Circle of Greed

by Patrick Dillon

  11

  THE WITNESS FROM HELL

  Normally the drive northward from downtown San Diego to Del Mar, the halcyon seaside town where he’d settled with Kelly and their seven-year-old daughter Shannon, required less than twenty-five minutes. But this was not a normal night—and Lerach was not going home. He was in the backseat of a limo heading to Los Angeles, where he was due in court in nine hours. Still stinging from his courtroom defeat that afternoon, preoccupied by how he would account for the thrashing to the New York office, and numbed by alcohol, Lerach settled in for the two-hour trip.

  “On to the next battle,” he announced to himself and his driver, cavalierly attempting to hide his budding self-doubt with a show of bravado. Then he reverted to the curses heard round the table at the bar where he and his team had retreated in defeat. He cursed the drive ahead of him, he cursed the attorneys who’d ganged up to undo him, and cursed the “stupid” jurors who hadn’t understood his slam-dunk case.

  He pulled a recorder and dictated some thoughts, more or less along the lines of his verbal diatribe, but with a slight enamel of circumspection—“The theory that heavyset jurors tend to be good plaintiffs’ jurors because they are happy-go-lucky types appears to be incorrect … Women are much more opinionated than men, less susceptible to reason, less likely to change their minds based upon the arguments of others.” As the town car cruised northward to Los Angeles, he fell asleep. His intention was to put these thoughts to paper, to be distributed to his colleagues as soon as he found time and distance from his defeat to craft a memo that wouldn’t taste of sour grapes.

  The media, specifically Barron’s and The Wall Street Journal, altered Lerach’s plans. On May 2, 1988, both publications lauded Fischel’s testimony for turning the tide for Nucorp in the eyes of the jury. Lerach could not contain himself. He scrawled fifteen “takeaway” points over nearly five pages. To anyone who read the memo later—and many would eventually do so, including his enemies—Lerach’s written venting would lend itself to various interpretations. His friends assumed he had been frustrated, exhausted, embarrassed—and obviously inebriated. His adversaries concluded that the mean-spirited memo perfectly captured Bill Lerach’s character. These opponents had been on the other side of Lerachian rants, and they had complained to each other about his coarse and bullying nature. And here it was, a gift that they came by mysteriously: Lerach’s inchoate rage on paper, in a document revealing his crass side and his reflexive penchant for vituperative, even immature, clichés. His vanity, insecurity, impatience, arrogance, and overconfidence, and his bent for recrimination, were all there, along with a disquieting contempt for the everyday Americans whom Lerach made it a point of pride to champion. Schoolteachers, working-class men, overweight people, and—most disturbingly—women. Within days of his penning the confidential internal memo, it was being circulated in law firms and in court chambers throughout the United States.

  Mel Weiss was hardly thick-skinned when it came to being embarrassed. What troubled him more than Lerach’s intemperate, unguarded musings about a jury that had turned on him was an addendum to Lerach’s memo. In it he suggested that the firm assign several associates, supervised by partner Leonard Simon, to build a dossier on Daniel Fischel. To his later regret, Weiss did not act on his misgivings. Perhaps it was because he too considered the expert defense witness a pernicious force. In the partisan politics in which both Lerach and Weiss dabbled, Lerach was proposing opposition research. What Simon and his team would unearth first appeared to be a bonanza. Then it turned into fools’ gold; then it turned into a tort.

  Weiss was also taken aback to learn of still another conclusion that Lerach had reached in the wake of the Nucorp debacle. From now on the firm’s star lawyer would stick to identifying and drawing up cases, getting them certified, and launching them toward positive outcomes. He would not try a case before a jury—ever again. The fearsome litigator who had rocked Southern California’s legal establishment with his virtuoso performance in the Pacific Homes case had had his own confidence upended. Within months Lerach tendered an offer to Patrick Coughlin, the assistant U.S. attorney, who had watched his flawed courtroom performance in the Nucorp trial. After passing muster with Weiss, Bershad, and others in the New York office, Coughlin would join Milberg, Weiss, Bershad, Hynes & Lerach—or Milberg West—as a partner in the litigation division and a trial specialist. His starting salary would be $72,000, nearly doubling what the government had been paying him. For the firm, it was a bargain.

  In bestowing trial responsibilities on Pat Coughlin, Lerach was making a huge professional and emotional transfer. Somewhere along the way, and not solely due to his humiliating defeat in Judge Irving’s courtroom, Lerach had started to lose his romance with the law. “I began to get cynical. I began thinking the system wasn’t working,” he would say later. And he set about beating not only his opponents but also the judicial system itself.

  Nonetheless, even with the turmoil and costly trial setback, there was solace—$41 million from the Nucorp directors and officers, plus another $9 million from the default judgment against Donaldson, Lufkin & Jenrette. These consolation prizes were not insignificant. In fact, they were part of a growing pattern.

  By the late 1980s, companies, particularly those with assets greater than $1 billion, faced a 63 percent chance of being sued by shareholders. The average settlement in 1988 was $6 million, with the average cost of putting up a defense in excess of $1 million. That was the average of more than 300 separate claims filed against about 250 companies. Big claims against deep-pockets companies averaged more than $40 million in court settlements, slightly less in mediated settlements, which the courts were then required to approve. This proved to be a bonanza, with huge insurers such as AIG and Fireman’s Fund getting into a market where premiums could run as high as $30 million depending on the size of a company and the history of claims against it.

  And of course, the fraud exclusion built into D&O insurance policies played directly into Lerach’s hands. For a CEO caught in Lerach’s sights, the allegation of fraud had a hideous and frightening ring to it. Rather than fight the charge and risk losing indemnification, the overwhelming percentage of the companies that he and his colleagues sued chose to settle without ever going to court.

  This, in turn, created a new line of opportunities for lawyers who, although not involved in the initial litigation, stepped in to help negotiate the settlements. For attorneys such as Los Angeles lawyer Robert F. Lewis, a partner in the firm of Lewis, Brisbois, Bisgaard & Smith, riding the wake of a Lerach lawsuit made for a good living. A 1961 graduate of UCLA Law School, Lewis saw a new wave of business liability sweeping the nation. He decided to specialize in insurance coverage, and for over two decades he helped clean up more than one hundred securities cases in which Lerach had won settlements. Gradually the two lawyers came to respect each other. One negotiation in particular cemented their relationship. Both lawyers recalled a contentious battle to arrive at a settlement in a securities case, followed by an even more contentious battle between Lerach and the insurance carrier represented by Lewis.

  Ultimately the two lawyers seemed stalemated, about $10 million apart in their negotiations. Late one evening, as they were entering what seemed the thousandth hour of dickering, Lewis pushed himself away from the conference table and said to Lerach: “You like Scotch, I hear. Let’s go over to my office and have a drink. At least we can make ourselves comfortable while we argue.”

  Lewis’s office was on South Figueroa Street, an easy walk from the federal courthouse in the heart of Los Angeles’s reemerging downtown business district. Once there Lewis opened a credenza and brought out an expensive single malt. With the first drink they resolved to finish their settlement negotiation before the night was through. By the second, their resolve to do battle was softening. By the third, they were toasting each other. “By the sixth,” Lerach quipped, “we were best friends.” Somewhere along the line, they struck a deal, toasting each ot
her one last time and promising to finalize their agreement in the morning.

  Lerach navigated his way back to his hotel, the Bonaventure, a modern landmark structure of cylindrical glass towers a short walk up the hill from Lewis’s office. He leaned forward as if into a headwind, feeling the warm flush of the liquor, the giddiness following a settlement, and the goodwill toward his opponent and newfound friend—and the agreement they had managed to strike. He remembered riding the outdoor bubble elevator and feasting on the sight of the vast neon city as he soared above it. He remembered entering his hotel room and exhaling. That was all he remembered.

  The next morning, after the wake-up call, Lerach still had a good feeling about the evening with Lewis, the kind of experience that was becoming rarer as he and his firm became pariahs in the legal profession. Except for one thing: he couldn’t remember the amount he and Lewis had settled upon. Embarrassed, he fished Lewis’s business card out of his pocket and found that the attorney had written his home phone number on the back. Reluctantly he dialed the number, hoping the settlement amount would arrive in his mind before the call was answered on the other end. A vague-sounding Lewis picked up. At first Lerach tried subterfuge, thanking him for the drinks and congratulating him on the settlement the two had achieved. Lewis was equally congratulatory. Lerach suggested Lewis fax the amount over to his firm’s Los Angeles office where his assistants would draw up the formal agreement. Lewis hesitated. Lerach asked him if something was wrong. Lewis did not answer.

  Lerach realized he was not alone in his embarrassment. “Bob, can you remember what we settled for?” he asked sheepishly. “Because I can’t.”

  Lewis laughed—he couldn’t remember either. And so, with the playing field thoroughly leveled, the two chastened adversaries proposed a late breakfast, at which they would take up where they left off.

  “We settled for around $24 million,” Lerach said nearly two decades later. “I’m sure it was close to what we had agreed on the previous night.”

  BY APRIL 1990 the complaint against Charles Keating and his companies, American Continental and Lincoln Savings, had grown to 235 pages and was in its fifth version. New plaintiffs and amended causes of action were added to include the litany of Keating’s nefarious and never-ending efforts to persuade lawmakers to intervene on his behalf. The lawsuit detailed the manipulations by Keating and other agents and individuals in his employ—accountants, bankers, attorneys, and politicians—that ended up harming 23,000 plaintiffs who had lost more than $288 million. The suit demanded compensatory damages, including interest—and triple the amount of the initial loss in punitive damages. The Lincoln lawsuit had grown into the largest commercial litigation of its time.

  It was only one of many high-profile cases on the agenda of Milberg Weiss. In the Washington Public Power Supply System case, for example, Milberg Weiss was a co-litigant that sued the giant utility after it defaulted on its bonds, losing $2.3 billion of investor money. Three quarters of a billion dollars was on the table, which could mean as much as $180 million in fees to the firm. That was a lot of money—but the firm was into the case for the equivalent of 36,000 billable hours, amounting to nearly $10 million in expenses. The stakes were sufficiently high to inspire Mel Weiss to help try the case.

  Not by coincidence, Weiss found himself crossing paths with Dan Fischel, the emerging perennial adversary, who had been hired by the defense as an expert witness. Prior to a hearing one day, Fischel approached the now-legendary Weiss, extending his hand and introducing himself.

  “I know who you are,” Weiss sneered. “And I will destroy you.”

  Even as their wins and fees were growing, Lerach noticed that their parallel costs kept mounting, including referral fees for other lawyers outside the firm as well as their growing stable of stalking horses—now known as “professional plaintiffs.” Lerach would also hear regularly from Dave Bershad, demanding that he chip in to the “referral fund.” It was a tidy cover, but the method of raising the recompense was complicated. Bershad and Weiss devised the scheme. Those who were part of it, the inner circle of very senior partners (and Lerach was one of them), would award themselves annual bonuses. The bonuses would more or less match the amount the firm spent on referrals and indirectly reward the serial plaintiffs in their stable. In a zero-sum game then, the money still came from the firm as a whole. And it meant that in order to pay for plaintiffs, all the attorneys at Milberg Weiss would contribute, directly or indirectly, whether they knew it or not.

  While prominent and precedent-setting cases bolstered their firm’s reputation, Mel Weiss and Bill Lerach both realized that their ability to compete for big prizes was made possible only by a stream of smaller, more efficient cases to be won or settled quickly. To land those cases, they relied on a stable of scouts such as Paul Tullman and reliable plaintiffs such as Seymour Lazar.

  Already Lazar had paid off, helping the firm file first in a 1987 case, making it the lead counsel representing plaintiffs who maintained that the $7.4 billion merger of Standard Oil and British Petroleum had shortchanged shareholders. For Lazar’s efforts, Dave Bershad directed that two separate $50,000 checks (one dated June 29, 1987, the other August 17, 1989) be sent to Lazar’s Palm Springs attorney, Paul Selzer, for “furtherance of arrangements” and “your share of fees.” Both payments appeared on the surface to be legitimate referral fees between lawyers. What was not legal was the “credit” Lazar received from his attorney for private legal work. In other words, the reward was passed through an intermediary to a plaintiff who had signed a mandatory court document pledging that he expected only normal recompense and no more than any other member of the class suing the petroleum giants. This was only one of seventy such lawsuits in which Lazar would participate as a Milberg Weiss plaintiff. In all, he would receive the equivalent of $2.4 million in payments over twenty-three years.

  By his own admission, Bill Lerach was not good at finding plaintiffs. With help from the likes of Lazar, however, the cases were good at finding him. By 1988 his stable of stalking horses was growing. One particular litigant would have the biggest impact on Lerach’s growing prominence—and eventually on his downfall. His name was Steven G. Cooperman.

  Like his soon-to-be running mate Seymour Lazar, Cooperman, then forty-six years old, led a colorful life. The son of Russian immigrants who had run a dry goods store in Norwalk, Connecticut, he had been a Beverly Hills ophthalmologist and Brentwood socialite. He advertised his medical services on television, sent limousines for his patients, and retained Red Skelton as his celebrity spokesman. He also amassed an array of impressionist and modern art, collected signed letters from the likes of Napoleon and Tchaikovsky, and bought luxury automobiles, including a 1931 Packard, to go along with his two homes in Brentwood, a home on the Gold Coast of Connecticut, and a property in Palm Springs. Although his medical practice was lucrative, his professional passion was playing financial markets, both as a stock investor and as a minor arbitrageur. Friends joked that he performed eye operations while wearing headphones so he could listen to financial broadcasts.

  In 1983 Cooperman married his third wife, the former Nancy Graef, an airline flight attendant, after meeting her at a Brentwood party and romancing her on an anything-goes spree to Europe. “Everything was totally, totally, totally ultra-luxurious, first class,” she would later testify at the couple’s divorce trial in 2004.

  With his medical practice at its peak, Cooperman earned more than $2 million a year. Later, he received an annual income of $500,000 from disability insurance, due to a heart condition. Nevertheless, by late 1988 his financial state was in decline, due to prodigious spending habits and a variety of self-inflicted wounds. An accusation lodged with the state Board of Medical Quality Assurance by California’s attorney general charged Cooper man with “unprofessional conduct,” and having committed “gross negligence and incompetence” in three instances in 1980, 1984, and 1987. He stood accused of performing unnecessary surgery on three patients and fabricat
ing medical records to justify it. Cooperman surrendered his license to practice medicine. On the other hand, he surrendered nothing else, least of all his own extravagance. Nancy could see what was happening and at one point asked him to curtail his spending. Cooperman griped back: “You are like a cold, wet blanket spoiling my fun.”

  Cooperman was also addicted to gambling with other people’s money. Turning his attention to playing financial markets, he sought backers to take arbitrage positions in takeover-vulnerable companies, teaming with entrepreneur Jonathan Rosenthal to try to purchase enough stock to acquire IPM Technology, a Los Angeles–based company that refueled, maintained, and unloaded cargo from aircraft in the Southwest. Although the company posted $54 million in sales in 1988, its stock never climbed above $9 a share. Cooperman and Rosenthal, saying they had backers who could buy IPM “with their pocket money,” asked for a look at the company’s books in order to prepare their offer. Seymour Kahn, the company president, blocked them. Within days of receiving their request, Kahn purchased 34.3 percent of the company’s stock from his nephew Saul Steinberg for $3.9 million, which amounted to $4.50 a share. The purchase gave Kahn a majority of stock—58 percent—but he said he would offer the remainder for the same $4.50 a share. Cooperman and his partners were not mollified. He complained that by arranging to purchase a majority stake in the company for a price lower than what Cooperman and Rosenthal were willing to pay, Kahn had violated its fiduciary duty to the company’s shareholders. The San Diego office of Milberg, Weiss got the call.

  Lerach was reluctant to take the case simply because the potential fee fell short of his fee threshold. On the other hand, Cooperman was a player. Earlier he and Uri Sheinbaum had formed a partnership to try to buy Del Webb Corp., the builder of the Flamingo, one of the early Las Vegas grand hotels, whose partial owner had been mobster Bugsy Siegel. At one time the company was among the largest residential developers in America. But after the severe stock market downturn of 1987, the company was moving to reduce debt by liquidating assets. Cooperman and Sheinbaum had assembled a group they said was willing to pay $156.4 million for the whole company, which was resisting—arguably to the detriment of shareholders. This case was more to the Milberg Weiss scale. Naturally Lerach took charge of drawing up the complaint. He also agreed to represent Cooperman in his suit against IPM Technology.