Thursday, January 19, 2006

Seymour Lazar Asks, "Did Anybody Get Screwed?"

Seymour Lazar is a lawyer in Southern California indicted last year (along with another lawyer) for allegedly taking secret payments from prominent plaintiff class action firm Milberg Weiss to serve as the representative plaintiff in various securities fraud and consumer cases.  A front-page article in the Wall Street Journal (here) includes an interview of Lazar in which he discusses his case, a step that is usually a risky proposition but one we've seen lately in white collar crime cases (see post here).  Lazar disputes doing anything wrong, although he does not deny receiving the payments.  He calls them "referral fees" and notes that lawyers pay them all the time in cases.  Lazar asks, "Did I hurt anybody? Who did I cheat? Did anybody get screwed?"

The problem for Lazar is that the standard is not simply did he "cheat" or "screw" anybody.  The representative plaintiff in a class action usually has to certify that he/she is not receiving anything more than other class members will receive, and class representatives have been disqualified for being affiliated with counsel for the class without any direct payment or other remuneration.  To take a payment from the lead attorney is more than just the appearance of a conflict, it is a violation of the fiduciary obligation of the representative.  The question for the fiduciary is not whether anyone was "screwed" but whether the representative plaintiff fulfilled the duties of being the named party in the action charged with the responsibility of acting to protect the interests of the class. Lazar's interview may be an effort to generate sympathy, and it succeeds by noting that at 78 years old, he recently had a triple bypass and is receiving treatment for cancer.  And he certainly is a colorful character, having played a minor role in the Melvin Dummar/Howard Hughes will contest in the 1970s.  Whether his standard for what is proper for a class representative will fly is another question. (ph)

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The question for the fiduciary is not whether anyone was "screwed" but whether the representative plaintiff fulfilled the duties of being the named party in the action charged with the responsibility of acting to protect the interests of the class.

But even so, we're back to the age-old question: Should breaching one's fidiciary duties, especially when no one suffers any direct harm, be classified as criminal conduct? I hope this fellow gets sued. But sending him to prison seems a bit off.

Posted by: Mike | Jan 20, 2006 9:50:22 AM


I guess it depends on what is meant by "direct harm." As an initial matter, making a secret payment (assuming they were hidden, which is what the government alleges) is not how one usually pays a referral fee. Moreover, under the ethics rules, a referral fee has to be fully disclosed to the client, in this case the class (and the court), and that does not appear to have been done. Why hide something that is legal, unless perhaps it is not completely legal?

The second point is that the rules against conflicts of interest are designed to prevent harms, and the possibility of harms. If a class representative is willing to take money to allow counsel to do as they see fit (which is not necessarily what happened in Lazar's case), then there is a potential harm, if nothing else than from the lack of an adequate representative who would police counsel. It is likely the case that no one suffered a harm similar to the victim of a robbery or larceny, but certainly the integrity of the system is harmed, and Lazar and Millberg Weiss may have been enriched by the arrangement. I don't think that's just a breach of a fiduciary duty that is being unfairly criminalized.

peter henning

Posted by: Peter Henning | Jan 20, 2006 10:41:43 AM

This is a very interesting case, which I have been following for a couple of months.

In Ontario, at least one class action judge has felt that he might want to have indpendent counsel properly review the fairness of any class action settlement. A complete review of the Millberg Weiss settlements might have detected this problem very early on and provide more guidance to counsel.

Posted by: Michael Webster | Jan 20, 2006 12:27:47 PM

Isn't the core issue whether the payment of the referral fees caused Lazar to discharge his responsibilities as class representative differently than he otherwise would have done so had the fees not been paid? Unless the government can prove that, it would seem that Lazar's "did anyone get screwed" defense might well resonate with a jury if not have some legal force.

The legal community has rather disingenuously dealt with referral fees for too long. Many states still ban them, though if a lawyer does any work on a case before referring it out, then the payment of a fee is acceptable. This sets up a Monty Pythonish "wink, wink, nod, nod" situation that is at least morally ambiguous.

Posted by: Will Aitchison | Jan 21, 2006 7:30:23 AM

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