PointofLaw.com
 Subscribe Subscribe   Find us on Twitter Follow POL on Twitter  
   
 
   

 

 

Milberg kickbacks defensible?



At Concurring Opinions, law professor Dave Hoffman (Temple) writes that he "[doesn't] particularly understand the economics of outrage" over the alleged kickbacks paid by Milberg Weiss and wonders about the strength of at least some of the arguments against the kickbacks. He generously invited me to respond; my response (which ran in the comments there too) follows after the break.

I don't think anyone is attempting to criminalize inefficient lawyering here, or, to borrow terminology that Larry Ribstein often uses, criminalize principal-agent problems either. It is a fact that current rules bar the knowing submission of perjured affidavits, the making of knowingly false representations in the course of winning class certification, and so forth. For better or worse, the law also currently imposes on the named plaintiff a duty of loyalty toward absent class members that is supposed to take precedence over any loyalty to the lawyer if the two conflict, a duty that the client can hardly shuffle off by delegating it to the lawyer, especially in exchange for bags of money. As I pointed out in my WSJ piece, we could argue all day over whether a different way of structuring class actions might be less costly, and might dispense with this vestigial watchdog role for named plaintiffs (perhaps strengthening some other safeguard against abuse). but it is not a defense to a criminal charge to say that yes, I committed the crime, but if legal structures were more efficiently arranged I wouldn't have had to. To pursue a parallel sort of case, it may be that notaries public and their sworn oaths make very poor watchdogs against certain types of document fraud, seldom prevent those frauds from occurring, and would be cut out of the system entirely were it designed rationally, but that can hardly constitute a defense to a charge of slipping a notary a large sum of money to swear a falsified oath.

As you hint at one point in your post, Milberg might try to argue that the payments (if admitted at all) served some purpose other than to ensure that the named plaintiff would line up with lawyers' interests rather than class interests in case of a divergence. However, many of those other conceivable purposes are themselves unlawful. For example, under New York law, lawyers are forbidden to pay clients in order to secure their willingness to litigate. Another possible motive would be to compensate clients for the nontrivial cost of arranging their investment portfolios so as to be ideal Milberg clients (owning a few shares of stock in a large number of companies, timing certain sorts of transactions to ensure membership in relevant classes, etc.) However, defense counsel can and do probe in depositions for whether stock was bought only in order to set up a claim and Milberg clients testified (falsely, according to the indictment) that no, they hadn't done so.

Another aspect of the economics of this is that Milberg was known for being incredibly quick off the dime to file actions, which gave it a big edge over rival firms in the pre-PSLRA environment. One likely reason (assuming the facts alleged in the indictment) is that it had tame clients ready to go because of the unlawful payments, whereas plaintiff's counsel who tried to play by the rules (no bribed clients, no clients who weren't bona fide owners of the stock, no submission of perjured evidence) would take days or weeks to line up clients and file actions.

 

 


Rafael Mangual
Project Manager,
Legal Policy
rmangual@manhattan-institute.org

Katherine Lazarski
Manhattan Institute
klazarski@manhattan-institute.org

 

Published by the Manhattan Institute

The Manhattan Insitute's Center for Legal Policy.