25-Year Kickback Scheme by NY Lawyers (MORE, CLICK HERE)

Weiss Agrees to Plead Guilty To Role in Kickback Scheme
The New York Law Journal by Anthony Lin - March 20, 2008

Famed securities class action lawyer Melvyn I. Weiss yesterday agreed to plead guilty to a federal racketeering charge over his participation in a scheme to pay kickbacks to lead plaintiffs in shareholder suits. The plea agreement recommends a sentence of between 18 and 33 months in prison for Mr. Weiss, 72. He also has agreed to pay $10 million in fines and forfeited fees.

Mr. Weiss was the last major figure indicted in a probe by the Los Angeles U.S. Attorney's Office into the payment of kickbacks by the New York-based firm known until yesterday afternoon as Milberg Weiss. At the time he was charged in September, three former name partners of the firm - William S. Lerach, David J. Bershad and Steven G. Schulman - had already agreed to plead guilty.

The plea agreement means the near-certain disbarment of Mr. Weiss, who was admitted to practice in New York in 1960.

Coincidentally, the Appellate Division, First Department, ruled yesterday to disbar Mr. Schulman, based on his guilty plea to an identical racketeering charge. The court found that the federal felony was essentially a mirror of the New York crime of enterprise corruption, meriting Mr. Schulman's automatic disbarment. (Matter of Schulman appears on page 5 of the print edition of today's Law Journal.)

The firm, which announced yesterday it was changing its name to Milberg, remains under indictment. In a statement, Milberg executive committee member Sanford Dumain said the firm was now "seeking a fair and appropriate resolution of remaining issues so that we can continue our work on behalf of injured investors and consumers."

In a statement, Mr. Weiss said: "I deeply regret my conduct and apologize to all those who have been affected, including all of the wonderful and extremely talented lawyers and other employees of the Firm, none of whom had any involvement in any wrongdoing. I believe that it is very important to preserve this unique legal resource for the benefit of victims of wrongdoing affecting the masses, who historically have been underserved in so many ways."

Only a few years ago, Milberg Weiss was the dominant firm when it came to securities fraud class actions and Messrs. Weiss and Lerach were two of the nation's best-known plaintiff's lawyers. Mr. Lerach famously carried boxes of documents into the courtroom to file a shareholder suit following the 2001 bankruptcy of Enron Corp. and the firm has been involved in several other high-profile class actions.

Such cases typically settle for millions and even billions of dollars, reaping large contingent fees for those plaintiff's firms designated as lead counsel. As a result, there is intense competition among firms to be so named.

Milberg's kickback scheme allowed it to maintain a stable of plaintiffs so it could swiftly bring a claim on behalf of shareholders. Prior to the enactment of the Private Securities Litigation Reform Act of 1995 (PSLRA), the first law firm to file such an action could count on winning lead counsel status. The plaintiffs in the scheme were generally paid 10 percent of the legal fees received in their cases.

Such agreements are illegal because name plaintiffs in class action suits are not permitted to have interests above those of other class members, to whom they owe a fiduciary duty. The name plaintiffs also falsely certified to courts that they were not receiving any payment for their services.

25-Year Scheme

Prosecutors claim the Milberg partners earned $250 million in legal fees on cases where plaintiffs were paid.

"This kickback scheme lasted for more than 25 years and had a severely detrimental effect on the administration of justice across the nation as lies were routinely made to judges overseeing significant cases," said U.S. Attorney Thomas P. O'Brien in announcing Mr. Weiss' plea agreement. "The scheme was based in greed and it affected the integrity of the courts and the interests of an untold number of absent class members."

According to the statement of facts attached to the plea agreement, the scheme began in the 1970s and continued until 2005. During this time, Mr. Weiss exercised substantial control over the firm, wielding a sole veto over its business affairs until 1999 and again after June 2004, when Mr. Lerach split off to form a rival San Diego-based firm now known as Coughlin Stoia Geller Rudman & Robbins. Mr. Weiss personally agreed to pay one plaintiff and, on one occasion in the 1980s, personally transported cash to Florida to pay another.

Prosecutors first focused on the plaintiffs who received kickbacks, indicting retired lawyer Seymour Lazar in 2005. With the cooperation of two other name plaintiffs, Howard Vogel and Stephen Cooperman, prosecutors indicted the firm and Messrs. Bershad and Schulman in May 2006.

Mr. Bershad agreed to plead guilty in July 2007. Mr. Lerach, who had not been indicted at the time, agreed to a guilty plea in September, as did Mr. Schulman. Mr. Weiss was indicted days later. Paul Selzer, a lawyer for Mr. Lazar who allegedly helped facilitate the kickbacks, remains a defendant in the case along with the firm.

Of the former Milberg partners, only Mr. Lerach has so far been sentenced. Last month, he received two years in prison and was ordered to pay $8 million. Judge John Walter of the U.S. District Court for the Central District of California imposed the longest sentence he could under the plea agreement and criticized prosecutors for not seeking more time for Mr. Lerach. "This whole conspiracy corrupted the law firm and corrupted it in the most evil way," the judge said.

Philanthropy Defense

A sentencing date will be set for Mr. Weiss after he formally enters his plea some time in the next few weeks. In a statement, prosecutors said they would ask Judge Walter to impose a 33-month sentence.

Mr. Weiss' lawyer, Benjamin Brafman, said in a statement he was hopeful the judge would substitute home or community confinement for up to half of Mr. Weiss' term. Judge Walter rejected a similar request by Mr. Lerach but Mr. Brafman said he hoped the court took account Mr. Weiss' long record of pro bono work and philanthropy.

"Accordingly, despite his participation in the criminal conduct he has today acknowledged, I am nevertheless hopeful and confident that the Court will recognize Mel Weiss to be one of the true legal giants of his generation and a consummate humanitarian whose contributions to the Bar and the world community have been nothing short of spectacular," Mr. Brafman said.

Mr. Weiss' most well-known pro bono work has been on behalf of Holocaust victims, and he has taken a lead role in lawsuits seeking compensation from German industry and government. He has been honored for his work by the Anti-Defamation League, United Jewish Appeal and other groups. Mr. Weiss also has been an active benefactor of his alma mater, New York University School of Law, where he and his wife established a fund to assist students seeking careers in public interest law.

Indeed, had Mr. Weiss proceeded to trial, his defense was expected to argue that he was so preoccupied with humanitarian and charity work during the charged period that Messrs. Bershad and Schulman had been able to carry on the kickback scheme without his knowledge.

Mr. Weiss' plea agreement comes at a time when the pace of securities class action filings may be on the rise again after a few lean years. The proposed bargain-basement sale of Bear Stearns Cos. to JP Morgan Chase & Co. quickly attracted the attention of plaintiff's lawyers and other casualties of the faltering economy are expected to trigger litigation as well.

Though it has suffered a large number of partner defections since its indictment, the Milberg firm noted in its statement yesterday that it remains one of the largest firms of its kind with 70 lawyers.

According to a recent survey, the firm led the securities class action bar last year with settlements worth $3.8 billion, though most of that figure was accounted for by a $3.2 billion settlement of securities litigation at Tyco International Ltd. The firm is also expected to receive a share of the fees from the proposed $7.2 billion settlement of Enron litigation, which is under review in federal court in Houston.

Mr. Dumain, the executive committee member, said none of its current lawyers were involved in the kickback scheme and that new procedures had been implemented "to help ensure that past problems would not occur again." "Milberg LLP apologizes to all judges, lawyers, clients and class members who deserve full and complete adherence to all legal and ethical norms," he said. "We pledge faithful adherence to those norms as we move forward to rebuild our practice."

The Milberg in the firm's name is Lawrence Milberg, who co-founded the firm in 1965 with Mr. Weiss. Mr. Milberg died in 1989.   Anthony Lin can be reached at alin@alm.com.