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Legal troubles at securities class action specialist Milberg Weiss L.L.P. haven't and won't lead to a drop in securities suits, many observers say.
But some observers maintain that the difficulties for the prominent firm--once a national leader in filing securities class action claims--have been a major reason that claim volume has dropped and likely will remain at or near a 10-year low for at least the short term.
Last week, former Milberg Weiss named partner David Bershad pleaded guilty to charges in connection with a federal investigation of an alleged kickback scheme with lead plaintiffs designed to increase the firm's chances of being appointed lead counsel in securities class action cases. For years, Milberg Weiss had been among the top firms nationally in the number of securities cases in which it served as lead or co-lead counsel.
The U.S. attorney in Los Angeles last year indicted Mr. Bershad, the firm and another former named partner. The investigation, which started several years ago, is ongoing.
Since the indictment, the firm has lost numerous attorneys and its status as the go-to law firm for lead securities fraud plaintiffs, observers note. A representative for Millberg Weiss was unavailable for comment.
Only Lerach Coughlin Stoia Geller Rudman & Robbins L.L.P. of San Diego remains the kind of high-volume securities class action law firm that Milberg Weiss once was, according to observers.
But Milberg Weiss' legal troubles have prompted prominent plaintiffs attorney Bill Lerach to contemplate retiring to prevent distractions at his firm, the Lerach firm confirmed in a recent statement. Mr. Lerach was a named partner at Milberg Weiss for years until 2003.
At least temporarily, a 50% reduction in plaintiffs law firms engaged in filing a high volume of securities class action lawsuits is a major factor in the recent drop in claim frequency, asserted insurer attorney Dan A. Bailey, a partner with Bailey Cavalieri L.L.C. of Columbus, Ohio.
Claim frequency began dropping in 2005, according to research by the Stanford Law School Securities Class Action Clearinghouse of Palo Alto, Calif., in cooperation with Cornerstone Research of Boston. That decline continued in the first half of this year (see related story).
Although attorneys who have left Milberg Weiss could help other firms build their securities class action practices, those firms would have to face "the enormous amount of time and money" that lead counsels must commit up front in securities cases, he said.
So far, other plaintiffs firms have not created high-volume practices, so fewer cases are being filed, he said.
Policyholder attorney Mark L. Weyman said that "there's something to that notion" about limited resources.
But in the past, firms have overcome their limited resources by pooling them for a case, said Mr. Weyman, a partner at Anderson Kill & Olick P.C. of New York.
Mr. Bailey said he has not seen that happen recently because lead counsels, who have a fiduciary duty to plaintiffs, want to tightly control cases.
Claims frequency down
Directors and officers liability insurance executive Carl Pursiano agreed that the Milberg Weiss situation has held down claim frequency but predicted that the case's influence would be "short- to mid-term."
The arrival of a bear stock market would drive up claim frequency again, said Mr. Pursiano, a New York-based senior vp with Liberty International Underwriters, a unit of Liberty Mutual Group Inc.
Other observers, though, said the Milberg Weiss case has not been a factor in reducing claim frequency.
Stanford Clearinghouse and Cornerstone study co-author Joseph Grundfest, a law professor at Stanford University Law School, suggests in the study that there may have been a "permanent shift" in claim frequency because tougher enforcement has led to a reduction in fraudulent activity.
Therefore, the diminishment of Milberg Weiss' high-volume filings practice has played no role in the reduction of claim frequency, and no one has demonstrated that a legitimate claim has gone unfiled over the last two years, he concludes.
Study co-author John Gould, a vp with Cornerstone, said that the stable stock market likely has driven down claim frequency but only until a bear market returns.
Many plaintiffs attorneys attributed the decline in claim frequency to fraud deterrence created by recent large settlements and the Sarbanes-Oxley Act.
Those attorneys say that the Milberg Weiss case--or the fortunes of any plaintiffs firm--has not and would not affect claim frequency.
They said their firms have shunned high volume business in favor of fewer but stronger cases--a trend they attribute to the Private Securities Litigation Reform Act of 1995.
"It's my belief the PSLRA has worked," said plaintiffs attorney Stuart Grant, a partner at Grant & Eisenhofer P.A. of Wilmington, Del. "That's OK. The more marginal cases disappear, and the recoveries are greater" in those cases that survive, he said. "So, the system is working."
Indeed, claim severity spiked during the first half of 2007, according to the Stanford Clearinghouse and Cornerstone.
"The Milberg model doesn't work," Mr. Grant asserted. Because of the upfront costs, "you don't want to be there in 100 cases," he said. "We'd rather have the 10 or 11 best cases" every year.
Plaintiffs law firm Labaton Sucharow & Rudoff L.L.P. of New York, takes a similar approach, said Joel H. Bernstein, managing partner.
As for strong cases, if one plaintiffs law firm leaves the class action field, several other firms would be vying for the lead counsel designation, as has been the case in the past, said plaintiffs attorney Salvatore J. Graziano, a partner at Bernstein Litowitz Berger & Grossman L.L.P. of New York.
Other plaintiffs attorneys agreed.
"I believe the meritorious cases have been filed and continued to be filed, with or without Milberg Weiss," Mr. Bernstein said.