Wednesday, May 17, 2006
The investigation of alleged kickbacks to representative plaintiffs in class actions looks like it will ensnare two name partners at Milberg Weiss and perhaps even the firm itself. While there has been media speculation that the firm might be able to work out a deferred prosecution agreement with the Department of Justice -- the preferred method these days for dealing with organizational misconduct -- the New York Times reports (here) that talks for an agreement may be foundering over issues such as "the waiver of client-attorney privileges; new compliance and monitoring systems and personnel the firm would be required to put in place; and the size of any potential payments . . . ." Milberg Weiss announced that name partners Steven Schulman and David Bershad have taken leaves of absence from the firm (see Law.Com story here), and a press release issued by the firm (here) states that the leave "will allow Mr. Bershad to focus fully on other matters." Those other matters include a federal grand jury in Los Angeles that meets on Thursdays, and an indictment of the two partners could come as early as May 18, assuming neither is negotiating a plea agreement. Whether the firm is also named is a key decision that may not be decided until the last minute.
Indicting Milberg Weiss would not necessarily put it out of business because, unlike accounting firms such as Arthur Andersen, law firms are not licensed by the state, only the individual lawyers, and the professional responsibility rules only indirectly govern law firms. That said, lawyers know that reputation is an attorney's most valuable asset, so a criminal indictment would likely cause such serious harm to the law firm and its laywers that it would break up in all likelihood. If that happens, I expect that at least one new firm, with different named partners, will emerge to take on some of the same client matters while unencumbered by the taint of criminal charges against Milberg Weiss.
Is a deferred prosecution agreement practical for a law firm? The hurdles to crafting such an agreement may be too great, at least if the Department of Justice insists on provisions similar to those in other such agreements. For example, many agreements contain an attorney-client/work product waiver, which Milberg Weiss could not do without permission from its clients. Obtaining that type of waiver would be even more difficult given the types of cases the firm takes because class actions involve multiple clients (and law firms). Another standard provision is the appointment of an outside monitor, which raises a different set of attorney-client privilege issues that might make it impossible to have a third-party being privy to all the law firm's operations. A limitation on the types of cases the firm could accept might cripple its ability to retain lawyers, the firm's most valuable asset, so an agreement that makes it more difficult to maintain the firm's profitability could end up killing it.
Unlike Time Warner or Bristol-Myers Squibb, companies that entered into deferred prosecution agreements and have extensive ongoing businesses with significant fixed assets, law firms have few tangible assets and a work force that is highly mobile, so there would be little incentive to stay if an agreement imposed terms viewed as too onerous. A deferred prosecution agreement for Milberg Weiss may result in a situation where there is no party on the other side shortly after the ink dries because lawyers can reconstitute their practices with relative ease while clients can switch to new counsel on a moments notice. Unlike corporations or even non-profits (such as hospitals) with continuing businesses in fixed locations, law firms may not be amenable to deferred prosecution agreements, which raises the question whether a criminal prosecution of the firm is even worth the effort. (ph)