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The indictments of Milberg Weiss Bershad & Schulman and two of its name partners earlier this month are likely to set off a wave of fights over lead-counsel status in ongoing securities class actions involving the firm. Judges may balk at giving a firm under indictment plum lead- or co-lead-counsel roles, and plaintiffs who were passed over for lead status in favor of Milberg’s clients may reopen fights for those slots. All of that means an uncertain future for the firm and its 125 lawyers. “It is extremely difficult for any institution under indictment to continue to operate,” says Thomas Dubbs, a partner at Labaton Sucharow & Rudoff, a Milberg competitor, noting that Arthur Andersen ultimately fell apart after its own indictment and trial in the Enron accounting scandals. Dubbs says his firm has already received a number of calls from terrified Milberg associates. (Calls to several Milberg associates were not returned for this article.) Prosecutors allege that partners David Bershad and Steven Schulman set up a kickback scheme that paid more than $11 million to three individual shareholders who agreed to stand as lead plaintiffs in hundreds of suits. In the days before the indictment, the firm was already dealing with challenges to its lead-counsel status. And legal scholars and plaintiffs lawyers expect more judges to follow suit. Meanwhile, rivals in the plaintiffs bar for such cases are waiting in the wings; foremost among them is the firm headed by one-time Milberg partner William Lerach. (Lerach himself was under investigation in 2002 over similar allegations, but prosecutors told his lawyer in February that he was not a target of the investigation.) On May 18, in a precursor to many likely challenges, a judge in Delaware’s Court of Chancery — a court where Milberg has filed many significant cases — told plaintiffs attorneys in an ongoing shareholder lawsuit that he was reluctant to let the firm have the lead-counsel slot. He appointed counsel for a new group of plaintiffs to the lead position. Plaintiffs in the suit, which is not one of those cited in the indictment, are contesting the decision by Russia’s largest oil producer, OAO Lukoil Holdings, to take over Chaparral Resources Inc., a subsidiary in Kazakhstan. The judge, Vice Chancellor Stephen Lamb, noted that the possibility of indictment could become a distraction for the Milberg team. “Frankly, I would have difficulty if the outcome were the appointment of Milberg Weiss as the sole lead counsel,” Lamb said, noting that partners at the firm had allegedly paid clients to act as class representatives “in cases in this court.” Milberg partner Seth Rigrodsky stood up to respond, saying he wanted to address those concerns, according to a transcript of the hearing and the account of a lawyer who was present. Lamb interrupted him: “I don’t see there is any point in addressing the court. There is, at least in papers every day, stories that your firm is to be indicted.” Some cases that were mentioned involve actions “that were filed and prosecuted by your firm in this court,” Lamb said. A NEW REVIEW The indictment should also trigger a review of lead-counsel status in suits where counsel has already been appointed, shareholders-litigation experts say. “Part of the criteria of being chosen as lead is that you’re qualified and competent to represent the lead plaintiff,” says Bruce Carton, vice president of Institutional Shareholders Services’ Securities Class Action Services, which keeps a database of class actions and settlements. “An indictment casts a shadow on that.” Milberg is currently lead or co-lead counsel in 95 active shareholders suits, according to the SCAS database. Many large institutional pension-fund clients have remained with Milberg even as the indictments loomed. They may now be forced to make new decisions about who should represent them. “Their first choice is going to be whether to drop the firm,” says Dale Oesterle, a law professor at Michael E. Moritz College of Law at Ohio State University and the author of a business law blog. Even if those clients do choose to stick with Milberg, says Oesterle, “the other litigants are going to ask the courts whether this plaintiff can adequately represent the class. And I think courts will have a hard time doing that.” Alan Lebowitz, general counsel to New York State Comptroller Alan Hevesi, did not return calls seeking comment. Hevesi manages one of Milberg’s largest fund clients, the New York State Common Retirement Fund. Like many larger funds, it has several firms on its approved list of securities-litigation counsel. But many of Milberg’s clients are smaller union pension funds that rely more heavily on the firm. Milberg counts at least 16 union funds as regular clients, including Central Laborers’ Pension Welfare & Annuity Funds, International Union of Operating Engineers Local 825, and New Jersey Building Laborers Pension & Annuity Fund. Several firms are eager to cash in on Milberg’s troubles. “Firms and institutional investors that were not chosen as lead plaintiffs counsel will try to reopen” competition for the lead or co-lead slot, says Carton. NO SECURITY Prior to its split with Lerach in May 2004, Milberg held an ironclad dominance in securities class actions and shareholder-derivatives suits. But no longer: The division spawned Milberg’s greatest competitor, Lerach Coughlin Stoia Geller Rudman & Robbins. The firm is still formidable, however: Milberg has consistently ranked in the top handful of plaintiffs law firms in both dollar value of settlements and number of settlements in cases in which it served as lead or co-lead counsel, and it ranked fourth in total settlement value last year, according to the SCAS. The Private Securities Litigation Reform Act of 1995 opened up shareholder actions to institutional clients, and that, in turn, increased the visibility of several newer players, such as Bernstein Litowitz Berger & Grossman, which garnered the most money from recoveries as lead or co-lead counsel last year, according to the SCAS database; Labaton Sucharow & Rudoff; and Grant & Eisenhofer. These firms have swooped in to lead some of the choicest litigation on behalf of a mix of individual and institutional clients. (A call to Grant & Eisenhofer was not returned, and Bernstein Litowitz declined to comment on the indictments.) Milberg’s continued resilience since the 1995 act has been a surprise to many. The law, according to lawyers who helped draft it, took aim specifically at Milberg: The bill’s backers believed that its provisions allowing institutional investors a higher profile in such litigation would cut into the firm’s ability to claim lead status. But the firm has made inroads with institutional clients, particularly the union pension funds. The unions were drawn by the firm’s vast experience and founding partner Melvyn Weiss’ ceaseless recruiting efforts, according to a lawyer who competes for such clients. But its roster of clients doesn’t include any blue chip institutional funds, such as the California Public Employees’ Retirement System, which have largely signed onto Lerach’s firm or the other top firms. Some competitors aren’t ready to count out the firm. “If anyone can pull it off,” says Dubbs, “it’s Mel Weiss.”
Julie Triedman is a staff writer for The American Lawyer , an ALM publication.

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