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Class-Action Law Firm Close to a Settlement
By Nathan Koppel 
The Wall Street Journal
Monday, June 2, 2008

Class-action law firm Milberg LLP is close to a settlement that could end a federal prosecution of the firm for alleged kickbacks, according to two people familiar with the discussions.  The deal would mark the climax of a case that has roiled the American plaintiff's bar.

While a deal could still fall apart, the sides have made progress after weeks of talks that have centered on the payment Milberg will have to make as part of a settlement.  Last summer, prosecutors had sought about $50 million in fines and penalties, but the demand mushroomed this year to about $100 million, say people familiar with the negotiations.  Recently, Milberg and prosecutors have zeroed in on a payout in the neighborhood of $75 million, these people say.

The government alleged that the firm paid more than $11 million in kickbacks to clients in exchange for their serving as lead plaintiffs in securities class actions.  These payouts allowed the firm to quickly file suits and become lead counsel, prosecutors allege, entitling Milberg to a large share of the fees:  some $250 million over more than two decades.  The firm, which is scheduled to stand trial in August, has denied wrongdoing.

A spokesman for the U.S. attorney's office in Los Angeles, which is leading the case, declined to comment.  Michael Spencer, a partner at Milberg, declined to comment.

Milberg's fall has been a blow to the U.S. plaintiff's bar.  It is rare for any law firm to face criminal charges, especially one as powerful as Milberg.  Led at one time by Melvyn Weiss and William Lerach, the firm pioneered the lucrative business of securities class-action lawsuits.  After a dramatic drop in a company's share price, the law firm typically would file suit on behalf of shareholders claiming the company misled investors about its financial health.  The firm has helped win huge settlements against accounting firms, tech companies and many high-profile corporations embroiled in scandal, including Enron Corp. and Tyco International Ltd.

Corporate executives long have complained that the suits were designed primarily to enrich lawyers.  The Milberg case has given a boost to that view, prompting some in Congress to call for tighter regulation of securities class-action suits.

Milberg maintained its suits were keeping Wall Street accountable, and the firm's success in winning large settlements for investors caused many in the plaintiff's bar to question the merits of the prosecution.  The government has maintained that Milberg lawyers undermined the justice system by lying to courts, claiming all plaintiffs were being treated equally when in fact some were getting kickbacks.

The prosecution of Milberg was also controversial, because it is relatively rare to criminally charge a business, as opposed to the specific individuals purportedly involved in a crime.  The criminal conviction of Arthur Andersen LLP for impeding the probe of Enron, a client, put the accounting firm out of business, costing thousands of employees their jobs.  In 2005, the Supreme Court overturned the Arthur Andersen conviction.  But the government claimed Milberg was a fair target, because much of top management was allegedly involved in the kickback scheme.

This has been a rough year for the plaintiff's bar.  Richard "Dickie" Scruggs, one of the nation's most prominent plaintiffs lawyers, who made his name in asbestos and tobacco litigation, pleaded guilty earlier this year to a criminal conspiracy charge.  He was implicated in a scheme to bribe a judge in a case over legal fees following insurance litigation stemming from Hurricane Katrina.  He is scheduled to be sentenced July 2 and may face up to five years in prison.

Meanwhile, a criminal trial is under way in federal court in Kentucky in which three plaintiffs lawyers involved with a class-action suit face allegations that they misappropriated about $65 million of a $200 million settlement on behalf of plaintiffs who claimed they were injured by the diet drug Fen-Phen.  The defense has said that if anything was improper about the settlement, it wasn't intentional.

Despite these blows, the plaintiff's bar as a whole has had plenty of action.  More than 170 lawsuits related to subprime lending were filed in federal courts in the first three months of this year, according to Navigant Consulting.

Beyond the recent black eyes to the profession, plaintiffs lawyers face an arguably bigger challenge from court decisions in the past several years that make it harder to bring certain class-action lawsuits or to sustain big damage awards.  A case the U.S. Supreme Court plans to hear in its next session could significantly undermine drug mass torts.

If the amount under discussion in the Milberg talks holds, the government will be able to claim more than $100 million in fines and penalties in the case -- factoring in the more than $30 million that other defendants in the case have agreed to pay.  That total figure would make the case one of the largest-netting prosecutions of a law firm.  Last year, Jenkens & Gilchrist, a now defunct Dallas firm, agreed to pay $76 million to resolve a federal tax-shelter investigation.

Milberg has asked Coughlin Stoia Geller Rudman & Robbins LLP, a powerful San Diego law firm that spun off from Milberg several years ago, to chip in part of its payout in the settlement, but the Coughlin firm has refused, say two people familiar with the matter.  The Coughlin firm hasn't been charged in the case.

Since its 2006 indictment, Milberg has lost many lawyers and considerable business, but it has continued to earn fees, including some large sums from its previously filed class actions.  This year, it was paid more than $120 million as part of a settlement of a class action alleging securities fraud at Tyco, according to two lawyers in the case.

Milberg is the last major defendant in an investigation that was launched in about 2001.  That probe has resulted in a two-year prison term for William Lerach, a prominent former Milberg partner, along with guilty pleas by three other former firm partners.

Melvyn Weiss, the firm's co-founder, is due to be sentenced Monday in Los Angeles, after pleading guilty this year to participating in a criminal conspiracy.  Mr. Weiss's plea agreement calls for him to serve up to 33 months in prison and to pay $10 million in fines and penalties, but he has requested to be sentenced to no more than 18 months.

Write to Nathan Koppel at nathan.koppel@wsj.com

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