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New York State Comptroller Alan G. Hevesi, the trustee of the $140 billion New York State Common Retirement Fund, has announced he will ask Southern District Judge William H. Pauley to replace indicted class action firm Milberg Weiss Bershad & Schulman as lead counsel in a shareholder suit against German pharmaceutical giant Bayer. Hevesi also said he was removing the firm from the pool of those eligible to serve as the CRF’s counsel in future securities litigation matters. In a statement released Thursday, Hevesi praised the firm for achieving outstanding results for the CRF in the past but said he was compelled to replace the firm based on the nature of the charges against it and the standards of the comptroller’s office with regard to contract matters. The CRF has been one of Milberg Weiss’ largest clients and the move is a major blow to the firm, which, along with partners David Bershad and Steven Schulman, was indicted May 22 in Los Angeles by federal prosecutors, who allege the firm paid more than $11 million in kickbacks to individuals who served as plaintiffs in class actions. Such payments are illegal because individual named plaintiffs are not permitted to have interests separate from those of other class members. The firm has denied the charges against it and the two partners and vowed to defend itself vigorously, but the indictment of the entire firm has called into question the firm’s ability to carry on as a class action firm, drawing comparisons with accounting firm Arthur Andersen, which was destroyed by client and staff defections long before going to trial on criminal charges stemming from its work for Enron Corp. Shortly after the announcement of the Milberg Weiss indictment, Ohio Attorney General Jim Petro fired the firm from representing one of his state’s municipal funds in a securities case. A partner at a competing class action firm said Thursday that Hevesi and other officials likely feel obligated to take such steps, given their fiduciary duties. “His duty to pensioners has to outweigh any concept of presumption of innocence,” the partner said of Hevesi’s decision. The comptroller also has been criticized for his past relationship with the firm, including the acceptance of substantial campaign contributions. The CRF’s move does not augur well for the firm, as most of its clients today are pension and other institutional funds run by fiduciaries. In a statement responding to Hevesi, Milberg Weiss said it regretted his decision but would “continue to provide the highest level of legal representation to its clients — the vast majority of whom continue to stand by the firm.” The class action against Bayer alleges the drug maker misled investors by making false statements about the safety of Baycol, a cholesterol-lowering drug suspected of playing a role in at least 100 patient deaths. The CRF claims it suffered $22 million in losses due to Bayer’s actions.

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