Law Firm Charged with Payola to Plaintiffs

It's the sort of story that surely will trigger the inherent skepticism and cynicism that many people already feel toward lawyers, law firms and the legal system in general. In Los Angeles Thursday, a federal grand jury indicted the country's top class-action securities law firm, Milberg Weiss Bershad & Schulman and two of its partners mail fraud, racketeering conspiracy, money laundering conspiracy and obstruction of justice.

According to the feds, the law firm paid individuals on the sly to serve as plaintiffs in huge class-action lawsuits. One client and his family, reports the New York Times, served as plaintiffs for the firm in about 70 cases and received about $2.4 million in kickbacks. The law firm and its partners deny the allegations. If true, though, they represent a devastating revelation not just about the firm, which is probably done regardless of how this plays out, but about how these big cases evolve and how they unfold. No legitimate plaintiffs around to sue? Pay for 'em! Can you imagine? This area of the law will never be the same again.

There are dozens of legal questions raised by the indictment and right now I cannot give you many answers. What happens to all those settlements in cases in which the firm allegedly paid plaintiffs? Will they be reopened? Probably, at least some of them. I also bet that other law firms and other plaintiffs will look at suing Milberg Weiss contending that the firm committed fraud during those lawsuits. And what about all those corporate defendants that over the years have been the targets of Mliberg Weiss? Well, they don't necessarily get off the hook with this news. Just because the firm may have ginned up plaintiffs doesn't mean that there weren't legitimate plaintiffs with legitimate claims. Still, they all must get a measure of satisfaction from seeing their tormentor tormented.

Why did the law firm itself get sued if there were only a few allegedly bad apples? Probably to put pressure on the partners to cut a deal. Remember, criminal cases against corporations rarely work out well for prosecutors-- see, Andersen, Arthur-- because jurors naturally have a hard time "convicting" an entity that is not a person. My guess is that the firm ultimately will reach some sort of a separate settlement with prosecutors and thereby leave its partners to fend for themselves. Whatever happens, it is going to be a nasty and costly fight-- just about as nasty and costly as the litigation Milberg Weiss has initiated over the years.

The long-term fallout here will hurt the entire class-action industry. Judges will be far tougher on law firms in evaluating whether a group of people constitutes a legal "class." Corporate defense attorneys also now will have more arguments to make when they try to decertify a class. Other law firms surely will rush to fill the void that Milberg Weiss will have to leave. And just about everyone will wonder how it came to be that another golden goose was cooked.

By  |  May 19, 2006; 9:00 AM ET
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