Class Action Criminality

Article excerpt

I. INTRODUCTION
II. THE INDICTMENT OF MILBERG WEISS
   A. Congress Regulates Securities Class Actions
      1. Why Private Enforcement?
      2. Paid Plaintiff Practices Before Securities Litigation Reform
      3. The Case for Reforming Securities Litigation
      4. Congress Regulates Lead Plaintiff Selection and Compensation
      5. The Government's Investigation of Milberg Weiss
      6. Overview of the Government's Charges
   B. The Government's Honest Services Claims
III. CLASS ACTION CRIMINALITY EXTENDS THE HONEST SERVICES FRAUD
     DOCTRINE
   A. The Doctrine's Inception and Evolution Before McNally
   B. McNally, Carpenter, and Congress's Response
   C. Judicial Review of Prosecutions Under Section 1346
      1. Lessons from Recent Case Law
        a. United States v. Rybicki
        b. United States v. Brown
        c. Other Lessons Learned from Recent Case Law
      2. Attorneys' Liability for Honest Services Fraud
IV. PLAINTIFFS WERE NOT FIDUCIARIES WITH DUTIES TO ABSENTEES
   A. Classic Fiduciary Doctrine and Its Applications
   B. The Relationship Between Class Representatives, Class Counsel,
      and Absentees Before Reform
      1. Cohen and Roper
   C. What the PSLRA Did and Did Not Do
   D. Analyzing the Indictment's Theory of Fiduciary Duty
      1. Named Plaintiffs' Limited Authority and Functions
      2. Duties of Plaintiffs' Counsel in Securities Class Actions
      3. Judicial Supervision of Securities Class Actions
V. WHY CLASS ACTION CRIMINALITY SHOULD FAIL
   A. Applying Breach of Fiduciary Duty Analysis to the Indictment
   B. Lenity
   C. Other Considerations Weighing Against Class Action Criminality
VI. CONSEQUENCES AND CRITICISMS
   A. Consequences for the Firm
   B. Consequences for Private Securities Litigation Generally
   C. Consequences for Class Actions Generally
   D. Other Criticisms of the Prosecution
   E. The Call for Further Private Securities Litigation Reform
VII. CONCLUSION

I. INTRODUCTION

Long before their arraignments on federal felony charges last year, class action lawyers Mel Weiss and Bill Lerach stood before the court of public opinion accused of abusing the legal system to enrich themselves. The partners received national attention for filing shareholder lawsuits against some of this country's best known corporations, usually alleging that top company management defrauded investors. Over the course of some three decades, Weiss and Lerach recovered on behalf of shareholders billions of dollars from corporate defendants; companies sued by the partners almost always chose to settle the fraud claims rather than risk judgment at trial. Compensated with multimillion dollar fee awards, Weiss and Lerach built their law firm, Milberg Weiss, (1) into a litigation juggernaut, became multimillionaires themselves, and contributed generously to Democratic Party candidates and causes. In the process, Weiss and Lerach made numerous powerful enemies in executive suites from coast to coast. Directors and officers of public companies reviled Milberg Weiss and railed against defending lawsuits filed by its lawyers. (2)

In the early 1990s, Corporate America, Wall Street, and the accounting industry joined forces to lobby Congress for relief from securities fraud litigation. These politically influential interests complained to federal legislators that the plaintiffs' bar filed frivolous securities class actions and employed unethical, "abusive" litigation tactics to extract settlements from law abiding companies, (3) thereby profiting at the expense of the shareholders whom they purported to represent. (4) Proponents of litigation reform depicted Milberg Weiss and its two (in)famous senior partners as the primary corruptors. (5) Congress received testimony that Milberg Weiss failed to investigate its fraud charges before racing into court and filing boilerplate allegations against innocent companies, often within hours of a significant decline in the companies' stock price. …