It appears that the drain of paying for criminal defense attorneys is having an impact even on mega-plaintiffs lawyer Dickie Scruggs, whose share of fees from the late 1990s tobacco settlements is thought to have approached $1 billion.

Since September 2006, Scruggs had been paying all fees and expenses for two “whistleblowers” who had been sued by their employer due to actions they’d taken to assist Scruggs in his assault on the insurance industry over its post-Hurricane Katrina claims-handling practices. (Basically, they stuck their necks out for him, so he was covering their back-sides.)

But on Tuesday, one of the two law firms defending the whistleblowers – Cori and Kerri Rigsby – asked to withdraw, citing “the inability of the Rigsbys and others” to pay its fees going forward or to even “adequately satisfy existing fee and expense obligations.” The motion is here.

The withdrawing firm is Washington, D.C.’s Zuckerman Spaeder, and its team was led by William W. Taylor, III, who is also the lead criminal defense lawyer for indicted class-action firm Milberg Weiss (or, as of today, Milberg LLP, see here). I have a call into Mr. Taylor, but given today’s activity in the Milberg case – founding partner Mel Weiss’ expected guilty plea, see here – I suspect I may be low down on his call-back list. Scruggs’ counsel, John Keker, declined to comment on Zuckerman’s motion and what it might mean.

The Rigsby sisters’ employer, E.A. Renfroe & Co., sued them in September 2006 for allegedly violating their employment contracts by photocopying confidential documents belonging to State Farm (to whom Renfroe was supplying supplemental claims-adjusters) and giving them to Scruggs. In addition to paying the Rigsbys’ costs of defending the suit, Scruggs had also taken on at least an oral commitment to indemnify the sisters for any judgment they might ultimately incur, according to a statement filed by the Rigsbys’ lawyers last December. See here.

Scruggs pled guilty Friday to conspiring to bribe a Mississippi state judge in Oxford in 2007, but his legal problems are not over. Prosecutors in Oxford contend he was involved in attempting to bribe a different state judge in Jackson in 2006, and a different set of prosecutors in Birmingham, Ala., are pursuing him on a criminal contempt charge, arising from Scruggs’ alleged defiance of a December 2006 court order. (The contempt charge was dismissed on February 29, but the Alabama prosecutors are contemplating an appeal.)

Scruggs is also likely paying the criminal defense costs of his son and co-defendant, Zach Scruggs, who faces trial March 31, and currently has at least 7 lawyers at 4 firms representing him, according to electronic court records. One would also expect that Scruggs would be footing the bills for his law partner Sid Backstrom, who also pled guilty Friday.

According to the withdrawal motion, the Rigsbys will continue to be represented by Birmingham’s Battle Fleenor Green Winn & Clemmor, who were also previously paid by Scruggs.

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.

[This is a guest column by my colleague, Fortune editor-at-large Peter Elkind. Back in the September 4, 2000, issue of Fortune, when the investigation of Milberg Weiss had not yet become public, he wrote a 9,000-word profile of Bill Lerach, available here, providing a remarkably prescient overview of things to come. In November 13, 2006 he wrote a 9,000-word cover story , available here, about what the investigation had unearthed by then.]

By Peter Elkind

I guess, at bottom, no matter how clear the rules, greed, unfettered power or feelings of omnipotence will lead some people into bad conduct.
–Mel Weiss, 2005 interview with Accounting Today

Last week’s events in the slow, stunning fall of plaintiffs’ juggernaut Milberg Weiss make a handful of points painfully clear.

The first is that 72-year-old firm co-founder Melvyn Weiss, indicted Thursday on four felony counts in the long-running federal kickback probe, isn’t just going down with his sinking ship. He’s taking the ship down with him.

In a remarkable statement on the eve of Weiss’ impending indictment, the firm—which has been crippled by its own indictment—announced that Weiss, in response to the new charges, has “decided to discontinue his involvement in firm management.”

No, Weiss isn’t leaving the firm—in fact, he’s not even taking a leave of absence. Far from it. “Mr. Weiss will remain available to counsel clients and Firm attorneys,” Milberg noted, as though offering a reassuring note.

But perhaps this should come as no surprise—even now. Unlike his former colleague, Bill Lerach—who leveraged the appeal to prosecutors of his own guilty plea to strike a plea bargain that protected the new law firm he spun off of Milberg Weiss in 2004—Weiss has stubbornly refused to even step aside, a move prosecutors have long demanded as a first step to any resolution of Milberg’s case. Devastating consequences be damned! This is an enterprise, remember, that represents public pension funds and small investors—and has long trafficked on claiming the moral high ground in the fight against corporate greed and criminality. (For more on Weiss’ missed opportunity to mitigate the damage to his firm, see here.)
How could Milberg’s 25-odd remaining partners put up with such a situation? Because the founder has always had a virtual strangehold on his firm. As one former partner told me last year: Milberg Weiss “was Mel’s world, and everyone else just lived in it.”

The indictment underlines this point. For years, Mel Weiss had veto power over any decision, even as his firm grew to more than 200 lawyers. Between 1983 and 2005, his individual stake in the firm—and its profits—ranged from 13.5% to 39.4%. Weiss’ take during that span: a stunning $209.9 million, according to the government.

If Thursday’s superseding indictment against Milberg, Mel Weiss, and two other defendants is to be believed—and it clearly rests on a solid foundation of evidence from (among others) two former Milberg name partners who have agreed to plead guilty and cooperate with prosecutors—Weiss was at the very center of the firm’s long-running scheme to secretly pay plaintiffs more than $11.3 million in kickbacks in 225 lawsuits.

As the government describes it, Weiss was personally involved in dirty dealings with all three of Milberg’s showcase paid plaintiffs—Steven Cooperman, Seymour Lazar, and Howard Vogel—each of whom secretly received millions for serving as name plaintiff in dozens of Milberg class actions. (Lazar, also a defendant in the case, has pled not guilty. Cooperman and Vogel have pled guilty and are cooperating with the government.) The indictment also ties Weiss to an unnamed trio of Florida residents who were paid to serve as plaintiffs in about 60 more lawsuits.

And the allegations are ugly. Weiss is no longer thinly masked, as he was in earlier government filings, as “Partner A.” The new indictment places him at the scene of the alleged crimes from the beginning.
It has Weiss, in August 1979, informing his number-two man, senior partner David Bershad (one of the now-cooperating former Milberg lawyers) that he had struck a deal with California investor Lazar to serve as a plaintiff in Milberg lawsuits in exchange for 10% of the firm’s attorney fees in those cases.
It has Weiss, in the early 1980s, informing Bershad not to worry about violating the law by paying a Florida plaintiff because they would be making the payments in cash, and thus there would be no paper trail and little risk of getting caught. Indeed, in the mid-1980s, the indictment says, Weiss personally carried “thousands of dollars in cash” from New York to Florida to make payments to two plaintiffs.
The indictment details how Weiss—along with Lerach and Bershad—in January 1986 included a provision in the firm’s partnership agreement that would allow the “conspiring partners” to tap the firm’s coffers to reimburse themselves for cash they’d each kicked in to a slush fund for paying plaintiffs. (Some of this cash was stashed in a safe in Bershad’s office at the law firm.) In December 1987, 1988, and 1999, according to the indictment, Weiss then “caused” the firm to reimburse him a total of about $380,000 in cash for such payments.

It has Weiss, in September 2003, advising name partner Steven Schulman (whose deal to plead guilty and cooperate was also announced Thursday) that because of the ongoing investigation into Milberg Weiss kickbacks, he wouldn’t negotiate a disputed payment to plaintiff Howard Vogel over the telephone. Two months later, according to the indictment, Weiss resolved the matter with Vogel’s lawyer face to face in Milberg Weiss’ New York office.

And finally, the indictment accuses Weiss of obstructing justice and making false statements in withholding an incriminating document that had been subpoenaed by prosecutors.
Weiss’ criminal lawyer, Benjamin Brafman, insisted his client would fight the charges. “We are confident that when the evidence is carefully reviewed at a trial of these charges, Mr. Weiss will be fully exonerated,” Brafman said in a statement.

That, of course, remains to be seen—as does the question of whether Milberg Weiss can survive long enough to witness such an outcome. On that issue, the firm on Thursday issued a second, stiff-upper-lip statement that suggested the gloomy prospects of what was once the most feared law firm in America: “Despite the government’s announcement today we will continue to fight for our clients and class members and to achieve the record recoveries for which our firm has long been known. The firm’s active partners, none of whom is alleged to have been involved in any wrongdoing, will maintain responsibility for the firm’s management and litigation activities. We will not be deterred from our work and will persevere throughout this difficult period.”

My colleague, Fortune editor at large Peter Elkind, has published a piece here reporting the next dominos to drop in the Milberg Weiss investigation: The indictment of name partner and firm founder Melvyn Weiss is expected to be announced tomorrow (Thursday), he reports, while previously indicted name partner Steven G. Schulman is expected to agree to plead guilty.

A quick aside on yesterday’s controversial plea agreement between the government and top defendant Bill Lerach. As reported elsewhere, it is a so-called 11(c)(1)(c) agreement, which means that if the judge approves it, he must order a sentence within the agreed upon range, which here is between 12 months and 24 months. A couple lawyers have commented to me that, despite the “binding” nature of these pleas, judges do, as a practical matter, still have bargaining leverage. That’s because if the judge disapproves such a plea, and says he won’t approve it unless he can impose, say, a 30-month sentence, it’s extremely hard for the defendant to respond by saying, “No, deal’s off, I’m going to trial.” Having crossed the mental Rubicon involved in admitting guilt and beginning to get put everything behind him, it is emotionally difficult to put oneself back into the fighting frame of mind.