A very close personal friend who has a lot at stake in this matter has been quite sure, for some time, that there will be an indictment.

Observer:

How was the Arthur Anderson indictment Millberg Weiss' fault? Unless I am misunderstanding you, that supposes that Millberg Weiss has an ability to engage in criminal prosecutions.

Also, where is the proof that Millberg Weiss has been conducting illegal business practices over the years?

How was the Arthur Anderson indictment Millberg Weiss' fault? Unless I am misunderstanding you, that supposes that Millberg Weiss has an ability to engage in criminal prosecutions.

Observer was saying that the indictment of Arthur Andersen was a mistake by the government, and that the government was wary of making a similar mistake by indicting Milberg Weiss, though there are a lot of arguments to be made that the situations aren't similar at all.

1. With the present administration, I wouldn't assume anything. We have seen the politicization of formerly nonpolitical (or apolitical) agencies such as the FDA and, yes, the DOJ.

2. If there was an applicable crime/fraud exception, we wouldn't be talking about a waiver--the privilege would be blown. One cannot waive what does not exist.

3. Of course lawyers in class action suits have clients.

Don't know why the link didn't work in my last post; it's
here

If there was a prosecution, it seems obvious that the crime-fraud exception would apply, since Milberg is accused of (among other things) illegal kickbacks to its clients. You can't privilege that. But in the context of a negotiated plea, you have no adjudication of the issue, and thus a formal waiver of the privilege is required. That doesn't mean there would actually be a privilege if the issue were litigated.

This is weird—a Jonathan Adler at Millberg Weiss:

Adler_bio

As a young attorney working on the defendants' side in securities class actions, I used to wonder why some class representatives, especially those who had done it repeatedly, would essentially "volunteer" for the job. Now we apparently know why some of them did.

There's a presumption in favor of the privilege that can only be overcome by an adjudication of fraud. It's also not clear to me that the privilege would be waived or vitiated by the type of fraud alleged in the Milberg Weiss case. At worst, I would think that privilege might be waived or vitiated to the extent that privileged information touched on unlawful payments to the named plaintiffs in question. This would not be an excuse to throw open the lawyers' files on a wholesale basis. Remember, the named plaintiffs in question were legitimate plaintiffs--i.e., legitimate holders of the shares on which the shareholder suits were brought. The extent of the alleged fraud (as I understand it) is that these legitimate plaintiffs were receiving illegitimate and undisclosed payments from the lawyers in consideration of their service as plaintiffs. While this is certainly illegal, it doesn't strike me as the worst thing in the world.

For those looking for a bias in my posts, I would note that my practice consists primarily of defending corporations and their directors in suits brought by shareholders.

Nobody:

For those looking for a bias in my posts, I would note that my practice consists primarily of defending corporations and their directors in suits brought by shareholders.

I am not sure how that disclosure helps us determine your bias. I might assume that a strong Milberg Weiss is good for your business prospects, as your clients will need more of your services, whereas, if you were a trial attorney at a competing firm, you would want MilWeiss to be maximally burdened.... But in fairness, I did not detect any particular bias in your posts.

Let's say there was a fraud at a company that started in 2001 and wasn't discovered until 2003. The result is that the stock price was artificially inflated between 2001 and 2003, because people were relying on, let's say, fraudulent financial statements.

If you bought your stock before 2001 then you bought at an honest price. It's possible that you were tricked by the fraud into holding your stock longer than you would have, but that's a difficult claim to pursue in a class action, because you'd have to produce individualized evidence that you would have sold if you had known the truth. So these people are basically out.

If you bought between 2001 and 2003, but also sold during that period, both your purchase and sale price were inflated. Your actual damages, if they even exist, are therefore minimal at best.

The people who got screwed are the ones who purchased between 2001 and 2003 and still held their stock at the time the fraud was revealed. They bought at an inflated price and then took the hit when the stock fell to where it should have been all along. Therefore, they are entitled to be paid by the people whose fraud resulted in the inflated stock price.

These damages are not a transfer of wealth from the current set of stockholders, because those stockholders fall into one of two categories: (1) people who purchased their stock before the fraud was revealed, in which case they are among the folks getting money; or (2) people who purchased their stock after the fraud was revealed, in which case the stock price already reflected not only the bad news but also the potential exposure from the inevitable lawsuit. To the extent the money comes out of company coffers, it's possible that it may be passed on to CUSTOMERS (although, it's kind of hard to compete when your products carry a lawsuit premium that your competitors' products don't), but the company can hardly recoup its losses from the shareholders.

When there is "real fraud" there is typically money available in the form of insurance, most often the policies that insure the officers and directors of the company. After all, if there "isn't much left for anyone," you might reasonably question why the money-hungry plaintiff's lawyers are interested in suing.

Fewer and fewer frivolous cases are settled these days thanks to the heightened pleading standards of the PSLRA, which make it much harder to survive a motion to dismiss without actual evidence of wrongdoing, evidence the plaintiff has to develop without benefit of discovery.

It's also worth remembering, as I alluded to above, that the lead plaintiff under the PSLRA is very often a major institutional investor like CalPERS. These people are extremely sophisticated investors who don't play games. They're not interested in wasting their time participating in a bunch of frivolous cases in hopes of getting lucky, and they're not going to sign off on a quickie settlement that gets them pennies on the dollar while the lawyers walk away with a big payday. The PSLRA has been a spectacularly good reform in this regard; it takes the market actors who already possess the appropriate incentives, and puts them in charge. The results have been good for investors, good for plaintiff's lawyers who play by the book, bad for those who don't.

Steve:

I think you will find that the allegations against Milberg Weiss generally involve pre-PSLRA era individual lead plaintiffs, not institutional lead plaintiffs in post-PLSRA cases.

Regarding institutional investors' motives to serve as lead plaintiff, you have correctly identified a potential "free rider" problem. Nevertheless, some institutional investors (mainly public pension funds) appear to recognize that it is to everyone's benefit if someone steps up and have been willing to take a "turn" as lead plaintiff--at least in the major cases arising from the Enron-era accounting scandals.

Steve,
In your 12:48 post, you describe the plaintiffs' lawyers as "money-hungry," but fail to hang that epithet on any of the other players--shareholders, directors, managers, the corporation itself, its defense lawyers, accountants, etc. None of these players is working for his health. They (we) are all money hungry. It's called capitalism.

The omission was intentional; the investment bankers actually are doing it for their health. God knows they don't need the money. ;)

If a securities fraud case goes to trial and the plaintiff proves "actual fraud" with actual intent to defraud, there is no insurance money to cover it. It is against public policy in all states to allow insurance coverage for actual fraud.

As long as the case is being litigated, however, there remains the possibility that the statements were "merely" reckless, that the defendants "should have known" that there was no basis in truth to them, and the defendants' insurance carrier is still on the hook.

That's why these cases always settle, because neither side has much incentive to go to trial. The plaintiff's attorney must convince the jury that the defendant is really really bad, but not evil - a fine line that, not surprisingly, most jurors don't get. The defense, of course, can't risk that the jury will only find them to be bad, not evil, either.

The reason it takes so long to reach a settlement is because the carrier's job is to say no as long as possible, waiting until it gets to the proverbial court house steps to commit itself. At that point, the carrier is typicaly compelled to settle in order to avoid a subsequent bad faith case against it by the insured defendants.

In most cases, all the plaintiff's lawyer was after was the insurance money anyway.

Just wanted to let you all know why there's so much litigation and so few verdicts (literally, statements of truth), in securities fraud cases.

BTW: I am extremely biased against Milberg Weiss and believe that Bill Lerach is the Devil incarnate.

It's about time. These plaintiffs' firms -- including those involved in the breast implant, asbestos and silicosis cases -- have been acting unethically, if not criminally, for years. Everyone knew it before, including defendants, defense counsel and courts, but no one did any thing about it. Apparently, times are changing. Couldn't happen to a nicer group of people.

The only addendum I will make to Steve's description of shareholders' damages is that the issue of in-and-out shareholders, i.e., those who buy and sell before the "fraud" is revealed, is actually more complicated than saying simply that they suffered no damages. The 9th Circuit, in Green v. Occidental Petroleum, (a leading damages case in class actions), talks about these shareholders as among the possible "damaged" shareholders, because they nonetheless bought and sold at prices that were distorted by the fraud. In one case I worked on, this point was made vividly clear: the company essentially faked all of its sales by creating phony customers for its products and then created "sales revenue" by using proceeds generated from the sales of stock in private placements. The market for the stock was truly distorted throughout the class period because the shareholders thought the company had a "hot" product it was selling, so much so that when the company lost a patent suit over the product, its share price plummetted. In reality, the company had no such sales and the product was not hot. Who knows what the true share price should have been. The case settled before we could test out our alternative theory (we represented the auditors; the company went into bankruptcy and the executives went to jail). Anyway, for these reasons, it is hard to exclude "in and out" shareholders from the classes of "damaged" shareholders in any class action. I only know of one opinion where the judge did this (In re Seagate Technology Sec. Litig, opinion by Judge Walker).

As for why these cases settle, there are 2 main reasons, apart from the merits of a particular case: (1) the availability of D&O insurance money to pay for the settlement; and (2) the huge downside risk of going to trial for both sides: for the plaintiffs' firms, who take nothing if they lose after years of work putting together these complex cases (which take months to try) and for the individual defendants, who can experience a financially ruinous verdict if they are found liable, given how easy it is to blackboard huge (hundreds of millions of dollars) damages numbers.

The discussion as to insurance policy not covering "actual" fraud is correct but I would argue that a jury verdict finding liability in a 10b-5 case may not be collateral estoppel that would preclude a defendant from litigating over the coverage issue later, because reckless conduct (see Hollinger v. Titan Capital Corp.) usually suffices to establish 10b-5 liability for everyone while knowing or intentional conduct is generally required to bring in th exclusion in a D&O policy. So, I think the impact of these exclusion clauses on settlement may be somewhat less than what Dave H. states (there is still some impact, which is namely, the longer the case goes on, with discovery etc., the more the plaintiffs may be uncovering evidence for the insurer's counsel to use later in trying to deny coverage).

As for the social utility of these cases, and the righteousness of indicting the Milberg firm, I leave that for others to decide. Having defended these suits and, while at the SEC, filed similar suits against companies and their officers, I think the issue is more complicated and the deterrent effect of these suits on corporate conduct is harder to gauge. Some very experienced defense attorneys think that the D&O carriers can have a huge impact on changing corporate behavior, if they want to (but largely do not because of the competitive market for selling D&O insurance). I can tell you that Sarbanes-Oxley has had a huge impact on corporate behavior.

Well, Nobody, I would represent you in a suit over the cancer but I think Mr. Weiss' assets may be tied up during the foreseeable future (paying his criminal attorney, the government and others), and thus the chances of collecting on a recovery are reduced. Why not ask one of those plaintiffs' firms that represent persons exposed to asbestos? Perhaps they can sue, as aiders and abettors, all of the D&O carriers who settled the frivolous shareholders suits filed by Milberg, and thereby enable Mr. Weiss to prosper and give you cancer? Just a thought. If it is a "second-hand" smoke situation, of course, there are always the tobacco companies to beat up on, in addition to Mr. Weiss.

I'm still waiting for my Enron Securities Fraud check.

Wow. Print that up on a pamphlet and pass it out by the courthouse.

Steve at 7:26 to what Lerach tactic are you referring? This is a fascinating case.

Meanwhile:

I will watch this case in all of my “spare” time while I deal with my own white-collar indictment for attempted felony extortion for writing a Civil Rights Demand Letter in Jaffrey, NH.

Check out the Milberg/King indictment comparison story from today, 18 May 2006:

http://christopher-king.blogspot.com

Peace.