The class action extortion racket

Lawrence Schonbrun:

AS A LAWYER who has been fighting the class-action lawsuit con game for 15 years, I know the indictment last week of one of the most prominent law firms in the business focuses long-overdue attention on our dysfunctional legal system. But charging Milberg Weiss Bershad & Schulman with allegedly paying illegal kickbacks to plaintiffs is akin to charging Al Capone with income-tax evasion. A much bigger problem remains unaddressed.

Law firms that specialize in class-action lawsuits have for many years exploited the same shameful business practices of the companies they sue, such as operating as a cartel-like syndicate and overcharging clients. In the process, these members of the bar have perverted what was established in the 1960s as a noble effort to give minority groups access to the civil courts.

Milberg Weiss — considered the Darth Vader of plaintiff law firms — has earned well over a billion dollars in legal fees by taking American businesses to court over claims of stock fraud, defective products and unfair business practices. Attorneys such as San Diego-based William Lerach, a former principal of the firm, and Melvyn I. Weiss have made staggering personal fortunes using the law as a bludgeon to scare large businesses into paying them to go away.

Another lawyer, the late Wendell H. Gauthier of New Orleans, made so much money in the case against breast implant makers and in the case resulting from the 1986 San Juan, Puerto Rico, Dupont Plaza Hotel fire that he was able to buy a chunk of the New Orleans Saints football team.

Meanwhile, real victims of bad corporate behavior often receive little more than a coupon worth a few dollars toward a purchase from the very company being sued. I have objected to the legal fees awarded lawyers in about 150 class-action lawsuits, with limited success. In the process, I have accumulated a long list of case studies demonstrating how dysfunctional this system is. Here are a few examples:

• Class-action lawyers sued the Bank of Boston in 1993, claiming that the bank had charged customers excessive escrow fees. Lawyers for both sides put together a settlement that ended up awarding each customer between $2.19 and $8.76, while counsel got more than $8.5 million in fees. The judge then allowed the bank to charge its customers for its share of those legal fees, as much as $91 each. One of the customers who objected to this settlement was subsequently sued by the class-action lawyers for $25 million.

• When class-action lawyers got wind of the accidental release of sulfuric acid from a General Chemical Corp. plant in Richmond, Calif., in 1993, they sent recruiters into nearby neighborhoods to sign up "victims," 60,000 in all. Some 30,000 people had flooded local hospitals, but doctors could find only a handful who had been injured. Rather than risk a trial and huge legal fees, the company settled the case for $180 million, of which the judge awarded $50 million to the lawyers. The average settlement for the victims: less than $1,000.

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There is more. I used to see this all the time in securities offerings where people would buy a few shares of intial offerings in order to cash in if the stock went down in value.