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Two New York plaintiffs firms are fighting it out in federal court over whether one got too chummy with defendants, at the expense of claimants, in its efforts to become lead counsel in a class action suit. The tactic is known as a “reverse auction,” by which class action plaintiffs lawyers talk with prospective defendants in advance and try to strike a deal that gives claimants an incentive not to sue. It’s done all the time in nonclass action cases, but it’s different when the rights of a group of claimants of unknown quantity and identity are at stake. “Class actions are not like individual actions, where a party can simply approach a potential defendant in the comfort of private negotiations and settle his claims without ever filing a complaint,” argues Bernstein, Litowitz, Berger & Grossman, the law firm leveling the charge against the other, Milberg, Weiss, Bershad & Schulman Both law firms have filed putative class actions against accountants KPMG and the Chicago firm of Sidley, Austin, Brown & Wood over tax-avoidance plans they developed and sold jointly in the late 1990s. Clients poured millions of dollars into the plans before the Internal Revenue Service found them invalid. Bernstein’s suit, Becnel v. KPMG, was filed in Arkansas and Milberg’s, Simon v. KPMG, was filed in New Jersey. In court papers, Bernstein claims that Milberg began negotiating with KPMG and Sidley almost a year before filing suit. It says that a class member, whom it does not identify, says that Milberg had reached a settlement deal of $175 million, one that would give class members who didn’t sue 65 percent to 75 percent of their losses but only 20 percent to 25 percent to those who sued. The Bernstein firm’s proposed remedy, at least in the short term, is that it be made lead counsel itself. Bernstein filed an emergency motion in Becnel on June 22, seeking appointment as interim class counsel and an injunction barring the defendants from conducting settlement negotiations with Milberg. Then, on June 29, Bernstein moved for permission to intervene in Simon and for a stay pending the Becnel motion. Neither motion is yet decided. Milberg partner Melvyn Weiss denies any such settlement was reached and dismisses the “reverse auction” charge. “To accuse us of what they characterize as a reverse auction, meaning these people are dealing with the least aggressive people to get a good deal, is nonsense,” he says. “I don’t think this court in New Jersey is going to buy into their arguments.” Weiss says he negotiated with the defendants before filing suit because they were facing a concurrent criminal investigation and “didn’t want to do things in a public way.” The Washington Post reported last Wednesday that the Justice Department is weighing criminal charges against KPMG and 20 former partners over the firm’s sale of tax shelters. In June, KPMG issued a statement apologizing for “unlawful” activity by former partners. Milberg and the defendants have been negotiating with the aid of former U.S. District Judge Nicholas Politan and Daniel Weinstein, a former state court judge from San Francisco. “We’re trying to resolve it based on the recommendations of these two former judges,” Weiss says. Defendant KPMG, in a brief opposing Bernstein’s intervention in the New Jersey case, says Milberg began discussing a global settlement with the defendants based on its representation of several potential plaintiffs. What’s more, it says, all potential class members would have the opportunity to approve any settlement Milberg negotiates. Bernstein partner J. Erik Sandstedt says his client, Thomas Becnel, sought to intervene in the New Jersey case out of concern that the Milberg settlement would be harmful to class members. “We really don’t need to embellish or engage in a rhetorical fight with Milberg,” says Sandstedt. “You only need to look at the facts of this situation, which we’ve detailed in our papers before the court, to see that Mr. Becnel is the one looking out for the interests of all class members.” KPMG’s sale of one-size-fits-all tax shelters was a departure from the predominant practice of the time, which was to develop products based on individual clients’ needs. According to both suits, KPMG teamed up with New York tax lawyer R.J. Ruble in 1997 to launch a campaign to sell tax shelters to wealthy individuals. Ruble was head of the tax practice at Brown & Wood, which merged in 2001 with Chicago’s Sidley Austin. Ruble helped create intricate tax shelter formulas that KPMG sold to its clients and he wrote more than 600 letters advising the clients that the plans offered would likely withstand Internal Revenue Service scrutiny in an audit. KPMG paid Ruble $50,000 or more for each letter he wrote, the suits charge. KPMG executives expressed doubts about the legality of the tax shelters even while the marketing campaign was under way, according to company memos cited in the suits, but it was only after the IRS disallowed the deductions that the selling stopped. Sidley let Ruble go in 2003. That was only the beginning of the trouble for KPMG and Sidley, both of which were prominently featured this April in a report on abusive tax shelters by the U.S. Senate’s Permanent Subcommittee on Investigations. While an attorney testifying for Sidley during a Senate hearing described Ruble as a “rogue,” the suits cite a memo in which the firm’s managing partner approved the alliance and fee-sharing arrangement with KPMG. An attorney for KPMG, Anthony Marchetta of Pitney Hardin in Florham Park, did not return a call about the cases. Neither did a company spokesman. Sidley national counsel for tax shelter litigation, Brad Brian of Munger, Tolles & Olson in Los Angeles, declines to comment on the cases.

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