Class-action securities attorney Mel Lifshitz and his law partners aren't just aces in the courtroom. They also know their way around an investment.
A charitable trust set up by Lifshitz's law firm, Bernstein Liebhard & Lifshitz, has seen a big increase in the value of its investment in
, a limited partnership that has been a plaintiff in more than a dozen class-action lawsuits filed by Lifshitz's law firm over the past four years.
The law firm's charitable trust -- BL Squared Foundation -- reported a 222% increase in the value of its initial $225,000 investment in Colbart Birnet, according to the trust's 2004 federal tax return. The big gain boosted the year-end value of the trust's investment in the Delaware limited partnership to $725,000.
By comparison, the
rose 9% in 2004. The average hedge fund was up 10%.
The law firm trust, which valued all of its assets and investments at $7.68 million in 2004, paid out $105,000 to three orthodox Jewish organizations in 2004, according to the tax return.
Colbart Birnet currently is the lead plaintiff in a pending class action against
, one of many lawsuits arising out of the three-year-old mutual fund trading scandal.
Legal experts, some of whom questioned the trust's investment in Colbart Birnet in a
previous article on this Web site, note that financial connections between lawyers and clients in class-action litigation are frowned upon. Federal laws exist to demarcate the proper boundaries, on grounds that a lawyer's loyalty should be to members of the larger class and not a specific plaintiff.
These days, there's a lot of jockeying between class-action lawyers to get their clients appointed as lead plaintiff in securities litigation. That's because a law firm as lead counsel is assured of playing a major role in negotiating any settlement and securing a rich fee for itself.
Meanwhile, a charitable trust funded and administered by Lifshitz's family also is an investor in Colbart Birnet. The Melly & Rochelle Lifshitz Charitable Trust sank $227,655 into the limited partnership in 2003, the same year the law firm trust made its investment.
Lifshitz, in an email response, said that as a general policy, the law firm trust "does not discuss its investment strategy or performance.'' He adds, "We have disclosed what the law requires to be disclosed.''
Last week, Lifshitz told
that there's nothing wrong with the investments the charitable trusts have made in Colbart Birnet. The attorney said there's no conflict of interest because neither he nor his law partners are beneficiaries of either trust.
In his latest email response, Lifshitz says the two charitable trusts have done a lot of good. He says the trusts "have been responsible for starting a hotline for individuals in desperate need of psychological help'' and "feeding thousands of poor individuals.''
The 2004 tax return for the law firm charitable trust recently became publicly available on GuideStar.org, a Web site that compiles information on nonprofit organizations and charitable foundations. The tax return does not specify whether the 222% gain in value is due solely to the performance of Colbart Birnet in 2004 or represents some new money being invested in the partnership by the law firm trust. The 2004 tax return for the Lifshitz family trust is not yet available.
It's also not clear how Colbart Birnet, which reports having just $1.83 million in assets, managed to generate such profitable returns in 2004. Regulatory filings describe the limited partnership as an "affiliate'' of Pond Equities, a small New York brokerage that is a longtime client of Bernstein Liebhard.
Over the years, Pond Equities has appeared as a plaintiff, sometimes in a lead plaintiff role, in 32 securities class actions filed by Bernstein Liebhard in federal court. The firm is led by Ezra Birnbaum, a neighbor and close friend of Lifshitz's. In 2004, two charitable trusts administered by Birnbaum, the Ezra Charitable Foundation and the JAAAA Foundation, contributed $139,000 to the Bernstein Liebhard law firm trust.
Since 2003, Colbart Birnet has invested $1.4 million in 14 private stock placements by small, cash-strapped companies, according to PlacementTracker, a research firm. On Wall Street, these deals are commonly called PIPEs, or private investments in public equity.
In 2004, regulatory filings show that Colbart Birnet registered to sell shares purchased in at least eight PIPE deals. Some of the obscure companies that Colbart Birnet purchased and sold stock in that year are
TNX Television Holdings
. PowerChannel, a defunct Internet service provider looking to merge with another business, most recently traded for a penny a share.
The revelation about Bernstein Liebhard's ties to Colbart Birnet comes at a time that there's growing attention in the legal world to conflicts of interest between plaintiffs' lawyers and their clients. Federal prosecutors, for instance, are investigating allegations that two of the biggest securities class-action lawyers, Mel Weiss and William Lerach, directed the payment of millions of dollars in "kickbacks'' to a retired Florida attorney to serve as a lead plaintiff in more than 50 suits they filed by Milberg Weiss Bershad Hynes & Lerach.
In fact, Bernstein Liebhard is trying to use the federal investigation as grounds to disqualify Lerach and his client from serving as lead counsel and lead plaintiff in a pending securities class-action against
( DCN), an auto-parts supplier. Last month, Bernstein Liebhard filed a motion in Ohio federal court saying Lerach's law firm is unfit to serve and that Bernstein Liebhard would make a better choice.
"What Lerach lacks is a secure future to which the class here is entitled to ensure consistent and undistracted representation -- as well as representation by a firm that has not brazenly violated the law and used its clients as pawns,'' lawyers for Bernstein Liebhard argue in the motion.
"Their allegation with respect to Lerach is that he is in effect skirting what the lead plaintiff provision was intended to do, which is to create a real plaintiff to monitor the actions of the plaintiffs' counsel,'' says Michael Perino, a professor at St. John's University Law School and an expert on securities class actions. "But that same argument could be apparently lodged against Bernstein Liebhard.''