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Wyly v. Weiss: speaking of lack of marginal deterrence value of civil litigation...

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Speaking of lack of marginal deterrence value of civil litigation, and also speaking of Milberg ripping off its clients...

Last week, the Second Circuit decided Wyly v. Weiss. Milberg Weiss brought securities litigation against Computer Associates in 1998; while that case was pending, they had brought additional litigation over a stock drop in 2002. The case settled in 2003, as a government investigation was pending, before Milberg conducted any additional discovery over the new allegations, and CA and its officers and directors got broad-based releases, while Milberg (facing its own legal troubles), received $30 to $40 million in CA stock. The settlement was rubber stamped without objection after Milberg represented to the court that it had considered the pending criminal investigation in reaching the settlement.

After the settlement was approved, CA restated more than $2.2 billion in revenue; the waiver was broad enough to cover any claims over that restatement. Numerous shareholders, led by Sam Wyly, were upset that Milberg settled on the quick, and asked Milberg to try to reopen the case under Rule 60(b); Milberg, who had already received its fees, and could jeopardize its standing as class counsel if it did anything to proved that it had negotiated a subpar settlement, refused. (I have former clients who empathize.)

Wyly sued in state court for malpractice. The Milberg defendants successfully enjoined the case in the original federal district court under the All-Writs Act, and the Second Circuit affirmed, holding that the plaintiffs were seeking to relitigate the original fairness determination, and that that fairness determination precluded a finding of malpractice, because it necessarily included a determination that class counsel performed adequately.

Perhaps the result is right in this particular case (Wyly's case largely rides on the failure to discover 23 boxes of withheld documents that seem to be immaterial). But even if so, the decision is far too overbroad. The question "Did class counsel commit legal malpractice?" (or, more precisely "Was class counsel's performance deficient?") differs from the question "Did the district court correctly rule that the settlement was fair on the record before it as presented by self-interested ex parte participants?" (One seeking a patent before the Patent Office has a duty to self-disclose because of the ex parte process. With rare exceptions, courts have permitted class counsel to affirmatively misrepresent matters to their own fiduciaries.) It cannot be the case that every fairness hearing determination is dispositive on the question of whether class counsel met their ethical duties. Imagine a scenario where class counsel tacitly colludes with the defendants to shortchange the class for its own benefit (much less one where class counsel explicitly colludes with defendants, or engages in a reverse auction to grab the largest share of settlement proceeds), and then wins a fairness determination thanks to a court's failure to see past the ex parte presentation. Is it really the case that class members have no cause of action for deficient performance? It's certainly not the case that a doctor can short-circuit a medical malpractice claim by pointing out that a competent doctor might have ended up with the same result. As I've noted before, we could solve the medical-malpractice crisis overnight if we simply required legal malpractice standards to conform to medical malpractice standards and vice versa.

More: Trask; Reuters.

Related: Judge Easterbrook's dissent in Kamilewicz v. Bank of Boston Corp., 100 F.3d 1348 (7th Cir. 1996).

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Rafael Mangual
Project Manager,
Legal Policy

Manhattan Institute


Published by the Manhattan Institute

The Manhattan Insitute's Center for Legal Policy.