.S. public companies were hit with securities class actions. Virtually all of those cases will be settled for pennies on the dollar--1.2% of maximum estimated losses in 2005, according to economic consultant Cornerstone Research. But loss as typically defined in securities suits has no connection to the economic reality of stock investing. A "fraud" that inflates a share price helps the investor who sells as much as it hurts the one who buys. Washington University researcher Anjan Thakor found that 31% of institutional investors showed a profit trading stocks of 480 companies that were later sued for fraud.
| • | Tightening noose
The Milberg Weiss indictments put the pressure on the kings of the class-action game. Forbes, Monday, June 19, 2006 Byline: Robert Lenzer and Daniel Fisher |
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