When the nation's largest class-action securities law firm Milberg Weiss Bershad & Schulman LLP was indicted in May in Los Angeles for allegedly receiving kickbacks, it sent a shock wave through the legal community.
Since then, Milberg has weathered a maelstrom of criticism in the mainstream press, but most other law firms have kept quiet and reserved judgment. Until now.
The first shot has come from L.A.-based powerhouse Latham & Watkins LLP, which has filed a motion in the U.S. District Court of Maine to dismiss Milberg as counsel for the class in an antitrust case in which Latham represents the defendant, Ford Motor Co. The motion could effectively cripple the class-action giant and is being watched carefully by the nation's legal community.
In its filing, Latham argues that Milberg's indictment hampers its ability to represent the class and threatens the integrity of the litigation. The motion, which points out that Milberg's clients could later appeal the case on the grounds that its counsel's ability to represent was impaired, puts a fundamental issue before the judge.
"They haven't been convicted," said Greg Keating, professor at USC Law School. "It would be a very severe consequence to say a firm that's been indicted can no longer represent plaintiffs. It would mean that the indictment itself was the kiss of death."
Milberg, in its opposition to Latham's motion, cites its experience and success representing classes the firm has won $45 billion in judgments for its class-action clients, more than any other firm and that other courts have expressed faith in the firm's ability since the indictment.
Last week, Milberg entered a plea of not guilty to charges of secretly paying more than $11 million in kickbacks over the past two decades to get people to take part in shareholder lawsuits. Both firms declined comment for this story.
The stakes are high for Latham, too. The firm is defending class actions against Milberg across the country and its motion characterized as "extremely aggressive" by several legal experts could severely hinder its ability to achieve equitable settlements for its clients.
The filing also is unusual in that if its motion is granted, the litigation will be delayed after three years of work on the Ford case. Most class action defendants, fearing negative publicity could drop their stock price, are anxious to resolve litigation of this type.
On the other hand, if Latham's motion is successful, Milberg could be removed from all of those cases. A ruling from the judge on the motion could come down by mid-August.
"Basically what Latham is saying is we don't want our clients to put money in this and come back later and hear that (the plaintiffs) didn't get adequate representation," Cresswell Templeton III of Hill Farrer & Burill LLP said. "The indictment may undermine the litigation or any settlement that may occur."
The case is naturally drawing scrutiny from class action experts.
"Think about how many lawsuits Milberg Weiss has pending throughout the country. Everybody's watching this," said Steve Velkei, partner and class action specialist at Liner Yankelevitz Sunshine & Regenstreif LLP. "From a practical perspective, if they enter into a settlement with Milberg, it could be grounds for (a class member) to challenge the settlement."
Velkei said it's not surprising that a firm with extensive resources like Latham which last year did $1.2 billion in business and employs 1,800 attorneys would be the first to file a motion of this nature.
"They have resources to push these kinds of things," he said. "And if Latham is successful, there's some real juice in knocking out the No. 1 player on the plaintiff's bar in these kinds of cases, right?"
Fight for survival
Milberg could well find the fight to continue business as normal is more difficult than staving off a conviction. In addition to Latham's motion to disqualify, several judges overseeing cases involving the firm have questioned its ability to properly represent cases in the wake of the indictment.
A San Francisco judge ruled last month that the indictment shouldn't automatically remove the firm from a case. A week later, however, a federal judge in Minnesota dropped the firm from its lead counsel status in a class action. Most recently, an Oklahoma judge said the indictment could jeopardize a case and has asked for briefs on the questions.
Parallels between the indictments of Milberg with Enron Corp's accounting firm, Arthur Anderson, have been drawn. Negative publicity from the charges virtually destroyed the accounting giant long before it was able to win a reversal in 2005 of its 2002 fraud conviction.
"Many of the firms that are hiring Milberg are pension funds and they want to look out for their investors," said Arthur Rubenstein, a UCLA School of Law professor and class action expert who is teaching at Harvard this year. "There's no necessary reason that a pension fund with relationship to the underlying employers would have to back away from Milberg at this point," Rubenstein said, "but I think if I were in Milberg's shoes, I'd be worried just the same."
The 20-count indictment, which was issued in May and named partners David Bershad and Steven Schulman along with the firm, has already taken a toll on Milburg. Since the charges, 15 of its 42 partners have resigned.
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