William Lerach liked to explain his business model with a boast that doubled as a confession. He had the greatest practice of law in the world, he told Forbes in 1989, because he had no clients. It was meant as a description of leverage: in a securities class action, the lawyer finds the fraud, files the case, and shepherds a class of thousands of anonymous shareholders while no individual client is large enough to tell him what to do. The line made general counsels shudder and made Lerach famous. It took federal prosecutors another two decades to establish that it was also, in the most literal sense, false. Lerach’s firm did have clients — a small, secret, rented stable of them — and the firm was paying them.
Milberg Weiss was not merely a participant in American securities litigation; for a generation it essentially was American securities litigation. Founded in New York in 1965 by Lawrence Milberg and Melvyn Weiss, the firm turned a procedural device — the shareholder class action under Rule 10b-5 — into an industry. When a public company’s stock collapsed on bad news, Milberg Weiss would file within days, sometimes hours, on behalf of a shareholder plaintiff, win appointment as lead counsel, and extract a settlement from which the firm took its fee. By the 1990s, with Weiss commanding the East Coast practice and Lerach running a San Diego office that terrified Silicon Valley, the firm appeared in more securities class actions than all rivals combined and had recovered, by its own accounting, some $45 billion for investors. Corporate America called it extortion. The firm called it private law enforcement. Both descriptions survived the scandal intact, which is what makes the scandal instructive.
The Invention
The modern securities class action was made possible by a 1966 revision to Rule 23 of the Federal Rules of Civil Procedure, which allowed a court to bind absent class members unless they opted out — converting the class suit from a curiosity into a weapon of mass aggregation. Milberg Weiss was the firm that understood, earlier and more completely than anyone, what the new rule implied when combined with the fraud-on-the-market theory that courts developed in the following decades: any material lie by a public company injured every purchaser of its stock, damages could be computed from the price drop, and a single lawyer holding a single share’s worth of grievance could conscript the claims of a hundred thousand strangers. Mel Weiss, a bearish, brilliant New Yorker with a gambler’s appetites and a genuine, complicated idealism about small investors, litigated the foundational cases. The firm won landmark recoveries against the icons of American fraud — from the junk-bond wreckage of Drexel and the savings-and-loan collapses, including a quarter-billion-dollar recovery against Charles Keating’s Lincoln Savings empire, to Washington Public Power, Prudential-Bache, and eventually the great accounting frauds of the dot-com bust. When Lerach, as lead counsel for the University of California, extracted more than $7 billion from the banks that had enabled Enron — the largest securities-fraud recovery in history — he was completing an arc the firm had begun forty years earlier.
In Silicon Valley of the 1980s and ’90s, Lerach was less a lawyer than a weather system. His San Diego office filed against technology companies with such industrial regularity — the joke held that a missed quarter was followed by an earthquake, then by Lerach — that executives coined a verb: to be Lerached. He cultivated the menace gleefully, posing for magazine photographs with a look of happy predation, telling reporters that his defendants were liars who deserved worse than money damages. Corporate America returned the loathing with interest and, in 1995, converted it into legislation. The Private Securities Litigation Reform Act — passed by the Gingrich Congress over President Clinton’s veto, the only veto override of his presidency — heightened pleading standards, stayed discovery, restricted professional plaintiffs to five cases in three years, and handed control of class suits to the largest injured investor rather than the fastest-filing lawyer. The statute was, in substantial part, an anti-Milberg law; the Senate debates named the firm outright. That its central factual premise — that Milberg’s plaintiffs were kept, compensated retainers rather than aggrieved investors — would be proved true in a criminal courtroom a decade later is among the purer ironies in the history of American legal reform: Congress was right about the corruption years before the Justice Department could prove it, and for reasons Congress itself only suspected.
The Race to the Courthouse
The scheme grew out of a procedural quirk. For most of the firm’s history, the plaintiff who filed first had the inside track to control the case — and controlling the case meant controlling the fee. What a filing-machine law firm needed, therefore, was not a client with a grievance but a client on call: someone who already owned a few shares of everything, would sign a certification the day the stock dropped, and would never quarrel about strategy or settlement. From the late 1970s until roughly 2005, prosecutors found, Milberg Weiss maintained exactly that. A handful of individuals — among them Seymour Lazar, a flamboyant retired entertainment lawyer in Palm Springs; Howard Vogel, a New Jersey investor; and Steven Cooperman, a Beverly Hills ophthalmologist — served as named plaintiffs or supplied family members and entities to do so in scores of the firm’s cases. In exchange, the firm secretly kicked back to them a share of its legal fees — roughly $11 million across the life of the scheme — routed through intermediary lawyers and disguised as referral fees, so that no payment traced directly from Milberg Weiss to its plaintiffs.
The concealment was the crime. Class representatives must swear they are receiving no compensation beyond their pro rata share of any recovery, precisely because a paid plaintiff serves the lawyer rather than the class. In case after case, Milberg’s stable so swore, falsely, in sworn certifications and depositions, while the firm’s partners — who had approved the payments from a safe in Bershad’s office, in some tellings of the evidence, with cash and cashier’s checks moving through designated conduits — sat beside them. Congress had this precise practice in mind when it passed the Private Securities Litigation Reform Act in 1995, restricting professional plaintiffs and handing lead-counsel selection to the largest institutional investor; Lerach lobbied furiously against the bill, and the firm adapted and thrived anyway. The kickbacks continued for another decade after Congress outlawed the business model they served.
The Ophthalmologist’s Picasso
The unraveling began, as it often does, with an unrelated crime and a man facing time. Steven Cooperman, the Beverly Hills eye doctor, had collected art along with lawsuits, and in 1992 his Picasso and Monet vanished from his home in what was in fact a staged theft; he collected $17.5 million in insurance. Convicted of the art fraud in 1999 and looking at a long sentence, Cooperman offered federal prosecutors in Los Angeles something better than restitution: the inner mechanics of Milberg Weiss, which had paid him — through intermediaries, including his own lawyer and a cooperating attorney — kickbacks for his service as a name plaintiff in dozens of cases. A grand jury in Los Angeles spent the better part of six years pulling the thread. Lazar was indicted in 2005. And in May 2006 the government did something it almost never does: it indicted the law firm itself, along with partners David Bershad and Steven Schulman, on charges including conspiracy, mail fraud, and money laundering, after negotiations collapsed over the firm’s refusal to accept terms that included waiving privilege and abandoning its people.
The indictment split the plaintiffs’ bar into camps — those who saw Arthur Andersen redux, the death penalty for an institution over the sins of a few, and those who noted that the few were the institution: the men whose names were on the door. Lerach was not initially charged; he had decamped in 2004 with the West Coast practice to form his own firm. But the investigation climbed. Bershad, the firm’s money man, pleaded guilty in July 2007 and agreed to forfeit $7.75 million. Schulman followed. In September 2007, Lerach agreed to plead guilty to conspiracy, and in February 2008 he was sentenced to twenty-four months in federal prison, forfeiting $7.75 million and paying a $250,000 fine. Melvyn Weiss — the profession’s most celebrated plaintiffs’ lawyer, then seventy-two — pleaded guilty in March 2008 and drew thirty months and nearly $10 million in penalties. That June, the firm, by then renamed simply Milberg, settled with the government: $75 million, a compliance monitor, and survival. Both name partners were disbarred. The professional plaintiffs — Lazar, Vogel, Cooperman — were convicted or pleaded guilty in turn.
The Cooperman thread had a flourish even fiction would decline. The Picasso and the Monet, insured and mourned, had not left the country or entered some collector’s vault; they were eventually recovered from a storage locker in Cleveland after a tip from a lawyer entangled in Cooperman’s scheme, and their reappearance converted a suspicious insurance payout into a provable fraud. The doctor who had spent years portraying corporate defendants’ lies for juries as a professional plaintiff was thus undone by the discovery that his own life was a staged loss — and his cooperation agreement, in turn, staged the losses of the men who had paid him. Federal prosecutors in Los Angeles, a jurisdiction with no particular stake in New York’s class-action wars, inherited the case by the accident of venue and pursued it with the patience of people who understood that the statute of limitations on a continuing conspiracy keeps continuing.
An Industry Practice
Lerach’s defense, offered with characteristic absence of contrition, was that everybody did it — that in the race-to-the-courthouse era, paying plaintiffs was an industry practice, and Milberg’s sin was dominance, not deviance. The government never charged another major firm, which either rebuts the claim or confirms that only the biggest scalp was worth the hunt, depending on one’s priors. What is not in dispute is the arithmetic of hypocrisy. Milberg Weiss built its public identity on a single proposition: that executives who lie under oath to investors must be made to pay, personally and institutionally. The firm’s partners then spent a quarter century orchestrating lies under oath — their own plaintiffs’ — in the very cases embodying that proposition, and concealed the payments with the money-laundering tradecraft of the defendants they deposed. The frauds Milberg sued over were, in the main, real; the recoveries to defrauded shareholders were real; and the sworn foundation of hundreds of those cases was fabricated. Both things are true, and the profession has never been comfortable holding them together.
For the firm, indictment was a slower Andersen. Courts weighing lead-counsel appointments began treating the pending charges as disqualifying; institutional investors, the post-PSLRA kingmakers, took their cases elsewhere; and the partnership hemorrhaged lawyers, shrinking from well over a hundred attorneys toward a remnant a fraction of that size as the case ground on. The two-year interval between indictment and resolution functioned as the punishment the eventual settlement merely ratified — a demonstration, watched closely by every professional partnership in the country, that for reputation businesses the accusation is the sentence, whatever the verdict.
The sentencings supplied the case’s final tableaux. Lerach reported to federal custody in 2008 while, in the same season, courts were approving hundreds of millions of dollars in fees to his former firm for the Enron recovery he had architected — the system simultaneously imprisoning him and paying him, each with full justification. Weiss, sentenced at seventy-two, heard prosecutors describe a scheme that predated some of his own partners’ bar admissions; his lawyers submitted testimonials from decades of grateful investors and charities, the standard liturgy of the white-collar sentencing, all of it true and none of it responsive. Both men were disbarred; both served their terms and returned to lives of comfortable, opinionated retirement — Lerach lecturing, when law schools would briefly have him, on the corruption of everyone else. The firm survived as Milberg LLP, a diminished successor trading on a name that now signified both the invention of investor protection and its betrayal.
The Practice With No Clients
The deeper problem the case exposed has outlived everyone involved. The class action is an agency problem wearing the costume of a lawsuit: the lawyer selects the case, funds it, controls it, and settles it, while the nominal principals — thousands of dispersed shareholders — know nothing and check nothing. The named plaintiff is the law’s answer to that problem, a human being with standing whose oath is supposed to guarantee that someone other than the lawyer is minding the class. Milberg’s kickbacks revealed how thin that guarantee was: the guardian was for sale, cheaply, and the market cleared for decades without detection by any court, any defendant, or any bar authority. Detection came, in the end, from an insurance fraud in Brentwood — luck, not oversight.
No court, in the aftermath, seriously entertained unwinding the settlements the tainted plaintiffs had anchored; the recoveries stood, distributed long since to the absent classes whose injuries had been real even when their representatives were rented. That quiet decision — to treat the corruption as severable from the results — may be the scandal’s most revealing artifact. The system needed the cases to have been legitimate, because the alternative was reopening decades of closed dockets, and so the legal fiction at the heart of the class action absorbed one more fiction and continued functioning. The defrauded shareholders kept their money; the lying plaintiffs kept, mostly, their freedom; the lawyers alone paid, and modestly, in prison terms measured in months.
Lerach served his sentence and emerged unrepentant, telling interviewers the prosecution was political payback from the corporate class he had bled; Weiss served his and returned to quieter pursuits; the successor firms — including the one bearing Lerach’s former partners’ names — remain pillars of the securities bar, litigating under the tightened rules the scandal helped cement. The case is taught now in professional-responsibility courses as a parable about greed, which slightly misses it. Melvyn Weiss and William Lerach were not short of money. What they wanted was velocity — to file first, always, forever — and they discovered that the only friction in the system was a stranger’s oath, so they bought it. The lesson is the one the securities laws themselves teach: wherever an oath is load-bearing and unaudited, someone will eventually discover what it costs. In the greatest practice of law in the world, it ran about $11 million, all in.
Sources: United States v. Milberg Weiss Bershad & Schulman LLP, No. 05-cr-587 (C.D. Cal.), indictment May 18, 2006, and resolution June 16, 2008; DOJ, U.S. Attorney’s Office for the Central District of California, press releases on the guilty pleas of David Bershad (July 2007), Steven Schulman (Sept. 2007), William Lerach (Feb. 11, 2008 sentencing), and Melvyn Weiss (June 2, 2008 sentencing); United States v. Cooperman (C.D. Cal. 1999); Private Securities Litigation Reform Act of 1995, Pub. L. 104-67; contemporaneous coverage by the Los Angeles Times, New York Times, Wall Street Journal, and Reuters; Forbes interview with William Lerach (1989).