Prosecutors Step Up Probe Of Milberg Weiss Law Firm
Ex-Partners Given Immunity In Grand-Jury Investigation Of Possible Illegal Payments
By John R. Wilke and Scot J. Paltrow, Staff Reporters 
The Wall Street Journal
Monday August 8, 2005

Federal prosecutors have stepped up their criminal investigation of Milberg Weiss, the nation's largest class-action law firm, granting immunity to two former partners as they intensify their scrutiny of a third, prominent litigator William S. Lerach.

A grand jury in Los Angeles heard secret testimony three weeks ago from one of the former partners given immunity, Alan Schulman, lawyers close to the case said.  Mr. Schulman's cooperation is a major development because he worked alongside Mr. Lerach, a former senior partner at Milberg Weiss and one of the nation's most prominent class-action lawyers.

The four-year investigation is focused on whether secret, illegal payments were made by the New York-based firm to plaintiffs whose names repeatedly appeared on securities class-action lawsuits brought by the firm, according to court documents and lawyers close to the case.  Plaintiffs in such suits are not permitted to receive payments beyond those awarded by courts, to avoid conflict between their interests and those of the rest of the class.  Often they must testify under oath that they haven't received undisclosed compensation.

Prosecutors have informed Mr. Lerach and two other former partners, David Bershad and Melvyn Weiss, that they could face indictment for conspiracy, according to lawyers close to the case.  The government also is probing payments made by Milberg Weiss to a financial analyst who repeatedly served as an expert witness in the firm's cases, apparently taking the investigation in a new direction.  Additionally, a new round of subpoenas has been sent to at least a half-dozen firms that were co-counsel with Milberg in securities class-action cases reaching back a decade or more.

The investigation is significant -- and controversial -- because it targets one of the nation's most aggressive and successful law firms.  Milberg Weiss has brought hundreds of securities lawsuits and won tens of billions of dollars in settlements and judgments against companies accused of defrauding investors.

Mr. Lerach, who split off from Milberg to form his own firm last year, is representing Enron Corp. investors who have sued the company for fraud, and so far has won more than $7 billion from Enron bankers including J.P. Morgan Chase, Citibank and Canada's CIBC, which agreed to pay $2.4 billion just last week.

The outlines of the investigation first surfaced in an indictment handed up by the grand jury in June.  The grand jury charged Seymour Lazar, a retired Palm Springs, Calif., lawyer who was a plaintiff in at least 50 Milberg Weiss securities cases, with fraud, conspiracy and money laundering, saying he had secretly been given $2.4 million for taking a leading role in those cases.  Mr. Lazar's attorney denied the charge and said that the payments, which were made by Milberg Weiss to Mr. Lazar's lawyer, were legal and that no effort was made to conceal them.

Milberg Weiss wasn't named in the indictment, but confirmed it was the "New York law firm" cited by prosecutors and called the allegations "baseless."

On Friday, William W. Taylor, a criminal-defense lawyer in Washington who is representing Milberg Weiss, said, "The firm continues to cooperate with the investigation," and that "we remain confident no wrongdoing occurred, and that no charges will be brought."  He and others representing the firm and the former partners declined to respond to further inquiries about the case.

Defenders of the firm say the government is trying to score political points with big business, and that most cases under scrutiny are more than a decade old.  Many trial lawyers also defend the firm by saying that abuses surrounding the use of repeat plaintiffs ended in 1995 when Congress changed the law on securities litigation -- and that the massive corporate frauds exposed in the past three years have shown the need for strong private enforcement of securities law to protect investors.

Much of the investigators' scrutiny now seems centered on Mr. Lerach, who worked directly with Mr. Lazar in the early years of the firm.  Prosecutors subpoenaed Mr. Lerach's payment records and even sought a sample of his handwriting, lawyers close to the case said.

Mr. Lerach also has ties to a second repeat plaintiff, Steven G. Cooperman, a former Los Angeles eye surgeon.  The Milberg investigation is rooted in Mr. Cooperman's 1999 offer to detail the alleged illegal payments in exchange for a lesser sentence in an insurance-fraud case.

Mr. Lerach, who graduated from the University of Pittsburgh law school in 1970, opened a West Coast office for Milberg Weiss in 1976 and quickly became one of the firm's most productive and aggressive lawyers, suing many Silicon Valley companies for misleading investors.  But he often clashed with Mr. Weiss and the East Coast wing of the firm, where Mr. Bershad controlled all payments and finances.

After a bitter parting last year, Mr. Lerach formed his own firm, Lerach Coughlin Stoia Geller Rudman & Robbins LLP, in San Diego.  Mr. Bershad and Mr. Weiss are senior partners of the renamed Milberg Weiss Bershad & Schulman LLP, in New York.  The conduct under federal investigation pre-dates the breakup of the Milberg Weiss firm.

Mr. Schulman, the former partner now cooperating with investigators, left in 2000 and opened a San Diego office for a third law firm, Bernstein Litowitz Berger & Grossmann LLP, of New York.  Milberg and Bernstein long have been rivals, battling for the biggest plaintiffs and for lucrative lead position in big class-action corporate fraud cases against such defendants as Enron, which was captured by Mr. Lerach, and the former WorldCom Inc., which was awarded by the court to Bernstein.  If prosecutors bring charges against Milberg or its former partners, Bernstein Litowitz could benefit by picking up any defecting clients.

Mr. Schulman and a spokesman for his firm refused to comment.

A second former Milberg partner who was granted immunity has been interviewed several times by investigators about the alleged payments, the lawyers close to the case said.  An attorney representing that partner declined to comment or identify his client.  Others close to the case said that he has not yet testified before the grand jury.

Prosecutors also are probing Milberg payments to John B. Torkelsen, a financial analyst based in Princeton, N.J.  He testified as an expert witness in scores of Milberg cases and was paid tens of millions of dollars by the firm over nearly 20 years.  Mr. Torkelsen typically testified on shareholder damages, which could influence the size of settlements or court judgments.  Expert witnesses are not permitted to testify on a contingent basis or receive undisclosed payments.

In 1998, Mr. Torkelsen formed a Pennsylvania-based venture-capital partnership, Acorn Technology Fund.  In 2003, he and his wife, Pamela Torkelsen, were among a group charged in federal court in Philadelphia in an alleged effort to defraud and embezzle money from various companies they managed or controlled which had been given $32 million in federally guaranteed loans from the Small Business Administration.  Pamela Torkelsen pleaded guilty to interstate transportation of stolen or fraudulently obtained property in January and is awaiting sentencing.  Mr. Torkelsen also is talking with prosecutors, but has refused to cooperate in the Los Angeles case, said a lawyer close to this case.

Mr. Torkelsen could not be reached for comment yesterday.  His attorneys did not return several phone calls seeking comment.

Prosecutors in Los Angeles have faced difficulty and delay in building a case, a lawyer close to the Milberg camp said.  The first witness in the case testified in exchange for a shorter jail sentence, and has faced more legal trouble since then, damaging him as a witness at trial.  At the same time, much of the conduct at issue stretches back many years, and the evidence is stale.  And it took a year to resolve a dispute over whether Milberg's former defense team, Williams & Connolly, could remain in the case.

Milberg and investigators also have been locked in a long-running battle over what internal documents they are required to turn over.  The law firm has taken a hard line on producing documents related to cases in which it has been involved, claiming attorney-client privilege over nearly all nonfinancial records, lawyers close to the case said.  A June 22 fax from Milberg's legal team, sent to outside law firms that were co-counsel in Milberg cases, said it intended to hand over only documents "not covered by attorney-client privilege ... and other applicable privileges and protections."

Write to Scot J. Paltrow at scot.paltrow@wsj.com1

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