Congress Must Investigate The Trial Lawyers
The last few years have revealed an ugly underbelly to the plaintiffs’ bar, and some of the biggest trial lawyers across the country have been brought down in criminal prosecutions for their sharp practices.
Bill Lerach and Mel Weiss, two legal eagles who made a fortune in bringing security fraud class actions against publicly traded companies, pleaded guilty in October 2007 and April 2008, respectively, for their roles in an alleged decades-long conspiracy pursuant to which serial plaintiffs were paid kickbacks from their court-awarded attorneys’ fees in the cases. The Milberg Weiss firm at which both men once were partners also was indicted for its alleged role in the scheme, and avoided further prosecution after paying a $75 million fine and employing a compliance monitor for two years. At the time of the June 2008 settlement between Milberg Weiss and the feds firm partner Sanford Dumain said: “We can now say to courts and clients that we are not a firm under indictment,” and “we needed an understanding from the government that no one currently at the firm had any knowledge of the wrongdoing.” It’s ironic that so many lawyers who are known for rooting out financial fraud were so thoroughly ignorant about what was happening at their own firm. After all, what did everyone think was happening when the same individuals repeatedly were serving as plaintiffs in dozens of lawsuits? In 1995, Congress enacted the Private Securities Litigation Reform Act specifically for the purpose of curbing the abuses for which Milberg Weiss and several of its partners were indicted, and surely this legislation should have raised a red flag even among the innocents at the firm.
Mass tort lawyers William Gallion and Shirley Cunningham Jr. were convicted in April 2009 for fraudulently taking $94.6 million from a $200 million settlement in the fen-phen litigation that should have gone to their clients.
The above are just a few of the higher profile names in an otherwise long list of plaintiffs’ lawyers who have been convicted and sent to prison. What the heck is going on? These men — all now disbarred — were officers of the court, and crusaded with self-righteous indignation against corporate wrongdoers. Their convictions now suggest that they were motivated less by principle and more by greed.
Although the plaintiffs’ bar no doubt has many law-abiding practitioners it is time for Congress to hold investigative hearings to determine the extent to which corruption pervades the lawsuit industry.
Indeed, in May 2008, Representatives John Boehner and Lamar Smith sent a letter to Rep. John Conyers, the then-Chair of the House Judiciary Committee, requesting an inquiry after Bill Lerach admitted that his conduct was an “industry practice,” and said that “everybody was paying plaintiffs.” In this letter Rep. Boehner writes:
If in fact Mr. Lerach’s crimes are an “industry practice,” then the Milberg Weiss scandal has revealed a clear and present threat to our nation’s prosperity. The United States Congress has an obligation to take action — by holding hearings to determine the extent of the trial lawyer scandal and the threat to our economy, identifying appropriate legislative remedies, and sending them to the President without delay.
Rep. Boehner’s request at the time went nowhere. Perhaps it was because Rep. Conyers was distracted by the criminal investigation into his wife — Detroit, MI councilwoman Monica Conyers — who was convicted on federal corruption charges in June 2009. Or maybe the inaction was because the Democrat Party gets a lot of campaign contributions from the trial lawyers. For example, lawyers from the class action law firm Milberg Weiss at which Bill Lerach and Mel Weiss once were partners “contributed more than $7 million to the party’s candidates since the 1980s.” Rep. Conyers and his fellow Democrats probably did not want to bite the hand that feeds them.
Of course, that was then, and this is now. Republicans control the House, Lamar Smith is the Chair of the Judiciary Committee, and the time has come for the investigation which was requested four years ago. Although Reps. Boehner and Smith focussed on class action securities fraud cases in their May 2008 letter, any hearings should include the full spectrum of the lawsuit industry and cover policy issues in addition to corruption allegations.
Here are a few additional topics Congress should explore based on recent headlines:
*** The Dubious “Confidential Sources”
Class action lawyers frequently bolster their complaints with allegations attributed to “confidential sources” within the company they are suing in the hopes of avoiding outright dismissals by the courts. Except it’s increasingly turning out that these “confidential sources” never were company insiders nor made the allegations attributed to them.
In August 2010 federal judge Robert P. Patterson Jr. sanctioned Milberg LLP and its co-counsel with a public reprimand after allegations attributed to “confidential sources” were not supported by their deposition testimony. Although a higher court later reversed the sanction the appellate decision stated “we understand why the district court felt the need to impose sanctions” as reported by Alison Frankel for Thomson Reuters:
“[Milberg and co-counsel] did not have evidentiary support for certain of the assertions in the second amended complaint; they took a statement attributable to a former Sony employee out of context, thereby making it misleading in terms of time, and they filed motion papers supporting the confidential source allegations even after defendants had served the Rule 11 motion.” Nevertheless, the panel found, Milberg and the other firms did eventually strike the misleading statements and did not act in bad faith.
And last year federal judge Suzanne Conlon dismissed a case filed by Robbins Geller Rudman & Dowd LLP after allegations attributed to a “confidential source” were not supported by his deposition testimony. Ironically, Milberg LLP is the successor to the firm founded by convicted felon Mel Weiss, and Robbins Geller Rudman & Dowd LLP is the successor to the firm founded by convicted felon Bill Lerach.
It’s one thing to make allegations; it’s quite another thing to attribute allegations to “confidential sources” who later claim they never said any such thing.
*** The Public Pension Fund Plaintiffs
In securities fraud class actions the trial lawyers frequently rope in a large public pension fund to serve as a plaintiff, and the relationship raises a host of issues.
Why is the public work being farmed out to a private firm in the first instance? Government attorneys are more than qualified to handle the cases, and by farming them out to private firms the pension funds lose billions in dollars that are awarded as attorneys’ fees rather than included within the settlement recovery. Given that many public pension funds are woefully underfunded it seems reckless to leave billions of dollars on the table for the taking by the plaintiffs’ lawyers.
And what is the criteria by which the outside firms are selected? In many cases the retained firms have provided campaign contributions to the elected official responsible for making the decision. For example, former New York comptroller Alan Hevesi long had been criticized for retaining his campaign donors to represent the state’s State Common Retirement Fund in securities fraud class actions, and he took $100,000 from Milberg Weiss for his 2002 campaign. Although it’s all perfectly legal it just looks unseemly.
Ironically, in October 2010 Hevesi pleaded guilty for steering more than $250 million in pension fund business in exchange for $1 million of improper benefits including campaign contributions, and last year the dirt bag was sentenced to 1+ years in prison.
The relationship between public pension funds and class action law firms certainly deserves a look but in 2009 then New York Attorney General Andrew Cuomo — a recipient of trial lawyer campaign largesse — took a pass on the issue.
*** Attorneys’ Fees For Non-attorney Work
Plaintiffs’ cases are vehicles by which to earn lucrative attorneys’ fees. Except sometimes the performed work could have been done by someone other than an attorney.
Last year U.S. District Judge Richard M. Berman rebuked Milberg LLP in a ruling on its request for additional attorneys’ fees in the securities fraud case In re Nortel Networks Corp. Securities Litigation because of, among other issues, “improper staffing”: “‘It is clear that a significant portion of the work done by senior attorneys could have been performed by more junior attorneys or paralegals at lower billing rates,’ Berman said.”
A substantial portion of the attorneys’ fees generated in class actions is through the review of voluminous document productions, and much of this work often is performed by temporary attorneys whom the plaintiffs’ firms obtain from staffing agencies.
The document review process involves both objective and subjective coding components. The objective component simply entails inputting bibliographical data from the document — such as date, title, author, recipients — onto a coding sheet or into a database, and the subjective component involves substantive analysis which includes issue spotting, determining relevancy, and providing comments for the document.
It is questionable whether temporary attorneys should be used for the objective coding of documents which seemingly is little more than clerical work. Indeed, some law firms outsource the objective coding portion of a document review to data entry service providers, and perhaps appropriately use the temporary lawyers with their much higher billing rates only for the subjective coding component; however, some plaintiffs’ class action firms in many cases — including Milberg in In re Tyco International, Ltd. Securities Litigation — have used temporary attorneys for both the objective and subjective coding portions of the document review.
*** The Coupon Settlement Cases
In consumer cases the class members increasingly only get mere coupons for discounted future purchases, and yet the plaintiffs’ attorneys get millions in cash for their efforts. The coupons are near worthless as the overwhelming majority are never redeemed. Indeed, why would a class member who allegedly was injured by the defendant in the first place want to purchase more goods or services in order to redeem the coupon?
For example, St. Louis, MO Judge Angela T. Quigless approved a class-action settlement last year against A.G. Edwards “that rewards lawyers at Milberg and other firms $21 million in cash while their clients get mostly coupons they can use over three years to obtain discounts on mutual funds.”
However, in an increasing number of settled cases, the class members aren’t even getting a stinkin’ coupon as compensation for their supposed injuries, and the defendants do little more than commit some money to raise consumer awareness on some silly issue.
For example, last summer trial lawyers settled a class action against MySpace involving its alleged disclosure of users’ browsing history after the social networking site agreed “to donate $50,000 to a nonprofit group or consultant to research the promotion of online privacy” as reported by Thom Weidlich for Bloomberg. And trial lawyers settled a class action against Procter & Gamble over its Pampers Dry Max diapers which allegedly caused diaper rash after the consumer product giant agreed to spend $400,000 to educate the public about “pediatric skin conditions” as reported by David Holthaus for Gannett. In both cases the few named plaintiffs got token amounts for their efforts, and the many putative class members didn’t get a penny. But the trial lawyers made out like kings in getting their attorneys’ fees covered by the defendants. In the MySpace settlement the plaintiffs’ lawyers will collect $750,000, and in the Procter & Gamble settlement the plaintiffs’ lawyers will collect $2.7 million.
*** M&A Suits
No sooner does a company offer to buyout another than some trial lawyer files a lawsuit to challenge the deal, and many of these ubiquitous suits may be little more than vehicles by which to generate lucrative attorneys’ fees as reported by Matt Egan for Fox Business: “Law firms’ sudden interest in ensuring shareholders are fairly compensated appears to be sparked by the realization that these M&A cases are easy money, often translating to hundreds of thousands of dollars in fees for very little work.”
In the Delaware Chancery Court where many of these M&A deal cases are filed, judges increasingly are casting a critical eye on the practice resulting in “significantly reduced requested plaintiffs attorneys fees” as reported by Gina Chon for The Wall Street Journal: “‘Delaware is now almost actively hostile toward cases they think are without merit,’ said Larry Hamermesh, a professor at Widener’s Institute of Delaware Corporate Law. ‘They are saying, Don’t waste my time with this stuff.'”
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The lawsuit industry often appears to serve as little more than a platform from which trial lawyers get rich with only incidental benefits to the purportedly aggrieved consumers and shareholders they represent. Unfortunately, the judges who are charged with overseeing these cases often are derelict in their duties and merely rubber stamp the fee applications for the trial lawyers as if merely extending a professional courtesy to a fellow member of the bar.
Ted Frank, a founder of the Center for Class Action Fairness, was a member of a recent panel discussing the topic of attorneys’ fees in class actions, and he said “the courts . . . are often the ones left with the job of policing attorneys fees in class action settlements” as reported by Jessica M. Karmasek for Legal Newsline: “‘I’m not saying all judges are bad about this,’ he said. ‘But some awful settlements are approved.'”
Frank further says on Point of Law that “the cases where the lawyers are abusing the system are not an anomaly”: “when the Center for Class Action Fairness is deciding whether to take a case, it’s almost always deciding between cases where the attorneys are abusing the system a little, or whether they’re abusing the system a lot.”
It’s long past time for Congress to take a hard look into the lawsuit industry: the very credibility of our legal system is at stake.