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Appeals Court Reverses Rule 11 Sanctions On Class Action Firms In Sony Corporation Case

A federal appeals court has reversed an August 2010 decision by a Manhattan federal judge which sanctioned class action law firm Milberg LLP and its co-counsel after allegations in a lawsuit against Sony Corporation attributed to "confidential sources" were not later supported by their deposition testimony as reported by Alison Frankel for Thomson Reuters:

"We understand why the district court felt the need to impose sanctions," the decision said. "[Milberg and co-counsel] did not have evidentiary support for certain of the assertions in the second amended complaint; they took a statement attributable to a former Sony employee out of context, thereby making it misleading in terms of time, and they filed motion papers supporting the confidential source allegations even after defendants had served the Rule 11 motion." Nevertheless, the panel found, Milberg and the other firms did eventually strike the misleading statements and did not act in bad faith.

Congress Must Investigate The Trial Lawyers

The last few years have revealed an ugly underbelly to the plaintiffs' bar, and some of the biggest trial lawyers across the country have been brought down in criminal prosecutions for their sharp practices.

Bill Lerach and Mel Weiss, two legal eagles who made a fortune in bringing security fraud class actions against publicly traded companies, pleaded guilty in October 2007 and April 2008, respectively, for their roles in an alleged decades-long conspiracy pursuant to which serial plaintiffs were paid kickbacks from their court-awarded attorneys' fees in the cases. 

Mass tort lawyers William Gallion and Shirley Cunningham Jr. were convicted in April 2009 for fraudulently taking $94.6 million from a $200 million settlement in the fen-phen litigation that should have gone to their clients.

Tobacco and asbestos lawyer Dickie Scruggs pleaded guilty in 2008 and 2009 in separate schemes to bribe Mississippi judges to rule in his favor.

The above are just a few of the higher profile names in an otherwise long list of plaintiffs' lawyers who have been convicted and sent to prison.  What the heck is going on?  These men -- all now disbarred -- were officers of the court, and crusaded with self-righteous indignation against corporate wrongdoers.  Their convictions now suggest that they were motivated less by principle and more by greed.

Although the plaintiffs' bar no doubt has many law-abiding practitioners it is time for Congress to hold investigative hearings to determine the extent to which corruption pervades the lawsuit industry.

Indeed, in May 2008, Representatives John Boehner and Lamar Smith sent a letter to Rep. John Conyers, the then-Chair of the House Judiciary Committee, requesting an inquiry after Bill Lerach admitted that his conduct was an "industry practice," and said that "everybody was paying plaintiffs."  In this letter Rep. Boehner writes:

If in fact Mr. Lerach's crimes are an "industry practice," then the Milberg Weiss scandal has revealed a clear and present threat to our nation's prosperity.  The United States Congress has an obligation to take action -- by holding hearings to determine the extent of the trial lawyer scandal and the threat to our economy, identifying appropriate legislative remedies, and sending them to the President without delay.

Rep. Boehner's request at the time went nowhere.  Perhaps it was because Rep. Conyers was distracted by the criminal investigation into his wife -- Detroit, MI councilwoman Monica Conyers -- who was convicted on federal corruption charges in June 2009.  Or maybe the inaction was because the Democrat Party gets a lot of campaign contributions from the trial lawyers.  For example, lawyers from the class action law firm Milberg Weiss which was indicted with Bill Lerach and Mel Weiss "contributed more than $7 million to the party's candidates since the 1980s."   Rep. Conyers and his fellow Democrats probably did not want to bite the hand that feeds them.

Of course, that was then, and this is now.  Republicans control the House, Lamar Smith is the Chair of the Judiciary Committee, and the time has come for the investigation which was requested three years ago.  Although Reps. Boehner and Smith focussed on class action securities fraud cases in their May 2008 letter, any hearings should include the full spectrum of the lawsuit industry and cover policy issues in addition to corruption allegations.

Here are a few additional topics Congress should explore based on recent headlines:

***  The Dubious "Confidential Sources"

Class action lawyers frequently bolster their complaints with allegations attributed to "confidential sources" within the company they are suing in the hopes of avoiding outright dismissals by the courts.  Except it's increasingly turning out that these "confidential sources" never were company insiders nor made the allegations attributed to them.

Last August federal judge Robert P. Patterson Jr. sanctioned Milberg LLP and its co-counsel with a public reprimand after allegations attributed to "confidential sources"  were not supported by their deposition testimony.  And last month federal judge Suzanne Conlon dismissed a case filed by Robbins Geller Rudman & Dowd LLP after allegations attributed to a "confidential source" were not supported by his deposition testimony.  Ironically, Milberg LLP is the successor to the firm founded by convicted felon Mel Weiss, and Robbins Geller Rudman & Dowd LLP is the successor to the firm founded by convicted felon Bill Lerach.

It's one thing to make allegations; it's quite another thing to attribute allegations to "confidential sources" who later claim they never said any such thing.

***  The Public Pension Fund Plaintiffs

In securities fraud class actions the trial lawyers frequently rope in a large public pension fund to serve as a plaintiff, and the relationship raises a host of issues.

Why is the public work being farmed out to a private firm in the first instance? Government attorneys are more than qualified to handle the cases, and by farming them out to private firms the pension funds lose billions in dollars that are awarded as attorneys' fees rather than included within the settlement recovery.  Given that many public pension funds are woefully underfunded it seems reckless to leave billions of dollars on the table for the taking by the plaintiffs' lawyers.

And what is the criteria by which the outside firms are selected?  In many cases the retained firms have provided campaign contributions to the elected official responsible for making the decision.  For example, former New York comptroller Alan Hevesi long had been criticized for retaining his campaign donors to represent the state's State Common Retirement Fund in securities fraud class actions, and he took $100,000 from Milberg Weiss for his 2002 campaign.  Although it's all perfectly legal it just looks unseemly.

Ironically, last October Hevesi pleaded guilty for steering more than $250 million in pension fund business in exchange for $1 million of improper benefits including campaign contributions, and the dirt bag is set to be sentenced on April 15. 

The relationship between public pension funds and class action law firms certainly deserves a look but in 2009 then New York Attorney General Andrew Cuomo -- a recipient of trial lawyer campaign largesse -- took a pass on the issue.

*** Attorneys' Fees For Non-attorney Work

Plaintiffs' cases are vehicles by which to earn lucrative attorneys' fees.  Except sometimes the performed work could have been done by someone other than an attorney.

Last year U.S. District Judge Richard M. Berman rebuked Milberg LLP in a ruling on its request for additional attorneys' fees in the securities fraud case In re Nortel Networks Corp. Securities Litigation because of, among other issues, "improper staffing": "'It is clear that a significant portion of the work done by senior attorneys could have been performed by more junior attorneys or paralegals at lower billing rates,' Berman said."

A substantial portion of the attorneys' fees generated in class actions is through the review of voluminous document productions, and much of this work often is performed by temporary attorneys whom the plaintiffs' firms obtain from staffing agencies.

The document review process involves both objective and subjective coding components. The objective component simply entails inputting bibliographical data from the document -- such as date, title, author, recipients -- onto a coding sheet or into a database, and the subjective component involves substantive analysis which includes issue spotting, determining relevancy, and providing comments for the document.

It is questionable whether temporary attorneys should be used for the objective coding of documents which seemingly is little more than clerical work. Indeed, some law firms outsource the objective coding portion of a document review to data entry service providers, and perhaps appropriately use the temporary lawyers with their much higher billing rates only for the subjective coding component; however, some plaintiffs' class action firms in many cases -- including Milberg in In re Tyco International, Ltd. Securities Litigation -- have used temporary attorneys for both the objective and subjective coding portions of the document review.

*** The Coupon Settlement Cases

In consumer fraud cases the class members increasingly get "nearly worthless" coupons for their purported injuries, and yet the plaintiffs' attorneys get millions in cash for their efforts.

For example, St. Louis, MO Judge Angela T. Quigless approved a class-action settlement last year against A.G. Edwards "that rewards lawyers at Milberg and other firms $21 million in cash while their clients get mostly coupons they can use over three years to obtain discounts on mutual funds." 

Ted Frank, a founder of the Center for Class Action Fairness, is crusading against these coupon settlement cases.  Frank "says the coupons are nearly worthless because so few of the intended beneficiaries will find it worthwhile to fill in all the necessary paperwork."  Indeed, why would a consumer want a coupon for future goods or services from the very company which allegedly defrauded them in the first instance?  In fact, the overwhelming majority of class members never redeem their coupons, and the only ones who really win are the plaintiffs' lawyers. 

It's long past time for Congress to take a hard look into the lawsuit industry:  the very credibility of our legal system is at stake.

Further reading that may be of interest:

Federal Judge Spares Mel Weiss From More Jail

Corporate Counsel Trade Group Challenges Use Of Temp Lawyers By Plaintiff Class Action Firms

The Shame:  Stanley Chesley Gets Disbarred

From Convicted Racketeer To Drunk Driver

Federal Appellate Courts Continue Crackdown On Plaintiff Attorneys' Fees In Class Action Cases

Lawrence Schonbrun No Fan Of Lawsuit Industry

Convicted Racketeer Mel Weiss Faces DUI Charge

Quid Pro Quo Ethics Complaint Filed Against New York Comptroller Thomas DiNapoli

The Public Rebels Against Trial Lawyers

Feds Bust Paul Ceglia Over Facebook Claim

Increasing Problem:  Confidential Sources Deny Allegations Attributed To Them In Class Actions

Lawyer Barons:  What Their Contingency Fees Really Cost America

Federal Appellate Courts Rejecting Lower Court Awards Of Attorneys' Fees In Class Actions

Federal Judges School Plaintiffs Lawyers

Milberg Gets Sloppy Seconds In Facebook Case

A Good Plaintiff Is Hard To Find

Judge Awards Lawyers $35,000 An Hour

Convicted Lawyer Raises Democrat Money

Class Actions Are Good Gigs For Trial Lawyers

Appeals Court Reverses Rule 11 Sanctions On Class Action Firms In Sony Corporation Case

Congress Holds Hearing On Asbestos Litigation

Judge Approves $13M Payout To Trial Lawyers

Federal Appeals Court Casts Critical Eye On Lawsuit Industry Settlement Practices

Lawsuit Industry Trembles Before Rick Perry

Rail Company Accuses Law Firm Of Racketeering

Delaware Judges Push Back Against Trial Lawyers

President Obama Picks Lawsuit Industry Tool To Head New Consumer Agency

Trial Lawyers Profit From M&A Suits

Class Action Settlements Sink To New Low

Milberg Can't Get No Love

Convicted Trial Lawyer Looks For Second Act

Class Action Lawyer Faces Disbarment Hearing

Stinky Settlement In Diaper Case

Big Payday For Trial Lawyers

CO Attorney Gary Lozow Gets Public Censure For Role In Milberg Weiss Kickback Scheme

In Denver, CO "veteran criminal defense attorney Gary Lozow of Isaacson Rosenbaum has stipulated to a public censure issued by the disciplinary office of the Colorado Supreme Court for acting as an intermediary in law firm Milberg Weiss' plaintiff kickback scheme" as reported by Matt Masich for Law Week Colorado.

In May 2006 and September 2007 the plaintiffs' class action firm -- in an incarnation known as Milberg Weiss Bershad & Schulman, LLP -- and several of its partners were indicted on federal charges for an alleged decades-long conspiracy pursuant to which serial plaintiffs were paid kickbacks to file securities fraud suits against publicly-traded companies.  Some heavy-weight former partners, including Mel Weiss and Bill Lerach, pleaded guilty and were imprisoned for their roles in the scheme, and the firm -- once dubbed the "meanest law firm" in America -- avoided prosecution by paying a $75 million fine and hiring a compliance monitor. 

Speaking on the intregity of the remaining partners at the firm -- now practicing by the moniker Milberg LLP -- partner Ariana Tadler previously stated:  "The lawyers that stayed were not implicated or involved in the indictment, and we are going to work just as aggressively as we always have to do the best for our clients."  And yet notwithstanding their innocence the question still begged is whether some of those remaining partners had suspicions about the scheme prior to the indictment and what, if any, steps they took to address the problem.  Indeed, Bill Lerach recently said that his conduct was an "industry practice."  After all, what did everyone think was happening when the same individuals repeatedly were serving as plaintiffs in dozens of lawsuits?  In 1995, Congress enacted the Private Securities Litigation Reform Act specifically for the purpose of curbing the abuses for which Milberg Weiss and several of its partners were indicted, and surely this legislation raised a red flag even among the innocents at the firm.

Milberg LLP has made the news a couple of times in recent weeks.  U.S. District Judge Robert P. Patterson Jr. sanctioned the firm and its co-counsel pursuant to Rule 11 with a public reprimand after allegations from two "confidential sources" in a lawsuit against Sony Corporation subsequently were not supported by the witnesses' deposition testimony, and U.S. District Judge Richard M. Berman rebuked the firm in a ruling on its request for additional attorneys' fees in the securities fraud case In re Nortel Networks Corp. Securities Litigation because of, among other issues, improper staffing.

Federal Judge Sanctions Milberg LLP

U.S. District Judge Robert P. Patterson Jr. has sanctioned plaintiffs' class action firm Milberg LLP and its co-counsel pursuant to Rule 11 with a public reprimand after allegations from two "confidential sources" in a lawsuit against Sony Corporation subsequently were not supported by the witnesses' deposition testimony as reported by Nate Raymond for the New York Law Journal.  Judge Patterson ruled:

A reprimand is an appropriate sanction where there has been no showing of bad faith, and where the parties are sufficiently concerned with their professional reputation that a public reprimand will have the intended effect of deterring future wrongdoing.  * * * Here, no more is necessary than to reprimand Milberg LLP, by Leigh Smith, Sanford Dumain and Jennifer Czeisler, Lax LLP, by Robert Lax, and Lange & Koncius LLP, by Joseph Lange and Jeffrey Koncius for failure to comply with the high professional standards expected by the court, namely for their objectively unreasonably joint actions:  (1) attributing a statement to a former Sony employee but eliminating the context necessary to make it accurate at the time the SAC [Second Amended Complaint] was filed, and (2) refusing to strike allegations that were unsupported by the testimony of the people they purported to quote until long after the lapse of the safe habor period.

Download Judge Patterson's Opinion And Order

Last week Milberg LLP was rebuked by U.S. District Judge Richard M. Berman in a ruling on its request for additional attorneys' fees in the securities fraud case In re Nortel Networks Corp. Securities Litigation because of, among other issues, "improper staffing" as reported by Nate Raymond for the New York Law Journal:  "'It is clear that a significant portion of the work done by senior attorneys could have been performed by more junior attorneys or paralegals at lower billing rates,' Berman said."

Judges may wish to explore the use of temporary attorneys by some plaintiffs' class action firms in determining the reasonableness of their fee requests.  A substantial portion of the attorneys' fees generated in class actions is through the review of voluminous document productions, and much of this work often is performed by temporary attorneys whom the plaintiffs' firms obtain from staffing agencies.  The document review process involves both objective and subjective coding components.  The objective component simply entails inputting bibliographical data from the document -- such as date, title, author, recipients -- onto a coding sheet or into a database, and the subjective component involves substantive analysis which includes issue spotting, determining relevancy, and providing comments for the document.  It is questionable whether temporary attorneys should be used for the objective coding of documents which seemingly is little more than clerical work.  Indeed, some law firms outsource the objective coding portion of a document review to data entry service providers, and perhaps appropriately use the temporary lawyers with their much higher billing rates only for the subjective coding component; however, some plaintiffs' class action firms in many cases -- including Milberg in In re Tyco International, Ltd. Securities Litigation -- have used temporary attorneys for both the objective and subjective coding portions of the document review.

Speaking of the Tyco case . . . Grant & Eisenhofer and name-partner Jay Eisenhofer have been sued by a shareholder who alleges that the plaintiffs' lawyers reaped over $200 million in excess attorneys' fees in breach of an agreement with the lead plaintiff which was not disclosed to the court as reported by Daniel Fisher for Forbes.  The supposed 2004 agreement between Grant & Eisenhofer and the lead plaintiff -- the Teachers Retirement System of Louisiana -- is not included as an exhibit to Richard Gielata's lawsuit against G&E.  A lawyer representing the plaintiff assures "that he has a copy of the agreement" but a former top official from the Teachers Retirement System of Louisiana says "she has no memory of any such fee agreement" as reported by Zach Lowe for The American Lawyer.  The lawsuit was filed by Delaware lawyer Joseph Gielata -- a relative of the plaintiff -- who worked at Grant & Eisenhofer several years ago, and the firm contends that he is a "former disgruntled employee" as reported by Phil Milford for Bloomberg:  "The firm will defend the case vigorously, and its principals 'vehemently deny these accusations.'"

Eisenhofer Complaint - File Stamped