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Wednesday, June 07, 2006 10:20:06 PM
Tara Weiss 06.07.06, 1:00 PM ET
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There’s nothing like a federal bribery and fraud indictment to scare away a law firm’s clients. That’s especially true at Milberg, Weiss, Bershad & Schulman, the class-action giant known for snagging the lucrative lead counsel position in numerous securities lawsuits.
The firm and two name partners are accused of paying kickbacks to plaintiffs in as many as 150 lawsuits. And since its May 18 indictment, Milberg has been losing both partners and clients. Among the defections: institutional clients like the Ohio Tuition Trust Authority and the New York State Common Retirement Fund. Adding to Milberg’s worries is the announcement on June 6 that Delaware’s Office of Disciplinary Counsel is investigating the firm's work in the state.
So which firms are likely to benefit from Milberg’s misfortune? Three years ago, Milberg Weiss was the leader in investor lawsuits, according to Institutional Shareholders Services, a Maryland-based company that tracks all securities class-action litigation for shareholders. Their most recent survey put Milberg Weiss in fourth place behind Bernstein, Litowitz, Berger & Grossman; Barrack, Rodos & Bacine; and Lerach, Coughlin, Stoia, Geller, Rudman & Robbins. Forbes.com called each of Milberg’s top four competitors, but they refused to comment on how they might be wooing Milberg’s former clients.
Each firm stands to gain. But of the three, it’s a toss-up between the industry’s two largest players. Bernstein, Litowitz, Berger & Grossman settled nine cases totaling $3.7 billion. Close. Barack, Rodos & Bacine also had settlements totaling $3.7 billion in five cases. While third-place Lerach, Coughlin, Stoia, Geller, Rudman & Robbins settled 47 cases, it totaled just $1.8 billion. By comparison, Milberg settled 34 cases totaling $600 million.
The indictment may have brought Milberg to its knees, but the company says it’s not yet crippled. “We will vigorously defend ourselves and our partners against these charges, and we will be vindicated,” Melvyn Weiss, one of the firm’s co-founders, said in a statement on the company’s Web site.
Despite how overly optimistic that may sound, even the firm’s competitors aren’t counting Milberg out. “They’re like cockroaches; they’re highly adaptable,” says John D. Lovi, a securities defense attorney and managing partner at Steptoe and Johnson's New York office, who frequently sparred with Milberg Weiss’ attorneys. “Unless this firm is destroyed by this investigation and this case, I think they will continue to be a dominant player in the field.”
It’s a field that’s notoriously cutthroat, despite attempts to temper the competition. The most recent effort was 1995’s Private Securities Litigation Reform Act. Prior to its passage, plaintiffs raced to the courthouse to be the first to file a lawsuit against a company if its stock dropped. Backroom jockeying determined who the lead plaintiff would be, a significant role since that attorney divvied up the winnings.
The Reform Act changed that. Now, the plaintiff who owns the most stock takes the lead role. But firms such as Milberg have allegedly found a way around that. State controllers decide where institutional investors put their money and which law firms represent them. Those are the same firms that make campaign contributions to state comptrollers, raising the question: Do comptrollers recommend firms to represent their states based on how much money was donated to their campaign?
That may be debatable, but New York State Comptroller Alan Hevesi received $100,000 from Milberg Weiss for his 2002 campaign and $13,500 from Melvyn Weiss and senior partner William Lerach. (Lerach left Milberg in 2004 and formed his own firm in California.)
“These types of contributions aren’t illegal; it’s a practice that’s under fire,” says Bruce Carton, vice president of shareholder services at Institutional Shareholder Services. “In a perfect world, that decision making would not be affected by political donations.”
Others that stand to gain from Milberg’s predicament are firms that represent members of the classes that didn’t initially hold lead status. That’s because the indictment leaves room for attorneys in class-action cases to lobby the court to unseat them as lead plaintiff. Those attorneys are likely to argue that Milberg was made lead counsel based on its reputation and because it follows the rules of the court. Now, all of that is in question.
The indictment is already affecting Milberg’s notorious ability to gain lead status. Last month, a Delaware judge denied the firm the lead counsel role in a case that involves Russia's largest oil producer, OAO Lukoil Holdings (other-otc: LUKOY - news - people ), and its proposed takeover of Chaparral Resources (otcbb: CHAR.OB - news - people ), a Kazakhstan subsidiary.
And last week Ohio Attorney General Jim Petro appointed Cincinnati firm Waite, Schneider, Bayless & Chesley to represent the Ohio Tuition Trust Authority in its case against the Putnam American Government Income fund. New York’s Hevesi is going to appoint a replacement in the New York State Common Retirement Fund class action against Bayer AG (nyse: BAY - news - people ).
Much has been made about the similarities between Milberg Weiss and the fall of accounting behemoth Arthur Anderson. But we’re not likely to see the demise of securities class-action suits. There’s simply too much competition out there. Plus, there’s already speculation that several attorneys from Milberg will form their own firm.
“If they were to disappear tomorrow, I doubt very little would change,” says Joseph Grundfest, a professor at Stanford University Law School and former Securities and Exchange commissioner. “The same companies would be sued, the same causes of action would be pursued.”
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