Famed securities class action plaintiffs' law firm Milberg, Weiss reportedly has been named in the indictment of Seymour Lazar. Mr. Lazar is a retired entertainment lawyer who has served as a plainitff in dozens of class actions over the years.
The indictment said Lazar and his family members collected at least $2.4 million in "secret and illegal kickback payments" from the law firm through Selzer and others.
During this period, Milberg Weiss earned at least $44 million in legal fees from cases in which Lazar or a family member was a plaintiff, according to the indictment.
It also accuses the law firm of filing "false and misleading" court documents and sworn statements signed by Lazar, and of hiding the payments to Lazar from the courts.
Although Milberg, Weiss has not yet been indicted, the WSJ($) reports that both senior partners at the firm and the firm itself may face indictment in the near future. (Blawgger Tom Kirkendall has more details and provides some context.)
I tend to agree with Larry Ribstein that what's sauce for the goose is sauce for the gander. Like Larry, I've been skeptical of the government's power to destroy firms by indicting them. (Although less so; I still think reasonable people could believe that it was Arthur Andersen's time to go.)
Yet, at the same time, it strikes me that there are sound policy reasons to prohibit lawyers from making kickbacks to the named plaintiffs in class actions. Since a named plaintiff is essential to bringing a class action, paying kickbacks to someone willing to serve as the requisite plaintiff may tend to make it easier for lawyers to bring nuisance claims. Because a named plaintiff who has received a kickback is even less likely to monitor the activities of the lawyer (who is the real party in interest in a lot of these suits) than is a typical class action plaintiff, it increases the probability of a settlement that benefits the lawyer but not the class (such as the notorious practice of coupon settlements).
One gathers that this practice is fairly widespread. Certainly, the testimony back when the PSLRA was adopted suggested it was common in the securities class action field. If the probability of detection and punishment is low, the economics of deterrence tells us we need a high nominal sanction to deter. As a result, we may well need criminal sanctions. Hence, I believe that an indictment of any individual lawyers who engaged in this practice would be perfectly appropriate.
Update: Jonathan Wilson has more on why kickbacks by class action lawyers to the named plaintiff in such suits are "dastardly":
The practices that Lazar is alleged to have engaged in are certainly dastardly. The principle of class action litigation is that the interests of many are adequately represented by a few named plaintiffs, allowing for a more efficient outcome than if each individual plaintiff were left to pursue his own remedies.That principle is utterly undone if, as alleged, the named plaintiff has a covert arrangment with class counsel for additional compensation that is not shared with other class members.The practice is especially dastardly because the mechanics of litigation (with the protection of the attorney/client relationship) cloak the transactions between the named plaintiff and class counsel. There is no third party to regulate those transactions and no mechanism to police wrongdoing.While judges have a responsibility to avoid collusive arrangements with class counsel and collusive settlements, in practice many judges lack the inclination and the legal tools to supervise these arrangements.While defendants may sometimes suspect inappropriate behavior, they too lack a mechanism to prevent it and may even lack the standing to complain about it.
