NewsNotables – Issue 56

Lawyer Will Plead Guilty in Kickback Scheme

The New York Times, September 18, 2007
Securities lawyer William S. Lerach agreed to plead guilty to a criminal conspiracy charge, forfeit $7.75 million to the government, pay a $250,000 fine and accept a sentence ranging from one to two years in federal prison in connections with a class-action scheme.

In his plea agreement, Mr. Lerach acknowledges making secret payments to Dr. Steven Cooperman, and acknowledges that others received payments from other partners of Milberg. These individuals were generally promised 10 percent of the attorney’s fees received by Milberg. The named plaintiffs who received kickbacks made false statements under oath concerning the payments. Dr. Cooperman, a former eye doctor in Beverly Hills, pleaded guilty to accepting $6.1 million in secret kickbacks for serving as a lead plaintiff in securities lawsuits filed by Milberg. Prosecutors claim that Milberg paid $11 million in kickbacks to plaintiffs in more than 150 cases, earning the firm more than $216 million.

For years, Mr. Lerach and his former firm aggressively filed class-action lawsuits. Being first to organize and file suits put them in position to get a sizable share of any legal fees produced by the cases. Mr. Lerach long championed the class-action system as an equalizer for small investors and other plaintiffs seeking redress of corporate wrongdoing.

Comment: Mr. Lerach may state that he “championed the class-action system as an equalizer for small investors and other plaintiffs seeking redress of corporate wrongdoing,” but the wrongdoing here was that of the law firm. Class-action suits are prevalent in our society. There are justifiable suits but looking at suits over the years, many are frivolous with legal fees exceeding total settlements. The case in hand is another example where greed outweighs ethics.

Billing in “Pro Bono” Cases Is Fodder for Ethics Debate

The Seattle Times, September 17, 2007
Lawyers at Davis Wright Tremaine (Davis) didn’t charge a parent group for seven years of work on a U.S. Supreme Court case against the Seattle Public Schools. Members of the group sued the district in 2000 when their kids, who are white, couldn’t get into Ballard High School. In June, the U.S. Supreme Court ruled that the school district’s use of race in determining school assignments was unconstitutional. They took the case pro bono. Now the firm is trying to collect $1.8 million in legal fees from the school district. Several national legal experts say the term, technically “pro bono publico,” meaning “for the public good,” may no longer apply. The firm’s effort has put a lens on a national debate. If attorneys get paid for pro bono work, is it still pro bono?

Anticipating backlash, Davis cited the Georgetown University-based Pro Bono Institute. According to that organization’s Web site, collecting fees in pro bono cases is fine, but attorneys should donate the money, for example, to charity. A Davis spokesman said the firm hasn’t decided whether to donate money it may collect in the Seattle case.

Comment: “Our position is that if fees are granted in a pro bono case, that those fees should be moved along to a charitable organization,” said David Brown, executive editor of The American Lawyer magazine. It seems that if they take on a case as pro bono, they should honor their commitment. Also, the plaintiffs are usually a philanthropic organization, so why not provide the “pro bono” services as promised and not collect fees and then contribute to another philanthropic organization?

How Lehman Sold Plan to Sidestep Tax Man

The Wall Street Journal, September 17, 2007)
Wall Street firms have long sought to use financial alchemy to save clients a bundle on their tax bills. Now one of the Street’s cleverest strategies is coming under scrutiny. The strategy arose a few years ago, a time when lots of U.S. companies were paying fat dividends. Wall Street sensed a golden business opportunity: sell their hedge-fund clients on ways to make those dividends even fatter by avoiding taxes on them.

Bankers at Lehman Brothers pitched an enticing product. By using a complex financial tool called derivatives, hedge funds with offshore operations could reap the benefits of owning big dividend U.S. stocks without actually owning them. The result is not paying tax on dividends received. Different versions of the strategy cropped up all over Wall Street.

The government’s question: “Are the trades executed for any purpose other than to sidestep the dividend tax?” Lehman’s controversial tax product shows that the firm paid considerable attention as to how the IRS might react. Internal Lehman emails reveal bankers searching for the line between smart tax planning and improper tax avoidance. In the end, Lehman and their lawyers concluded that it was a business worth pursuing.

Comment: Avoiding taxes has been pursued since the tax system was instituted. Wall Street bankers and National CPA firms continue to seek ways to reduce or completely eliminate tax on various sources of income. Their schemes usually follow a very complex root that was never intended by Congress. If there is a way to avoid paying tax, someone or some firm will find a way to do it. Usually each step within itself is legal, but when you take them as a whole, they usually don’t pass the IRS test: “Are the trades executed for any purpose other than to sidestep the dividend tax”? The answer is no all too often.

By Roger Eigsti
Board President,
Institute for Business, Technology, and Ethics