Circle of Greed

by Patrick Dillon

  Torkelsen had parlayed his credibility as an investor with a critical eye on risk assessment, an attribute that played well before judges and juries trying to determine the amount of losses suffered by shareholders in class action lawsuits. In Torkelsen, Lerach and Mel Weiss had acquired another legal entrepreneur. He was willing to work on contingency, claiming nothing if a case in which he testified was lost. On the other hand, if the firm won and if his testimony helped determine the outcome, he would command a premium. Over the next two decades, as Milberg Weiss ascended to the peak of securities shareholder lawsuits, Torkelsen and the firm would fit like hand and glove, or so it seemed.

  Another acquisition was Paul L. Tullman a fifty-year-old Milberg Weiss partner and Mel Weiss’s Long Island neighbor. Tullman had been talking for some time of leaving the firm and renewing his career as a stockbroker. It didn’t take long for Weiss, Bershad, and their partners Steven Schulman and Robert Sugarman (also a Long Island neighbor) to conceive of a plan whereby Tullman would become more valuable as a broker and plaintiff referrer than as an attorney. Because he was still a member of the New York State Bar, he would receive attorney’s “referral fees,” even though his work had nothing to do with the law. Tullman had a big Rolodex filled with clients, friends, and clients of other brokers who would soon become named plaintiffs for the firm. For this new partnership with the firm, he would earn nearly $9 million.

  In landing these three accomplices, Milberg Weiss scored the kind of trifecta that thrilled Mel Weiss when he hit them at the racetrack: Lazar, an eager plaintiff willing to sit for hours in depositions delivering coached answers; Torkelsen, whose stage presence as an expert witness was worthy of an Oscar; and Tullman, who was in a perfect position to spot cases and the plaintiffs who would bring them in.

  Flush with a growing number of settlements in New York and on the West Coast, Mel Weiss was already anointing his coast-to-coast operation as “the Rolls Royce of securities litigation.” The firm was ready to try big, headline-making cases, he told his top partners, and he would become the recognized dean of all securities class action attorneys. Noting that Lerach had grown out of his shared office space, Weiss directed his young protégé to plant the firm flag on the finest, most prominently located, and tallest building in San Diego. That wasn’t hard. The sleek twenty-story glass building known as One America Plaza had just been completed, and space at the top was available. Every office had a high view of the city. From Lerach’s corner, he could literally duplicate the waterscape view of C. Arnholt Smith, San Diego’s biggest bank bandit. He could see the harbor, the yachts, the powerboats, the naval flotilla, and the Pacific Ocean horizon beyond.

  Of course, he couldn’t see 475 miles north to Silicon Valley, not literally, but he could see in his mind’s eye where his caseload would come from. For the next two decades no other law firm and no other lawyer would sue so many Fortune 500 firms. High-tech giants—firms such as Apple Computer, Lucent Technologies, Hewlett-Packard, Oracle, IBM, Intel, 3Com, Tyco, Raytheon—were Lerach’s specialty. But he also went after venerable American corporations, ranging from AT&T and Honeywell to Exxon Mobil and The Gap. He sued accountant firms such as Touche Ross and Arthur Andersen; he sued financial institutions Citibank, Merrill Lynch, and Drexel Burnham; he sued telecommunications companies as well as multi-complex behemoths such as Enron and Halliburton. And he relished the animosity he engendered doing it.

  Lerach also evolved into a prominent Democratic Party donor. In time the (mostly) liberal practitioners of the New Economy, both in and out of Silicon Valley, would express surprise that Lerach didn’t cut them any slack for their politics, their record of job creation, or the innovations they produced that made life better for so many Americans. This was a misreading of Lerach’s worldview, even though he expressed admiration for capitalism, just not unbridled capitalism. These entrepreneurs were essentially libertarian Democrats who wanted the government out of their bedrooms and their boardrooms—just as they wanted Wall Street out of their labs. This wasn’t Bill Lerach’s philosophy. He’d gone from being a Goldwater Republican to a Great Society Democrat, and he saw his role as being supplemental to government—not at odds with it—precisely because business executives were forever figuring out ways to circumvent regulators and manipulate the market to their own benefit.

  For Lerach, it wasn’t really about national politics, at least not when he started out: in his first big case with political overtones, four of the so-called Keating Five were Democratic senators. Bill Lerach didn’t care about the next so-called “killer app” in Silicon Valley, or that the New Economy’s proprietors were creating jobs and increasing human productivity and connectivity in this place the romantics once called the Valley of the Heart’s Delight due to its abundance of fruit orchards. Milberg Weiss had taken him on as partner, allowing him to reside in San Diego if he could drum up cases. And so Bill Lerach needed cases. He hated fraud; he liked suing and litigating. It wasn’t that complicated.

  He was happy to become the ogre in the Valley of the Heart’s Delight or any other valley—and a scourge of Wall Street as well.

  * South of Pittsburgh, in a West Virginia hamlet called Coalwood, future NASA engineer Homer “Sonny” Hickam, Jr., author of Rocket Boys, was similarly inspired, as were thousands of American boys. No Sonny Hickams, the Kennedy Avenue boys soon wearied of the challenges of rocketry and returned to sports. “Fortunately,” Gene Carney told the authors, “the U.S. space program did not depend on us.”

  * On a trip home to his congressional district in 1971, McCloskey told a group at Stanford University that it was time to start “a dialogue to discuss impeachment.” This was before Watergate—McCloskey was trying to end the Vietnam War—and when he failed to enlist even liberal House Democrats in the effort, he decided to challenge President Nixon in the 1972 Republican primaries. His quixotic campaign garnered but a single delegate to the GOP convention in Miami.

  * Snow’s point was on target, but his implication wasn’t literally correct. A 1995 congressional report identified a retired lawyer named Harry Lewis as the plaintiff in more than three hundred cases against publicly held companies.

  7

  THE BIG CON

  Down the street from Lerach’s shiny San Diego high-rise office was a venerable lending institution known as San Diego Federal Savings & Loan, a company that began in 1885 with origins not dissimilar to those of George Bailey’s mythical “building and loan,” in It’s a Wonderful Life.

  In the early 1980s, as Lerach was making a name for himself in the law, the public face of San Diego Federal was Edwin J. Gray, a senior vice president and director of public affairs. Despite the proximity of their offices, Ed Gray and Bill Lerach didn’t travel in the same social circles—their mutually exclusive political views saw to that. As Lerach evolved into a big-government liberal, Gray remained a steadfastly small-government conservative (he’d been president of the San Diego Taxpayers’ Association) who had joined the Reagan Revolution while Lerach was still in law school, later following his muse to Sacramento and eventually to Washington.

  In the nation’s capital, however, their paths would cross, and Edwin Gray would emerge as an unlikely and staunch ally of Lerach and his clients, a vast array of mostly elderly investors who had been fleeced in one of the great robberies in the history of American financial chicanery. Nobody saw the collaboration coming, not Lerach, not Gray, and certainly not Ronald Reagan, the man who put Ed Gray on a collision course with his own political party. On May 1, 1983, Gray raised his right hand and took the oath of office as the seventeenth chairman of the Federal Home Loan Bank Board (FHLBB), the regulatory agency charged with overseeing the nation’s savings and loan institutions. Then forty-six years old, Gray had been press secretary to Governor Reagan in Sacramento and had served briefly in the Reagan White House as director of Office of Policy and Development. Attorney General Edwin Meese III, an original Reaganite and a fellow San Diegan, administered the swearing-in, anoi
nting Gray to head the regulatory agency overseeing federally chartered savings and loans. In that post as chief of the FHLBB, Gray would have authority for the Federal Savings and Loan Insurance Corporation, known by its acronym, FSLIC, which insured deposits at nearly all thrifts in the United States.

  Seven months earlier Reagan had signed the legislation making it easier for federally insured financial institutions, regardless of their size, portfolios, or economic expertise, to compete in the increasingly sophisticated financial markets. The Depository Institutions Act* was “the most important legislation for financial institutions in fifty years,” the president proclaimed in an October 15, 1982, Rose Garden ceremony. Promising that it would open the doors to more jobs, more housing, and faster growth for the economy, the president added, “All in all, I think we hit the jackpot.”

  Instead, and despite Ed Gray’s efforts, the Federal Home Loan Bank board would become a cog in the circle of greed that helped define the 1980s; Reagan’s so-called “jackpot” would be claimed by an astonishing array of schemers and swindlers. These con men, in turn, would provide an unprecedented pot of gold for the lawyers who pursued them—foremost among them Bill Lerach. The government agency that Gray headed was born out of the calamitous 1929 stock market crash that signaled the onset of the Great Depression—and that wiped out Richard E. Lerach’s meager family savings, planting the seeds of myth, and of class resentment, that would motivate his younger son.

  In the aftermath of World War II, S&Ls helped fuel the explosion of middle-class home ownership that changed the face of the nation. Insiders had a name for this formula—they called it “three-six-three,” meaning that S&L executives borrowed from their depositors at 3 percent, loaned money at 6 percent, and were on the golf course by three P.M.

  These mom-and-pop S&Ls were idealized in Frank Capra’s 1946 classic It’s a Wonderful Life, in which Jimmy Stewart plays George Bailey, the scrupulous and civic-minded proprietor of Bailey Brothers Building and Loan, who stays home to help the town while his brother Harry goes off to the war. Capra cast Stewart in his morality play as a quiet hero who didn’t qualify for military service because of a boyhood injury, but who nonetheless saves the mythical town of Bedford Falls—and his own soul—by standing up to the rapacious banker, Mr. Potter, played by the legendary Lionel Barrymore. The movie premiered the year Bill Lerach was born, and he watched it many times. As he grew older, Lerach tended to view corporate executives as modern-day versions of the loathsome Mr. Potter. Lerach fancied himself as an angel arrayed against such greedy executives—but not the lovable and bumbling angel “Clarence” of Frank Capra’s conception. Bill Lerach would become ruthlessly unsentimental at rooting out the fraudsters. In his mind, he would become a different kind of angel. The avenging kind.

  FOR DECADES THIS COMMUNITY banking network, along with its benign stereotype, hummed along—until housing costs started climbing faster than the old recipe could handle. To ease the inflationary pressure on new home buyers, Congress put a cap on the interest rates that thrifts could pay on deposits; the theory was that by paying out less for deposits, S&Ls would shrink interest on home loans as well. But this initiative did not anticipate how high inflation would climb. By 1979, Jimmy Carter’s third year as president, inflation was over 13 percent, yet federal regulations allowed the thrifts to pay only 5.5 percent on deposits. New unregulated financial institutions—money market funds—came into being that were allowed to pay higher interest rates and thus began attracting depositors at the expense of the thrifts. What’s more, owing to a new agility made possible by innovations in information technology, depositors could easily shop for the highest interest rates anywhere in the nation—and instantly park their money in those institutions. S&Ls, the “thrifts” that owed their ethic to Benjamin Franklin and their image to Jimmy Stewart, were suddenly obsolete, even without the machinations of Mr. Potter and his ilk.

  In 1980, as Jimmy Stewart’s friend Ronald Reagan campaigned against President Carter in an election that turned on the nation’s mounting financial problems, nearly 85 percent of the nation’s 3,800 S&Ls were losing money. In March Carter signed legislation phasing out the interest-rate limits on S&Ls. Congress also raised the FSLIC insurance coverage on deposits from $40,000 to $100,000. This was advertised as a way to protect Americans’ savings, but the average thrift account had only $6,000 in it, and the origins of the legislation raised the question of who it was really supposed to benefit. As a practical matter, thrifts could now attract large amounts of money with less risk to their depositors or themselves.

  The new law invited the participation of shady operators who were just as unsentimental as, and far more imaginative than, Hollywood’s idea of a cold-blooded banker. Debt became a medium of exchange. Corporations loaded up their leverage to pay for deals they otherwise could not have afforded; profits went to defraying interest on multimillion-dollar loans; and ownership of venerable corporations changed hands through arrangements and takeover schemes so byzantine that regulators could hardly keep pace.*

  “If you were in real estate, a savings and loan was the perfect cash cow,” federal bank examiner William Black explained. “It was the perfect vehicle for someone who was greedy.”

  One of these thrifts would soon become a symbol for what plagued the industry. Lincoln Savings and Loan Association was based in Irvine, California. Federal regulators in the San Francisco branch of the FHLBB informed Gray that deeply troubling activities were occurring at this institution. Bad judgment alone wasn’t the issue, the examiners suggested. The price of the stock appeared to have been artificially inflated. Elderly people living in retirement communities near the thrift’s twenty-three branches were purchasing shares in $1,000 lots from people who were not certified to sell securities. Tellers had made it easy for them by showing them glossy promotional material and offering forms they could use to transfer insured funds from other banks and thrifts. These purchases, the customers were told, were just like banks’ certificates of deposit—only better. There was no downside, would-be customers were assured. There was only upside: they offered higher returns than CDs. They were federally insured because Lincoln was federally insured. Therefore Lincoln would be able to stand by its commitments. This was all false. Customers who purchased Lincoln securities were buying stock in the thrift, nothing less, nothing more. They were definitely not depositing money in a federally insured savings account.

  Those primarily at risk were Lincoln’s own clients, many of them elderly, susceptible depositors. Horrified by what he was hearing, Gray asked for daily reports from his field examiners. He instructed them to be prepared to take drastic action. That might be a problem, he was told, and it had to do with the identity of the blustery, politically connected man in charge at Lincoln. His name was Charles H. Keating, Jr. It was a name destined to be linked to scandal and shame—and to one of Bill Lerach’s greatest legal triumphs.

  CHARLES KEATING WAS DOING everything in his power not to cooperate with federal bank examiners. In fact, he was resisting Gray’s attempts at reform—enlisting an A-list of financial heavyweights to portray Ed Gray as Chicken Little. Keating even ginned up Alan Greenspan, then an esteemed private economist, who argued that deregulation was working. Greenspan gave his stamp of approval to some twenty innovative thrifts, including Lincoln Savings, which he singled out in writing as being a soundly run institution with record profits that “poses no foreseeable risk to FSLIC.” When he wrote this letter, Greenspan, the future chairman of the Federal Reserve Board, was a paid consultant working for Charles Keating. Within two years, nineteen of the twenty institutions on Greenspan’s list had failed.

  Lerach would use such dubious assessments to his advantage as he battled in court to recover the looted billions siphoned out of Lincoln Savings and Loan. By this time—the mid-1980s—he had completed the metamorphosis from Rustbelt Republican to West Coast Democrat. It was opposite of the ideological journey that Ronald Reagan had traveled, as both men shed t
he skins they were born into and reinvented themselves as their more natural political beings in the tolerant sunshine of California.

  The Lincoln Savings and Loan case would be a crucial way station in Lerach’s philosophical evolution. The sins—and sinners—of market capitalism would soon reveal themselves in a virtual roll call of names and companies, starting with Drexel Burnham and moving on to Enron, WorldCom, Martha Stewart, Conrad Black, Ken Lay, Bernard Ebbers, even Dick Cheney’s Halliburton. Each time one of those names made headlines, Lerach would tell anyone who would listen, “I told you so.” Lerach had been radicalized—and no corporation, and no man, had more to do with it than Lincoln Savings and Loan and Charles Keating.

  AT THE TIME HE purchased Lincoln Savings, Charlie Keating pledged to retain Lincoln’s experienced executives and continue its primary business of making home loans. He did not keep this promise. Within months all company officers were replaced by staffers from American Continental, and its home loan programs were gutted. Next, Keating—through Lincoln—purchased $2.7 billion in high-risk junk bonds, mostly from Michael Milken’s Drexel Burnham. These were far riskier waters than Lincoln had ever navigated, and the men at the helm had little experience in such ventures. Meanwhile, not liking the noise Ed Gray was making in Washington, Keating began doling out contributions to key congressional members—nearly half a million dollars in all. This money went to members of the House and Senate who hailed from states where either American Continental or Lincoln Savings was doing business, and to members on relevant congressional committees who were in positions to influence legislation. The largest amounts went to five U.S. senators, four of them Democrats: John Glenn of Ohio ($200,000), Alan Cranston of California ($90,000), Donald W. Riegle, Jr., of Michigan ($76,100), and Dennis DeConcini of Arizona ($55,000). Those were only the direct federal contributions: Keating had other ways of funneling political money, including a stunningly large $850,000 gift to voter registration groups run by Cranston’s son Kim.