The Manhattan Institute's Walter Olson has a subscription-only op-ed on the Milberg Weiss indictment in today's WSJ. Olson writes:
Milberg Weiss lawyers have been in the forefront of efforts to define kickbacks broadly and punish them with rigor. The firm's Web site boasts that it "has sued major providers of private mortgage insurance for kickback violations, resulting in substantial settlements." Melvyn Weiss and others at the firm have expressed indignation at, and filed lawsuits over, alleged kickbacks in the contexts of Wall Street initial public offerings, mutual fund sales, insurance brokerage commissions and doctors' prescribing of pharmaceuticals.There's more at Overlawyered.com.Although there are many debatable cases, concealed payoffs to named plaintiffs in class actions aren't one of them: They're clearly improper under virtually any analysis. As the indictment states, both plaintiffs and their lawyers are under obligation 1) not to place a named plaintiff's interests above those of absent class members; 2) not to behave deceitfully or unethically toward the court or absent class members; and 3) not to withhold from the court "any fact" that might call into question the representativeness of the plaintiff (a financial dependence on the lawyer would be one such fact). As a class action proceeds, plaintiffs repeatedly swear under oath to these matters. Bonus payments to compensate named plaintiffs for their time and trouble are permitted at settlement, but they must be disclosed to absent class members and approved by the judge.
These rules have a purpose. With other class members absent, named plaintiffs are one of the few watchdogs against self-dealing or misconduct by the lawyers -- specifically, the pursuit of settlements that result in high legal fees, whether or not they serve the interest of the class. It's true that law firms do seek docile, loyal or merely clueless persons to serve as their named plaintiffs, which means it's rare (though not unheard of) for them to contribute an independent point of view in a case. But if the Justice Department's allegations are correct, Milberg was taking no chances on the watchdogs staying pacified: It threw regular chunks of raw liver into their cages. Significantly, Justice alleges that payoffs were computed not as a share of the class's eventual recovery, but as a share of Milberg's own fee haul -- incentivizing the named plaintiff to side with Milberg's interests should the two clash.
The WSJ itself also has a subscription-only editorial on the matter, titled "Very Rough Justice." The editorial is of mixed minds on the indictment, and begins:
Let's all admit it. Across the country last week, millions of Americans were indulging in Schadenfreude -- the enjoyment of another's misfortune -- at the indictment of class-action tort giant Milberg Weiss. Yet even the many victims of Milberg Weiss should think twice about cheering the Justice Department's blunderbuss tactic of indicting the entire law firm.The editorial continues, noting that the evidence against Milberg Weiss attorneys seems to be quite strong, but the Justice Department's tactics were excessively heavy-handed.
Despite the impressive evidence, the problem with this case is that Justice has chosen the nuclear option of indicting the entire Milberg Weiss firm. As in the Arthur Andersen case, this may well mean a death sentence for the law firm whether or not it is convicted. More troubling is that, even if Milberg is convicted, the larger cause of justice and deterrence may not be served. . . .. . . The Justice Department essentially held a gun to Milberg Weiss's head and threatened to indict unless the firm waived attorney-client privilege and agreed to label its own partners criminals. Never mind the irony that this is similar to the methods that Milberg Weiss has used itself against countless law-abiding businesses.
The practice is still a dangerous precedent that can be used -- and surely will be -- against more honest business enterprises. Justice played the same rough game with KPMG, deciding not to indict that accounting firm only after it agreed to renounce the tax shelters it had been selling and throw many of its partners over the side. The threat of a corporate death sentence is an abuse of prosecutorial discretion against any but the most corrupt criminal enterprises -- namely, the mob.
Related Posts (on one page):
- Olson & WSJ on Milberg Weiss:
- More on Milberg Weiss Indictment:
- Milberg Weiss Indicted
- Will Milberg Weiss Be Indicted?
Well, other than the use of physical violence, I don't see that there is any difference between the mob and say MCI and Enron. MCI and Enron were nothing more than huge pyramid schemes, aided and abetted by compliant regulators, banks, accounting firms, and the targets of their schemes to keep the pyramid growing (MCI was brought down when the pyramid collapsed because of the rejection of the Sprint merger on anti-trust grounds, not on the actual revalation of the fraud: that came after the collapse). They certainly destroyed more lives with their criminal activities and the Bernie Ebbers and Ken Lays of the world are just as unrepentent as the most loathesome mob boss.
So, how is this different from the pressure prosecutors put on any defendant? It may not be fair, and it may take the indictment of a law firm to get the legal establishment to notice it, but it sure ain't uncommon.
Can someone help a brother out? Is there a case or treatise that makes a good argument as to why corporations and other business organizations can be the subject of a criminal indictment?
Why would the firm make these payoffs?
In the pre-Reform Act days (i.e., any case filed before Dec. 1995, or thereabouts), the first firm that filed a lawsuit frequently was appointed class counsel and its client was the lead plaintiff. So, the indictment alleges, Milberg apparently encouraged some plaintiffs to buy a few shares of many different stocks, so they could be ready to file suit against these companies and appoint Milberg as counsel on a moment's notice. Having a stable of "ready to go" plaintiffs explains one of the biggest mysteries to me, as a former defense counsel, which is how the firm managed to find someone and file suit within a few hours' notice of a company's bad news announcement. I had thought, naively it turns out, that perhaps the firm had simply paid off stock brokers to refer clients to them whom the brokers knew were invested in the companies that suffered large loss (a relatively minor ethical transgression, compared to the payoff scheme alleged in the indictment.
The conduct is harder to understand in the post-Reform Act era, because the lead plaintiff is supposed to be the plaintiff who lost the most money on the investments, so the strategy of having one plaintiff "ready to go" wouldn't work. I will say that, for a few years after the Reform Act passed, Milberg followed a practice of creating plaintiff "groups", i.e., grouping many named plaintiffs together, and counting the groups' losses as one, to argue for lead counsel statuts. This practice would be open to the kickback scheme alleged in the indictment, but only on a watered down level.
Maybe the post-Reform Act cases in which alleged kickbacks were paid are all shareholder derivative actions, or non-stock consumer cases.
And, even if it was an integral part of the business, I still don't understand why EVERYBODY at the firm--from copy guy on up--must suffer the consequences of a criminal indictment against the firm itself. Sure, disgorging profits makes sense. Put the firm shareholders and employees who knowingly devised and ran the conspiracy in prison. But "Milberg Weiss" is not a person, it doesn't have a brain or the ability to conspire or set a business model, and it's composed of a lot of workers who, in my view, shouldn't lose their jobs or suffer adverse reputational costs because of the malfeasance of their employers.
The alternative would be to encourage a wink-and-a-nod sort of law firm administration, where the partners are wilfully ignorent of questionable doings, on the grounds that what they don't know about won't hurt them, but if they make a little extra money because they closed their eyes, then fine. Not a good incentive for the legal profession.
I am not suggesting that a low level partner or, worse, an associate, should be able to take down a firm, but you do have to draw the line somewhere, and, IMHO, it has to be a lot higher for attorneys and CPAs. This case doesn't appear to be that of low level attorneys, but rather, of fairly major players in the firm. And, if nothing else, that means that they were presumably bringing a lot of money to the bottom line of the firm.
Also note that these guys have the money to buy the best attorneys money can buy, a couple times over. If they or the firm are convicted, that means, at least to me, that justice has been done. I have a lot more sympathy for the average felon, who can't afford adequate representation, is significantly charged up well over what the DA/U.S. Atty. can prove, and then has his PD convince him to a plea deal on one or two charges, when some of these guys are innocent of any charges. These attorneys are not going to be convicted unless the prosecution has a slam dunk case against them.
Usually it takes a whole lot more -- say, scienter -- to bring a criminal charge against someone.
I can tell you, when I was at the SEC, we had numerous accounting fraud investigations after AA went under and its former clients retained new auditors, who then uncovered many problems that AA had either missed or had tolerated.
That said, I don't think DOJ should have indicted AA if the firm had gone through with its promised reforms. I agree that many innocent people lost jobs as a result of senior management's wrongful conduct and the DOJ's decision to indict the firm over that conduct.
I think the Milberg situation is similar, except maybe the senior management at Milberg (at least, 2 named partners) were allegedly very deeply involved in the wrongful conduct charged in the DOJ's complaint. That would justify the indictment more, in DOJ's eyes.
I think the firm is toast, and won't survive the fallout from the indictment because its senior partners and clients will begin leaving in droves.
Thus, my question: Why is the Milberg Weiss situation any different? For example, Deloitte &Touche was sued for $1.8 billion in 1993. Deloitte settled in 1994 for $312 million without admitting or denying wrongdoing. Deloitte had about 1400 partners at the time and each of them was responsible for their share of the fine even if they did not work with an S&L client. Did all the partners who had no knowledge of any wrongdoing really deserve to lose life savings, etc. due to the actions of a few rogue partners? Had a judgement for $1.8 billion come done against Deloitte wouldn't that have been a death knell for the firm? Isn't suing the firm itself for such a large amount akin to putting a gun to the accused's head?
I am not an attorney, nor am I an accountant. Pardon my cynicism, but it seems to me what is a common prosecutorial practice takes on more import to attorneys when other attorney are being sued.
Schadenfreude. Such an ugly word for such a beautiful emotion.
To Tom Tildrum: I could not foresee any conflict in cases where the US is the opposing party; Milberg Weiss would be on the opposite side in those cases, just as the firm is in the criminal indictment. The only conflict would be if the Milberg firm were representing the US in some fashion.
Human beings, though, are a different, and entirely less important, classification of legal people...
I have absolutely no experience with the practices of big law firms, but do they really have enough non-salary expenses to mask anything of the kind? (I say non-salary because presumably the firms all have very tight records of who gets paid what for how many hours of work, and because I doubt the hypothetical partners paid the kickbacks out of pocket).