June 25, 2005
Lawyer Accused of Taking Kickbacks from Plaintiffs Class Action Counsel
The U.S. Attorney's Office for the Central District of California announced the indictment of Seymour Lazar, a 78 year-old lawyer in Palm Springs, for allegedly taking approximately $2.4 million in secret kickbacks from lawyers for plaintiffs in class actions in exchange for serving and causing his family members to serve as named plaintiffs in more than fifty class action and shareholder derivative action law suits over the last twenty years. According to a press release (here):
[T]o conceal the illegal kickback scheme from the courts presiding over such lawsuits, the other parties to such lawsuits, and the absent class members and shareholders whose interests Lazar and his family members purported to represent, Lazar made false and misleading statements in under-oath depositions and in documents Lazar signed under penalty of perjury. The indictment further alleges that the illegal kickbacks were secretly paid to Lazar through various intermediary law firms and lawyers selected by Lazar, who used and applied the kickback payments at Lazar's direction and for his benefit.
Also indicted was Paul Selzer, a lawyer who is accused of being an intermediary for Lazar by funneling payments to him.
A quick check of Westlaw shows that Lazar was one of the named plaintiffs in Churchill Village v. General Electric, 361 F.3d 566 (9th Cir. 2004), a class action by dishwasher owners against manufacturers, In re MCA Shareholder Litigation, 785 A.2d 625 (Del. 2001), a shareholder derivative suit in the Delaware courts alleging a breach of fiduciary duty by the board related to a merger agreement, and Bell Atlantic Corp. v. Bolger, 2 F.3d 1304 (3rd Cir. 1993), another shareholder derivative suit. He was also a plaintiff in In re Concord Holding Securities Litigation, a securities fraud class action for which there is a settlement notice here. It is not clear whether Lazar received any of the alleged payments in connection with these cases, but he is clearly one of the group of "usual suspects" who serves regularly as a named plaintiff in class actions.
Interestingly, one of the issues in the Bell Atlantic case was an alleged conflict of interest for a law firm that represented the defendant corporation and individual defendant-directors and officers. A named or representative plaintiff in class actions and derivative litigation has a fiduciary duty to the other members of the class, or other shareholders in derivative litigation, to ensure that the action is conducted fairly, and there is a strict prohibition on these plaintiffs from accepting anything other than what other class members receive, unless specifically approved by the court. To receive payments from attorneys for the class while serving as representative would be a conflict that automatically eliminates the person from any involvement as the representative plaintiff, and as seen here can result in criminal charges. One of the changes adopted in the Private Securities Litigation Reform Act in 1995 was to alter the method of selecting the representative plaintiff in federal securities fraud actions, requiring that the court choose as the lead plaintiff a party -- often now an institutional investor -- with a large stake the company. This provision was designed to eliminate some of the more unseemly aspects of the "race to the courthouse" among the plaintiff class action firms who kept a roster of potential representative plaintiffs on file. Lazar is charged with taking the process of serving as a representative plaintiff a step further by accepting payments from the attorneys to serve as the named plaintiff, or obtaining a compliant family member, most likely to allow the lawyers to pursue the class action or derivative suit without any interference (or oversight) while getting a cut of the attorney's fees. (ph)
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