By Brooke A. Masters
Washington Post Staff Writer
Thursday, May 25, 2006
Ever since the accounting firm Arthur Andersen LLP imploded in 2002 under the weight of an obstruction-of-justice indictment and 28,000 people lost their jobs, federal prosecutors have shied away from filing criminal charges against corporate entities.
Instead, the Justice Department has cut deals with cooperative companies such as Computer Associates International Inc., accounting firm KPMG LLP and drugmaker Bristol-Myers Squibb Co., agreeing not to press criminal charges in exchange for sweeping management changes, large financial penalties and help putting individual employees behind bars.
Last week, federal prosecutors in Los Angeles broke with that trend, filing a 20-count criminal indictment against the phenomenally successful class-action law firm Milberg Weiss Bershad & Schulman LLP. The indictment alleges that two of the firm's top partners, David J. Bershad and Steven G. Schulman, who were also indicted, secretly paid more than $11.3 million in kickbacks to individuals to serve as plaintiffs in class-action securities cases and then lied about it under oath.
The firm and the lawyers have denied wrongdoing. "We have been assured by the partners involved that they didn't engage in wrongdoing," said the firm's attorney, William W. Taylor III. "The firm stands firmly behind them." Bershad and Schulman have taken leaves of absence to fight the charges against them.
The Justice Department's decision to move against the firm, which has 125 lawyers and 240 support-staff members, has been highly controversial because most observers think simply being indicted could force a professional-services firm such as Milberg Weiss out of business.
"It is wrong to attribute the activities of one or two people to the entire firm," said Leon Silverman, a former Justice Department official. "This is the Andersen case duplicated, and the results of that were disastrous." By the time the U.S. Supreme Court overturned Andersen's conviction in 2005, the accounting firm had basically ceased to exist.
Milberg Weiss already has lost one of its prominent clients -- the Ohio Tuition Trust Authority -- and legal analysts said judges may be reluctant to appoint the firm to represent large classes of investors while the indictment is pending because it might not be around for the duration of the case. "From a purely instrumental standpoint, as opposed to a moral one, what happens if they lose the federal case? Who is going to represent the class?" asked University of Texas law professor Henry T.C. Hu.
Even some of Milberg Weiss's longtime ideological adversaries, such as the editorial page of the Wall Street Journal, have expressed concern about the Justice Department's choice of tactics, though they applauded efforts to crack down on class-action fraud.
"In very general terms, we are not in favor of indicting companies, whether they are law firms or chemical manufacturers, when individuals are more closely identifiable with the" alleged crime, said Darren McKinney, spokesman for the American Tort Reform Association.
Some observers have raised concerns that the firm may be being singled out because of politics and ideology. Milberg Weiss, which has 560 pending cases and has wrung more than $45 billion out of corporate opponents since 1965, is not only the country's best known plaintiff's law firm, but is also roundly despised by many Republican policymakers.
"Within this administration, there seems to be much greater hostility towards the kinds of class-action lawsuits Milberg Weiss was doing [than in other administrations]. It's hard to know if it's just a coincidence because this is a really novel prosecution," said Barry Boss, a District defense attorney.
According to the nonpartisan Center for Responsive Politics, Milberg Weiss lawyers including Bershad, Schulman and the other living named partner, Melvyn I. Weiss, have given a total of $2.8 million to federal Democratic candidates since 1999, compared with $23,000 to Republicans.
"Mel Weiss is a well-respected, highly regarded Democratic fundraiser. I would hope that this isn't motivated by politics," said Weiss's personal attorney, Benjamin Brafman. "Milberg Weiss is the preeminent class-action law firm in the country. Many of the defendants they have successfully sued are among the most powerful corporate giants in America. Is this payback time? I don't know."
But Rep. Barney Frank (D-Mass.), a prominent defender of class-action lawsuits, said he saw "no evidence" that the case was political. While he said he was "skeptical that [indicting the firm] is a good idea," he added, "the Justice Department does not seem to have followed an excessively political course."
Justice Department officials said they think seriously before charging a corporate entity. "We understand that a corporate indictment can have impacts for employees, shareholders and customers. We try to be sensitive to that," said Associate Deputy Attorney General Ronald Tenpas. "But you can't have a rule that you're never going to charge corporations. On occasion it's an institutional problem, and we're going to indict the institution."
Other legal analysts noted that the Justice Department took its time with this case and made several efforts to reach a deal with the law firm. The first cooperating witness began working with prosecutors in 1999, and the first subpoena went out to the law firm in 2002.
Since 2003, federal prosecutors considering corporate charges have followed guidelines known as the Thompson Memo that lay out factors including the nature of the alleged wrongdoing, the role and knowledge of management, any history of prior misbehavior, how much the company cooperated with the probe, and the remedial measures the company took.
Milberg Weiss faced trouble on several fronts. Both Bershad and Schulman sat on the firm's executive committee, and between them they owned more than 32 percent of the firm by 2005.
"It's not just lawyers in a big law firm. It's not your employees-run-amok problem," said Daniel Richman, a Fordham University law professor.
The firm also created issues for itself by refusing to agree to two key concessions the Justice Department had wrung out of other cooperating companies. The law firm would not agree to waive attorney-client privilege and tell the Justice Department about its employees' conversations with the lawyers defending the firm in this case. Milberg Weiss also refused to help the Justice Department build its case against Bershad and Schulman.
"We're not going to turn on our partners just because you ask us to," said Taylor, the firm's lawyer.
The firm's refusal to waive privilege drew cheers from lawyers across the political spectrum who have argued that the government should not be asking companies to give up their right to seek legal advice in private. "It's government overreaching and deeply troubling," said Larry J. Fox, a plaintiff's lawyer with Drinker Biddle & Reath LLP of Philadelphia. "That invades the lawyer-client privilege."
But outside lawyers pointed out that Milberg Weiss's stand made it seem as if the firm was asking for special treatment. "Look at all the other firms that have agreed to cooperate and have helped the government build their case against individuals," said Stanford University law professor Joseph Grundvest. "If the government is going to be operating on a level playing field, it almost has no choice but to indict them."