When David Bershad agreed to talk about the scheme his former firm, Milberg Weiss, cooked up to provide attorneys with a steady supply of paid class-action plaintiffs, it was music to the ears of corporate tort reformers everywhere.

That’s because tarnishing Milberg Weiss, one of the biggest and most famous plaintiffs’ law firms, could slow the momentum of shareholder suits everywhere. On Friday, Bershad signed off on a guilty plea to a one-count statement that included charges of obstruction of justice, conspiracy, and lying under oath. In his 15-page statement, the lawyer explained how he and other members of the firm used kickbacks to fuel its powerful growth over a thirty-five year period.

While shareholder suits are said to be down of late because of the robust economy, they could be pushed off a cliff by the reputational damage to other firms caused by the Milberg Weiss scandal—not to mention what would happen if other firms are charged with similar kickbacks. The hit to Milberg Weiss alone seems sure to take a toll overall: the firm ranked fourth among plantiffs’ law firms with $1.6 billion in total securities class-action settlements in 2006, according to a recent listing by Institutional Shareholder Services.

Curiously enough for a lawyer likely to be regarded as an enemy by many finance chiefs, Bershad served as what might be called the CFO of the firm: the senior partner responsible for overseeing Milberg Weiss’s financial affairs and its accounting department. From about the 1970s through 2005, however, he was one of a number of partners in the firm who secretly agreed to pay a number of lead plaintiffs a percentage of the fees the attorneys made in class-action suits, according to the statement Bershad signed off on that accompanied his plea agreement with George Cardona, acting U.S. Attorney for the Central District of California.

Those payments were apparently a way of keeping the lawsuit business flowing. They enabled Bershad and the other conspiring partners were “to secure a reliable source of individuals who were ready, willing, and able
to serve as named plaintiffs in Class Actions that Milberg Weiss
wanted to bring,” according to the statement.

Further, those getting the kickbacks would go prospecting for potential other class-action business. “Such payment arrangements generally enabled Milberg Weiss to file more Class Actions and to file them more quickly than would be possible absent such arrangements,” according to the statement.

The kickbacks were also a way to grow market share. Filing cases faster than the competition boosted Milberg Weiss’s ability to grab lead-counsel status in the lawsuits, according to Bershad. And lead lawyers generally get a bigger piece of the attorneys’ fees handed down in class actions than other firms involved in the same cases get. “The secret payments arrangements with paid plaintiffs played a meaningful role in enabling Milberg Weiss to grow,” according to the statement.

To hide the payments, Bershad and four other unnamed partners paid some of the plaintiffs in cash, according to the statement. In the earlier years of the scheme, they “pooled their personal cash into a fund Bershad maintained in his office at Milberg Weiss, which was used by the Conspiring Partners to supply cash for secret payments to paid plaintiffs and others,” it said.

The amounts the partners each contributed were supposed to be proportionate to their partnership interests in firm, according to Bershad, who says he “kept track of the amounts contributed and of the secret cash payments that had been made to paid plaintiffs.”

Later on in the scheme, Bershad and the four unnamed partners collected “bonuses” from the firm that amounted to the cash they had contributed to the fund plus taxes, according to the statement.

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