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Three plaintiffs class action firms have vowed to appeal Monday’s federal court ruling in Newark, N.J., that preliminarily approved a $225 million settlement of a class action against accounting giant KPMG and its lawyers, Sidley, Austin, Brown & Wood. The challengers seek to disqualify lead plaintiffs firm Milberg Weiss Bershad & Schulman, whom they accuse of collusion and conflicts of interest. They claim the firm held a “reverse auction” — negotiating with KPMG and Sidley Austin on behalf of putative class members before filing a class action suit — and did so while keeping an individual plaintiff in Florida dangling in the dark. U.S. District Judge Dennis Cavanaugh turned away the objectors and set next Feb. 24 for a fairness hearing on final approval of the pact in Simon v. KPMG, 00-6003. It provides $195 million in compensation to class members and $30 million in attorney fees, ending claims that KPMG and Sidley Austin sold hundreds of tax shelters that the Internal Revenue Service later eviscerated. The objecting firms are Fine, Kaplan & Black of Philadelphia; Cohen, Milstein, Hausfield & Toll of Washington, D.C.; and Bernstein, Litowitz, Berger & Grossman of New York. The first two firms have class action suits, in behalf of the same plaintiff class, pending in New York federal court. And all three firms had moved to be appointed co-lead-counsel in the present case, assuming Milberg Weiss were disqualified. Appearing as interveners, they aired their challenges during two days of hearings last week, arguing that the Florida client, Mark Kottler, was kept in the dark about Milberg Weiss’ class action activities and that when he learned of them, he withdrew his case. Milberg Weiss denies those accusations. Both sides presented expert testimony on the conflict issue. The interveners’ expert, Boston University law professor Nancy Moore, said that Milberg Weiss’ conduct violated Rule of Professional Conduct 1.7. Moore, who helped fashion the rule as chief reporter for the Ethics 2000 Commission, said there was a conflict that “raised serious questions about the adequacy of Milberg Weiss’ representation of the putative class.” But Cavanaugh was persuaded by Milberg Weiss’ expert, former 3rd U.S. Circuit Court of Appeals Chief Judge Arlin Adams, that the controlling case is Lazy Oil Co. v. Witco Corp., 116 F. 3d 581 (3 Cir., 1999), which set a test that balances the class’s interest in experienced counsel against actual prejudice to the objectors of continued representation. He found the interveners were not prejudiced by Milberg Weiss’ continued participation and that class members would suffer additional costs if approval were put off. “It may be that eventually, the Third Circuit will look at this again, and it may be that they will agree with Professor Moore that the traditional New Jersey rule on conflicts should take precedent,” he said. “Whether or not there was a conflict, I think, is going to be for another day.” Cavanaugh said that Kottler had credibility problems in his account of the whole episode. Further, he said, his high regard for the two former judges made him inclined to accept their testimony that Milberg Weiss’ negotiations with KPMG and Sidley Austin were free from collusion and conducted with the best interests of class members in mind. Kottler’s new attorney, Steven Toll of Cohen, Milstein, objects to the settlement on its merits, pointing out that while it compensates former KPMG clients at 35, 65 or 130 percent of the fees they paid to the accounting and law firms, depending on an assortment of factors, it takes no account of additional taxes paid as a result of the IRS rejection of the shelters. The settlement also includes a provision for a 50 percent penalty against those who dispute their placement in one of the categories and lose, he says Toll.

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