Ideoblog

Another perspective on Milberg Weiss: Perino responds

[The following is from Mike Perino, author of the paper I commented on in yesterday's post].

I would like to thank Larry and Bruce for taking the time to comment so thoroughly on my paper. Their comments fall into two broad categories. First, they argue “even if the evidence shows what it purports to show, this does not establish that the class members were harmed.” (emphasis in original). Second, they question whether there are specification errors in the regressions that may undermine the results. I’ll tackle each of these critiques in turn.

Larry and Bruce’s first comment is implicitly premised on this question: If one could add up all the costs and all the benefits of a system that allowed class action attorneys to share revenues with the clients who were willing to serve as lead plaintiffs, would absent class members (and presumably the markets as a whole) be better or worse off than under our current system which bans such payments? In essence, they argue that investors might be better off because this kind of fee sharing might motivate the lawyers to file higher quality complaints.

I agree this is an interesting question and I am willing to concede for the sake of argument that such a system might create the benefit they suggest. But, I have to disagree with Larry and Bruce when they say that this is a question that I “missed.” The reality is that this is simply not the question that my paper sought to address. The paper never attempted to tally all of the costs and benefits of allowing revenue sharing between lawyers and their clients. Indeed, it is difficult to image how one might even try to assess this question empirically. How exactly do we measure the benefit of higher quality complaints? For that matter, what metric do we use to measure complaint quality?

Although this is not the paper I sought to write, it is worth noting that if one were to undertake such a project one would have to consider several costs that Larry and Bruce “miss.” For example, part of the standard critique of securities class actions is that they might lead lawyers to bring not only strong cases of fraud, but also marginal or non-meritorious ones purely for their settlement value. Paying plaintiffs might lead to more suits of this variety as well. And, if we really wanted to do the analysis correctly, we would want to evaluate not only the costs and benefits of the system that Larry and Bruce propose, but also the costs and benefits of other systems that seek to encourage lawyers to file higher quality complaints (including our current system that imposes a heightened pleading standard in this type of case).

The difficulties associated with attempting such an analysis are obvious and I don’t want to dwell on them here because, again, this is not what my paper is about. Rather than attempting to grapple with these likely incalculable costs and benefits, my goal for the paper was much more modest and involved a far more tractable empirical question. I sought to assess the government and Milberg’s competing claims concerning the propriety of the prosecution. The government claimed that its prosecution was justified because kickbacks were more than a mere ethical lapse. It argued that they created a conflict of interest between the representative plaintiff and absent class members that led to excessive fees. Milberg and Bill Lerach, by contrast, say that kickbacks may have spurred representative plaintiffs to hold out for higher settlements and that courts would have reduced any fees that were too high. The only claim I make in the paper is that the empirical evidence I compile is more consistent with the government’s position than with Milberg’s. The paper shows that, all else equal, there is no statistically significant correlation between recoveries and either the indictment cases or cases with repeat plaintiffs.

So the available data do not support Milberg’s argument that kickbacks created incentives that actually led plaintiffs to hold out for higher settlement amounts. By contrast, means comparisons show that: (1) average fee requests and awards in the indictment cases were significantly higher than those in the non-indictment cases; (2) Milberg Weiss’ average fee requests and awards were significantly larger than those of other plaintiffs’ law firms; and (3) within the subset of Milberg Weiss cases, the firm’s average fee requests and awards were higher in the indictment cases than in other cases. The regressions show the impact of the Indictment variable (or in alternate specifications the presence of repeat plaintiffs) is not uniform across cases but instead varies with the size of the settlement. As settlements grew larger, the fee requests and awards in the indictment cases grew at a faster rate than those in the non-indictment cases. All of this is consistent with the government’s contention that kickbacks led to excessive fees.

So, while Larry and Bruce raise an important normative question about whether we should allow this kind of revenue sharing, that question does not alter the core conclusions of this paper, a point that they acknowledge (“The apparent reason why Perino does not focus on this theory is simply that the defendants didn’t rely on it.”). And, although they seem to suggest otherwise in their critique, I never take the normative position that revenue sharing should be banned outright. Quite the opposite is true—in the theoretical section of my paper (pages 21-23) I point out that under certain conditions (specifically where the plaintiff owns a sufficiently large portion of the underlying claim) revenue sharing might indeed encourage plaintiffs to hold out for higher settlements. I have publicly taken the position that we should require disclosure of pay-to-play payments made to the campaigns of state officials that control public pension fund participation in class actions rather than enacting any outright ban. And, I have questioned whether the PSLRA’s ban on incentive payments should be reconsidered if we truly want to encourage institutional investors to take on the lead plaintiff role. See Markets and Monitors: The Impact of Competition and Experience on Attorneys’ Fees in Securities Class Actions.

This brings me to one additional point. Larry and Bruce argue that I look “at only one side of the theoretical story, whether the fees motivated better monitoring by named plaintiffs.” Larry and Bruce then argue that “this story is not particularly interesting because … even non-bribed plaintiffs would have little incentive or ability to affect class action outcomes.” In support of this claim they cite Eisenberg and Miller’s paper on attorneys’ fees, which finds no significant correlation between fees and passage of the PSLRA. But, of course, if one wanted to examine the impact of better monitoring, relying solely on whether the case was filed before or after passage of the act would be a poor proxy because post-PSLRA cases contain a mix of traditional small-stakes plaintiffs and non-traditional institutional investors. In another paper (which their critique does not cite), I show that, all else equal, cases with public pension lead plaintiffs have, among other things, significantly lower fee requests and fee awards than cases involving other types of plaintiffs. See Institutional Activism through Litigation: An Empirical Assessment of Public Pension Fund Participation in Securities Class Actions. So I disagree with Larry and Bruce with respect to the potential benefits of enhanced monitoring.

That brings me to their comments on the model specifications. The thrust of this critique is that I fail to adequately account for the probability that fee requests and fee awards will be below one-third of the settlement as settlement size increases. They recognize that as a robustness check I truncated the dataset to omit fee requests in excess of $100 million, but they argue that this is inadequate for a variety of reasons. Instead, they suggest, among other things, that I should truncate settlements in excess of $100 million. It turns out that I performed just such an analysis when I was writing this paper, but did not discuss the results because they were similar to the results discussed in the paper.

Consider, for example, the regressions for fee awards. When fee requests above $100 million are omitted (this is Model 3 in Table 6), the coefficient for the interaction term is 0.059 (p = 0.027). When, as Larry and Bruce propose, settlements greater than $100 million are omitted, the correlation is actually somewhat stronger (coefficient = 0.080; p = 0.001). The same is true for fee requests. So, adopting this methodological suggestion does not alter the empirical results, but I’ll make sure that any future versions of the paper disclose this finding as well.

Quick response: Thanks for Mike for this thoughtful rejoinder.  I will only respond here that, again assuming the validity of Mike's results, there remains a question in light of Bruce and my theoretical approach whether class members are harmed by these payments. The Milberg defendants deserve their punishment because the kickbacks were wrong under current law. The question whether such payments should be wrong deserves more attention in the overall policy debate on class actions.

Another perspective on Milberg Weiss

Michael Perino has written a paper, The Milberg Weiss Prosecution: No Harm, No Foul?, which has gathered significant attention, including a presentation at AEI, and substantial notice in Saturday's NYT by Joe Nocera . The paper addresses whether the actions of Milberg Weiss and its now disgraced principals, including Melvyn Weiss and Bill Lerach, injured the very shareholders they were supposedly championing by paying kickbacks to named plaintiffs.

One might ask at the outset why this matters. There is now no legal doubt that the Milberg defendants broke the law by paying the kickbacks. Whether or not their kickbacks hurt shareholders, the defendants’ behavior was disgraceful and ought to be punished severely.

And yet the question does matter. To begin with, it has salience in the court of public opinion. Those who sympathize with Milberg’s efforts over the years can still ask if the means justified the ends. This becomes harder to do if Milberg was ripping off the people they were supposed to be defending.

More importantly, there is a larger policy debate about the role of class action lawyers. If kickbacks undermine the positive effects of class actions, we ought to be very concerned about them. On the other hand, if kickbacks are not harmful or even improve class actions, then perhaps the laws they violate should be changed.

Either way Lerach and Weiss go to jail, but the long term public policy outcome may differ. For example, there is a debate underway about whether plaintiffs’ contingent-fee lawyers should get favorable tax treatment for litigation expenses. We might like to know whether these lawyers are doing society any good before deciding how they should be taxed. And there are even broader issues at stake about the role of empirical evidence and criminal prosecution of business.

So Perino’s article is important. What does it show? In a nutshell, Perino’s findings respond to an important contention of the Milberg defendants, that the kickbacks didn’t hurt the shareholders. Defendants claim the kickbacks came out of their pockets and motivated the name plaintiffs to monitor counsel’s efforts and their fee requests. Class members therefore actually may have gained from the kickbacks in the form of higher settlements and lower fees. But Perino purports to show that the fees were actually higher and varied less in kickback cases for which the Milberg defendants were indicted, while the settlements were no higher. This suggests that the fees didn’t motivate higher settlements and lower fees, and therefore that class members were harmed as compared to a world in which there were no kickbacks. In effect, rather than reducing defendants’ benefits from the litigation, they were a sort of quid pro quo through which the defendants bought acquiescent lead plaintiffs.

But there are two main problems with the data and conclusions. The first major point, and perhaps the more important from a broader perspective, is that even if the evidence shows what it purports to show, this does not establish that the class members were harmed. That is because the paper looks at only one side of the theoretical story -- whether the fees motivated better monitoring by named plaintiffs. In fact, this story is not particularly interesting because we should already have assumed that even non-bribed plaintiffs would have little incentive or ability to affect class action outcomes. And, indeed, there’s evidence to support our skepticism: Theodore Eisenberg & Geoffrey P. Miller, Attorney Fees in Class Action Settlements: An Empirical Study, 1 J. Empirical Legal Stud. 27, 28 (2004) found that the size of the award determines fees, that objectors to fee awards have no discernable effect on the size of the award, and that even the enactment of the PSLRA, which gave a significant role to institutional plaintiffs, did not decrease securities class action fees.

In focusing on how the kickbacks affected fees and settlements as compared to non-kickback cases, Perino misses another important question: whether class action fees and payments to plaintiffs helped class members by motivating the filing of high-quality class action complaints.

The apparent reason why Perino does not focus on this theory is simply that the defendants did not rely on it. We can readily understand why the defendants made nothing of this argument: it would not have helped their litigation position to concede that the kickbacks reduced net recoveries and argue the class members were still better off because of the kickbacks’ effects in motivating lawsuits. But regardless of defendants’ litigation position, society should care a lot about this incentive effect.

To understand why the kickbacks might have motivated higher quality class actions, it is important to understand the incentives under which class action lawyers operate. They are paid on a contingency basis – they earn nothing unless they win. Moreover, at the time of filing a class action complaint the lawyer does not know if the client will be the lead plaintiff or whether the lawyer will end up representing the lead plaintiff because the court decides these questions. Under the rules prevailing prior to the Private Securities Litigation Reform Act (PSLRA), the lead plaintiff was often the first to file, provided that plaintiff met all the standing rules. All of this means that lawyers may invest a lot of effort in a complaint for which they may get no reward.

Weak incentives to invest in writing the complaint are especially problematic because of the importance of the complaint. Given the dynamics of litigation and settlement, the key moment in the case is the resolution of a motion to dismiss or for summary judgment. These cases almost never go to trial – trial is just too expensive for everybody for reasons that go beyond this short discussion. When the plaintiff survives the preliminary motion stage, the defendants have sharply greater incentive to settle. Thus, securities class action complaints are the foundation of the case law of securities regulation. Lower quality complaints may reduce the deterrent value of securities litigation and lead to lower-quality securities law.

It follows that if class actions are to play a positive role, it is important that plaintiffs’ lawyers be motivated to put a lot of effort into complaints that clearly identify what defendants did wrong. See Kobayashi and Ribstein, Class Action Lawyers as Lawmakers, 46 Ariz. L. Rev. 733 (2004).

Putting all this together, lawyers who want their investments in their complaints to pay off must be able to quickly find clients who had standing to sue (e.g., were shareholders at the time of the alleged fraud), were willing to sue, and would not dump the lawyer later in the litigation. The kickbacks helped accomplish these objectives in three ways. First, they encouraged people to be plaintiffs. This in itself is no small matter, since being a plaintiff means, among other things, having to show up for depositions and putting up with other hassles during the lawsuit. At the same time, the plaintiff gets little reward from the lawsuit because he has to share recovery with the other class members. Plaintiffs, in other words, need some incentive to come forward. See Theodore Eisenberg & Geoffrey P. Miller, Incentive Awards to Class Action Plaintiffs: An Empirical Study, 53 UCLA L. Rev. 1303, 1307 (2006).

Second, the kickbacks created a stable of plaintiffs that the lawyers could draw from quickly who had invested in the securities that ultimately became the subject of litigation.

Third, the payments encourage the plaintiffs to be loyal to particular lawyers. Plaintiffs otherwise might have an incentive, once a lawyer has gotten them to the ball in style, to pursue the case with a different lawyer who may have better litigation skills but who didn’t have either the skill or the incentive to invest in the complaint.

It follows that, even if the kickbacks reduced net recoveries in given cases – that is, assuming the same suit would have been filed without the kickback – they still may have made class members better off because they motivated better lawsuits. Indeed, Perino himself notes in his article that “Milberg Weiss is clearly good at what it does.” Moreover, eleven years ago, even after the PSLRA changed the system of appointing lead plaintiffs to one in which lead plaintiffs were institutional investors, with presumably better incentives regarding appointment and monitoring class counsel, Perino told the Senate Banking Committee:

Since passage of the Act, Milberg Weiss appears to have become an even more dominant presence. Milberg Weiss' appearance ratio in 1996 stood at about 59% nationwide and 83% in California.Milberg Weiss' increased significance can be explained by the fact that: (1) it is likely the best capitalized plaintiffs' firm and therefore best able to finance the delays associated with slower procedures under the Reform Act; (2) it has the most diversified portfolio of plaintiffs' claims and is therefore better able to absorb the risk associated with litigation under the new regime; and (3) it is best situated to internalize the externalities associated with the need to invest to create new precedent interpreting the Act's novel provisions.

We should emphasize that even if the kickbacks did help class members by improving the quality of securities litigation, this does not make them right. They were still against the law, and flagrant violations of the lawyers’ ethical obligations. But we already knew that without Perino’s article. The whole point of Perino’s paper is that even if the kickbacks were illegal, it matters whether the kickbacks hurt shareholders. Our analysis bears on that point.

Bruce Kobayashi and I have discussed in a pair of articles the importance of these hypotheses regarding incentives in class actions that were not discussed in Perino’s paper. In Class Action Lawyers as Lawmakers, we proposed mechanisms for protecting lawyers’ investments in complaint-drafting post-PSLRA so as to promote incentives to produce high quality complaints. In The Hypocrisy of the Milberg Indictment: The Need for a Coherent Framework on Paying for Cooperation in Litigation, we argued that plaintiffs’ incentives to come forward are important, and that indeed these incentives have been recognized in the criminal context via prosecutors’ ability to offer plea bargains to cooperating witnesses – including in the Milberg cases themselves. We contended that an appropriate system would recognize the incentive issue and allow it to play out under court supervision in the civil context as now happens in criminal cases. Instead, illegalizing witness and plaintiff payments in civil cases drives these payments underground, eliminating the possibility of judicial supervision.

To repeat, the empirical implication of our theory is that even if class members bore the cost of the kickbacks, and even if the kickbacks did not improve settlements or reduce fees compared to Milberg’s non-kickback cases, the kickbacks may have helped the class members by motivating Milberg to file better cases.

Indeed, Perino himself shows that “there is a positive and significant correlation between the dependent variables and the presence of Milberg Weiss as a lead counsel in the case” (Perino at 36). This is consistent with our hypothesis that the kickbacks improved the quality of Milberg’s cases by giving them an incentive to invest more in the cases. Nevertheless, Perino does not take that correlation into account in reaching his bottom-line conclusion that the kickbacks harmed class members because, he says, “neither this study nor any of the previous studies draw a causal link between Milberg Weiss’ participation and higher settlement amounts” (id). Rather, according to Perino, Milberg may just have been able to get a “leg up. . . in the best cases” (37). That’s true. But the difference between a “good” and “bad” case has a lot to do with the lawyer’s skill and investment of effort in the case. This seems to be borne out by Milberg’s continued success even after the PSLRA reduced the potential role of kickbacks. In any event, exactly the same thing about correlation and causation can be said about all of the paper’s empirical conclusions, not just the correlation between the presence of Milberg and higher settlements.

The bottom line is that, while Perino’s data (assuming it shows anything) responds to Milberg’s argument about kickbacks, and therefore is potentially useful on that score, it does not show what it purports to show, and what has earned it significant publicity – that the kickbacks hurt the plaintiffs.

The second major point about Perino’s paper is that, on a close look, it is far from clear that the data shows even what it purports to show – that the kickbacks hurt plaintiffs’ recoveries in given cases. This calls for some extended statistical analysis, which we give here.

In general, Perino’s data bears on important issues of public policy. The kickbacks likely affected the incentives of the Milberg defendants. If the effect benefited class members, then perhaps we should rethink whether the kickbacks should be illegal.

It is also important to stress broader lessons of this analysis. First, empirical work is becoming very important in the legal literature and in litigation. There is no doubt that this work can be very useful. On the other hand, there is a danger of over-persuasion. Thus, as continuing controversies concerning “junk science” have taught us, it is extremely important to be cognizant of the limitations of data, and careful about what it does and does not show. This warning applies not only to statistical methods, but also to the need to have sound theories motivating the development of the hypotheses being tested. We understand that we (and Perino for that matter) may have left behind some numerically challenged readers, who may be tempted to skip over the technically daunting analysis to the clearly framed conclusion. But that is part of our point: the analysis is at least as important as the conclusion.

Second, it is particularly important to get the data and theories right with respect to Milberg. Lerach, in particular, is for some people the personification of a particular brand of evil – the Jeff Skilling or Ken Lay of the trial bar. Lerach’s flamboyance can divert attention from the real issues. In particular, is the problem with class actions in general or with the Milberg defendants in particular? Could it be that it was the class actions themselves that made Lerach & Co. evil, with the kickbacks only the mechanism used for putting them out of business? Was it the very fact that the Milberg defendants were so good at class actions that made them bad?

Third, given the notoriety of Milberg’s business and Lerach in particular, there is a particular danger of punishing business people because they are in an unpopular (though legal) business, and not for what they’ve actually done wrong. This is no less true of Lerach and Weiss than it is of Lay and Skilling. Indeed, Nocera, in the article cited at the beginning of this piece, is candid about this when he concludes that “if putting [Lerach] in prison for his little kickback scheme — rather than his far more venal form of economic extortion [of class actions] — is a little like putting Al Capone in jail for tax evasion, well, so be it.”

Given this potential for bias we need to be especially careful about our data and theories. Notably, Nocera cited Perino’s data as an important basis for his conclusion. For all these reasons, it is very important to be sure that Perino’s data actually shows what it purports to show. As we have demonstrated, that is not clear.

Reflections on the Weiss sentence

So Mel Weiss got 30 months. Possibly he deserves this, and I’m not going to use this space to sing his praises. But I want to recap a couple of arguments Bruce Kobayashi and I have been making for awhile that put this in perspective.

First, whatever one thinks about class actions, it’s still a legitimate business, and Weiss and Lerach were among the best at it. As Bruce and I argue in Class Action Lawyers as Lawmakers, these lawyers make valuable contributions to the production of law, particularly through their complaints. We suggest ways the law might provide better incentives by protecting class action lawyers' investments in their complaints. The kickbacks can be understood as a form of (illegitimate) self-help. That doesn’t mean they should be excused, but it does point to this broader policy issue.

Second, the positive role of class action lawyers suggests that the kickbacks, though wrong, may not have harmed class members. Mike Perino disagrees. Watch for more on this in a forthcoming post.

Third, as Bruce and I discuss in The Hypocrisy of the Milberg Indictment, the kickbacks these lawyers were convicted for are functionally similar to the “payments” prosecutors make to witnesses all the time in the form of promises of leniency. Both types of payments compensate witnesses and plaintiffs for their time and trouble. The critical difference, of course, is that the prosecutors (hopefully) make full disclosure and get court approval. Weiss and Lerach couldn’t disclose because the payments they made are illegal. Bruce and I recommend changing the law from prohibition to disclosure. This would, among other things, enable the courts to better police these payments.

Weiss and Lerach may have gotten what they had coming, but we shouldn't let the celebrating obscure the deeper policy lessons.

The Lerach sentencing

It’s time for Lerach to face the music. The WSJ law blog has the story and useful links, including to some of the letters seeking leniency for Lerach. One in particular caught my eye, from Richard M. Buxbaum, a famous corporate law professor from Berkeley. Buxbaum writes from 55 years of experience that two lawyers “stand head and shoulders above all others" -- Abe Pomerantz and Bill Lerach:

That they and their colleagues do well while doing good remains an avoidable reality in our system of law. . . I do believe that the public good this version of the invisible hand has generated for our financial markets and even our economy should not be downplayed. It has, in my respectful opinion, an important place in mitigation if not in justification.

Although it may seem surprising, I agree. Bruce Kobayashi and I wrote about the contributions of Lerach and his colleagues in the class action bar in our Class Action Lawyers as Lawmakers. We argued that the system of choosing and compensating class action lawyers should take account of the need to provide incentives for these contributions.

While that doesn't excuse Lerach’s crimes, in our Hypocrisy of the Milberg Indictment, Bruce and I showed the fundamental equivalence of the witness payments Milberg was convicted for and the practices government lawyers use in getting testimony in white collar crime cases, including the one against Lerach.

Sadly, what is much less well-recognized is that the arguments Buxbaum makes for Lerach are precisely the same I’ve been making for the likes of Mike Milken and Jeff Skilling. What many call their “greed” is what moves the market’s invisible hand and what has, in Buxbaum’s words, generated so much public good for our financial markets. Both financial innovations and legal innovations may be taken too far, but this doesn’t negate their positive aspects and the need to encourage them.

That’s not an excuse for wrongdoing. If laws have been broken the violators should be sent away. But we should be aware that the excesses of prosecutors can cause at least as much, and possibly more, harm than the excesses of financial speculators.

So I'm fine with taking all this in mitigation of Lerach's sentence, as long as we recognize that the principle applies at least as strongly to financiers as to litigators.

Weiss and Lerach as entrepreneurs

Lattman has a post in honor of the recent Mel Weiss indictment (and Lerach plea) quoting Stephen Weiss portraying his father as a sort of pioneering entrepreneur.

Apropos of that, there's Gilles & Friedman, Exploding the Class Action Agency Costs Myth: The Social Utility of Entrepeneurial Lawyers, They argue that it's misguided to focus on "the agency costs problem long derided in class action practice" because

in the majority of small-claims class actions, there is no legitimate reason to care whether class members are being undercompensated (or compensated at all), nor any reason to worry that entrepreneurial lawyers are being overcompensated. Rather, we assert that the driving force behind class action practice -- and any effort to reform, reduce, redirect that practice -- should be deterrence. All that matters, we argue, is whether the defendant-wrongdoer is forced to internalize the social costs of its actions -- not to whom it pays those costs.

So are Weiss & Lerach sort of like Mike Milken – much derided but actually the agents of socially productive creative destruction, brought down by the corrupt and complacent status quo they sought to destroy?

The argument isn't totally off the mark. Bruce Kobayashi & I have theorized for better protection of the intellectual property created by class action lawyers (Class Action Lawyers as Lawmakers), and for a reconsideration of the illegality of the witness/plaintiff payments that Lerach et al were prosecuted for (The Hypocrisy of the Milberg Indictment)

But, hey, let's not get carried away. The fundamental problem here is the securities fraud remedies, as well as remedies under other laws, that are central to the business plan of "entrepreneurs" like Lerach. Because of these laws, these legal entrepreneurs have been a factor in stifling the other sort of entrepreneurship, which is arguably much more socially productive.

The important point of the analogy between the lawyers and the other entrepreneurs is that, in fact, they are all business people in legitimate industries. Therefore, misguided precedents and norms created in prosecuting these businessmen carry over into other forms of business. Two wrongs (in criminal prosecutions) not only do not make a right, they compound the problem of excessive criminalization of business. In particular, the plea bargain practices used in prosecuting Lerach and Weiss were similar to those used and justly criticized in Enron and other cases.

So, if we have problems with the class action lawyer business model, let's address them at the source.  In particular, we should examine whether we really do need the deterrence they provide, as suggested by Gilles & Friedman, and at what cost. 

Lerach's plea bargain

Per the WSJ, Lerach "agreed to forfeit $7.75 million to the government, to pay a $250,000 fine and to accept a sentence ranging from one to two years in federal prison." But he evidently did not agree to cooperate in the government's ongoing case against Schulman or possible case against Mel Weiss. See WSJ Law BLog and Bloomberg.

Why no cooperation deal? Maybe the government's been reading my and Kobayashi's article on the Milberg case. We note the "hypocrisy" of the government using "incentive 'payments' [i.e., a plea deal] to induce the cooperation of Howard Vogel in order to prosecute Milberg’s incentive payments to Vogel to be a lead plaintiff." This point would have been even more obvious –- to the public, the court approving the deal, and the jury hearing any case in which Lerach ultimately testifies -- if the government also offered a plea deal in exchange for cooperation to a main target of the investigation.

But it's still possible that the government made an implicit, non-disclosed deal with Lerach, as arguably happened with Fastow in the Enron case, as we discuss in the article. We might yet see Lerach testifying against his former colleagues, and we might also see him getting easy time or a lighter sentence.

As we point out in the article, the only reason for distinguishing government deals with witnesses and conduct like Lerach's is that the government discloses and gets court approval. Obviously that distinction is out the window when there's no full disclosure.

Now, there's no evidence that that's happening here. But I, for one, will be watching for further developments.

Lerach headed to jail

According to the WSJ:

Noted securities lawyer William Lerach is set to plead guilty to one count of conspiracy in the criminal case involving his former law firm, now called Milberg Weiss LLP. A plea agreement calling for a one- to two-year prison term could be announced as soon as today, according to people familiar with the investigation. The case, brought last year in federal court in Los Angeles, alleges Milberg Weiss paid $11.3 million in improper kickbacks to clients.

Here's my recent comments about Lerach's indictment.

Milberg's case for kickbacks

The WSJ has an article on the Milberg kickback case. The article says:

A soon-to-be-published law-review article by professors Larry Ribstein and Bruce Kobayashi posits that the sort of fee-sharing alleged in the Milberg case could, if legalized, actually increase the payoff to all class members. Without the chance of earning a special incentive bonus beyond the expenses and nominal amounts that courts are permitted to approve, the argument goes, a plaintiff may not have the incentive to file a case and undertake the role of lead plaintiff. The result: Some meritorious class actions would never be filed, and class members would thus recover zero.case.

The article is The Hypocrisy of the Milberg Indictment: The Need for a Coherent Framework on Paying for Cooperation in Litigation. The paper was previously discussed on the Law Blog, as noted here.  For some other discussions of the many ironies in the Milberg prosecution, see here, here, here, here, and here.

At the risk of beating a dead horse, two points made in many of the above posts bear quick repeating. First, the paper isn't a defense of illegal practices, or for that matter of Milberg. Rather, it's a call for consistency. As we say in the abstract,

This case illustrates the need to develop coherent standards regarding payments to litigants and witnesses. These standards should be based on the incentive effects of the payments rather on a desire to discourage or encourage particular types of actions.

Bruce and I are working on a more formal general model that furthers this project.

Second, it is important to emphasize the danger in these payments. The WSJ story quotes Geoff Miller as saying that "[t]he concern is that a lead plaintiff won't be a vigorous monitor of the lawyer if the plaintiff shares the lawyer's fees." That's true (though it's also worth noting that Miller has co-authored with Ted Eisenberg a study of lead plaintiff bonus awards in which, as we summarize in our paper, "they find evidence consistent with using these payments to solve the collective action and free rider problems, as by reimbursing lead plaintiffs for non-pecuniary costs."

The key is that these payments need to be disclosed and monitored. Yet illegalizing the payments actually frustrates monitoring. As Bruce and I point out:

legislative or judicial rules preventing sufficient awards clearly increase lawyers’ incentives to engage in illegal behavior in order to solve the free rider problem with lead plaintiffs. The illegality of this behavior, in turn, triggers efforts to conceal the payments and the demand for more remedies, including federal criminal sanctions, to prevent such arbitrage.

So one of the many ironies of the Milberg case is that current law actually exacerbates the problem the law is intended to address.  That's an aspect of a more general problem I've discussed repeatedly:  the criminalization of business behavior. 

WSJ Law Blog on the hypocrisy of the Milberg indictment

Nathan Koppel reports on an interview with yours truly concerning my and Kobayashi's article on the Milberg case, last discussed here. Koppel's discussion is fair and I'm happy he aired our position. But the paper is sure to spark some controversy and misunderstanding. So if you're skeptical -- or even if you're not -- I'd suggest you read the paper.  It's short!

Lerach and Weiss in trouble

It looks like Bershad’s turned, and so it may be fan-hitting time for Lerach and Weiss. Here’s the WSJ Law Blog, linking relevant docs, and an earlier post by Fortune's Roger Parloff.

Two quick comments. First, it’s interesting that the statement indicates the witness/plaintiff payments were disguised as referral fees (the plaintiffs went to intermediate firms, those firms referred to MW, MW paid a referral fee which was really a disguised fee to the plaintiffs).

Bruce Kobayashi and I discuss in The Hypocrisy of the Milberg Indictment the inconsistency in how the law treats various kinds of litigation payments, specifically payments to plaintiffs and witnesses on the one hand, and the government’s “payments” in the form of plea bargains on the other. Now add the further complication that it’s ok for referring law firms to get paid, but not plaintiffs.

I am definitely not defending any law-breaking that may have existed here (indeed, just the opposite - see below), just raising a policy question about what the law should be in the first instance. Bruce and I argue that the illegality of witness payments drives the conduct underground, making it more difficult to detect and regulate.

Second, if Lerach did what he’s being accused of, he's arguably a worse miscreant than many of the firms he’s sued for securities fraud over the years. Certainly worse than the peripheral actors in the Enron case Lerach's been trying to get the Court to hear. After all, this isn’t really about agency costs within his firm and those who allegedly aided and abetted it.  Lerach and Weiss are accused of trying to make their firm richer. This is about lying to the court. Strong liability, perhaps criminal liability, is arguably more necessary for this type of conduct because it's otherwise difficult to detect and discipline.