Milberg prepares for consequences of indictment for referral fee 'misuse'

For the past 40 years Milberg Weiss Bershad & Schulman has been pioneering class action lawsuits on behalf of investors and shareholders. The firm has become the scourge of corporate America.

But a cloud now hangs over Milberg - and name partners David Bershad and Steven Schulman - after the firm was indicted by Los Angeles federal prosecutors for allegedly paying $11.3m (£6.06m) in illegal referral fees to individuals who took on the role of lead plaintiffs in a series of cases. Some commentators are labelling the affair as the legal world's Arthur Andersen.

The indictment follows five years of investigation by federal prosecutors. Over 105 pages, the prosecutors outline the allegations against Bershad, Schulman and the firm, detailing each case in which a referral fee is claimed to have been paid.

The backlash against Milberg began immediately. The day after the firm was indicted, it lost its role as lead counsel on a class action in Ohio. Other clients and courts, including the New York state comptroller Alan Hevisa, have also indicated that they want the firm kicked off ongoing cases.

Meanwhile, several partners have announced their intention to leave Milberg, and high-profile figures, including New York Attorney General Eliot Spitzer, are returning money donated to political campaigns by Milberg lawyers.

Milberg's indictment has prompted a certain amount of Schadenfreude on the defendants' side of the fence. One senior litigator in a firm that commonly acts for the corporates sued by Milberg says: "There's a lot of satisfaction in the banks and in the law firms that represent the banks.

"People were wondering whether this would come home to roost."

The litigation community on both sides of the Atlantic and in both camps - claimant and defendant - acknowledge that Milberg has always played a leading role in its field.

"It's a shame, because the firm truly was a pioneer in investor rights and it appears from the indictment that they're claimed to have participated in some of the same things that they prosecuted," says Michael Hausfeld, one of the name partners at Milberg's rival Cohen Milstein Hausfeld & Toll.

Even Milberg's critics point out that the firm itself is entirely legitimate and blame the US legal system for allowing a situation where investor and antitrust litigation can be so prevalent - and so profitable for the plaintiff firms involved.

The indictment itself gives some indication of the numbers. In the 21 years covered by the allegations, prosecutors claim that the firm earned $216.1m (£114.82m) in fees from the lawsuits concerned. During the same period, Bershad took home a total of $160.9m (£85.49m) in drawings, averaging out at more than $7m (£3.72m) a year. Schulman's profits were worth an average of $4.8m (£2.55m) a year since 1991, when he became an equity partner in the firm.

According to Milberg's official statement on the indictment, both Bershad and Schulman took voluntary leaves of absence from the firm prior to the case being filed, "because they hoped doing so would avoid indictment of the firm".

Many onlookers see the US government's indictment of such a powerful law firm as an attack on the class action culture itself. Some are wondering whether Milberg's indictment is the precursor to similar cases being launched against plaintiff firms in other areas of class action litigation such as product liability. However, lawyers predict that, if the US Department of Justice was intending to land a fatal blow to class actions, it will fail.

"I don't think it'll have very much effect on class action litigation because Milberg Weiss has very large and powerful and capable competitors," thinks Marc Gottridge, a litigation partner with Lovells in New York. "Other firms will pick up the slack."

Hausfeld believes that the allegations against Milberg do not reflect the way class actions are generally carried out and that referral fees are not a major problem.

"It's a roadmap for what not to do, but fortunately I think it's what an overwhelming majority of firms don't do," he says.

Milberg, meanwhile, has begun the campaign to clear its name. The firm launched a website immediately after the indictment (www.milbergweissjustice.com) to post statements, updates and comments supporting its case.

It says: "The government's allegations of wrongdoing have been categorically denied by the indicted partners, and the firm intends to join with them in vigorously defending against the charges."

The firm is making no further comment.

The indictment hints that more named defendants may be added in due course. The US media and legal blogging community are speculating that "Partner A and Partner B", referred to in the charges, may well be founding partners Melvyn Weiss and William Lerach.

Lerach left Milberg in 2004 to set up San Diego firm Lerach Coughlin Stoia Gellar Rudman & Robbins, but last year was understood to be involved in the ongoing investigation. Lerach Coughlin did not return calls for comment.

But even if no other defendants are added to the indictment, the size and scale of the Milberg case makes it one of the most significant events to hit the US legal community for some time. This is truly one to watch.