<http://www.nytimes.com/2005/07/17/business/yourmoney/17tort.html>
July 17, 2005
Robin Hoods or Legal Hoods?
By TIMOTHY L. O'BRIEN and JONATHAN D. GLATER
"Without notes he launched into a brief history of the American tort
system and how crucial it was in protecting the masses from the greed
and corruption of big corporations that make dangerous products. And,
while he was at it, he didn't like insurance companies and banks and
multinationals and Republicans, either."
- John Grisham, "The King of Torts"
THREE months ago, William S. Lerach, the powerful class-action
attorney both feared and loathed in executive suites across the
country, received a disturbing call from his lawyer. Federal
prosecutors, Mr. Lerach was told, wanted more time to build a criminal
case against him.
Until then, a three-year investigation into whether Mr. Lerach and his
former New York law firm, Milberg Weiss Bershad & Schulman, had used
illegal tactics in shareholder lawsuits that made him and the firm
rich and famous had appeared to be dormant. The phone call meant that
the inquiry had suddenly gained traction.
Federal authorities made a similar request to Mr. Lerach's former
partner, Melvyn I. Weiss, asking him to waive statute-of-limitations
requirements. Mr. Lerach and Mr. Weiss declined to give them freer
rein, said individuals with direct knowledge of the investigation.
In a more telling indication of where the inquiry was headed, the
federal authorities also asked Milberg Weiss itself to give
prosecutors more time to assemble their case. The meaning was clear: A
firm that had spent decades winning multimillion-dollar lawsuits
against huge corporations was now in the cross hairs of an
investigation and a possible indictment that could put it out of
business.
On June 23, the exact parameters of the federal investigation became
clear when the United States Attorney's office in Los Angeles indicted
an eccentric 78-year-old Palm Springs investor named Seymour M. Lazar.
The indictment charged Mr. Lazar with accepting millions of dollars
from an unidentified law firm in what the government describes as
"kickbacks" for serving as the lead plaintiff in dozens of fraud suits
the firm filed against corporations from 1976 to 2004. Milberg Weiss
and others have acknowledged that it is the unidentified firm cited as
Mr. Lazar's co-conspirator in the court papers.
Though Mr. Lerach and Mr. Weiss are not named in the indictment
either, both are clearly embroiled in a wide-ranging investigation,
the outcome of which is likely to influence how all plaintiffs'
lawyers practice, as well as the potential civil penalties for
corporate wrongdoing. As a result, the inquiry has reignited heated
debates about the tort system, debates that have come to a head in
recent years.
Milberg Weiss has spent decades building itself into the nation's
premier securities class-action law firm, and its lawyers have become
accustomed to making corporate America sweat. Although the legal
tables appear to have turned, lawyers representing Mr. Lerach and Mr.
Weiss deny any wrongdoing by their clients.
"Neither Milberg Weiss nor any of its attorneys had any knowledge of a
secret arrangement between Mr. Lazar and his law firm, if one
existed," said William W. Taylor III, a lawyer at Zuckerman Spaeder
who is representing Milberg Weiss.
Legal analysts also question the strength of the government's case,
citing possible problems with witnesses and evidence. Even so, the
federal examination alone has proved gratifying to Milberg Weiss's
critics.
"We are pleased that the investigation has been initiated and we await
with interest its results," said Stanton D. Anderson, a Washington
lawyer at McDermott Will & Emery who has pressed for overhauling the
nation's civil justice system on behalf of the United States Chamber
of Commerce. "Even though Milberg Weiss is not our kind of law firm,
we would hope the Justice Department would not indict the firm. We
would rather see them indict individuals."
Until Mr. Lerach and Mr. Weiss bitterly parted ways last year after
working as partners for nearly three decades, Milberg Weiss claimed
the mantle as corporate America's most aggressive and nettlesome
private legal adversary. Even after the partners separated - with Mr.
Weiss, 69, staying in charge of the firm that bears his name and Mr.
Lerach, 59, starting a new San Diego firm, Lerach Coughlin Stoia
Geller Rudman & Robbins - both men remained pivotal figures in the
plaintiffs' bar. To critics, the lawyers embody what they say is amiss
with modern class action suits: shifty and belligerent legal tactics,
excessive paydays for lawyers and repeated blackmailing of
straight-arrow corporations.
Supporters of the plaintiffs' bar respond that lawyers like Mr. Lerach
and Mr. Weiss have led the way in ensuring corporate accountability,
most notably in Mr. Lerach's tenacious, inventive litigation against
the fallen energy giant Enron. Some plaintiffs' advocates also say
that despite the lush fees that lawyers like Mr. Lerach and Mr. Weiss
have snared, their lawsuits have served as a powerful deterrent
against future corporate wrongdoing and have secured rich settlements
that aggrieved shareholders might otherwise have never seen.
THIS standoff over class-action tactics has waxed and waned in
partisan legislative battles for more than a decade. Republicans,
heavily financed by corporate coffers, have sought to rein in the
plaintiffs' bar, while Democrats, beneficiaries of hefty contributions
from lawyers like Mr. Lerach and Mr. Weiss, have maneuvered in
opposition. Although changes enacted by Congress have threatened to
undermine tort lawyers, the profession has quickly adapted after each
setback. And in the wake of corporate scandals at Enron and elsewhere,
the reputation of shareholder lawyers has enjoyed a renaissance.
The White House has waded into the class-action battle by making
overhaul of the tort system one of the pillars of its legislative
agenda. This year, President Bush signed a law making it more
difficult to file class-action suits in state courts. Lawmakers are
also considering legislation that could resolve years of litigation
over asbestos, which has bankrupted dozens of companies that made or
used the material.
Legislative machinations in Washington have led the plaintiffs' bar to
assert that the investigation of Milberg Weiss may be politically
inspired. "It would be inappropriate to comment on an ongoing
investigation, but this sounds like another example of the Bush
administration attacking someone who opposes their political agenda,"
said Chris Mather, a spokeswoman for the Association of Trial Lawyers
of America, a trade group representing plaintiffs' attorneys.
An examination of the roots of the Milberg Weiss investigation - and a
glance at the colorful cast of characters involved - suggests that
there is more than politics at work in the case. The investigation
appears to have sprung at least in part from distaste in some legal
quarters with the way Milberg Weiss and many other plaintiffs' firms
do business, concerns about appropriate court conduct and sharply
differing visions of how best to police corporate malfeasance.
"Those new at the mass tort game look often over their shoulders, as
if what they're doing should somehow be illegal. With time, though,
their hides grow so thick they think of themselves as Teflon."
- "The King of Torts"
The investigation of Milberg Weiss began in the late 1990's with the
prosecution for art fraud of Steven G. Cooperman, a multimillionaire
ophthalmologist who collected fine art and opulent houses on both
coasts. He was also a frequent plaintiff in shareholder lawsuits
brought by the firm.
Struggling with more than $6 million in personal debt, Mr. Cooperman
engineered the theft of two of his own paintings - a Picasso and a
Monet - from one of his homes and collected $17.5 million from
insurers for the missing artwork, according to court documents from
his divorce proceedings.
After the paintings turned up in a climate-controlled storage facility
in Cleveland, Mr. Cooperman was prosecuted and convicted on fraud
charges in 1999 and faced a 10-year prison term. To reduce his
sentence, said a number of people with direct knowledge of the case,
he offered prosecutors a bigger fish: Milberg Weiss.
Federal prosecutors in Los Angeles declined to comment. But other,
former government lawyers said the prospect of securing Mr.
Cooperman's cooperation had to be tempting to the authorities because
taking on Milberg Weiss guaranteed a highly publicized, exacting legal
battle.
"Your reaction to that is, there's an interesting scalp, more
important than my two-bit art fraud thief," said Michael J. Shepard,
former chief of special prosecutions in the United States Attorney's
office in Chicago, who is now in private practice in San Francisco and
played no role in the Cooperman prosecution.
The deal that Mr. Cooperman signed with prosecutors remains under
seal. But he was not sentenced for two years, until July 2001. His
sentence was heavily reduced and he ended up serving less than two
years in prison. According to the judge in the divorce proceeding, Mr.
Cooperman received "large sums as kickbacks from attorneys in one of
the leading class-action firms in the nation" - Milberg Weiss. In
cooperating with prosecutors, the judge said, Mr. Cooperman would help
implicate "members of the Milberg Weiss law firm."
For several months, nothing happened. Then, in early 2002, federal
prosecutors in Los Angeles sent out a barrage of subpoenas to law
firms that had worked with Milberg Weiss. Word of the federal
investigation leaked to the news media.
According to some advocates for Milberg Weiss, the timing of the
subpoenas was suspect. They were issued as the Enron scandal unfolded,
putting Mr. Lerach in the headlines. The Enron debacle also positioned
Milberg Weiss as a staunch defender of innocent investors bamboozled
by corrupt executives running huge companies, rather than as an
attack-dog firm geared toward shaking down innocent companies.
In May this year, Mr. Lerach's firm also sued the Halliburton Company
in federal court in Houston, contending that the engineering and
construction concern defrauded investors by manipulating and
falsifying its financial statements between 1998 and 2001. During most
of the period in question, Vice President Dick Cheney was
Halliburton's chief executive. The lawsuit contends that Mr. Cheney
earned a handsome salary and stock awards despite presiding over both
a failed acquisition and the doctoring of the company's accounts.
Halliburton said that the accusations were meritless and that it
intended to contest them "vigorously." Mr. Cheney's office declined to
comment.
Milberg Weiss is also a generous backer of Democratic Party
politicians and policies. According to the Center for Responsive
Politics, in the 2004 election cycle lawyers at the firm made
political contributions of more than $400,000, overwhelmingly to
Democratic candidates and organizations; they gave $208,000 in 2002.
Supporters of the law firm say that between Milberg Weiss's political
leanings and the close ties that Enron and Halliburton enjoyed at the
White House, the investigation smacks of a political hit.
Nonsense, say others.
"Milberg Weiss says the Justice Department investigation is
politically motivated and I think that's just ridiculous," said Mr.
Anderson, the lawyer for the Chamber of Commerce. "I reject that
argument out of hand. I just don't think the system functions that
way."
Grover Norquist, president of Americans for Tax Reform and a principal
architect of political conservatives' efforts to overhaul the tort
system, concurred, saying that aiming at one law firm would not
produce the kind of fundamental changes that he and his sympathizers
in the White House seek.
"I have no idea how this came to light or what brought it to the
government's attention," Mr. Norquist said. "If they're imagining this
is somebody's idea of achieving tort reform, they're wrong."
Milberg Weiss cooperated closely with the federal investigation from
the start, according to individuals with direct knowledge of the
inquiry. Altogether, the firm has handed over hundreds of boxes
containing reams of documents. But inside the firm, unity began
fraying even before the investigation began. So instead of battling an
indictment, lawyers at Milberg Weiss battled one another. Last year,
the firm split in half, with its hundreds of lawyers choosing between
joining Mr. Lerach's new firm or staying with Mr. Weiss's in New York.
News of the split, not the criminal investigation, was the talk of the
town. Milberg lawyers dismissed the inquiry.
Around the time that the firm began splitting up, Patrick J. Coughlin,
a former Milberg Weiss partner who now works with Mr. Lerach, sounded
a defiant note in an interview: "The investigation started a year and
a half ago. Nothing's happened."
"If you get, say, five thousand cases, and you settle them for twenty
thousand bucks each, that's one hundred million dollars. Your cut is
one-third."
- "The King of Torts"
The legal forte of Milberg Weiss had once been considered an unseemly
legal backwater by established law firms. In the hands of Mr. Lerach
and Mr. Weiss, however, class-action suits became potent artillery
used against major insurers, health care companies and Silicon Valley
enterprises.
Milberg Weiss's huge fees and scorched-earth methods gave rise in the
mid-1990's to federal legislation meant to disable the firm and other
aggressive members of the plaintiffs' bar. But Milberg Weiss adapted
by courting heavyweight institutional investors rather than individual
plaintiffs as clients.
"We're no angels. We're driven by the profit motive just like everyone
else," Mr. Lerach said in an interview last year. "I make more money
in one month sometimes than my father made in his entire life."
Mr. Weiss offered a similar assessment in an interview last year. "Am
I in it for the money? Yes," he said. "What I do with the money is my
business."
Beyond the monetary rewards, Mr. Lerach said the partners reveled in
bringing to heel white-collar fraudsters, as well as banks and other
advisers who assisted them. The firm's court victories also undermined
some forms of cigarette advertising and helped to hold oil companies
more accountable for environmental damage.
But critics said Milberg Weiss's assaults on technology companies
amounted to highway robbery. Tech enterprises operate in a notoriously
risky and unpredictable industry that is prone to earnings gyrations,
making them easy targets for class-action lawyers asserting accounting
manipulation.
Mr. Lerach has long believed otherwise. "You can say whatever you want
about tort reform and the plaintiffs' bar, but I would argue that if
you lose the plaintiffs' bar you lose an important counterweight to
corporate abuses," he said last year.
Despite the legislative and political challenges to their business
model, Mr. Weiss and Mr. Lerach managed not only to survive but also
to thrive. Ultimately, it was the clash of their egos, not outside
forces, that caused the firm to splinter. "It was what I think you
would call spontaneous combustion," Mr. Weiss said last year,
describing how he and Mr. Lerach parted ways.
AS the old Milberg Weiss gave way to the new and as Mr. Lerach settled
into his own West Coast practice, the federal investigation continued
apace, consumed with document production. Apparently, prosecutors in
Los Angeles became concerned that Mr. Cooperman's value as a witness
was shrinking, because many of the Milberg Weiss payments discussed in
his divorce proceedings last occurred about a decade earlier.
So, three months ago, prosecutors asked Milberg Weiss, Mr. Lerach and
Mr. Weiss to retroactively waive their right to argue that the statute
of limitations barred any prosecution. That way, presumably, Mr.
Cooperman's involvement with the firm could still be examined. The
group was willing to give prosecutors some concessions but not others,
and talks over the subject collapsed.
Without an agreement to give authorities the extra time they wanted,
federal prosecutors decided to stop just examining documents. Last
month, they indicted Mr. Lazar and his lawyer, Paul T. Selzer, on
kickback charges as well as charges of conspiracy, mail fraud, money
laundering and obstruction of justice - all carried out, prosecutors
contend, in conspiracy with Milberg Weiss.
"Like all victims, they had a choice. They could get angry, ask
questions, make demands, want justice, or they could quietly take the
money."
-"The King of Torts"
Mr. Lazar and Milberg Weiss go way back, according to the indictment.
As early as 1981, prosecutors contend, the firm was paying him to
serve as a plaintiff and to testify in shareholder lawsuits. The
indictment asserts that from 1981 to 2004, Milberg Weiss received more
than $44 million in legal fees and paid more than $2.4 million to Mr.
Lazar in illegal kickbacks on cases in which both parties crossed
paths.
David W. Wiechert, a lawyer for Mr. Selzer, said, "Paul Selzer is a
pre-eminent endangered-species and land-use attorney with an
unblemished record as a practitioner and a person. He has diligently
upheld the law as opposed to committing crimes such as the charged
offenses."
A lawyer for Mr. Lazar, who was recently hospitalized in Palm Springs,
said at the time of the indictment, "It appears this is an effort to
get Mr. Lazar to say negative things about his class action counsel
and become a government witness."
A person who once knew Mr. Lazar well said he has a colorful past as a
sophisticated, wily investor who at one time was among Wall Street's
most active traders.
"He liked to engage in exaggerated behavior just for fun - he'd go to
a high-powered legal meeting with bankers and intentionally not wear
socks and a tie," said George J. W. Goodman, a business journalist who
has written extensively about the financial world under the nom de
plume Adam Smith. "If Seymour was 25, he would be a master arbitrageur
running a hedge fund and telling people that everything they needed to
know is in Sun Tzu."
Mr. Lazar is described by members of the Milberg Weiss camp as an
astute, aggressive investor who needed little handholding when it came
to the class-action arena.
"The suggestion that Lazar was a plaintiff whom class-action lawyers
simply took off the shelf is ridiculous," said Benjamin Brafman, Mr.
Weiss's attorney. "Without a witness, the case against Lazar and
Selzer is shaky at best. To try then to draft a case against Milberg
Weiss is a legal hurdle that cannot be made and should not be made."
MR. BRAFMAN and other Milberg Weiss advocates also say that the
payments outlined in the indictment were referral fees paid to law
firms representing Mr. Lazar - fees that are common throughout the
plaintiff's bar. But legal analysts say that if the fees were paid to
the law firms with the unspoken understanding that the money would be
given to Mr. Lazar, then that would be improper.
"They're supposed to be a representative of the class itself, or are
supposed to be similarly situated to the other class members," said
George M. Cohen, a law professor at the University of Virginia, about
lead plaintiffs in class-action suits. "If they are getting lots of
money from the law firm, then they are more likely to do things that
are good for the law firm and bad for the class."
Readily available plaintiffs like Mr. Lazar were much more important
to class-action lawyers in the time before changes were enacted in
1995. In the old days, the first law firm to file a suit could secure
lead-counsel status in a suit, giving it considerable say in the
allotment of legal fees among all the firms participating in a case.
But the legal landscape has changed. Now plaintiffs' firms compete to
woo institutional investors, who have suffered the largest dollar
losses, to secure the lead counsel position. Mr. Lerach's firm
represents the Regents of the University of California in litigation
against Enron, for example; having one shareholder ready to rumble
matters less today.
There is another reason that any case against Milberg Weiss and its
lawyers will not be easy for prosecutors: Some of the so-called overt
acts prosecutors describe in the indictment date back decades. And the
conspiracy charge is crucial because it allows prosecutors to tie
together some long-ago actions for which the statute of limitations
may have expired.
"I believe that at the end of the day, if the facts are fairly and
carefully reviewed, the Justice Department will ultimately conclude
that Mel Weiss has not committed any criminal act whatsoever," Mr.
Brafman said. "I have seen no credible evidence whatsoever to suggest
that Mr. Weiss violated the law in any way."
And proving that any improper payments were knowingly made by Milberg
Weiss lawyers to benefit Mr. Lazar may be tricky, lawyers said.
"That's almost invariably the central issue in a white-collar case,"
said Mr. Shepard, the former prosecutor. "The issue is not did
something happen. More frequently, we all know what happened, and the
question is who knew about it. That's where the rubber meets the
road."
For now, lawyers at Mr. Weiss's and Mr. Lerach's firms are hunkering
down. In the days after the indictment was reported, senior lawyers at
the New York firm held a meeting for all partners and associates; a
memo circulated advising members of the firm not to discuss the case
with anyone, not even with one another. And senior partners at rival
plaintiffs' firms say they have received résumés from Milberg Weiss
lawyers looking to jump ship.
This is virgin territory for Mr. Weiss and Mr. Lerach, who are
pursuing a novel strategy as they cope with the publicity surrounding
the investigation. For the first time, neither is talking openly about
a potentially spectacular case.
Others, however, are talking a good deal about the ramifications of a
high-profile prosecution. Longtime critics of the plaintiffs' bar say
that if the government drags Milberg Weiss or any of its best-known
lawyers into court, it will send a chilling message to the entire
class-action bar: Change your ways or face similar consequences.
"Plaintiffs' lawyers are stretching the envelope through solicitation
of clients and solicitation of plaintiffs," said Victor E. Schwartz, a
Washington attorney with Shook, Hardy & Bacon who advocates revising
the civil justice system. "But while the focus is on Milberg Weiss
now, this process of aggressive solicitation didn't begin with them.
There are a handful of other firms that have a lot at stake in this."
