Top class-action lawyer to be indicted

Melvyn Weiss, the prominent class-action attorney, is expected to be charged Thursday for his role in a kickback scheme tied to more than 150 investor lawsuits, Fortune has learned.

By Peter Elkind, Fortune editor-at-large

(Fortune Magazine) -- A day after a surprising plea deal from class-action powerhouse William Lerach, federal prosecutors are preparing to file charges Thursday against the last big target in their criminal case, Melvyn Weiss, Fortune has learned.

The charges against the 72-year-old Weiss, known as the dean of the class-action securities bar and one of the country's most powerful lawyers, will likely be aided by the expected announcement Thursday of a cooperation deal with Steven Schulman, another attorney indicted in the probe, according to lawyers involved in the case. Schulman had previously pled not guilty to charges.

Prominent class-action lawyer Melvyn Weiss is expected to be indicted Thursday on fraud charges.

The stunning new developments cap a seven-year probe into allegations that Weiss and his law firm, Milberg Weiss, paid people to sign on as plaintiffs in more than 150 lawsuits against corporations. Weiss and Lerach were once among corporate America's most feared class-action lawyers.

Schulman, a former name partner at Milberg Weiss, is expected to plead guilty to a single racketeering conspiracy charge and to assist the prosecution, according to lawyers in the case.

A source cautioned that the deal had not yet been finalized and could still unravel.

Milberg Weiss released a statement late Wednesday stating it understood that charges would soon be brought against Weiss and that he would step down from firm management to focus on his defense. Weiss, the statement said, will be available to advise clients and the firm's attorneys.

Milberg Weiss and Schulman were indicted in May 2006 in connection with a long-running investigation into millions of dollars in illegal kickbacks allegedly paid to the firm's class-action plaintiffs in a scheme dating back to the 1970s.

On top of the existing allegations against Milberg Weiss, prosecutors are expected to add an obstruction of justice charge Thursday, according to lawyers involved in the case. Milberg Weiss, in its statement Wednesday, acknowledged that a new indictment would be filed against it.

The dramatic new turn in the investigation means Weiss will likely stand trial with the firm he founded. That trial, now scheduled to begin in January, will probably be delayed as a result of the latest developments.

Benjamin Brafman, Weiss' criminal attorney, declined to discuss his client's status. Herbert Stern, Schulman's lawyer, did not return Fortune's calls seeking comment.

This week's rapid-fire moves in an investigation that dates back to 1999 began Tuesday morning with the announcement of a plea deal by Bill Lerach, who had long headed the San Diego-based West Coast office of Milberg Weiss.

Lerach had not previously been indicted and remained characteristically dismissive and defiant, even as prosecutors seemed to circle closer. In May, after it became clear that a top Milberg partner - 67-year-old David Bershad, who had also been indicted - was about to "flip," Lerach suddenly turned pragmatic, authorizing his attorney to advise prosecutors that he was prepared to plead guilty and serve prison time.

With the plea agreement filed this week, Lerach, who has raged for decades about cheating and criminality in American business, has now ended his landmark legal career with the reluctant admission that he broke the law.

If the plea bargain that he signed passes muster with a federal judge, Lerach, 61, will serve up to two years in prison for concealing illegal kickbacks to plaintiffs in securities class-action lawsuits. He will also pay $8 million in restitution and fines and is virtually certain to lose his law license.

Class-action lawyer Lerach to plead guilty

The part of the probe that ensnared Lerach focused on events dating to before he formed his own plaintiffs firm in 2004 - until recently called Lerach Coughlin Stoia Geller Rudman & Robbins - by splitting off the West Coast operations of Milberg Weiss.

Together with Weiss, Lerach had built a lucrative volume business in securities lawsuits, many of which followed a sudden drop in a company's stock price.

The ready availability of investors willing to serve as plaintiffs in a lawsuit allowed Weiss and Lerach to be first to file cases against hundreds of public companies whose stock had faltered, allowing them to control the cases and maximize their fees.

Lerach specialized in suing Silicon Valley companies, and his abrasive ways and aggressive tactics - always in the name of defrauded investors - earned him the hatred of CEOs. One famously called him "lower than pond scum."

But Lerach was also enormously effective, expanding the frontiers of securities litigation by bringing new types of cases and naming banks and accounting firms as defendants, forcing corporations to pay billions of dollars to investors and hundreds of millions of dollars in legal fees. In the Enron class-action case, Lerach recovered a record $7.3 billion in settlements, mostly from banks that helped finance the energy giant.

Says Boris Feldman, a frequent Lerach adversary with the Silicon Valley firm of Wilson Sonsini Goodrich & Rosati: "He was the most creative lawyer the plaintiffs securities bar has ever seen."

With Tuesday's unexpected plea deal with prosecutors, Lerach managed to strike a surprisingly attractive bargain - and even preserve a piece of his legacy.

He faces a modest term behind bars (prosecutors are likely to recommend 24 months); he will give up just a fraction of the fortune he has made ($100 million during the 1990s alone); and his agreement requires him neither to cooperate with the feds nor testify against his former colleagues.

Indeed, in a highly unusual provision, the deal explicitly bars federal prosecution of his own 180-lawyer firm - recently renamed Coughlin Stoia Geller Rudman Rollins - as well as two of its top partners. This will help ensure that it remains one of the biggest players in the class-action game, even as the indicted Milberg Weiss firm continues to lose business.

"It is a very attractive plea agreement," said Columbia University law professor John Coffee. "To some, this looks like the man taking the bullet for his firm."

But it's also clear what made the bargain attractive for prosecutors. After seven years, the deal bagged one of the investigation's two top prizes and eliminated the risk of losing a case against Lerach at trial or on appeal. And it assures that Lerach will serve time prison and never practice law again.

While the deal gives Lerach's firm and its top partners a pass, they were little more than a path to Lerach anyway. And the feds don't really need Lerach's cooperation to make a case at trial against Mel Weiss or his firm.

To that end, prosecutors already have the cooperation of Bershad, who served for decades in New York as Weiss' right-hand man and the firm's chief operating officer. And now they will likely have Schulman's help as well.

Lerach's plea agreement took months to hammer out, and Tuesday's filings reveal it was reached with the highly unusual involvement of a "settlement judge" - a sitting federal judge (not the presiding judge in the case) who helps mediate a deal between prosecutors and defense lawyers.

Weiss (in contrast to Lerach) has steadfastly refused to step aside from his law firm. On Wednesday, Milberg Weiss stated only that Weiss would no longer manage the firm, but suggested that he would continue working on client matters. Milberg Weiss has seen wholesale defections of both lawyers and clients as the investigation has deepened.

The indictment charges that Milberg Weiss continued paying plaintiffs into 2005 - after it was already under criminal investigation. According to government filings, some plaintiffs were paid with cash kept in a safe in Bershad's office.

Lerach's statement of facts attached to his plea agreement is short on the most lurid details, but acknowledges that Milberg Weiss paid multiple plaintiffs, and that he, Bershad and other partners participated in the scheme.

In a farewell e-mail announcing his "retirement" to firm colleagues last month, Lerach wrote that he was leaving to resolve the investigation about "alleged events" at Milberg Weiss. He cast himself as a victim of the corporate forces he'd long battled.

"When you spend decades challenging powerful interests," he wrote, "the powerful interests will fight back with a vengeance." Now, of course, Lerach has admitted to breaking the law in connection with those "alleged events."

In a statement after his plea was filed, Lerach offered a gentler tone: "I have always fought for my clients aggressively and vigorously in order to hold powerful corporations responsible when their actions harmed people, however, I regrettably crossed a line and pushed too far. For my actions, I apologize and accept full responsibility for my conduct."

Fortune senior editor Roger Parloff contributed to this story. Top of page