First, a little backstory. The investigation into Milberg started in the late 1990s with the prosecution of Steven Cooperman, a successful opthalmalogist who was indicted for insurance fraud--engineering the theft of paintings from his own collection in order to collect the insurance proceeds, amounting to a little over $17 million. Eager to strike a deal, Cooperman offered prosecutors information about illegal kickbacks allegedly paid to him by Milberg Weiss. The investigation grew from there, and in 2002, federal prosecutors in Los Angeles issued sub poenas to several law firms that worked regularly with Milberg. In 2005, the government indicted Seymour Lazar, another repeat plaintiff in Milberg's stable, charging Lazar with accepting millions of dollars in illegal kickbacks from the firm.
At the same time, Milberg was having internal problems, and Bill Lerach and Mel Weiss eventually decided the firm would be better off splitting, despite the more than thirty years they had practiced together. For a short time there was "East Coast Milberg" and "West Coast Milberg," before Lerach named his new firm Lerach Coughlin Stoia Geller Rudman & Robbins. Mel Weiss retained control of Milberg, and the two firms both continue to practice on the plaintiffs' side and compete for much of the same work. Lerach's firm represents the class of plaintiffs in the Enron litigation, as well as in the more recent litigation against Halliburton, and some of the firms' supporters claim that the Milberg investigation is largely political.
Over the last several months, Milberg has been attempting to broker a nonprosecution deal with prosecutors, which wouldn't save Milberg partners from prosecution, but would head off an indictment against the firm as an entity, which would likely sound the death knell for the firm. In an effort to appease prosecutors, David Bershad and Steven Schulman, two partners likely to be indicted, left the firm last week. The prosecutors demands regarding admissions of wrongdoing and nine-figure fines eventually proved too much, though, and apparently talks broke down earlier this week. Here is Bershad's parting memo to Milberg employees.
So, it seems, the Los Angeles U.S. Attorney will announce this afternoon, in a press conference scheduled for 12:30 PM Pacific time, that Milberg Weiss, and perhaps individual partners, have been indicted. How will this affect the securities litigation landscape? Not much, at least in the long run.
It's true that Milberg and Lerach take the number three and four spots on the "SCAS 50" report, which ranks plaintiffs' firms by total dollar amount of settlements generated. The two firms together generated $2,434,590,893 in settlements in 2005, and while there are a couple of firms with larger settlements, there are none with nearly so many. The top ten firms on the report generated 144 settlements; of those 144, more than half, 81, came from Milberg and Lerach. So why do I think there won't be much long-term impact? A number of reasons:
First, as Larry Ribstein notes, the value of Milberg as a firm--aside from any reputational value it might hold--is in its lawyers. If Milberg goes down, the unindicted lawyers will move quickly to other plaintiffs' firms, and securities litigation will continue apace. No doubt the disintegration of the firm will cause temporary dislocations in current litigation, but as lawyers settle at other firms, that disruption will be minimized. No doubt there will be competition among the remaining firms to fill the void left by Milberg, but that kind of competition will likely increase, rather than decrease, the number of filings.
Second, it's not clear to me that Lerach is in any danger. Even if Lerach himself were indicted, the Lerach firm is new and separate from Milberg, and not in any danger of indictment as an entity. It's quite likely that if Milberg implodes as a result of the indictment, many of the lawyers and much of the work there will flow to Lerach, a firm already well positioned to continue litigating in this area.
Finally, the PSLRA itself changed securities litigation practice sufficiently that the kinds of practices targeted at Milberg are likely much less widespread than they were in the 1980s and '90s. Prior to the PSLRA, the first plaintiff to file a securities class action was typically named the lead plaintiff, and his or her counsel became lead counsel for the class. The PSLRA now requires that in most cases the plaintiff with the largest dollar amount of losses be named lead plaintiff. Plaintiffs' firms are now much more aggressive at getting institutional investors on board as plaintiffs. In the Enron litigation for example, Lerach's named plaintiff is the University of California. Institutional investors are more savvy, more capable of retaining control over counsel, and far less likely to engage in the type of kickback schemes alleged against Milberg. Moreover, although we still see repeat plaintiffs in smaller securities class actions, the PSLRA limits the number of times an individual may act as lead plaintiff. The PSLRA may not have curtailed securities litigation as a whole, as some thought it would, but it does make the kind of acts alleged against Milberg more difficult to undertake and less beneficial.
I suspect that the Milberg indictment will make for some interesting dinner theater for those of us on the defense side of the securities litigation bar, and will open room for expansion for smaller plaintiffs' firms, but that's about it. I'm skeptical that an indictment would have any significant long-term effect on the landscape of securities litigation.
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