The Criminal Class Action

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The
past decade has witnessed the rise of new, massive settlements forged
not out of civil litigation but on the periphery of the criminal justice
system. Since 2003, prosecutors have demanded that defendants
in a variety of high-profile corporate scandals set up multimillion-dollar
restitution funds for victims to settle criminal charges. Yet
few rules exist for the prosecutors who create and distribute these
complex settlements. Consider three examples:

(1)
In September 2004, software giant Computer Associates conceded that
it had unlawfully inflated its quarterly earnings reports by using shadow
accounting practices that effectively backdated lucrative licensing
contracts. As part of its agreement with the U.S.
Attorney’s Office, Computer Associates agreed to establish a $225
million restitution fund to compensate shareholders injured by the scandal.

Months after the fund was announced, however, not a single shareholder
had come forward with a proposal for how to dispense the money in a
fair and appropriate manner.

(2)
Shortly after Bernard Madoff committed the largest criminal fraud in
United States history, federal prosecutors sought to compensate
victims with his seized assets. In what some have
called “reality-show kind of fighting,”
Madoff’s victims sharply contested the distribution of his property.
Because of the nature of the fraud, some long-term investors lost their
life savings. Others, who withdrew funds over time, made less
than they thought, but actually profited from the scheme. Still
others lost millions through “feeder funds” without ever investing
with Madoff directly. Prosecutors, however, lacked
any rules to hear and resolve victims’ competing claims to Madoff’s
estate.

(3)
After the pharmaceutical company Eli Lilly reached a $1.2 billion settlement
with 30,000 plaintiffs for side effects associated with its antipsychotic
drug Zyprexa, federal prosecutors
launched a separate criminal case to recover $1.4 billion in restitution.
Although both actions sought overlapping monetary damages against the
same defendant and for the same conduct, no formal procedures existed
to ensure that victims were not doubly compensated or to prevent defendants
from being punished twice for the same misconduct.

Had
all three cases proceeded only in civil litigation, the result would
have been decidedly different. From the start, counsel for the
shareholders in Computer Associates, guided in part by the strength
of their legal claims, would have negotiated and participated in the
discussions over the amount and distribution of the settlement.

The Madoff victims would have been entitled to an array of procedural
protections, separate attorney representation, and payouts based on
their different statuses and needs.
The Zyprexa cases would have been centralized before a single federal
judge for pretrial coordination and review.

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