Andersen, KPMG and Milberg

The W$J discusses a possible looming federal criminal indictment of the former Milberg, Weiss class action firm, noting that it’s not clear which of the current versions of the firm (NY or San Diego) the government is looking at.  See also Tom Kirkendall’s post, discussing an earlier NYT article.

I discussed Bill Lerach’s famous class action firm last July, and in my article (with Kobayashi)  Class Action Lawyers as Lawmakers, 46 Arizona L. Rev. 733 (2004).

This investigation may please some defenders of business because Lerach has been a symbol of litigation excess.  But we should keep a few things in mind before launching into full gloat mode. 

To begin with, whatever Lerach and his firm did, what applies to Andersen and KPMG applies to the Milberg firms – the government shouldn’t be criminally indicting firms for the misdeeds of a few.

Now, one might say that Andersen and KPMG are important firms whose indictment weakens rather than strengthens corporate monitoring.  But the Milberg firms also have served a role in this respect.  If I had to choose poisons, I would say that civil liability is a more precise and valuable remedy than the blunt instrument of criminal law.

As detailed in my article noted above, Lerach’s firm has gotten quite good at working with the heightened pleading rules that now apply in securities laws claims. Indeed, the deterrent effect of any indictment of the Milberg firms must be analyzed in light of the pleading rules and the other constraints on securities class actions in the Private Securities Litigation Reform Act. These rules, by requiring large shareholders to have a say in picking lead counsel, have already dealt with the abuses of having stables of plaintiffs that are being targeted by the government.  This illustrates how legislative reforms should be viewed as an alternative to the criminal law in fixing whatever is wrong with corporations.  We may not need both.

There is also an irony here:  It is the requirements and constraints of the PSLRA  that have effectively reduced the number of firms that can compete in the securities class action “market.”  Thus, for better or worse, the remaining firms might be viewed as the sort of oligopoly we’re facing now with the limited number of large auditing firms.

Whatever the specific impact of the PSLRA, we should also remember that the underlying cause of firms’ woes is the securities laws and open-ended federal remedies for fraud.  Lerach/Milberg are merely the messengers.

Finally, I worry that the government’s case may be at least in part politically motivated.  I know the case has been ongoing for awhile and therefore is not merely a response to recent events.  But might the government be persuaded to move forward with an indictment in the post-Andersen environment when it’s been criticized as being too hard on business? 

I hope not. These class action firms are not my favorite sector of the economy, and they've caused their share of trouble.  But what’s at stake here is the rule of law and fair treatment of business, which is not just for the companies we happen to like. 

Update: There’s more on the feds’ pursuit of Milberg in the W$J and Tom Kirkendall. The W$J article includes Milberg’s statement that the lawyer payments that are the focus of the investigation have long been a common practice and were disclosed on the firm’s 1099 forms.

Comments

[Paul Brophy]

" The government shouldn't be criminally indicting firms for the misdeed of a few" argument doesn't hold water for a firm of few dozen lawyers. Does anyone here believe that all of the partners didn't know of this practice? Compare this to the Andersen case where there is no way that hundreds of partners around the world could possibly know a thing about the details of a single client's audit.

Also, what is the point of the argument that "we did nothing wrong, because we sent 1099s to the IRS for the payments we made?" The law against attorneys paying kickbacks to clients in class action cases is clear. Are embezzlers exempt from criminal prosecution as long as they report the income on their tax return?