Circle of Greed

by Patrick Dillon

  Irving took heed and instructed Goldman to allow his witness to summarize his opinions out of earshot of the jury. If the judge considered the opinions relevant to the case against the defendants, he would then rule on the admissibility.

  Fischel would be put back on the stand the following morning, albeit with constraints. When they concluded the day, to prepare for the next, both sides were girding for what they knew would be a long and bloody slugfest in front of the jury, not only as to the witness’s overall credibility and effectiveness but over nearly every question, every answer, every one of more than fifty exhibits.

  Bill Lerach and Dan Fischel had now entered a phase when no ground could be given. Mountain climbers have a name for a similar circumstance as they near the summits of the world’s tallest peaks, when the oxygen grows thin and no misstep is without consequence. They call it “the death zone.”

  * As it turned out, Irving served a relatively brief period on the federal bench. In September 1990, objecting to the 1987 mandatory federal sentencing law, he became the first federal jurist in the nation to resign in protest over “mandatory minimums.”

  10

  MAKING ENEMIES

  The next morning, March 16, 1988, the battle resumed. Goldman led off by asking the Chicago law professor to explain what the term risk meant to him with regard to Nucorp. Fischel delivered a haymaker, saying that Nucorp’s collapse mirrored a large and precipitous depression in the oil industry.

  Sitting at the plaintiffs’ table, Lerach comforted himself with the thought that this explanation was transparently self-serving. Goldman’s client, auditing giant Arthur Andersen, was the most culpable defendant. As Torkelsen, his expert witness, had tried to explain, after Nucorp’s malfeasance, the auditors were the next most culpable in perpetrating the fraud in this tight little circle of greed. Everything false flowed from their financial sign-offs. Still, he wondered whether the jury was buying it. A glance at the jurors was not reassuring. Goldman and Fischel seemed to have their full attention.

  Fischel was maintaining that Nucorp had “put all its eggs in this one basket,” in the energy market of the early 1980s after legislation signed by President Reagan had decontrolled the price of oil. Immediately, prices shot up, Fischel noted, adding: “Nucorp’s entire business strategy was premised on a strong market for its products.” Fischel then described what happened when demand turned downward and the industry experienced oversupplies of goods it once needed—products that Nucorp was selling. It was this phenomenon, as natural to capitalism as water flowing downhill, that Fischel attributed to Nucorp’s demise. It was delivered with such simplicity that no jury member, no matter his or her education or experience in the market, could fail to understand.

  The jurors seemed attentive to Fischel’s observation, elicited in deft questioning from Goldman, that during the class period, as Nucorp’s stock began to tank, its officers and directors, including Circle K founder and major Nucorp creditor Fred Hervey, continued to raise money and invest in the company, while declining to sell their stock—a signal they were trying to right the ship rather than abandon it.

  Furthermore, Fischel cited several reports from analysts besides DLJ, each of them giving qualified recommendations for purchasing Nucorp stock at this time; he noted one particular prediction that “large capital gains” were to be made if market conditions created, as expected, increased energy demands.

  Under Goldman’s questioning, Fischel rebutted John Torkelsen point by point as to why Nucorp went bankrupt. “None of the statements identified by Mr. Torkelsen as causing an increase in the price of Nucorp relative to the industry … had any significant effect on stock prices,” he testified. Several jurors leaned forward. One, the former schoolteacher, seated in the lower right-hand corner of the jury box, looked accusingly at Lerach, or so he thought. She’d been doing it for most of the trial, he reminded himself. Finally, when Fischel’s presentation neared its conclusion, the judge declared his intention to send the jury home for the day. Turning to Lerach, Irving asked if he was prepared to cross-examine Fischel.

  “I’m ready to go. I feel confident I can finish him tomorrow.” It was a revealing choice of words but not an accurate prediction, because the two would battle each other for more than a decade to come.

  THE NEXT DAY, MARCH 17, 1988, would come the cross-examination. This would be Lerach’s stage. On it he would not only defend his best witness, he would attempt to undercut Fischel and impeach the credibility of the defense’s entire case. Their exchange of words over the next two days covered more than 230 pages of trial transcripts. But mere words, transcribed by a court reporter on one-dimensional pages of paper, do not convey the fury embedded in their intellect, or their sarcasm, or their disdain for each other, as evidenced by the flash in the eyes, the sneers on the lips, the upturn of the brows, the prolonged stares, even the screeches in their voices. As Judge Irving later observed: “These two really went at it.”

  Lerach began with a nuanced tactic, referring to Fischel as “Mr. Fischel,” whereas the defense attorneys consistently addressed their august expert as “Professor Fischel.” Certainly it was a mere pinprick meant to deflate Fischel’s standing with the jury, but after a thousand such pinpricks, who could predict how much blood Lerach might be able to draw?

  “You have never gone to a graduate school of business?” Lerach asked, beginning right away to unmask the witness.

  “Not as a student, although I teach at a graduate school of business,” Fischel demurred.

  “Sir,” Lerach began, using another of the subtle disparagements both would invoke, “would you please just answer my questions if you can? You never went to a graduate school of business as a student; is that correct?”

  “Correct,” Fischel answered.

  “You never studied accounting?”

  “That’s correct.”

  “You never majored in corporate finance?” Lerach continued.

  “That’s correct.”

  After continuing to dilute Fischel’s experience, Lerach then asked a question that would come back to haunt him. Citing sworn testimony Fischel had given in a deposition two months earlier, he wanted to know how much Fischel had billed the defendants for his services as an expert witness up to that point—asking him if he remembered that the sum was “several hundred thousand dollars.” Fischel replied, “I do.”

  “How many hundreds of thousands of dollars was it?”

  “I don’t know exactly,” Fischel responded. “I could perhaps estimate …”

  “Well, when you meant—when you said several hundred thousand dollars, what did you have in mind?” Lerach asked. “Five hundred, six hundred, seven?”

  Fischel appeared to ponder the implications of the question. Was Lerach trying to expose him as a hired gun?

  “No,” he answered. “Over time a significantly lower sum. But I don’t send out bills, we have a bookkeeping department.”

  Lerach moved on to something else. In this phase he intended to expose Fischel further as a pretender. The line of questioning centered on Fischel’s self-congratulations over Milberg Weiss citing one of his published articles in a Supreme Court brief. In that testimony Fischel had left something out.

  Lerach exhibited the article in question, “The Use of Modern Finance Theory in Securities Fraud Cases Involving Actively-Traded Securities,” reminding Fischel it was the same one “you mentioned so frequently in your testimony that the Supreme Court cited recently.” Fischel, not knowing where Lerach was headed, sounded pleased.

  “And you’re very proud of the article and the fact that it’s been cited by the Supreme Court …?”

  “I’m very proud of the article,” Fischel replied.

  “And you remember, you sort of made a point of the fact that my law firm had filed a brief in that Supreme Court case where we cited your article?”

  “I was very proud of that, too,” Fischel said.

  “Now the underlying theory that was accepted by th
e Supreme Court in this new case is known as ‘fraud on the market’ theory—correct?”

  Fischel agreed.

  Lerach moved parallel to Fischel and looked back toward the jury before asking the next question. “Are you the father of the ‘fraud on the market’ theory?”

  Seemingly unsure of where this was all going, Fischel said, “I don’t know how to answer that question, Mr. Lerach.”

  “Did you originate the theory?” the plaintiffs’ lawyer asked, still gazing out at the courtroom audience. “Were you instrumental in getting the courts to first accept that theory?”

  Fischel was now happy to answer, explaining that while he understood that the courts had been debating the theory prior to the publication of his article, he nonetheless “could take credit for providing the economic rationale for the controversial theory that was viewed as a ‘pro-plaintiff theory.’”

  Lerach too felt pleased with the answer. He directed Fischel to page nine of the article, where a subhead said: “The Fraud on the Market Theory and the Market Model of Investment Decision.” He asked Fischel if he could find a federal case cited in the article, Blackie v. Barrack. After Fischel indicated he had found it, Lerach said: “That was a landmark decision on the ‘fraud on the market’ theory, wasn’t it?”

  “That’s why it is cited first,” Fischel replied self-assuredly.

  “I wonder, do you recognize the father of the ‘fraud on the market’ theory as being present in this courtroom?” Lerach asked. He was waiting for the answer as a hunter might await his prey at a watering hole. “Who was the lead counsel in Blackie v. Barrack that won the landmark victory for the plaintiffs and established the ‘fraud on the market’ theory?” Lerach asked, as if he were a schoolteacher addressing a recalcitrant pupil.

  “I don’t know,” Fischel said simply.

  “It was my law firm, wasn’t it, sir?” Lerach, said, modulating his megaphone voice for all in the courtroom to hear.

  “I don’t know. I have no reason to disbelieve you,” Fischel answered.

  By now Lerach was playing center stage of his own opera. “Don’t you know that my partner, Mel Weiss, argued that case to the Ninth Circuit?”

  Fischel said he did not but added, “I would be happy to acknowledge your prominence in this area.”

  “I’m not asking for an acknowledgment of prominence. I’m asking whether you’re aware that Blackie v. Barrack was argued by Melvyn I. Weiss of Milberg Weiss,” Lerach said, raising his voice even higher. From his chair at the defense table, Chuck Dick, the attorney for Circle K, stared at Lerach, thinking to himself that the plaintiffs’ lawyer had wound himself up like a cheap wristwatch that was about to explode.

  Lerach stood in the well of the court, silent, arms crossed. The silence continued, tensely. Then he asked the defendants’ expert witness: “So when the Supreme Court cited your article, sir, they were citing an article which relied upon a decision that our firms were instrumental in getting decided; isn’t that true?”

  A commotion broke out at the defense table. “Objection, relevance, no foundation,” chimed in Chuck Dick.

  Although intrigued by the line of questioning himself, Judge Irving had no recourse but to sustain the defense.

  But Lerach was just getting started. For the better part of the day he and Fischel sparred over allegations that Nucorp insiders and Continental Bank and Circle K Corp. schemed to manipulate the price of Nucorp stock. At the heart of Lerach’s argument was that Circle K had purchased Nucorp stock with funds from Continental to rebuild market confidence and invigorate Nucorp’s falling stock prices. The security for the loan from Continental was the purchased Nucorp stock—in other words, a classic daisy chain.

  Answering Lerach’s question as to whether this was or was not improper, Fischel responded with his own question: “If Burns knew in October 1981 that Nucorp was insolvent, as the plaintiffs have alleged, would he have ever agreed to give the bank the right to seize every asset that he owned as a result of changing the form of collateral to be tied to the market value of the stock if he knew the stock was really worth nothing?”

  “I don’t know,” Lerach shot back. “I’ve never participated in a fraud of the magnitude of the one Mr. Burns orchestrated. But would you—”

  Objections interrupted him. The judge agreed that Lerach’s comment should be stricken, and the jury was admonished to disregard it. Lawyers for each side had reason to believe they were getting their points across. Lerach had implanted the concept of a giant fraud; the defense had introduced the idea that Lerach was a hothead. Actually, both sides may have been underestimating their audience: in the jury box, foreman Richard Bunch thought to himself that Fischel’s answers sounded like common sense.

  Lerach wanted to get back to the market-manipulation argument. He asked Fischel if he was familiar with a tradition in which, a company’s stock was listed on the New York Stock Exchange, the president of the company would frequently be the buyer of the first hundred shares to pass over the tape?”

  Fischel stared at him blankly and then said: “It sounds like a nice tradition.”

  Then Lerach got to the point. “Have you ever gone fishing in the ocean?”

  “As a matter of fact, my father used to take me, Mr. Lerach,” Fischel responded.

  “Well then, you know what it is to chum, don’t you?” Lerach asked.

  Fischel said he was not familiar with the term.

  “Well, chumming is when you throw a little bait in the water so the fish will come up and you can catch them,” Lerach told him.

  “I’m sure you’re an expert on fishing,” Fischel retorted.

  Lerach snapped off his next question: “You know, Mr. Burns was a high roller. In fact, you’ve seen in a deposition he’s referred to as an oil/gas wheeler-dealer? Have you seen that?”

  Fischel did recall seeing a reference in Business Week.

  “Now, doesn’t it sort of strike you that Mr. Burns purchasing $45,000 [of Nucorp stock] at the time he was trying to bring about that public offering is analogous to doing a little chumming or flipping a chip to the croupier at the table?” asked Lerach.

  “No, because if I understand your description of chumming, all you’re losing is the bait that you’re throwing into the water. That doesn’t sound like it’s worth very much money,” Fischel countered. “However, when you pay real dollars to purchase securities that aren’t worth what you’re purchasing them for, you’re deliberately inflicting losses on yourself, which doesn’t sound very chummy to me.”

  This quip prompted laughter among the audience and within the jury box.

  Lerach didn’t join in. Chumming, he said, was really something more serious. “Now sir, as a supposed expert in stock market behavior, you are aware that it is a very serious violation of the securities laws for insiders of a public company to engage in what are known as ‘induced stock purchases’ at or about the time of a public offering of the company’s securities?”

  AFTERWARD, AS HE WALKED OUT of the courtroom with Gold, Lerach felt a hard-earned exhilaration. Even with Fischel in the way, the case against Nucorp had finally been made for the jury. What he failed to consider, at least for the moment, was the fact that the trial was now nearly six months long and that the case against the defendants, Arthur Andersen, Circle K, and Continental Bank, was still in midair.

  Trial resumed shortly after eight thirty A.M. on March 18, a Friday. Lerach reminded Fischel and the jury of his testimony the previous afternoon addressing the hypothetical question of whether the price of Nucorp stock would be boosted by phony earnings reports. Immediately he showed Fischel previous testimony from Burns stating that poor earnings during the summer of 1981 would be withheld from the company’s quarterly statement that was to precede its offering of $150 million in common stock.

  “Would you agree with me that the insiders believed they needed those July profits for the September securities offering?” he asked.

  “Without knowing more, I would no
t accept that statement, no sir.”

  Here we go again, Lerach thought to himself.

  They argued for the next half hour over the value of earnings reports, with Lerach implying through previous testimony that these statements provided gravity for perspective investors while Fischel described them as only a part of an equation. Even though he’d grown used to such equivocation, Lerach appeared incredulous.

  “Sir,” he said sternly, “isn’t it a fact that earnings computed in accordance with generally accepted accounting principles as reported to the investment community in accordance with the regulations of the Securities and Exchange Commission are an important determinant of stock prices?”

  Fischel could not be budged. “In some cases they are, in other cases they are not, depending on the situation.”

  Again, Lerach felt his face turning red like the mercury in a thermometer, revealing his barely controlled anger. “And in a case of a company like Nucorp, which trumpeted every one of its releases on earnings as reporting record earnings and forecasting continued record earnings, you would say that that is an instance where it’s likely that the earnings had an impact on the stock, correct?”

  The witness stood firm. “No, sir. In fact, I’ve tried to analyze that question by looking at exactly how Nucorp’s stock price performed in relation to various earnings releases, and, for example, when Nucorp announced the heavy oil as proved and therefore reported increased earnings, it stated very clearly in its earnings release that it was reporting increased earnings because of its accounting change in the way earnings were reported.”

  An exasperated Lerach felt as if he were wrestling a greased pig. He finally asked Fischel what then were the most important factors investors should consider. This prompted the answer that Fischel had been dying to deliver: “I believe that the well-accepted finance literature is that cash flows and the riskiness of cash flows are the primary, if not the exclusive determinant of securities values,” he said.