On the Milberg Indictment
posted by Dave Hoffman
I’ve been mulling over the Milberg indictment. Since I waited a weekend to post, I have the advantage of having read lots of other folks’ views. Quick summaries follow:
- Michael Dorf: Kickback payments slaved the named plaintiffs to MW, bloating agency costs.
- Steve Bainbridge:Kickbacks encourage “nuisance claims.” We may need criminal sanctions to crank the Hand formula to optimal levels, but only against individual lawyers.
- Walter Olson:”[MW was] taking no chances on the watchdogs staying pacified: It threw regular chunks of raw liver into their cages.”
- Larry Ribstein: Who cares? Lawyers are fungible.
- Ed Morrissey: Bad for Democrats and ambulance chasers.
- Christine Hurt: It’s high noon, and MW can’t blink.
- And let’s not forget MW itself: It was just a referral! And the theory is overreaching! And our interests remained aligned!
Wow. Lots of words. So here is what I think.
First, I still don’t particularly understand the economics of outrage here. I’ve seen two arguments about why kickbacks are bad (apart from their being unlawful, which we’ll put aside briefly). First, I’ve heard the argument that they “capture” the lead plaintiff, making that person less able to monitor the lawyer’s work. As Dorf points out, however, plaintiffs in securities class actions are sort of like shareholders stockholders: they have deputized oversight and management to lawyers, in return for fiduciary duties. Some folks seem to have in mind a more active role for lead plaintiffs – something like a controlling stockholder(?) – but given the relatively low bonuses awarded in settlements for lead plaintiffs, why would anyone want to play that role? That is, you can’t have distributed, small-stakes, high-impact, governance by private actions and have plaintiff management at the same time. The capture argument is another way of saying that these types of claims are not in the public interest. But we don’t criminalize inefficient lawyering. Not usually.
The second argument I’ve seen is related to the first – it is Bainbridge’s – and it suggests that kickbacks encourage securities actions that are (on the merits) weaker. Yup, that sounds right. But that isn’t an argument against kickbacks, it is an argument that judges aren’t doing enough to raise hurdles to weak actions at early stages, as the PSLRA was designed to accomplish. To the contrary, I have found that judges are quite hostile to securities claims.
The argument that I haven’t seen on the blogs, but which is larded through the indictment, suggests that MW was, in effect, selling out the rest of the class to benefit the folks at the head of the line. And in a way, this is (for me) the strongest argument against the practice. If MW really did countenance paying referrals-as-kickbacks to named class members out of their portion of the settlement, then we know that dollars were being taken out of the mouths of the rest of the class pretty directly. On the other hand, one might argue that MW had to pay off the named plaintiffs to bring the cases in the first place – that it is a an expense like overhead.
Two additional aspects of the case trouble me. Obviously, indicting the entire firm feels excessive. I don’t agree with Larry R. that reputational effects won’t follow MW’s innocent lawyers. I know lots of counsel at MW – I litigated against them – and I thought they were incredibly hard working, tough, honest, passionate adversaries. One of my worst days as a lawyer came across a deposition table from an experienced Milberg partner: he taught me a great lesson on how to get one’s opponent to hang himself on the record. And I’d be shocked if more than a handful of lawyers at the firm had any knowledge of the activities charged. If the USAO is really indicting out of pique for failure to roll over as most corporations would do in response to a patently unreasonable discovery demand, well, many folks who think of themselves as white knights are going to be tarnished unfairly.
Second, I have some problems with the continued federalization of state practice ethical rules. Although the indictment doesn’t come out and say this, some of the illegality is premised on state fiduciary duty and referral laws. (Some, granted, is based on Rule 23.) Shouldn’t this type of prosecution be the job of Elliot Spitzer and his imitators? Which raises a question: why didn’t Spitzer get here first?
May 22, 2006 at 10:48 pm
Posted in: Corporate Law, Criminal Law, Current Events, Economic Analysis of Law, Law Practice, Legal Ethics, Securities
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Responses (2)
Dave Hoffman - May 24, 2006 at 4:33 pm
Walter Olson writes (in an email that he has graciously permitted me to publish):
“I don’t think anyone is attempting to criminalize inefficient lawyering here, or, to borrow terminology that Larry Ribstein often uses, criminalize principal-agent problems either. It is a fact that current rules bar the knowing submission of perjured affidavits, the making of knowingly false representations in the course of winning class certification, and so forth. For better or worse, the law also currently imposes on the named plaintiff a duty of loyalty toward absent class members that is supposed to take precedence over any loyalty to the lawyer if the two conflict, a duty that the client can hardly shuffle off by delegating it to the lawyer, especially in exchange for bags of money. As I pointed out in my WSJ piece, we could argue all day over whether a different way of structuring class actions might be less costly, and might dispense with this vestigial watchdog role for named plaintiffs (perhaps strengthening some other safeguard against abuse). but it is not a defense to a criminal charge to say that yes, I committed the crime, but if legal structures were more efficiently arranged I wouldn’t have had to. To pursue a parallel sort of case, it may be that notaries public and their sworn oaths make very poor watchdogs against certain types of document fraud, seldom prevent those frauds from occurring, and would be cut out of the system entirely were it designed rationally, but that can hardly constitute a defense to a charge of slipping a notary a large sum of money to swear a falsified oath.
As you hint at one point in your post, Milberg might try to argue that the payments (if admitted at all) served some purpose other than to ensure that the named plaintiff would line up with lawyers’ interests rather than class interests in case of a divergence. However, many of those other conceivable purposes are themselves unlawful. For example, under New York law, lawyers are forbidden to pay clients in order to secure their willingness to litigate. Another possible motive would be to compensate clients for the nontrivial cost of arranging their investment portfolios so as to be ideal Milberg clients (owning a few shares of stock in a large number of companies, timing certain sorts of transactions to ensure membership in relevant classes, etc.) However, defense counsel can and do probe in depositions for whether stock was bought only in order to set up a claim and Milberg clients testified (falsely, according to the indictment) that no, they hadn’t done so.
Another aspect of the economics of this is that Milberg was known for being incredibly quick off the dime to file actions, which gave it a big edge over rival firms in the pre-PSLRA environment. One likely reason (assuming the facts alleged in the indictment) is that it had tame clients ready to go because of the unlawful payments, whereas plaintiff’s counsel who tried to play by the rules (no bribed clients, no clients who weren’t bona fide owners of the stock, no submission of perjured evidence) would take days or weeks to line up clients and file actions.”
Eh Nonymous - May 26, 2006 at 1:38 pm
Walter makes some very nice points; I actually have no quibble with his analogies or his analysis.
Here’s my point of interest: What individual plaintiff ever has the skill, leverage, and knowledge to deal effectively with those areas where class counsel’s interests actually diverge from those of the class?
That’s the sharpest possible agency problem, if and when it exists; the decision whether and how to settle, and the question of fees when not provided for by statute, are such situations. That’s why we have judicial oversight of fee petitions and class settlements, precisely because it’s obvious that the dollar incentives of the class counsel may not be perfectly aligned with the interests of the class.
But most of the time, I don’t think MW had anything to worry about along those lines. That’s not to say, following Walter’s example, that we can argue for policy reasons that swearing oaths, or maintaining the fiction of class representative independence, are useless. But, it rings hollow unless there’s a reason to say that’s what they were doing.
I see the alleged crime, I see the opportunity. What’s the motive? It’s not an element of the offense, but it just doesn’t make sense to me (or maybe a jury?) without it.
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