Editorial: Lawsuits -- Criminal Scheme?

The Charleston Gazette, May 24, 2006

Five years ago, a large class-action lawsuit accused Charleston native John Chambers and other top Cisco Corporation executives of profiteering at the expense of their stockholders. The court filing claimed that the boardroom insiders used private knowledge to sell their personal shares just before corporate bad news became public and sent stock prices downward.

Now, federal agents say the Cisco suit, plus many others like it, arose from a criminal scheme by a crafty national law firm to bleed corporations through well-planted suits — a litigation blitz that brought $216 million to the lawyers, but only trivial portions to shareholders.

Last week’s indictment was against Milberg Weiss, Bershad & Schulman , America ’s foremost class-action securities law firm. It alleges racketeering conspiracy, mail fraud, money-laundering and obstruction of justice. The 20-count accusation says:

The law firm recruited three stooges to buy shares in many volatile corporations likely to suffer stock price slumps. When a slump hit a company, and its executives previously had sold shares, an insider trading suit was filed. One of the stooges, California lawyer Seymour Lazar and his relatives, served as plaintiffs in about 70 such suits.

Since it’s a crime for lawyers to pay people to become clients and bring lawsuits, Milberg Weiss covertly funneled $11 million in “secret and illegal kickback payments” to the stooges for creating the suits, the indictment alleges. Cash for this purpose was stored at the law firm or sent through casinos or outside lawyers.

A U.S. attorney called it “a pattern of deception that spans two and a half decades.” The government seeks to recover $216 million in “tainted attorneys’ fees.”

The law firm’s wave of class-action suits inflicted severe damage on many corporations. The New York Times reported:

“Feared and loathed inside boardrooms across the United States , Milberg Weiss made hay out of the numerous accounting and management scandals that caused stocks to collapse in recent years. Sometimes bullying, sometimes screaming, sometimes speaking very softly, the firm’s lawyers coaxed and cajoled what it has estimated to be $45 billion in recoveries from companies.”

Incredible! A single law firm forced numerous American corporations to pay $45 billion for stock dealings — and pocketed $216 million in lawyer fees. Undoubtedly, some of these cases involved serious wrongdoing. But other cases probably were settled merely to escape the ruinous cost of litigation.

America is the only country that tolerates a gigantic lawsuit industry designed to bleed “deep pockets” — mostly corporations — and enrich lawyers who concoct the suits (as well as defense lawyers paid handsomely to answer the plaintiff lawyers). This litigation system inflicts a terrible burden on U.S. businesses.

Of course, genuine victims of wrongdoing need recourse to courts. But if other nations handle this problem without turning multitudes of lawyers into millionaires, why can’t America do likewise?