Class-Action Law Firm Close to a Settlement
By Nathan Koppel
The Wall Street Journal
Monday, June 2, 2008
Class-action law firm Milberg LLP is close to a settlement that
could end a federal prosecution of the firm for alleged
kickbacks, according to two people familiar with the
discussions. The deal would mark the climax of a case that
has roiled the American plaintiff's bar.
While a deal could still fall apart, the sides have made
progress after weeks of talks that have centered on the payment
Milberg will have to make as part of a settlement. Last
summer, prosecutors had sought about $50 million in fines and
penalties, but the demand mushroomed this year to about $100
million, say people familiar with the negotiations.
Recently, Milberg and prosecutors have zeroed in on a payout in
the neighborhood of $75 million, these people say.
The government alleged that the firm paid more than $11 million
in kickbacks to clients in exchange for their serving as lead
plaintiffs in securities class actions. These payouts
allowed the firm to quickly file suits and become lead counsel,
prosecutors allege, entitling Milberg to a large share of the
fees: some $250 million over more than two decades.
The firm, which is scheduled to stand trial in August, has
A spokesman for the U.S.
attorney's office in
Los Angeles, which is leading the case,
declined to comment. Michael Spencer, a partner at
Milberg, declined to comment.
Milberg's fall has been a blow to the U.S. plaintiff's bar. It is
rare for any law firm to face criminal charges, especially one
as powerful as Milberg. Led at one time by Melvyn Weiss
and William Lerach, the firm pioneered the lucrative business of
securities class-action lawsuits. After a dramatic drop in
a company's share price, the law firm typically would file suit
on behalf of shareholders claiming the company misled investors
about its financial health. The firm has helped win huge
settlements against accounting firms, tech companies and many
high-profile corporations embroiled in scandal, including Enron
Corp. and Tyco International Ltd.
Corporate executives long have complained that the suits were
designed primarily to enrich lawyers. The Milberg case has
given a boost to that view, prompting some in Congress to call
for tighter regulation of securities class-action suits.
Milberg maintained its suits were keeping Wall Street
accountable, and the firm's success in winning large settlements
for investors caused many in the plaintiff's bar to question the
merits of the prosecution. The government has maintained
that Milberg lawyers undermined the justice system by lying to
courts, claiming all plaintiffs were being treated equally when
in fact some were getting kickbacks.
The prosecution of Milberg was also controversial, because it is
relatively rare to criminally charge a business, as opposed to
the specific individuals purportedly involved in a crime.
The criminal conviction of Arthur Andersen LLP for impeding the
probe of Enron, a client, put the accounting firm out of
business, costing thousands of employees their jobs. In
2005, the Supreme Court overturned the Arthur Andersen
conviction. But the government claimed Milberg was a fair
target, because much of top management was allegedly involved in
the kickback scheme.
This has been a rough year for the plaintiff's bar.
Richard "Dickie" Scruggs, one of the nation's most prominent
plaintiffs lawyers, who made his name in asbestos and tobacco
litigation, pleaded guilty earlier this year to a criminal
conspiracy charge. He was implicated in a scheme to bribe
a judge in a case over legal fees following insurance litigation
stemming from Hurricane Katrina. He is scheduled to be
sentenced July 2 and may face up to five years in prison.
Meanwhile, a criminal trial is under way in federal court in Kentucky in which three plaintiffs lawyers
involved with a class-action suit face allegations that they
misappropriated about $65 million of a $200 million settlement
on behalf of plaintiffs who claimed they were injured by the
diet drug Fen-Phen. The defense has said that if anything
was improper about the settlement, it wasn't intentional.
Despite these blows, the plaintiff's bar as a whole has had
plenty of action. More than 170 lawsuits related to
subprime lending were filed in federal courts in the first three
months of this year, according to Navigant Consulting.
Beyond the recent black eyes to the profession, plaintiffs
lawyers face an arguably bigger challenge from court decisions
in the past several years that make it harder to bring certain
class-action lawsuits or to sustain big damage awards. A
case the U.S. Supreme Court plans to hear in its next session
could significantly undermine drug mass torts.
If the amount under discussion in the Milberg talks holds, the
government will be able to claim more than $100 million in fines
and penalties in the case -- factoring in the more than $30
million that other defendants in the case have agreed to pay.
That total figure would make the case one of the largest-netting
prosecutions of a law firm. Last year, Jenkens &
Gilchrist, a now defunct
firm, agreed to pay $76 million to resolve a federal tax-shelter
Milberg has asked Coughlin Stoia Geller Rudman & Robbins LLP, a
powerful San Diego law firm that
spun off from Milberg several years ago, to chip in part of its
payout in the settlement, but the Coughlin firm has refused, say
two people familiar with the matter. The Coughlin firm
hasn't been charged in the case.
Since its 2006 indictment, Milberg has lost many lawyers and
considerable business, but it has continued to earn fees,
including some large sums from its previously filed class
actions. This year, it was paid more than $120 million as
part of a settlement of a class action alleging securities fraud
at Tyco, according to two lawyers in the case.
Milberg is the last major defendant in an investigation that was
launched in about 2001. That probe has resulted in a
two-year prison term for William Lerach, a prominent former
Milberg partner, along with guilty pleas by three other former
Melvyn Weiss, the firm's co-founder, is due to be sentenced
Monday in Los Angeles, after
pleading guilty this year to participating in a criminal
conspiracy. Mr. Weiss's plea agreement calls for him to
serve up to 33 months in prison and to pay $10 million in fines
and penalties, but he has requested to be sentenced to no more
than 18 months.
Write to Nathan Koppel at