The documents related to the plea agreement of Howard Vogel, who admitted to receiving over $2 million in secret kickbacks from plaintiff securities class action firm Milberg Weiss for serving as the representative plaintiff, are available below. Two interesting items to note in the documents. First, Vogel pled guilty to violating 18 U.S.C. Sec. 1623, the false declaration/perjury provision, based on certifying to the federal courts considering the settlements of the securities class actions that he did not receive any payments other than what was approved by the court. This strikes me as a much stronger case than asserting mail or wire fraud for the payments because the law is clear that such payments are prohibited without judicial approval and the documents will show the scope of the disclosure ( or lack thereof). Second, the payments to Vogel and his family were from 1992 to 2005, including a $1.1 million payment in December 2003 from Milberg Weiss arising from the Oxford Health Plans securities class action, so it is a continuing course of conduct. The Statement of Facts contains a chart listing the specific cases and payment amounts, which will provide a roadmap to the types of charges that may be filed against current or former members of the law firm and, perhaps, even the firm itself. Very interesting reading, and possibly a precursor to coming indictments. (ph — thanks to a faithful reader for sending along the case documents)
Category: Legal Ethics
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The government’s investigation of securities class action law firm Milberg Weiss for alleged kickbacks paid to representative plaintiffs in lawsuits took a significant step forward with a plea agreement by retired real estate mortgage broker Howard Vogel. Vogel or members of his family served as the named plaintiffs in a number of class actions for which Milberg Weiss served as class counsel, and he admitted to receiving $2.5 million for services in 40 cases, including a $1.1 million payment from the attorney’s fees in a class action against Oxford Health. More importantly, according to a New York Times article (here), the payments occurred as recently as 2005, avoiding any statute of limitations issues.
In 2005, a grand jury indicted Seymour Lazar and an attorney for the receipt of alleged kickbacks from Milberg Weiss, and that case is scheduled to go to trial later in 2006. In that case, Lazar has asserted that any payments were referral fees from one lawyer (or law firm) to another, and Lazar is an attorney although he did not work on the class action suits and his receipt of attorney fees was not disclosed to the court as part of the settlement. Vogel is not an attorney, so alleged payments of a portion of the attorney’s fees by Milberg Weiss could not be defended on the ground that they are otherwise acceptable referral fees because the professional rules do not permit lawyers to share fees with non-lawyers, particularly with the representative plaintiff in a class action. One payment to Vogel involved cash in an envelope given to him by a law firm partner, not the usual method of splitting attorney’s fees.
Although Milberg Weiss is not named in the Vogel plea documents, it has acknowledged that it is the law firm referred to as the "New York law firm" that made the payments. Partners at the law firm, which broke up in 2004, are described by letter, for example as "Partner E" and "Partner D." Will the law firm be indicted? Prosecutors could name the firm, and its successor, in a conspiracy count in order to tie together a continuing course of conduct over a significant period of time that involves multiple representatives of the firm and different cases. The benefit of a conspiracy charge for the government is that it can include conduct outside the usual five-year limitations period if they are part of the same agreement. Along the same lines, prosecutors could seek RICO charges against the individuals, including partners, which is another means to avoid statute of limitations issues for conduct before 2001. An indictment could allege that the firm is the RICO enterprise, which might spare Milberg Weiss from being indicted while still having the law firm as a featured player in a prosecution. (ph)
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The Recorder reports (here on Law.Com) that two named partners at class action law firm Milberg Weiss Bershad & Schulman, David Bershad and Steven Schulman, will be indicted shortly for fraud related to secret payments to representative plaintiffs in class actions. Seymour Lazar, who served as the named plaintiff in a number of cases litigated by Milberg Weiss’ predecessor firm, was indicted in 2005 on fraud charges related to the receipt of the secret payments. Lazar has asserted that they payments were referral fees, although the usual rule is that a representative plaintiff is not permitted to receive any compensation other than that authorized by the court. The class actions were filed before the adoption of the Private Securities Litigation Reform Act in 1995, so any prosecution of Bershad and Schulman may face possible statute of limitations problems if there is not a waiver.
Prosecutors had been investigating the roles of Melvyn Weiss and William Lerach, two of the best-known plaintiff class action attorneys in the country who were partners until their firm split in 2004. They have now been dropped from the case, although they are likely to be witnesses for one side or the other if Bershad and Schulman are indicted. The Recorder story notes that three Milberg Weiss partners and two former clients have been granted immunity, and attorneys for the two lawyers have traveled to Washington D.C. to speak with the Criminal Division at the Department of Justice to try to block an indictment. If indictments are handed up, it promises to be a bitter fight involving seasoned litigators as the defendants. (ph)
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Lawyers certainly find creative ways to get in all sorts of trouble. The Seventh Circuit upheld the conviction of Chicago attorney Richard Connors for attempting to smuggle 46 boxes of Cuban cigars (hidden in four suitcases) into the country through Canada. The opinion’s first paragraph (here) shows that this one is more than a little intriguing:
Divorce rates are disturbingly high. Sometimes, marital splits get nasty when an ex-spouse decides to dish out a little dose of discomfort to his or her former partner. And as far as dishing out discomfort is concerned, the havoc visited on Chicago lawyer Richard Connors by his ex-wife would win a gold medal for creativity. With substantial assistance from his ex, Connors stands convicted in federal court of (among other things) violating a law we seldom encounter, the Trading with the Enemy Act * * * .
Connors received quite a surprise when his ex-wife’s role in turning him in first came to light at trial. The Seventh Circuit rejected his Fourth Amendment argument that his ex-wife’s involvement in the case constituted an illegal search. He received a 37-month prison term. Peter Lattman on the Wall Street Journal Law Blog caught this one.
Meanwhile, New York attorney Perry Reich received a 27-month sentence for his forgery of a federal magistrate’s signature on a fake order and lying to federal officials. Reich continues to deny that he faxed the fake order to an opponent in civil litigation. According to a Law.Com story (here), U.S. District Judge Nicholas Garaufis said at the sentencing, "I don’t know why he did what he did — I don’t know if he knows why he did what he did. I’m not sure that any rational lawyer would ever do anything like this. It defies logic." Reich’s lawyer’s questioned whether his client was in his right mind for doing something "this stupid, this outrageous." Maybe it seemed like a good idea at the time, but the consequences have been disastrous. Thanks to Harlan Protass on the Second Circuit Sentencing Blog for passing along the story. (ph)
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The prosecution of former Illinois Governor George Ryan may take an interesting turn that raises issues of legal ethics related to his defense counsel from large firm Winston & Strawn and a defense witness who, at this point in time, is the Acting United States Attorney for the Southern District of Illinois. This one is a bit hard to follow, so follow the bouncing ball here (for fans of "Sing Along with Mitch" and other outstanding early 1960s entertainment). Edward McNally was Ryan’s attorney in 2001, and he testified at trial about meetings with prosecutors in 2001 about the case. At the time, McNally was a partner at Altheimer & Gray, which went into bankruptcy in 2003 and owes, among others, LaSalle Bank approximatley $28 million on a defaulted loan. Here’s where it gets a bit convoluted. Winston & Strawn is counsel to the creditors in the Altheimer & Gray bankruptcy, and in that proceeding five former partners opted not to participate in a bankruptcy court plan for paying the firm’s debts, and one of those partners is McNally. Since then, Winston & Strawn has sued four of those partners to recover for their liability on the loan, but the one partner not sued is — you guessed it — McNally. Based on his ownership interest in the partnership, McNally is potentially liable for more than $500,000 of the bank loan.
According to a Chicago Sun-Times article (here), prosecutors are raising a ruckus that Winston & Strawn, which is representing Ryan pro bono, has gone easy on McNally to ensure his cooperation, and the failure to disclose the conflict means that the government could not impeach his testimony with all relevant information. Winston & Strawn has said that it was not aware of any potential conflict, and that may well be the case with a firm that large and the different departments (probably on different floors) handling the cases. Whether the information is particularly damning for McNally, it does raise an interesting question related to Winston & Strawn: did the firm view McNally, now in a very important government position, as a person who it would be better not to sue, and if so, was that in its client’s interest or a desire to cull favor? The dots are pretty far apart to see a far-reaching plan to shield McNally to preserve his cooperation in the Ryan case, except for those addicted to conspiracy theories. But, the relationship raises questions about Winton & Strawn’s internal conflicts mechanism, and whether the issue should have been flagged before McNally testified. Better to reveal before the fact than try to explain something after its revelation. (ph)
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Prominent plaintiff class action attorneys William Lerach and Melvyn Weiss have dodged a bullet with the U.S. Attorney’s Office for the Central District of California reportedly deciding not to pursue criminal charges against them related to secret payments to representative plaintiffs in class actions. In 2005, Seymour Lazar was indicted for accepting kickbacks from the Milberg Weiss firm for serving as, or having relatives serve as, the named plaintiffs in various class actions, including securities fraud actions. The firm, now called Milberg Weiss Bershad & Schulman after an acrimonious split between Lerach and Weiss in 2004, may be a target of the government’s investigation, along with named partners David Bershad and Steven Schulman. An AP story (here) reports that the two attorneys and the firm could be indicted in the near future, and that recently accountants for the firm testified before the grand jury. While Lerach and Weiss are the two well-known attorneys, it is often the case that the rainmaker is not involved as much in the day-to-day operations of the firm or the cases, so it could be that the other lawyers have a greater involvement in the alleged illegal payments.
Indictments of law firms are fairly uncommon, and it will be interesting to see the effect on the organization. Unlike accounting firms, such as Arthur Andersen that had to go out of business after its conviction (later reversed on appeal) because of problems related to its license, law firms are not licensed, only the lawyers. Theoretically, the firm could continue to operate after a conviction, and it would not directly affect the representation of clients. Whether a law firm could survive the reputational hit from an indictment, much less a conviction, is a different story. Under the current securities class action regime, plaintiff’s firms are chosen by the court from among various contenders, and a criminal indictment would have a significant negative effect on its ability to compete in that process. (ph)
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A Wall Street Journal article (here) with the headline "Judge Orders Probe Into Boies Firm" discusses the Adelphia Communications bankruptcy in which David Boies was accused of failing to disclose a conflict of interest in connection with recommending two document-management companies to assist Adelphia in the case. The two companies, Amici LLC and Echelon Group LLC, had financial ties to Boies’ children and a former partner who served time for fraud, none of which was disclosed to Adelphia or the court. The creditor’s committee and the U.S. Trustee supported the appointment of an examiner to review the conduct of the firm, Boies, Schiller & Flexner, which has sought approval of almost $30 million in fees, but U.S. Bankruptcy Judge Robert Gerber denied the request. According to a Law.Com story (here), the judge will allow the parties an opportunity to investigate the matter further and then to present their findings to the court. Boies has denied engaging in any misconduct, and it is not clear whether the bankruptcy judge’s decision can be termed a "probe" into the firm. A sub-headline to the Journal story states that there is an "ethics inquiry," which to me means an investigation by the bar disciplinary authority or even by the court, not permission to a party to continue discovery on a matter. Anyone, including Adelphia or the U.S. Trustee, could file a complaint with the bar that may result in an investigation of Boies, but there is no indication that such a complaint has been lodged at this point. While one could view the judge’s decision to let the matter continue as indicating a potential problem for Boies Schiller in having its fees authorized, that is by no means the only, or even most likely, outcome of the bankruptcy case. (ph)
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Well-known plaintiffs class action law firm Milberg Weiss is the lead counsel in a settlement with KPMG regarding the tax shelters sold to individuals that the accounting firm has admitted were bogus. The settlement calls for KPMG to pay $225 million to the taxpayers who bought the shelters, from which the attorneys will receive $30 million. A Wall Street Journal article (here) discusses an offer by Milberg Weiss to attorneys for tax shelter purchasers who have opted out of the class that they can receive a portion of the attorney’s fees, conditioned, of course, on their clients joining the settlement. When the settlement, which has not yet been approved by the federal district court, was first disclosed in 2005, lawyers for some of the tax shelter purchasers asserted that it was collusive and undervalued the potential claims against KPMG. Milberg Weiss has pushed forward, but a significant number of class members — over 20% — have opted out, which means that the settlement may not cover enough potential claims to make it worthwhile to KPMG, which would still have to litigate with a number of the remaining plaintiffs.
An interesting question is whether it is ethical the offer the attorneys for those who have opted out of the settlement a portion of the fee pool. It is always good to see that Milberg Weiss has retained the services of a law professor well-versed in the field of legal ethics to advise on the fee-sharing issue, and Professor Roy Simon from Hofstra is quoted in the Journal article as supporting the fee offer. The question for those attorneys who advise clients to opt into the settlement and accept a portion of the fees will be whether they had a conflict of interest by putting their interests in obtaining fees ahead of the client’s goal of securing the largest award possible. I suspect the issue of timing will be key. For example, if an attorney recommends joining the Milberg Weiss-negotiated settlement after being offered a portion of the fee pool, and if later cases turn out to involve substantially higher awards to individual plaintiffs who purchased tax shelters, then those clients may argue that the conflict tainted the lawyer’s advice and constituted a breach of the lawyer’s fiduciary duty. All the disclosure in the world may not cure a situation in which the lawyer looks to be putting his or her own fee before the client’s best interest, and it is not a claim in which you want to be on the receiving end. Even assuming Milberg Weiss’ offer passes muster under Rule 1.5 for sharing fees among lawyers, and the lawyers disclose to their clients the amount they expect to receive, it may be a situation fraught with too much danger from the potentially serious conflict of interest the offer poses. As always, the admonition voiced at the end of roll call on Hill Street Blues certainly applies here: "Let’s be careful out there." (ph)
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Seymour Lazar is a lawyer in Southern California indicted last year (along with another lawyer) for allegedly taking secret payments from prominent plaintiff class action firm Milberg Weiss to serve as the representative plaintiff in various securities fraud and consumer cases. A front-page article in the Wall Street Journal (here) includes an interview of Lazar in which he discusses his case, a step that is usually a risky proposition but one we’ve seen lately in white collar crime cases (see post here). Lazar disputes doing anything wrong, although he does not deny receiving the payments. He calls them "referral fees" and notes that lawyers pay them all the time in cases. Lazar asks, "Did I hurt anybody? Who did I cheat? Did anybody get screwed?"
The problem for Lazar is that the standard is not simply did he "cheat" or "screw" anybody. The representative plaintiff in a class action usually has to certify that he/she is not receiving anything more than other class members will receive, and class representatives have been disqualified for being affiliated with counsel for the class without any direct payment or other remuneration. To take a payment from the lead attorney is more than just the appearance of a conflict, it is a violation of the fiduciary obligation of the representative. The question for the fiduciary is not whether anyone was "screwed" but whether the representative plaintiff fulfilled the duties of being the named party in the action charged with the responsibility of acting to protect the interests of the class. Lazar’s interview may be an effort to generate sympathy, and it succeeds by noting that at 78 years old, he recently had a triple bypass and is receiving treatment for cancer. And he certainly is a colorful character, having played a minor role in the Melvin Dummar/Howard Hughes will contest in the 1970s. Whether his standard for what is proper for a class representative will fly is another question. (ph)
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Lawyers (and others) sometimes refer to the "smell test" for a transaction — if it doesn’t smell right, then it’s not something to get involved in. For Milberg Weiss, the government’s prosecution of Seymour Lazar for payments he received from the firm for serving as a lead plaintiff in class actions does not appear to have passed that test, at least according to a memorandum written by the law firm that served as the conduit for the payments. Prosecutors in Los Angeles filed an internal memorandum from Best, Best & Krieger regarding the transfers from Milberg Weiss to Lazar that stated "To us it just smells bad and probably would to an investigator." Paul Selzer, a former partner at Best, Best & Krieger, was indicted along with Lazar for his role in funneling the payments from Milberg Weiss to Lazar. Prosecutors filed the memo as part of a response to a motion by Lazar to end his house arrest, and it’s not clear why the document was made public. It certainly indicates that lawyers close to the transactions were worried about the legality of the payments from Milberg Weiss, and the long-running investigation of the firm and former partner William Lerach has been moving along slowly but could pick up steam if Lazar were to agree to cooperate in the investigation. The memo was written in 1994, and much of the conduct involved in the case took place in the 1990s, raising a question whether the statute of limitations may have run on some of the transactions for a prosecution of Milberg Weiss and any of its lawyers (leaving aside a possible conspiracy charge that could be used to cover a longer period). A story in The Record (available on Law.Com here) discusses the Best, Best & Krieger memorandum. (ph)
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