Indictment may doom Milberg Weiss law firm

Milberg Weiss Bershad & Schulman, the law firm charged with paying more than $11 million in kickbacks to plaintiffs in lawsuits, may hemorrhage clients the same way accounting firm Arthur Andersen did, legal experts said.

The law firm, which has won more than $45 billion for investors in securities-fraud cases, and two of its partners were charged Thursday by federal prosecutors in a 20-count indictment that included mail fraud and conspiracy counts. Legal experts say the firm is the largest U.S. law firm ever indicted.

The Milberg Weiss indictment is comparable to the charges made in 2002 against Arthur Andersen, which all but drove the fifth-largest accounting firm out of business, New York University law professor Stephen Gillers said. Andersen was convicted of obstruction of justice related to the Enron fraud. The U.S. Supreme Court overturned the conviction last year after the firm had shrunk from 85,000 employees to about 200.

"This will probably mean the end of the firm," said Larry Hamermesh, a securities law professor at Widener University School of Law in Wilmington, Del. "It will probably end up in receivership in a couple of months and begin to dissolve. It's like Arthur Andersen redux."

Prosecutors said Milberg Weiss, from 1984 though 2005, gave three clients more than $11 million "in secret and illegal payments" for cases in which the firm made $216.1 million in fees. The payments were made in cash or checks through intermediary lawyers or other professionals, according to the indictment announced in federal court in Los Angeles yesterday.

Milberg Weiss and the two partners, Steven Schulman, 54, and David Bershad, 66, denied the charges. The New York-based law firm employs 125 lawyers.

The firm called the indictment "unjust, misguided, and misinformed" in a statement.

Marina Ein, a spokeswoman for Milberg Weiss, said in an interview that there are "fundamental differences" between the case against the firm and that against Arthur Andersen. Melvyn Weiss, "the heart and soul" and lead partner of the firm, has not been charged with any misconduct, Ein said.

"We believe strongly that the firm will beat back these charges that were leveled [Thursday], and that it will continue to represent their clients in cases around the country," Ein said.

In an early sign that Thursday's indictment may hurt Milberg Weiss, a Delaware judge expressed reluctance at a May 17 hearing to appoint the firm as sole lead counsel in a case because of the government's investigation of the firm.

Columbia University law professor John Coffee Jr. said large institutional clients may hesitate before using Milberg Weiss as counsel because of the indictment.

"A number of public pension funds, which are always publicity sensitive, will find it difficult to use a law firm that's been indicted," Coffee said. "Long before Arthur Andersen was indicted, it found it was losing clients because of the effect on its reputation."

Gillers disagreed, saying that the pension funds and shareholders Milberg Weiss represents "will not be scared off quite as easily as corporate America."

Milberg Weiss represents the $140 billion New York State Common Retirement Fund, a state pension fund, in a shareholder suit against Bayer involving the safety of its cholesterol-lowering drug Baycol. The suit is in the discovery stage, according to David Neustadt, a spokesman for New York Comptroller Alan Hevesi, who manages the fund and is its sole trustee.

Asked whether that representation would change in light of the charges against Milberg Weiss, Neustadt would only say, "We're reviewing the indictment."

"It has been so phenomenally successful with its plaintiff classes that it will be an incentive for its clients to remain faithful," Gillers said.

Joseph Grundfest, a former Securities and Exchange Commissioner and a professor at Stanford Law School in Palo Alto, Calif., said the comparison of the case against Milberg Weiss to that of Arthur Andersen can't be made without knowing what Milberg Weiss was willing to concede to avoid prosecution.

Milberg Weiss said negotiations with prosecutors broke down, in part, because the government demanded it waive the attorney-client privilege to avoid being charged, something Arthur Andersen would have done if it had the chance, Grundfest said.

Another difference between the cases is that Arthur Andersen was one of only five major accounting firms, Grundfest said, while there are many more law firms that represent shareholders in securities lawsuits.

"There are many competitors that can step up to the plate and fill the void," Grundfest said. "So the arguable social harm is lower."