Kickbacks to Plaintiffs: Industry Problem?

[WSJ_law_blog]

Does the Milberg criminal case point to a broader ill in the securities class-action industry? That’s a question being raised by U.S. Rep. John Boehner, the Republican leader in the House.

In this letter expected to be sent to the House Judiciary Committee today, Boehner (pictured) asks the committee to investigate whether plaintiffs lawyers routinely pay kickbacks to shareholder clients, as Milberg is alleged to have done. The firm denies wrongdoing. Four of its former-once-senior partners have pleaded or agreed to plead guilty.

The letter highlights comments that former Milberg partner William Lerach made to the WSJ earlier this year: Lerach called his conduct an “industry practice” and said that “everybody was paying plaintiffs.”

Lerach has been sentenced to two years in prison. The start date for his sentence of May 19, Boehner writes, is the “latest milestone in a steadily unfolding scandal that points to a cancerous growth within our economy.”

Lofty rhetoric, to be sure, but there’s also the point that Congress itself has made some efforts to address this issue. Federal legislation from 1995, the famous PSLRA, prohibits lead plaintiffs from being paid more than other plaintiffs in securities class-actions, with some exception for incidental expenses (though the law didn’t apply to state court). Also, the PSLRA placed limits on parties’ ability to serve as lead plaintiffs in multiple class actions — a measure designed to discourage figurehead, “repeat plaintiffs” from taking the lead in cases.

LB’ers: Please share your knowledge: Did class-action lawyers routinely pay name clients to compensate them for their role in class actions? If so, is this still a pressing problem? (If you have specific information, we’re eager to hear. Please email me at nathan.koppel@wsj.com.)