Thursday, September 20, 2007

The Weiss Indictment and Schulman’s Plea Agreement

In what may be the beginning of the final act in the Milberg Weiss criminal investigation, on September 20, 2007, a federal grand jury indicted Mel Weiss of participating in a scheme that paid millions of dollars in kickbacks to paid plaintiffs in over 235 class action and shareholders derivative lawsuits. The payments, allegedly made over a 25-year period, garnered the Milberg Weiss firm over $250 million. The Second Superseding Indictment naming Weiss and adding additional allegations against the Milberg Weiss firm and against Seymour Lazar, one of the paid plaintiffs, can be found here. The U.S. Attorneys’ Office’s press release announcing the indictment can be found here.


In addition, on September 20, 2007, former Milberg Weiss partner Steven Schulman agreed to plead guilty to a federal racketeering charge and to acknowledge that he and others conspired to conceal the secret payments from courts and absent class members. Schulman’s plea agreement can be found here, and the U.S. Attorneys’ office’s September 20 press release announcing the plea agreement can be found here.



A September 21, 2007 Wall Street Journal article describing the new indictment and Schulman's guilty plea can be found here. A September 21, 2007 New York Times article can be found here.

The new indictment describes a scheme in which Weiss, Bill Lerach (refer here), David Bershad (refer here), Schulman, and unnamed Milberg Weiss partners E, F and G formed a conspiracy to provide individuals illegal kickbacks, and to cause the individuals to provide false and misleading statements in court documents and in depositions. The three named paid plaintiffs are alleged to have received at least $11.3 million in illegal payments, and others are alleged to have received hundreds of thousands of dollars in payments.

The new indictment alleges that in order to conceal the payments, some of the payments were made through intermediary law firms, and one of the criminal defendants named in the indictment is Paul Selzer, an attorney who is alleged to have received and transmitted the payments for Lazar.

Many of the allegations in the new indictment appeared in the indictments previously filed or were revealed at the time of Bershad’s plea agreement. The new indictment does add the allegation that the kickback payments were omitted from or mischaracterized within the Milberg Weiss law firm’s accounting books and records, and that as a result the law firm "provided false and misleading information to Milberg Weiss’s outside accountants and tax preparers concerning such payments." The indictment also alleges that the law firm prepared false tax documents to disguise the nature of the payments to the intermediary law firms. (There is certainly some significant irony in the fact that the law firm, which garnered hundreds of millions of dollars in fees by alleging that corporations misrepresented their financial condition, is itself alleged to have misrepresented itself financially and to have falsified its own books and records.)

The new indictment also contains some interesting new tidbits. For example, the indictment alleges that after Bershad warned Weiss that paying one of the named plaintiffs in Florida would violate Florida law, "Weiss and Partner F replied, among other things, that because they would be paying [the individual] in cash, there would be no paper trail and therefore there was little risk they would ever be caught." The indictment also alleges that in the mid-80s, Weiss carried thousands of dollars in cash to Florida to pay the Florida paid plaintiffs.

The new indictment also contains detailed allegations regarding the disposition of the Milberg Weiss firm’s $40 million fee from the Oxford Health case (about which refer here). Schulman’s plea agreement suggests where this information may have come from, and is described further below.

The Milberg Weiss firm and Weiss himself are also alleged to have obstructed justice by withholding and or misrepresenting the discovery of a 1990 fax from one of the paid plaintiffs (Stephen Cooperman, about whom refer here) to Bershad. The indictment alleges that the document was withheld from production called for by a Grand Jury subpoena, and that later Weiss made a false statement by stating that he had found the document in a safe in his office at the law firm and that he had forgotten about the document at the time of the document production. The new indictment alleges that Weiss "had not discovered the 11/15/1990 telefax in his safe, but instead had taken the document from David J. Bershad, who had found it in his desk drawer when searching for documents responsive to the Grand Jury Subpoena." (It appears that many of the details in the new indictment may have come from Bershad, who is cooperating with the government as part of his plea agreement.)


According to the U.S. Attorney’s Office press release, Weiss will appear in court on October 12, and will be arraigned on October 25. The press release also states that Weiss faces a maximum prison sentence of 40 years in federal prison. The indictment also seeks the Milberg Weiss firm’s forfeiture of the entire $251 million it is alleged to have made in the cases in which the paid plaintiffs allegedly participated.


Although somewhat overshadowed by the new indictment, Schulman’s plea agreement also has some interesting new information. As part of his agreement, Schulman agreed to pay a $250,000 fine and a criminal forfeiture of $1.85 million ($1 million within seven days of his guilty plea and $850,000 seven days before his sentencing). The plea agreement also contemplates a sentence of from 27 months to 32 months, but the sentencing calculation is not binding on the court. Schulman retains the right to appeal the amount of any forfeiture or fine and also the conditions of his supervised relese. Schulman has agreed to cooperate with the government.


Exhibit A to Schulman’s plea agreement reflects the factual allegations against him. The exhibit alleges that Schulman entered in to an agreement with Weiss, Bershad and unnamed Milberg Weiss partner E to make and conceal secret payments to Vogel. The specific allegations relate to payments made in connection with the settlement of the Oxford Health class action. Schulman and Vogel and alleged to have agreed that in light of the size of the Milberg Weiss law firm’s $40 million fee in the case, Vogel’s share should be reduced from his usual 12 percent.


Schulman allegedly told Weiss that Vogel was willing to accept a smaller percentage, but Weiss is alleged to have said that "in light of the pending criminal investigation" he did not want to negotiate over the telephone. Weiss allegedly instructed Schulman to set up a meeting, and Weiss later allegedly told Schulman that he had worked out an agreement. Schulman is alleged to have sent a Milberg Weiss law firm check to an intermediary attorney, in order to effect payment to Vogel, with a letter stating that the check was to the law firm in payment of services rendered in the Oxford Health case.


Schulman is also alleged to have made or to have caused to be made false and misleading statements in several cases, in which Vogel stated that he was not accepting payments for serving as a plaintiff.


According to the U.S. Attorney’s Office press release, Schulman is scheduled to appear in court on October 19 and is scheduled to be arraigned on October 22.


The prison term specified in Schulman’s plea agreement (27 to 32 months) seems to stand in odd contrast to the significantly shorter 12 to 24 months specified in Lerach’s plea agreement. (This may provide one more fact supporting the view, favored in certain quarters, that Lerach got off easy.) However, Schulman’s relatively greater recommended sentence may be due to the application of negative Sentencing Guideline factors specified in his plea agreement as "substantial interference with the administration of justice"; "obstruction extensive in scope"; and "abuse of a position of trust."


With all of the (currently) indicted Milberg partners having pled guilty, Weiss stands alone to face the allegations. The government’s case apparently will be aided by Bershad’s and Schulman’s cooperation. (Lerach did not agree to cooperate with the government in his plea agreement.) Meanwhile, the Milberg Weiss law firm also faces even more serious allegations than it did before. The firm released a statement today (here) that "we will continue to fight for our clients and class members and to achieve the record recoveries for which our firm has long been known." The statement adds that none of the firm’s active partners is alleged to have been involved in any wrongdoing." (Of course, the partners who are alleged to have committed wrongdoing on the firm’s behalf have all left the firm, and several of them have already pled guilty. But, hey, they aren't at the firm any more, are they?)

So cue the "Ride of the Valkyries" and raise the curtain for what may prove to be the final act, the one in which the fat lady could possibly sing.

Hat tip to the Legal Pad blog (here) for the links to the new indictment, press releases and Schulman plea agreement.

More Subprime Lawsuits: The D & O Diary is maintaining a running tally (here) of subprime-related securities class action lawsuits. Today, I added two new lawsuits to the list, a new lawsuit filed against NetBank (press release here) and a new lawsuit against Opteum (press release here). The addition of these two new lawsuits brings the total of subprime related lawsuits to 16, in addition to four subprime-related lawsuits that have been filed against construction companies.

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