Circle of Greed

by Patrick Dillon

  13

  A TROJAN HORSE NAMED KEATING

  Within months Senator McCain would prove to be a trophy witness in the civil lawsuit on behalf of 23,000 class action plaintiffs against Charles Keating and the confederate banks and auditors. McCain would lament publicly his poor judgment for attending the two meetings with the federal banking regulators. He would bemoan taking money from Keating and express regret for writing letters to regulators on Keating’s behalf. And while McCain, the only senator who testified before Judge Bilby and the jury in the Keating trial, was forthright in his testimony and appeared to despair at his predicament on the witness stand, his embarrassment served mainly as a reminder to Lerach of the real axes he was grinding.

  During a 1990 Christmas party Kevin Roddy mentioned to Lerach that he would be leaving the next morning for Phoenix to depose Senator McCain. Roddy remembered saying something to the effect of “I guess we’re going to ruin his Christmas vacation.” To which Lerach, drink in hand, drew close and hissed: “I don’t really give a rat’s ass about McCain. I want us to bury that little fucker Fischel under the courthouse steps.”

  FOUR MONTHS LATER in a federal courtroom in San Jose, California, Milberg Weiss’s newest partner, Patrick Coughlin, found himself in a pretrial hearing in the chambers of U.S. District Court Judge James Ware, in a shareholder lawsuit he was about to try before a jury against a Silicon Valley darling named Apple Computer. In the suit the plaintiffs’ lawyers claimed their clients had been deceived in a press release by Apple executives who had exaggerated the capabilities of a new disk drive, thus creating false expectations among purchasers, who drove up the price of Apple stock in anticipation of greater computing performance and a competitive advantage over its rivals. The drive, which had taken four years and $50 million to develop, had been code-named “Twiggy” and would power a new computer named “Lisa” (Local Integrated Software Architecture), coincidentally sharing the name of Steve Jobs’s oldest daughter.

  It was rolled out in the spring of 1983, with Apple targeting business customers wanting more advanced performance and willing to pay nearly $10,000 per machine for a more sophisticated operating system. Within a week Apple stock soared to $70 a share, an all-time high. Five months after the rollout Apple had sold more than 100,000 Lisas. Throughout those five months complaints flooded Apple offices in Cupertino, California. The Lisa was not as fast as advertised. In fact, it was downright slow and clumsy. It wasn’t an Apple—it was a lemon. The company itself seemed to be in trouble.

  Apple’s chief defense attorney, Laurence Popofsky, devised a trial strategy that had worked in the Nucorp case in San Diego: he would argue that since Apple had lost money on its own product, it was therefore inconceivable that the company had not deliberately released a faulty product on the market. As far as shareholders were concerned, they had taken a risk on a potentially volatile high-tech stock in an efficient market. Of course the chief proponent on this “efficient market” rationale was Daniel Fischel.

  It was during the pretrial hearing, as the plaintiffs’ attorneys and attorneys for the defense were outlining their cases, previewing their evidence, and listing potential witnesses that Fischel’s name arose. Popofsky was prepared to argue that any mention of his inclusion as a defendant in the Lincoln case be prohibited by Judge Ware.

  Thanks to Coughlin, Popofsky got his chance. “He’s named as a defendant in a RICO case we’ve got going in the Lincoln case,” Coughlin told the judge in chambers, while the judge’s court reporter recorded his statements. “We actually think he is a crook … who helped Lincoln carry out one of the largest frauds in the country.”

  Popofsky was apoplectic, strenuously arguing that since Fischel hadn’t been convicted of anything, Coughlin’s remarks were outrageous and unprofessional. Coughlin was taken aback, but the words he had unleashed could not be retrieved. Later Fischel approached Coughlin in the courtroom. “I heard you called me a crook,” he spluttered.

  Coughlin, normally an imposing man, recoiled but managed to stammer, “I’m sorry. I apologize.” He offered to strike his statement from the record. “I shouldn’t have said that.”

  Fischel refused his offer, saying only “No. I might want to use it later.”

  Coughlin had little time to be nonplussed. He had to focus on persuading the jury to turn on Apple chief A.C. “Mike” Markkula, Jr., a Silicon Valley legend who had parlayed his own business expertise, $91,000 of his own money, and a $250,000 bank line of credit to become a one-third owner of Apple. Although Fischel did indeed deliver his opinion that Apple shareholders had been hurt only by putting themselves at risk in a risky market, Coughlin clung to his argument that, sitting before the jury, was a tangible instrument of deceit.

  In his closing arguments, he circled the Lisa displayed in the middle of the courtroom, and asked the jury: “Ladies and gentlemen, do you wonder why my opponents and their experts never bothered to turn this device on? Why they never offered a demonstration?” Then, patting the computer, he rose on his toes and declared, “Because it doesn’t work!”

  The jury took little time in deliberating. The panel found Markkula and John Vennard, an Apple president in charge of disk drives, liable for $100 million in damages.* Gasps were heard from the audience, from the defendants, and even from their attorneys. The verdict generated page-one headlines across the nation and incited riotous meetings and conference calls in boardrooms from Silicon Valley to Wall Street. At Wilson, Sonsini, Goodrich & Rosati in Palo Alto, the law firm that had helped Apple launch its original IPO, senior partners conferred with nervous clients. A $100 million jury verdict was a warning. A new, hostile sentiment might be brewing against volatile high-tech companies and the executives who comprised the firm’s client list. A new word was entering their business vocabulary and it was as fearsome a word as attacked or mugged. The word was Lerached.

  Two nights after the audacious verdict Milberg Weiss West held a riotous victory party at the luxurious Omni Hotel, near the waterfront in downtown San Diego. The music was loud, backslaps abounded, and booze flowed. It was a big, open event, or so it seemed, with guests of guests not even affiliated with the firm joining the celebration. Amid the congratulations on this great victory, the future prizes were in view—as were the obstacles to winning them. Before long, the pending case against Keating, Lincoln Savings, and the other big-name defendants came up in conversation. So did Dan Fischel. “We’re still going to put that little fucker out of business,” Lerach was overheard to say, more than once, by more than his own people.

  The irony was that, Fischel or no Fischel, thanks to Keating and all those who enabled his shenanigans, business was never better for class action securities lawyers than it was in the early 1990s. The “decade of greed” had given way to … another decade of greed. And Lerach was there to, depending on your philosophy, partake of the spoils—or fulfill his obligation to keep the bastards honest.

  Stanley Sporkin, the former SEC enforcement officer and later a federal district judge, had certainly done his part. On Thursday, August 24, 1990, Sporkin ruled that Keating and his associates used “a dishonest scheme” to loot Lincoln and defraud investors in American Continental Corporation. Sporkin rejected Keating’s appeal to reverse the government’s takeover of his financial empire.

  In Arizona, Mike Manning, a government attorney, was thrilled. The Resolution Trust representing the FDIC case he headed could go forward with its lawsuit. Bill Lerach was equally elated, and when he called Joe Cotchett, he was even more heartened to learn that the fabled trial lawyer was willing to take the reins of the trial team. Cotchett had gone over the complaint and lauded the Milberg Weiss lawyers for the preparation. He had just one area of doubt: “Why Lexecon? Why Fischel?” Lerach pondered the question, sucked in his breath, and said: “Joe, do you want in on this?” Then it was Cotchett’s turn to ponder the issue. Why let Fischel stand in the way of a $30 or $40 million fee? It wasn’t his issue, it was a Milberg issue. He was in. They sh
ould start taking depositions right away.

  There was big money to be made for plaintiffs’ lawyers in big cases, obscene amounts. In 1988 Lerach had cleared $2.3 million in salary, while Mel Weiss had taken home $2.6 million. In the following decade each partner averaged $10.3 million in salary annually from 1990 to 1998—a cool hundred million per man per decade.

  ULTIMATELY, LERACH’S GAMBIT WORKED: the most culpable defendants in the Keating case concluded that they didn’t want to risk facing Joe Cotchett before a jury. Even as the pretrial wrangling was still taking place, they began clamoring to settle the cases. And Judge Irving proved masterful in mediating these settlements for which Lerach had hired him. They came from some of the biggest-name defendants, accountants, investment banks, other professionals, and even law firms that had represented Keating and his allies. Joining Arthur Andersen were Ernst & Young (which coughed up $63 million) and the prominent law firms of Jones, Day, Reavis & Pogue ($24 million) and Kaye, Scholer, Fierman, Hays & Handler ($41 million). The week before, Offerman & Co., a Minneapolis-based underwriter for some of the bonds, settled (for $1.5 million).

  “Any professional who accepted an engagement for Mr. Keating is going to have an exceedingly difficult time before a jury to show that they conducted their professional duties properly,” said Popofsky, announcing the settlement of his client Ernst & Young. Such was the mediator’s stature that Judge Irving was given a seat near the jury box. Now it was time for the showdown with the defendants who had not settled before trial. As he watched Cotchett deliver his opening arguments, Judge Irving was grateful for the privilege he’d earned. And some of the entities that had refused to settle quickly found themselves wishing they had been less truculent.

  “Ladies and gentlemen, the evidence will show …,” the plaintiffs’ advocate began, his voice deep and certain, his timing impeccable, as he instructed an assistant to play for the jury a video introducing his case, a video worth a thousand of his own words. The lights dimmed; up came the presentation, and in it, one by one, the faces of Charles Keating, various American Continental and Lincoln Savings officers, and other wealthy defendants. The images were crisp and came in quick flashes; each person was asked a question and responded by refusing to answer on the grounds of avoiding self-incrimination. What the jury saw was a cascade of faces and voices and the words “self-incrimination.”

  And Cotchett wasn’t through. He offered another video, the American Continental motivational training film. It showed Keating mounting a desktop, reaching into his pocket, shouting, “It’s all about the money,” and hurling $100 bills into the air. The screen showed bills raining down on his employees, and it showed the employees jostling each other, scrambling to snatch as much money as they could, supplicating themselves before a laughing Charlie Keating. This is sickening, Irving thought, as he watched. Glances at the faces of the nearby jurors told him they were reacting similarly.

  Later came the parade of witnesses—Rea Luft, Ramona Jacobs, Leah Kane, John Brunner, a sixty-eight-year-old retired puppeteer, and more than two dozen others, including Katherine Bartolone, a seventy-six-year-old retired nurse and widow, who had lost $50,000 that she and her husband had saved for over fifty years at their local Lincoln Savings before it had been taken over, and looted, by Keating.

  “I went to roll over this CD,” she told the mesmerized jury. “The young man told me that they had another account that was as safe as the Rock of Gibraltar.”

  John Stoia had courted and prepared each witness prior to their testimony; Joe Cotchett skillfully elicited their tales of victimhood. The trial continued from April through mid-June. As the plaintiffs’ case unfurled itself, more defendants opted to negotiate their way out from under the jury’s wrath. By now some ninety defendants had settled for nearly $200 million. Those remaining in the dock were Keating himself; his officers; a Phoenix-area businessman named Conley Wolfswinkel; Continental Southern, an Atlanta development firm; Société Brétonneau, a French-owned banking combine; auditors Touche Ross—and of course, Lexecon, the economic consulting firm headed by Daniel Fischel.

  Fischel’s replacement lawyer Dan K. Webb presented a vigorous defense, calling upon his experience as a former U.S. Attorney for the Northern District of Illinois. Webb had received widespread attention for his courtroom prosecution of retired Admiral John Poindexter, in the Iran-contra scandal, and he was respected as an attorney who knew the boundaries of the law. Nonetheless Webb’s motions for a summary judgment to exclude Lexecon and Fischel from the case received no sympathy from Judge Bilby. The precept of attrition, however, would ultimately insinuate a favorable outcome for the consulting firm.

  The case was winding down, and certainly the time spent away from their homes and families and practices was having an influence on the attorneys. Webb tried one last gambit. He called Judge Bilby and said his client wanted to present an offer to the plaintiffs’ lawyers. Bilby summoned Len Simon to his chambers. The date was June 22, 1989.

  There Webb continued to assert his client’s innocence, adding that at the very most Lexecon had played only a peripheral role compared to the other defendants. Webb also reminded Judge Bilby and Simon of an assertion he had previously made and was prepared to prove: copies of several bills that Simon had turned up during discovery, bills that American Continental Corporation had paid to Lexecon for services were forgeries. Simon had been dismissive of this assertion, but Judge Bilby had referred the allegation to the FBI, and following its investigation, Mark Sauter, who had left his law firm to become an American Continental vice president, admitted that he had forged the bills, acting out of greed, to defraud Keating and his own company.

  Simon, who saw the implications, was in the mood to reconcile. What if Lexecon agreed to forfeit the equivalent of its fee from Keating in service to the plaintiffs? Simon quickly calculated the amount to be just over one million dollars* and then made another private mental calculation of how much money might go out the door to try one of the last plaintiffs in order to … get what? Another million, two million, three? They were approaching diminishing returns. Simon said he’d confer with Lerach and get back to Webb. To Simon’s surprise, Lerach did not throw a tantrum when the offer was relayed to him. Economics and efficiency were now trumping revenge. Was Cotchett okay with the offer? Lerach wanted to know. Joe didn’t care one way or the other about Lexecon, Simon reminded Lerach. “Okay, let’s take the deal and get on with our lives,” Lerach told his colleague.

  Simon and Webb returned to Judge Bilby’s chambers. The settlement offer was accepted. But Webb demurred. His client would not sign a “settlement” agreement.

  Exasperated, Simon asked, “Well, what will he sign?”

  Webb answered, “A disposition,” meaning that the judge would resolve the differences between both sides regardless of any conveyance of money or property. It was a subtle, legal nuance but one meant to avoid a stigma for the defendant. Simon understood the difference between settlement and disposition, and he also understood that this resolution would not require “forty pages of boiler-plate crap that come with traditional settlements.” So in the interest of a speedy conclusion, he agreed. After being dogged for months by allegations that he was a crook, after being tainted as a potential expert witness, possibly costing his consulting company millions of dollars in fees, Daniel Fischel was in the clear. But one matter was overlooked. Even though the resolution was untraditional, a traditional exercise normally follows. It requires a release, meaning both parties agree not to subsequently sue the other. The concluding documents in the case of the plaintiffs versus Lexecon did not contain a release document.

  “Joe overlooked it, Bill overlooked it. But I was there and should have gotten it,” Simon lamented sixteen years later. When he belatedly approached Fischel, asking him to sign the release, Fischel refused, telling Simon what he had told Simon’s partner Patrick Coughlin in the Apple trial: “I may want to use this against you later.”

  Eight days after the cease-
fire was signed with Lexecon, on Wednesday, July 1, 1992, exactly three months to the day the trial against Keating and the remaining defendants began, Judge Bilby issued his instructions to the jury and bade them to weigh the evidence presented before considering the gravity of the stakes. Although he must have known that the jury was well aware that Charles Keating was now in state prison near Bakersfield, California, the judge dutifully directed them to deliberate in good conscience and refrain from any outside influences that might influence their decision.

  On July 10 the jury announced it had reached its conclusion. In his San Diego office Bill Lerach had tried to stay focused on the cases that lay in their accordion files and boxes on the floor before him. But when Kathy Lichnovsky, his secretary, buzzed him and told him Len Simon was on the line, he nearly knocked his own phone off the desk.

  “Bill,” was all Simon had to say. Lerach could tell from his colleague’s tone, they’d hit the jackpot. “Three billion three in damages,” Simon said, breathlessly. “Another five against the other guys.” In actuality, the jury had awarded $600 million in compensatory damages against Keating and another $1.5 billion in punitive damages. Under the federal racketeering laws, the compensatory damages were to be tripled. Even with Keating’s bankruptcy, the overall take from the settlements and verdict against the remaining defendants would be worth hundreds of millions. Investors would get a significant portion of their money back. He congratulated and thanked Simon even as Kathy Lichnovsky announced that Joe Cotchett was calling. Lerach congratulated Cotchett and himself for his own good judgment in bringing the famed trial lawyer in on the case. As Lerach told K. L. to ring Mel Weiss, John Stoia asked his assistant to begin contacting Ramona Jacobs and the other victims so he could deliver the news.