The Indictment Against Law Firm Milberg Weiss and Two of Its Partners: What's Really at Stake, and Why the Media Is Missing the Point

In May of this year, a federal grand jury in Los Angeles indicted the law firm of Milberg Weiss and two of its partners for allegedly violating a variety of federal laws, including racketeering and obstruction of justice. My fellow columnist Michael Dorf wrote then about the indictment and America's "love/hate relationship" with class action litigation. In this column, I want to discuss how recent coverage of the indictment misrepresents what is at stake in cases like the Milberg indictment.

Milberg Weiss: Previously America's Top Plaintiffs' Class Action Firm

Before the indictment, Milberg Weiss was America's premier plaintiffs' class action firm. Its lead partners--especially its patriarch, Mel Weiss--brought plaintiffs' work to a new level of sophistication. Because Milberg had the wealth and manpower to fully staff large securities and consumer class actions, the corporations the firm sued often settled instead of taking cases to trial.

Soon Milberg's partners were drawing salaries as high as those of some of the CEOs of the firms they sued. Mel Weiss made $16 million in one year, and collected Picassos. This lifestyle raised eyebrows, but critics had no real concrete gripe to voice against the firm - until the indictment.

The Indictment's Key Allegation: Inducement of Perjury

The indictment alleged that the firm paid certain clients kickbacks - sometimes in amounts in the hundreds of thousands of dollars - in exchange for their willingness to participate in securities class actions as "lead" plaintiffs.

In all, Milberg is alleged, over a twenty-five year period, to have paid three people $11.4 million to serve as lead plaintiffs in 180 cases.

What would motivate Milberg to pay? One answer is that, until the mid-1990's when the law was changed, securities class action litigation always involved a "race to the courthouse." When a plaintiffs' firm saw evidence of securities fraud, it had to find a person who held stock in that company to be the "lead" plaintiff before it could file a class action lawsuit on behalf of all shareholders. The firm that filed first would typically get to control the suit and would take the largest fee - and it was impossible to file without a lead plaintiff.

According to the indictment, when Milberg saw evidence of fraud - such as a surprise revelation that caused stock to dip - it didn't go try to find stockholders. Instead, it already had stockholders -- because it kept people on its "payroll," so to speak, who held shares in a myriad of companies. Typically, one of them would hold stock in the company Milberg wanted to sue.

As described thus far, Milberg's behavior - though crafty - was not illegal. But it led to illegality. When judges asked the lead plaintiffs if they had received anything of value in exchange for their participation in the lawsuit, they lied under oath - allegedly because Milberg induced them to.

Meanwhile, the indictment claims, Milberg itself never told any court, in any of these suits, about its relationship with the lead plaintiffs. The judges were thus left in the dark. Had the judges known, they might have been highly dubious about approving Milberg as lead counsel in the cases. Though Milberg's conduct was not illegal, a judge might have seen it as unethical, or simply not the kind of thing a lead counsel ought to be doing. With a choice of firms, the judge might have opted to choose another firm - and Milberg would have lost substantial fees.

Beyond Perjury: Were There Crimes That Harmed Other Class Members?

The indictment, interestingly, suggests that the court and the justice system weren't the only ones boondoggled: It suggests the other, non-lead-plaintiff class members were hurt, too.

Is this true? The indictment indicates that these other class members were denied the "honest services" of the lead plaintiffs or of the class's attorneys, Milberg Weiss. But were they hurt in any concrete sense? Perhaps not.

To begin, the kickbacks were paid out of Milberg's own fee, not out of the recovery to the class as a whole. So in this sense, the class was not hurt; Milberg did not take from the class's pocket to pay itself.

Still, the U.S. Attorney clearly suspects that the legal fees would have been smaller had no kickbacks been paid, and thus the class would have gotten more money in the end. But here, too, any harm is speculative and uncertain.

The legal fees charged were approved by a federal judge in every one of these cases. And fees are typically based on factors such as what is a typical hourly rate for the relevant market in legal services, how many hours were spent on the case by the firm, and the firm's role in winning the case. None of these factors relates to Milberg's conduct vis-à-vis the lead plaintiffs, or the lead plaintiffs' own conduct.

(Of course, other class action law firms had every reason to complain; they doubtless lost cases to Milberg due to its sharp dealing. But the indictment does not claim any criminal responsibility on Milberg's part for these harms. Possibly, the law firms could try to sue Milberg to recover the fees lost, but there are two problems with this: The amount of fees is highly speculative, and the firms who never got the fees, also never did the work to earn them.)

The Misleading Reportage About Milberg

These realities of the case against Milberg have been obscured in much of the press coverage of the indictment.

Consider an October 31 Fortune article about Milberg and its paid plaintiffs, "The Law Firm of Hubris and Greed." The article reported that "[paid plaintiff] Howard Vogel's biggest windfall came in the giant Oxford Health Plans case. Viewing the health insurer as a juicy target for yet another lawsuit, Vogel had spent $3918 to buy 50 shares for his retirement plan in 1997. Sure enough, the stock plummeted, and Milberg filed a class action" (Emphasis added).

What is odd about this description of Milberg's perfidy is that the author of the article seems to believe that Howard Vogel somehow caused Oxford Health Plan's stock to plummet--the implication is that since Vogel took money from Milberg in secret, Oxford could not have been guilty of securities fraud.

What the Fortune article did not report was that Oxford's notorious 60% drop in share price was caused by a report in October 1997 that it had earlier wrongly recorded $81 million in revenues, thus wiping out its positive earnings record and thrusting the company into the red. The SEC concluded that Oxford had violated federal securities law, and began an investigation that resulted in a settlement in 2002.

Even if Howard Vogel had bought Oxford because he (or Milberg) suspected that its managers were cooking the books, that does not mean that the suit they later brought was frivolous--it just means that Vogel and Milberg were pretty good at figuring out which companies were cooking the books.

The Erroneous Claim That This Is Champerty

The indictment in fact suggests that if this is what Vogel and Milberg were doing, then they were breaking New York law, since what they did was "champerty." Champerty, which I have written about on this site before, is the "officious" stirring up of unnecessary litigation.

However, it is hard to see how Vogel and Milberg's prescient purchase of Oxford "stirred up" litigation. Oxford's fraudulent conduct, if there was any, was going to happen whether or not Vogel bought the stock, and the subsequent investigation by the SEC was going to happen whether or not Milberg brought the class action on behalf of Vogel and others. The difference between the SEC investigation and the Milberg suit is that the SEC settled its probe of Oxford for $250,000, while Milberg settled its civil suit for $300 million (the third largest settlement of 2003).

A Fraud on the Courts, For Certain - But That May Be Milberg's Main Crime

My point here is not to defend Milberg against the charge that they did something wrong when they secretly paid Vogel and others to be plaintiffs. Secret payments in class actions are wrong because they constitute a fraud on the courts, whether or not they are fraud on anyone else, and whether or not they actually harm anyone else.

So far, the Milberg indictment looks like it will destroy the firm. That may be a fair price for it to pay for trying to cut corners -- and, especially, for allowing lies to be told to, and relevant information concealed from, the courts before which its partners appeared, and to which they had a duty.

If other plaintiffs' firms step in and take up the slack, it will not matter whether Milberg disappears as a result of the indictment. But if companies like Oxford are left with the impression that, thanks to the crackdown on Milberg, they will have plenty of room to engage in fraudulent conduct without fear of civil litigation, then we will all be the poorer for it.