Saturday, May 20, 2006

Is It Fraud or Dishonesty in the Milberg Weiss Prosecution

The indictment (here) of Milberg Weiss and two of its name partners, Steven Schulman and David Bershad, strikes me as involving a basic distinction in how the two sides will approach the case.  For the government, this appears to be a case about honesty, or the lack thereof, by attorneys required to present information to the court about the fees being received in a class action and the need for representative plaintiffs to limit their compensation to that approved by the court.  The key charges are the mail fraud counts involving the right of honest services against the Milberg Weiss defendants.  The conspiracy, RICO conspiracy, and money laundering charges all revolve around proving that the payments -- or kickbacks in the government's parlance -- to the representative plaintiffs were improper and hidden from view because everyone knew that their disclosure would cost the law firm (and representative plaintiff) its lucrative role in the class action.  While the mail fraud charges also allege that the defendants obtained money or property from the victims, identified as the members of the class, that will be a very difficult theory of criminal liability to establish.  Milberg Weiss did not receive anything that was not negotiated with its opponent, who usually had no incentive to pay more money to the law firm, and a state or federal judge who, at least on the record, stated that the settlement was fair to both sides and the attorney's fees a fair reflection of the work put into the case and the risk undertaken.  Two sets of eyes scrutinized the settlement, so it is hard to say that Milberg Weiss deprived the class members of anything by sneaking something past them. 

For honest services, however, the issue focuses more on the role of the fiduciary, and the fulfillment of the obligation of trust to ensure that the client's interests are put first and all procedures are scrupulously followed.  For the government, its allegations of secret payments and disguised transactions are not grounded on a theory of theft from the victims, but instead that the law firm and three identified representative plaintiffs colluded to keep their double-dealing secret.  Each received a benefit from the collusion, and the class members lost the benefit of its counsel and lead plaintiff protecting their interests.  As a case about honesty, the prosecution may have some traction.

For Milberg Weiss, the issue (and challenge) will be to make this a case about loss, and whether there was any ill-gotten gain to the law firm.  The crime of fraud evolved from larceny, and in the English common law the crime was known as larceny by trick.  For a larceny, the defendant must take and carry away the property of the victim, so that the gain and loss are congruent.  For Milberg Weiss, the question is probably quite simple: prove what we took from the victim.  The answer is that the class members are probably no worse off than if the alleged secret payments had never been made, at least in the sense that any settlement would have involved a payment to a law firm.  What the firm chooses to do with its money is not the business of the class members, or perhaps even the court, for that matter. 

So, which one is it?  The mail fraud statute permits the government to charge a scheme to deprive of the right of honest services, a notoriously slippery concept, particularly in private fraud prosecutions.  For public corruption cases, the loss is easily identified because the public and its representative government lose the benefit of the honest services of its servants, elected or appointed.  In the private relationship context, it becomes harder to identify whether there has been a violation when the case involves something other than a diversion of assets or other type of naked self-indulgence at a cost to the victim.  The mail fraud charges, and the related offenses that build off of them, likely will survive a motion to dismiss, although the defendants will take their best shot.  At trial, the question may well come down to one of whose viewpoint the jury adopts: is this a case of dishonesty, or is it a case of theft in which the victim really never lost anything and the defendants didn't get more than what a judge and opponent said they deserved.  It should prove to be a very interesting case. (ph)

Fraud, Legal Ethics, Prosecutions | Permalink

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