Elkind: Mel Weiss is sinking his firm

September 24, 2007, 8:16 PM UTC

[This is a guest column by my colleague, Fortune editor-at-large Peter Elkind. Back in the September 4, 2000, issue of Fortune, when the investigation of Milberg Weiss had not yet become public, he wrote a 9,000-word profile of Bill Lerach, available here, providing a remarkably prescient overview of things to come. In November 13, 2006 he wrote a 9,000-word cover story , available here, about what the investigation had unearthed by then.]

By Peter Elkind

I guess, at bottom, no matter how clear the rules, greed, unfettered power or feelings of omnipotence will lead some people into bad conduct.
–Mel Weiss, 2005 interview with Accounting Today

Last week’s events in the slow, stunning fall of plaintiffs’ juggernaut Milberg Weiss make a handful of points painfully clear.

The first is that 72-year-old firm co-founder Melvyn Weiss, indicted Thursday on four felony counts in the long-running federal kickback probe, isn’t just going down with his sinking ship. He’s taking the ship down with him.

In a remarkable statement on the eve of Weiss’ impending indictment, the firm—which has been crippled by its own indictment—announced that Weiss, in response to the new charges, has “decided to discontinue his involvement in firm management.”

No, Weiss isn’t leaving the firm—in fact, he’s not even taking a leave of absence. Far from it. “Mr. Weiss will remain available to counsel clients and Firm attorneys,” Milberg noted, as though offering a reassuring note.

But perhaps this should come as no surprise—even now. Unlike his former colleague, Bill Lerach—who leveraged the appeal to prosecutors of his own guilty plea to strike a plea bargain that protected the new law firm he spun off of Milberg Weiss in 2004—Weiss has stubbornly refused to even step aside, a move prosecutors have long demanded as a first step to any resolution of Milberg’s case. Devastating consequences be damned! This is an enterprise, remember, that represents public pension funds and small investors—and has long trafficked on claiming the moral high ground in the fight against corporate greed and criminality. (For more on Weiss’ missed opportunity to mitigate the damage to his firm, see here.)
How could Milberg’s 25-odd remaining partners put up with such a situation? Because the founder has always had a virtual strangehold on his firm. As one former partner told me last year: Milberg Weiss “was Mel’s world, and everyone else just lived in it.”

The indictment underlines this point. For years, Mel Weiss had veto power over any decision, even as his firm grew to more than 200 lawyers. Between 1983 and 2005, his individual stake in the firm—and its profits—ranged from 13.5% to 39.4%. Weiss’ take during that span: a stunning $209.9 million, according to the government.

If Thursday’s superseding indictment against Milberg, Mel Weiss, and two other defendants is to be believed—and it clearly rests on a solid foundation of evidence from (among others) two former Milberg name partners who have agreed to plead guilty and cooperate with prosecutors—Weiss was at the very center of the firm’s long-running scheme to secretly pay plaintiffs more than $11.3 million in kickbacks in 225 lawsuits.

As the government describes it, Weiss was personally involved in dirty dealings with all three of Milberg’s showcase paid plaintiffs—Steven Cooperman, Seymour Lazar, and Howard Vogel—each of whom secretly received millions for serving as name plaintiff in dozens of Milberg class actions. (Lazar, also a defendant in the case, has pled not guilty. Cooperman and Vogel have pled guilty and are cooperating with the government.) The indictment also ties Weiss to an unnamed trio of Florida residents who were paid to serve as plaintiffs in about 60 more lawsuits.

And the allegations are ugly. Weiss is no longer thinly masked, as he was in earlier government filings, as “Partner A.” The new indictment places him at the scene of the alleged crimes from the beginning.
It has Weiss, in August 1979, informing his number-two man, senior partner David Bershad (one of the now-cooperating former Milberg lawyers) that he had struck a deal with California investor Lazar to serve as a plaintiff in Milberg lawsuits in exchange for 10% of the firm’s attorney fees in those cases.
It has Weiss, in the early 1980s, informing Bershad not to worry about violating the law by paying a Florida plaintiff because they would be making the payments in cash, and thus there would be no paper trail and little risk of getting caught. Indeed, in the mid-1980s, the indictment says, Weiss personally carried “thousands of dollars in cash” from New York to Florida to make payments to two plaintiffs.
The indictment details how Weiss—along with Lerach and Bershad—in January 1986 included a provision in the firm’s partnership agreement that would allow the “conspiring partners” to tap the firm’s coffers to reimburse themselves for cash they’d each kicked in to a slush fund for paying plaintiffs. (Some of this cash was stashed in a safe in Bershad’s office at the law firm.) In December 1987, 1988, and 1999, according to the indictment, Weiss then “caused” the firm to reimburse him a total of about $380,000 in cash for such payments.

It has Weiss, in September 2003, advising name partner Steven Schulman (whose deal to plead guilty and cooperate was also announced Thursday) that because of the ongoing investigation into Milberg Weiss kickbacks, he wouldn’t negotiate a disputed payment to plaintiff Howard Vogel over the telephone. Two months later, according to the indictment, Weiss resolved the matter with Vogel’s lawyer face to face in Milberg Weiss’ New York office.

And finally, the indictment accuses Weiss of obstructing justice and making false statements in withholding an incriminating document that had been subpoenaed by prosecutors.
Weiss’ criminal lawyer, Benjamin Brafman, insisted his client would fight the charges. “We are confident that when the evidence is carefully reviewed at a trial of these charges, Mr. Weiss will be fully exonerated,” Brafman said in a statement.

That, of course, remains to be seen—as does the question of whether Milberg Weiss can survive long enough to witness such an outcome. On that issue, the firm on Thursday issued a second, stiff-upper-lip statement that suggested the gloomy prospects of what was once the most feared law firm in America: “Despite the government’s announcement today we will continue to fight for our clients and class members and to achieve the record recoveries for which our firm has long been known. The firm’s active partners, none of whom is alleged to have been involved in any wrongdoing, will maintain responsibility for the firm’s management and litigation activities. We will not be deterred from our work and will persevere throughout this difficult period.”