Federal prosecutors today reached a settlement with class action law firm Milberg, four of whose former name partners have pleaded guilty in the past year to criminal charges relating to the payment of kickbacks to individual plaintiffs in shareholder cases.
The deal calls for the New York-based firm to pay $75 million in fines in exchange for the dropping of criminal charges. That amount is to be paid in installments through 2012, but the schedule will be accelerated if Milberg's revenues exceed $40 million in a single quarter or $120 million over four quarters.
According to the agreement filed in Los Angeles federal court, Milberg "acknowledges and accepts responsibility" for the actions of the former partners -- Melvyn I. Weiss, William S. Lerach, David J. Bershad and Steven G. Schulman, who have pleaded guilty to participating in the kickback scheme.
But federal prosecutors also stated their "belief that no attorney currently a partner or associate with Milberg LLP is culpable with respect to the Investigated Conduct."
Sanford Dumain, a Milberg management committee member, said Monday the firm had retained counsel to explore recouping some of the $75 million through litigation against its former partners. He declined to provide further details on those efforts.
Lawyers for the four ex-partners have either declined comment or did not return calls.
The firm has already placed the first installments of the fine, totaling over $22 million, in escrow, he said.
Dumain said the important thing was that the firm would now be able to move forward.
"It's very important to us to get this behind us and have the recognition that none of the current partners and associates had anything to do with the misconduct," he said.
As part of the settlement, the firm will also be required to maintain for an additional two years a "best practices" monitoring program it instituted several months prior to its 2006 indictment. The program, overseen by former federal prosecutor Bart M. Schwartz, is intended to ensure that the firm engages in no further misconduct in its handling of client matters.
That misconduct, which spanned over 25 years, helped make Milberg the dominant firm when it came to securities fraud class actions.
At its height before a 2004 bi-coastal split, the firm then known as Milberg Weiss Bershad Hynes & Lerach was behind more than half of all securities class actions. The firm became Milberg Weiss Bershad & Schulman after Lerach left to found the San Diego-based firm now known as Coughlin Stoia Geller Rudman & Robbins.
Shareholder suits often settle for millions and even billions of dollars, reaping large contingent fees for those plaintiffs firms designated as lead counsel. As a result, there is intense competition among firms to be so named.
Milberg's kickback scheme, which paid named plaintiffs 10 percent of legal fees in a case, allowed it to maintain a stable of such plaintiffs in order to swiftly bring claims on behalf of shareholders. Prior to the enactment of the Private Securities Litigation Reform Act of 1995, the first law firm to file such an action could count on winning lead counsel status.
Such agreements are illegal because named plaintiffs in class action suits are not permitted to have interests above those of other class members, to whom they owe a fiduciary duty. The named plaintiffs also falsely certified to courts that they were not receiving any payment for their services.
In the statement of facts accompanying the settlement agreement, Milberg today admitted earning around $239 million in legal fees on cases where plaintiffs were paid. The firm also admitted it concealed the fact that it illegally paid frequent class action expert witness John Torkelsen on a contingent-fee basis.
The firm further admitted kickbacks were paid to a number of New York-area stockbrokers who referred clients to act as named plaintiffs in Milberg cases. One of these, a lawyer-turned-stockbroker named Paul L. Tullman, received almost $9 million in payments from the firm between 1981 and 2005.
When Tullman received his last payment, the investigation of the firm's activities was already several years old. Prosecutors brought their first indictment in June 2005 against Seymour Lazar, one of the plaintiffs who received kickbacks, and Paul T. Selzer, a lawyer who allegedly facilitated the payments. Lazar and two other kickback recipients ultimately pleaded guilty in the case. With Milberg's settlement, Selzer will remain the only defendant.
LEAD FIGURES PLEAD GUILTY
It initially appeared the firm's two leading figures, Weiss and Lerach, who split off from Milberg to form his own California firm in 2004, had escaped prosecution when, in May 2006, only the firm and Bershad and Schulman were indicted.
But after Bershad agreed to plead guilty last July, Lerach announced he too would be pleading guilty. Weiss was indicted in October 2007 and pleaded guilty in March. He was sentenced earlier this month to 30 months in prison. Lerach is already serving the two-year sentence he received in February.
Milberg saw a significant number of its lawyers depart the firm in the wake of its indictment, and the ongoing prosecution raised the possibility that the law firm might disintegrate in a manner similar to accounting firm Arthur Andersen, which fell apart after its indictment for obstruction of justice in the Enron scandal.
But Dumain said Monday that Milberg, which has around 60 lawyers, remains one of the largest law firms in the securities class action bar.
"I think it's remarkable how many people have stayed here and gotten good results," he said. He also said the firm continued to have resources, like its own team of investigators, that other plaintiffs firms lacked.
Following its indictment, the firm was also fired by some client pension funds and removed from lead counsel roles by some courts. Dumain acknowledged these setbacks but said far more frequent had been instances in which Milberg had carried on with its work on matters while under indictment.
Barbara Hart, the head of securities litigation for competing firm Lowey, Dannenberg, Cohen & Hart, said Milberg had many young, talented lawyers and said she expected they would "put their best efforts forward to win new business."
But she said the firm's recent past will probably continue to be a factor with clients, as well as with courts.
"I don't imagine it will make things easier for them," she said.
For many in the legal community it will also be difficult to imagine the new Milberg carrying forward without Weiss at the helm. But Dumain said the firm had been planning for the 72-year-old Weiss' eventual retirement even before his indictment.
Milberg was represented by William W. Taylor of Zuckerman Spaeder; Bryan Daly of Mayer Brown and former U.S. assistant attorney general Viet Dinh.