Civil suit against Milberg Weiss is score-settling

August 7, 2007, 4:34 PM UTC
Fortune

“We hate them,” says class-action lawyer Russel “Cap” Beatie, Jr., referring to his competitors at the now-indicted firm of Milberg Weiss. “We’d like to step out into the back alley and shoot it out with them.”

Beatie, of Beatie & Osborn, filed last week’s class-action civil RICO suit against Milberg Weiss (the WSJ’s law blog item about it is here), which he candidly characterizes as “in the nature of a religious crusade.” Blustery and profane, Beatie says he blames Milberg Weiss for blackening the reputations of all class-action firms, thereby strengthening the hand of tort reformers. But there’s little question that his suit is even more personal than that.

The named plaintiffs in Beatie’s suit are six members of class actions in which Milberg Weiss served as lead counsel. In part, the complaint repeats, of course, the charges contained in the government’s May 2006 federal indictment, which alleges that the firm secretly paid named plaintiffs in more than 150 cases to induce them to neglect their duty to look after the interests of absent class members.

But Beatie’s suit also goes beyond the indictment, showcasing charges in which the most obviously injured parties (assuming there was wrongdoing) were Milberg Weiss’s rival firms in the class action bar — like Beatie & Osborn, for instance. (Neither Beatie’s firm nor any other plaintiffs firm is actually named as a plaintiff, however.) Beatie claims that Milberg Weiss repeatedly inflated its clients’ losses in court filings in order to trick the judge into appointing it “lead counsel” in the case. The lead counsel controls the case and gets the lion’s share of the attorneys fees. Beatie’s suit alleges misconduct along these lines in shareholder litigation involving Network Associates (MFE), Oxford Health Plans (UNH), Safeskin Corp. (KMB), Linux VA (LNUX), Aurura Foods, Chubb (CB), Waste Management Inc. (WMI), MicroStategy (MSTR), Sonus Networks (SONS), and Organogenesis. Beatie’s firm had unsuccessfully sought lead counsel status in at least three of these cases.

Two Milberg Weiss spokespersons failed to respond to emails left Friday seeking comment. (The firm’s position on the indictment is laid out at MilbergWeissJustice.com. There it proposes as the firm’s calling card: “Committed to the Truth.”)

In fairness, computation of losses is often not simple — clients may have made lots of buys and sales during the class period, for instance, and some of them may have held short positions as well as long positions. Honest mistakes undoubtedly occur.

When class actions are initiated, many law firms will usually file very similar complaints, all vying to represent the same class of shareholders. Until 1995, the first to file suit had an advantage in winning the lead counsel designation, resulting in an unseemly “race to the courthouse.” In an attempt to end that phenomenon, a 1995 federal reform law dictated that, beginning in 1996, the law firm that represented the plaintiff with the largest claimed losses was now supposed to win lead counsel status, all things being equal.

Accordingly, one of the first things that happens in a class action filed today is that the rival plaintiffs firms submit “certificates of loss” purporting to set out their clients’ losses in share value during the class period. But, in practice, the accuracy of these certificates tends to rely on the honor system, since the depositions and document production that are needed to verify or disprove their accuracy usually will not occur until many months after the lead counsel has already been selected. By that time the lead counsel is already deeply steeped in the minutiae of the case, and the rivals firms are long gone from the scene. If an error in a certificate comes to light at that late date, a judge may be loath to throw a wrench into everything by forcing a expensive, time-consuming change in counsel.

In the MicroStrategy case, for instance, Judge T.S. Ellis III of Alexandria, Virginia, chose Milberg Weiss as co-lead counsel in 2000 because its client, a union pension fund, claimed $610,000 in losses — the most among institutional clients vying for the lead plaintiff role. Many months later, though, when the fund was being prepared for depositions, Milberg Weiss said it discovered that the fund’s losses were actually only $80,000. Judge Ellis acknowledged that, if not for the mistake, he never would have appointed Milberg Weiss co-lead counsel. Nevertheless, he also found that Milberg Weiss’s error was “innocent, an act of negligence rather than bad faith,” and imposed a very modest penalty on the firm — about $50,000 out of a $25 million fee.

Evidently Beatie hopes that in light of the government’s criminal allegations — e.g., the secret safe in the credenza (see here), the cash passing under the table at a Howard Johnson’s (see here), etc. — Milberg Weiss may lose the benefit of the doubt that it has previously enjoyed.

RICO suits offer plaintiffs the prospect of treble damages, and the number Beatie hopes to multiply by 3 would not just be the $11 million in kickbacks that Milberg Weiss allegedly paid to three professional plaintiffs, according to the indictment, but the entire $216 million the firm recovered in fees from those cases. (Each of those benchmarks may be low, since the government has now located at least three additional plaintiffs in Florida whom it claims were also regularly paid by Milberg Weiss, according to the statement of facts submitted in connection with David Bershad’s guilty plea last month. See here.)

Losing your entire fee used to be the standard penalty for disloyalty to a client, regardless of whether the client was harmed, according to ethics professor Stephen Gillers of New York University Law School. In the last 15-20 years, however, many courts have softened that draconian rule, Gillers continues, and they now may consider the extent of the misconduct, whether it was intentional, and the evidence, if any, of actual harm. Since class members’ settlement awards in all these cases were ultimately approved as “fair” by the presiding judges, actual harm may be difficult to prove here.