Circle of Greed

by Patrick Dillon

  Lerach next turned his attention to others he deemed responsible for the fraud: the company’s underwriter, Wall Street’s Donaldson, Lufkin & Jenrette; its auditor, Arthur Andersen; its lender, Continental Illinois Bank and Trust of Chicago; and finally a major Nucorp investor, Circle K Corp., a Phoenix-based convenience-store chain that was the first to install gas pumps. These were Nucorp’s enablers, Lerach believed, and they were liable for damages as well. More to the point, they had deep pockets.

  The remaining defendants, particularly Circle K, were determined not to cave, as Nucorp had done. For his part, Lerach welcomed a courtroom duel, especially with that big $41 million settlement behind him. Here was a golden chance to present the scheme liability concept to a jury, showing an out-of-control company could go only as far as its auditors and underwriters let it. The only negative, he thought, were the plaintiffs.

  “They’re institutional investors, not widows and orphans,” he worried aloud to San Francisco attorney David Gold, who put this lone misgiving aside and signed on as cocounsel, adding more firepower to Lerach’s arsenal.

  The trial began in federal court in San Diego on Tuesday, October 20, 1987, one day after “Black Monday,” the worst one-day percentage decline in stock market history, before U.S. District Court Judge J. Lawrence Irving. A fifty-two-year-old former trial attorney appointed to the bench by President Reagan, Irving had a reputation for being cordial and impartial.*

  The issues in the giant jigsaw puzzle that Lerach would construct before the jury involved the complicated responsibility that each of the defendants might or might not bear, individually or together, in Nucorp’s transgressions. Throughout the trial more than a dozen defense lawyers representing the four defendants would vigorously argue that their clients bore no responsibility for the various schemes Lerach was alleging. In fact, they would argue, they were equally and unwittingly victims of Nucorp’s activities themselves.

  “What if it turns out that Continental lost money, what if Continental is a victim?” asked Bill Tucker, an attorney defending Continental Bank.

  To win the $200 million jury award he sought, Lerach would first have to demonstrate Nucorp’s transgressions—which he’d already done in securing the previous settlement with the company, but not before a jury—and then tie each of the defendants, individually and collectively, to those schemes. Essentially he was trying five cases in one, something the jury would have to sort through in order to assess culpability of one, two, three, or all four defendants—or none at all.

  This was a tall order, particularly in front of a jury consisting of a retired navy electrician, a housewife married to a retired army noncommissioned officer, a retired telephone company manager, a twice-divorced housewife, a retired San Diego County public works employee, and a former schoolteacher whose expertise was in home economics. Only one, the schoolteacher, had a college degree. And only one, the navy electrician, had more than six figures invested in the stock market. The problem, both sides knew, would be keeping their evidence and their questions coherent, their witnesses’ answers relatively understandable, and the jury attentive.

  As he had in the Pacific Homes case seven years earlier, Lerach opened by ingratiating himself with the jurors, reminding them that all participants would be spending considerable time together, while “evidence of a true life story” unfolded. “Unfortunately, it is a story in which there are no heroes, and it has not a happy ending,” he continued. “You are going to learn about a story of dishonesty and professional negligence.”

  Warming to his task, Lerach told the jury that Nucorp was nothing more than “a deception, an illusion.” Exhibits proving as much would come in the form of charts, graphs, internal memos, and press releases linking each of the four defendants to Nucorp’s dealings and downfall—and its investors’ losses. To assist them in sorting out culpability, Lerach told the jurors that his expert witness, a man named John Torkelsen, would explain the amount of damages investors suffered because of the defendants’ collusion with Nucorp.

  Forming a rapport with a jury, as Lerach had done in the Pacific Homes case, required a deft touch. Initially, at least, he struck the right notes. During his cross-examination of Nucorp chief Richard Burns, Lerach skillfully got the man he’d already sued and settled with to essentially explain in his own words how he had had a conflict of interest regarding the rosy scenarios he was putting out.

  “I was surely impressed with that curly-haired fella,” juror Russell Col-son recalled of Lerach more than twenty years later. “He was very smooth, very articulate. There was just this manner about him. His body language was just so great.”

  But in the seven years since he had tried the Pacific Homes case, Lerach had become a bit hardened. In the Nucorp case, even his sense of humor had an edge to it. In an introductory phase of the trial, Tucker, the Continental Bank attorney, laid out a detailed history of the bank’s relationship with Burns. “Let me give you some names—you will be hearing of people associated with the Continental Bank—so that when their names come up in the evidence you won’t be hearing them for the first time. Mr. O’Keane, [James O’Keane, a Continental energy specialist, who handled the Nucorp credit account] we have already told you about. He is the banker with heart …”

  Lerach couldn’t resist. “I have to tell the court that I once had a friend who needed a heart transplant,” he said by way of rejoinder. “While consulting with the surgeon he said, ‘I only have one request. I would prefer that my transplanted heart be that of a banker.’ When the surgeon asked ‘why?’ he said, ‘Because it’s never been used.’”

  The jury cracked up. Even the defense joined in the laughter. Judge Irving, too, obviously delighted in the rejoinder. Later in the trial, however, while cross-examining O’Keane, Lerach’s wit turned harsh:

  “And one of the places you wanted to force them to raise cash [to pay back a loan] was in the sale of the notes to the insurance companies?”

  “I didn’t really care where they raised the cash,” O’Keane answered.

  “As long as they raised it and paid you?”

  “Sure,” O’Keane answered, his demeanor signaling he thought the question to be misinformed. Banks were in business to make money on their loans.

  “Good solid loan-sharking stuff, right?” Lerach asked, grinning. Likewise, when it came time to question Burns, Lerach could not conceal his disdain. It was subtle, but this demeanor toward Burns put Lerach’s own personality on the jury’s screen as well.

  BEFORE HE PUT TORKELSEN on the stand, Lerach wanted to follow up on a significant discovery. Among the hundreds of documents his research team planned to introduce into evidence was the deposition of a member of Donaldson, Lufkin & Jenrette’s Los Angeles office who had helped underwrite Nucorp’s public offerings. The witness, Steven Lebow, then a twenty-four-year-old MBA from the Wharton School of Business, had originally been scheduled to testify on behalf of the defense. But when Steven F. Goldstone, an attorney with the New York firm of Davis, Polk & Wardwell, learned that Lerach’s team had uncovered inconsistencies in Lebow’s deposition, he withdrew Lebow’s name from the defense witness list. Lerach requested, and Judge Irving granted, a court order compelling Goldstone to produce his client within ten days. Goldstone objected, trying to explain that Lebow was too junior to explain the DLJ underwriting decisions he had witnessed. Both Lerach and Judge Irving scoffed at Goldstone’s recalcitrance, reminding him that it was he who had scheduled the witness in the first place.

  On December 9, after greeting the jury, Irving asked Goldstone if the witness was in the courtroom. “No, your honor, we are unable to produce Mr. Lebow,” Goldstone answered, begging the judge for more time. In fact, Goldstone had asked a federal appeals judge for a ruling that would block Lebow’s testimony. Still, the Davis Polk partner assured the judge he would try to have the witness available the next day. Judge Irving could not disguise his anger. Lerach was enjoying the drama.

  Clearly peeved, the judge gave
Goldstone a hard deadline. Either produce the witness the next morning or face the consequences. That evening, in his hotel, Goldstone received the news he expected to hear: the appeals court turned down his petition. A tense courtroom reopened for business on December 10. Bill Lerach and David Gold scanned the audience, trying to spot Lebow. At the defense table Goldstone tensely reviewed his notes, not looking up. Judge Irving entered briskly, greeted those in attendance, and sped through some housekeeping matters. Then he turned his attention to Goldstone, who was already standing. “Mr. Goldstone, is Mr. Lerach’s witness with us?”

  “With the greatest respect, your honor: No, your honor, I have advised my client not to produce Mr. Lebow because of the ‘tactical disadvantages’ it will present.” He also announced he had appealed Judge Irving’s court order but had been turned down the previous evening. He asked the judge for more time to file another appeal.

  Judge Irving’s patience was at an end. Either produce the witness after the noon recess, he said, or face a default judgment. Those in the know gasped. Goldstone was risking losing the case before it had been tried. Lerach felt his face flush and his head lighten, and he clutched the table in front of him for fear of fainting. At the defense table, James Goldman, helping in the representation of Arthur Andersen, was equally shocked.

  After the lunch break Judge Irving looked hard at Goldstone, repeating his earlier question. Goldstone gave the same answer. Irving erupted. “In twenty years of practice and five years as a judge, I have never seen anything so incredible,” he said. “A total refusal to cooperate with opposing counsel, playing games, tactical or otherwise with the court and counsel, about ‘I will produce, I won’t produce,’ a court order, then ‘I won’t produce,’ then ‘I will produce, but only on conditions.’”

  The judge announced for all to hear: “I find defendant Donaldson Lufkin Jenrette in default,” adding that they had lost this case for willfully violating his order. “You are excused Mr. Goldstone,” the judge said flatly. With that, Goldstone hightailed it out of the courtroom.

  After appeals had been exhausted, his client Donaldson, Lufkin & Jenrette would be made to forfeit $20 million paid by the company’s insurers. As for Goldstone, there are second acts in American life. He would continue to practice law on Wall Street before joining RJR Nabisco in 1995 as its chairman and CEO. There Goldstone helped undo the ill-considered merger between R.J. Reynolds and Nabisco and helped broker a historic settlement between the giant tobacco company and forty state attorney generals, led by New York’s Eliot Spitzer, who by then had become a symbiotic ally of Bill Lerach not only in tobacco litigation but in major fraud cases as well.

  ON DECEMBER 28, 1987, following a Christmas break, John Torkelsen appeared as an expert witness. Lerach led him through his biography. A Princeton National Merit Scholar with a degree in chemical engineering and an MBA from Harvard, Torkelsen identified his current business as Princeton Venture Research, explaining that the New Jersey firm performed financial analysis, investment banking, and management consulting for professional investors, banks, insurance companies, university endowments, and pension funds—advising them on investment decisions. The company also assisted start-ups, helping them with their documentation in order to raise capital.

  Essentially, Torkelsen was a venture capitalist who sat on the boards of two companies, one doing computer work for the National Institutes of Health, and the other working for the National Security Agency. Harvard had been a client, and so had MIT, as had Fidelity, John Hancock Insurance, Chase Manhattan Bank, and Bankers Trust. His consultancy had developed proprietary computer software for analyzing economic data. One sector that benefited from the programs was the oil and chemical industries.

  Lerach glanced at the jury. His witness clearly was making an impression. What the jury and the judge did not know was that Torkelsen was incentivized to make such an impression. Specifically, he had a unique and secret agreement with the Milberg Weiss firm: he would be paid on a contingency basis, just like the law firm that hired him. If the firm won, Torkelsen won—as much as ten percent of the fee awarded to the firm. In a case such as this with the plaintiffs asking for $200 million, whereby plaintiffs’ attorneys would share around $40 million in fees, Torkelsen’s performance over nearly three days on the stand could be worth as much as $4 million to him.

  After a few preliminary questions, which Lerach and Torkelsen had rehearsed, Lerach segued into asking Torkelsen if he had reviewed and analyzed evidence—including SEC documents and Nucorp’s securities trading—and whether he had read transcripts of prior trial testimony. Yes, he had. He had even prepared his own graphs and charts tracing the issuing of Nucorp’s debentures and price fluctuations during the class action period. Lerach entered two charts into evidence. Both were similar to exhibits that Lerach and his own team of lawyers had prepared in previous cases showing the rise and precipitous decline of Nucorp stock along with the issuing of debentures.

  Torkelsen was asked to tell the jury how many shareholders were holding Nucorp stock during the months of the decline. Basing his answer on trading records, Lerach’s superwitness estimated that by the end of 1981 more than nine thousand individuals held common stock, when he factored in debenture holders. Lerach then asked about favorable auditors’ reports, buoyant press releases, and equally optimistic financial reports—including prospectuses released by Donaldson, Lufkin & Jenrette—that used such phrases as “record levels of sales,” while Torkelsen traced the announcements along the graph showing the sharp upward trajectory of Nucorp stock prices. Clearly, he offered, the company news was highly material to the stock price. Torkelsen also told the jury that Nucorp was suffering from a lack of financial control as it expanded by acquiring new companies, leaving it with excessive inventories and forcing it to drastically cut prices for drilling equipment. Under law, those problems should have been disclosed.

  At four thirty P.M., noting that Lerach and Torkelsen had put the jury through a rigorous day, Judge Irving called a recess. “Have a nice evening,” he concluded. Lerach approached Torkelsen, his eyes twinkling, and said under his breath: “I don’t think the defense is going to have a very nice evening.”

  The defense’s cross-examination of Torkelsen began the next day with a sustained barrage from James Goldman, one of the attorneys representing Arthur Andersen. First, he attacked Torkelsen’s expertise in virtually every facet—from accounting and auditing to petroleum engineering, to geology, to heavy oil, to oil machinery—compelling the expert witness to concede that he was not an expert in any of those fields. Then after a series of jabbing questions, he got Torkelsen to acknowledge that Nucorp was a speculative player in a volatile industry. He asked Torkelsen whether, if his own client Arthur Andersen had not contributed material misstatements on behalf of Nucorp, the jury would even need to consider Torkelsen’s testimony. Finally Lerach stepped in, and the judge sustained his objection. But Goldman had sprung a trap: “You’re not offering expert testimony that Arthur Andersen is responsible for any of the particular misstatements that are involved in this case—isn’t that right?”

  Torkelsen, sensing he was cornered, answered: “That’s correct.”

  Ever so slightly, Goldman had pried his client away from the other defendants. With new footing, he launched an attack on Torkelsen’s damage analysis, the very heart of the witness’s expertise, in an attempt to show that even someone who purchased a stock at an inflated price could have sold that same stock at an even more inflated price.

  “It’s complicated,” Torkelsen acknowledged. Reading the looks on the faces of the jurors in the courtroom that day, observers could conclude that they agreed with Torkelsen. It was getting complicated. The questions and answers lasted throughout the morning in a courtroom that was overheated due to an incorrect thermostat setting somewhere in the building. Judge Irving apologized to the jury for their discomfort. The jurors were also challenged by the mind-numbing calculations that Goldman called upon Torkelsen to ma
ke on market forecasts of heavy oil reserves, probable reserves, and proven reserves—as well as how each affected Nucorp’s ultimate market capitalization. Further he attacked, taking Torkelsen deep into the weeds, in an effort to have the witness trip himself up. This was a calculated gamble because the defense lawyer could lose the jury’s attention—and sympathy.

  Late in the session Goldman asked the witness whether Wall Street had placed too much value on Nucorp’s unproven heavy oil reserves. Torkelsen fought him off, deflecting attention from Wall Street to the accountants who signed off on Nucorp’s rosy scenarios.

  “The accountants used those heavy oil reserves to create an accounting function that increased the earnings of other oil, Torkelsen replied. “Not in the context of you were going to pull that heavy oil out of the ground right now and make a profit today. It was because it was an accounting treatment that the auditors applied that goosed—excuse me, that increased the earnings from the—”

  Judge Irving broke in: “Is that a Wall Street term?”

  “We use it quite frequently, your honor.”

  “Financial analysts use that?” the judge asked.

  “Actually we do,” Torkelsen told him. “It’s a term for cooking the books.”

  More sparring followed. Goldman struck a blow by questioning Torkelsen about inconsistencies between his estimation of damages in earlier depositions and his current testimony on the stand. The judge, taking note that a college football game, the Holiday Bowl, was taking place in San Diego later that evening and that the New Year recess was almost upon them, told the jury he intended to release them early.

  Lerach was not ready to quit for the year—or even the evening. He needed to redress Goldman’s attack on his expert. “Now, was that a proceeding where there was submitted to the court for its approval a partial settlement of this litigation with certain other defendants?”