Circle of Greed

by Patrick Dillon

  THE SEEDS OF RETRIBUTION had been sown during that April night eight years earlier when, in drunken ruin following the Nucorp defeat, Lerach was heard to announce his intent to put Fischel out of business. It had certainly gained more force with subsequent threats and the attempted branding of the University of Chicago professor and expert witness as a crook. Fischel had felt the effects personally and economically, noting a sudden drop-off in business from even regular clients, not to mention the nearly $4 million he and his firm had spent paying their own legal fees and the $700,000 “nonsettlement” to resolve the Lincoln Savings case. Fischel had also heard from colleagues that Lerach had often disparaged him at securities litigation conferences for giving Keating “a clean bill of health.” The final blow came in a letter Milberg Weiss attorney Kevin Roddy wrote to the National Law Journal, discrediting Fischel as an expert witness. In his ill-advised missive Roddy repeated that Lexecon had “settled” in the Lincoln case. Even more distressing to Fischel, Roddy had also said that Lexecon had committed “wrongful activities on behalf” of Keating, a convicted felon, and had conduced “fraudulent dealings with regulators.”

  Fischel took out a yellow legal pad and began drafting ways to explore his remedies. He approached his challenge both as a law professor and as an expert witness in his own behalf. Milberg Weiss was spreading lies against him. Milberg Weiss had sued him as a RICO defendant in the Lincoln case not because they were convinced he had been complicit as a fellow “corrupt racketeer” but to shred his credibility and, with it, his business. The more research he did, the more convinced he was that Milberg Weiss had abused the legal process against him. Would a judge and jury buy his theory? Moreover, was he up to another prolonged war with Milberg Weiss Lerach? If he lost would he put himself out of business? And what about Dan Webb, his lawyer? They had virtually lived together through the Lincoln ordeal. Was he up for more bloody combat? As it turned out, Webb was not.

  That was why, in October 1992, the phone rang in the Mayer Brown office of Alan Salpeter, then forty-five, a senior partner and experienced trial lawyer. “I’m Dan Fischel at the Chicago Law School. Could we meet for lunch today?”

  Salpeter immediately recognized the name. Fischel and his colleagues at Lexecon had been expert witnesses in Mayer Brown cases.

  “I’m considering filing a lawsuit. It’s against Milberg Weiss,” Fischel told him. “I’d like you to consider taking on the case.” Fischel said he’d already drafted a complaint and would fax it. Salpeter and another partner, Michele L. Odorizzi, who’d been on the University of Chicago Law Review with Fischel, quickly glanced at the sixty-page complaint when it arrived at the Mayer Brown offices shortly before eleven A.M. They continued to read aloud to each other as they made the fifteen-minute walk to the stately, red-granite Chicago Club and then mounted the ornate stairway to the dining room overlooking Lake Michigan. By the time Fischel arrived with two other Lexecon partners, Dennis Carlton and Andrew Rosenfeld, the Mayer Brown lawyers had finished reading the drafted complaint.

  Salpeter, a physically fit former college third baseman, could feel his competitive juices flowing. He loved trial work, loved matching his skills against his opponents’ in front of juries. He was familiar enough with Milberg Weiss to know that their bread and butter relied on staying away from juries and settling before trial. From what Fischel had put down on paper, he was more than eager to take this case to a jury.

  “First I have a few questions,” Salpeter said, as his prospective clients settled at their table in the opulent dining room that had once been the province of Marshall Field, George Pullman, N. K. Fairbank, and Mayor Richard Daley. “Are the facts true?”

  Fischel, stonefaced, replied, “Yes.”

  “A couple of more questions, then,” Salpeter said.

  Fischel leaned forward as if to invite them.

  “How strong is your stomach?” Salpeter asked. “How deep are your pockets?”

  Fischel appeared to smile, ever so slightly. “Don’t worry about either one of them.”

  * On September 7, 1991, Judge Ware overturned the jury verdict as excessive. He also found that the two Apple executives had not violated securities laws. But he also ordered the corporation to stand for a new trial. A disappointed Coughlin eventually negotiated a $16 million settlement.

  * Ultimately the amount came to around $700,000.

  14

  THE VISIBLE HAND OF GREED

  The night the Keating trial ended, or possibly the night before, someone casually approached a relatively understated house in the fashionable Brentwood neighborhood of Los Angeles. The visitor carried an oversize, rectangular cardboard box resembling a pizza container. Instead of ringing the doorbell, the intruder unlocked the front door, strode into the front hallway, and went straight to an alarm, disarming it effortlessly. With equal efficiency the burglar turned back down the hallway, went into the library, and approached a framed twenty-by-twenty-inch painting of a cottage perched on a precipice overlooking the sea. Plucking the object with both hands, he then disengaged the stretched canvas from the frame, carefully sliding it into the container that had been padded for this purpose.

  Turning back into the hallway, the prowler climbed a stairway to a bedroom and advanced on another painting, this one about ten inches high and a foot wide. The piece depicted a jumbled female torso before a mirror. With care, the bandit lifted the art and, leaving it in its frame, placed it in the padded cardboard box. The thief sealed the box with packing tape. Once secured, he retraced his steps, rearmed the alarm, and disappeared into the mild summer night.

  The following Sunday, July 12, 1992, Bill Lerach received a call at home. It was Steven Cooperman, his newfound serial plaintiff. “We got burglarized,” he said, relating that he and Nancy had returned from vacation to find two paintings missing.

  “Which ones?” asked Lerach, who had been to the Cooperman home and had admired his collection.

  “A Monet and a Picasso,” Cooperman replied.

  The Monet was The Customs Officer’s Cabin at Pourville, and the Picasso was Nude Before a Mirror. Lerach recognized the name of the latter work of art. Cooperman told Lerach what he had told the Los Angeles police officers. “There was no sign of a break-in. The alarm was still armed.”

  Lerach asked the obvious question, and Cooperman told him, yes, they were insured. He had taken out the policies a couple of months earlier. How much? Lerach asked.

  “About twelve million,” Cooperman replied. Sixteen years later, while in federal prison, Lerach would recall this about the phone conversation: “An amber warning light suddenly went off.”

  BY THE SUMMER OF 1992 Lerach had fully transformed himself into a case spotter and developer, initiating and managing lawsuits as a hedge fund manager might manage a portfolio. The huge jury awards in Lincoln and Apple had stirred the rival realms of business and the law, and the number of class action securities cases was growing exponentially—up 50 percent from just one year before—as was the indelible fear in boardrooms of being Lerached. The net effect was that 90 percent of all securities cases were now settling out of court; more than one-third of them fell under the jurisdiction of the federal district court governing Northern California. The average settlement rose too, from $6.3 million to $9.8 million. More than $700 million was paid out in 1991 alone, even before the enormous jury awards in Lincoln and Apple.

  By 1992 Lerach’s firm commanded more than 25 percent of all class action securities cases nationwide. This prodigious market share would keep rising through the decade, as interested parties—industry advocates, entrepreneurs, tort reformers, members of Congress, and would-be competitors—began tracking with mounting alarm the juggernaut named Milberg, Weiss, Bershad & Lerach. With success and money and technology, the firm grew larger and more efficient, turning itself into a virtual lawsuit machine or, as some saw it, a legal raptor.

  “He’s got quite an operation over there,” defense lawyer Chuck Dick told a prominent Bay Area techn
ology writer in 1996. “He has a team of people in his office who do nothing but maintain a database of information about the companies they have under surveillance. They start charting a company with the announcement of an initial public offering … It’s an impressive operation, but it also means he needs to meet this huge overhead nut every month. He always has to have a large enough volume of cases, regardless of the strength of his documentation or tangible evidence, to keep his business going.”

  In the eyes of the typical Silicon Valley executive, this was putting things too charitably. Most of them believed William Lerach had become little more than a shakedown artist, albeit an extremely formidable one. Prominent Silicon Valley venture capitalist L. John Doerr, in an edgy Wired magazine article, was quoted as saying of Lerach: “He’s an exceptionally smart, shrewd, entrepreneurial, economic terrorist.”*

  Doerr, who was exceptionally smart, shrewd, and entrepreneurial himself, knew what he was talking about. Of the eight prominent high-tech companies that had tapped Doerr to serve on their boards, by the early 1990s, five had experienced the double-whammy of having their stock price dip and then being nailed immediately with a Lerach-generated class action claim. Doerr estimated the cost of fighting the claims, settling the suits, and purchasing the requisite D&O insurance at $120 million—just for those five companies. It was a sum, he liked to say, that would pay the salaries of two hundred top-flight engineers or programmers for a decade.

  Lerach’s success did, however, spawn a growth industry in Silicon Valley: it led to the proliferation, and expansion, of corporate law firms such as Wilson, Sonsini, Goodrich & Rosati, specializing in defending high-tech companies from class action suits. The firm’s premier corporate attorneys—Bruce Vanyo, Boris Feldman, and Steve Schatz—found themselves counseling many prospective clients and current clients with this message articulated by Vanyo: “For small and medium-size (emerging firms in volatile markets) the drain could be relatively huge in cost of litigation, the psychic energy expended, the diversion of resources and attention to preparation, let alone the vagaries of juries that might not be favorably disposed toward companies jurors might perceive to have deep pockets.”

  High-flying high-tech executives ignored this advice at their peril. Even those who followed it faithfully often found it impossible to avoid Bill Lerach’s gunsights.

  Duane and Theodore Roth, two brothers from Iowa who had moved to San Diego to run a small medical research company, learned this lesson the hard way. Duane, a Republican, was CEO and chairman of the board of Alliance Pharmaceutical Corporation; his younger brother Ted, a Democrat, was a vice president and director of the company, seeking to develop a product called Oxygent, a human blood substitute for hospital use during surgical procedures. In September 1992, after the Federal Drug Administration asked for details in Alliance’s testing protocols, the company announced a delay in Oxygent’s clinical trials. Predictably, the company’s stock dropped at this news, and following the Alliance press release, Milberg Weiss filed a class action suit alleging fraud on the part of the company and its officers.

  This swift legal strike would have surprised no Silicon Valley executive. Ironically, it caught Ted Roth off guard—precisely because Roth knew Bill Lerach socially. Both were active in San Diego County Democratic Party circles and had attended fund-raisers together, some hosted by Lerach. In fact, Ted Roth’s daughter Kristin attended Torrey Pines High School with Lerach’s daughter Shannon. The girls were friends and had enjoyed sleepovers at the Lerach home.

  “I think I can talk to him,” Ted told his brother Duane and other Alliance Pharmaceutical officers. “I’ll explain to him what we do, why the trials were delayed …” Roth believed he had a hole card: except for some stock options he himself had exercised six months earlier because they were about to expire, none of the officers had sold a thing. Thus there was no insider trading; there was only a delay in clinical trials on the part of a relatively small firm—some 150 people were employed by Alliance Pharmaceutical, most of them scientists.

  At a political fund-raiser, Ted Roth buttonholed Lerach, who told him to come by the office. “Look, Ted,” Lerach said, “this is business, it’s nothing personal.” It was quite personal to the Roth brothers, however. Ted Roth got on Lerach’s calendar for a face-to-face meeting at Milberg Weiss’s San Diego office tower. When Roth and his attorney, Julia B. Strickland, arrived, they found an unsmiling Lerach flanked by two other Milberg Weiss lawyers. Strickland and Roth made their pitch: the firm was not guilty of fraud or anything else, they said, and would happily cooperate with Lerach even without a subpoena. They offered to show Milberg Weiss litigators around their office, open their books, even assign a staff researcher to help them decipher the technical stuff.

  “Maybe we could save everyone time and bother,” Roth offered.

  “I don’t give a fuck about the merits,” Lerach replied coldly. “We’ve already calculated the damages—and it’s $10 million to $15 million. If you want to talk about a settlement, we can negotiate.”

  “Bill, look who you’re talking to,” Roth tried one last time.

  Lerach cut him off. “As I told you,” he said, “this is not personal. It’s business.”

  At this point most company directors facing Lerach’s scorched-earth tactics would cave. Often their insurance companies would virtually insist on it. What Lerach didn’t know was that Alliance Pharmaceutical’s D&O insurance carrier was trying to weasel out of covering the cost of litigation on a technicality: because Alliance had no product yet in the market, the insurance carrier was claiming that there was no “product failure” as contemplated in the policy. So Duane Roth, now additionally incensed at how his kid brother had been treated at Milberg Weiss’s office, and without any deep pockets inducing him to settle, vowed to fight the case.

  The following year Julia Strickland’s motion for summary judgment was granted by U.S. District Court Judge Irma E. Gonzalez. Milberg Weiss appealed, and in 1995, when the appeal was assigned to a three-judge panel that Lerach considered unfavorable, he called Strickland with an offer: if Alliance would reimburse Milberg Weiss for its own litigation costs, the suit would be withdrawn. No deal, said the Roth brothers. A couple of days before scheduled oral arguments, Lerach simply dropped the suit.

  In the end, Alliance Pharmaceutical’s insurance carrier did reimburse the company for most of the estimated $2 million in legal fees it incurred. Nonetheless, the litigation took its toll in energy, lost time, and embarrassment from scientific researchers unaccustomed to having sheriff’s deputies drop subpoenas on their desks. And Bill Lerach had turned a well-connected friend into a well-motivated adversary.

  ON FRIDAY, AUGUST 7, 1992, Ann Baskins, an in-house attorney for the hallowed firm of Hewlett-Packard, was driving south over the Santa Cruz Mountains to play golf at Pebble Beach. Suddenly she heard the news she’d been bracing for over the car radio. The day before, HP had announced its quarterly earnings were far below expectations—and considerably lower than the two previous quarters. She and her colleagues had been warned to expect the market to react, and it did. HP stock was down twelve points, she heard the reporter say. Immediately, she pulled her car over and called a colleague in the legal department. “Get ready,” she said. “We’re going to get hit.”

  In his San Diego office Bill Lerach had already been alerted to HP’s earning reports. At first even Lerach was reluctant to take on the legendary Silicon Valley icon that had been launched in a Palo Alto garage and grown into one of technology’s global leaders, a $14.5 billion company that was known for conducting itself beyond reproach. Plus, Hewlett-Packard had very deep pockets and a huge legal staff, plenty of ammunition to fight a legal war of attrition. As he mulled these realities, Lerach called Len Simon and told him to track the usual trail—the company’s SEC reports, press releases, and sales of shares by insiders. Simon reported back quickly: all the usual signs were there.

  On Monday, August 10, John A. Young, HP’s president, to
ok a phone call from Ann Baskins. “We’re being sued,” he heard her say. “The lawyers from Milberg Weiss Lerach filed this morning in federal court in San Jose. We’re being accused of hyping forecasts to inflate stock prices and cashing in shares before the announcement of our earnings decline. They want a hundred million dollars.”

  Young was incredulous. Now sixty, he had joined the company’s sales and marketing division in 1958, and while working his way up the ranks of the company, he’d become inculcated with the famed “HP way” that his mentors Bill Hewlett and David Packard had insisted upon. Even as he was receiving the news from Baskins, Young was mystified by the shift in the earnings report. HP was so vast, so diverse, with so many elements, no one could point to one thing, one product, one division to locate where the company had missed the mark. It could be many factors, each small and inconsequential individually, but taken together, the company had been negatively impacted.

  Baskins had more grim news. The volume of documents and exhibits that the plaintiffs would seek would be staggering, perhaps a million items. HP would have to spend time preparing a defense and identifying and protecting trade secrets that could be inadvertently exposed during the lawsuit, including products in the works, profit reports, market strategies. Young was beginning to fathom what lay ahead.

  Baskins could say nothing to reassure Young, except that she would get back to him before the end of the day. Immediately she placed a call to the law firm of Wilson Sonsini. When she called Young the next time, she told the HP president that she was hiring Steve Schatz, a former federal prosecutor, and Bruce Vanyo, a securities specialist, both Wilson Sonsini partners, to help them prepare a defense.

  After HP spent nearly $2 million, used more than one thousand hours of its officers’ and managers’ time, and, as Baskins had predicted, provided a million documents, Vanyo and Schatz concluded that the specter of a jury trial was very real. “We are vulnerable to the market place,” Vanyo told his clients.