On The Cover/Top Stories
Mr. Class Action
Robert Lenzner and Emily Lambert, 02.16.04

Mel Weiss and Bill Lerach won $30 billion suing Corporate America for tactics they alleged to be venal, illegal or just plain greedy. Now their own methods are under federal investigation.

Melvyn Weiss, 68, is grizzled and intimidating. William Lerach, 57, is a flamboyant, sharp-elbowed showman. Together, as cochairmen of one of the most feared law firms in the nation, Milberg Weiss Bershad Hynes & Lerach, they have bullied corporate America out of $30 billion in damages and counting. In building the modern-day model for the shareholder class action, their mission has been unbelievably profitable--especially for themselves.

In 1990 they helped land $1.2 billion in damages in the Drexel Burnham junk bond scandal. In the late 1990s they went after misleading sales tactics at the 25 largest life insurance companies, exacting $10 billion in damages. Since 1995 Weiss and Lerach have handled half of all class actions alleging securities fraud. Some 80% of the time they land cash settlements, often pocketing half of total legal fees. The firm's profits hit $112 million in 1995, up more than fivefold from 1990; in the same period Weiss' and Lerach's annual pay more than quadrupled to $16 million apiece. Weiss flies around in a chartered jet and owns a widely admired collection of Picassos.

Now Weiss and Lerach are eyeing their biggest payday ever, thanks to the corporate scandals still reverberating on Wall Street. In a giant suit in federal court in New York, they are going after 55 investment banks, alleging fraud in 310 initial public offerings of stock. Ten of the firm's 212 lawyers (including 5 of its 93 partners) are on the case. Milberg and other plaintiff firms have rented 15,000 square feet of space to house 15 million documents in the fight. The goal: several billion dollars in damages. They hope to win that much or more from Citigroup and J.P. Morgan Chase for their role in the Enron collapse. The next honeypot will be the fund mischief uncovered by New York Attorney General Eliot Spitzer. Says Weiss with a grin: "The mutual fund scandal will be the greatest in Wall Street history." The firm has filed 46 lawsuits so far.

But a significant obstacle stands in his way. Federal prosecutors are investigating whether Milberg Weiss violated criminal laws in its hell-bent pursuit of securities fraud cases in the 1990s. A federal grand jury in Los Angeles is probing, in particular, the relationship between Milberg Weiss and a convicted felon named Steven Cooperman. Cooperman, an eye surgeon who went to jail in 2001 for an art insurance fraud, was Milberg Weiss' plaintiff in some 55 class actions from 1988 to the late 1990s. In many of these cases Cooperman's lawyer, James Tierney, was paid 10% of Milberg's legal fees for having referred the cases to Milberg. Investigators are looking at whether Tierney then kicked back some money to Cooperman, which would be illegal under state law. Milberg's Lerach insists the firm made no improper payments: "I never paid a plaintiff," he told FORBES. Both Cooperman and Tierney are cooperating with the grand jury investigation. A former Milberg partner has been granted immunity and is aiding investigators. Federal agents recently visited the offices of Buchbinder Tunick, a small accounting firm that audits Milberg's books. The U.S. Attorney in Los Angeles continues subpoenaing Milberg documents about past class actions. In Philadelphia, meanwhile, another federal grand jury is studying whether the firm, among others, wielded undue influence over the city controller's office in trying to win business.

The long-simmering investigations may never lead to any charges being filed; both investigations began about two years ago. MelWeiss is infuriated by the long wait in limbo. "The grand jury [in Los Angeles] is costing us a fortune in reputation as other law firms tell institutional investors not to hire us," he says. One lawyer in that case sees a 50-50 chance of charges getting filed.

But the investigations, even if inconclusive, cast a harsh light on a firm infamous for aggressive tactics and an intimidating, take-no-prisoners style. Weiss and Lerach fancy themselves as the number one enemy of corporate crooks, the champion of the small investor. But some Milberg Weiss cases paint a picture of a firm that abuses its power, pursues vendettas, conspires with short-sellers and buys influence among Democratic politicians. The firm is so pugnacious that even the most powerful chief executives are loath to criticize Milberg publicly.

Milberg's ability to intimidate companies often scares them into cash settlements. It filed suits against two companies--Guess and Titan International--that were in disputes with unions that were potential Milberg clients in unrelated securities cases. Back-scratching? Milberg Weiss won't comment. Judges in several recent cases have criticized Milberg lawyers for tactics the judges deemed to be misleading or intimidating. Milberg itself has been sued for its brass-knuckle ways. In 1999 a jury found that Milberg had mounted a malicious decade-long campaign to destroy a small consulting outfit that had opposed it in various trials. Before the jury could set punitive damages, Milberg paid the firm, Lexecon, $50 million to settle the case.

Thus Mel Wiess has an abundance of enemies. He is "manipulative, deceptive, ruthless," says rival lawyer Howard Sirota. "He works 25 hours a day at getting more--more money, more power. That's who he is." And even a fan, David Boies, a formidable corporate lawyer who has fought with and against Milberg Weiss, says watching Weiss in court "is like watching a scene from The Godfather" because the man speaks so softly that it can be menacing. In one lawsuit against Martha Stewart, federal Judge John Sprizzo recently warned Weiss to avoid intimidating his rival lawyers.

CASE NAME (settlement date)	SETTLEMENT AMOUNT TOTAL	LEGAL FEES MILBERG SHARES**
Nasdaq Market-Makers (Sept. '98)	$1,000 million	$180 million
IPO Securities Litigation (June '03)	$1,000 million	pending
Lucent Technologies (Dec. '03)	$517 million	$98 million
Oxford Health Plans (June '03)	$300 million	$99 million
3Com (Feb. '01)	$259 million	$65 million
Rite Aid (part one) (Apr. '01)	$193 million	$64 million
Dole Food (Mar. '03)	$172 million	$8 million
Dollar General (May '02)	$162 million	$33 million
MicroStrategy (Apr. '01)	$155 million	$51 million
Informix (Oct. '99)	$137 million	$44 million
Computer Associates Intl* (Dec. '03)	$134 million	$40 million
Rite Aid (part two) (May '03)	$127 million	$32 million
Mattel (Sept. '03)	$122 million	$37 million
Ikon Office Solutions (Apr. '00)	$111 million	$33 million
Sunbeam (Nov. '01)	$110 million	$33 million
Prison Realty Trust (Mar. '01)	$104 million	$31 million
*The settlement fee was paid in shares (5.7 million) with an average price of $23.43. **Per settlement notices. Source: Institutional Shareholder Services' Securities Class Action Services.

On The Cover/Top Stories
Page 2 of 4 from Mr. Class Action
Robert Lenzner and Emily Lambert, 02.16.04

The unwanted scrutiny comes at a difficult time, for Milberg Weiss is in the throes of a bitter breakup, after which the two lead partners will run separate rival firms. Mel Weiss, in New York, and Bill Lerach, in San Diego, profess to be friends; their split is "amicable," Weiss insists. But they are fast becoming fierce foes, and the tensions between them are palpable: Weiss East and Lerach West already have begun jousting for clients. The consensus is that both men have enormous egos in a firm with room for just one.

Morale at the firm has deteriorated in the past two years as almost a dozen partners and associates have bolted, including several former prosecutors. More departures could result once the full split is completed in the spring. "It's Armageddon, but Mel faces death every day," says Arthur R. Miller, a renowned Harvard law professor who advises the firm.

The firm's origins were particularly modest. Weiss, reared in New York and the son of an accountant, earned a law degree from New York University and joined Lawrence Milberg in 1965 to form a small firm that scraped together any cases it could find, including criminal defense. (Milberg died of a heart attack in 1989.)

In 1966 Weiss' career took a sudden turn for the better. A change in judicial rules made class actions much easier to pursue in federal court; one plaintiff could act on behalf of many. This originally was aimed at buttressing civil rights laws and strengthening consumer-fraud regulation. The idea was to create an army of private attorneys general who would supplement the activities of the Justice Department, state attorneys general and others.

Weiss recognized a phenomenal--if risky--business opportunity. He scraped together bank loans to keep the firm solvent until he could win a contingency fee or two. After struggling in debt for 13 years, Weiss struck gold in 1978 when he settled a fraud case against U.S. Financial (which had gone bankrupt in 1973) for $50 million. Milberg got $4.5 million in fees and a new star: a young Pittsburgh lawyer named Bill Lerach, who had impressed Weiss with his work on the settlement. Weiss persuaded Lerach to open Milberg's first West Coast office, and their partnership marked the start of an extraordinary expansion.

Many spectacular victories followed. In 1980 Milberg obtained a $40 million settlement from the United Methodist Church, for elderly people who lost their life savings in a prepaid life-care contracts fiasco. In 1990 it won $757 million from utilities, brokerage firms and underwriters in the collapse of the Washington Public Power Supply System, whose bonds lost $2.3 billion in value when the utility defaulted. In 1990 Milberg Weiss helped secure $1.2 billion for shareholders of Columbia Savings & Loan and several other S&Ls affected by the junk bond machinations of Drexel's Michael Milken. Weiss credits plaintiff lawyers with reforming the accounting profession, forcing writeoffs of goodwill and mandating independent board members.

In the 1990s the firm hit full stride, scoring impressive victories against companies guilty of outrageous behavior. Last year a federal judge commended the firm for being "extraordinarily deft" in "ferreting out," even before regulators did, the actions that led to a $1.6 billion charge at Rite Aid.

From 1996 to 2000 Milberg Weiss sued MetLife, Prudential and two dozen other big insurers and won on behalf of millions of policyholders. Weiss successfully extended the concept of class-action litigation to life insurance companies, a feat that amazed securities lawyers. In addition to paying $10 billion in damages, the insurers were forced to stop making false promises that premium payments would end after seven years, to cease charging higher prices to minorities and to stop churning policies to ring up additional sales. Later the firm attacked HMOs for, among other things, illegally withholding payments to thousands of doctors in 19 states. (When Aetna settled, the docs each got an average of $250 plus a promise to reform the system; Milberg shared legal fees of $50 million.) Along the way Weiss did pro bono work, negotiating on behalf of World War II slave laborers, victims of the Sept. 11 attacks and handgun casualties.

Weiss promoted the legal doctrine of "fraud on the market," which argues that investors are defrauded by any false or overly optimistic forecast by a company. This made management miscues fair game for suits alleging chicanery. Whenever a stock price plunged or an accounting charge occurred, suits were filed, usually by Milberg first. Filing first in the early 1990s was critical, for under court rules the first filer became lead counsel and held more control over the case, laying claim to the biggest piece of the fees. (Congress voted to end this unseemly race in 1995; now the lead goes to whoever represents the investor group that suffered the greatest loss. Weiss blames this reform for "the unprecedented period of greed and corruption" that ensued.)

Milberg Weiss was particularly adept at finding plaintiffs and filing first, and its methods are the focus of the grand jury in California. "In the vast run of cases, it was the lawyers who initiated them, selected the plaintiffs, controlled the strategy, controlled the settlement, and collected fees from the settlement," a federal judge in northern California noted in 1999. The lead plaintiffs anchoring the cases were "in reality, token figureheads," the judge ruled, in refusing Milberg's request to lead a class action against Network Associates.

Up Next

Milberg Weiss is hunting for still more riches in a hit list of a thousand current cases. A sample:

IPOs-Suing 55 investment banks for arranging 310 allegedly fraudulent IPOs.

•Mutual funds—Has filed 46 lawsuits so far in the emerging scandal. Weiss promises more lawsuits are coming.

•WorldCom—Milberg partner Bill Lerach has angered competitors and a judge in his aggressive bid to be named lead counsel.

•Parmalat—Hit Italian dairy company with a suit on Jan. 5. Now it's searching for the hardest-hit lead plaintiff.

•Martha Stewart—Suing the kitchen queen and seven of her executives for allegedly hiding news of a federal investigation.

On The Cover/Top Stories
Page 3 of 4 from Mr. Class Action
Robert Lenzner and Emily Lambert, 02.16.04

Milberg had a team of "figureheads," chief among them Dr. Steven Cooperman. Working mostly with Bill Lerach's team in the West Coast office, Cooperman became a star "victim" in myriad suits, some of which targeted high-flying tech companies. He was a plaintiff in 11 Milberg cases in 1990 alone. In 1993, when he was party to a lawsuit against a Texas-based chain of used-car dealerships, a federal judge dismissed the case and acerbically noted that Cooperman must be "one of the unluckiest and most victimized investors in the history of the securities business."

Investigators are probing whether Milberg Weiss made illegal payments to Cooperman, who didn't respond to requests for comment. The firm denies doing so but confirms that it routinely paid, to Cooperman attorney Tierney, a 10% cut of its legal fees for referring Cooperman to Milberg. Paying a cut to Tierney is legal--unless it was a way of masking illegal payments to Cooperman himself. Some state laws bar a lawyer from paying a cut of his legal fees to a lead plaintiff (though he can cover moderate expenses).

Justice Department officials have informed Milberg they believe Cooperman got kickbacks via Tierney (who won't comment). They hope to prove that the firm was privy to the alleged arrangement. One person familiar with the case says he saw a worksheet that Cooperman had compiled, entitled "My take,"listing the fees he claimed to be due for his role in various lawsuits. The amounts ranged from $10,000 to $75,000.

Cooperman also served as a scout for new plaintiffs for the firm. He is said to have tipped off Lerach to a case against AHI Healthcare Systems, a doctor network that went public in September 1995. AHI's prospectus referred to an imminent deal with Lakewood Health Plan, which was owned by Dr. Ronald Fischman, a Cooperman pal and himself a plaintiff for Milberg in earlier cases. Fischman called off the deal on Sept. 27, 1995, but AHI staged its public offering of stock a day later--without disclosing the Lakewood deal's collapse.

Cooperman even served up the lead plaintiff, one lawyer says: psychologist Mel Kinder, who bought 200 shares of AHI on Dec.1, 1995, at $12.25. Then Milberg filed suit in California on Dec. 20--by which time the stock had fallen to $6.13--alleging AHI should have disclosed the Lakewood deal's demise. AHI settled for $6.8 million, including $2 million in fees.

None of this might otherwise have come to the government's attention but for Cooperman's own legal problems. In 1988 he was charged with "unprofessional conduct" and gross negligence and gave up his California medical license. In 1991 an insurer sued him, alleging he had lied about his medical condition on numerous disability policies. And he and his lawyer--James Tierney--were found guilty of conspiracy in connection with a staged theft, in 1992, of Picasso's "Nude Before a Mirror" and Monet's "The Customs Officer's Cabin at Pourville." Cooperman had collected $17.5 million in an insurance settlement, only to have the cops stumble upon the paintings a few years later. In 2001 he began serving a 37-month sentence, getting out of prison after 21 months; Tierney was convicted and sentenced to 8 months' jail time and surrendered his legal license.

Milberg used another approach in ginning up business: Your enemy is my enemy. In 1998, one knowledgeable lawyer says, keen to represent a garment workers' union, Lerach ordered that a lawsuit be filed against Guess, the jeansmaker. The union was pushing at the time to organize the company's nonunion workers and told Lerach to file a shareholder suit--without naming the union as a plaintiff--to pester the company, this person says; the union denies it. Milberg settled the suit, getting $1 million in fees; the union ultimately dropped its organization effort--and Milberg later got some union business. A union representative says there was no quid pro quo. Lerach, after initially responding to some questions from FORBES, refused to be interviewed and instructed in a terse e-mail: "Please don't call, write or stop by ever again."

In a similar case, Milberg in 2000 filed a shareholder suit against Titan International, a tire company entangled in a bitter battle with a striking local of the United Steelworkers of America. Milberg repeatedly denied it was acting on the union's behalf, but Titan objected that Milberg's investor plaintiffs were, in fact, union members and later showed that a Steelworkers lawyer had reviewed Milberg Weiss' contract. Titan threatened to sue the law firm for harassment, and Milberg withdrew its case and promised never to sue Titan again.

In another case Milberg Weiss filed a lawsuit against telecom supplier Terayon Communication at the behest of short-seller Cardinal Partners. Milberg Weiss, with Cardinal to be lead plaintiff, sued on Apr. 13, 2000--one day after the stock took a 26%dive. At a hearing the judge said "it all looks rather strange" that the case had been prepared before the stock had even dropped. Terayon asserts that Cardinal, which faced losses of $80 million shorting Santa Clara, Calif.-based Terayon, sued as part of a scheme to drive down the stock price. Milberg Weiss declines to comment on the case, which is pending.

But Mel Weiss admits he talks to short-sellers to get information for prospective suits. On Aug. 29, 2001 Mark Roberts, director of research at Off Wall Street Consulting Group, advised his clients to short Hanover Compressor, a natural gas company partly owned by Enron. In February 2002 Milberg sued Hanover. The case was settled for $80 million. "Weiss and Lerach call me from time to time," says Roberts. "Whole lawsuits are based on our reports."

The Cover/Top Stories
Page 4 of 4 from Mr. Class Action
Robert Lenzner and Emily Lambert, 02.16.04

At other times judges have criticized Milberg lawyers for trying to pocket rich fees while giving their clients little. In 2002 Circuit Judge W. Douglas Baird in Pinellas County, Fla. berated Milberg for cutting shareholders out of a proposed settlement with Florida Progress Corp. The company had agreed to pay Milberg fees and expenses up to $375,000, with Milberg releasing the company from future lawsuits about the matter.



The judge compared Milberg lawyers with "squeegee boys" who scrub already-clean windshields and then demand to be paid. "All of the evidence suggests that class members are in precisely the same financial and legal position today as they would have been had this litigation never been filed," he wrote. Milberg withdrew the suit.

Will anything stop Milberg? Republicans in Congress want to enact a Class Action Fairness Act that would move most cases from plaintiff-friendly state courts to harsher federal ones and rein in lawyers' fees. It is "a travesty," Weiss says. "They are trying to take away the right to remedy wrongs done by Corporate America. Society will be hurt if this passes." If big business doesn't get the relief it wants from Congress, can it take solace in a messy breakup of the infamous firm? Probably not. Once Mel Weiss and Bill Lerach split, companies won't have to contend with one big, lethal litigation machine any longer; they will have to do battle with two of them.



Research by Tatiana Serafin.