Who will mourn Milberg?

The criminal investigation against Milberg Weiss is drawing toward an apparent indictment of the firm. Should we care?

I’ve been suspicious of the investigation, which started out with Bill Lerach as the apparent target. The investigation heated up in 2002, around the time that Lerach, a prominent contributor to Democratic causes, sued not only Enron, but also a company named Halliburton. I'm not a big Lerach supporter, but I do care about the rule of law.

Here, though, I want to focus on the specific implications of indicting the firm. An indictment may put Milberg effectively out of business because courts and lead plaintiffs would be leery of supporting lead counsel status for firm facing this much trouble.

Should we care? The WSJ reports that former judge and SEC enforcer Stanley Sporkin has been concerned about an indictment "because of the vital role class-action cases play in policing corporate conduct and recovering damages for investors." On the other hand, Tom Kirkendall says “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.”

The Andersen meltdown caused significant economic dislocation for individuals, though the macro effect isn’t clear. The Andersen failure may be contributing to the costs of SOX, but it’s not clear how much. With or without Andersen the compact Big Audit industry, backed by SOX and PCAOB, has significant ability to control overall audit costs. On the other hand, had Andersen survived, it might have had some incentive to compete on costs, and perhaps to offer a dissenting voice on what SOX 404, and AS 2, actually demand.

The difference from Milberg is that the value there lies in the talent of the individual unindicted lawyers.  They're free to, among other things, start up their own firms to compete for class action business. AA auditors had less flexibility in that regard because the firm's reputational capital is so important in the auditing industry -- the firms offer their reputations as a bond for the accuracy of their clients’ disclosures in the broad capital markets.

A class action law firm’s reputation is somewhat less important than that of a big auditing firm because the firm's market is institutional investors (the clients in class action suits post-PSLRA) and judges who certify class actions. These “buyers” are much better able to judge the quality of the individual professionals without the firm’s imprimatur.

Of course it takes a lot of resources to run a big class action. But these resources can be hired. Reputation is much harder to replace. I wonder, though, what Bruce Macewen (aka Adam Smith, Esq.) would have to say about this.

So, just as the PSLRA didn't put Lerach out of business, so I suspect indicting Milberg will not severely affect securities class actions.  But I guess we may find out.

Comments

[Robert Schwartz]

there is no pit deep enough in which to toss those slime balls. And stanley Sporking who is a thug, can be tossed in with them.