A Crook Who Doesn't Know When to Stop

June 7, 2008

Some guys just don't know when to shut up. William Lerach is one of those guys.

Once the most feared plaintiffs' lawyer in the United States, Lerach went to prison last month for his involvement in a long-running kickback scheme. He and three of his partners at the firm Milberg Weiss Bershad Hynes & Lerach, you see, allegedly made secret payments to a small group of people who acted, in effect, as Potemkin plaintiffs, allowing the firm to trot them out as clients whenever it wanted to sue a company whose stock had fallen. Which, by the way, was often; in its glory years, Milberg Weiss's annual "market share" in securities litigation exceeded 50 percent.

Wait. Did I say "allegedly?" I take that back; at this point there is nothing alleged about it: Lerach and his partners absolutely, positively committed these crimes. David Bershad, Steven Schulman and Melvyn Weiss — Schulman became one of the firm's name partners after Lerach split the firm in 2004, taking the West Coast office with him — have all pleaded guilty to the same essential charges. None of the cases came close to going to trial, although the firm itself, now called Milberg, remains under indictment, with a trial set for August and a settlement expected.

Bershad, who appears to have been the firm's bagman as well as one of its top partners, used to keep a safe full of cash in his office credenza; that was the firm's slush fund for its crooked clients. According to the government, Milberg Weiss disbursed $11.3 million illegally over a 25-year period. In other words, this wasn't some rogue operation — the kickbacks were at the heart of the firm's business model.

Although neither Bershad nor Schulman has been sentenced, the denouement of the case came Monday when Weiss, one of the co-founders of Milberg Weiss — and long considered one of the giants of the securities bar — was sentenced to 30 months in prison. This came less than a month after Lerach began serving his two-year sentence. When I began asking around about why Lerach had gotten the lesser sentence, I was told that he had pleaded guilty a year earlier than Weiss and that he had not tried to prevent the government from obtaining a crucial piece of evidence, as Weiss had.

Fair enough. But there is something about their disparate sentences — even though there is only a six-month difference — that sticks in my craw. In the aftermath of his guilty plea, Weiss has struck notes of genuine remorse. "Looking up from the deep pit into which I have descended has been painful," he wrote in a letter to the judge before his sentencing. "I have spent day after day, and sleepless nights, reflecting on how I could have permitted myself to stray so far off course from the hopes and desires I established for my life's work."

Meanwhile, Lerach was publishing his reflections on the case in a first-person article that appeared this week on the Web site of Portfolio, the Condé Nast business magazine. In the article, Lerach expresses zero remorse, positions his crimes as having hurt no one while serving a greater good and makes the absurd claim that he was railroaded by his political opponents.

It is a brazen, shameful piece of work — and it must infuriate the prosecutors who made the plea agreement with him, and the judge who accepted it, especially since Lerach wrote his own remorseful letter to the judge ahead of his sentencing. It also ought to infuriate anyone who cares about the law. Plenty of criminals head to prison still believing they're above the law, but Lerach takes the cake.

As regular readers know, I'm no fan of Lerach. I've long thought he ran a kind of extortion racket, filing class-actions suits against companies whose stock had dropped — without a shred of evidence that any wrongdoing had taken place — and then torturing them with motions, discovery and depositions until they settled. He used their own rational judgment — that it made more economic sense to settle than fight — against them. When a case settled, Lerach, in effect, took money from shareholders, sliced off a large percentage for his firm and gave whatever was left back to shareholders. The best description of Lerach's methods I ever heard came from the venture capitalist John Doerr: a "cunning economic terrorist," he called Lerach.

None of this is illegal, alas. Lawyers like Lerach have the right to file bogus lawsuits, and extract what they came from them. What is illegal is secretly paying off what Michael Perino, a St. John's University law professor, calls "professional plaintiffs"— people who hold stock in dozens of companies just so an attorney can use them as "aggrieved shareholders" whenever they want to file a lawsuit. Lawyers like Lerach needed such "on call" clients because it was important to be first to the courtroom to file a suit; up until 1995, when the law changed, that was the crucial criteria in determining which lawyers would be lead counsel, and thus take the largest share of attorney's fees.

In his Portfolio article, Lerach claims that before 1995, it was legal to pay plaintiffs the way Milberg Weiss did — and that everyone did it. It wasn't, and they didn't. "The practice of secretly paying plaintiffs was always illegal," said Robert Giuffra Jr., a lawyer with Sullivan & Cromwell, who helped write the 1995 law when he was working for Congress. But the new law made its illegality even more explicit, while ending the "race to the courthouse," as Giuffra calls it, by changing the criteria for lead counsel. (The lawyer whose client had the most shares now has the best shot at become lead counsel.) One of the shocking things about the Milberg Weiss case is that the firm continued to pay plaintiffs well after the passage of the 1995 law.

Lerach's statement has infuriated other plaintiffs' lawyers. "It would just be unthinkable" to give kickbacks to lead plaintiffs, Max Berger of the firm Bernstein, Litowitz, Berger & Grossman said.

Sean Coffey, another Bernstein, Litowitz partner, added: "It is bad enough that this confessed criminal cheated for years to get an unfair advantage over his rival firms. But for this guy, on his way to prison, to say that everyone does it is just beyond the pale."

Lerach's "everybody does it" claim — which he has made in numerous pre-prison interviews, as well as the Portfolio article — is also giving the congressional enemies of the plaintiffs' bar a new weapon with which to club it. For instance, Senator John Cornyn, Republican of Texas, has introduced legislation that would both force new disclosures on the plaintiffs' bar and reduce their fees; the senator told me point-blank that Lerach's pronouncements helped spur him to file the legislation. So as he heads to jail, Lerach has succeeded in making life more difficult for everyone who sues companies for a living. Nice going.

Let's take another of Lerach's claims: "The government contends that the people on whose behalf we sued were damaged by the fees paid to plaintiffs," he wrote in the Portfolio article. "This is false." According to Lerach, the kickback came out of the lawyer's fees. In other words, he was the one sacrificing when he kicked money back to one of his on-call plaintiffs!

Nonsense. Think about it: Why is it illegal for a lead plaintiff to take money under the table from his lawyer in a class-action suit? Because in doing so, the client has a conflict with the rest of the class, for whom he is supposed to be fighting. If he knows he is going to get a kickback that comes out of the attorney's fees, he will care more about the fees than the amount of the settlement — or the amount he might reap from a trial. Indeed, Perino recently published a study that showed that the fees awarded in Milberg Weiss cases that were included in the indictment were considerably higher than the fees in other Milberg Weiss cases but that "the recoveries are statistically indistinguishable." Which is to say, the lead plaintiffs didn't spend a lot of time worrying about extracting the maximum settlement.

There is a second reason why having Potemkin plaintiffs constitutes wrongdoing. The plaintiffs are the ones who are supposed to bring the cases — not the lawyers. They hire lawyers because they have suffered harm and want redress, and they are the ones who should be making the final decisions about fighting, settling or dropping the case. The Milberg Weiss method really meant that the client was a nonentity in the process. As Lerach once famously put it to Forbes — in another great example of his lack of discretion — "I have the greatest practice of law in the world. I have no clients."

Ultimately, what Lerach wants us to believe is that it was his zealotry in bringing evil corporations to heel that caused him to cross the line. There is no question that corporations do things they shouldn't, and given the system we have, plaintiffs lawyers, at their best, can offer a kind of rough justice. Even Lerach has had his bright, shining moment, when he extracted billions from the banks that aided Enron.

But Enron is not really representative of Lerach's career, much as he'd like you to believe it. He's a crook who got caught, and if putting him in prison for his little kickback scheme - rather than his far more venal form of economic extortion - is a little like putting the 1920s gangster Al Capone in jail for tax evasion, well, so be it.

That's a form of rough justice, too.

[ RGM Short Selling Home page ]