GEORGE S. CARDONA United States Attorney THOMAS P. …

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GEORGE S. CARDONAUnited States AttorneyTHOMAS P. O’BRIENAssistant United States AttorneyChief, Criminal DivisionDOUGLAS A. AXEL (Cal. Bar # 173814)Deputy Chief, Major Frauds SectionRICHARD E. ROBINSON (Cal. Bar # 090640)ROBERT J. McGAHAN (Cal. Bar # 196568)Assistant United States AttorneysMajor Frauds Section

1100 United States Courthouse312 North Spring StreetLos Angeles, California 90012Telephone: (213) 894-0713/0689/5416Facsimile: (213) 894-6269E-mail: [email protected]

[email protected] [email protected]

Attorneys for theUnited States of America

UNITED STATES DISTRICT COURT

FOR THE CENTRAL DISTRICT OF CALIFORNIA

UNITED STATES OF AMERICA, ))

Plaintiff, ))

v. ))

MILBERG WEISS BERSHAD & )SCHULMAN LLP; )DAVID J. BERSHAD; )STEVEN G. SCHULMAN; )SEYMOUR M. LAZAR and )PAUL T. SELZER, )

)Defendants. )

) )

No. CR 05-587(A)-JFW

GOVERNMENT’SCONSOLIDATED OPPOSITIONTO MOTIONS BY DEFENDANTSSTEVEN G. SCHULMAN,SEYMOUR LAZAR, AND PAUL T.SELZER TO DISMISSINDICTMENT DUE TO INVALIDHONEST SERVICES FRAUDTHEORY; EXHIBITS ATTACHEDSEPARATELY

Date: August 6, 2007Time: 1:30 p.m.Place: Courtroom of the

Hon. John F. Walter

Plaintiff, United States of America, by and through its counsel of record, the

United States Attorney’s Office for the Central District of California, hereby files

this consolidated opposition to: (1) the Motion by Defendant Steven G. Schulman

to Dismiss Counts 1, 2, 6, 7, 8, 18 and 19 With Respect to Defendant Steven G.

Case 2:05-cr-00587-JFW Document 305 Filed 07/11/2007 Page 1 of 52

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Schulman Due to Invalid Honest Services Fraud Theory Based on Delaware

“Transactional” Cases (“Schulman Delaware Motion”) (Dkt # 196); (2) the Motion

by Defendant Steven G. Schulman to Dismiss Counts 1, 2, 6, 7, 8, 18 and 19 With

Respect to Defendant Steven G. Schulman Due to Invalid Honest Services Fraud

Theory Based on Federal Cases (“Schulman Federal Cases Motion”) (Dkt # 263);

(3) the Motion by Defendant Seymour Lazar to Dismiss Counts 1–13 and 18–20 of

the First Superseding Indictment Due to Invalid Mail Fraud Theory (“Lazar Honest

Services Motion”) (Dkt # 267); and (4) Defendant Paul Selzer’s Motion to Dismiss

Counts 9–13 and 20 of the First Superseding Indictment (“Selzer Honest Services

Motion”) (Dkt # 259) (collectively, the “Honest Services Motions”). This

consolidated opposition is based on the accompanying memorandum of points and

authorities; the exhibits attached thereto; the files and records of this case; and any

argument forwarded at the hearing on this motion on August 6, 2007.

DATED: July 11, 2007 Respectfully submitted,

GEORGE S. CARDONAUnited States Attorney

THOMAS P. O’BRIENAssistant United States AttorneyChief, Criminal Division

DOUGLAS A. AXELAssistant United States AttorneyDeputy Chief, Major Frauds Section

/s/ Robert J. McGahan RICHARD E. ROBINSONROBERT J. McGAHANAssistant United States AttorneysMajor Frauds Section

Attorneys for PlaintiffUNITED STATES OF AMERICA


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TABLE OF CONTENTS

PAGE(S):

I. INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

II. BACKGROUND . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

III. ARGUMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

A. THE INDICTMENT PROPERLY CHARGES “HONESTSERVICES” FRAUD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

1. The Indictment Is Sufficient Because it ProperlyCharges the Elements of the Offense . . . . . . . . . . . . . . . . . . . . 9

2. The Indictment Need Not Allege, Nor Must theGovernment Prove, Economic Harm to Establish“Honest Services” Fraud . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

a. The Ninth Circuit’s Decision inUnited States v. Bohonus ConfirmsThat No Risk of Economic HarmNeed Be Shown . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

b. The Public Corruption Cases, WhichDo Not Require Risk of EconomicHarm, Also Apply Here . . . . . . . . . . . . . . . . . . . . . . . . 16

c. The Indictment Alleges a Kickback/Bribery Scheme . 18

3. Even if Required, The Indictment ProperlyAlleges That The Defendants’ ConductHarmed and Posed Foreseeable Risks ofEconomic Harm to Class Members . . . . . . . . . . . . . . . . . . . . 20

a. The Indictment Sufficiently Alleges aScheme to Defraud Absent ClassMembers of Money and Property . . . . . . . . . . . . . . . . . 20

(i) The Kickback Payments . . . . . . . . . . . . . . . . . . . 20

(ii) Material Economic Information . . . . . . . . . . . . . 22

b. The Conflict of Interest Alleged in the IndictmentCreated a Foreseeable Risk of Economic Harm . . . . . . 24

c. Class Members Also Suffered a Foreseeable Risk ofEconomic Harm Because the Illegal and UnethicalConduct Subjected Judgments and Settlements toCollateral Attack . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32

4. Defendants Defrauded Shareholders of TheirIntangible Right to Honest Services in the“Delaware Transactional Cases” . . . . . . . . . . . . . . . . . . . . . . 36


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TABLE OF CONTENTS

PAGE(S):

5. The Fifth Circuit’s Decision in United States v. Brown Does Not Apply To This Case . . . . . . . . . . . . . . . . . . . . . . . . 37

B. THE INDICTMENT IS NOT UNCONSTITUTIONALLYVAGUE ON ITS FACE OR AS APPLIED . . . . . . . . . . . . . . . . . . . 38

C. DISMISSAL OF THE INDICTMENT IS NOT A PROPER REMEDY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39

IV. CONCLUSION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42


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TABLE OF AUTHORITIES

CASES : PAGE(S):

Alpine Pharmacy, Inc. v. Chas. Pfizer & Co., 481 F.2d 1045 (2d Cir. 1973) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

Amchem Products v. Windsor, 521 U.S. 591 (1997) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35

Buford v. H&R Block, Inc., 168 F.R.D. 340 (S.D. Ga. 1996) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

Costello v. United States, 350 U.S. 359 (1956) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

Cotchett v. Avis Rent-a-Car System, 56 F.R.D. 549 (S.D.N.Y. 1972) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26

Diaz v. Trust Territory of the Pacific Islands, 876 F.2d 1401 (9th Cir. 1989) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30

Epstein v. MCA, 179 F.3d 641 (9th Cir. 1999) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28

Epstein v. MCA, Inc., 126 F.3d 1235 (9th Cir. 1997) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28

Esler v. Northrop Corp., 86 F.R.D. 20 (W.D. Mo. 1979) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

Graybeal v. American Savings & Loan Association, 59 F.R.D. 7 (D.D.C. 1973) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26

Greenfield v. Villager Industries, Inc., 483 F.2d 824 (3d Cir. 1973) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31

In re Agent Orange Product Liability Litigation, 818 F.2d 216 (2d Cir. 1987) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31

In re Bristol-Myers Squibb Securities Litigation, 361 F. Supp. 2d 229 (S.D.N.Y. 2005) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

In re Cendant Corporation Prides Litigation, 243 F.3d 722 (3d Cir. 2001) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

In re Discovery Zone Securities Litigation, 169 F.R.D. 104 (N.D. Ill. 1996) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26

In re Equity Funding Corp. of America Securities, 438 F. Supp. 1303 (C.D. Cal. 1977) . . . . . . . . . . . . . . . . . . . . . . . . . . . 30, 31

In re General Motors Corp. Pick-Up Truck Fuel Tank,

55 F.3d 768 (3d Cir. 1995) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25


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TABLE OF AUTHORITIES (cont’d)

CASES : PAGE(S):

In re Washington Public Power Supply System Securities Litigation, 19 F.3d 1291 (9th Cir. 1994) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25

Jerlyn Yacht Sales v. Roman Yacht Brokerage, 950 F.2d 60 (1st Cir. 1991) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

Lewis v. Teleprompter Corp., 88 F.R.D. 11 (S.D.N.Y. 1980) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31

Lobatz v. U.S. West Cellular of California, Inc.,222 F.3d 1142 (9th Cir. 2000) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

Matsushita Electric Industrial Co., Ltd. v. Epstein, 516 U.S. 367 (1996) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28

Mautner v. Hirsch, 32 F.3d 37 (2d Cir. 1994) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

McNally v. United States, 483 U.S. 350 (1987) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12, 41

Norman v. McKee,

431 F.2d 769 (9th Cir. 1970) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30

Officers for Justice v. Civil Service Com'n, Etc., 688 F.2d 615 (9th Cir. 1982) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25

Phillips Petroleum Co. v. Schutts, 472 U.S. 797 (1985) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24

Piambino v. Bailey, 757 F.2d 1112 (11th Cir. 1985) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

Shields v. First National Bank of Arizona, 56 F.R.D. 442 (D. Az. 1972) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26

Shields v. Valley National Bank, 56 F.R.D. 448 (D. Az. 1971) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26

Staton v. Boeing Co., 327 F.3d 938 (9th Cir. 2003) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27

Stavrides v. Mellon National Bank & Trust Co., 60 F.R.D. 634 (W.D. Pa. 1973) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31, 32

Stull v. Pool,

63 F.R.D. 702 (S.D.N.Y. 1974) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26


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CASES : PAGE(S): Susman v. Lincoln American Corp.,

561 F.2d 86 (7th Cir. 1977) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26

Sweet v. Pfizer, 232 F.R.D. 360 (C.D. Cal. 2005) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

Turoff v. May Co., 531 F.2d 1357 (6th Cir. 1976) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26

United States v. Bohonus, 628 F.2d 1167 (9th Cir. 1980) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . passim

United States v. Boyd, 309 F. Supp. 2d 908 (S.D. Tex. 2004) . . . . . . . . . . . . . . . . . . . . . . . . . 14, 15

United States v. Brown,

459 F.3d 509 (5th Cir. 2006) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11, 38, 39 United States v. Bryza,

522 F.2d 414 (7th Cir. 1976) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13, 14 United States v. Douglas,

398 F.3d 407 (6th Cir. 2005) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

United States v. Frega, 179 F.3d 793 (9th Cir. 1999) . . . . . . . . . . . . . . . . . . . . . . . . . . . 16, 38, 39

United States v. Fulbright,

105 F.3d 443 (9th Cir. 1997) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41

United States v. George, 477 F.2d 508 (7th Cir. 1973) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13, 14, 19

United States v. Givens,

767 F.2d 574 (9th Cir. 1985) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

United States v. Gray, 96 F.3d 769 (5th Cir. 1996) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35

United States v. Gray, 405 F.3d 227 (4th Cir. 2005) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

United States v. Hasner, 340 F.3d 1261 (11th Cir. 2003) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

United States v. Hausman, 345 F.3d 952 (7th Cir. 2003) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15, 16, 21

United States v. Hutchison,

22 F.3d 850-51 (9th Cir. 1993) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41


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CASES : PAGE(S):

United States v. Lamoreaux, 422 F.3d 750 (8th Cir. 2005) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

United States v. Leahy, 464 F.3d 773 (7th Cir. 2006) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

United States v. Lemire, 720 F.2d 1327 (D.C. Cir. 1983) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

United States v. Little, 889 F.2d 1367 (5th Cir. 1989) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21, 23

United States v. Lyons,

454 F.3d 968 (9th Cir. 2006) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

United States v. Mathews, 772 F.2d 208 (9th Cir. 1978) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

United States v. Miller, 471 U.S. 130 (1985) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41

United States v. Panarella, 277 F.3d 678 (3d Cir. 2002) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13, 18

United States v. Poindexter, 719 F. Supp. 6 (D.D.C. 1989) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40

United States v. Reyes, 2007 WL. 831808 (N.D. Cal. Mar. 16, 2007) . . . . . . . . . . . . . . . . . 11

United States v. Rowe, 56 F.2d 747 (2d Cir. 1932) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23

United States v. Rybicki, 287 F.3d 257 (2002), aff'd, 354 F.3d 124 (2d Cir. 2003) (en banc) . . . . . . 30

United States v Rybicki,

354 F.3d 124 (2d Cir. 2003) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

United States v. Sun-Diamond Growers of California, 138 F.3d 961 (D.C. Cir. 1998) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

United States v. Telink, Inc., 910 F.2d 598 (9th Cir. 1990) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41

United States v. Vinyard, 266 F.3d 320 (4th Cir. 2001) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10, 11

United States v. Wallach,

935 F.2d 445 (2d Cir. 1991) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23


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CASES : PAGE(S):

United States v. Welch, 327 F.3d 1081 (10th Cir. 2003) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

United States v. Williams, 441 F.3d 716 (9th Cir. 2006) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . passim

United States v. Woodruff, 50 F.3d 673 (9th Cir. 1995) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

Weinberger, et al. v. Great Northern Nekoosa Corp., 925 F.2d 518 (1st Cir. 1991) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25

Weisman v. Darneille, 78 F.R.D. 669 (S.D.N.Y. 1978) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32

Zucker v. Occidental Petroleum Corp., 192 F.2d 1323 (9th Cir. 1999) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

STATE CASES:

E.I. Dupont v. Florida Evergreen Foliage, 744 A.2d 457 (Del. 1999) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35

In re Cox Communications, Inc. Shareholders Litigation, 879 A.2d 604 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36, 37

In re MCA, Inc., 598 A.2d 687 (Del. Chanc. Ct. 1991) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28

In re MCA, Inc. Shareholders Litigation, 774 A.2d 272 (Del. Ch. Ct. 2000) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29

In re MCA Shareholder Litigation, 2001 WL. 34129771 (Del. Feb. 28, 2001) . . . . . . . . . . . . . . . . . . . . . . . . . 29

In re MCA Shareholders Litigation, 1993 WL. 43024 (Del. Chanc. Ct. 1993) . . . . . . . . . . . . . . . . . . . . . . . . . . 28

Prezant v. De Angelis, 636 A.2d 915 (Del. 1994) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28, 37, 38

State v. Guthman, 619 A.2d 1175 (Del. 1993) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35

FEDERAL STATUTES:

Fed. R. Civ. P. 23 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . passim

18 U.S.C. § 201 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2


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18 U.S.C. § 371 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

18 U.S.C. §§ 981(a)(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

18 U.S.C. § 982(a)(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

18 U.S.C. §§ 1341, 1343 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2, 13TABLE OF AUTHORITIES (cont’d)

CASES : PAGE(S): 18 U.S.C. § 1346 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . passim

18 U.S.C. § 1503 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

18 U.S.C. § 1623 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

18 U.S.C. § 1952 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

18 U.S.C. § 1956(h) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

18 U.S.C. §1961 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41

18 U.S.C. § 1962(d) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

21 U.S.C. § 853 (Counts 18 and 19) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

26 U.S.C. § 7206 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

28 U.S.C. § 2461 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2


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I.

INTRODUCTION

On May 18, 2006, a grand jury returned a First Superseding Indictment

(“Indictment” or “FSI”) charging, among others, defendants Steven G. Schulman

(“Schulman”), Seymour M. Lazar (“Lazar”), and Paul T. Selzer (“Selzer”)

(collectively, “the Defendants”) in connection with a scheme to pay secret and

illegal kickbacks in class action and shareholder derivative litigation initiated and

pursued in federal and state courts throughout the country by the law firm of

Milberg Weiss Bershad & Schulman LLP (“Milberg Weiss”).

Schulman has been charged in seven counts of the Indictment; Lazar has been

charged in all twenty counts; and Selzer has been charged in five counts. Count

One charges Schulman, Lazar, and others, with conspiracy, in violation of 18

U.S.C. § 371, the objects of which were to obstruct justice (18 U.S.C. § 1503); to

commit perjury (18 U.S.C. § 1623); to travel in interstate commerce to promote

bribery (18 U.S.C. § 1952); to commit mail and wire fraud involving the

deprivation of money and property and honest services (18 U.S.C. §§ 1341, 1343,

and 1346); and to make illegal payments to a witness (18 U.S.C. § 201(c)).

Schulman and Lazar have also been charged with conspiring to conduct the affairs

of an enterprise through a pattern of racketeering activity, in violation of 18 U.S.C.

§ 1962(d). Counts Three through Five charge Lazar only with substantive counts of

mail fraud involving the deprivation of honest services, in violation of 18 U.S.C. §§

1341, 1346. Counts Six through Eight charge Schulman and Lazar with mail fraud

involving the deprivation of money and property and honest services, in violation

of 18 U.S.C. §§ 1341, 1346 and 2. Count Nine charges Lazar and Selzer with

money laundering conspiracy, in violation of 18 U.S.C. § 1956(h), and Counts Ten

through Thirteen charge Lazar and Selzer with substantive counts of money


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1 Lazar has also been charged with filing false tax returns, in violation of 26U.S.C. § 7206 (counts Fourteen through Sixteen), and one count of obstructingjustice, in violation of 18 U.S.C. § 1503 (Count Seventeen). Lazar has not movedto dismiss these counts.

2 Schulman Delaware Motion at 1–2 (emphasis in original).

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laundering.1 Schulman and Lazar have been charged with criminal forfeiture, in

violation of 28 U.S.C. § 2461(c); 18 U.S.C. §§ 981(a)(1)(C), 1963; and 21 U.S.C. §

853 (Counts 18 and 19). Finally, Lazar and Selzer have also been charged in Count

Twenty with an additional charge of criminal forfeiture, in violation of 18 U.S.C. §

982(a)(2), and 21 U.S.C. § 853.

By these motions (collectively, “the Honest Services Motions”), the

Defendants request that this Court dismiss the Indictment against them.

Defendants, in four overlapping and generally redundant briefs, contend that the

entire Indictment must be dismissed because it purportedly relies on an “invalid

honest services theory” underpinning mail and wire fraud allegations throughout the

Indictment. According to Defendants, the government must allege that a

“divergence of interests” with class members actually occurred; that the defendants

“believed that such a divergence was likely”; that “such a divergence caused

economic harm to the class”; and that Defendant’s conduct posed a “foreseeable

risk of economic harm.”2 Defendants further argue that the “honest services fraud”

statute, 18 U.S.C. § 1346, is unconstitutionally “vague,” both on its face and “as

applied” to the facts of this case. Defendants also contend that application of §

1346 is inapplicable to “transactional cases” filed in Delaware Chancery Court.

Defendants’ Honest Services Motions must be denied, for several reasons.

First, the Indictment pleads the elements of the offense in sufficient detail to

enable defendants to prepare their defense to plead double jeopardy in a subsequent

prosecution. Nothing more is required.

Second, the Indictment alleges facts constituting a “honest services” mail and

wire fraud scheme under applicable Ninth Circuit precedent. See United States v.


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3 Schulman has filed a motion to strike the Travel Act and Illegal WitnessPayment objects of the conspiracy and RICO conspiracy counts. Defendant’smotion, which neglects to cite controlling authority, fails as set forth in theGovernment’s Opposition thereto.

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Bohonus, 628 F.2d 1167 (9th Cir. 1980). Contrary to Defendants’ arguments, the

Ninth Circuit’s decision in Bohonus does not require allegations or proof of actual

economic harm resulting from the deprivation of honest services. Rather, the

government need only prove the fraudulent concealment of material facts.

Defendants do not deny that kickback or bribe payments between class counsel and

a representative plaintiff would be material to courts and absent class members in

connection with the bringing, prosecution, and resolution of class action and

shareholder derivative litigation.

Notably, none of the defendants has moved to dismiss the Indictment on the

grounds that it fails to allege a scheme to defraud involving money and property.

Nor has any defendant moved to dismiss or strike the Indictment’s allegations that

the defendants agreed to obstruct justice and to engage in perjury. In addition, no

defendant substantially challenges the allegations that the concealed kickbacks to

the Paid Plaintiffs were per se illegal and improper under New York and California

law.3 Defendants’ failure to bring any substantive challenge to these allegations

undermines their attack on the “honest services” fraud allegations. Distilled to their

basics, Defendants’ motions stand for the proposition that Section 1346 does not

encompass conduct by class action attorneys – who are public fiduciaries and serve

in a position of “public trust” – which involved: (1) suborning perjury; (2)

submitting inflated attorneys’ fee requests in order to make kickback payments; (3)

making material misrepresentations to courts in connection with representing absent

class members; (4) concealing material facts from the courts and class members

whom they purported to represent; and (5) making bribe payments that were per se

illegal. In other words, lawyers who suborn lies, who cheat, who obstruct justice,

and who pay bribes, and the Paid Plaintiffs who conspired with them, apparently


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provided “honest services” to class members. To state the proposition reveals its

absurdity. More importantly, it is not the law.

Furthermore, Defendants miscast the allegations in the Indictment as

involving solely “private actors.” In fact, class action plaintiffs and class counsel

are specifically appointed by courts to serve as fiduciaries for absent class members

in protecting their property rights. As such, both class plaintiffs and class counsel

serve in positions of “public trust” with authority delegated by, and emanating

from, the courts. Therefore, as even Defendants would concede in a case involving

the corruption of public conduct, the government need only allege and prove the

fraudulent concealment of material facts.

Third, even if there was some “reasonably foreseeable economic harm”

requirement engrafted into the offense of “honest services” mail and wire fraud, the

allegations in the Indictment satisfy this test. The Indictment in fact alleges that the

scheme to defraud involved the deprivation of money and property by depriving the

absent class members of the kickbacks which were furnished to the Paid Plaintiffs

and by depriving them of material economic information. Not one defendant has

filed a substantive motion to dismiss the Indictment on the ground that it fails to

sufficiently allege such deprivations.

Further, a risk of reasonable foreseeable economic harm existed as a result of

the conflict of interest created by the corrupted plaintiffs’ overwhelming interest in

the attorneys’ fee award, rather than the net recovery to the class. Finally, because

the corrupted class plaintiffs and class counsel were engaged in conduct that was

per se criminal under New York law, absent class members were deprived as a

matter of law of the services of an “adequate” class representative and class

counsel. Under these circumstances, any settlement approved by a court would be

subject to collateral attack with the concomitant danger of economic harm to absent

class members.

Fourth, there is nothing unique about so-called “Delaware Transactional

Cases” that take them outside the realm of “honest services” fraud under § 1346. In


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fact, given that Delaware courts have recognized that shareholders have a

cognizable interest in the integrity of representative litigation, its application in this

case is particularly appropriate.

Fifth, the “honest services” fraud statute is not unconstitutionally vague,

either on its face or as applied in this case. A person of reasonable intelligence

would understand that it is unlawful to suborn perjury, to make false statements to

courts, to have concealed bribery arrangements, and to use cash and phony referral

fee arrangements to disguise a kickback arrangement.

Sixth, even if this Court were to conclude that a secret kickback and bribery

scheme between class counsel and class plaintiffs in class action and derivative

litigation could not amount to a deprivation of honest services mail and wire fraud,

the remedy is not wholesale dismissal of the Indictment. Rather, the Government

should be permitted to redact the “honest services” fraud allegations of the

Indictment because the remaining allegation state criminal offenses.

II.

BACKGROUND

The Indictment in this case arises from the operation of a broad-ranging

conspiracy, beginning at least as early as 1981 and continuing into in or about 2005,

to obstruct justice; to commit perjury; to engage in interstate travel or use facilities

of interstate commerce to facilitate commercial bribery; to commit mail and wire

fraud; and to make illegal witness payments. As pertinent herein, the Indictment

alleges the following:

Milberg Weiss was a law firm partnership with principal offices in New

York, New York, and, until in or about May 2004, San Diego, California. (FSI,

¶ 1). Milberg Weiss specialized in bringing class action and shareholder derivative

lawsuits (collectively “class actions”) in federal and state courts throughout the

United States, including within the Central District of California. (Id., ¶¶ 1, 26).

Schulman was a partner of Milberg Weiss beginning in 1989, and became a

member of the firm’s management committee and executive committees in 1998


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and 1999, respectively. In 2004, Schulman became a named partner of the firm.

(FSI, ¶ 3). Lazar served as a plaintiff for Milberg Weiss in numerous lawsuits, and

also caused his wife, and other family members, to serve as plaintiffs. (Id., ¶ 5).

In class actions, the conduct of named plaintiffs and class counsel affects the

economic interests of absent class members not before the court. (FSI, ¶ 20). As a

result, class counsel and named plaintiffs owe fiduciary duties to absent class

members. (Id., ¶ 20). Among other things, the named plaintiffs may not place their

own interests above those of other class members and shareholders; may not act in a

deceitful or unethical manner toward the court or absent class members or

shareholders; and are required to disclose all facts that reasonably could affect the

ability of the named plaintiff to represent other class members or shareholders. (Id.).

Named plaintiffs are also prevented, with narrowly defined exceptions, from

receiving any compensation for serving as a named plaintiff beyond their pro rata

share of any settlement. (Id., ¶ 24). Further, the Indictment alleges that because a

named plaintiff has fiduciary duties to other class members, they may not have a

financial interest in a class action or shareholder derivative action that differs from

other class members or shareholders. (Id).

As a result of their fiduciary duties, class attorneys are prohibited from giving

preferential treatment to the interests of a named plaintiff over the interests of

absent class members or shareholders. (FSI, ¶ 21). In addition, class attorneys may

not act in a deceitful or unethical manner toward courts or absent class members

and shareholders. (Id.). Further, class attorneys must disclose any fact that could

reasonably affect the attorneys’ ability to fairly and adequately represent the

interests of the absent class members or shareholders. (Id.).

In connection with the initiation, prosecution, and resolution of class actions,

Milberg Weiss, through defendant Schulman and others, agreed to and did pay

secret kickbacks to individuals, such as Lazar, to serve as named plaintiffs in such

lawsuits, or to cause family members or friends to serve as plaintiffs for Milberg

Weiss. (FSI, ¶ 27). Such payments were per se illegal and unethical because: (a)


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under New York law it is a criminal offense for an attorney to promise or give

anything of value to induce a person to bring a lawsuit, or to reward a person for

having done so; (b) under New York law it is a criminal offense to pay a fiduciary,

without the consent of those to whom he or she owed fiduciary duties, with the

intent to influence his or her conduct as a fiduciary; and (c) under both New York

and California laws and regulations, it is impermissible for an attorney to share

attorneys’ fees with persons who are not duly licensed to practice law. (Id., ¶ 29).

Further, the Indictment alleges that the concealed kickback payments created

a conflict of interest between the plaintiffs receiving the bribes and the absent class

members to whom they owed fiduciary duties. This was so because, as a result of

the receipt of kickbacks from Milberg Weiss, the named plaintiffs had a greater

interest in maximizing the award of attorneys’ fees to Milberg Weiss than in

maximizing the net recovery to absent class members and shareholders. (FSI, ¶

29). Moreover, Milberg Weiss impermissibly favored the interests of one set of

clients – the Paid Plaintiffs – over the class members to whom it owed fiduciary

duties. (Id., ¶ 21).

Because the defendants recognized that their conduct was improper, the

Indictment alleges that Schulman and others employed various devices to conceal

the illegal payments from the courts and absent class members. (FSI, ¶ 30). For

example, Schulman and others made, and caused others to make, false and

misleading statements, and omitted and caused others to omit material facts in court

papers and in under oath statements. (Id.) As examples, the Indictment alleges nine

specific instances in which Lazar lied, or provided misleading and evasive

testimony, designed to conceal his kickback arrangement with Milberg Weiss.

(Count One, Overt Acts 2, 34, 40, 46, 47, 80, 82, 103 and 104). In addition, the

Indictment alleges that Schulman caused to be submitted perjured declarations from

another paid plaintiff, Howard Vogel. (Count One, Overt Acts 162, 164, and 165).

In other instances, plaintiffs lied about purchasing stocks for the express purpose of

positioning themselves and Milberg Weiss to file class action lawsuits. (Id., Overt


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Act 184).

Moreover, the Indictment also alleges that defendant Schulman himself gave

false testimony during a deposition taken of him by an absent class member who

objected to the settlement of a “Delaware transaction case.” (Count One, Overt Act

No. 148). During his own deposition, defendant Schulman falsely stated that no

promises had been made to Eugenia Vogel “in the context of any benefit that she

might receive that the class would not receive” and that he was “not . . . aware” of

any such promises being made “in any other case.” (Id.).

Finally, the Indictment alleges that the conspirators undertook affirmative

measures to conceal the kickback payments by using cash to make payments to Paid

Plaintiffs. (FSI, ¶ 47). Also, the Indictment alleges that kickbacks were made to

Paid Plaintiffs under the guise of phony referral fees to intermediary attorneys, such

as defendant Selzer, who knew they were not collecting a referral fee but were

simply being used as a concealed conduit for the benefit of enabling Milberg Weiss

to make a kickback payment to a plaintiff. (Id.). The Indictment alleges specific

examples where Schulman himself caused checks to be sent to a Paid Plaintiff,

accompanied by false letters signed by Schulman, purporting to make a “referral

fee” to another lawyer, when Schulman well knew that the payments were not

“referral fees,” but kickback payments to a plaintiff. (Count One, Overt Acts

142–43, and 156).

III.

ARGUMENT

A. THE INDICTMENT PROPERLY CHARGES “HONEST SERVICES”FRAUD

1. The Indictment Is Sufficient Because it Properly Charges the Elementsof the Offense

Federal Rule of Criminal Procedure 7(c) states in relevant part that an

indictment “must be a plain, concise and definite written statement of the essential

facts constituting the offense charged. . . .” The Ninth Circuit has squarely held that

an indictment is sufficient if it “sets forth the elements of the charged offense so as


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to ensure the right of the defendant not to be placed in double jeopardy and to be

informed of the offense charged.” United States v. Woodruff, 50 F.3d 673, 676 (9th

Cir. 1995). See also United States v. Givens, 767 F.2d 574, 584 (9th Cir. 1985)

(“An indictment which tracks the words of the statute charging the offense is

sufficient so long as the words unambiguously set forth all elements necessary to

constitute the offense.”); United States v. Mathews, 772 F.2d 208, 209 (9th Cir.

1978) (indictment is legally valid when “cast in the language of the applicable

statute”). Moreover, the Supreme Court has held that “[a]n indictment returned by

a legally constituted and unbiased grand jury, . . . if valid on its face, is enough to

call for trial of the charge on the merits.” Costello v. United States, 350 U.S. 359,

363 (1956).

The Indictment in this case satisfies these requirements. The Ninth Circuit

has held that the elements of mail fraud are: “(1) [defendant] participated in a

scheme with the intent to defraud, and (2) the scheme used or caused the use of the

mails in furtherance of the scheme.” United States v. Lyons, 454 F.3d 968, 971 (9th

Cir. 2006). The Ninth Circuit has further held that, with respect to “honest

services” fraud under 18 U.S.C. § 1346, “Depriving an employer of one’s honest

services and of its right to have its business conducted honestly can constitute a

scheme to defraud.” United States v. Williams, 441 F.3d 716, 723 (9th Cir. 2006)

(quoting United States v. Bohonus, 628 F.2d 1167, 1172 (9th Cir. 1980)).

The Indictment sufficiently pleads this offense. At Counts Three through

Five, the Indictment charges that defendant Lazar, “knowingly and with intent to

defraud, devised, participated in, and executed a scheme to defraud absent class

members and shareholders in the Lazar Lawsuits as to a material matter, by

depriving these victims of the honest services of Milberg Weiss, lawyers in Milberg

Weiss, and Lazar.” (FSI, ¶ 60). The Indictment further alleges the use of the mails

or private and commercial carrier to execute the scheme. (Id., ¶ 61). In Counts Six

through Eight, the Indictment charges that defendants Lazar and Schulman,

“knowingly and with intent to defraud . . . participated in . . . a scheme to defraud


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absent class members and shareholders in the Lazar lawsuits as to a material matter,

by depriving these victims of money and property and of the honest services of

Milberg Weiss, lawyers in Milberg Weiss, and Lazar, and to obtain money and

property by means of material false and fraudulent pretenses, representations, and

promises.” (FSI, ¶ 63). The Indictment further alleges the use of the mails to carry

out the fraudulent scheme. (Id., ¶ 64).

Much of Defendants’ arguments rest on disputed facts that are outside the

record and which must be ignored by this Court. In essence, Defendants’ Honest

Services Motions are not motions to dismiss under Federal Rule of Criminal

Procedure 12, but premature motions for judgement of acquittal (without any

evidence having yet been presented by the government) under Federal Rule of

Criminal Procedure 29. Even cases on which the defendants rely explicitly reject

nearly identical challenges to the sufficiency of an indictment charging “honest

services” fraud. For example, in United States v. Vinyard, 266 F.3d 320 (4th Cir.

2001), the Fourth Circuit held:

[Defendant’s] assertion on this point misapprehends the requirementsfor an indictment. A valid indictment must “contain the elements ofthe offense charged, fairly inform a defendant of the charge, and enablethe defendant to plead double jeopardy as a defense in a futureprosecution for the same offense.” . . . [T]he elements of mail fraudare “(1) the existence of a scheme to defraud, and (2) the mailing of aletter, etc., for purposes of executing the scheme.” In codifying the“honest services” doctrine . . . Congress made it clear that the “term‘scheme or artifice to defraud’ includes a scheme to or artifice todeprive another of the intangible right of honest services.” Thus, theelements of a mail fraud scheme involving the deprivation of honestservices are identical to those of a normal mail fraud prosecution. Although judicial interpretation of the honest services doctrine hassomewhat limited its scope in the private employment context, thoselimitations have not altered the essential elements of the mail fraudoffense that must be alleged in the indictment . . . . This indictmenttherefore complied with the statutory and constitutional requirements,and the district court’s denial of . . .[the] motion to dismiss was proper.

Vinyard, 266 F.3d at 325–26. Similarly, in United States v. Douglas, 398 F.3d 407

(6th Cir. 2005), the Sixth Circuit reversed a district court’s dismissal of an

indictment charging “honest services” mail fraud that did not allege a “breach of

fiduciary duty.” The court stated:


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4 Schulman Delaware Motion at 11.

5 Schulman Delaware Motion at 7–11 (citing United States v. Brown, 459F.3d 509 (5th Cir. 2006); United States v. Vinyard, 266 F.3d 320 (4th Cir. 2001);

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The government contends that the “breach” element identified by thedistrict court is not actually an element of the honest services claim. The government argues that this Court has only identified the “breach’issue as an evidentiary burden, and therefore is not the subject of asufficiency-of-the-indictment inquiry. . . . The government accuratelystates the elements of the honest services charge. The indictment onlyhas to allege that defendants devised a scheme to defraud, involvinguse of the mails for the purpose of executing the scheme. Theindictment sufficiently makes these allegations.

Douglas, 398 F.3d at 419. See also United States v. Reyes, 2007 WL 831808 (N.D.

Cal. Mar. 16, 2007) (denying motion to dismiss indictment charging “honest

services” fraud because indictment sufficiently pled elements of the offense and

informed defendant of the nature of the charges against him).

2. The Indictment Need Not Allege, Nor Must the Government Prove,Economic Harm to Establish “Honest Services” Fraud

Defendants claim that the indictment “failed to allege that the interests of the

defendants or the named plaintiffs, on the one hand, and the absent class members,

on the other hand, actually diverged from one another such that the defendant’s

pursuit of their private interests would harm the interests of the class.”4 Defendants

also argue that the government must allege that the Defendants’ believed that their

conduct “would or diminish the absent class members’ net recovery.” Finally,

Defendants maintain that the Indictment fails to allege a “kickback” case because

the named plaintiffs purportedly lacked the ability to “control” class action

litigation. None of these claims has any merit.

a. The Ninth Circuit’s Decision in United States v. BohonusConfirms That No Risk of Economic Harm Need Be Shown

Defendants’ legal arguments rest principally on “honest services fraud” cases

from other circuits which have held that the government must demonstrate some

“reasonably foreseeable risk of economic harm” when proving at trial fraudulent

deprivation of “honest services.”5 Defendants, however, virtually ignore the only


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United States v. Lemire, 720 F.2d 1327 (D.C. Cir. 1983)).

6 The government does not concede that the allegations in the Indictmentinvolve merely “private conduct.”

7 In McNally v. United States, 483 U.S. 350 (1987), the Supreme Court heldthat the mail and wire fraud statutes did not encompass a scheme to depriveanother of the intangible “right to honest services.” In 1988, Congress enacted 18U.S.C. § 1346 which explicitly provided that a “scheme to defraud” included a“scheme or artifice to deprive another of the intangible right of honest services.” Bohonus remains controlling law “because, by overruling McNally, Congressrestored the pre-McNally landscape.” United States v. Williams, 441 F.3d 716, 721(9th Cir. 2006).

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relevant authority, the Ninth Circuit’s decision in United States v. Bohonus, 628

F.2d 1187 (9th Cir. 1980), which considered the application of the “honest services”

doctrine to private, commercial conduct.6 Nothing in the holding or facts of

Bohonus suggests that the government must prove, let alone allege in an indictment,

that the deprivation of honest services fraud caused, or even implicated, tangible

economic harm. Bohonus is the law of this Circuit, and it requires rejection of

Defendants’ arguments outright.7

In Bohonus, the Ninth Circuit reversed the dismissal of an indictment

charging the defendant with mail fraud involving the deprivation of honest services

and money and property. In that case, a purchasing agent for U-Haul demanded

kickbacks from a broker who had sold, or arranged for the sale of, insurance

coverage to U-Haul in two separate transactions. Bohonus, 628 F.2d at 1169–70.

Notably, as to the first insurance contract, the purchasing agent did not demand a

kickback until more than thirteen months after the contract had been negotiated. Id.

Accordingly, the demand for kickbacks could not have affected either the price or

quality of the contracts procured by U-Haul. Although the purchasing agent

threatened to cancel the contract if he was not paid a kickback from the broker, he

admitted that the threat was a “bluff” and there was no intent to carry out the threat.

Id. at 1169, 1175. As to the second contract, the Ninth Circuit’s opinion contains


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no facts whatsoever suggesting or implying that the indictment alleged that the

kickback payment affected the price or quality of the insurance services provided;

or that any such allegations were relevant to the sufficiency of the mail fraud charge

in the indictment. Id.

In reversing the district court’s dismissal of the indictment, the Ninth Circuit

noted that the mail and wire fraud statutes “condemn [schemes] which are contrary

to public policy or which fail to measure up to the reflection of moral uprightness,

of fundamental honesty, fair play and right dealing in the general and business life

of members of society.” Bohonus, 628 F.2d at 1171. The court then directly

analogized the bribe payments to bribery of a public official:

When a public official is bribed, he is paid for making a decision whilepurporting to be exercising his independent discretion. The fraudelement is therefore satisfied. A public official’s non-disclosure ofmaterial information has also been held to satisfy the fraud element. .. . [T]he duty to disclose was incident to the defendant’s duty as anemployee . . . . His employer had the right to negotiate for and award acontract with all of the relevant facts before it. The rationale applied topublic officials has been carried over into the area of commercialdeprivations.

Bohonus, 628 F.2d at 1171. In holding that “depriving an employer of one’s honest

services and of its right to have its business conducted honestly” constitutes a

“scheme to defraud,” id. at 1172, the court did not hold that the conduct at issue

must cause, or even risk, “economic harm” to his employer or principal. Moreover,

none of the facts on which Bohonus relies even arguably supports such a

requirement. To the contrary, as the Ninth Circuit recently affirmed, “We held [in

Bohonus] . . . that the same rationale that governs the public official/constituent

relationship also applies in the employee/employer context.” United States v.

Williams, 441 F.3d 716, 723 (9th Cir. 2006) (emphasis added); see also United

States v. Panarella, 277 F.3d 678, 692 (3d Cir. 2002) (“nondisclosure of a conflict

of interest in a fiduciary setting falls squarely within the traditional definition of

fraud”).

Indeed, the cases on which Bohonus principally relies, United States v. Bryza,

522 F.2d 414 (7th Cir. 1976), and United States v. George, 477 F.2d 508 (7th Cir.


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1973), explicitly reject Defendants’ arguments that the government must show

some tangible economic “loss” or economic harm. In Bryza, the Seventh Circuit

stated:

[I]t is clear that International Harvester was deprived of Bryza’s honestand faithful services in addition to the right to make the best possiblepurchase. Although Bryza argues he obtained the best possiblecontracts for his employer, I-H was entitled to negotiate thosepurchases with the knowledge of its employee’s interest. Thus, eventhough I-H was satisfied with Bryza’s job performance and theproducts he purchased for I-H from its suppliers, and despite the factthat no preferential treatment, beyond receiving business, was accordedthe suppliers, that the suppliers’ prices to I-H were fair and reasonable,that I-H was never shown to be dissatisfied with the suppliers’ pricesor products, and that Bryza insisted upon efficiency, quality and fairprices from the suppliers, Bryza’s conduct nonetheless falls within thepurview of the mail fraud statute.

Bryza, 522 F.2d at 422. Because defendant failed to disclose material facts, “The

fraud consisted in Bryza’s holding himself out to be a loyal employee, acting in I-

H’s best interests, but actually not giving his honest and faithful services, to I-H’s

real detriment.” Id. In George, 477 F.2d at 512, the court stated, “Since the

gravamen of the offense is a ‘scheme to defraud,’ it is unnecessary that the

Government allege or prove that the victim of the scheme was actually defrauded or

suffered a loss.” See also United States v. Leahy, 464 F.3d 773, 787 (7th Cir. 2006)

(“[Mail and wire fraud] statutes do not require the government to prove either

contemplated harm to the victim or any loss. Moreover, a defendant’s honest belief

that his actions will ultimately result in a profit and not a loss is irrelevant for

determining whether a violation has occurred.”); United States v. Welch, 327 F.3d

1081, 1106 (10th Cir. 2003) (“[W]e reject defendants’ argument that the intent to

cause economic harm or injury is an element of §§ 1341 and 1343.”); United States

v. Sun-Diamond Growers of California, 138 F.3d 961, 974 (D.C. Cir. 1998) (“[W]e

disagree with [defendant’s] contention that § 1346 . . . require[s] the government to

show that the defendant intended to cause economic harm to his victim.”); United

States v. Boyd, 309 F. Supp. 2d 908, 913 (S.D. Tex. 2004) (“[A]n indictment

alleging honest services fraud need not explicitly allege actual or material harm to

the victims. The Government need only prove that the defendant’s false


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representations were material. The materiality element is satisfied if the

information or omissions would naturally tend to lead or [are] capable of leading a

reasonable employer to change its conduct.”).

Defendants’ arguments amount to a defense of “no harm, no foul,” a legal

proposition that has been consistently rejected by courts, and which ignores the vice

against which “honest services” fraud protects, namely, the corruption of fiduciaries

by the receipt of concealed payments, the knowledge of which would be material to

the fiduciaries’ employer or principal. For example, in Boyd the district court

rejected a challenge to an indictment charging “honest services” fraud in which a

union official took kickbacks from law firms seeking to become counsel for the

union. Boyd, 309 F. Supp. 2d at 908. Rejecting the defendant’s argument that the

indictment was deficient because it failed to include “allegations that defendant’s

conduct led to appointment of incompetent [counsel] or that the alleged breaches of

fiduciary duties caused the [union] or its members economic loss,” the court held

that the concealment of the kickbacks was material and, therefore, the indictment

properly charged “honest services” fraud. Id. See also United States v. Lamoreaux,

422 F.3d 750, 754 (8th Cir. 2005) (court affirmed conviction for “honest services”

fraud even though government adduced no proof that corporate fiduciary who took

kickbacks could have negotiated a better price for services).

The Seventh Circuit’s decision in United States v. Hausman, 345 F.3d 952

(7th Cir. 2003) is also instructive. In that case, the Seventh Circuit sustained the

sufficiency of an indictment charging an attorney with honest services fraud arising

from the receipt of kickbacks from a chiropractor to whom he sent clients for

treatment. In rejecting virtually the same arguments advanced here, the court held:

[Defendants] contend that [the chiropractor’s] . . . payments were notkickbacks, but rather constituted the legitimate spending of incomederived from use of fees to which [the chiropractor] was legallyentitled. They maintain that [the attorney’s] clients had no right to thesettlement funds paid to [the chiropractor] or, consequently, to theallocation of twenty percent of those funds to expenditures designatedby [the attorney]. In this sense, reason [defendants], no harm resultedto [the attorney’s] clients, who were deprived of nothing to which theywere entitled. This reasoning ignores the reality that [the attorney]


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288 Schulman Delaware Motion at 1 (discussing extension of § 1346 to “non-

public conduct” involving “private actors”).

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deprived his clients of their right to know the truth about hiscompensation . . . . It is of no consequence, despite [defendants’]arguments to the contrary, that [the chiropractor’s] fees (absent hisdiscount) were competitive, or that clients received the same netbenefit as they would have absent the kickback scheme. The schemeitself converted [the attorney’s] representations to his clients intomisrepresentations, and [the attorney] illegally profited at the expenseof his clients, who were entitled to his honest services as well as theircontractually bargained-for portion of [the chiropractor’s] discount.

United States v. Hausman, 345 F.3d at 957. This case is no different: absent class

members, other plaintiffs, and the courts entrusted with safeguarding their interests

were entitled to know the full truth about Milberg Weiss’s kickback arrangements

with the Paid Plaintiffs so they could evaluate the reasonableness and fairness of

such fees, and the actions of Schulman, Milberg Weiss, the Paid Plaintiffs, and their

co-conspirators in bringing and prosecuting these actions. That these material facts

were concealed through a pattern of lies and misrepresentations unquestionably

makes out a case of “honest services” fraud.

b. The Public Corruption Cases, Which Do Not Require Risk ofEconomic Harm, Also Apply Here

Engrafting some “economic harm” or “loss” requirement onto § 1346 would

be particularly inappropriate in this case. Leaving aside the Ninth Circuit’s

precedent in Bohonus, even those courts which have required proof of a

“foreseeable risk of economic harm” in the honest services context involve solely

private actors engaged in purely private transactions.8 On the other hand, these

same courts impose no such requirement in those cases involving bribes or

kickbacks paid to public officials. See, e.g., United States v. Hasner, 340 F.3d

1261, 1271 (11th Cir. 2003) (“Public officials inherently owe a fiduciary duty to

public to make governmental decisions in the public best interests. When a public

official, instead, secretly makes decisions based on his own personal interests, the

official defrauds the public of his honest services.”) (internal citations and

quotations omitted). See generally United States v. Frega, 179 F.3d 793 (9th Cir.


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1999) (affirming “honest services” conviction of judges who received payments

intended to influence their judicial decision-making).

In this case, the defendants are not mere “private actors” engaged in purely

“private conduct.” To the contrary, as named plaintiffs and attorneys purporting to

represent thousands of absent class members in court proceedings, the defendants

served in positions of public trust and as public fiduciaries. As articulated by the

Second Circuit more than thirty years ago:

One accepting employment as counsel in a class action does notbecome a class representative through simple operation of the privateenterprise system. Rather, both the class determination anddesignation of counsel as class representative come through judicialdeterminations, and the attorney so benefitted serves in something of aposition of public trust.

Alpine Pharmacy, Inc. v. Chas. Pfizer & Co., 481 F.2d 1045, 1050 (2d Cir. 1973);

see also Sweet v. Pfizer, 232 F.R.D. 360, 371 (C.D. Cal. 2005) (“[c]lass counsel . . .

serve in a position of public trust”); Buford v. H&R Block, Inc., 168 F.R.D. 340,

351–52 (S.D. Ga. 1996) (“The class attorney serves in something of a position of

public trust. The class attorney has a fiduciary duty to the court as well as to each

member of the class.”). As such, class action attorneys simply cannot be compared

to mere private actors. As noted by one district judge:

[C]lass actions . . . perform essentially a public function. Class actionsare essentially public . . . [because] [t]he class members on whosebehalf class actions are brought and prosecuted do not initiate,maintain or control the litigation in the same way that members of thegeneral public do not initiate, maintain or control litigation brought bypublic officials or agencies. . . . . Lawyers are and should be held to [a]higher standard than merely that they have avoided criminal liability. Lawyers should avoid impropriety and even the appearance ofimpropriety in the conduct of their profession. This should beespecially true of class action lawyers who, after all, are exercising . . .public responsibilities . . . .

Testimony of Hon. Vaughn R. Walker, Chief Judge, United States District Court for

the Northern District of California, Before the Subcommittee on Capital Markets,

Securities and Government Sponsored Enterprises, Committee on Banking and

Financial Services, United States House of Representatives, June 28, 2006, at 1–2, 4

(attached as Exhibit A). These obligations of complete disclosure are particularly


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28 9 Schulman Delaware Motion at 17–20.

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heightened as “absent class members did not choose the forum, the counsel for the

class or even to litigate . . . .” Esler v. Northrop Corp., 86 F.R.D. 20, 36 (W.D. Mo.

1979). Indeed, as the Eleventh Circuit held:

Rule 23 class actions accomplish many salutary goals; at the sametime, they can cause great mischief. In both instances, the legalprofession, judges and lawyers alike, are responsible for the result. The lawyers who bring these cases have a heavy fiduciaryresponsibility to their clients . . [,] to the trial judge and to the people,who provide the forums and the governmental resources for these suits.

Piambino v. Bailey, 757 F.2d 1112, 1139 (11th Cir. 1985). For these reasons, class

action attorneys and named plaintiffs should be treated as public officials and,

therefore, the mere failure to disclose material information in the course of

discharging their duties to whom they owe fiduciary duties constitutes “honest

services” fraud. See Panarella, 227 F.3d at 696 (“A public official is a fiduciary

toward the public, . . . and if he deliberately conceals material information from

them he is guilty of fraud.”) (citation omitted).

c. The Indictment Alleges a Kickback/Bribery Scheme

Ignoring Bohonus and apparently recognizing the substantial body of

kickback/bribery cases which reject the requirement of any showing or allegation of

actual economic harm or loss, see United States v Rybicki, 354 F.3d 124 (2d Cir.

2003) (en banc) (Rybicki II) (“[T]he undisclosed bribery itself is sufficient to make

out the crime [of honest services fraud]”), Defendants attempt to argue, despite the

allegations of the Indictment, that this case does not really involve “kickbacks” at

all.9 Defendants attempt to redefine “kickback” as involving only those payments

where the bribe recipient has “power” or “control” over a particular transaction.

Defendant’s argument conflicts with the common definition of “kickback,” and has

in fact been specifically rejected by a case on which the Ninth Circuit relied in

United States v. Bohonus. Moreover, Defendants’ arguments necessarily depend on

disputed evidentiary facts outside the four corners of the Indictment, which this


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Court is obligated to ignore at this stage of the proceedings.

The commonly understood definition of “kickback” includes no limitation

that it applies only to a recipient who has “power” or “control” over a transaction.

See Merriam Webster’s Collegiate Dictionary (10th Ed. 1994) (kickback n. “a

return of a part of a sum received often because of confidential agreement or

coercion”). Defendants’ argument was expressly rejected in United States v.

George, 477 F.2d 508 (cited with approval in United States v. Bohonus). There, the

court of appeals rejected defendant’s argument that no fraud occurred because the

recipient of the kickback was “never shown to [have] provide[d] or secure[d] any

special services” in favor of the payor of the kickback. Id. at 512. Instead, the

Seventh Circuit focused on the fact that “preferential treatment” was contemplated

and that the kickback recipient was in a position to “influence” transactions: “The

fact that the official who is bribed is only one of several and could not award the

contract by himself does not change the character of the scheme where he is

expected to have influence enough to secure the end result.” Id. (Citations omitted).

In this case, the Indictment sufficiently alleges that the Paid Plaintiffs were

expected to, and did, exercise their influence in favor of Milberg Weiss in order that

Milberg Weiss and its attorneys would be appointed class counsel in cases; Milberg

Weiss would secure the right to control class litigation; to approve the settlement of

such cases; and, ultimately, to position Milberg Weiss to obtain a large attorneys’

fees award, a portion of which would then be kickbacked to the plaintiffs. Taken to

its logical conclusion, Defendants’ arguments would have troubling and absurd

consequences. Under their incorrect view of the law, the government could neither

allege nor prove “honest services” fraud in connection with schemes to: bribe two

justices on the United States Supreme Court, as long as the vote split was 7–2; bribe

20 senators in the United States Senate, as long as the vote split was 71–29; or to

pay a kickback to a purchasing agent, as long as a senior employee exercised

absolute veto authority over the agent’s actions


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10 Throughout their papers, Defendants claim that the government concededat a status conference that the scheme did not result in any “harm” and that MilbergWeiss obtained “extraordinary results” in the Lawsuits at issue in the Indictment. These claims are false. The government only stated that it would not seek to provethat any class action settlement would have been different because it is not relevantto proving the charges. Since the Indictment explicitly alleges that class memberswere deprived of money and property, Defendants arguments are incorrect.

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3. Even if Required, The Indictment Properly Alleges ThatThe Defendants’ Conduct Harmed and Posed ForeseeableRisks of Economic Harm to Class Members

Even if some allegation of a risk of foreseeable economic harm was required,

the Indictment alleges that Defendants’ conduct caused harmed and posed a “risk of

foreseeable economic harm” to absent class members and shareholders.10

a. The Indictment Sufficiently Alleges a Scheme to DefraudAbsent Class Members of Money and Property

None of the Defendants have moved to dismiss the Indictment on the grounds

that it fails to allege a scheme to defraud involving the deprivation of money and

property. At most, Defendants argue in passing that class members were not

deprived of any money or property because the kickbacks came from Milberg

Weiss’s attorneys fees. Defendants are wrong, on two counts. First, the Indictment

properly alleges that the class members were deprived of the kickbacks furnished to

Paid Plaintiffs. Second, the Indictment also properly alleges that class members

were deprived of material economic information, a valid property interest which has

repeatedly been recognized by the courts.

(i) The Kickback Payments

The Defendants contend that the government will not be able to prove that

class members were deprived of the kickback payments furnished to the Paid

Plaintiffs because they derived from Milberg Weiss’s attorneys’ fees. But, in fact,

the kickbacks derived from monies properly belonging to class members, whether

the monies came from a common settlement fund or were paid by the civil

defendants separately. As courts have repeatedly recognized in class action cases,


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every dollar of a class recovery that goes to the attorneys deprives class members of

the benefit of those monies. “Simple logic teaches that a fee award depletes the

amount by which the class is benefitted.” In re Bristol-Myers Squibb Securities

Litigation, 361 F. Supp. 2d 229, 233 (S.D.N.Y. 2005) (citing Mautner v. Hirsch, 32

F.3d 37, 40 (2d Cir. 1994)). It is for this reason, among others, that class members

have an absolute right to notice and an opportunity to be heard in connection with

class settlements and, particularly, to object to a court’s award of attorneys’ fees.

“The particularized, traceable, remediable injury necessary for an objector’s

standing arises from his claim on his share of whatever is left in the pot after

attorneys’ fees are withdrawn.” Zucker v. Occidental Petroleum Corp., 192 F.2d

1323, 1326 (9th Cir. 1999).

Therefore, it is fundamentally incorrect for Defendants to argue that the

kickbacks did not come from monies otherwise owing to the absent class members.

In fact, Schulman and Milberg Weiss necessarily submitted inflated claims for

attorneys’ fees because they were secretly obligated to pay the Paid Plaintiffs their

bribes. The kickback itself is a “property” interest contemplated by the mail and

wire fraud statutes. Hausman, 345 F.3d at 957; United States v. Little, 889 F.2d

1367, 1368 (5th Cir. 1989) (“[T]he state entity suffers a property loss when a

contractor gives a kickback from his own money, even when he was the low bidder,

because the contractor was willing to sell his product . . . for the state price less the

kickback amount.”).

Even in those cases where attorneys’ fees are paid separately by the civil

defendants, absent class members have a cognizable property claim to those funds

when they are obtained through misconduct. The law is clear: “Unless otherwise

agreed, an agent who makes a profit in connection with transactions conducted by

him on behalf of the principal is under a duty to give such a profit to the principal.”

Restatement (Second) of Agency, § 388. As noted by one court of appeals, “The

Restatement [of Agency] makes clear that even in the absence of a corrupt intent on

the part of the agent, where the agent secures a profit unbeknownst to the principal


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in connection with a transaction undertaken on the principal’s behalf, the agent has

an affirmative duty to account and pay over that profit to the principal . . . .” Jerlyn

Yacht Sales v. Roman Yacht Brokerage, 950 F.2d 60, 67 (1st Cir. 1991)).

It is for the aforementioned reasons that courts have recognized that class

members have standing to object to an award of attorneys’ fees, even when those

attorneys’ fees have been recovered directly from the civil defendants, because “the

aggregate amount of the attorneys fees and the class settlement payments may be

viewed as a ‘constructive common fund.’” Lobatz v. U.S. West Cellular of

California, Inc., 222 F.3d 1142, 1146–47 (9th Cir. 2000); see also In re Cendant

Corporation Prides Litigation, 243 F.3d 722, 732 (3d Cir. 2001) (“[T]he integrity

and fairness of class settlements is threatened by excessive attorneys’ fee awards

such that class plaintiffs have standing to challenge excessive fee awards, even

when they have received dollar-for-dollar recovery in the class settlement.”). Every

case in which Milberg Weiss paid a kickback necessarily involved an “excessive”

fee award because Milberg Weiss was willing to accept less for its services, and

because the fee award necessarily included the obligation to make a secret bribe

payment to the Paid Plaintiff. Under common agency principles, the Paid Plaintiffs

and Milberg Weiss were required to account for, and pay over, those amounts to the

absent class members.

(ii) Material Economic Information

There can be no question that the mail and wire fraud statutes encompass an

“intangible right to control the disposition of . . . assets . . . .” and “cover fraudulent

schemes to deprive victims of their rights to control the disposition of their own

assets.” United States v. Gray, 405 F.3d 227, 234 (4th Cir. 2005). Defendants do

not challenge the Indictment’s allegations that courts are obligated to protect the

rights and interests of absent class members and shareholders, nor that named

plaintiffs and class counsel are required to disclose all facts that would be material

to a court’s determination of the fairness of any settlement. (FSI, ¶¶ 21–22). Nor

do Defendants dispute that a secret kickback arrangement between class counsel


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and the named plaintiff would be material to a court or to other class members or

shareholders in resolving the fairness of a proposed settlement. Accordingly,

Defendants must concede that the Indictment sufficiently alleges that material

information was concealed that affected the economic rights of class members to

participate in class litigation.

For example, in United States v. Wallach, 935 F.2d 445, 462–63 (2d Cir.

1991), the Second Circuit found sufficient evidence of mail fraud even though the

defendants argued that stockholders in a corporation actually benefitted from the

conduct at issue and, as argued here, shareholders received “valuable services.” In

rejecting that argument, the court of appeals stated, “[T]he withholding or

inaccurate reporting of information that could impact on economic decisions can

provide the basis for a mail fraud prosecution.” Wallach, 935 F.2d at 463; see also

United States v. Little, 889 F.2d 1367, 1368 (5th Cir. 1989) (concealment of

economically material information constitutes basis for mail fraud prosecution).

As stated by Judge Learned Hand,

A man is none the less cheated out of his property, when he is inducedto part with it by fraud, because he gets a quid pro quo of equal value. It may be impossible to measure his loss by the gross scales availableto a court, but he has suffered a wrong; he has lost his chance tobargain with the facts before him. That is the evil against which the[mail fraud] statute is directed.

United States v. Rowe, 56 F.2d 747, 749 (2d Cir. 1932). Here, class members were

entitled to know that Milberg Weiss and Schulman had entered into secret and

illegal kickback arrangements with named plaintiffs. Unquestionably, this affected

their ability to determine whether to object to their representation by Milberg Weiss

and the Paid Plaintiffs; to any settlement agreement entered into by Milberg Weiss;

to attorneys fees requested by Milberg Weiss (which were necessarily influenced by

an obligation to pay kickbacks); and whether to opt out of any proposed settlement

of the action.

That Defendants’ conduct impinged on the economic rights of absent class

members cannot seriously be disputed. The Supreme Court has long held that,


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because of the binding effect of a class judgment, the Constitution’s Due Process

clause protecting the deprivation of property rights requires “adequate”

representation of class members, and notice and an opportunity to be heard in

connection with the litigation of the class action. Phillips Petroleum Co. v. Schutts,

472 U.S. 797, 811, 812 (1985) (“the Due Process Clause of course requires that the

named plaintiff at all times adequately represent the interests of the absent class

members”) (citing Hansberry v. Lee, 311 U.S. 32, 42–43 (1940). For these reasons,

“class action . . . may only be certified if the trial court is satisfied, after a rigorous

analysis, that the prerequisites of Rule 23(a) are satisfied.” General Telephone Co.

v. Falcon, 457 U.S. 147, 161 (1982) (emphasis added); see also National

Association of Regional Medical Programs v. Mathews, 551 F.2d 340, 344–45

(D.C. Cir. 1976) (“Basic consideration of fairness requires that a court undertake a

stringent and continuing examination by the named class representatives at all

stages of the litigation where absent members will be bound by the court’s

judgment.”); Hanon v. Dataproducts Corp., 976 F.2d 497, 509 (9th Cir. 1992)

(district court must conduct a “rigorous analysis” of the proposed class

representatives).

b. The Conflict of Interest Alleged in the Indictment Created aForeseeable Risk of Economic Harm

Defendants claim that, despite the allegations in the Indictment, no “conflict

of interest” existed between Milberg Weiss, the Paid Plaintiffs, and the absent class

members they purported to represent. According to Defendants, because the

attorneys fees supposedly depended on the overall success of the litigation, both

Milberg Weiss and the plaintiffs had an incentive to “maximize” any recovery in

any particular case. Defendants’ arguments, which simply ignore the allegations in

the Indictment, are simplistic and seriously flawed.

As an initial matter, Defendants ignore the Indictment’s allegations that a

named plaintiff may not receive any compensation in a lawsuit beyond his pro rata

share of any recovery in the case or that of disclosed “bonus” payment to which


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other class members or shareholder would have an opportunity to object. (FSI, ¶

24). Nor could they. When a named plaintiff “join[s] in bringing [an] action as a

class action . . . by doing so he has disclaimed any right to a preferred position in

the settlement.” Officers for Justice v. Civil Service Com’n, Etc., 688 F.2d 615, 632

(9th Cir. 1982).

Well-established case authority holds that a plaintiff’s interest in the

attorneys fees creates a conflict of interest, a situation that is exacerbated when that

interest is concealed by misrepresentations and perjury. The conflict of a Paid

Plaintiff ineluctably flows from the well-recognized inherent conflict between class

counsel and the class arising from class counsels’ interest in attorneys fees:

While the conflict between a class and its attorneys may be most starkwhere a common fund is created and the fee award comes out of, andthus directly reduces, the class recovery, there is also a conflictinherent in cases like this one, where fees are paid by a quondamadversary from its own funds – the danger being that the lawyers mighturge a class settlement at a low figure on a less-than-optimal basis inexchange for red-carpet treatment on fees. It is because of the potentialrisk that plaintiffs’ attorneys and defendants will team up to furtherparochial interests at the expense of the class that the Rule 23(e)protocol employed by several circuits explicitly includes scrutinizingsettlements for indicia of collusion, including collusive fee settlements.

Weinberger, et al. v. Great Northern Nekoosa Corp., 925 F.2d 518 (1st Cir. 1991);

see also In re General Motors Corp. Pick-Up Truck Fuel Tank, 55 F.3d 768, 820

(3d Cir. 1995) (“fee agreement clearly does impact [class members’] interests, as it

is, for practical purposes, a constructive common fund”). Indeed, the Ninth Circuit

has explicitly held, "Because in common fund cases the relationship between

plaintiffs and their attorneys turns adversarial at the fee-setting stage, courts have

stressed that when awarding attorneys' fees from a common fund, the district court

must assume the role of fiduciary for the class plaintiffs." In re Washington Public

Power Supply System Securities Litigation, 19 F.3d 1291, 1302 (9th Cir. 1994).

This conflict has repeatedly been recognized by courts finding a disqualifying

conflict of interest by named plaintiffs when they have a direct, or even indirect,

interest in the award of attorneys’ fees. See, e.g., Cotchett v. Avis Rent-a-Car

System, 56 F.RD. 549, 544 (S.D.N.Y. 1972) (denying class certification when


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recovery of attorney purporting to represent class presented “serious issue” of a

conflict of interest because “possible recovery [by named plaintiff] as a member of

the class is far exceeded by the financial interest [named plaintiff] might have in the

legal fees engendered by this lawsuit”); Graybeal v. American Savings & Loan

Association, 59 F.R.D. 7, 13–14 (D.D.C. 1973) (named plaintiffs also serving as

class counsel is “inherently fraught with potential conflicts of interest” because

“plaintiff may stand to gain little as class representatives, but may gain very much

as attorneys for the class”); Shields v. Valley National Bank, 56 F.R.D. 448 (D. Az.

1971) (“Shields has not demonstrated competence to represent the class because he

seeks to be not only the attorney for the class and be awarded a fee for his

representation, he seeks in the same action, personal relief”); Shields v. First

National Bank of Arizona, 56 F.R.D. 442 (D. Az. 1972) (same).

As stated by one court when finding a proposed named plaintiff inadequate to

represent a class because she was the wife of one of the class counsel:

The threshold fact which compels disqualification is that the plaintiff,Lillian Stull, is the wife of Richard Stull, a member of the firm of Stulland Stull, who is her personal attorney in this litigation and who, withhis firm, would represent her and others of the class, were it to bedeclared. The potential conflict of interest inherent in this situation isobvious. . . . [T]he difficulty . . . with this situation lies in the fact thatthe possible recovery of Ms. Stull as a member of the class is farexceeded by the financial interest she and her husband, as a maritalunit, might have in the legal fees engendered by this lawsuit.

Stull v. Pool, 63 F.R.D. 702, 704 (S.D.N.Y. 1974). See also Turoff v. May Co., 531

F.2d 1357 (6th Cir. 1976) (refusing to certify class plaintiffs who were attorneys

with class counsel or wife of class counsel); Susman v. Lincoln American Corp.,

561 F.2d 86 (7th Cir. 1977) (affirming refusal to certify class plaintiff who was

brother of class counsel because of conflict of interest related to attorneys’ fees); In

re Discovery Zone Securities Litigation, 169 F.R.D. 104, 109 (N.D. Ill. 1996)

(refusing to certify class when named plaintiffs were stockbrokers of class counsel

because “facing the possibility of receiving more investment business from class

counsel and the commissions that go with it, the brokers have more incentive to

maximize fees for the attorneys than to ensure adequate recovery for the class . . .


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.[T]he brokers’ possible recovery here is dwarfed by the potential attorneys’ fees.”).

Indeed, because an expectation of a recovery different from other class

members necessarily constitutes a corrupting influence, courts are reluctant to

approve even fully disclosed “incentive” awards because of their potentially

corrupting influence:

If class representatives expect routinely to achieve special awards inaddition to their share of the recovery, they may be tempted to acceptsuboptimal settlements at the expense of the class members whoseinterest they are appointed to guard. . . . [I]ndividual class memberswho have actively participated in the litigation are the ones likely to bemost aware of the dynamic at the negotiating table, the strength of theclass claims, and the costs of pursuing the litigation. If they supportthe settlement agreement and are treated equally in that agreement withother class members making similarly strong claims, the likelihood thatthe settlement is forwarding the class’s interests to the maximumdegree practically possible increases. If, on the other hand, suchmembers of the class are provided with special “incentives” in thesettlement agreement, they may be more concerned with maximizingthose incentives than with judging the adequacy of the settlement as itapplies to class members at large.

Staton v. Boeing Co., 327 F.3d 938, 975–77 (9th Cir. 2003). In Staton, the court

reversed a district court’s approval of a settlement which provided for large

“incentive” payments to certain plaintiffs: “Because the very large differential

amount of damage awards between the named and unnamed class members is not

justified on this record, the district court abused its discretion in finding the

settlement agreement to be fair, adequate and reasonable under Rule 23(e).” Id. at

978.

Here, the Defendants’ conduct posed a risk of “reasonably foreseeable

economic harm” to other class members because the kickback payments created a

risk that the corrupted plaintiffs would accept or urge the adoption of a settlement

that was less than optimal for other class members; at the end of the day, their

interest in the fees far exceeded whatever the ultimate recovery might be. It is no

answer, as defendants argue, that Milberg Weiss’s fees depended on the ultimate

“success” of their litigation efforts. Such simplistic reasoning ignores that class

attorneys must weigh the marginal costs of continuing to litigate a case against the

probable marginal benefits to be obtained for the class by continued litigation. It


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11 In Epstein III, the Ninth Circuit withdrew its opinion, on rehearing, afterconcluding that the Supreme Court’s decision in Matsushita Elec. Indus. Co., Ltd.v. Epstein, 516 U.S. 367 (1996) held that litigants in federal proceedings in theNinth Circuit could not litigate the issue of adequacy of representation that hadbeen resolved in the Delaware Chancery Court. Epstein III, 179 F.3d at 649–50. Although Epstein II was withdrawn, nonetheless two judges in Epstein III

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also ignores that civil defendants may attempt to settle class actions with those class

attorneys out of the many that often file redundant class actions who are most likely

to enter into an expeditious settlement in exchange for an award of fees. See, e.g.,

Prezant, 636 A. 2d 915 (disapproving class settlement on objections by class

members because of potential collusion in settlement).

One of the Lazar Lawsuits is instructive. In In re MCA, Inc., 598 A.2d 687

(Del. Chanc. Ct. 1991), the Delaware Chancery Court rejected a proposed

settlement in connection with a case involving a tender offer because it offered no

monetary value to the class members; provided for an award of $1,000,000 in fees

for the class attorneys despite the lack of any benefit for class members; and

purported to extinguish related federal law claims that had been filed in a federal

district court elsewhere in the country. The court later described the proposed

settlement as “patently inadequate . . . in which the class would have received no

monetary benefit but the attorneys would have $1 million in fees . . . .” In re MCA

Shareholders Litigation, 1993 WL 43024 at *4 (Del. Chanc. Ct. 1993). The Ninth

Circuit (in a related federal case) was even less impressed:

Delaware counsel completely failed to investigate or develop theirfederal claims and basically “rolled over” during settlementnegotiations, ultimately entering into a settlement that was essentiallyworthless except for their own fees. This course of conduct . . . f[ell]well below the level of representation that is required to bind [absentclass members]. . . . Delaware counsel’s representation of [the federallaw claims] surpassed inadequacy and sank to the level of subversion.

Epstein v. MCA, Inc., 126 F.3d 1235, 1255 (9th Cir. 1997) (“Epstein II”),

withdrawn and superseded on other grounds, Epstein v. MCA, Inc., 179 F.3d 641

(9th Cir. 1999) (“Epstein III”).11


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expressed their continuing concerns over the adequacy of representation byplaintiffs’ counsel. Id. at 650 (“the opinion [in Epstein II] convincingly concludedthat Delaware counsel provided inadequate representation”) (Wiggins, J.,concurring); (“The conflict prior to settlement approval was palpable. . . . Classrepresentatives had absolutely no incentive to obtain fair valuation of the federalclaims, because of their inability to assert the claims”) (Thomas, J., dissenting). Later, the Delaware Chancery Court entertained a Rule 60 collateral attack on theoriginal judgment, but denied the claim because movants had waited too long but,more importantly, could not “point to evidence or facts that would lead areasonable mind to the conclusion that an adverse party improperly obtained a finaljudgment.” In re MCA, Inc. Shareholders Litigation, 774 A.2d 272 280 (Del. Ch.Ct. 2000). Of course, movants could not do so – Schulman and his Paid Plaintiffsconcealed their illegal activity which, as Milberg Weiss has admitted, see infra,would have been valid grounds on which to bring a collateral attack.

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MCA is of particular relevance to this case because one of the class counsel

was none other than defendant Schulman; co-defendant Seymour Lazar was a

named plaintiff in the Delaware action; and the federal claims which Schulman and

Lazar sought to extinguish in exchange for $1 million to the attorneys were pursued

and litigated in the Central District of California. Moreover, in MCA there was

vigorous opposition to the settlement by objecting class members who argued that

the class received inadequate representation and there was collusion between the

plaintiffs and defendants. See Reply Brief of Petitioners Below Appellants

Lawrence Epstein and John Lindner, In re MCA Shareholder Litigation, 2001 WL

34129771 (Del. Feb. 28, 2001). Schulman can hardly claim that there was not

actual fraud visited upon absent class members by the failure to disclose the secret

and illegal kickback arrangement.

As argued previously, the government is not required to prove that there was

actual harm inflicted upon any class members by the conduct at issue in the

Indictment. But the above example well illustrates the potential for economic harm

because it creates an incentive for named plaintiffs to enter into a settlement that

serves their own interests. For example, in United States v. Rybicki, 287 F.3d 257

(2002), aff’d, 354 F.3d 124 (2d Cir. 2003) (en banc) (“Rybicki I”), the government


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prosecuted attorneys who provided kickbacks to insurance adjusters to expedite the

attorneys’ settlement claims. Although the government stated at trial that it would

not seek to prove that the value of any settlement was higher because of the

kickback payment, the Second Circuit nonetheless ruled that, as a result of the

kickbacks, it was “reasonably foreseeable that the companies in question might

suffer economic harm . . . .” Id. at 266. The court held:

[T]he jury could have found that it was reasonably foreseeable . . . thatthe effect of the payments to the adjusters would have been to providean incentive to the adjusters to not seek the lowest settlement amountor to not delay the settlement, thereby depriving the insurancecompanies of the difference between the most favorable settlement theadjusters could have otherwise obtained and the settlement actuallyagreed upon or the time value of money lost by expediting thesettlement and disrupting the normal patterns of case disposition.

Rybicki I, 287 F.3d at 266–67.

Defendants attempt to minimize the obvious significance of the foregoing by

reaching to facts outside the indictment. Defendants argue that, because any

proposed settlement was subject to careful scrutiny by the court, the possibility of

economic harm inuring to the detriment of the class was foreclosed. But this places

the cart before the horse. The procedural safeguards touted by Defendants lose any

meaning when material information is being withheld from the courts which

themselves are fiduciaries towards the class. “Under Rule 23(e) the district court

acts as a fiduciary who must serve as a guardian of the rights of absent class

members.” In re Equity Funding Corp. of America Securities, 438 F. Supp. 1303,

1325 (C.D. Cal. 1977) (citing Norman v. McKee, 431 F.2d 769 (9th Cir. 1970) (“The

district judge properly understood [his] responsibility was to act as guardian of the

absent parties and the corporate fund as a whole.”)); see also Diaz v. Trust

Territory of the Pacific Islands, 876 F.2d 1401, 1408 (9th Cir. 1989) (“The district

court must ensure that the representative plaintiff fulfills his fiduciary duty toward

the absent class members, and therefore must inquire into the terms and

circumstances of any dismissal or compromise to ensure that it is not collusive or

prejudicial.”). As one court stated,


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We may here during the course of the litigation, and most certainlywill if it is settled, use the powers inherent in our fiduciary obligationto the class to examine the employment contract between counsel andthe named plaintiffs and to audit carefully counsel’s financial recordsas they relate to this case to assure ourselves that the fiduciaryobligations between plaintiffs’ counsel and the class has [sic] not beenviolated.

Stavrides v. Mellon National Bank & Trust Co., 60 F.R.D. 634, 637 n.6 (W.D. Pa.

1973) (emphasis added); see also Greenfield v. Villager Industries, Inc., 483 F.2d

824, 832 (3d Cir. 1973) (“The ultimate responsibility [to assure adherence to Rule

23] of course is committed to the district court in whom, as the guardian of the

rights of the absentees, is vested broad administrative, as well as adjudicative,

power.”).

Surely, Defendants do not contend that they were entitled to withhold

material information from the courts. The Second Circuit has specifically held that

the failure to disclose material facts concerning a fee arrangement “overlooks the

class attorneys’ duty . . . to be sure that the court, in passing on [the] fee application

has all the facts as well as their fiduciary duty to the class not to overreach.” In re

Agent Orange Product Liability Litigation, 818 F.2d 216, 223 (2d Cir. 1987)

(quoting Lewis v. Teleprompter Corp., 88 F.R.D. 11, 18 (S.D.N.Y. 1980)).

In this case, the Indictment undeniably alleges that Schulman favored the

interests of some clients – the Paid Plaintiffs – over the interests of his other clients,

the absent class members and shareholders who were never informed of the illegal

and improper kickback arrangement. Put simply, Schulman did not arrange to share

a significant percentage of his law firm’s attorneys’ fees with all class members or

shareholders in the cases which he litigated. Under these circumstances, the

Indictment charges a scheme to defraud as contemplated by the mail and wire fraud

statutes.

c. Class Members Also Suffered a Foreseeable Risk of EconomicHarm Because the Illegal and Unethical Conduct SubjectedJudgments and Settlements to Collateral Attack

Defendants cannot reasonably dispute that class members are entitled to be

represented “fair[ly]” by an “adequate” class representative and “adequate” class


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counsel under federal and state rules governing class actions. See Fed. R. Civ. P.

23; Delaware Court of Chancery Rule 23. These rules state in pertinent part: “One

or more members of a class may sue . . . as representative parties on behalf of all

only if . . . (4) the representative parties will fairly and adequately protect the

interests of the class.”

Here, the Indictment alleges that the secret kickback arrangement was per se

illegal and improper under New York law. First, it is a criminal offense for an

attorney to pay an individual for the purpose of prosecuting that person’s lawsuit.

McKinney’s Jud Law §§ 488(2), (3) (criminal offense for an “attorney or

counselor” to “promise or give . . . a valuable consideration to any person, as an

inducement to placing, or in consideration of having placed . . . a demand of any

kind, for the purpose of brining an action thereon, or of representing the claimant in

the pursuit of any civil remedy for the recovery thereof”). Secondly, the payments

violated New York’s prohibition against commercial bribery. McKinney’s Penal

Law § 180.00. Third, New York law precludes an attorney from advancing or

guaranteeing financial assistance to the client in connection with contemplated or

pending litigation. N.Y. Comp. Codes R. & Regs., tit. 22, § 1200.22(b) (DR 5-

103).

Under these circumstances, it is beyond peradventure that the Paid Plaintiffs,

and the attorneys such as Schulman who secretly paid them, were “inadequate” to

represent class members. Weisman v. Darneille, 78 F.R.D. 669, 671 (S.D.N.Y.

1978) (refusing to certify class where class plaintiff had lied about felony

conviction because “[a]s a fiduciary for the class, [plaintiff] would be required to

adhere to the highest standards of honesty and integrity.”); see also Stavrides v.

Mellon Nat’l Bank & Trust Co., 60 F.R.D. 634, 636–37 (W.D. Pa. 1973) (denying

class certification when class counsel acted unethically).

Indeed, Milberg Weiss admitted as much when it challenged the “adequacy”

of other lawyers and associated named plaintiffs to represent class members in

securities litigation. For example, in In re Network Associates Securities Litigation,


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12 Milberg Weiss’s position in these cases regarding the fiduciaryobligations of class counsel and class plaintiffs, while undoubtedly correct, wasparticularly hypocritical. As the government will show at trial, Schulman himselfwas routinely handing out cash to stockbrokers “under the table” – literally – inconnection with procuring individuals willing to serve as “named plaintiffs” forMilberg Weiss. See Transcript of Sworn Statement of Stockbroker A (“Broker A”)at 30–31 (attached hereto as Exhibit C) (“[AUSA]: Okay. Tell us, in as much detailas you can, the actual way in which the cash was physically transferred from Mr.Schulman to you, and in what form it was provided to you in terms of packaging orthe like. [Broker A]: We would be sitting at a table, having breakfast, and Mr.Schulman had a briefcase under the table. I would take out what was in hisbriefcase and put it into my briefcase, give him back his briefcase, close up mybriefcase. And there were packages of hundred dollar bills, packs of hundreddollar bills. [AUSA]: So the money was passed, literally, underneath the table.[Broker A]: Under the table.”).

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No. C-99-1729-SBA (N.D. Cal.), Milberg Weiss argued that proposed class

plaintiffs were “inadequate” under Rule 23 because their class counsel had engaged

in conduct that violated provisions of the Private Securities Litigation Reform Act

barring stockbrokers from receiving payments to refer clients to class action

attorneys. As correctly stated by Milberg Weiss:

Courts must scrutinize the “competence” of counsel and the namedrepresentatives’ ability to rely on counsel. A representative who hasdemonstrably misled its clients, violated ethical standards, and [made]misrepresent[ations] to the court . . . much less a representative whomay have committed a crime in the instant matter, cannot serve as afiduciary to the class.

NALPG’s Opposition to Weiss & Yourman Motion and Vattuone Motion for

Appointment of Lead Counsel Pursuant to Section 21D(A)(3)(B) of the Securities

Exchange Act of 1934 at 14, In re Network Associates, Inc. Securities Litigation,

No. C-99-1729 (WHA) at (citations omitted) (attached as Exhibit B).12 In response

to an argument that the actions of counsel could not taint the named plaintiffs or

other counsel, Milberg Weiss declared: “Adequate parties cannot cleanse

inadequate counsel!” Id. (italics in original).

In other papers, Milberg Weiss argued:


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13 Network Associates Plaintiff Group’s Reply in Support of TheirMiscellaneous Ex Parte Request Regarding Appointment of Lead Plaintiff andCounsel at 6 (attached as Exhibit D).

14 Waste Management Plaintiffs Group’s Opposition to the WasteManagement Institutional Shareholder Group’s Motion to Be Appointed LeadPlaintiff at 30, In re Waste Management, Inc. Securities Litigation, No. H-99-2183(S.D. Tex.) (hereinafter “Milberg Weiss Waste Management Brief”) (attached asExhibit E).

15 Neon Plaintiffs’ Group Reply Memorandum in Support of its Motion,and in Opposition to the New Era Group’s Motion, for Appointment of LeadPlaintiff and Lead Counsel at 4, Kern v. New Era of Networks, Inc., C.A. No. 99-WM–1274 (D. Col.) (attached as Exhibit F).

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C “The [proposed named plaintiffs’] actions represent per se violation ofPSLRA rules, that carry criminal consequences. This misconduct . . .establish [sic] the fiduciary inadequacies of the [proposed namedplaintiffs].”13

C “Under no circumstances can the [proposed named plaintiffs] beproperly designated the lead plaintiff in this case or their three lawfirms designated co-lead counsel. The misconduct of the [proposednamed plaintiffs’] law firms in violating the Reform Act, New YorkJudiciary Law and Texas disciplinary rules taint the entire group andshould result their [sic] disqualification from any leadership role.”14

C “[S]tatutory violations [committed by plaintiffs’ counsel], on top of theviolations of the Colorado Rules of Professional Conduct governingsuch solicitations, renders their conduct unacceptable and irreversiblydisqualifies the New Era Group from serving as “adequate”representatives of the class of injured investors”15

Because the secret and illegal kickback payments rendered Milberg Weiss

and its corrupted plaintiffs “inadequate” as a matter of law, it subjected any final

judgment or settlement to collateral attack. Fed. R. Civ. Proc. 60(b) (“the court may

relieve a party from a final judgment, order, proceeding for . . . .fraud (whether

heretofore denominated intrinsic or extrinsic), misrepresentation, or other

misconduct of an adverse party”). As argued by Milberg Weiss itself:

The Supreme Court has stressed that adequacy of representationin a class action must always be present for the outcome to bebinding on the class. Ortiz v. Fibreboard Corp., __ U.S. __, 119 S.Ct. 2295, 2323 (1999); Amchem Products v. Windsor, 521 U.S. 591,626–27 (1997). Thus, the misconduct of the [proposed named


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plaintiffs] and their counsel has potentially serious consequences ifthey are appointed lead plaintiff/lead counsel. Because they seizedcontrol of the case via conduct that violates the Reform Act and NewYork and Texas law, this renders them inadequate representatives ofthe class. Thus, any result obtained in the case by them – whether adismissal, settlement or otherwise – will remain subject to challenge onthe grounds that they were not adequate representatives of the classsued for and their designation of lead plaintiff or lead counsel violatedthe Reform Act. This would create an unnecessary uncertainty andrisk both for the plaintiff class and for the defendants who, after all, areentitled in a class action to the benefits of res judicata no matter whatthe outcome may be. This is a very serious issue.

Milberg Weiss Waste Management Brief at 31 (attached hereto as Exhibit E) (bold

and underscore in original). See also E.I. Dupont v. Florida Evergreen Foliage,

744 A.2d 457, 458 (Del. 1999) (“[U]nder Delaware law, a tort claimant fraudulently

induced to execute a release may opt either for rescission or a separate suit for fraud

with damages . . . .”); State v. Guthman, 619 A.2d 1175, 1178 (Del. 1993) (“in civil

matters a magistrate may amend final judgements upon his or her own initiative or .

. . for fraud, misrepresentation or newly discovered evidence.”).

Therefore, even accepting Defendants’ argument that the government must

show some risk of foreseeable economic harm, such risks were posed by the

defendants’ unlawful conduct here. Class members were entitled to expect

adequate class representation resulting in a binding judgment protecting their

interest, and free from later collateral attack. United States v. Gray, 96 F.3d 769,

775 (5th Cir. 1996) (affirming “honest services fraud” convictions when failure to

disclose cheating scheme to principal because it was reasonable to believe that

principal might have changed its business conduct had it known of the cheating

scheme).

4. Defendants Defrauded Shareholders of Their Intangible Right toHonest Services in the “Delaware Transactional Cases”

Defendant Schulman devotes an entire brief arguing that he could not have

committed “honest services fraud” in so-called “Delaware Transactional Cases.”

For all of the reasons set forth above, Schulman’s arguments should be rejected.

There was nothing unique about the conduct of litigating the Delaware


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Transactional Cases which even remotely takes them out of the realm of “honest

services” fraud. To the contrary, as the Delaware Chancery Court has held,

“Stockholders have a cognizable interest in the integrity of the representative

litigation process and in ensuring that it functions in a manner that generates

benefits for its intended beneficiaries, and not windfalls to attorneys.” In re Cox

Communications, Inc., 879 A.2d 604, 639 (2005). Put another way, stockholders

have an intangible right to be represented honestly by class counsel and named

plaintiffs. Here, the class members were defrauded of that intangible right because

Schulman and his cohorts concealed from them and the courts their secret bribery

scheme and the conflicts of interest that attended the initiation and resolution of

these cases.

Schulman further misleads the Court by referring to recent changes in the

Rules of the Delaware Chancery Court now requiring all representative plaintiffs to

swear under oath that they are not receiving compensation for serving as a

representative plaintiff. Delaware Chancery Court Rule 23(aa) and 23.1(b).

Schulman claims that these rules resolved a purported “ambiguity” in the law.

What Schulman neglects to tell this Court is that these rule amendments were

prompted by his own indictment. As for any purported prior ambiguity in the rules,

Schulman also neglected to mention the views of one presumably knowledgeable

authority on this subject matter:

According to Chancellor William B. Chandler III, the changes reiteratein explicit terms what has always been the accepted practice inDelaware regarding compensation to the class or derivativerepresentation in class action and derivative litigation.

“Fee splitting or fee sharing with a plaintiff representing the class hasnever been permitted or countenanced in Delaware, and is expresslyforbidden under our law. The amendments to our rules, asrecommended by our rules committee, reaffirm and ratify thislongstanding practice and common law understanding,” Chandler saidin an email.

E. Bennett, Chancery Court Amends Rules to Prevent ‘Kickback’ Schemes, 10

DELAWARE LAW WEEKLY 3 at 1, January 17, 2007 (attached hereto as Exhibit G).

The Delaware Supreme Court’s decision in Prezant v. De Angelis, 636 A. 2d


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915 (Del. 1994) is instructive. In that case, the Delaware Supreme Court rejected a

settlement of a class action settlement, even though the Chancery Court,

recognizing the inadequacy of the class representative, had applied “heightened

scrutiny” to the proposed settlement and still found it fair and adequate. Id. at 925.

In rejecting the Chancery Court’s procedure, the Delaware Supreme Court stated:

In addition to the due process concerns, if, in fact, there was noadequate class representative, the entire settlement process was tainted. The determination made by the Court of Chancery in approving thesettlement was done on the basis of the record created by the parties. Ifthe record was not made by an adequate representative of the class, itis, to say the least, suspect. This is so because an adequaterepresentative, vigorously prosecuting an action without conflict andbargaining at arms-length, may present different facts and a differentsettlement proposal to the court than would an inadequaterepresentative. Accordingly, the Court of Chancery’s use ofheightened scrutiny does not cure a failure to determine if De Angelisis an adequate class representative.

Id. at 925.

Here, Schulman, Milberg Weiss, and the Paid Plaintiffs, were rendered

inadequate to serve as class representatives as a matter of law by their concealed

bribery scheme and the lies and misrepresentations they told. Their conduct

irretrievably compromised the “integrity of the representative litigation process” in

which all class members have a cognizable interest. In re Cox Communications,

879 A.2d at 639. Therefore, there is no basis on which to dismiss the “honest

services” fraud allegations.

5. The Fifth Circuit’s Decision in United States v. Brown Does Not ApplyTo This Case

As shown above, the Indictment in this case sufficiently alleges mail and wire

fraud, and conspiracy to commit those offenses. Nevertheless, relying on the Fifth

Circuit’s divided decision in United States v. Brown, 459 F.3d 509 (5th Cir. 2006),

the defendants argue that the Indictment fails to allege a “divergence of interests”

between the corrupted class counsel and paid plaintiffs and the other plaintiffs and

class members they purported to represent, and that defendants understood such a

“divergence of interests” existed. Brown is inapplicable.

The panel majority’s opinion in Brown explicitly recognized that bribery and


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kickback cases are “paradigmatic cases of honest-services fraud.” Brown, 459 F.3d

at 521. There can be little doubt that the conduct alleged here falls squarely within

the common definition of a “kickback” and the explicit prohibitions of New York’s

commercial bribery statute. As the court in Brown held, “in typical bribery . . .

cases, there is usually no question that the defendant understood the benefit to him

resulting from his misconduct to be at odds with the employer’s expectations.” Id.

at 522. Certainly, courts and class members had every right to expect that

Schulman, Lazar, Milberg Weiss, and other paid plaintiffs would not engage in

conduct that was per se illegal. Schulman’s efforts to disguise the payments

through phony referral fees and his own perjury about payments to named plaintiffs

evidence his own awareness of the wrongfulness of his conduct.

B. THE INDICTMENT IS NOT UNCONSTITUTIONALLY VAGUEON ITS FACE OR AS APPLIED

Defendants argue that the Indictment should also be dismissed because 18

U.S.C. § 1346 is unconstitutional on its face and applied as to them. Defendants are

wrong. As an initial matter, no court has ever held that Section 1346 to be void for

vagueness on its face, and defendants’ position has been explicitly rejected by the

Ninth Circuit. Frega, 179 F.3d at 803; Bohonus, 628 F.2d at 1174–75.

Nor can defendants plausibly argue that § 1346 is unconstitutionally vague as

applied in this case. “In examining a statute for vagueness, we must determine

whether a person of average intelligence would reasonably understand that the

charged conduct is proscribed. The statute must be examined in the light of the

facts of the case at hand.” Williams, 441 F.3d at 724 (internal citations and

quotations omitted). The Indictment in this case is replete with allegations of

specific acts demonstrating that the defendants knew their conduct was wrongful.

Class plaintiffs routinely lied under oath about the existence of the scheme;

kickbacks were paid in cash; kickbacks were laundered through “cut-out” lawyers

and other professionals to disguise the payment of the kickbacks, and accompanied

by letters falsely stating the fees were for lawyers non-existent work in class action


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and shareholder derivative litigation.

It is not unreasonable to conclude that average citizens would understand that

class action attorneys, purporting to act as public fiduciaries, would violate the law

by: paying bribes, often in cash, to certain plaintiffs and thereby favoring their

interests over other class members; suborning perjury by the plaintiffs receiving the

bribes (particularly in the face of a federal statute, the Private Securities Litigation

Reform Act, specifically requiring sworn disavowal of receiving any compensation

other than a pro rata share); laundering the kickbacks to plaintiffs through conduit

attorneys and other professionals under the false pretense that they were legitimate

“referral fees” or “professional fees”; and by making false statements and omitting

concededly material information from courts. See, e.g., Frega, 179 F.3d at 803

(person of average intelligence would understand that receipt of bribes by judge

would be proscribed).

If, in fact, the defendants truly believed their conduct was legal, the payment

arrangements would have been disclosed to courts; plaintiffs would not have lied

under oath about the kickbacks; the payments would have been made directly by

check to the plaintiffs (and not by cash) and accounted for as a legitimate business

expense; and, there would have been no need to create phony letters supporting the

pretense that the payments were legitimate referral fees to other lawyers.

C. DISMISSAL OF THE INDICTMENT IS NOT A PROPER REMEDY

Even if this Court were to conclude that the Indictment does not sufficiently

allege a scheme to defraud absent class members of their intangible right to “honest

services,” dismissal of the Indictment is not warranted. Even omitting those

allegations, the Indictment sufficiently charges a conspiracy to obstruct justice; to

make false material declarations under oath; to use interstate commerce to facilitate

commercial bribery; to commit mail and wire fraud involving the deprivation of

property and money; and to make illegal payments to a witness. The Indictment

also sufficiently alleges a conspiracy to operate the affairs of an enterprise through a

pattern of racketeering based on offenses specified above, which are predicate acts


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of racketeering under 18 U.S.C. § 1961. Moreover, the aforementioned offenses

constitute “specified unlawful activity” underlying the substantive money

laundering and money laundering conspiracy counts at Counts Thirteen through

Fifteen. And, Counts Six through Eight properly charge a scheme to defraud

involving deprivation of money and property.

Accordingly, even if the Court determines that the Indictment does not

sufficiently allege “honest services” fraud, it should strike those particular

allegations or, alternatively, permit the government to file a redacted indictment

removing those allegations. Contrary to Defendants’ claims, such a procedure

would not run afoul of the Fifth Amendment’s Grand Jury clause. For example, in

United States v. Poindexter, 719 F. Supp. 6, 8–9 (D.D.C. 1989), the district court

permitted the government to redact the indictment to remove one of two alleged

objects of the charged conspiracy. In rejecting defendant’s claim that such a

procedure violated the Fifth Amendment, the court stated:

[T]he defendant argues that the reduction of the indictment proposedby the government would deprive him of his right under the FifthAmendment to be tried on the charges brought by the grand jury. Thegrand jury, it is said, returned the present, broad indictment, and underthe Fifth Amendment, defendant is entitled to be tried on the basis ofthat indictment and none other. That argument, however, conflictshead-on with the decision of the Supreme Court in United States v.Miller, 471 U.S. 130 (1985). In that case, a unanimous Court upheldthe validity of a conviction upon proof that was narrower than theallegations in the indictment. In the view of the Supreme Court, thischange in the proof did not deprive the defendant of his right to betried on an indictment returned by a grand jury. On the same principle,the reduction of the language of an indictment does not deny to adefendant his grand jury rights, provided that (1) the indictment as sonarrowed continues to state a complete criminal offense, and (2) theoffense is contained in the indictment as originally returned.

Ninth Circuit cases are in accord. In United States v. Fulbright, 105 F.3d 443, 452

(9th Cir. 1997), the Ninth Circuit affirmed a conviction where the government had

redacted certain allegations from a count charging bank fraud. Rejecting the

defendant’s argument that the redaction “constituted an impermissible amendment”

of the indictment, the court held that because redaction of certain language did not

broaden the original charge, no Fifth Amendment violation occurred. See also


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United States v. Hutchison, 22 F.3d 846, 850–51 (9th Cir. 1993) (affirming

conviction where government had redacted allegations in superseding indictment).

The Ninth Circuit’s decision in United States v. Telink, Inc., 910 F.2d 598

(9th Cir. 1990) is not to the contrary. In that case, the district court dismissed an

indictment following the Supreme Court’s decision in McNally v. United States,

483 U.S. 350 (1987), invalidating honest services mail and wire fraud. The

government had generally alleged a scheme to defraud involving money and

property, and argued on appeal that the indictment alleged three specific property

interests. The court rejected the government’s argument because “[t]he indictment

is silent on the three property interests which the government now discusses at

length.” Id. at 600. The court, therefore, held that the indictment was “permeated

with pre-McNally ‘right to honest services’ theory” and, because it could not

segregate the money and property fraud theory from the recently invalidated

“honest services” fraud theory, the court upheld dismissal of the indictment. Id

By contrast, the Indictment in this case is highly specific regarding the

property interests subject to the scheme to defraud. The indictment alleges that

class members were deprived of “economic information that affected [class

members’] rights and ability to influence and control class action and shareholder

derivative actions brought on their behalf” and “the amount of any kickback that

[Milberg Weiss] paid using attorneys’ fees obtained in the lawsuit.” (FSI, ¶ 33(b),

(c)). Defendants offer no serious challenge to these allegations. Therefore,

wholesale dismissal of the Indictment is an improper remedy.

IV.

CONCLUSION

For the reasons set forth above, to preserve the integrity of the judicial

process in federal and state courts throughout this country, and to hold public

fiduciaries accountable for their misconduct, the Government respectfully requests

that this Court deny the defendants’ Honest Services Motions, and that this case


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proceed to trial on the Indictment as charged.


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GEORGE S. CARDONA United States Attorney THOMAS P. …