From San Diego Union-Tribune:
Wire fraud charges reportedly pending
By Bruce V. Bigelow
UNION-TRIBUNE STAFF WRITER
February 23, 2006
U.S. prosecutors have told lawyers Steven Schulman and David Bershad that they'll be indicted for their role in a scheme that allegedly paid kickbacks to clients, according to Schulman's lawyer.
The two are longtime partners in the New York office of the Milberg Weiss law firm, which also was based in San Diego and reigned for decades as the dominant player in the specialized practice of class-action shareholder suits.
Assistant U.S. Attorney Richard Robinson told Schulman and Bershad on Monday that they are facing indictment on wire fraud and money laundering charges over the payments, Schulman's lawyer Edward Hayes told Bloomberg News yesterday. Robinson told the two men they could be indicted in the next 30 days, Hayes said.
For the past five years, federal prosecutors in Los Angeles have been investigating claims that the Milberg Weiss firm illegally paid shareholders to file the suits.
To some, the government's move against Schulman and Bershad is part of a squeeze play to snare two bigger fish: Melvyn Weiss, the firm's founding partner in New York, and prominent San Diego lawyer William Lerach, who headed the firm's West Coast operations for 28 years.
Lerach split with Weiss in 2004 and formed a new firm in San Diego, Lerach Coughlin Stoia & Robbins. The government's investigation, though, has focused on tactics used by Milberg Weiss at a time when Weiss and Lerach were co-chairmen of the firm's management committee.
Prosecutors overseeing the probe in Los Angeles told Lerach and Weiss on Friday they have no plans to charge them – at least for now.
But as the two biggest names in shareholder litigation, they remain obvious targets. Lerach, in particular, has earned the lasting animosity of corporate America with his brash, take-no-prisoners style.
Until the indictments are handed up, the extent of the government's case against Bershad and Schulman remains unclear.
“Mr. Schulman absolutely denies he was involved in any kickback scheme and that any referral fees involved in his cases were 100 percent legitimate,” Hayes told Bloomberg News.
Neither Bershad, a founding member of Milberg Weiss, nor his attorney, Andrew Lawler, were immediately available today to comment on Hayes' statements. Tom Mrozek, a spokesman for the U.S. Attorney's Office in Los Angeles, which has been conducting the investigation, declined to comment on “any aspect” of the investigation.
Hayes said that prosecutors allege Schulman knew about a scheme to pay referral fees to lawyers who sent them clients with securities-fraud claims. Some of the fees allegedly later made their way to the clients, he added.
“The government contends there are millions in fees” at issue in the case, Hayes said.
Schulman will be charged with fraud over allegedly knowing about the fee scheme and not taking steps to stop it, Hayes said. He'll face money laundering charges because he allegedly knew some lawyers were reportedly helping plaintiffs hide the source of money they received from the fees, Hayes said.
A referral fee is paid from one firm to another for referring a client and splitting up the work, said George M. Cohen, a law professor and legal ethics teacher at the University of Virginia at Charlottesville.
“In many cases, it's not really a huge issue,” Cohen told Bloomberg News, although problems might arise if such fees are used by “lawyers who are less competent and can't get business in a legitimate way.
“Basically, the rules say you can have some kind of referral fee as long as both lawyers are contributing to the representation or they agree to a joint representation,” Cohen said. “Then it's OK, as long as the client understands that this is what's going on.”
Investigators are relying on accusations made by two former Milberg partners about the alleged kickback scheme, Hayes said.
“We don't believe these individuals have any legitimate proof of any wrongdoing,” Hayes said.
“Every document they've pointed to is inconsistent with the allegations” over the fees, he said.
Hayes added that the charges are an attempt to pressure Schulman and Bershad into cooperating with prosecutors in their continuing investigation of Weiss' and Lerach's actions.
When Lerach and Weiss split in 2004, their firm had represented clients in half of all securities class-action suits filed in the past decade. The firm boasted that it had obtained settlements and judgments for its clients that totaled over $30 billion.
When the two lawyers met in the mid-1970s, Weiss already was established in New York as one of the nation's leading class-action attorneys. He had gained prominence in several cases that showed how major accounting firms weren't actually conducting independent audits of publicly traded companies.
Lerach, who opened the firm's San Diego office in 1975, gained prominence in his own right, building a volume business in shareholder litigation. Colleagues say he has been brilliant at identifying corporate wrongdoing by scrutinizing insider stock sales and analyzing financial statements.
He found new ways to include related parties in his suits, among them accountants, bankers and lawyers. And he developed innovative ways to apply existing law, such as federal anti-racketeering statutes, to his shareholder cases.
As the lawyer leading the shareholder lawsuit against Enron, Lerach has so far obtained record settlements totaling more than $7.1 billion with several Wall Street banks and brokers, including Citigroup and J.P. Morgan.
Even after their 2004 split, the Lerach and Weiss law firms together accounted for 57 percent of securities fraud settlements last year, according to a Cornerstone Research survey.
Bloomberg News contributed to this report.
Bruce Bigelow: (619) 293-1314; firstname.lastname@example.org