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staff reporter Ask melvyn weiss or William Lerach why their firm-Milberg Weiss Bershad Hynes & Lerach-will be split into East and West coast firms, and they’ll say it’s because the 200-lawyer operation is too difficult to manage. The firm’s leaders will also tell you that the division of the country’s most dominant securities class action firm is amicable and has nothing to do with money or with any tension between them-the bombastic and often controversial Lerach in San Diego and the older, more traditional Weiss in New York. “I have gotten along with him for 30 years,” Weiss said. “This has nothing to do with it.” Lerach said that as strong-willed individuals they have had their disagreements over the years. But he was quick to praise Weiss for his years of mentoring and said the split was not the result of any personal dispute between the two. However, interviews with six ex-partners at Milberg Weiss who spoke anonymously and with other attorneys who are familiar with the firm’s operation and cases, yield a somewhat different story. Money issues In recent years, these lawyers said, the California and New York operations have fought over money. California senior partners reportedly believed they were entitled to a bigger share of the pie because their operation was more profitable. Competitiveness between the East and West coast operations has taken a toll, with no geographic boundaries between where the two operations would pursue and file cases, the attorneys said. The firm’s dominant offices are in New York, with 75 lawyers, and in San Diego and San Francisco, with a combined total of 104 attorneys. The lawyers also point to Lerach’s take-no-prisoners litigation style-and Weiss’ waning tolerance of Lerach and his West Coast operation. Among the recent controversies: A Los Angeles grand jury is investigating whether the firm paid individuals to be plaintiffs in shareholder suits. And, in 1999, the firm paid a $50 million settlement in a case that accused it of malicious prosecution following a lawsuit brought by Lerach. Perhaps the last straw, several attorneys interviewed said, occurred on May 30 when Lerach sent a letter to two law firms that had been appointed co-lead plaintiffs’ counsel in a WorldCom Inc. shareholders’ securities class action in federal court in New York. Lerach, who heads Milberg Weiss’ team representing 41 pension funds in the WorldCom case, tried and failed three times to have Judge Denise Cote return his clients’ suits to state court, returning control of the cases to him. But Cote’s May 20 order reaffirmed the cases’ status as part of a federal multidistrict litigation. Ten days later, Lerach wrote the May 30 letter to plaintiffs’ lead counsel-New York’s Bernstein Litowitz Berger & Grossmann and Philadelphia’s Barrack, Rodos & Bacine. According to two people who said they’ve seen the letter, it demanded that both firms notify their malpractice insurance carriers that if they mishandled the case and did not properly represent the interests of Milberg Weiss’ clients, they would be held liable. Lerach’s letter to the two law firms was awkward for Milberg Weiss. The firm is representing the New York State Common Retirement Fund in at least two unrelated cases. Bernstein Litowitz and Barrack Rodos, as co-lead counsel in the WorldCom case, are representing the retirement fund. Three days after Lerach’s letter, Weiss sent his own letter to Bernstein Litowitz and Barrack Rodos retracting Lerach’s letter and apologizing to the two firms, the two sources said. “The letter embarrassed Mel,” said one ex-Milberg Weiss partner. Neither Weiss nor Lerach would comment on the letters, saying they were a client matter. The law firms that received the letters declined to comment. Given its huge profile, Milberg Weiss is no stranger to controversy. The firm’s Web site trumpets the firm as “The world’s leading class action law firm,” and few would argue with that. Since the firm was founded in 1965 by Weiss and the now-deceased Lawrence Milberg, it has come to dominate the securities class action field. When Congress passed the Private Securities Litigation Reform Act in December 1995, it was designed, at least in part, to reign in Lerach, who was accused of holding corporate America hostage with his shareholder suits. Since then, if anything, the firm has become more dominant. From the law’s enactment through the end of 2002, Milberg Weiss was lead or co-lead counsel in 54.5% of all securities class action stock fraud cases filed and settled, according to Cornerstone Research and Securities Class Action Alert. The No. 2 firm was lead or co-lead counsel in 8.5% of stock fraud class actions. By its own reckoning, Milberg Weiss has settled cases worth more than $30 billion over the years. It also has seen its number of lawyers triple since 1992. Weiss and Lerach point to the firm’s size as the reason that it needs to be divided in two “It’s a huge enterprise,” Weiss said, referring to the firm’s eight offices and staff of more than 450. He said that having one large operation places a heavy burden on the firm’s senior litigators because they are all also involved in firm management. “The quality of the lawyers at the top is at the highest standard, and we want to continue it that way without imposing a big management burden on the staff,” he said. Lerach said he is tired of spending so much time on management issues and that two smaller firms will be better able to recognize and reward young lawyers moving up at the firm. Discounting unwieldiness The ex-partners interviewed, however, discounted unwieldiness due to size as a reason for the breakup, since many American law firms have 200 or more attorneys. According to The National Law Journal‘s 2002 survey of the nation’s 250 largest law firms, 198 had 200 or more attorneys. One current and one ex-partner said that what separates Milberg from other firms is that it is by far the largest that relies on contingency fees. “The difference is that in a contingency fee firm you have continuous overhead but not constant revenue,” said Kenneth Vianale, one ex-partner who spoke on the record. “With defense firms, they have clients who are paying the bills.” He said separating the firm into two will eliminate certain wasteful inefficiencies. Among the high-profile cases the San Diego office is overseeing, aside from WorldCom, are the Enron Corp. shareholder class action in Houston, where Lerach is lead plaintiffs’ counsel, and a suit against AOL Time Warner Inc. and its executives for allegedly cheating investors by inflating its stock price. The New York office is handling cases that include massive litigation against investment banks over the alleged misleading of investors in about 300 initial public offerings during the stock market boom and a securities class action against Bayer over its failed drug Baycol. Weiss and Lerach both said that the details of how and when the split will occur need to be worked out. Dividing the cases will not be difficult, one partner in San Diego said, because the firm’s work has been mostly “bifurcated” for years. Weiss said he saw no problem in the firm’s dividing and handling existing cases. The new firms will cooperate, and all cases will be properly staffed, he said. Money as driving force? When it comes to finances, Weiss and Lerach insisted that the split was not caused by disagreement over sharing money. “Both sides will be taken care of fully-an even split,” Weiss said. Calls to more than two dozen other Milberg Weiss partners seeking comment about the breakup were not returned. But the ex-partners who spoke anonymously said they believed that money was a driving issue for the divorce, although no one would disclose any firmwide financial information. One former partner explained that the firm’s senior management had wide discretion in determining compensation for equity and nonequity partners, with pay for equity partners ranging from $400,000 to $12 million and pay for nonequity partners ranging from $200,000 to $500,000. “The West Coast partners thought they should have been getting a bigger share,” another ex-partner said. However, the one San Diego partner who talked said, “I am telling you that that’s not an issue. I am not dissatisfied with the money.” Regardless of what caused the split, it’s clear that there will be two firms of relatively equal size based on opposite coasts going after corporate America. Lawyers on the defense side said they did not foresee an impact on their clients. Lawyers at competing plaintiffs’ firms expressed curiosity over the final outcome. They were not applauding the breakup of their biggest competitor. “In a way, it will be more difficult, because we will have two competitors, not one,” said Steven Toll, a founding partner of Washington’s Cohen, Milstein, Hausfeld & Toll. Staff reporters Andrew Harris, Gary Young and Allison Altmann contributed to this story, as did Jason Hoppin of The Recorder in San Francisco. Aronson’s e-mail address is [email protected].

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