Circle of Greed

by Patrick Dillon

  Lerach pounced on the answer. “Well, sir, you can be exactly sure that Nucorp’s investment banker, as well as Nucorp, was telling the public during 1981 that the company had a strong cash flow already and was projecting dramatic increases in cash flow. Correct?” He stared hard at Fischel who offered no response.

  “Isn’t that true, sir?” Lerach persisted.

  “Appears to be true, yes, sir,” Fischel answered.

  Sensing the wind at his back once again, Lerach continued. “And if you go back and look at Mr. Burns’s press release on July 28, 1981, it said that Nucorp had recorded record earnings, record revenues and record cash flow for the six months ended June 30. The only thing he didn’t say, it was record negative cash flow …”

  Triumphant, Lerach turned to Fischel’s contention that the flagging energy industry had more to do with Nucorp’s bankruptcy than the allegations of wrongdoing. He began by attacking the witness’s graphic representations of an industry in decline. He challenged the scale of one graph showing the number of oil rigs in operation and accused Fischel, its author, of distorting the figures to give the impression that the depression of the industry, beginning in 1982, was greater than it really was. This tactic led to a flurry of further attacks; Lerach offered his own graphs and recomputed scales and literally wrote over Fischel’s exhibits by superimposing numbers of his own.

  On the bench Judge Irving glanced at the jury box. He sensed restlessness as the citizen jurors, none trained in finance, tried to follow the plaintiffs’ attorney’s attack on the defense witnesses’ exhibits. Sensing the jury’s flagging attention, he allowed a few more testy skirmishes before calling a morning recess. After the jurors had exited the courtroom, the judge said: “In addition to the usual reasons we’re taking the break, I’m also taking it for purposes of hopefully the blood pressures of both the questioner and the witness would be hopefully depressed a bit during the recess. Please, Mr. Lerach, keep in mind the admonition of this court throughout this trial not to editorialize in the presence of the jury. Professor Fischel, remember your role here is as a witness, and not an advocate.”

  Then it was the defense’s turn once again. James Goldman, the Arthur Andersen attorney, elicited an opinion from his witness that industry analysts had been so optimistic about the drilling activity in 1981 that they helped create a demand for Nucorp products. In turn, when expectations were not met, rather than get caught in oversupply themselves, oil-drilling firms had slammed on the brakes. As a result, Nucorp was stuck with its own inventory as well as materials and components it had already ordered and in some cases paid for. When word got out, its stock price began suffering.

  Juror Russell Colson took note, thinking to himself: That’s a pretty logical explanation.

  Goldman also tried to demonstrate how Lerach, using different trajectories for different columns on his graphs and Fischel’s, was able to manipulate the appearance of the downward trajectory of drilling activity to make it appear to be flatter than it was—in order to refute Fischel’s contention that the drop-off had been close to catastrophic.

  Then came Goldman’s finale: “Professor Fischel, did anything that you saw or heard during the course of your cross-examination by Mr. Lerach cause you to change your basic opinion to the effect that it was the depression in the oil industry that caused most of the decline of Nucorp’s securities?”

  “No,” came the answer.

  The jury was excused and told they would be recalled the following week, after the attorneys and the judge had conferred about presenting their closing arguments. In the end, the defense was disarmingly simple, and although presented by individual attorneys for their individual clients, it coalesced into a single narrative: Hindsight is perfect. As it turned out, there were wrongdoers. But the wrongdoers were at Nucorp and they already settled. As for everybody else, the plaintiffs and even the defendants—two of whom, Continental Bank and Circle K—lost money too by betting in a volatile market. The plaintiffs were overreaching.

  This was all too simplistic, Lerach thought. In his head, he was already beginning to summarize his closing arguments. Just because you lost money is not a defense and doesn’t mean securities laws weren’t violated, he would tell the jury. That argument and others would be nuanced according to each and all of the defendants’ and the witnesses’ testimony, but they would also be constructed around his own epistemology:

  In an era when small investors—with the federal government’s encouragement—are all but required to put their life’s savings in the stock market, free market capitalism cannot be a rigged dice game. It cannot be a crooked enterprise in which company executives, with the help of other company executives, disseminate fanciful information about their corporation’s profits and prospects, knowing that picture to be a false one based on bogus numbers, in order to attract money from investors; and then, after that money comes in, and the stock prices fall to their natural level—in other words, the level they’d have reached in a transparent world, with honest information—then turn around and shrug and say, “Oh, well, you knew the risks.” It is particularly egregious when those self-same executives who put out the bogus information dump their own stock, at inflated prices, before anyone knows what’s going on. “Securities fraud” is one jargon phrase for this. So is “insider trading,” but what it really is … is stealing, and it is despicable.

  That was the gist of Bill Lerach’s argument in Nucorp. Actually, it was the gist of all his cases. It’s why criticism of his methods and persona didn’t faze him. It’s why he slept well at night. He was right, of course, although to use his own logic, just because his motivation was to address fraud didn’t mean he never overreached in any of his lawsuits—or that he and his partners were immune from the temptation of taking ethical shortcuts themselves.

  In this particular case, in his self-righteousness, Lerach had overlooked something—the rectitude of his opponents, particularly Chuck Dick, the attorney for Circle K, and his client Fred Hervey. Then forty-two, Dick had just been named managing partner of the San Diego office of Baker & McKenzie, one of the largest law firms in the world.

  Dick was born in Manhattan, Kansas, and earned undergraduate and law degrees at Iowa State. During his undergraduate years he had considered entering a seminary and becoming an Episcopal priest. Deferring that decision, he decided to have a go at law school and soon found its rigors appealing.

  After graduating, he joined the navy reserve, serving as an attorney in the judge advocate branch in the late 1960s. His assignment brought him to San Diego about the same time Lerach settled there. Aside from his legal work for the United States Navy, Dick was smitten by the climate, the beaches, and the sunny, low-key disposition of the city—an indelible alternative to where he had grown up—just as Bill Lerach had been. One reflection of his midwestern upbringing did stick with him, however. Those who knew him had never heard him utter an unkind word about another human being, raise his voice in anger, or invoke an expletive stronger than “darn.” He presented a stark contrast to Bill Lerach’s profane bluster.

  So did Fred Hervey, the elderly, hard of hearing high school dropout, World War II veteran, and self-made business icon. Hervey, Chuck Dick would argue in his closing arguments, was not a perpetrator of fraud but a victim of it himself. In Hervey, Dick held the very card Bill Leach had played in the Pacific Homes case.

  “You need victims,” the plaintiffs’ lawyer who had won on behalf of aggrieved retirees had said. This time Chuck Dick, the defense lawyer, had an elderly victim. His victim, Fred Hervey, deserved the jury’s sympathy. He would see to it that he got it.

  At eleven thirty A.M. on April 5, 1988, Dick, wearing his customary bow tie and disarming smile, began his plea on Circle K’s behalf. “Accused of being a cheat, branded for deceitful conduct, charged with high offenses and fraud, the people at Circle K come to you, ladies and gentlemen, for protection.”

  Then he laid down his trump card: “Fred Hervey is in the evening of
his life, as the shadows grow longer, humbled to receive the summons as one of his last official acts … as one of the people at Circle K, to come into this courtroom and, at a time when he should be basking in a sense of accomplishment that comes with all that he has achieved and built and constructed and shaped and molded in his life. He comes into this courtroom charged as a cheat and as a man who, in utter and reckless disregard for the rights of others, conspires to defraud.” For two hours, Dick would affirm various defense witnesses while directly attacking the plaintiffs’ interpretation of the facts, their witnesses’ testimony, and their allegations that Circle K aided and abetted Nucorp’s fraud. All through his mesmerizing presentation, one primary message rang out: “Fred Hervey may not have been clairvoyant,” his lawyer said. “But he was an honest man.”

  “Protect the people at Circle K,” Chuck Dick beseeched the jury in his final sentences. “Preserve their honor. Tell them that whatever may have been the facts we have unearthed in our autopsy of Nucorp, that the words with which they stand charged and branded are inapplicable.”

  Judge Irving asked Lerach if he was ready to proceed with closing arguments of his own. The attorney, his voice off-key and husky, answered: “Your honor, in light of the hour, if we’re going into a recess for ten minutes, that would be five to four P.M. The jury is obviously tired, if you look at them. Mr. Dick made quite an argument. I mean to compliment him that it was, it was a very powerful argument … Does your honor have an inclination of perhaps starting tomorrow, even starting a little bit early?”

  The following morning, Bill Lerach reiterated the plaintiffs’ case against each defendant, starting with Arthur Andersen and ending with Circle K, point by point, from prebilling, to literally putting stock in difficult-to-drill heavy oil, to Nucorp’s “fraud on the market,” to disputing much of Professor Fischel’s expertise and opinions. Had he been trying the case against Nucorp, there would have been no doubt that the energy company was guilty of fraud. What remained in the jurors’ minds at the end of the two-hour oration, however, was a basic question: had Nucorp defrauded not only its investors but also its own lenders, its analysts, and its underwriters?

  Judge Irving spent the afternoon instructing the jury. Even though the case involved numerous defendants, the mathematical possibilities were not problematic. Weigh guilt or innocence for each of the defendants based on the evidence presented for each defendant. Try to be as straightforward as possible.

  On Thursday morning, April 7, the jury filed into an austere room adjacent to Department 8, Judge Irving’s courtroom. Richard Bunch, the foreman, directed them to take their places around a rectangular table. Off to one side on a desktop sat a coffeepot. By way of other creature comforts, nothing else was offered for the occasion. Bunch, a deliberate man, laid out a wide strip of paper so he and his colleagues—two men and three women—could construct a timeline and retrace inflection points in a kind of taxonomic scheme. Essentially it came down to identifying causes and weighing their effects. But something else pervaded the deliberations, something customary in jury rooms: the personalities of the attorneys and witnesses. “Lerach treated us like school kids,” Bunch would eventually say, passing on his recollection of how he and at least two other jurors had responded to the plaintiffs’ lawyer. “On the other hand, that Circle K guy, the lawyer, was the best-prepared and put on a good case for his client.”

  At three P.M. on Tuesday afternoon, April 12, 1988, four business days after they had begun deliberations, Judge Irving’s clerk telephoned each of the attorneys, asking them to appear in court. Expecting that a verdict might be at hand, everyone assembled within twenty minutes. No verdict, as it turned out, but the judge had received a note, which he read aloud: “Judge Irving, may we have a calculator for use in the jury room?”

  The judge asked the lawyers in the courtroom: “Does anyone have any objection, first of all, to the court taking in a calculator?” Lerach was elated by the question, which implied calculations for monetary damages.

  The jury also wanted to hear a tape that Lerach had introduced into evidence. It had been recorded during a Nucorp board meeting that Hervey had attended. The meeting had been contentious because Nucorp had been forced to reveal some accounting sleights-of-hand to its board. The contents of that discussion cut both ways. Hervey had not been pleased with the revelations. Yet he could also be heard acquiescing in some instances for Nucorp’s sake and the sake of his own bottom line. Abby Silverman, filling in that afternoon for Chuck Dick, had asked the judge to direct the jury to listen to the whole tape, so as not to take Hervey’s quotes out of context.

  Once he received the calculator, Bunch, the jury foreman, put it to use, while another juror wrote some figures on the sheaf of paper laid before them on the table. Instead of calculating damages, the jury was trying to determine how significantly Nucorp’s reported bottom line had been inflated by its prebilling practices. They had also recounted the battle of the graphs, an epic war that had become nearly physical between Lerach and Fischel, in which Lerach literally wrote over Fischel’s numbers, even turning some charts around. The jurors had become confused over these tactics—and the plaintiffs had not been the beneficiaries. Finally, as Lerach feared, Chuck Dick’s closing arguments had rung an emotional bell. The passionate defense lawyer had planted the seed firmly in each juror’s mind: was Circle K a villain or victim?

  The deliberations continued into the next day. Lerach was growing nervous, even while assuring Mel Weiss over the telephone of his confidence. He reminded his mentor that this was an unsophisticated jury trying a sophisticated case—but remember, they had asked for a calculator. Trying to assess damages from three separate deep-pocket entities was no easy task among lawyers, let alone laypeople. Two more days of deliberation produced no news, nor notice from the jury room. At noon the judge sent the jury home for the weekend.

  Judge Irving called the attorneys together on Thursday, April 21, to inform them that he would be leaving town on Friday and would not be back until the following Tuesday, April 26. Judge John Rhoades, the presiding federal judge, would fill in. The following Monday Rhoades received a note from the jury room. They had a verdict. His clerk called Judge Irving, who said he could be back by 1:30 P.M. Then Judge Rhoades called the jurors in and sat them in the jury box, telling them that Judge Irving would hear their verdict. At the same time Rhoades’s clerk called the attorneys and told them a verdict had been reached and the time of its delivery—1:45 P.M.

  Hearing this news, Lerach dialed a Manhattan number. When the phone rang in Mel Weiss’s office atop Penn Station, Lerach received no answer. Thinking his mentor must be at lunch, Lerach left a message: “The jury’s coming in at one forty-five.”

  At one thirty P.M. Pacific Time, Judge Irving rushed up the rear steps of the federal court building, entered his chambers by a back door, and hastily donned his black robe. His clerk had notified him that all counsel were present. He asked them to state their names for the record, and as they did, a palpable tension filled the room.

  The bailiff opened the door to the jury room, and the lawyers stood as the panel filed in, led by Richard Bunch, and took their seats. A socially circumscribed ritual attends to this moment too, this passing in review, in which the eyes of jurors and those judged seldom meet, adding to the tension. Once the jurors were in their places, all in the courtroom took their seats.

  The judge turned to Bunch: “Has the jury reached a unanimous verdict?”

  “Yes, sir,” he said.

  The judge directed him to hand the verdicts to his court clerk, who then read them aloud, beginning with Executive Life Insurance Company, a separate plaintiff from Lerach’s class action plaintiffs, which had bought Nucorp notes through Drexel Burnham: “We the jury, in the above-entitled cause unanimously find as follows: In Nucorp Energy Securities Litigation on claims brought by Executive Life Insurance Company—we find against Executive Life Insurance Company.” Four more counts remained, and to each the jury a
ssigned the same unfavorable judgment. Finally, Bunch said: “We assess the amount of damages to be zero.”

  Judge Irving peered down at the plaintiffs’ table, his eyes meeting Lerach’s. Both knew what the first verdict meant, even though Lerach’s plaintiffs were not involved. From the jury box Russell Colson glanced up, catching sight of Lerach, who had begun a downward slide in his chair. In turn, for each and every charge against each and every defendant, the jury had drawn the same conclusion, and as each was repeated, the sound became a knell of defeat for Lerach and his plaintiffs: “We find against the plaintiffs. We assess the amount of damages to be zero.”

  In Lerach’s corner office with the view of San Diego Harbor and beyond, the telephone rang. It was Mel Weiss calling back. He had gotten Lerach’s message—one-forty-five—and gotten it wrong. “One hundred forty-five million!” he virtually shouted triumphantly into the voice mailbox receiver.

  “We had a miscommunication,” Lerach would say later, long after the jurors—Bunch, a retired county surveyor; Clara Crocker, a housewife; Russell Colson, a retired salesman; Helen Saylor, a retired schoolteacher; Howard Dillman, a retired telephone company superintendent; and Marianne Fox, a construction crane operator—had been polled, and long after he and his entourage had trooped out of the courthouse and straight to the Westgate Plaza Hotel, where Bill Lerach returned Mel Weiss’s phone call before joining his colleagues at the bar.

  While dulling their distress with round after round of Scotch whiskey, Lerach and his team of lawyers assessed the causes of their defeat. It wasn’t an easy process, because it was difficult to demonize Fred Hervey or even dislike Chuck Dick. It was far easier to focus their disappointment, frustration, and rage at one man—Daniel Fischel, the contrarian from Chicago. Obsessing on Fischel would prove an even costlier mistake than trying the Nucorp case all over again.