For high-powered securities lawyer Mel Lifshitz, giving takes many forms, some more noble than others. Since 2003, a charitable trust funded and administered by Lifshitz's family has donated money to various causes, most of them orthodox Jewish organizations. Another recipient of the charity's money, however, has been a limited partnership that was a plaintiff in more than a dozen class-action lawsuits filed by Lifshitz's firm over the past four years, a review of documents shows. TheStreet.com found that the Melly & Rochelle Lifshitz Charitable Trust has invested at least $227,655 in the Delaware limited partnership, Colbart Birnet. In addition, a charitable trust set up by Lifshitz's law firm, Bernstein Liebhard & Lifshitz, one of the nation's top securities class-action firms, has invested at least $225,000 in the same partnership. Moreover, in five filings with the Securities and Exchange Commission, Lifshitz is listed as a "beneficial owner" of the Colbart Birnet partnership -- a circumstance Lifshitz says is plain wrong and attributes to "human error." Clouding the picture further are two alternate spellings for Colbart Birnet that appear in court filings and a federal tax return for the law firm charity. Lifshitz says there's nothing to the discrepancies and ascribes them to "typographical" mistakes. Financial connections between lawyers and clients in class-action litigation are frowned upon and can violate a federal law designed to preserve the autonomy of plaintiffs in such suits, legal experts say. According to the theory, a lawyer should not be beholden to any single plaintiff, especially the lead plaintiff, when he is negotiating on behalf of a larger group. "The potential is the conflict between a lawyer's obligation to the class and his personal interest,'' says Milton C. Regan Jr., a professor of legal ethics at Georgetown University School of Law. "The potentially aggrieved parties would be the
other members of the class.'' Lifshitz, in an email exchange, says he has no financial interest in the Colbart partnership, and does not benefit from the trust that invested in it. He does acknowledge that he is a trustee of the two charities. "This sounds potentially troublesome,'' says Michael Perino, a professor at St. John's University Law School and an expert on securities class actions. "It strikes one as an odd form of charity. Is this a disguised way of kicking some money back to this entity to get it to serve as lead plaintiff?'' Regan, the Georgetown professor, says one way for a lawyer to eliminate possible conflicts is to disclose his financial ties to a client to the court and let the judge resolve the matter. It's not clear that Bernstein Liebhard has done this as a matter of course in the lawsuits in which Colbart Birnet appears as a plaintiff.
Nothing NewQuestions about possible conflicts of interest are nothing new in the securities class-action bar. Federal prosecutors 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. Before it split up into two firms in 2004, Milberg Weiss was the nation's most successful securities class-action firm. The investigation of Weiss and Lerach is raising questions about some of the dubious methods that plaintiffs' lawyers have used to round up clients in order to file class-action lawsuits. With regard to Lifshitz, Colbart Birnet has appeared as a plaintiff in class actions filed by his firm against a number of mutual fund companies, as well as Guidant ( GDT) and Dynegy ( DYN). Typically, the suits have alleged violations of securities laws and sought monetary damages from the defendants. Colbart Birnet most notably appears as the lead plaintiff in a pending class action against Federated Investors ( FII), one of many lawsuits arising out of the three-year-old mutual fund trading scandal. Bernstein Liebhard became the court-appointed lead counsel in the case based, in part, on the strength of Colbart Birnet's claim for $1.14 million damages. The lead counsel designation is a plum assignment, meaning Bernstein Liebhard will a play major role in overseeing the litigation, arguing motions and negotiating any settlement with Federated. In light of Federated's $72 million settlement with securities regulators last November, Bernstein Liebhard is looking at a possible multimillion-dollar payday for its efforts. All in all, the New York-based law firm has been on a tear for the past few years. The National Law Journal recently named Bernstein Liebhard as one of the country's "hot'' plaintiffs' firms. It played a starring role in negotiating a partial $1 billion settlement in a class-action lawsuit that alleges 55 Wall Street investment firms defrauded investors by artificially inflating the value of hundreds of dot-com IPOs in the late 1990s. Bernstein Liebhard was also co-lead counsel in a securities class action against Deutsche Telekom ( DT) that settled last year for $120 million.
TheStreet.com, which publishes this Web site, was one of the 309 dot-com defendants that signed on to the partial $1 billion settlement in the so-called IPO class action.
No InterestIn a series of email exchanges, Lifshitz downplayed the significance of the charitable trusts' investments in Colbart Birnet. He said any suggestion of a conflict of interest involving himself, or his law firm, is simply wrong. "I do not have any interest -- minority or otherwise -- in Colbart Birnet L.P. A charity of which I am a trustee does,'' says Lifshitz. "I do not benefit from the charity and I am not a beneficial owner of it." Lifshitz says the law firm recently contacted Roy Simon, a law professor who specializes in legal ethics, about its dealings with Colbart Birnet, and the professor "reiterated our advice that the firms' conduct fully complied with all ethical and legal obligations." Simon, the Howard Lichtenstein distinguished professor of legal ethics at Hofstra University School of Law, says he sees no potential for a conflict of interest involving the investments by the charitable trusts in Colbart Birnet. Simon says he was recently retained by Bernstein Liebhard to advise it on the Colbart Birnet situation. "This is not something that worries me from a conflict perspective,'' says Simon. "I can't understand why this would have an impact on his judgment.'' Simon says he sees no potential quid pro quo in the investments by the charitable trusts because Colbart Birnet was a client of the law firm before the investments were made.
Three EntitiesDelaware corporate records reveal three entities bearing the Colbart Birnet name: Colbart Birnet Asset Management, Colbart Birnet II and Colbart Birnet IV. Colbert Birnet II is the one that received investments from the Lifshitz and Bernstein Liebhard family trusts. In the Federated case, Colbart Birnet, Colbart Birnet II and Colbart Birnet IV are listed as plaintiffs represented by Bernstein Leibhard.
A business profile obtained from corporate database Experian says Colbart Birnet employs two people and had estimated sales of $514,000. Since 2003, the Colbart entities have been frequent investors in private stock placements by small, cash-strapped companies that trade for under a $1 a share. On Wall Street, these deals are commonly called PIPEs, or private investments in public equity. But Colbart apparently also has other investments. In the Federated case, a declaration filed by Colbart Birnet says it bought and sold about 2 million shares of various Federated funds from 1999 through 2001.
Human ErrorSome federal filings, however, paint a conflicting picture of Lifshitz's interest in Colbart Birnet. Last year, five regulatory filings made in connection with the registration and sale of stock by Optionable ( OPBL), a small New York firm that provides services to brokerages, listed Lifshitz as one of Colbart Birnet's "beneficial owners.'' The other listed owners are Ezra Birnbaum and Eli Levitan, a New York lawyer. Birnbaum is president of Pond Equities, a New York brokerage firm that has been 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. Some regulatory filings describe Colbart Birnet as an "affiliate'' of Pond Equities. An investment advisory form filed by Pond with the SEC describes Birnbaum as the general partner of Colbart Birnet II. The form says about 1% of Pond customers are investors in Colbart Birnet, and a minimum investment costs $100,000. The form also says Colbart Birnet has $1.83 million in assets. Birnbaum, who lives near Lifshitz in Lawrence, N.Y., on Long Island, did not return several telephone calls. Levitan could not be reached for comment. Lifshitz, in an email response, says the description of him as beneficial owner of Colbart Birnet is a mistake and he had not been aware of it until TheStreet.com brought it to his attention. He said he would ask the company to correct the filings.
A spokesman for Optionable says the information about the beneficial owners of Colbart Birnet was provided by the limited partnership. However, the spokesman said the company recently was informed that some of that information may be incorrect.
More MistakesStill, it's not the only discrepancy that has appeared in official documents involving Colbart Birnet. A federal court docket search found 18 lawsuits in which Bernstein Liebhard was representing a lead plaintiff named "Colbert Birnet." In those cases, the name of the partnership was spelled with an "e,'' rather than an "a.'' Lifshitz, in explaining the discrepancy, says it "is simply a typographical error.'' The "typographical error" is reflected in a June 2003 declaration in a case captioned Colbert Birnet II vs. Guidant. On the signature section of the declaration, "Colbert Birnet II" is typed in beneath an illegible handwritten signature. There is at least one other misspelling of Colbart in official documents. In the 2003 federal tax return for the Bernstein Liehbard law firm's charitable trust -- The BL Squared Foundation -- Colbart is spelled "Colbirt.'' Perino, the St. John's professor, notes that there are provisions in class-action securities law that put limits on how many times an investor may serve as lead plaintiff in such cases. According to him, an investor cannot serve as a lead plaintiff in more than five class actions in any three-year period.
Past PrologueThe question of plaintiff autonomy came up 14 years ago in the dealings of Richard Greenfield, who in his time was one of the most successful securities class-action lawyers in the country. Greenfield came under fire for filing lawsuits on behalf of companies he had a controlling interest in. In response to Greenfield's tactics, some federal judges tossed out his lawsuits. In one proceeding, a New Jersey federal judge ordered a disciplinary investigation after it was discovered that one of the plaintiffs was a so-called shell company controlled by Greenfield.
In 1994, Greenfield's license to practice law in New Jersey and Pennsylvania was suspended for a year. He was reinstated in 1995. In the case involving Colbart Birnet, there's no indication the limited partnership was serving as a shell company. However, it was incidents like the one involving Greenfield that led to the passage of the federal Private Securities Litigation Reform Act of 1995 -- a law that changed the playing field for securities class-actions. The nine-year-old law was aimed at cracking down on some of the abusive tactics being used by class-action lawyers. One provision of the law sought to create an arm's-length distance between the lawyers heading up a class action and the lead plaintiff in a lawsuit. Federal lawmakers had hoped to encourage lead plaintiffs to take a more active role in class-action lawsuits by pressing their lawyers on settlement negotiations and the divvying up of legal fees. "There's case law saying you shouldn't be lead plaintiff and lead counsel and people have been disqualified for that,'' says Jill Fisch, a securities professor with Fordham University School of Law. "This is something that is material and should be disclosed.'' In the Federated case, at least, there's no indication that either Lifshitz or his law firm has disclosed their ties to Colbart Birnet. Lawyers for Federated declined to comment.