Article   |   Volume 159, Issue 5

The Criminal Class Action

Adam S. Zimmerman & David M. Jaros

April 2011

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.

The Criminal Class Action -