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Friday, May 19, 2006 - Page updated at 01:32 PM

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Milberg Weiss case may resemble Arthur Andersen's

Bloomberg News

Milberg Weiss Bershad & Schulman, the law firm charged with paying more than $11 million in kickbacks to plaintiffs in lawsuits, may hemorrhage clients the same way accounting firm Arthur Andersen LLP did, legal experts said.

The law firm, which has won more than $45 billion for investors in securities-fraud cases, and two of its partners were charged yesterday by federal prosecutors in a 20-count indictment that included mail fraud and conspiracy counts. Legal experts say the firm is the largest U.S. law firm ever indicted.

The Milberg Weiss indictment is comparable to the charges made in 2002 against Arthur Andersen, which all but drove the fifth-largest accounting firm out of business, New York University law professor Stephen Gillers said. Andersen was convicted of obstruction of justice related to the Enron Corp. fraud. The U.S. Supreme Court overturned the conviction last year after the firm had shrunk from 85,000 employees to about 200.

"This will probably mean the end of the firm," said Larry Hamermesh, a securities law professor at Widener University School of Law in Wilmington, Delaware. "It will probably end up in receivership in a couple of months and begin to dissolve. It's like Arthur Andersen redux."

The indictment of Arthur Andersen proved to be a mistake for the government because the firm had collapsed by the time it the Supreme Court had erased its conviction.

"You'd think that would've taught the government a lesson: Go after the bad guys, but don't go after the institution on which hundreds or thousands of people depend for their livelihood," Gillers said.

Prosecutors said Milberg Weiss, from 1984 though 2005, gave three clients more than $11 million "in secret and illegal payments" for cases in which the firm made $216.1 million in fees. The payments were made in cash or checks through intermediary lawyers or other professionals, according to the indictment announced in federal court in Los Angeles yesterday.

Milberg Weiss and the two partners, Steven Schulman, 54, and David Bershad, 66, denied the charges. The New York-based law firm employs 125 lawyers.

The firm called the indictment "unjust, misguided, and misinformed" in a statement.

Marina Ein, a spokeswoman for Milberg Weiss, said in an interview that there are "fundamental differences" between the case against the firm and that against Arthur Andersen. Melvyn Weiss, "the heart and soul" and lead partner of the firm, has not been charged with any misconduct, Ein said.

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"We believe strongly that the firm will beat back these charges that were leveled today, and that it will continue to represent their clients in cases around the country," Ein said.

Arthur Andersen relinquished permits to practice public accountancy to state regulators in 2002 after being convicted of obstructing justice by shredding documents related to the collapse of Enron Corp. Before the conviction, the accounting firm had lost hundreds of clients following Enron's restatement of $586 million in profits.

In an early sign that yesterday's indictment may hurt Milberg Weiss, a Delaware judge expressed reluctance at a May 17 hearing to appoint the firm as sole lead counsel in a case because of the government's investigation of the firm.

A day before the indictment, Delaware Judge Stephen Lamb said he would consider granting a request to replace a Milberg Weiss lawyer in a shareholder lawsuit against OAO Lukoil, Russia's biggest oil producer.

Lamb said that with Milberg "under the threat of indictment," the request came as no surprise.

"Frankly, I would have difficulty if the outcome were the appointment of Milberg Weiss as sole lead counsel," Lamb said during the hearing. "Times being what they are and stories being what we see in the newspapers, that would not be an acceptable outcome to me."

Columbia University law professor John C. Coffee Jr. said large institutional clients may hesitate before using Milberg Weiss as counsel because of the indictment.

"A number of public pension funds, which are always publicity sensitive, will find it difficult to use a law firm that's been indicted," said Coffee, who also likened the charges to those against Arthur Andersen. "Long before Arthur Andersen was indicted, it found it was losing clients because of the effect on its reputation."

Gillers disagreed, saying that the pension funds and shareholders Milberg Weiss represents "will not be scared off quite as easily as corporate America."

Milberg Weiss represents the $140 billion New York State Common Retirement Fund, a state pension fund, in a shareholder suit against Bayer AG involving the safety of its cholesterol- lowering drug Baycol. The suit is in the discovery stage, according to David Neustadt, a spokesman for New York Comptroller Alan Hevesi, who manages the fund and is its sole trustee.

Asked whether that representation would change in light of the charges against Milberg Weiss, Neustadt would only say, "We're reviewing the indictment."

"It has been so phenomenally successful with its plaintiff classes that it will be an incentive for its clients to remain faithful," Gillers said. He said no firm larger than Milberg Weiss had ever been indicted.

Joseph Grundfest, a former Securities and Exchange Commissioner and a professor at Stanford Law School in Palo Alto, California, said the comparison of the case against Milberg Weiss to that of Arthur Andersen can't be made without knowing what Milberg Weiss was willing to concede to avoid prosecution.

Milberg Weiss said negotiations with prosecutors broke down in part because the government demanded it waive the attorney- client privilege to avoid being charged, something Arthur Andersen would have done if it had the chance, Grundfest said.

The government often requires companies to waive the attorney-client privilege to win deferred prosecution agreements, which Milberg Weiss has used and benefited from in bringing its securities cases against those same companies, Grundfest said.

"When the government asks defendants to waive the attorney-client privilege in other cases, Milberg is all for it," Grundfest said. "But now that they are a defendant, suddenly they seem to have religion on this issue."

Another difference between the cases is that Arthur Andersen was one of only five major accounting firms, Grundfest said, while there are many more law firms that represent shareholders in securities lawsuits.

"There are many competitors that can step up to the plate and fill the void," Grundfest said. "So the arguable social harm is lower."

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