If you go to the Web site of the law firm of Milberg Weiss, you will see such language as "protecting victims of corporate fraud and other public misconduct," the "most prestigious and recognized plaintiff law firm in the United States," and so on.
Milberg Weiss specializes in class action suits, especially for violations of the securities laws. As many Motley Fool readers can attest, if a public company's stock plunges, you will likely see Milberg Weiss file a lawsuit. Some of the latest suits include those against Cray Inc. (NASDAQ:CRAY), DitechCommunications (NASDAQ:DITC), and DreamWorks Animation SKG (NYSE:DWA).
Well, the U.S. Justice Department appears to have a less optimistic view of Milberg Weiss. According to a Wall Street Journal story, the Justice Department has engaged in a three-year investigation of the law firm. Ironically, the claims appear to be those that Milberg Weiss routinely files against its defendants -- such as fraud and conspiracy.
Allegedly, Milberg Weiss paid kickbacks to prospective plaintiffs to file lawsuits against public companies. This was revealed last week when the Justice Department filed a case against an entertainment lawyer who was involved in more than 50 lawsuits for Milberg Weiss. The allegation is that he collected roughly $2.4 million in kickbacks over a period from 1981 to 2001. Such arrangements are illegal for class-action suits.
Under the securities laws, private plaintiffs can bring suits against public companies. Unfortunately, such cases often appear to be more like reflex actions from firms like Milberg Weiss. If a suit is filed within days of a fall in a stock, how much time can a law firm have devoted to the case?
Then again, in light of Internet technologies, it is not too hard to scan for public comments from a company's management team and then compare those to new comments that have resulted in a stock's decline (such as when a company warns). A law firm can then make a putative case that there was misrepresentation, resulting in losses to shareholders.
Rather, if you read these complaints, you will notice they often look alike. It's as if these law firms have a special computer program that cranks out nice-looking lawsuits. Public companies routinely settle these suits in order to avoid expensive and prolonged litigation. So put two and two together and it's no wonder the Justice Department became suspicious.
Because of all this, there has been chatter about making it more difficult to bring private securities lawsuits against public companies. In fact, the nominee for the Securities and Exchange Commission, Sen. Chris Cox, is an outspoken critic of these suits.
The irony is that it may be the actions of one of the biggest firms in the field, Milberg Weiss, that brings the gravy train to an end. No doubt, there are certainly many public company CEOs who would be quite happy.
Fool contributor Tom Taulli does not own shares mentioned in this article.
