"Of course, this is the worst possible development," a law professor at New York University, Stephen Gillers, said. "It bodes ill for Partners A & B," the professor said, using the pseudonyms prosecutors have adopted to refer to Messrs. Weiss and Lerach in court proceedings. "Each of them is clearly in the prosecutors' sights," Mr. Gillers said. With Bershad's testimony, prosecutors "may now have the ability to pull the trigger" and obtain an indictment of the two men, Mr. Gillers said.
"It seems pretty damning to me," another professor who has been following the case, Larry Ribstein of the University of Illinois, said. "They are facing a trial or pretty hard time, if all this pans out."
Messrs. Weiss and Lerach have not been charged with any crime. However, in recent weeks, the pair has been in plea discussions with federal prosecutors, a lawyer involved in the case said, speaking on condition of anonymity.
Mr. Weiss's attorney, Benjamin Brafman, declined to comment on the development. Mr. Lerach's lawyer, John Keker, did not respond to a message seeking comment for this article.
Bershad could receive up to five years in prison on the conspiracy count. Prosecutors and Bershad's lawyers agreed that sentencing guidelines call for 18 months to two years in his case, though Judge Walter is not obligated to follow that recommendation. Bershad also agreed to forfeit $7.75 million of his receipts from the various lawsuits and to pay a $250,000 fine.
At yesterday's hearing, Bershad and one of his lawyers, Cristina Arguedas, stood at a lectern as a prosecutor, Richard Robinson, outlined the facts the government would seek to prove if Bershad went to trial. For 15 minutes, the prosecutor described the scheme by which Milberg Weiss used secretly paid plaintiffs to win the race to be first to file securities lawsuits.
"Generally, these individuals were promised that they would be paid approximately 10% of the net attorneys' fees that Milberg Weiss obtained," Mr. Robinson said. This gave Milberg Weiss an advantage because plaintiffs' firms that filed first were likely to be named as lead counsel and to enjoy a larger share of attorneys fees when cases were settled, he said. In 1995, Congress changed the laws related to class actions, and first-to-file status became less critical.
In one of the case's most eye-catching allegations, Mr. Robinson said Bershad kept in his office a stash of cash contributed by Milberg Weiss partners. The prosecutor said this became a "secret payment fund" used to make off-the-books distributions to plaintiffs, who were expected to take less than the customary 10% if they were paid in cash.
Mr. Robinson said Partner A, Mr. Weiss, made at least one payment from the fund, and Partner B, Mr. Lerach, sought reimbursement for a cash payment to a plaintiff. The prosecutor said Partner A also used a "phony option," which court papers indicate related to an artwork, to pay $175,000 owed to one plaintiff involved in the scheme.
