Last week, Milberg-Weiss and two of its partners were formally charged with bribery and fraud surround their aggressive pursuit of class-action lawsuits, often against companies with falling share prices. Walter Olson helps describe in detail what was going on, but the short answer is that the firm, as many of us suspected for years, appears to have been generating class action suits against large companies mainly for the benefit of itself and the legal fees generated. A few months ago, I questioned shareholder suits and their fundamental logic when I was guestblogging at Overlawyered.
So I am happy that this particular rock is finally being turned over. However, there are substantial problems on the prosecution side of this as well. The Justice department is using the abusive Thompson Memo guidelines to go after Milberg-Weiss. Larry Ribstein is concerned with the firm death penalty approach being taken here that was used to bring down Arthur Anderson.
Milberg is a different story. The case seems to be based on the
alleged misconduct of a couple of partners. If the partners did what
they are accused of, they should go down. Moreover, the firm will have
earned fees under questionable circumstances and should bear civil
consequences for that. But the criminal indictment casts a shadow on
the entire firm that it will have a hard time surviving, given the need
to establish its credibility for courts and institutional investors in
the highly competitive class action industry. Moreover, unlike AA, it's
not clear the indictment reveals a continuing public policy problem,
given the post-PSLRA reliance on unbribable plaintiffs.
We (and I) may not like Milberg's business. But the class action
part of it was one enabled by legal rules. The right way to deal with
the problems of this business is to change the rules, as I've argued
for securities class actions in my Fraud on a Noisy Market.
When we criminally condemn firms like Milberg because we don't like
their business, we set a precedent for other firms in controversial
lines of work -- e.g., Drexel Burnham.
More seriously, the power to criminalize a firm puts a potent tool
in the government's hands to get the firm to cooperate in sacrificing
the rights of criminal defendants. Here the cure seems patently worse
the disease. The questions are no less in Milberg than in KPMG just
because Milberg was in an unpopular line of work.
The government tactic de jour, as outlined in the Thompson memo, is to threaten a large company with extinction, telling them they might get off the hook but only if they agree to throw a number of their employees to the wolves. These steps include the unbelievable step of forcing companies to waive attorney client privilege, including privilege between any company-paid attorney and any employee. Does anyone doubt that if the company who employs you was given the choice of having the government prosecute them or you, who they would choose? In this context, Arthur Anderson should be commended for not sacrificing its employees for its own survival. KPMG survived, because it chose to roll over on its employees. I commented on many of the problems with the AA takedown here, and on the dangers of the Thompson Memo here and here. Tom Kirkendall is all over the story.