Yesterday's indictment of class action plaintiffs' law firm Milberg Weiss in connection with a fraud case promises to shine a bright spotlight on the need for tort reform. The firm, along with two of its partners, Steven Schulman and David Bershad, stand accused of orchestrating a long-running scheme to pay off the named lead plaintiffs in the shareholder lawsuits the firm has built its reputation in pursuing. The indictment doesn't speculate on whether the motive was fun or profit, but the smart money's on profit. Mr. Bershad earned some $161 million as his share of the firm's profits between 1983 and 2005; Mr. Schulman made $67.1 million between 1991 and 2005. The firm allegedly raked in about $200 million in fees over 20 years just from the 150 suspect cases described in the indictment.
The case hinges on an alleged conspiracy by which the firm would kick back a portion of its fees to the lead plaintiffs in its trademark shareholder suits. Such an arrangement is illegal because it leaves the named plaintiff with different interests than the other class-action plaintiffs he's supposed to represent. One such named plaintiff who was indicted last year, Seymour Lazar, stands accused of taking a total of $2.4 million in exchange for his participation in a plethora of such cases over the years. Mr. Lazar allegedly received $325,000 over two years for suits against W.R. Grace, $100,000 for a suit against British Petroleum, more than $400,000 for two different suits against Genentech, and the list goes on.
Finding creative ways to make lots of money might sound like the American way, but the allegations made in this case paint a picture of a perversion of the entrepreneurial spirit. These alleged crimes weren't victimless. Those millions upon millions of dollars came from the pockets of the unsuspecting shareholders in the defendant companies. The plaintiffs' attorneys' fees that apparently lined the pockets of Messrs. Schulman, Bershad, and Lazar and others implicated in the case came from those shareholders in the form of profit-reducing payouts that cut dividends, while the lawsuits threatened to depress stock prices.
If this indictment makes an eloquent case for tort reform, other related circumstances, especially right here in New York, highlight how difficult that reform can be to achieve. Consider all the New York politicians who have taken contributions just from the members of the plaintiff's bar implicated in this particular case. The state's comptroller, Alan Hevesi accepted $100,000 from the firm for his 2002 campaign, as well as $13,500 each from senior partners Melvyn Weiss and William Lerach. Mr. Lerach later left the firm, but was still a partner during part of the time covered by the indictment. He was certainly at the firm when he donated $12,000 to the Friends of Pataki committee in 2001 and 2002.
The gubernatorial campaign of the attorney general, Eliot Spitzer, accepted $35,000 from the firm, of which $20,000 came in during the past year as the legal cloud darkened, and another $35,000 from Mr. Weiss. Mr. Schulman donated $9,000 to Mr. Spitzer's 2002 attorney-general and 2006 gubernatorial campaigns. Mr. Bershad gave Mr. Spitzer $13,000 in 2002 and $10,000 for 2006.
It's worth asking whether that money might have played some role in one interesting little trill in the indictment: The federal indictment notes that some of the behavior it alleges also violates New York law. Yet Mr. Spitzer, who normally interprets New York law to expand his jurisdiction, doesn't seem to have taken much interest in pursuing Milberg Weiss before or during the federal investigation. Likewise, after winning re-election in 2002 in part with a cash infusion from Milberg Weiss, Mr. Hevesi just happened to hire the firm to represent the state's public-employee pension fund in - you guessed it - a shareholder suit against Bayer AG.
The good news is that Mr. Spitzer, at least, is now making an effort to distance himself from Milberg Weiss; the attorney general is preparing to return at a minimum the most recent contributions. As for Messrs. Hevesi and Pataki, at best it's too soon to say. Mr. Hevesi's spokesman told the Sun's Jacob Gershman yesterday that the comptroller is still studying the indictment. There's no word yet from Mr. Pataki. To give them the benefit of the doubt, the money came in a long time ago and it may be difficult to retrieve.
We're all for campaign contributions as a form of free speech, but trial lawyers' exercise of their First Amendment rights doesn't absolve politicians of their responsibility to put an end to abusive litigation like that alleged in this indictment. No matter how much money these New York politicians, or other beneficiaries of trial lawyer largesse, return, the fundamental problem of the abuse of civil litigation will remain. This indictment shows just how big that problem may turn out to be.