The agreement by now-former Milberg Weiss partner David Bershad to enter a guilty plea in connection with the government’s investigation of the firm’s alleged kickbacks to individual class plaintiffs represents a watershed event, not only in connection with the criminal investigation but also potentially for the Milberg firm and even for the plaintiffs’ class action securities bar. Bershad’s plea agreement can be found here and the Statement of Facts accompanying the plea agreement can be found here. (Hat tip to the WSJ Law Blog, here, for the links to the plea documents.)
The Statement of Facts accompanying the plea agreement has a number of interesting features, not the least of which is the statement of potential criminal matters the government agrees that it will not continue to pursue against Bershad. The non-prosecution agreement includes not only the allegedly improper payments to class plaintiffs, but also references alleged violations of law arising out of “requests to courts for reimbursement of fees and costs of a damages expert witness and/or his associated entities based in Princeton, New Jersey” or “the Princeton Expert’s financial relationship with PNC bank.” These allusions to the expert witness apparently refer to regular Milberg Weiss expert witness John Torkelson, who separately entered his own guilty plea in an unrelated matter in November 2005 (refer here). Bershad’s plea agreement also references non-prosecution for “election, campaign or other political contributions.” Unfortunately, the plea agreement provides no further elaboration on what this last point might be all about.
Another interesting feature of the Statement of Facts is its description of the personal cash pool that Bershad and other Milberg partners supposedly formed to be “used by the Conspiring Partners to supply cash for secret payments to paid plaintiffs and others.” The contributions to the pool, which was maintained in Bershad’s office, were proportionate to the contributing partners’ respective partnership interests. The contributing partners then “caused Milberg Weiss to award ‘bonuses’ to them” to reimburse them for the cash contributions to the pool. Among the partners alleged to have contributed to and made cash payments out of the fund are the pseudononymous “Partner A” and “Partner B” whom some commentators (refer here and here) believe to refer to Melvyn Weiss and Bill Lerach, respectively. Neither Weiss nor Lerach has been charged with any crime, nor even mentioned by name in any of the government documents in the criminal matter.
Among other features of the government’s undertakings in the plea agreement is the government’s agreement that if Bershad provides “substantial assistance to the prosecution” (according to the plea agreement’s specifications) then the government agrees “to move the Court…to fix an offense level and corresponding guideline range below that otherwise advised by the Sentencing Guidelines, and to recommend a sentence no greater than the low-end of this reduced range.” In other words, Bershad has a real incentive to cooperate – he will undoubtedly provide the government with a lot more particulars about the “cash pool” and the activities in connection therewith of Partner A and Partner B. (According to the Washington Post, here, Bershad could avoid jail time altogether if the government elects to fully reward him for his help.) These incentives are the reason that there had been speculation (refer here) that Bershad’s entry into a plea agreement might well put enormous pressure on, say, Partners A and B.
There had been press coverage (refer here) suggesting that Mel Weiss and Bill Lerach had recently rejected possible plea agreements. (The Wall Street Journal also confirmed here that Lerach will retire from his firm by year’s end.) Whether or not they will face further pressure or have further opportunities to reach an accommodation with prosecutors remains to be seen. But the obvious incentive for the government to reach an agreement with Bershad was to enlist his assistance to go after ‘bigger fish” (as the Los Angeles Times put it, here) – which would suggest further pressure on Messrs. Weiss and Lerach. Indeed, most of the press coverage of Bershad’s plea is focused on the boost Bershad’s cooperation will give the prosecutors, as illustrated for example in the articles in USA Today (here) and the Wall Street Journal (here)
Where all of this leaves the Milberg Weiss firm itself is even more complicated. The firm was named as a defendant in the prior criminal indictment (refer here). The Statement of Facts accompanying Bershad’s plea suggests that firm checks were used for some of the improper payments and that the partnership itself reimbursed the payoff pool participants out of partnership proceeds. Bershad’s actions were clearly undertaken on the firm’s behalf, as well. Whether the firm itself will now be forced to face the music also remains to be seen, but Bershad’s forthcoming cooperation with the government does not bode particularly well for the firm. According to the Washington Post (here), the firm’s criminal defense lawyer is negotiating with the government toward a possible plea agreement, supposedly involving a “multimillion dollar” payment, in advance of a scheduled August 6 hearing. The Legal Pad Blog’s very pointed comments about the Milberg Weiss firm’s fate can be found here.
It may take a while longer for all of these possibilities to sort themselves out, but make no mistake that the consequential effects from Bershad’s plea agreement will, in the end, result in a reordered plaintiffs’ class action bar. The role of the most prominent players and prominent firms on the plaintiffs’ side will substantially change. Other plaintiffs firms may jockey for position, but only within the constraints of the game as it will now be played in the backwash from these events. Among other things, these events may also portend that the current lower level of securities class action filings may continue for some time, if for no other reason than that the leading players are just a little preoccupied right now.
Options Backdating Litigation Update: Regular readers know that I have been maintaining a list (here) of companies that have been sued in options backdating related litigation. I have recently updated the post to include in the list of companies named in options backdating related securities class action litigation a reference to PainCare Holdings. When the securities class action lawsuit was originally filed against PainCare (refer here), the lawsuit did not contain options backdating allegations. But when plaintiffs filed their Amended Consolidated Complaint on May 23, 2007 (here), the amended pleading included for the first time allegations of stock option manipulations. In light of the amended allegations, I have added the PainCare case to the list.
Special thanks to Cara Perlas of the Stanford Law School Securities Class Action Clearinghouse for the link to the amended complaint in the PainCare case.