I’ve been mulling over the Milberg indictment. Since I waited a weekend to post, I have the advantage of having read lots of other folks’ views. Quick summaries follow:
- Michael Dorf: Kickback payments slaved the named plaintiffs to MW, bloating agency costs.
- Steve Bainbridge:Kickbacks encourage “nuisance claims.” We may need criminal sanctions to crank the Hand formula to optimal levels, but only against individual lawyers.
- Walter Olson:”[MW was] taking no chances on the watchdogs staying pacified: It threw regular chunks of raw liver into their cages.”
- Larry Ribstein: Who cares? Lawyers are fungible.
- Ed Morrissey: Bad for Democrats and ambulance chasers.
- Christine Hurt: It’s high noon, and MW can’t blink.
- And let’s not forget MW itself: It was just a referral! And the theory is overreaching! And our interests remained aligned!
Wow. Lots of words. So here is what I think.
First, I still don’t particularly understand the economics of outrage here. I’ve seen two arguments about why kickbacks are bad (apart from their being unlawful, which we’ll put aside briefly). First, I’ve heard the argument that they “capture” the lead plaintiff, making that person less able to monitor the lawyer’s work. As Dorf points out, however, plaintiffs in securities class actions are sort of like
shareholders stockholders: they have deputized oversight and management to lawyers, in return for fiduciary duties. Some folks seem to have in mind a more active role for lead plaintiffs – something like a controlling stockholder(?) – but given the relatively low bonuses awarded in settlements for lead plaintiffs, why would anyone want to play that role? That is, you can’t have distributed, small-stakes, high-impact, governance by private actions and have plaintiff management at the same time. The capture argument is another way of saying that these types of claims are not in the public interest. But we don’t criminalize inefficient lawyering. Not usually.
The second argument I’ve seen is related to the first – it is Bainbridge’s – and it suggests that kickbacks encourage securities actions that are (on the merits) weaker. Yup, that sounds right. But that isn’t an argument against kickbacks, it is an argument that judges aren’t doing enough to raise hurdles to weak actions at early stages, as the PSLRA was designed to accomplish. To the contrary, I have found that judges are quite hostile to securities claims.
The argument that I haven’t seen on the blogs, but which is larded through the indictment, suggests that MW was, in effect, selling out the rest of the class to benefit the folks at the head of the line. And in a way, this is (for me) the strongest argument against the practice. If MW really did countenance paying referrals-as-kickbacks to named class members out of their portion of the settlement, then we know that dollars were being taken out of the mouths of the rest of the class pretty directly. On the other hand, one might argue that MW had to pay off the named plaintiffs to bring the cases in the first place – that it is a an expense like overhead.
Two additional aspects of the case trouble me. Obviously, indicting the entire firm feels excessive. I don’t agree with Larry R. that reputational effects won’t follow MW’s innocent lawyers. I know lots of counsel at MW – I litigated against them – and I thought they were incredibly hard working, tough, honest, passionate adversaries. One of my worst days as a lawyer came across a deposition table from an experienced Milberg partner: he taught me a great lesson on how to get one’s opponent to hang himself on the record. And I’d be shocked if more than a handful of lawyers at the firm had any knowledge of the activities charged. If the USAO is really indicting out of pique for failure to roll over as most corporations would do in response to a patently unreasonable discovery demand, well, many folks who think of themselves as white knights are going to be tarnished unfairly.
Second, I have some problems with the continued federalization of state practice ethical rules. Although the indictment doesn’t come out and say this, some of the illegality is premised on state fiduciary duty and referral laws. (Some, granted, is based on Rule 23.) Shouldn’t this type of prosecution be the job of Elliot Spitzer and his imitators? Which raises a question: why didn’t Spitzer get here first?