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When their firm’s California operation split off in 2004, the leaders of Milberg Weiss, one of the premier class action law firms in the country, had a choice: Break up their partnership and form a new firm, or continue as the same entity. Dissolving would have triggered massive capital payouts to former partners but almost certainly would have saved the new firm from liability for wrongdoing committed prior to the breakup. The firm and its top partners, at the time, had been under criminal investigation by the federal government for five years. But the probe seemed to be focused on departing California partner William Lerach, and dissolving was expensive. So the New York firm’s executive committee, under lead partner Melvyn Weiss, decided to keep the partnership intact, banking that it would be out of the investigation’s shadow once the split was complete. They made the wrong choice, and not for the last time. Three years later, the California spinoff is bringing new cases while collecting millions in fees from past settlements; Milberg Weiss, meanwhile, is slouching through a prolonged decline. Weiss and the firm stand indicted, with two former name partners having cut deals to testify against them. Lerach, on the other hand, made a deal that gives him a year or two in prison but kills any investigation of his former California partners. In interviews over the past couple of months, more than two dozen people intimately familiar with the criminal probe described Milberg Weiss leaders who have been by turns indecisive, myopic, stubborn, and simply unlucky in making big-picture business and legal decisions. Most of those people spoke on condition of anonymity because of the ongoing criminal case. They say that, more than anything else, the firms’ contrasting situations stem from differences between Lerach’s and Weiss’ personalities and leadership styles. “We were never afraid to confront the investigation and to prepare for it,” says Paul Geller, a name partner with Coughlin Stoia Geller Rudman & Robbins, which joined with Lerach just after the Milberg Weiss split. “I would contrast that, with all due respect, to the Milberg Weiss model.” While he never worked for the New York firm, he says, “It’s the general sense that, rather than face the situation head-on and discuss a plan for it, they took more of a head-in-the-sand approach.” Former partners say decisions Milberg Weiss has made since the 1990s have led to its decline. First, they say, Weiss and his New York partners failed prior to the split to broaden their client base. Second, the firm wasn’t protected from liability at the time of the split. And lastly — and most baffling to those who know Weiss as a successful legal strategist — the firm allegedly continued to negotiate payments to a former client for years after Milberg leaders learned that prosecutors were probing such deals. In short, says a former partner of the pre-split firm, “Mel made one miscalculation after another.” In an e-mail, a firm publicist declined to address a list of specific questions about the firm but sent a written statement from Weiss saying he’s proud of his accomplishments. “The firm has established important protections for consumers, shareholders, and citizens of this great country,” he wrote. “I look forward to clearing my name and returning to a practice to which I have devoted my professional life, one that has given access to the courts to millions of Americans who would not otherwise have been able to achieve justice.” KNOW WHEN TO FOLD �EM The Milberg Weiss investigation began in 1999, when a Beverly Hills ophthalmologist convicted of insurance fraud cut a deal for a lighter sentence by telling federal prosecutors he could finger Lerach in a kickback scheme. That touched off an eight-year investigation into payments by the firm to leading clients in securities class actions. The investigation seemingly foundered until late 2005. Over the past two years, a flurry of indictments against the firm, former clients, Milberg Weiss partners, and lawyers who served as intermediaries between the two have generated a series of guilty pleas. Most significantly, former name partners David Bershad and Steven Schulman have entered pleas in which they agreed to cooperate against the firm. Lerach, the probe’s initial target, isn’t cooperating, though he’s agreed to serve a year or two in prison and pay an $8 million fine. Weiss, on the other hand, continues to fight the charges, as does his firm. But their ability to mount a successful defense is severely hampered by Bershad’s and Schulman’s cooperation. The “statement of facts” made by Bershad as part of his deal says that the firm continued to channel improper payments to lead plaintiffs until 2005, and that Weiss himself agreed to meet with lead plaintiff Howard Vogel, whose attorney was later sent a $1.1 million payment, even though the partners knew the feds were investigating. And lawyers familiar with the case say that because Weiss, 72, is the one partner remaining in a case where the other targets have pleaded guilty, he’s almost certain to face a harsher prison sentence than Lerach, Bershad, or Schulman — probably more than two years even if he enters a guilty plea, and more than twice that if he’s convicted at trial, they say. Lerach evaded a similar fate by striking a plea deal and leaving his firm — now Coughlin Stoia — with arrangements that assure him millions of dollars in continuing income for years. Milberg Weiss, though, is hamstrung by the fact that Weiss has decided not to leave — and the firm’s executive committee hasn’t forced him out. With the indicted partner still at the firm, it’s increasingly hard to retain public pension funds as clients, say lawyers at the firm. More importantly, the firm can’t negotiate a way out of its own indictment — people familiar with negotiations say that would require the firm to admit that Weiss took part in a conspiracy. In analyzing the situation, people involved in the case point to legacy and pragmatism: Weiss, they say, doesn’t want to be disgraced, whereas Lerach is impervious to such concerns. Weiss has long tried to cultivate a reputation as a lion of the New York Bar, but Lerach years ago resigned himself to being vilified in the press. With Weiss, a former partner says, “the relative skin is much thinner.” Also, Weiss has never made succession plans for his firm, say former partners there. They say he continues to view himself as its leader. A guilty plea, one of those lawyers says, “doesn’t comport with his self-image.” For example, lawyers say, Weiss speaks often about his work on behalf of Holocaust survivors seeking recompense for their suffering, and he sees himself as what another former partner calls “the grandfather of the securities plaintiff bar” and even as a “white-shoe” lawyer. Were Weiss to leave the firm, say lawyers with direct knowledge of plea talks, his firm could settle its criminal case for a relatively affordable $50 million. But even departing to save his firm, the lawyers say, would be too much of an admission for Weiss.
Justin Scheck is a reporter with The Recorder , an ALM publication.

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