A web site called mymeso.org, looks like it’s probably run by a nonprofit, 501(c)(3) group devoted to providing dispassionate information about the dreaded, fatal, asbestos-linked cancer known as mesothelioma. Or possibly by a concerned citizen whose close relative has contracted the disease.

It’s neither. It’s an alter ego of Beasley Allen Crow Methvin Portis & Miles, a plaintiffs law firm in Montgomery, Alabama, that brings asbestos suits, among other things. (Somewhat ironically, another Beasley Allen specialty is consumer fraud class-actions.)

Anyone can obtain a “.org” top-level domain name from the Public Interest Registry, which promotes itself as “the registry of choice for organizations dedicated to serving the public interest.” Though its use ordinarily connotes a noncommercial outfit of some kind, the registry does not bar for-profits from using it.

As of this writing, if you closely examine the mymeso.org homepage, and scroll down a ways, eventually in the right-hand margin you’ll detect two light-gray-on-white boxes whose typeface is so faint that they almost look like watermarks.

One box says “POWERED by HOPE and Supporters Like You,” and the other says “PUBLIC AWARENESS web site sponsored by BEASLEY ALLEN.” (When the page is printed out, these messages are invisible, at least using my printer.)

If you click on the “POWERED by HOPE” box, you get to a “mission statement” that finally acknowledges that mymeso.org is not just sponsored by Beasley Allen; it is Beasley Allen, or, as BA puts it, “a community outreach effort” of that firm. The site was set up by BA on January 16, 2008, according to its Whois data.

Most of the posts on the site are signed by Wendi Lewis, who is not further identified. Some of Lewis’s posts refer to verdicts won on behalf of mesothelioma victims, and some of those offer links to Beasley Allen’s main web site for the “full story.” The site also has an email “contact” feature that provides no indication of where it leads.

For comment I called Thomas J. Methvin, a name partner at Beasley Allen, who also happens to be the president-elect designate of the Alabama State Bar.

Methvin acknowledges that Wendi Lewis is a Beasley Allen employee, but says that the identification of the site as “sponsored by” the firm is sufficient to avoid any confusion. He says that those who have written to the site so far have not been seeking legal assistance; it’s just been about “awareness.”

Ethics professor Stephen Gillers, of New York University Law School, says that he did not know whether mymeso.org met the Alabama’s bar regulations, since rules on advertising vary greatly from state to state. “The disguised nature of the web site would not allow it to survive challenge under the New York rules,” he noted, however.

Professor Robert Kuehn of the University of Alabama School of Law said that Alabama’s rules on lawyer advertising are “not very stringent” and that it was not clear to him that what they do require – primarily inclusion of certain disclaimer language – would come into play here, since the site does not outwardly appear to solicit clients. He also noted that the firm might have First Amendment protections that could override whatever regulatory provisions were implicated.

Assistant general counsel Samuel Partridge of the Alabama State Bar said that, under longstanding policy, he was not allowed to give an opinion over the phone as to the permissibility of a specific lawyer’s conduct.

Incidentally, when first asked to look at the site, none of the experts I contacted initially understood what legal ethics question I wanted to ask them, since none realized that the site was run by a law firm until I told them.

Beasley Allen is not the only law firm with a dot-org avatar. The New Haven, Connecticut, plaintiffs law firm of Early, Ludwick, Sweeney & Strauss also uses one, called the Mesothelioma & Asbestos Awareness Center, at maacenter.org. The home page uses a popular symbol of medicine as its emblem – the two serpents wrapped around a winged staff – and its “about us” blurb says: “Our organization is staffed entirely by volunteer writers and other contributors who recognize the importance of building awareness.”

But at the bottom of the home page there is also a notice in faint gray typeface stating that the site is sponsored by Early Ludwick. It contains a hyperlinked disclaimer which, when clicked upon, finally does state, with refreshing candor, “Attorney Advertising.”

Jim Early, the New Haven firm’s managing partner, initially said he didn’t think his firm was associated with the Mesothelioma and Asbestos Awareness Center, and that he’d never heard of that group before. But then he added, “I’ve got people that do my Internet stuff and I’m not sure what they’re doing. I think we make it clear on all our web site stuff that we’re a law firm.”

I then used the “contact” device on the maacenter.org site, identifying myself as a reporter, and asking if the site was affiliated with Early Ludwick. Jim Early emailed me back as follows: “I have received the inquiry you posted on the web site our firm sponsors. As I indicated, I do not believe the web site is ‘deceptive’ as our name appears on the bottom of the home page as a law firm. . . . I am sorry I did not have complete familiarity with the name of the web site as you listed it to me yesterday as i was in the middle of several other projects and had not seen it beforehand. However I have since looked at it and compared it to other web sites and feel that it would be in compliance with appropriate attorney advertising standards. Emails to that web site do reach my office and we do sponsor that site.”

UPDATE: (March 28, 2008): As of this morning the mymeso.org web site had been revised. It now has a legible “Website sponsored by BEASLEY ALLEN” notice at the top, right-hand side of the home page, a second legible message at the bottom, and its “contact” device indicates that Wendi Lewis works at Beasley Allen. These seem like good revisions to me.

Yesterday a special master in a federal shareholders class-action suit against The Coca-Cola Company (KO) recommended that the law firm of Coughlin Stoia Geller Rudman & Robbins be barred from serving as class counsel because it had purchased “stolen” company documents from a disgruntled former Coke executive.

“Class Counsel engaged in extremely troubling conduct,” wrote Special Master Hunter R. Hughes, III, “by paying for documents stolen from Coke, and then exacerbated the [situation] by refusing to accept responsibility for that conduct and by continuing, to this day, to defend that conduct through the use of arguments that appear to be pretextual.” Hughes’s ruling is here. (The pertinent pages are 49-69.)

Hunter’s recommendation was submitted to U.S. District Judge Willis B. Hunt, Jr., of Atlanta, who will wait to receive comments from the parties before deciding what action to take.

Hunter acknowledged that Coughlin Stoia’s lawyers had “vigorously and skillfully prosecuted this case for now seven years,” and said that “had they addressed this issue head-on, recognizing the impropriety of the arrangement they made . . . that might well have served to mitigate the circumstances. But they did not. Instead, they turned a blind eye to the terms of the consulting agreement pursuant to which they paid for the company documents and continue even now to make unfounded arguments which only obfuscate the issue.”

Coughlin Stoia partners (on the West Coast) were not immediately available to respond to email inquiries sent early this morning (from the East Coast), but any comment received will be inserted when it arrives.

(Coughlin Stoia, formerly known as Lerach Coughlin, is the firm founded by William Lerach in 2004, when he split away from Milberg Weiss and took that firm’s West Coast office with him. Lerach began serving a two-year federal prison term earlier this month after pleading guilty to conspiring to obstruct justice in connection with an unrelated kickback scheme at Milberg Weiss. Milberg Weiss has pleaded not guilty to the same charges, and is scheduled to go to trial in August.)

The case against Coke, filed in October 2000, alleges that the company artificially inflated its revenues through “channel-stuffing.” (A company channel-stuffs when it cajoles distributors into buying more product than they really need, to make it look to shareholders like consumer sales are brisker than they are.)

About four months after the case was filed, two former Coke executives approached the class’s law firm (then still known as Milberg Weiss) to offer help on the case, according to Hughes’s report. One of the two former execs, Greg Petro, told class counsel that he’d taken about 3,000 Coke documents with him when he had been terminated. The law firm then signed a “consulting agreement” with the two former executives, agreeing to pay them $200 an hour but, in any event, no less than $75,000, if they would provide information to the firm “including . . . documentation in any form, written or electronic, concerning Coke.” Petro then turned over 3,023 company documents, including many marked “confidential.” Some were then used in connection with an amended complaint filed in the case.

When the consulting agreement came to light more than a year ago, Coughlin Stoia lawyers backed Petro’s claim that neither he nor they had thought he was taking Coke documents without authority because, among other things, Petro had been ordered, when terminated, to “clean out his office.” Special Master Hughes found that such a command could not “rationally be construed to authorize Petro to walk off with company documents, any more than it authorized him to take the company’s desk, chairs, and computer.”

Hughes also rejected arguments that the firm was not really buying the documents, just entering into a consulting agreement, and a public-policy style argument that Petro’s conduct should be condoned because he was a whistleblower trying to expose corporate wrongdoing.

In a footnote, Hughes found that public policy arguments weighed in the other direction: “On a very practical level, for the Court to give Plaintiffs’ counsel a pass on this conduct, would simply invite terminated employees, particularly of public companies, to on a wholesale basis remove company documents following their termination in hopes they can sell them should the company be sued.”

In the silver-lining department, Special Master Hughes did find that the mere past involvement of Bill Lerach in the case, and Lerach’s subsequent admission of unrelated criminal conduct, did not warrant barring Coughlin Stoia from serving as class counsel.

Correction: Earlier version of this story had wrong the wrong month for when Milberg Weiss is set to go to trial. Correct month is August. Regret the error.

Yesterday a special master in a federal shareholders class-action suit against The Coca-Cola Company (KO) recommended that the law firm of Coughlin Stoia Geller Rudman & Robbins be barred from serving as class counsel because it had purchased “stolen” company documents from a disgruntled former Coke executive.

“Class Counsel engaged in extremely troubling conduct,” wrote Special Master Hunter R. Hughes, III, “by paying for documents stolen from Coke, and then exacerbated the [situation] by refusing to accept responsibility for that conduct and by continuing, to this day, to defend that conduct through the use of arguments that appear to be pretextual.” Hughes’s ruling is here. (The pertinent pages are 49-69.)

Hunter’s recommendation was submitted to U.S. District Judge Willis B. Hunt, Jr., of Atlanta, who will wait to receive comments from the parties before deciding what action to take.

Hunter acknowledged that Coughlin Stoia’s lawyers had “vigorously and skillfully prosecuted this case for now seven years,” and said that “had they addressed this issue head-on, recognizing the impropriety of the arrangement they made . . . that might well have served to mitigate the circumstances. But they did not. Instead, they turned a blind eye to the terms of the consulting agreement pursuant to which they paid for the company documents and continue even now to make unfounded arguments which only obfuscate the issue.”

Coughlin Stoia partners (on the West Coast) were not immediately available to respond to email inquiries sent early this morning (from the East Coast), but any comment received will be inserted when it arrives.

(Coughlin Stoia, formerly known as Lerach Coughlin, is the firm founded by William Lerach in 2004, when he split away from Milberg Weiss and took that firm’s West Coast office with him. Lerach began serving a two-year federal prison term earlier this month after pleading guilty to conspiring to obstruct justice in connection with an unrelated kickback scheme at Milberg Weiss. Milberg Weiss has pleaded not guilty to the same charges, and is scheduled to go to trial in August.)

The case against Coke, filed in October 2000, alleges that the company artificially inflated its revenues through “channel-stuffing.” (A company channel-stuffs when it cajoles distributors into buying more product than they really need, to make it look to shareholders like consumer sales are brisker than they are.)

About four months after the case was filed, two former Coke executives approached the class’s law firm (then still known as Milberg Weiss) to offer help on the case, according to Hughes’s report. One of the two former execs, Greg Petro, told class counsel that he’d taken about 3,000 Coke documents with him when he had been terminated. The law firm then signed a “consulting agreement” with the two former executives, agreeing to pay them $200 an hour but, in any event, no less than $75,000, if they would provide information to the firm “including . . . documentation in any form, written or electronic, concerning Coke.” Petro then turned over 3,023 company documents, including many marked “confidential.” Some were then used in connection with an amended complaint filed in the case.

When the consulting agreement came to light more than a year ago, Coughlin Stoia lawyers backed Petro’s claim that neither he nor they had thought he was taking Coke documents without authority because, among other things, Petro had been ordered, when terminated, to “clean out his office.” Special Master Hughes found that such a command could not “rationally be construed to authorize Petro to walk off with company documents, any more than it authorized him to take the company’s desk, chairs, and computer.”

Hughes also rejected arguments that the firm was not really buying the documents, just entering into a consulting agreement, and a public-policy style argument that Petro’s conduct should be condoned because he was a whistleblower trying to expose corporate wrongdoing.

In a footnote, Hughes found that public policy arguments weighed in the other direction: “On a very practical level, for the Court to give Plaintiffs’ counsel a pass on this conduct, would simply invite terminated employees, particularly of public companies, to on a wholesale basis remove company documents following their termination in hopes they can sell them should the company be sued.”

In the silver-lining department, Special Master Hughes did find that the mere past involvement of Bill Lerach in the case, and Lerach’s subsequent admission of unrelated criminal conduct, did not warrant barring Coughlin Stoia from serving as class counsel.

Correction: Earlier version of this story had wrong the wrong month for when Milberg Weiss is set to go to trial. Correct month is August. Regret the error.

Attorneys for famous plaintiffs lawyer Richard F. “Dickie” Scruggs filed a battery of motions yesterday which suggest that he plans to try to invoke a variety of “entrapment” defense — claiming, essentially, that the government unfairly lured him into commiting the crime — without openly admitting that that’s what he’s doing. If a defendant invokes the entrapment defense openly, he becomes subject to a number of special obligations and burdens that the Scruggs lawyers will want to avoid. I’ll explain exactly what I mean by that at the end of this post, after reviewing the substance of the motion.

In their papers, Scruggs and his two co-defendants – law partners Sidney A. Backstrom and David Zachary Scruggs (Scruggs’s son) – specifically ask a federal judge in Oxford, Mississippi to dismiss the indictment against them due to “outrageous government misconduct.” The motion alleges that government “agents,” including Lafayette County state judge Harold Lackey of Oxford (the alleged target of the bribery attempt outlined in the indictment), effectively manufactured the crime. It also claims that federal investigators misled federal judges in their wiretap applications by concealing evidence suggesting that Scruggs and his partners were not involved – at least at the early stages.

The motion is here. The crux of its argument is this. On March 28, 2007, Timothy Balducci, a lawyer who was working with Scruggs in defending a fee-dispute suit filed against Scruggs’s firm and four other law firms approached Judge Lackey in an “ex parte” meeting — i.e., a discussion about a case without opposing counsel being present. While such meetings might be considered unethical in themselves, they are not per se criminal. The motion says that Balducci was acting on his own, without Scruggs’s knowledge, and implies that such ex parte encounters, called “earwigging,” are common in northern Mississippi, even if frowned upon.

At the meeting Balducci told Judge Lackey, whom he knew well, that he’d consider it a “personal favor” if the judge would order certain inflammatory language removed (“stricken”) from the plaintiff’s complaint against the firms and then send the case to arbitration. Balducci also suggested that when Judge Lackey retired from the bench, he’d consider it an honor if Lackey would let him pay him to serve as an “of counsel” to Balducci’s newly formed firm, lending his name to the firm’s letterhead. The motion claims that Balducci meant for the two invitations — the “personal favor” and the offer of “of counsel” status at his firm — to be unrelated and independent of one another, though it is unclear how the Scruggs defendants would know what was in Balducci’s mind. (Balducci pled guilty to conspiring to bribe Judge Lackey in November is now a cooperating government witness against the Scruggs defendants.)

The motion then suggests that Lackey overreacted and misinterpreted what Balducci was saying — perhaps because he, Lackey, feared that he was the target of a sting operation — and that Lackey went to the FBI a few days later to report the approach. Thereafter Lackey began working for the government, wearing a wire, and aggressively attempting to build a criminal case against Scruggs, the motion says. (It alleges that Lackey repeatedly called Balducci, for instance, and dropped by unannounced at his office, while Balducci often did not even return the judge’s calls.)

For more than five months, the motion continues, the government still had nothing on the Scruggs defendants. Then on September 18, the motion argues, everything suddenly took a decisive turn toward the criminal — but only because of Judge Lackey and his government handlers.

Lackey called Balducci and told him, in “hushed, conspiratorial tones,” that he had something to say that might shock Balducci. He asked whether, if he helped Balducci and Scruggs, they would help him. Balducci evidently agreed, and three days later Lackey asked for $40,000 to take care of an unspecified problem. Balducci again agreed, but the motion maintains that in the subsequent taped and wiretapped conversations Balducci repeatedly asserted that this would be a matter just between him and the judge (i.e., not involving Scruggs at that stage).

“Here’s how it works,” Balducci told Lackey on September 27, for instance, when he delivered the first $20,000. “They’ll come a time where I’ll sit him down in private and I’ll tell him [Scruggs] that I solved a problem for him. . . . . I’ll just go to him and say that I cured a problem that you had and you need to recognize the problem that I have cured you had.”

Finally, on November 1, when Balducci made the final payment, FBI agents confronted him with the evidence against him, flipped him, and sent him back to the Scruggs law firm wearing a wire in an attempt to make a case against Scruggs. At that point, the motion’s narrative abruptly stops, offering no insights into what the Scruggs defense from that point forward would be, if not entrapment. The indictment, after all, goes on to allege that the Scruggs defendants agreed, at Lackey’s request, to make an additional $10,000 payment, and that Scruggs provided Balducci with phony invoices for jury consulting in an effort to cover-up what the, by then, $50,000 in bribes had really been.

So what the defense is alleging sounds an awful lot like entrapment, but it never uses that word. Here’s why, I think. If a defendant mounts a formal entrapment defense, he must prove that, first, the government induced him to commit the crime and, second, that he had no predisposition to committing it.

There are lots of difficulties that come with invoking that defense, but chief among them is that the defendant opens the door to the government’s trying to prove other “similar” bad acts, even though the defendant hasn’t been charged with them in the indictment. (These become relevant to proving the defendant’s “predisposition” to commiting the crime)

The government already gave notice on January 28 that it will, in fact, try to introduce evidence of at least one such “similar act.” Prosecutors want to show that Scruggs was involved in a conspiracy to improperly influence a Hinds County state court judge, Bobby DeLaughter of Jackson, in early 2006. On January 7, Scruggs’s longtime friend (and erstwhile defense co-counsel in the federal bribery indictment), Joey Langston, in fact pled guilty to conspiring to corruptly influence DeLaughter at Scruggs behest. (Judge DeLaughter himself has not been charged with any wrongdoing, and has strenuously maintained his innocence.)

Scruggs’ counsel are understandably determined to keep the DeLaughter incident out of evidence – indeed, another motion filed yesterday is devoted specifically to achieving that goal – but their chances of succeeding would be greatly reduced if they ever admitted that they were mounting an entrapment defense.

My subjective view, then, for what it’s worth, is that the defense lawyers do not realistically hope to win the motion to dismiss (an extreme longshot) but rather fully expect to have to proceed to trial. The short-term purpose of the motion is to counteract months of adverse publicity with a competing storyline: one that portrays the Scruggs defendants as victims, not perps. That way, if the case does go to trial, there will at least be two narratives out there percolating down into the potential jury pool, and not just the government’s.

Further, my guess is that the Scruggs defendants never will actually invoke an entrapment defense, but will, rather, tell this (possibly true) story of a heavyhanded government sting operation, implicitly inviting the jury to acquit even if a technical crime may have been committed. The ultimate goal, then, would be a form of jury nullification.

The motion to keep the DeLaughter incident out of evidence is here. (In other motions filed yesterday, the defendants also asked that the wiretap evidence be thrown out; that the defendants be tried separately from one another; and that, due to adverse publicity, the case be moved outside of Mississippi to either Texas or Louisiana. All of those motions, together with supporting documents, are available at David Rossmiller’s Insurance Coverage Blog, here, which has had the most comprehensive coverage of the Scruggs indictment.)

Yesterday morning, an extraordinary lawsuit — in which State Farm had gone to Mississippi federal court to enjoin a Mississippi state criminal investigation of the insurer — ended in an extraordinary way.

After Mississippi Attorney General Jim Hood endured three hours of tough questioning by a State Farm attorney (who said, when court adjourned at 5 p.m., that he still had another hour left to go), attorneys for both sides huddled for hours until they struck a settlement. It was finalized Wednesday morning, before Hood’s testimony was to resume.

Most details of the settlement were sealed, including the all-important question of whether Hood would be permitted to continue his criminal inquiry. It appears that Judge David C. Bramlette wrestled the agreement out of the parties after making an important, though not necessarily determinative, legal finding in State Farm’s favor. His order is available here.

Nevertheless, my very subjective reading of the spectacle (I’d gone down to the Natchez, Mississippi, federal court to watch the hearing) was that it had ended rather like that infamous Roberto Duran-Sugar Ray Leonard bout in which Duran failed to answer the eighth-round bell, mumbling, “No más, no más.”

The case, which State Farm brought last September, is an instance of one of the rarest species of lawsuit, and one of the most difficult to win: a suit by the target of a state criminal investigation asking a federal court to halt the inquiry in its tracks.

Generally, the law forbids federal courts from interfering in this situation, because the federal courts are supposed to assume that state courts will adequately protect the federal civil rights of the target.

There is a narrow exception to that rule, however, if the target can show that the state prosecution is being brought in “bad faith” or for purposes of “harassment” — an extremely difficult thing to prove. Nevertheless, under the unusual facts of this case, State Farm, in fact, won a temporary restraining order against Hood last September, which was still in effect as of Wednesday, and it is hard to believe that State Farm would have settled the case without keeping that ban in place.

State Farm’s statement on the outcome reads: “Judge Bramlette has ruled that our contract with the attorney general is valid, unambiguous and enforceable and we are very pleased with the outcome.”

Hood’s office, on the other hand, emailed this comment: “Thanks to Judge Bramlette, who has the patience [of] Job, this case has been dismissed. I am glad I had an opportunity to rebut the allegations against our office. The Office of Attorney General will continue to fight for the policy holders [of] Mississippi. As for the criminal investigation, as with any case, I cannot comment.”

In February 2006 Attorney General Hood commenced a criminal investigation into whether State Farm had engaged in fraudulent practices to avoid paying money it owed policyholders for wind damage sustained in Hurricane Katrina. (A thirty-foot storm surge had demolished many homes on the coast, leaving nothing but slabs of concrete; that made it hard to determine the degree to which the homes had suffered damage from hurricane-force winds, which was covered under homeowners policies, before they were washed away by the later storm surge, which was not.)

Hood had agreed to drop his criminal inquiry in a letter agreement dated January 23, 2007. On that same date State Farm agreed to settle a civil case Hood had brought against State Farm in state court; a federal private class action brought for 32,000 policyholders by a group of lawyers headed by Richard F. (“Dickie”) Scruggs; and 640 individual cases also brought by Scruggs’ group. The Scruggs attorneys stood to make $10-20 million in fees from the class action, and another $26 million from the 640 individual cases. Scruggs and other members of his group are major campaign contributors to attorney general Hood.

While the settlement of the 640 individual cases did become final, a federal judge refused to approve the class action deal as proposed. Then, before that judge’s qualms could be addressed, the Scruggs group lawyers withdrew from the deal, and the case was dismissed. There is evidence that the Scruggs group withdrew from the deal at least in part because they were infuriated that State Farm had failed to pressure a subcontractor into dropping its suit against two former employees who had, for many months, been secretly assisting both the Scruggs group and the Hood investigation by supplying them with internal, confidential State Farm documents — allegedly in violation of their employment agreements. Scruggs himself was the main party on the hook in the case against the whistleblowers, since he was paying their attorneys fees and had agreed to indemnify them for any judgment ultimately entered against them.

After the class action deal fell apart, State Farm says it nevertheless honored the deal’s substantive terms — reevaluating slab claims and offering to pay a minimum of 50% of the policyholders’ policy limits for structural damages — albeit in the more informal setting of mediations supervised by the Mississippi Department of Insurance. (The Scruggs group attorneys don’t make any money off these mediations.) The company claims to have already paid out more than $70 million to policyholders in those mediations in a process that is ongoing.

In August 2007 Hood served State Farm with a new criminal grand jury subpoena seeking documents nearly identical to those that had been sought during his earlier criminal inquiry, prompting State Farm to sue the following month in federal court in Jackson, Mississippi, to stop Hood from reopening the criminal inquiry. State Farm claimed that Hood was violating its January 2007 letter agreement and unethically colluding with the Scruggs group, using the criminal proceeding as a way to pressure State Farm into paying lucrative settlements that would benefit the Scruggs lawyers — Hood’s campaign contributors.

Hood responded that his January 2007 agreement had only been a “gentleman’s agreement”; that, in any case, State Farm had failed to honor its terms in that the deal had contemplated federal court supervision; and that the criminal inquiry was, in any event, not covered by the letter agreement because it was a new inquiry focusing no longer upon a fraud upon policyholders (withholding payments for wind damage) but fraud upon the National Flood Insurance Program (improperly deflecting State Farm’s wind damage liability to the federally-funded National Flood Insurance Program.)

Even before State Farm filed its suit on September 13, 2007, the plot had begun to thicken. On August 21, 2007, Scruggs was indicted in federal court in Birmingham for criminal contempt for failing to obey a court order in the case brought by State Farm’s subcontractor against his whistleblowers. Scruggs has pleaded not guilty. The order he is charged with defying had required him to return to the subcontractor documents that had been “purloined” by Scruggs’s whistleblowers; instead, Scruggs had turned the documents over to Hood’s office (even though Hood’s office already had a set).

In June 2007, Judge William Acker Jr. had recommended that criminal contempt charges be brought against Scruggs. He had found that the night after Acker issued his order, Scruggs had called Hood and had prompted him to have a subordinate email instructions to Scruggs to send the documents to him. He noted that he could not understand why Scruggs and Hood would have behaved as they had unless they had “teamed up to bully State Farm into civil and criminal settlements.”

Then in late November 2007, Scruggs and four associates were indicted by federal prosecutors in Oxford, Mississippi for allegedly trying to bribe a state judge to influence litigation stemming from an intra-Scruggs-group squabble over the $26 million in fees received from State Farm’s settlement of the 640 Katrina cases. Scruggs has pleaded not guilty to those charges, too.

At Wednesday’s hearing, attorney general Hood professed very vague memories of what, if anything, Scruggs had asked him to do in the days immediately following Judge Acker’s order, stating only that his understanding had been that there was a “law enforcement exception” to the order and referring all more specific inquiries to the line prosecutor handling the inquiry, Courtney Schloemer. He said he’d never seen the letter Schloemer emailed to Scruggs instructing him to send the documents to her, though he’d had “some communication” about it with her before she sent it.

Schloemer had been subpoenaed to testify at this week’s hearing, so had the proceeding not been settled, she presumably would have done so. It would have been a ticklish task. She either would have had to accept sole responsibility for aiding conduct that Judge Acker has said he considers contemptuous, or she would have had to testify that her boss played a more active role than he now recalls. (In his testimony Wednesday, Hood also maintained that he had still never read any of Judge Acker’s orders, including the one that had all but labeled Hood a co-conspirator in Scruggs’ alleged contempt.)

But the emotional high point of Wednesday’s hearing came when State Farm attorney James R. Robie posed a certain highly specific question to Hood, the very asking of which suggested that State Farm might have somehow gained access to sources who were once quite close to Scruggs.

An attorney’s questions do not constitute evidence. On the other hand, an attorney is not supposed to ask an inflammatory question without a good-faith basis. Accordingly, it was a bombshell when State Farm’s Robie began the following line of inquiry:

Q. Mr. Hood, before Scruggs settled with State Farm … the case with 640 plaintiffs, which generated a fee in excess of $20 million for Mr. Scruggs and his partners, did they dispatch Mr. [Timothy] Balducci and Mr. [Steven] Patterson to have dinner with you in a restaurant in Jackson to talk about that?” [Balducci and Patterson are associates of Scruggs who have each pleaded guilty to bribing a state court judge in connection with one of the two federal criminal cases that Scruggs now stands accused of.]

A. I don’t know.

Hood’s counsel, J. Lawson Hester, objected on relevance grounds, but Judge Bramlette overruled and allowed Robie to press further.

Q. I’m asking you whether or not Mr. Scruggs sent Mr. Balducci and Mr. Patterson to have dinner with you here at a restaurant in Jackson to talk about settlement of that case.

A. I don’t know what Mr. Scruggs did with Balducci and Patterson.

Q. Did you have dinner with Mr. Balducci or Mr. Patterson at Crechale’s restaurant where they discussed Scruggs’ desire to settle that case?

A. No, sir. I haven’t been to Crechale’s in a long time.

Q. You did not have dinner with them where they discussed –

A. When are you talking about? And you said “Crechale’s.” I haven’t been to Crechale’s so I know I didn’t have dinner with anybody at Crechale’s.

Q. My real question is: Did Mr. Patterson or Mr. Balducci have dinner with you and tell you that if you did not participate or assist Mr. Scruggs in settling that mass tort action which was going to generate a 20-million-dollar-plus fee, that he would fund an alternative candidate to run against you for attorney general?

A. If you’re asking me did somebody come to me and threaten me, the answer is no. Now, out of all candor in this, I don’t want to mislead you. I remember having dinner on one occasion with Mr. Balducci and Mr. Patterson, but that conversation was about they were leaving the firm that they were presently — that Mr. Balducci was presently with. They didn’t convey any threats to me about settling the case or anything like that. [Balducci left the firm of Joey Langston in about January 2007 to start his own firm, bringing nonlawyer Patterson, who had also worked with Langston, with him as a business associate. (Last month Langston pled guilty to participating in yet another bribery attempt, in 2006, allegedly intended to aid Scruggs in a different state-court fee-dispute litigation. Scruggs has denied involvement in any wrongdoing there, too.)]

Q. They never suggested that if you didn’t participate in dropping your criminal investigation that Dickie Scruggs would fund an alternate candidate and [former Mississippi attorney general] Mike Moore would support that?

A. No, sir. Absolutely not.

Well, Hood denied it, so that’s where things stand. But had the proceeding continued, we might have learned what Mr. Robie’s basis was for asking the question, and we might have heard some other interesting questions he thought he had a good-faith basis for asking.

Between the pending federal prosecutions of Scruggs and the multiple ongoing litigations between State Farm and the remnants of Scruggs’s group, now known as the Katrina Litigation Group, it seems likely that we will eventually be hearing more about the evidence that prompted Mr. Robie’s question.

Last month the New York City Bar Association announced that it had nominated Patricia Hynes to become its next president. The press release identified her as senior counsel at Allen & Overy’s New York office, a federal prosecutor from 1967 to 1982, the recipient of a boatload of laureates and accolades, and a person with a stellar record of public service.

What the release does not mention is where Hynes spent the bulk of her career. For about 24 years she was a partner at the now-indicted law firm that was known, from mid-1993 to mid-2004, as Milberg Weiss Bershad Hynes & Lerach. She’s that Hynes. She left the firm in late August 2006, about three months after the indictment came down. For more than ten years, from the late 1980s until she took “of counsel” status in 2000, she also served on Milberg Weiss’s executive committee. (The Wall Street Journal Law Blog noted the omission at the time in the last paragraph of this post.)

The firm, now known simply as Milberg Weiss, has been charged with conspiring, from at least 1979 through 2005, to obstruct justice and make “false material declarations under oath” in federal court proceedings. In other words, the case is about lying. It alleges lying day-in and day-out, year after year, decade after decade, to federal judges, to opposing counsel, and to absent class members — i.e., the firm’s clients. The lies were allegedly intended to conceal $11.3 million in secret payments and kickbacks that the firm is said to have paid to named plaintiffs in more than 225 class actions.

The firm and its co-founder, Melvyn Weiss, have each pleaded not guilty. But former name partners David Bershad and William Lerach, as well as Hynes’s successor on the firm name plate, Steven Schulman, have all pleaded guilty. (Firm co-founder Lawrence Milberg died in 1989.) Four other non-Milberg defendants have also pleaded guilty, including three named plaintiffs who say they took secret payments from the firm. The government also alleges in the indictment that over the course of the conspiracy three other “senior partners” at the firm, identified only as Partners E, F, and G, were also participants. To be clear, I’m not suggesting that Hynes might be one of them. On the contrary, I assume she wasn’t.

Last July, before her nomination, I called Hynes to ask what, if anything, she’d known about the wrongdoing alleged at her firm. She said: “I have no comment. I’m not talking to any press on the Milberg Weiss situation. Thank you.”

When I learned she’d been nominated to become president of the City bar I assumed that, surely, that policy had changed. But evidently it hasn’t.

Hynes has not responded to a detailed e-mail and two phone messages left Wednesday and Thursday seeking comment on what she knew about wrongdoing at her former firm. If she responds, either to that question or to what I’ve written here, I’ll print her response.

Alan Rothstein, the City Bar’s general counsel, said in an interview that “the nominating committee did it’s due diligence with regard to that and was fully satisfied that Pat Hynes had absolutely nothing to do with the events that happened at Milberg.” When I asked for additional detail, he said, “That’s pretty much what I can tell you.”

Asked about why the press release did not mention Hynes’s career at Milberg Weiss, Rothstein said that the release follows the standard protocol for such announcements; “the usual form is to indicate where the person is now and their public service. We don’t go through their firm histories.”

I have qualms about what’s happening here. In addition to all the wonderful things that Hynes unquestionably is, she also appears to have been a major-league dupe. While being a dupe is not unethical, and certainly not illegal, it’s no badge of honor, either. For idealistic young law students making their career choices, it must have been reassuring if not inspirational to see former Manhattan executive assistant U.S. attorney Pat Hynes’s name so prominently displayed on Milberg’s letterhead. It vouched for the integrity of the whole operation. Whether she knew it or not, part of what she was being paid to do there for 24 years was to lend the firm an aura of integrity that, judging from three top partners’ guilty pleas, it didn’t deserve.

Assuming the nominating committee’s right, and that Hynes knew nothing about the wrongdoing occuring at the firm, she still gravely misjudged the character of at least three of her most powerful colleagues. (If the indictment is right, she misjudged seven of them!) The very fact that the government has chosen to indict the whole firm suggests that the U.S. Department of Justice, unlike the City Bar, regards what happened there as much more than the aberrational acts of a few bad apples.

Silence cannot be used against one in criminal proceedings. But silence can be used against one in many civil proceedings, and it most certainly can — and ought to be — used against anyone who is affirmatively seeking some extraordinary honor or high office.

The questions I would like to ask are basic things: When did she first learn of the criminal investigation? What inquiries did she make at that time? What responses were provided to her, and by whom? When she was on the executive committee, was she ever asked to leave the room while others stayed behind to engage in further discussions? If so, what did she make of that?

If she answered such questions for the nominating committee — and I assume she must have — why can’t she answer them in public?

Again, to be clear: I don’t think Hynes’s tenure at Milberg Weiss necessarily disqualifies her from serving as president of the City Bar. Maybe if the public had heard her say whatever she told the nominating committee, it would understand why the City Bar feels comfortable choosing her as its next president. But the public hasn’t heard any such thing.

The City Bar takes itself seriously. It issues reports opining on the proper treatment of detainees in the war on terror, on the plight of lawyers in Pakistan, the death penalty, reporter-shield laws, campaign finance laws, and class-action reform. What sort of moral authority will the City Bar’s voice carry over the next two years while its president’s former firm goes on trial (set to begin August 12, 2008) for allegedly having made a mockery of attorneys’ most basic obligations of candor to court, adversaries, and clients, and she is unwilling to discuss what she knew or didn’t know about it.

This nomination should have been postponed until such time as Hynes feels free to answer questions in public about the nearly quarter century she spent at Milberg Weiss.

Mine is evidently a minority view, though. The members of the nominating committee — each a titan of the New York bar — all disagree with me. (Rothstein told me the committee’s vote was unanimous.) They were E. Leo Milonas, chairman (former City Bar president and former state supreme court justice, Appellate Division); Preeta D. Bansal (the head of Skadden Arps’s appellate practice); Robert B. Fiske, Jr. (partner at Davis Polk and former U.S. Attorney for Manhattan); Sara Moss (Estee Lauder’s general counsel); Carlos G. Ortiz (Goya Foods’ general counsel); Milton L. Williams (state supreme court justice, Appellate Division); and Mary Marsh Zulack (Columbia law professor). Nominating committee chairman Milonas did not return two phone messages.

Under the City Bar’s by-laws, any member can theoretically petition for permission to run against Hynes, but if no one does so by February 8 — and typically no one does — Hynes will be declared the 63rd president of the 137-year-old association at its annual meeting on May 20, taking her place alongside the likes of Cyrus Vance, Whitney North Seymour, and Charles Evans Hughes. (Disclosure: I’m a member of the City bar, though not a very active one.)

What do readers think about this situation?

[Correction: An earlier version of this post noted that two named plaintiffs used by Milberg to bring class actions had pleaded guilty to accepting secret kickbacks from the  firm; actually three have.]

Steve Schulman, a former top Milberg Weiss partner who agreed to plead guilty to racketeering charges in September, has sued his former firm for nonpayment of his criminal defense attorneys’ fees. The complaint is here.

Schulman seeks an injunction that would force the class-action law firm — which is still defending its own indictment on related charges — to continue to pay the attorneys’ fees Schulman is incurring while cooperating with the government against the firm and its founder, Mel Weiss. The firm and Weiss have pleaded not guilty.

Schulman has also sued the law firm of Coughlin, Stoia, Geller, Rudman & Robbins (formerly Lerach Coughlin, etc.), the spin-off firm formed by former Milberg partner Bill Lerach in May 2004. Bill Lerach agreed to plead guilty in September in a deal in which the government agreed not to prosecute Coughlin Stoia or its top partner Patrick J. Coughlin.

Schulman says that until September, Milberg Weiss and Coughlin Stoia had been splitting his defense costs 50/50.

Until 2004, Milberg Weiss was the leading class-action plaintiffs firm in the nation; Coughlin Stoia is still one of the leaders today.

“Acting maliciously and in flagrant bad faith,” the complaint asserts, the two law firms “have wrongfully stopped paying petitioner’s legal fees in retaliation for his agreement to plead guilty and cooperate with the Government in its ongoing investigation and prosecution of Milberg Weiss and its founding partner, Melvyn I. Weiss.”

Schulman characterizes his former partners as attempting to “punish” him “for agreeing to cooperate with the government,” and calls the effort “a gross violation of public policy and a flagrant breach of . . . contractual obligations.”

Milberg Weiss partner Sanford Dumaine said he could not comment, but would be filing papers responding later this afternoon. Dan Newman, a spokesman for Coughlin Stoia, did not immediately return a voicemail seeking comment. I’ll post his comment when received. (In the meantime, I’ll note that the law firms very likely will have some nontrivial arguments on their side for not reimbursing Schulman once he acknowledged criminal wrongdoing. Contracts to reimburse people for costs incurred in connection with criminal acts are often void as against public policy.)

Schulman claims that without the firms’ subsidization of his fees, he faces “imminent risk of being deprived of his constitutional right to criminal counsel of his choice guaranteed by the Sixth Amendment.”

Under Milberg Weiss’s 1991 partnership agreement the firm agreed to reimburse partners for attorneys’ fees “for which a partner becomes liable in connection with the rendition of services to a client,” according to the complaint.

When Bill Lerach split away in May 2004 and formed Lerach Coughlin, the complaint continues, the two firms entered into a “joint defense agreement” and agreed to “retain joint counsel in connection with the pending grand jury investigation.”

Then on May 11, 2006 — seven days before Schulman was indicted — Schulman signed a “leave of absence agreement” with Milberg Weiss in which that firm specifically committed to reimburse him for legal fees “even in the event [Schulman] were to be convicted of a felony, until such time as such conviction has been upheld by a final non-appealable court order.” Schulman says he bargained for this valuable clause, and in exchange passed up the opportunity to share in fee awards from pending Tyco (TYC), Nortel (NT), Sears, and Enron class actions.

From May 2006 until September 2007, Schulman says, Milberg Weiss and Coughlin Stoia had split the costs of his civil and criminal attorneys fees 50/50, paying about $4.5 million to his defense lawyers at Stern & Kilcullen and McDermott Will & Emery.

Schulman agreed to plead guilty on September 20, 2007, the same day that Milberg Weiss co-founder Mel Weiss was indicted. But upon agreeing to plead guilty, he says, both firms stopped paying his fees.

Though Schulman did plead guilty on October 9, he contends that he is still entitled to payment under his Leave of Absence Agreement, since has not yet been formally “convicted.” That event will not occur until his sentencing, which is currently scheduled for June 23, 2008, he argues. He has already run up about $1.2 million in unreimbursed fees since September, according to his complaint.

Schulman filed the suit in state supreme court in Manhattan on November 27. Though Schulman has already initiated arbitration proceedings against Milberg Weiss and, the complaint says, will soon do so against Coughlin Stoia, Schulman has gone to court to seek an emergency order that the firm keeping paying his fees while the arbitrations are pending.

In passing, Schulman notes that as a partner at Milberg Weiss he earned $15 million in 2005. He says his equity share that year was 15.5 percent, which was third behind founder Mel Weiss (17 percent) and David J. Bershad (16 percent). Bershad was the first Milberg Weiss partner to agree to plead guilty.

In his 1,500 word sermon in Sunday’s Washington Post, shareholder class-action impresario Bill Lerach argued that “the legal system is a lot tougher on shareholder lawyers than it appears to be on Wall Street executives.” He was referring to the fact that neither Citigroup (C) CEO Chuck Prince nor Merrill Lynch (MER) CEO Stan O’Neal are headed to jail, while Lerach is. (For his article, click here.)

I’m not going to spend much time addressing the thrust of that argument, except to note in passing that the sparse dataset he relied upon did not seem sufficient to prove his thesis. Neither Prince nor O’Neal, who each presided over subprime mortgage debacles at their companies, has (yet) been accused of much more than stupidity or mismanagement, which aren’t crimes. Lerach, on the other hand, has pleaded guilty to conspiring to make intentional false statements and obstruct justice in more than 150 court cases during a two-decade period, for which he stands to serve — if a judge accepts on January 14 the terms of his breathtakingly lenient plea agreement — a maximum of only two years. (Former Enron CEO Jeff Skilling is serving 24 years; former Tyco (TYC) chief Dennis Kozlowski is doing 8 1/3 to 25; and former WorldCom CEO Bernie Ebbers is looking at 25.)

Nor was I going to focus on Lerach’s apparently misguided belief that he’s being incarcerated because, as he puts it, “in my zeal to stand up against this kind of corporate greed over the years, I stepped over the line.” In fact, of course, the crimes he has pled guilty to have nothing to do with standing up to corporate greed. They relate to undermining the rights of the investor classes he ostensibly represented (by providing secret payoffs to their named representatives) and using illegal means to gain a competitive advantage over rival firms in the plaintiffs bar (who were also theoretically trying to fight corporate greed).

I was writing instead to focus on a telling and refreshing concession in the piece. After discussing how big O’Neal’s and Prince’s salaries were (unconscionably large, but fully disclosed), he recounts how much money their inattentiveness or incompetence has cost shareholders. “The previously reported profits have been wiped out,” he writes, “and rumors of billions more in coming write-offs abound.” Then comes the capper: “Who knows what the class-action suits against Merrill and Citi for stock fraud will cost?”

Well, exactly. But let’s drill down on that last insight. What he’s saying is that the innocent Citi and Merrill shareholders whose fate he is bewailing are about to lose even more money because they will have to foot the bill for the defense attorneys fees and settlement payments and increased insurance premiums being brought down upon those companies by the shareholder class-action suits that are reflexively coming down the pike. Shareholder suits brought by lawyers who aspire to become the next Bill Lerach.

Getting confused? You should be. You’re noticing something distinctive about Lerach’s life’s work, and it’s something that’s true even if you were to assume, for the sake of argument, that all of his cases were actually nonfrivolous — i.e., arguably had merit. The weird thing about those cases is this: Most of them probably didn’t benefit most of the people for whom they were brought.

There’s actually a remarkable consensus about that fact in legal academia today. Here’s why.

In the typical fraud suit prompted by a sudden drop in stock price, the vast majority of investors who get hurt—i.e., the ones who bought when the stock price was allegedly inflated by the fraud, and sold after it had fallen back to true value—purchased their stock from other innocent investors. Those innocent sellers inadvertently benefited from the fraud (i.e., they sold at an artificially inflated price), but the law does not require them to cough-up their windfalls. Instead, the injured investors go after the corporation itself for their reimbursement. But everything the corporation pays as a consequence—attorneys fees, insurance premiums, settlements, judgments—ends up hurting its current shareholders, who also happen to be innocent of any wrongdoing.

It gets worse. In real life, most diversified investors, like pension funds and mutual funds, aren’t harmed by most securities frauds to begin with. If a pension fund holds a portfolio of 1,000 stocks, and 100 of those companies are accused of fraud in a given year, the fund most likely will be a net buyer (i.e., loser) as to 50 of those inflated stocks, but a net seller (i.e., winner) as to the other 50. Empirical studies appear to confirm that the majority of diversified investors—which is the vast majority of all investors—don’t suffer net damages. Any compensation they receive from lawsuits is overcompensation.

What about the undiversified investors—the widows and orphans? Too often private shareholder suits don’t help them either. Undiversified investors are typically “buy-and-hold” investors. To be a class member, though, investors must have bought their stock during the period when the alleged fraud was in effect, which is usually less than a year before the date of the price drop. Buy-and-hold investors will often have bought too early to qualify.

In August six influential law professors—four of whom are generally considered moderate-to-liberal on shareholder issues—wrote SEC chairman Christopher Cox urging him to convene a series of roundtable discussions on these subjects with a view to proposing reforms. The letter, authored by Donald Langevoort of Georgetown University Law Center, emphasized the professors’ unanimous concern about the “immense amount of ‘pocket-shifting’” that is currently occurring (i.e., innocent investors senselessly paying innocent investors, with much of the money being lost to attorneys fees en route), and the need to pay “more attention to the burden imposed on smaller investors whose inactive trading makes it more likely they will be funding the pay-outs than receiving them.” The professors’ letter is available here.

The SEC general counsel Brian Cartwright wrote back indicating that these were just the sorts of issues the Commission hopes to look into in an upcoming “formal roundtable” it wants to convene “to explore the topics of private securities litigation, its relationship to Commission enforcement efforts, and its effects on U.S. capital markets, competitiveness, shareholder value, and investor protection.” (The precise schedule and agenda has not yet been announced.)

It’s a welcome development. Too bad it won’t come in time to protect those poor Citi and Merrill shareholders from the drubbing Lerach acknowledges they’re about to sustain from benefactors like him.

In his 1,500 word sermon in Sunday’s Washington Post, shareholder class-action impresario Bill Lerach argued that “the legal system is a lot tougher on shareholder lawyers than it appears to be on Wall Street executives.” He was referring to the fact that neither Citigroup (C) CEO Chuck Prince nor Merrill Lynch (MER) CEO Stan O’Neal are headed to jail, while Lerach is. (For his article, click here.)

I’m not going to spend much time addressing the thrust of that argument, except to note in passing that the sparse dataset he relied upon did not seem sufficient to prove his thesis. Neither Prince nor O’Neal, who each presided over subprime mortgage debacles at their companies, has (yet) been accused of much more than stupidity or mismanagement, which aren’t crimes. Lerach, on the other hand, has pleaded guilty to conspiring to make intentional false statements and obstruct justice in more than 150 court cases during a two-decade period, for which he stands to serve — if a judge accepts on January 14 the terms of his breathtakingly lenient plea agreement — a maximum of only two years. (Former Enron CEO Jeff Skilling is serving 24 years; former Tyco (TYC) chief Dennis Kozlowski is doing 8 1/3 to 25; and former WorldCom CEO Bernie Ebbers is looking at 25.)

Nor was I going to focus on Lerach’s apparently misguided belief that he’s being incarcerated because, as he puts it, “in my zeal to stand up against this kind of corporate greed over the years, I stepped over the line.” In fact, of course, the crimes he has pled guilty to have nothing to do with standing up to corporate greed. They relate to undermining the rights of the investor classes he ostensibly represented (by providing secret payoffs to their named representatives) and using illegal means to gain a competitive advantage over rival firms in the plaintiffs bar (who were also theoretically trying to fight corporate greed).

I was writing instead to focus on a telling and refreshing concession in the piece. After discussing how big O’Neal’s and Prince’s salaries were (unconscionably large, but fully disclosed), he recounts how much money their inattentiveness or incompetence has cost shareholders. “The previously reported profits have been wiped out,” he writes, “and rumors of billions more in coming write-offs abound.” Then comes the capper: “Who knows what the class-action suits against Merrill and Citi for stock fraud will cost?”

Well, exactly. But let’s drill down on that last insight. What he’s saying is that the innocent Citi and Merrill shareholders whose fate he is bewailing are about to lose even more money because they will have to foot the bill for the defense attorneys fees and settlement payments and increased insurance premiums being brought down upon those companies by the shareholder class-action suits that are reflexively coming down the pike. Shareholder suits brought by lawyers who aspire to become the next Bill Lerach.

Getting confused? You should be. You’re noticing something distinctive about Lerach’s life’s work, and it’s something that’s true even if you were to assume, for the sake of argument, that all of his cases were actually nonfrivolous — i.e., arguably had merit. The weird thing about those cases is this: Most of them probably didn’t benefit most of the people for whom they were brought.

There’s actually a remarkable consensus about that fact in legal academia today. Here’s why.

In the typical fraud suit prompted by a sudden drop in stock price, the vast majority of investors who get hurt—i.e., the ones who bought when the stock price was allegedly inflated by the fraud, and sold after it had fallen back to true value—purchased their stock from other innocent investors. Those innocent sellers inadvertently benefited from the fraud (i.e., they sold at an artificially inflated price), but the law does not require them to cough-up their windfalls. Instead, the injured investors go after the corporation itself for their reimbursement. But everything the corporation pays as a consequence—attorneys fees, insurance premiums, settlements, judgments—ends up hurting its current shareholders, who also happen to be innocent of any wrongdoing.

It gets worse. In real life, most diversified investors, like pension funds and mutual funds, aren’t harmed by most securities frauds to begin with. If a pension fund holds a portfolio of 1,000 stocks, and 100 of those companies are accused of fraud in a given year, the fund most likely will be a net buyer (i.e., loser) as to 50 of those inflated stocks, but a net seller (i.e., winner) as to the other 50. Empirical studies appear to confirm that the majority of diversified investors—which is the vast majority of all investors—don’t suffer net damages. Any compensation they receive from lawsuits is overcompensation.

What about the undiversified investors—the widows and orphans? Too often private shareholder suits don’t help them either. Undiversified investors are typically “buy-and-hold” investors. To be a class member, though, investors must have bought their stock during the period when the alleged fraud was in effect, which is usually less than a year before the date of the price drop. Buy-and-hold investors will often have bought too early to qualify.

In August six influential law professors—four of whom are generally considered moderate-to-liberal on shareholder issues—wrote SEC chairman Christopher Cox urging him to convene a series of roundtable discussions on these subjects with a view to proposing reforms. The letter, authored by Donald Langevoort of Georgetown University Law Center, emphasized the professors’ unanimous concern about the “immense amount of ‘pocket-shifting’” that is currently occurring (i.e., innocent investors senselessly paying innocent investors, with much of the money being lost to attorneys fees en route), and the need to pay “more attention to the burden imposed on smaller investors whose inactive trading makes it more likely they will be funding the pay-outs than receiving them.” The professors’ letter is available here.

The SEC general counsel Brian Cartwright wrote back indicating that these were just the sorts of issues the Commission hopes to look into in an upcoming “formal roundtable” it wants to convene “to explore the topics of private securities litigation, its relationship to Commission enforcement efforts, and its effects on U.S. capital markets, competitiveness, shareholder value, and investor protection.” (The precise schedule and agenda has not yet been announced.)

It’s a welcome development. Too bad it won’t come in time to protect those poor Citi and Merrill shareholders from the drubbing Lerach acknowledges they’re about to sustain from benefactors like him.

Last Friday, Apple (AAPL) was hit with a $1.2 billion class action for allegedly bricking — i.e., intentionally disabling — the iPhones of customers who had used unauthorized “unlocking” software on their phones (enabling them to use carriers other than AT&T) or unauthorized applications on their handsets (like non-Apple ringtone software). AT&T Mobility (T) is also named as a co-defendant.

The suit seeks $1.2 billion in damages, alleging violations of the federal antitrust laws, California unfair business practices laws, and the tort of “computer or chattel trespass.” It also claims that Apple’s customer warranty and license agreements, by forbidding customers from using third-party software on their phones, violate the Magnuson-Moss Warranty Act. (For the text of that act, see section (c) of the statute linked here.)

Both Apple and AT&T, through spokespersons, declined comment. Here is the complaint, and the suit’s official web site, set up by the plaintiffs lawyers, is here. (Don’t miss the picture of Steve Jobs in the iPhone screen looking suitably Satanic.)

The case stems from a series of unusual events that began with a carefully worded press release from Apple on September 24. (These events have been extensively covered in the blagosphere, but a good place to begin might be with my colleague Philip Elmer-DeWitt’s Apple 2.0 post, here.)

“Apple has discovered,” it said, “that many of the unauthorized iPhone unlocking programs available on the Internet cause irreparable damage to the iPhone’s software, which will likely result in the modified iPhone becoming permanently inoperable when a future Apple-supplied iPhone software update is installed.” It went on to warn that “unauthorized modifications” to the iPhone’s software violated the customer’s license agreement and voided the warranty.”

Four days later the company released version 1.1.1 of its iPhone operating system which did, indeed, cause problems, with many of the expensive phones being disabled — some permanently.

The suit alleges that none of these problems were actually inadvertent or inevitable byproducts of necessary upgrades, but were, instead, intentionally engineered efforts to punish customers for using competitors’ applications or services instead of Apple’s and AT&T’s. It also asserts that Apple customer service personnel were instructed to refuse to help customers restore the damaged phones to service, even though inexpensive fixes were technically feasible.

In an email, lead plaintiffs counsel Max Folkenflik, of New York’s Folkenflik & McGerity, says that he is seeking certification of a class that would include all purchasers of iPhones, regardless of whether the phones were actually disabled by Apple’s release of version 1.1.1. “All purchasers have less choice and pay higher prices than they would in a competitive market,” he writes. “Freedom of choice is worth money in the same way that markets value liquid investments over illiquid investments. The fact that unlocked iPhones sold for more than locked iPhones provides evidence for that conclusion if any were needed.”

He then totes up the damages as follows. “Our actual damage estimate of $200 million is based on a 2 million member class,” which is based on the number of iPhone customers that are predicted by December. He then theorizes that each purchaser suffered about $100 in injury due to “higher voice and data costs, avoidable roaming charges, fees for termination of T-Mobile plans, and the reduction of value based on the locked up technology.”

The antitrust laws and the California statute allow trebling of damages, which would bring the figure up to $600 milion. Then he also seeks punitive damages under the tort count (chattel trespass) of an additional $600 million, pushing the total figure up to $1.2 billion.

Though the suit raises many thorny issues, one of the more eyebrow-raising claims accuses Apple of monopolistic practices on the theory that the iPhone is such a distinctive device that it constitutes its own market — i.e., no other cell phone manufacturer even rises to the level of being a competitor. Since Apple obviously enjoys a monopoly over the iPhone market, the suit claims it is now illegally trying to extend that monopoly into other areas, including phone service and handset software.

To support the claim that the iPhone should be deemed to constitute its own market, the plaintiffs allege: “For many users, including the Plaintiffs and the Class, there was no product available which offered anywhere near the same combination of services and ease of use.”

It seems that being sued for antitrust violations may be overtaking plagiarism as the sincerest form of flattery.