March 25, 2008: 7:23 AM EDT
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Mortal blow to a once-mighty firm

With their co-founder facing 33 months in prison, reeling law firm Milberg LLP looks to settle with federal prosecutors.

By Peter Elkind, editor at large

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Melvyn Weiss: pleaded guilty to kickback scheme.

(Fortune) -- It has taken almost nine years, but the extraordinary federal investigation that last week claimed 72-year-old Melvyn Weiss - the proud, long-defiant dean of the class-action securities bar - has now erased an entire masthead of name partners in what was once America's most feared law firm.

Under an agreement filed late last week, Weiss, who was indicted last September, has agreed to plead guilty to racketeering as part of a 25-year scheme to pay kickbacks to class-action plaintiffs; he faces a 33-month prison term and will pay $10 million to the government. And with that, Milberg Weiss - the firm that Weiss co-founded and ran for decades with an iron hand - announced that it would reduce its name to Milberg LLP.

This latest move followed the prior excisions of senior partners David Bershad and Steven Schulman, after both pleaded guilty. San Diego-based Bill Lerach, also once a name partner and a dominant figure in the firm, received a two-year prison sentence last month after entering his own guilty plea.

In fact, the only thing that has preserved the surviving name of the firm's co-founder, Larry Milberg, may be the fact that he died in 1989. According to government filings that refer to "Partner F," (Milberg, as Fortune has learned), he also participated in the illegal scheme, joining Weiss and other top partners in ponying up cash for the secret payments. The lawyers later recouped their money by arranging for the firm to award them special "bonuses." The latest developments have prompted a grim joke among insiders in the case: that if Larry Milberg were still alive, the firm might now be reduced to the name of "LLP."

A change in tone

They have also prompted a dramatic reversal in tone. Weiss, who had defiantly protested his innocence, last week issued a statement of apology for the "wrongdoing," saying "I deeply regret my conduct." Milberg Weiss, indicted as a firm in 2006, has yanked an elaborate website (MilbergWeissJustice.com) which made a fervid case for its innocence (it included a letter from four Democratic congressmen blaming the indictment on partisan politics by the trial-lawyer-hating Bush administration).

In a statement, attorney Sanford Dumain, a member of the Milberg Weiss executive committee, expressed the firm's "deep disappointment" at the revelation of Weiss' misconduct, explaining that it had "previously believed our former leaders' assurances of their innocence." The firm, which is in settlement talks with prosecutors, would now seek "a fair and appropriate resolution of remaining issues," Dumain said. But the firm has already suffered terrible damage. Once a litigation powerhouse, feared by corporate America, the firm has endued a dramatic exodus of attorneys and clients; it now has about 70 lawyers.

It is unclear precisely what prompted Weiss's decision to cut a deal. But he faced potentially devastating trial testimony from both David Bershad (for decades, his top deputy in Milberg's New York office), as well as Schulman, who dealt directly with many plaintiffs; both agreed to cooperate with the government.

Weiss may also have been rattled by tough words from the presiding federal judge in his case, John Walter of Los Angeles, who, in sentencing Lerach to the two-year maximum in the range established by his plea deal, openly suggested that the penalty was too light, declaring that Lerach's behavior had corrupted his firm "in the most evil way." To top of page