LOS ANGELES (HedgeWorld.com)–There is one imaginatively employed piece of office furniture, along with five named defendants, 20 counts, and more than 100 pages in the indictment issued Thursday [May 18] by a U.S. grand jury in Los Angeles as a result of a long investigation of an alleged rent-a-plaintiff scheme.

One of the defendants is a prominent New York-based law firm, one that has been at the center of much recent litigation affecting the alternative investments industry: Milberg Weiss Bershad & Schulman LLP. Two other defendants are two of that firm’s named partners–David Bershad and Steven Schulman. Then there are two lawyers from outside the firm–Seymour Lazar and Paul Selzer.

Mr. Lazar is a retired Palm Beach, Calif., lawyer, and active trader in the stocks of public companies. He was the subject of an indictment almost a year ago–this bill essentially reaffirms the existing charges against him, and adds charges against his alleged co-conspirators. Mr. Lazar and family members are frequently plaintiffs in litigation brought by Milberg Weiss. Paul Selzer, also of Palm Springs, Calif., is Mr. Lazar’s personal attorney.

The indictment invokes the Racketeering Influenced and Corrupt Organizations Act–RICO. Only two days before it came down, Messrs. Bershad and Schulman each separately announced a leave of absence from the work of the firm; these announcements appear to have been tied to an intense last-minute round of negotiations in anticipation of their indictment as individuals, negotiations that failed to head off indictment of the firm itself.

When Mr. Bershad joined Milberg Weiss in 1968, it was a small general practice run by Lawrence Milberg and Melvyn Weiss. The firm’s statement upon his leave of absence May 16 congratulated him not only on having molded the firm for more than 30 years but on having in the process “transformed the class action bar and [given] effective court access to millions of previously disenfranchised investors, shareholders and consumers.”

Under RICO, the government would be authorized upon conviction to seize as forfeit to the United States any “interest” a defendant “has acquired or maintained” through the racketeering activity, and the interests that the government claims here are extensive.

This indictment explains the benefits of securing “lead counsel” status in a class action lawsuit. A lawyer or law firm with that title typically coordinates the overall litigation strategy, assigns the work to be done on the case among the other lawyers and law firms involved, and in some cases determines the division of attorney’s fees.

The compensation that may be paid to a named plaintiff representing a class is limited. It is the pro rata share on the recovery, calculated on the same basis as the share available to all the unnamed class members, plus reasonable costs and expenses incurred in the lawsuit as approved by the court, plus in some cases what the bill of indictment calls a “modest bonus payment.” But any such bonus must be disclosed to absent class members, and can only be awarded after the absent members have had a chance to object.

This is the key legal theory of the case. “Because a named plaintiff acts as a fiduciary toward absent class members or shareholders and is required to remain free of any conflict of interest toward them, the named plaintiff may not have any financial interest in the outcome of a class action or shareholder derivative lawsuit other than those described above”–beyond, that is, the pro rata share, plus costs, plus explicit and approved bonus.

Beginning about 1981 and continuing through at least 2005, the firm and two named partners secretly paid kickbacks to named plaintiffs in such actions in which it served as counsel. Accordingly, the lawyers committed a criminal offense; they paid a fiduciary, without the consent of the beneficiaries of his fiduciary duties, with the intent of influencing the performance of those duties.

Mr. Lazar, in particular, allegedly served and caused his relatives and an affiliated entity to serve, as named plaintiffs in approximately 70 lawsuits, for which the firm paid in aggregate approximately $2.4 million.

The indictment describes in some detail the measures employed to keep the kickbacks secret. The government claims that the firm “obtained and caused to be obtained the cash in a manner that made the payments difficult to trace, including from casinos,” and that the firm and David Bershad (Mr. Schulman isn’t named in this connection) kept cash in a safe located in a credenza in Mr. Bershad’s office.

Milberg Weiss lawyers allegedly “caused such payments to be falsely characterized in Milberg Weiss’s accounting books and records as, among other things, referral fees, professional fees, and ‘fees to others’ paid to the Intermediary Lawyers or other professionals.”

A conviction would certainly mean an end to Milberg Weiss as a viable firm, and the demise of Arthur Andersen suggests that even a successful end to the litigation may prove unhelpful for the firm. In May 2005, the U.S. Supreme Court overturned Arthur Andersen’s conviction on Enron-related criminal charges, yet by then there was nothing left of AA to celebrate the “victory.”

Andrew M. Lawler, attorney for Mr. Bershad, put out a statement Thursday evening, saying that his client “categorically denies the allegations of the complaint” and is confident he will win the coming fight. Furthermore, Mr. Lawler said, the indictment “is based on novel and unprecedented theories of criminal liability. The government’s decision to employ the RICO statute against a distinguished 66-year-old attorney is a misuse of the statute and cannot be justified.”

CFaille@HedgeWorld.com

Contact Bob Keane with questions or comments at bkeane@investmentadvisor.com.