As anticipated by this post from earlier this week, a federal grand jury indicted Milberg Weiss Bershad & Schulman yesterday in Los Angeles for allegedly funneling kickbacks to plaintiffs in dozens of securities class-action cases over a 20-year period. The indictment represents the first prosecution since the Enron Task Force’s dubious decision to prosecute Arthur Andersen out of business in 2002 that the Justice Department has charged a major firm with a crime because of the alleged misconduct of principals in the firm. Previous posts on the longstanding investigation of Milberg Weiss are here.
The indictment probably means sayonara for the firm, although the firm’s partners are initially saying that they will continue operating while fighting the charges. The indictment came on the heels of intense negotiations between the firm and the Justice Department over a proposed deferred-prosecution agreement under which the firm would have operated under a court-appointed monitor, admitted responsibility and paid a fine of about $40 million. However, negotiations apparently broke down over the DOJ’s demand that the firm waive its attorney-client privilege, a demand which is becoming de jure these days in the government’s criminalization of business.
Inasmuch as it is generally illegal for a class representative to be paid more than what other members of the class receive from the lawsuit (except for reimbursement of out-of-pocket expenses), the indictment charges that the firm paid more than $11 million in kickbacks to class action representatives and disguised those payments as legitimate referral fees or other legal payments. The indictment includes counts alleging conspiracy, racketeering, mail fraud, money laundering and filing of false tax returns, and includes charges against two of the firm’s more prominent partners — David Bershad and Steven Schulman — for allegedly being directly involved in making secret payments to plaintiffs.
Interestingly, the indictment alleges that Bershad used cash from a safe in his credenza to pay kickbacks to plaintiffs. Gee, I thought that only big-time college football and basketball coaches engaged in that sort of thing with their star players. ;^)

In a development that drips with irony, this NY Times article (see also here) reports that David Bershad and Steven Schulman — two of the top partners in the class action plaintiffs firm, Milberg Weiss Bershad & Schulman LLP — have left the firm as a part of a strategy to persuade the Justice Department not to go Arthur Andersen on the firm over its involvement in an alleged kickback scheme relating to cases that the firm pursued. Previous posts on the longstanding investigation of Milberg Weiss are here.
As the previous posts note, the investigation has focused on whether some of the class representatives in securities class-action cases that Milberg Weiss pursued were paid illegal kickbacks by the firm in addition to whatever damages they received as members of the class. Last month, a retired New Jersey mortgage broker named Howard Vogel — who, along with his wife, was a class representative in about 40 Milberg Weiss class action cases — pled guilty to accepting kickbacks from the firm in some of those cases. In pleadings in Vogel’s case, prosecutors contend that Schulman and Bershad — described in the pleadings as “partner D” and “partner C” — assisted Vogel in taking $1.2 million in kickbacks for initiating securities-fraud class actions against Oxford Health Plans Inc. and Baan Co., both of which were were settled in 2003.
The irony in this situation is that Milberg Weiss is squarely in the crosshairs of a criminal investigation that is strikingly similar to the criminalization of agency costs that Milberg Weiss has profited from in connection with a large number of the firm’s class action securities fraud cases over the years. Although an indictment and resulting meltdown of the Milberg Weiss firm will not have close to the negative economic impact of the Justice Department’s similar destruction of Arthur Andersen, an indictment and resulting demolition of the firm — particularly before even one of the courts in any of the firm’s class action cases has determined that the firm did anything wrong in connection with its financial arrangements with class representatives — would be a gross injustice. Milberg Weiss is simply a product of the rather confused theoretical basis of our system for handling class action securities fraud cases; prosecuting that firm out of business will not result in any meaningful reform in that system.
Update: Peter Lattman passes along Bershad’s farewell memo to Milberg Weiss employees.

Yesterday, in the last day of testimony in the criminal trial of former key Enron executives Ken Lay and Jeff Skilling, the Enron Task Force confirmed in open court that it refuses to grant immunity to half-a-dozen former Enron executives who have declined to testify during the trial on Fifth Amendment grounds, but would likely provide exculpatory testimony for Lay and Skilling if they were granted immunity to testify.

The Lay-Skilling defense team limited the immunity request to those six witnesses even though the Task Force has fingered about 100 former Enron executives as unindicted co-conspirators in the case and targeted many of those in the Enron criminal investigation without indicting them. U.S. District Judge Sim Lake declined to grant defense immunity to the witnesses after the Task Force refused to recommend immunity to facilitate the witnesses’ testimony.

Meanwhile, during a hearing yesterday in New York federal district court, a Skadden, Arps lawyer representing accounting firm KPMG in negotiations with the Justice Department over KPMG’s involvement in creating and promoting allegedly illegal tax shelters testified that a Justice Department prosecutor threatened that “if [KPMG has] discretion regarding [payment of attorneys’ fees of KPMG partners involved targeted in the probe], we will look at that under a microscope.” Ellen Podgor in this post provides excellent background information on this hearing.

So, in one case, the Justice Department prevents a jury from assessing potentially exculpatory testimony for the defense while, at the same time, arguing that its witnesses alleging criminal conduct against the defendants are unrefuted.

In another case, the Justice Department attempts to undermine individual defendants from defending themselves by cutting off their main source of funds for a defense to a prosecution that — absent such a source for defense costs — would likely overwhelm them.

Yet two more examples of the increasingly high price of asserting innocence in our criminal justice system. As Sir Thomas More reminds us, “do you really think you could stand upright in the winds [of abusive prosecutorial power] that would blow” if that power were to set its sights on you? And what is the more serious danger to justice and the rule of law — out-of-control prosecutors or risk-taking businesspersons?

In the movie A Man for All Seasons, Sir Thomas More had the following exchange with King Henry VIII’s henchman, Thomas Cromwell, when Cromwell threatened Sir Thomas for relying on his common law right to remain silent regarding the reasons for his refusal to take the King’s oath of allegiance to the then new Church of England:

Sir Thomas: You threaten like a dockside bully.
Cromwell: How should I threaten?
Sir Thomas: Like a minister of state. With justice.
Cromwell: Oh, justice is what you’re threatened with!
Sir Thomas: Then I am not threatened.

In this devastating Opinion Journal op-ed, the Wall Street Journal’s Kimberly Strassel conjures memories of the Sir Thomas-Cromwell exchange as she surveys the alleged threats that New York AG (“attorney general” or “aspiring governor,” take your pick) Eliot Spitzer has made over the past couple of years as he has demonized unpopular businesspeople to further his political career. As noted in this earlier post, Spitzer’s bullying of businesspeople is but one aspect of the dubious tactics that he used to regulate business in whatever manner he deems appropriate.
As noted earlier here, Spitzer is certainly not alone in using the power of his political office to criminalize easy targets for his own benefit. In fact, Spitzer’s approach is not even particularly original — he is essentially doing the same thing that Rudy Giuliani did 20 years ago in prosecuting Drexel Burnham and Michael Milken out of business. Back then, the politically ambitious Giuliani mounted a well-coordinated propaganda campaign (which, ironically, was facilitated by the Wall Street Journal reporter, James Stewart) that demonized Milken’s revolutionary financing techniques that unlocked billions in shareholder wealth during the 1980’s. Daniel Fischel brilliantly exposed Giuliani’s duplicity with regard to Milken and Drexel in his 1995 book, Payback: The Conspiracy to Destroy Michael Milken and his Financial Revolution, yet Spitzer and others continue to use the Giuliani model for abusing prosecutorial power to criminalize unpopular businesspeople for political or personal gain.
Interestingly, Fischel may take the witness stand as early as this afternoon as an expert witness for the defense in another case involving the demonization of unpopular businessmen, the Lay-Skilling trial. Although Enron’s collapse was the result of market forces, an American accounting icon was illegitimately prosecuted out of business as a result of Enron, causing huge job losses for multiple communities and untold financial hardship to thousands of employees throughout the country. Meanwhile, the lead prosecutor in that case parleyed his role in contributing to that economic hardship into a cushy partner position with a leading New York law firm.
Ms. Strassel’s piece is a powerful reminder that the Giulianis and Spitzers of the world have created — as Larry Ribstein has pointed out — a prosecutorial agency cost problem that is at least as troubling as the corporate agency cost problem that they prosecute. As Sir Thomas also reminds us, “do you really think you could stand upright in the winds [of abusive prosecutorial power] that would blow” if that power were to set its sights on you?

Last week, I noted UCLA law professor Stephen Bainbridge’s excellent explanation of corporate agency costs and why shareholders deserve protection from theft, but not from risk-taking.

In this typically insightful post, University of Illinois law professor Larry Ribstein follows up on Bainbridge’s article and provides an equally lucid summary of the risks to justice and the rule of law that result from a policy of criminalizing corporate agency costs. After listing seven such problems, Professor Ribstein concludes as follows:

All of this means that in order to prosecute corporate agency costs we have necessarily given lots of discretion to prosecutors. The result is a potential prosecutorial agency cost problem that threatens to rival the corporate agency costs being prosecuted.

The three-month trial last year of five former Enron Broadband Services (nicknamed “EBS”) executives on fraud and insider trading charges ended in a disastrous mix of acquittals and a mistrial for the Enron Task Force. So, this time around, U.S. District Judge Vanessa Gilmore has split the previous case into three seperate trials, and jury selection cranks up today in Houston federal court on another floor from the ongoing Lay-Skilling trial.
H’mm. I wonder whether any of those prospective jurors have heard about Enron over the past several months? ;^)
At any rate, in this first re-trial, Kevin Howard, the former EBS CFO, and Michael Krautz, the former EBS senior accounting director, will be tried together on four counts alleging that they conspired to commit wire fraud and falsify books and records in connection with a sale of video-on-demand profits. The Task Force contends that the sale was phony and was performed in order to inflate EBS earnings falsely. Howard and Krautz respond that the sale was an entirely legal and creative structured finance transaction that allowed EBS to generate earnings in an industry that was undergoing a huge shakeout amidst intense competition and fast-changing technology. The Sixth (yes, that’s sixth) Superseding Indictment against Howard and Krautz is here.
Well-known Houston criminal defense attorneys Jack Zimmerman and Jim Lavine represent Howard and Krautz is represented by Washington, D.C. lawyer Barry Pollack. The Task Force has assembled a new team to handle the re-trial of Howard and Krautz led by Assistant U.S. Attorneys Van S. Vincent of Nashville and Jonathan E. Lopez of Washington, D.C.
Initial estimates are that the re-trial will last about a month.

As noted earlier here, the venerable Houston law firm of Vinson & Elkins has received its fair share of bad publicity for its role as primary outside counsel for the social pariah, Enron. Probably the severest criticism for V&E was its role in handling the investigation into the allegations contained in Sherron Watkins’ memo to former Enron chairman and CEO, Ken Lay. V&E’s investigation found no wrongdoing, and Watkins and the Enron Task Force contend that V&E whitewashed the matter to help Lay hide severe problems at the company.
Now, according to this Bond Buyer News article, the San Diego city attorney is prepared to file a lawsuit against V&E over an investigation into the city’s pension debacle that the city attorney alleges was mishandled. San Diego’s pension problems were revealed in early 2004 when the city announced that it had about $1.2 billion in unfunded pension liabilities ó now estimated to be between $1.4 billion and $2 billion ó due to a number of factors, including the underfunding of annual contributions and the creation of expanded retirement benefits, some of which may not have been legal. The city hired Vinson & Elkins to review the cityís pension problems and disclosure practices and to recommend improvements.
Vinson & Elkins wrote two reports. The initial one was completed in the fall of 2004 and detailed how the pension problems occurred over time. It also recommended a series of major steps for the city to take to improve its pension reporting and disclosure practices. The second report was completed in July 2005 and concluded that at least six former officials and San Diego city council members may have violated the federal securities laws by failing to ensure pension problems were disclosed in bond documents.
San Diego City Attorney Michael Aguirre has contended that the Vinson & Elkins reports, for which he says the city was billed about $6 million by the law firm, were ìa whitewashî (heard that before?) that failed to hold city officials fully accountable. Aguirre conducted his own investigation of the pension debacle after the issuance of the V&E reports and his conclusions regarding the former officials were much harsher than the V&E conclusions:

ìBoth [Vinson & Elkins] and Kroll [another participant in the investigation] are exploiters of vulnerabilities of the city,î Aguirre said. ìInstead of helping the city do what it was required to do, they coordinated their efforts to help the people that were under investigation escape responsibility because thatís where the money was.î

This investigatory work is getting a tad expensive for V&E, don’t you think?

Let’s see if I can keep this straight.
This article about the beginning of jury selection for the upcoming bribery trial against former HealthSouth CEO Richard Scrushy and former Alabama Governor Don Siegelman reports that former Alabama Lieutenant Governor Bill Baxley represents one of the other co-defendants, former Siegelman cabinet member Mack Roberts.
Meanwhile, Siegelman is running for governor again and wants to be acquitted of the charges before the June 6th Alabama Democratic primary in which he is opposed by current Alabama Lieutenant Governor Lucy Baxley, who is the former wife of Roberts defense counsel Baxley.
I wonder if Ms. Baxley will be a character witness for Siegelman? ;^) Hat tip to Letter of Apology for the link.

As the testimony of former Enron CEO Jeff Skilling concludes today in a Houston courtroom, a political firestorm is brewing in the United Kingdom over the Enron-related case of the NatWest Three (previous posts here) — the three former London-based National Westminster Bank PLC bankers who are charged in Houston with bilking their former employer of $7.3 million in one of the schemes allegedly engineered by former Enron CFO Andrew Fastow and his right hand man, Michael Kopper.
According to this article from The Scotsman, an influential committee of the Scottish Parliament has taken the extraordinary step of writing to the UK government to lodge a formal complaint requesting that Scotland be exempted from the provisions of the 2003 Extradition Treaty signed with the US in the wake of the 9/11 attacks on New York and Washington, D.C.
According to The Scotsman article, the committee has notified the UK government that it is objects to Scots being taken to the US to stand trial for offenses without the US being required first to present a prima facie case against the Scots in a UK court. The committee also objects to other terms of the controversial treaty, such as allowing UK citizens to be extradited to the US for one offense and charged with another and giving US the power to demand the extradition of British citizens to face trial in the US even though the US Congress has not approved the treaty allowing the British government similar extradition rights with regard to US citizens. One of the NatWest Three — Gary Mulgrew — is a Scot and the son of a member of the Scottish Parliament.
Inasmuch as it is highly unlikely that the UK government would exempt Scotland from a major international treaty, the Scottish committee’s complaint is largely symbolic. But it is adding to growing political pressure in the UK for the UK government to disavow the extradition treaty, which went into effect in January 2004 as an anti-terrorist measure. The treaty has resulted in 12 extraditions to date, but none of them have been for terrorist offenses. Two were extradited for alleged drug offenses, six for alleged fraud or robbery, one on murder allegations, two for alleged rape and one for an alleged assault. 23 other alleged white-collar criminals — many of whom work in London’s financial district — are currently awaiting extradition on allegations of fraud and other financial offenses.
Meanwhile, the London Daily Telegraph has established this handy webpage that includes articles, editorials and other resources relating to the controversy.
Thus, if the NatWest Three lose their current appeal to the House of Lords and are extradited to Houston, they will be forced to prepare the defense of their case against the imposing resources of the Enron Task Force while imprisoned in Houston’s Federal Detention Facility. Meanwhile, their main accusers — Fastow and Kopper — remain living comfortably in River Oaks and Montrose.
But an equally damaging aspect of the the case is the way that it portrays the US justice system in the UK and internationally as a wild frontier with no respect for due process of law. That portrayal is a natural product of the criminalization of business mindset that elevates propaganda campaigns and prosecutorial misconduct over proof of criminal charges in a court of law. Little wonder that the already high price of asserting innocence in the US justice system continues to increase.

This earlier post examined the Justice Department’s policy under the controversial Thompson Memo to threaten to go Arthur Andersen on companies that fulfill an obligation to pay defense counsel for current or former employees who are under criminal investigation or indictment by the DOJ.
According to the Thompson Memo, the DOJ expects companies under investigation to surrender any right against self-incrimination and to cut their accused employees adrift. The memo is incredibly bad public policy in that it now places a business executive on notice that even seeking legal counsel from company counsel could later be used against the executive in court as evidence that the executive knew what he or she was doing might not be proper. Under those circumstances, what rational executive would seek legal advice from company counsel in the first place?
Now, this Lynnlee Browning/NY Times article reports on U.S. District Judge Lewis Kaplan’s decision to conduct a hearing in the criminal case against the former KPMG partners who the firm served up as sacrifical lambs in connection with the DOJ’s probe of KPMG in connection with the firm’s creation and promotion of allegedly illegal tax shelters. Judge Kaplan is clearly troubled by the DOJ’s pressure on the accounting firm to stop paying the defense costs of the former KPMG partners. Peter Lattman (here and here), Ellen Podgor (here and here) and the Wired GC also comment on this development.
Although the DOJ attempted to characterize KPMG’s decision to cut off support for a former employee as “voluntary,” it appears that Judge Kaplan has seen that ruse. As a practical matter, few CEO’s or corporate boards will risk becoming the next Arthur Andersen by not cooperating with the DOJ, so the “cooperation” that the DOJ “suggest” under the Thompson Memo is hardly optional. In an earlier hearing in the KPMG case, when Judge Kaplan questioned the fairness of pressuring companies to throw their employees into the grease, the Assistant U.S. Attorney handling the hearing replied that companies are “free to say, ‘We’re not going to cooperate.'” Judge Kaplan replied: “That’s lame.”

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