When its California operation split off in 2004, the leaders of Milberg Weiss had a choice: Break up their partnership and form a new firm, or continue as the same entity.
Dissolving would have triggered massive capital payouts to former partners, but almost certainly would have saved the new firm from liability for wrongdoing committed prior to the breakup. The firm and its top partners, at the time, had been under criminal investigation for five years.
But the probe seemed to be focused on departing California partner William Lerach, and dissolving was expensive. So the New York firm's executive committee, under lead partner Melvyn Weiss, decided to keep the partnership intact, banking that they'd be out of the investigation's shadow once the split was complete.
They made the wrong choice, and not for the last time.
Three years later, the California spin-off is bringing new cases while collecting millions in fees from past settlements; Milberg Weiss is slouching through a prolonged decline.
Weiss and the firm stand indicted, with two former name partners having cut deals to testify against them. Lerach, on the other hand, made a deal that gives him a year or two in prison but kills any investigation of his former California partners.
In interviews over the past couple of months, more than two dozen people intimately familiar with the criminal probe describe Milberg Weiss leaders who have been by turns indecisive, myopic, stubborn and simply unlucky in making big-picture business and legal decisions. Most of those people spoke on condition of anonymity because of the ongoing criminal case.
They say that more than anything else, the firms' contrasting situations stem from differences between Lerach's and Weiss' personalities and leadership styles.
"We were never afraid to confront the investigation, and to prepare for it," said Paul Geller, a name partner with Coughlin Stoia Geller Rudman & Robbins whose firm joined with Lerach just after the Milberg Weiss split. "I would contrast that, with all due respect, to the Milberg Weiss model."
While he never worked for the New York firm, he said, "It's the general sense that, rather than face the situation head-on and discuss a plan for it, they took more of a head-in-the-sand approach."
Former partners say decisions Milberg Weiss has made since the 1990s have led to its decline.
First, they say, Weiss and his New York partners failed prior to the split to broaden their client base. Second, the firm wasn't protected from liability at the time of the split. And lastly -- and most baffling to those who know Weiss as a successful legal strategist -- the firm allegedly continued to negotiate payments to a former client for years after Milberg leaders learned that prosecutors were probing such deals (See Conflicts Just Made Milberg Problem Worse).
In short, said a former partner of the pre-split firm, "Mel made one miscalculation after another."
In an e-mail last week, a firm publicist declined to address a list of specific questions about the firm but sent a written statement from Weiss saying he's proud of his accomplishments.
"The firm has established important protections for consumers, shareholders and citizens of this great country," he wrote. "I look forward to clearing my name and returning to a practice to which I have devoted my professional life, one that has given access to the courts to millions of Americans who would not otherwise have been able to achieve justice."
KNOW WHEN TO FOLD 'EM
The Milberg Weiss investigation began in 1999, when a Beverly Hills ophthalmologist convicted of insurance fraud cut a deal for a lighter sentence by telling federal prosecutors he could finger Lerach in a kickback scheme.
That touched off an eight-year investigation into payments by the firm to lead clients in securities class actions. The payments, prosecutors say, involved giving the clients a portion of the firm's attorney fees in exchange for serving as lead plaintiff. Such an arrangement is improper because it gives the lead plaintiff disparate interests from the rest of the class -- and because, in most cases, the firm told courts that the client was not receiving such payments.
The investigation seemingly floundered until late 2005. Over the past two years, a flurry of indictments against the firm, former clients, Milberg Weiss partners and lawyers who served as intermediaries between the two have generated a series of guilty pleas. Most significantly, former name partners David Bershad and Steven Schulman have entered pleas in which they agreed to cooperate against the firm. Lerach, the probe's initial target, isn't cooperating, though he's agreed to serve a year or two in prison and pay an $8 million fine.
Weiss, on the other hand, continues to fight the charges, as does his firm. But their ability to mount a successful defense is severely hampered by Bershad's and Schulman's cooperation.
The "statement of facts" made by Bershad as part of his deal says that the firm continued to channel improper payments to lead plaintiffs until 2005, and that Weiss himself agreed to meet with lead plaintiff Howard Vogel, whose attorney was later sent a $1.1 million payment, even though the partners knew the feds were investigating.
Last month's Weiss indictment suggests another miscalculation: Weiss, the prosecutors allege, obstructed their probe by withholding a document from them for more than a year.
In January 2002, the indictment says, prosecutors subpoenaed a 1998 fax relating to payments to a client. Weiss didn't turn it over until 2003, claiming he had just found it in his office safe. Prosecutors allege Bershad had found it in his desk and passed it to Weiss some time before.
While Weiss' alleged conversations about Vogel and failure to produce the document may seem relatively minor, lawyers involved in the criminal case say they've tipped the balance in favor of prosecutors because a 2002 change to federal sentencing guidelines significantly increased obstruction of justice sentences.
And lawyers familiar with the case said that since Weiss, 72, is the one partner remaining in a case where the other targets have pleaded guilty, he's almost certain to face a harsher prison sentence than Lerach, Bershad or Schulman -- probably more than two years even if he enters a guilty plea, and more than twice that if he's convicted at trial, they said.
Lerach evaded a similar fate by striking a plea deal and leaving his firm -- now Coughlin Stoia Geller Rudman & Robbins -- with arrangements that assure him millions of dollars in continuing income for years.
Milberg Weiss, though, is hamstrung by the fact that Weiss has decided not to leave -- and the firm's executive committee hasn't forced him out.
With the indicted partner still at the firm, it's increasingly hard to retain public pension funds as clients, said lawyers at the firm. More importantly, the firm can't negotiate a way out of its own indictment -- people familiar with negotiations said that would require the firm to admit that Weiss took part in a conspiracy.
Weiss, through his attorney, declined to comment.
In analyzing the situation, people involved in the case point to legacy and pragmatism: Weiss, they say, doesn't want to be disgraced, whereas Lerach is impervious to such concerns. Weiss has long tried to cultivate a reputation as a lion of the New York Bar, but Lerach years ago resigned himself to being vilified in the press.
With Weiss, a former partner said, "the relative skin is much thinner."
The pre-split Milberg Weiss spent years -- and millions in legal fees -- figuring out how to divide the firm's capital, caseload and clients.
Retrospect shows that the New York partners ended up worse than their California counterparts in all three areas, beginning with the East Coast firm's structure.
Under Milberg Weiss' longstanding partnership agreement, the firm's total capital fund payout to former partners in any month was capped at about $175,000.
But if the firm were to dissolve, it would have to dole out lump-sum payments that two partners of the pre-split firm estimated at between $40 million and $50 million.
"At the time, several of us believed the only reason why they did that was to avoid paying," said one of them.
That view isn't held by everyone involved with the case; Edward Hayes, the New York solo who represented Steven Schulman until last year, said he believes firm leaders carefully considered the possibility of reincorporating, and probably made the right decision.
"These are very, very smart guys there," he said. "These kinds of decisions, I think, they're very good at."
Hayes said that from his perspective, the calculus seemed to be not about the liabilities of dissolving, but rather the lack of benefits: The prosecutors, he said, would probably have tried to argue that even a reincorporated firm should be liable for past behavior.
"If you reincorporate with the same people and the same receivables, I don't think it would have helped," he said.
"It's too easy to look back and say they should've done this and they should've done that," he added.
Three years after the split, two former Milberg Weiss partners seeking capital payouts are now arguing that the breakup was in fact a de facto dissolution for the New York firm.
The New York Law Journal, a sibling publication of the Recorder, reported last year that ex-Milberg partners Robert Sugarman and Alan Schulman, two of the government's key witnesses in developing the case, are in arbitration with the firm in an attempt to collect their capital.
Another divorce issue that unfolded poorly for Milberg Weiss was the division of caseload and the stable of institutional investors that would let the new firms generate cases.
At the time of the breakup, there were two standout cases: litigation over the Enron collapse led by Lerach, and suits over tech-boom-era initial public offerings, controlled by the New York partners.
There was relatively little debate over who'd get what, said people familiar with the breakup, because of where the cases originated. Leaders of each firm assumed that their cases would produce hundreds of millions of dollars in fees.
The California partners were right: People briefed on the Enron fee structure say it will yield about $700 million in attorney fees. Lawyers with the San Diego firm expect to receive about half of that, of which an expected $80 million or so will go to Milberg Weiss, they said, for its pre-split efforts.
Speaking privately, lawyers who worked in the New York firm before and after the split say that, in contrast, the expected payout from the IPO suits is probably a bust.
Last December, the 2nd U.S. Circuit Court of Appeals dealt a potentially fatal blow to the IPO cases, saying they could not move forward as class actions. At the time, Bloomberg News reported that Weiss had earlier declined to settle the cases for $3 billion to $4 billion, instead asking for $12 billion.
The Enron fees are important not just to the Coughlin Stoia firm, but to Lerach himself. Upon his departure, said several people with direct knowledge of the firm's partnership structure, he owned between 15 and 20 percent of the firm.
Based on the firm's partnership agreement -- which bases a payout on the average of a partner's draw for the four calendar years before leaving -- he stood to collect about $10 million on departure, said people familiar with the arrangement.
But in 2005, the Lerach firm's executive committee decided to treat the Enron fortune differently: The money, whenever it arrived, would be split based on the percentage of the firm each partner owned as of 2005.
Partners said the main intent was not to help Lerach, but the move ensured that he would get a sizable chunk of a huge fee award even if he left before the fees arrived.
Former Milberg Weiss partners said the New York firm's business problems go beyond the IPO setback. Most importantly, they say, the pre-split firm's New York offices failed to develop the broad client base that California spent millions to build.
In particular, lawyers from New York and San Diego said that in the years leading up to the divorce, the California partners were far more aggressive in cultivating the institutional-investor clients that became necessary for plaintiff firms after federal legislation in 1995.
That wasn't the case at first -- immediately after the Private Securities Litigation Reform Act, Weiss was successful in bringing public New York state funds on as clients, whereas Lerach's West Coast offices struggled.
But in the late 1990s, Lerach's aggressive courtship of union pension funds outstripped Weiss' client development efforts. Lerach began representing funds in class actions and also in opt-out suits. In those cases, Lerach convinced large shareholders that he could get them a better deal if they declined to participate in class settlements spearheaded by other firms.
Those relationships created a broad base of union and public funds -- and eventually led to the UC Regents pension fund, which became the lead plaintiff in the Enron litigation.
The San Diego firm's Geller credited a computerized portfolio monitoring system developed by the West Coast office in 1998 as one reason the firm was successful in getting clients.
While most securities plaintiff firms have such a system now, the Lerach firm was one of the first to aggressively push it, and when the split happened, it held onto the proprietary program. Another partner at the current Coughlin Stoia firm said it continues to spend about $8 million a year on monitoring.
HEROES AND SCOUNDRELS
While luck or foresight may play a part in contrasting decisions by Lerach and Weiss, people familiar with both lawyers attribute differences in dealing with the criminal case largely to personality.
In the press and privately, Lerach for years spoke unabashedly about having made huge amounts of money in his role as self-professed enemy of corporate malfeasance, and didn't seem to take business press criticism of his large fees to heart.
As one former partner put it, Lerach, 61, didn't mind being portrayed as a "lovable rogue," and by the start of this decade, he cared less and less that many business people called him much worse than that.
Several former partners said Lerach -- who did not respond to requests for comment -- is a pragmatist and a realist. He hired criminal defense attorney John Keker, but when it came down to seriously evaluating the risks of fighting a criminal case in which Bershad would testify against him, he cut his potential losses by agreeing to a prison sentence of one to two years.
Leaders of the San Diego firm said they repeatedly discussed the prospect of -- and made plans for -- operating without Lerach.
"A firm that wants to have a life longer than any individual partner has to do these things," Geller said.
Weiss, on the other hand, never made succession plans for his firm, said former partners there. They said he continues to view himself as its leader.
A guilty plea, one of those lawyers said "doesn't comport with his self-image."
For example, they said, Weiss speaks often about his work on behalf of Holocaust survivors seeking recompense for their suffering, and sees himself as what another former partner called "the grandfather of the securities plaintiff bar" -- and even as a "white-shoe" lawyer.
Were Weiss to leave the firm, said lawyers with direct knowledge of plea talks, his firm could settle its criminal case for a relatively affordable $50 million. But even departing to save his firm, the lawyers said, would be too much of an admission for Weiss.
As one former partner put it, "Mel will go to his grave insisting he's up there with Dag Hammarskjold."