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As the legal community ponders whether the criminal indictment of Milberg Weiss Bershad & Schulman will eventually lead to that firm’s dissolution, two of its former partners are arguing that the firm actually dissolved two years ago at the time of its bi-coastal split. They claim they are now owed millions of dollars in returned capital and unpaid fees as a result. If the timing of the claims is awkward, the identity of the ex-partners making them is more so. They are Alan Schulman and Robert P. Sugarman, both of whom have been widely reported to be key cooperating witnesses in the prosecution’s case against the firm over the alleged payment of kickbacks to class action plaintiffs. It is unclear if and how the two matters will proceed together. The lawyers representing the two sides in the monetary dispute both said Friday they were not aware of their clients’ strategies in the criminal case. But one source close to the investigation said the ex-partners’ claims showed they had a strong financial interest in “bringing the whole firm down.” The survival of the firm has indeed been called into question by the indictment last month of the firm and individual partners David J. Bershad and Steven G. Schulman, who is not related to Alan Schulman. Several lawyers and clients have left the firm since the announcement of criminal charges, increasing parallels with accounting firm Arthur Andersen, which was obliterated by defections months before its trial on criminal charges relating to work it performed for Enron Corp. Both Alan Schulman and Sugarman have been cooperating with federal prosecutors in Los Angeles for some time, said the source close to the investigation. The two partners first raised the money issue with the firm in February 2005. Milberg Weiss’ partnership agreement requires such partner disputes be arbitrated but the matter surfaced publicly in Manhattan Supreme Court a few months ago when Schulman and Sugarman moved to compel arbitration on the grounds that Milberg Weiss was not cooperating in efforts to select an arbitrator. The partners both left the firm then known as Milberg Weiss Bershad Hynes & Lerach in 1999. Schulman become the head of the San Diego office of class action rival Bernstein Litowitz Berger & Grossman while Sugarman became a solo practitioner in Uniondale, N.Y. Neither returned calls for comment. In 2004, the firm split into the present New York-based Milberg Weiss, headed by Melvyn I. Weiss, and San Diego-based Lerach Coughlin Stoia Geller Rudman & Robbins, headed by William S. Lerach. Schulman and Sugarman claim this breakup constituted a dissolution of the firm and, under the partnership agreement, requires the accelerated payment of returned capital and deferred compensation. They are currently receiving some money but it is in small installments designed to be spread over several years. The alleged unpaid compensation stems from legal fees earned while the two were partners at the firm but not received by the firm until after they left. The two do not specify in court documents how much they are owed except to say the amount is in the millions. The claims are against both Milberg Weiss and Lerach Coughlin. The firms’ position is that the 2004 split was not a dissolution but that the Lerach Coughlin partners withdrew from the partnership in the same manner as Schulman and Sugarman. The distribution of work at the firm was covered by comprehensive agreements, which took over a year to work out. The parties had agreed that J. Lawrence Irving, a former federal judge in San Diego, would mediate the matter. But Irving withdrew unexpectedly last December. He did not return a call seeking comment. Milberg Weiss had suggested possible replacements in former New Jersey U.S. District Court Judges Alfred M. Wolin and Nicholas H. Politan, as well as New York University President John E. Sexton, but the ex-partners rejected all three as unacceptable due to their “well-known close ties to Mel Weiss.” They did not elaborate on those ties, but both judges have overseen settlements involving Milberg Weiss and Weiss is a major benefactor and member of the board of trustees at NYU School of Law, from which he graduated in 1959. In court papers, Schulman and Sugarman, who are represented by Allen D. Black of Philadelphia’s Fine, Kaplan & Black, pushed for the appointment of a three-lawyer arbitration panel and attributed difficulties in selecting a sole arbitrator in part to the “small and close-knit world” of the securities class action bar. “Many otherwise qualified single arbitrators (including many with impeccable credentials) have close ties to one or the other of the parties,” they said. “Of the few neutral and potentially acceptable candidates, many want no involvement in this dispute.” The parties agreed last month to have a three-lawyer panel arbitrate, with each side picking one arbitrators, and those two lawyers picking the third. Henry G. Miller of White Plains, N.Y.-based Clark Gagliardi & Miller, the lawyer representing Milberg Weiss and Lerach Coughlin in the dispute with the ex-partners said the matter was just getting started and issues beyond the question of dissolution had not yet been explored. He also said he was uncertain how the arbitration would be affected by the ongoing criminal case. William W. Taylor of Washington, D.C.’s Zuckerman Spaeder, the chief criminal defense lawyer for Milberg Weiss, did not return a call seeking comment. The spokesperson for the Los Angeles U.S. Attorney’s Office also did not return a call. Federal prosecution Federal prosecutors charged the firm and the two indicted partners with paying three individuals more than $11 million pursuant to secret agreements giving them a percentage of legal fees of more than $200 million the firm received in class actions in which the individuals served as plaintiffs. Such agreements are illegal because name plaintiffs in class action suits are not permitted to have interests above those of other class members, to whom they owe a fiduciary duty. Two of the alleged kickback recipients, Steven G. Cooperman, 64, of Connecticut and Howard J. Vogel, 61, of Florida, have been cooperating with prosecutors. Vogel, who has said he worked with Sugarman as well as Bershad and Steven Schulman, pleaded guilty in April to receiving $2.5 million for serving as a Milberg Weiss plaintiff. Both Alan Schulman and Sugarman were reported to have left Milberg Weiss under stormy circumstances. Schulman, once considered Lerach’s top lieutenant, told Fortune magazine in 2000 that he thought Lerach had engaged in unethical conduct and was “reckless,” “vindictive” and “dangerous.”

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