Malpractice Suit against Milberg Blocked by 2nd Circuit

10/11/12

On Wednesday, the 2^nd U.S. Circuit Court of Appeals upheld the block on a malpractice suit brought in state court by Texas businessman Samuel Wyly against the law firms of Milberg and two others, namely Stull, Stull & Brody, and Kessler Topaz Meltzer & Check. Criticizing the decision of the 2^nd Circuit, a lawyer for Wyly, William Brewer said the decision, “further erodes the already limited ability of class members to control the conduct of class counsel.”


Wyly and other investors had appointed the law firms in a series of class action suits brought against Computer Associates accusing the company's officers and directors of conspiring to inflate the revenues and stock prices of the company. Milberg and Stull, Stull & Brody were co-lead counsels for the plaintiffs in the cases, which began in 1998. In 2002, more cases were filed against Computer Associates with Milberg and Kessler Topaz Meltzer & Check serving as co-lead counsel on the fresh cases.

In August 2003, the plaintiffs and Computer Associates reached a settlement providing $130 million to $140 million in stock to the class – the settlement was approved by U.S. District Judge Thomas Platt in Brooklyn. Under the settlement, the plaintiff's law firms were to receive $30 million to $40 million in stock, an apportionment termed by the judge as “fair and reasonable.”

However, following the settlement, in 2004, the Justice Department and the SEC completed investigations into the accounting practices of Computer Associates, and in that matter the company agreed to a $225 million settlement and to a deferred prosecution agreement. At the time, the Wall Street Journal reported that Computer Associates had withheld 23 boxes of documents both from the government authorities and from the class action litigations.

The plaintiffs in the class actions, including Wyly, asked the plaintiff's law firms to vacate the settlement and reopen the cases upon new evidence. After three years of courtroom battles, Platt ruled that the missing 23 boxes were insufficient to justify reopening the cases.

Then Wyly sued the plaintiffs' law firms for malpractice in New York Supreme Court.

The plaintiffs' law firms asked Platt to enjoin the malpractice case, which Platt did, observing that it was “necessary in aid of its jurisdiction” and required to avoid relitigation.

Though the 2nd Circuit Court of Appeals found that Platt had erred on the ‘jurisdiction' ground and that there was no overlap in claims in the state and federal court cases to justify such a decision, it held that Platt had the right to enjoin the malpractice case, given that he had already awarded attorney's fees in the matter. Judge Jose Cabranes ruled for the 2nd U.S. Circuit Court of Appeals holding that the attorney fees award already made in the class actions was sufficient to dismiss the malpractice suit to avoid relitigation.

Cabranes observed, “Even a cursory review of the allegations in the (malpractice) complaint belies (Wyly's) contention that the state court action does not seek to relitigate the District Court's determination that class counsel's representation was reasonable.” Circuit judges Kearse and Sack joined him.

The case is Wyly v. Weiss, 2nd U.S. Circuit Court of Appeals, No. 10-4785.