Class action criminality.

• Author: Casey, Lisa L.

1. INTRODUCTION II. THE INDICTMENT OF MILBERG WEISS A. Congress Regulates Securities Class Actions 1. Why Private Enforcement? 2. Paid Plaintiff Practices Before Securities Litigation Reform 3. The Case for Reforming Securities Litigation 4. Congress Regulates Lead Plaintiff Selection and Compensation 5. The Government's Investigation of Milberg Weiss 6. Overview of the Government's Charges B. The Government's Honest Services Claims III. CLASS ACTION CRIMINALITY EXTENDS THE HONEST SERVICES FRAUD DOCTRINE A. The Doctrine's Inception and Evolution Before McNally B. McNally, Carpenter, and Congress's Response C. Judicial Review of Prosecutions Under Section 1346 1. Lessons from Recent Case Law a. United States v. Rybicki b. United States v. Brown c. Other Lessons Learned from Recent Case Law 2. Attorneys' Liability for Honest Services Fraud IV. PLAINTIFFS WERE NOT FIDUCIARIES WITH DUTIES TO ABSENTEES A. Classic Fiduciary Doctrine and Its Applications B. The Relationship Between Class Representatives, Class Counsel, and Absentees Before Reform 1. Cohen and Roper C. What the PSLRA Did and Did Not Do D. Analyzing the Indictment's Theory of Fiduciary Duty 1. Named Plaintiffs' Limited Authority and Functions 2. Duties of Plaintiffs' Counsel in Securities Class Actions 3. Judicial Supervision of Securities Class Actions V. WHY CLASS ACTION CRIMINALITY SHOULD FAIL A. Applying Breach of Fiduciary Duty Analysis to the Indictment B. Lenity C. Other Considerations Weighing Against Class Action Criminality VI. CONSEQUENCES AND CRITICISMS A. Consequences for the Firm B. Consequences for Private Securities Litigation Generally C. Consequences for Class Actions Generally D. Other Criticisms of the Prosecution E. The Call for Further Private Securities Litigation Reform VII. CONCLUSION I. INTRODUCTION

   Long before their arraignments on federal felony charges last year, class action lawyers Mel Weiss and Bill Lerach stood before the court of public opinion accused of abusing the legal system to enrich themselves. The partners received national attention for filing shareholder lawsuits against some of this country's best known corporations, usually alleging that top company management defrauded investors. Over the course of some three decades, Weiss and Lerach recovered on behalf of shareholders billions of dollars from corporate defendants; companies sued by the partners almost always chose to settle the fraud claims rather than risk judgment at trial. Compensated with multimillion dollar fee awards, Weiss and Lerach built their law firm, Milberg Weiss, (1) into a litigation juggernaut, became multimillionaires themselves, and contributed generously to Democratic Party candidates and causes. In the process, Weiss and Lerach made numerous powerful enemies in executive suites from coast to coast. Directors and officers of public companies reviled Milberg Weiss and railed against defending lawsuits filed by its lawyers. (2)

   In the early 1990s, Corporate America, Wall Street, and the accounting industry joined forces to lobby Congress for relief from securities fraud litigation. These politically influential interests complained to federal legislators that the plaintiffs' bar filed frivolous securities class actions and employed unethical, "abusive" litigation tactics to extract settlements from law abiding companies, (3) thereby profiting at the expense of the shareholders whom they purported to represent. (4) Proponents of litigation reform depicted Milberg Weiss and its two (in)famous senior partners as the primary corruptors. (5) Congress received testimony that Milberg Weiss failed to investigate its fraud charges before racing into court and filing boilerplate allegations against innocent companies, often within hours of a significant decline in the companies' stock price. Legislators also heard that Milberg Weiss--rather than its shareholder clients--controlled the lawsuits, making even the most critical decisions without consulting the named plaintiffs representing the class. How did Milberg Weiss find compliant shareholders willing to lend their names to the lawsuits on such short notice? Rivals claimed that the law firm utilized a stable of "professional plaintiffs," small investors paid by the lawyers to serve as class representatives in dozens of cases. (6) Stockbrokers who referred professional plaintiffs to the law firm received compensation, too. (7) Weiss and Lerach did not deny to Congress that Milberg Weiss recruited shareholders to serve as plaintiffs. However, what most seemed to influence federal lawmakers of the need for securities litigation reform was a statement made by Lerach outside the hearings, away from Capitol Hill. (8) In a 1993 magazine interview, Lerach had boasted: "I have the greatest practice of law in the world.... I have no clients." (9)

   Milberg Weiss's foes spent almost $30 million on their lobbying and public relations campaign (10) before they persuaded Congress to enact reforms, both procedural and substantive, restricting securities class actions. Thus was born the Private Securities Litigation Reform Act of 1995 (PSLRA). (11) And yet, the PSLRA's formidable limits on securities class actions did not destroy Milberg Weiss's lucrative practice. Nor was the firm decimated by a subsequent federal law barring securities class actions from state courts. (12) Even multiple adverse decisions from a Supreme Court hostile to securities litigation did not devastate Milberg Weiss's practice. (13) In fact, Milberg Weiss solidified its position as the foremost plaintiffs' securities firm in the country. (14) Rather than killing off the firm, securities litigation reforms gave Milberg Weiss--with its superior resources and ability to invest in riskier lawsuits--a competitive advantage over rival plaintiffs' law firms at the turn of the century.

   Thus, following revelations of massive financial frauds and management wrongdoing at Enron, WorldCom, Tyco, and scores of other public companies, it was Milberg Weiss that led the vanguard of attorneys filing class actions and other lawsuits on behalf of aggrieved investors. (15) In the aftermath of the scandals, the press praised Lerach as a "corporate crime fighter" (16) and "America's best hope for corporate reform," (17) a far different image than the media's pre-Enron depictions of him as a greedy corporate extortionist. (18) Milberg Weiss and other plaintiffs' firms not only obtained enormous, unprecedented recoveries for deceived investors, but they also conditioned their settlements on directors instituting various corporate governance reforms favored by institutional investors. (19) By the spring of 2006, Lerach had amassed a partial settlement fund for defrauded Enron shareholders totaling more than $7.3 billion--then the largest securities fraud recovery ever produced. (20)

   In the meantime, while the plaintiffs' bar negotiated record-setting settlements for millions of shareholders, the Justice Department revived a dormant criminal investigation of Milberg Weiss for allegedly paying its clients who agreed to act as plaintiffs in class actions. The government's inquiry began in 1999 with a tip from a former Milberg Weiss client, who was seeking a reduced prison sentence for an unrelated felony. (21) He told federal authorities that Milberg Weiss shared ten percent of its fees with him for serving as a representative plaintiff in dozens of shareholder lawsuits. (22) It took seven years before prosecutors had enough evidence to corroborate the felon's claims and indict any Milberg Weiss lawyer. However, still without sufficient evidence linking Weiss and Lerach to any crime, the government demanded that the law firm waive its attorney-client privilege and cooperate in the investigation. If Milberg Weiss refused to provide documents and testimony against Weiss and Lerach, prosecutors would seek an indictment of the entity, which could destroy the firm. (23) When Milberg Weiss nonetheless rejected prosecutors' demand, the Justice Department made good on its threat.

   On May 18, 2006, the Justice Department announced that a federal grand jury in Los Angeles had indicted Milberg Weiss for racketeering, conspiracy, and fraud. (24) The 102-page indictment claimed that the law firm orchestrated a secret conspiracy to pay several clients a substantial portion of the attorneys' fees awarded to Milberg Weiss as class counsel, a total of some $11.3 million over a 21-year period. (25) In exchange for a ten percent share of Milberg Weiss's fees, these clients and their family members agreed to participate as named plaintiffs in scores of securities class actions and derivative lawsuits, (26) all but a few initiated before the PSLRA became effective. The fee sharing arrangements allegedly enabled Milberg Weiss to file complaints before its competitors-namely, any other law firms contending for court appointments as lead plaintiffs' counse1. (27) Characterizing the fees shared with plaintiffs as "kickbacks," prosecutors demanded that Milberg Weiss forfeit some $216 million in "tainted" attorneys' fees awarded to the firm in lawsuits fronted by paid plaintiffs. (28)

   Never before had the Justice Department indicted a prominent national law firm. (29) News of the case--dubbed the "Trial Lawyers' Enron" (30)--diverted attention from the corporate financial scandals and generated widespread commentary. Some members of Congress (31) and the legal academy (32) questioned the prosecution's timing and its motives. The indictment largely concerned a defunct practice (almost all of the alleged payments to class action plaintiffs were made from 1979 to 1996) (33) that Congress had already addressed through reforms included in the PSLRA. Why did the federal government spend almost eight years amassing evidence of outdated conduct? Was the prosecution politically motivated? (34) Did Milberg Weiss's corporate enemies pressure the Bush Administration to pursue the case in...