Circle of Greed

by Patrick Dillon

  Then a momentous thing happened. HP’s share price started rising. And it kept rising. Simon and Lerach followed the trajectory. Would the price bounce help the defense argument and influence the jury? The element of doubt worked both ways. A trial could be long and certainly costly—to Milberg Weiss as well as to Hewlett-Packard. Besides, David Packard was not Charles Keating. John Young was not in jail. “How much are we into it?” Lerach asked his colleague. Simon said the firm costs were over half a million dollars. The two attorneys decided to fold their case. Simon went to his office and called Steve Schatz to say the plaintiffs were dropping their lawsuit.

  These two cases—Alliance Pharmaceutical and Hewlett-Packard—were the exception, not the rule, and in hindsight they reveal a lesson that was rarely mentioned at the time by either Lerach’s defenders or detractors. That lesson was, if you really had done nothing wrong, it made sense to fight these class action security cases in court. If more firms had done that successfully, there likely would have been fewer plaintiffs’ lawsuits. Milberg Weiss wasn’t bluffing exactly, but there was a rationale behind Bill Lerach’s bullying. He wanted these companies to settle. What his adversaries didn’t comprehend was that their willingness to capitulate so readily convinced Lerach not that he’d perfected a devious and unjust legal instrument of torture but that these executives were almost always hiding something, and that significant fraud was rampant in U.S. boardrooms.

  “I DIDN’T KNOW SHIT about running a business,” Lerach would confess years later. Yet by the end of 1992 he was indeed running a business. He was filing nearly 80 percent of the cases and generating 80 percent of the fees driving $46.4 million in profits for the entire law firm. His passion lay in generating cases and writing the initial drafts of all complaints, which he insisted on, often working until midnight, even on weekends, returning his marked-up drafts, stained by food and drink, to Kathy Lichnovsky to decipher his handwriting and clean up his copies. The upside was becoming apparent. By the end of 1992 Lerach would earn $9.3 million, second only to Mel Weiss.

  It all came at a price. He and Kelly had built a new home in Fairbanks Ranch, a golf and horse community northeast of San Diego that hosted the equestrian endurance event in the 1984 Olympic Games. Even surrounded by luxury, Kelly grew progressively unsettled, demonstrably unhappy with a work-obsessed husband. The strain grew, but Lerach, while not oblivious to it, was not inclined to alter his own course. “I need someone on the team,” he would admit years later. “Whatever my makeup is, I need someone positive around me.”

  He found it in Star Soltan, an attractive young associate at his law firm. After graduating from the University of California, Davis, School of Law, she joined a New York law firm based in San Diego. When that firm downsized, the newest lawyers were let go. Her old boss, Michael L. Lipman, a former assistant U.S. attorney, knew Lerach and admired his casework. He recommended Soltan to the firm, advising his former colleague to “pay close attention to Bill Lerach,” who was then trying an important case called Nucorp. She did and found herself “working longer and harder than I had ever imagined.” Soltan remembered being buoyed by recovering money for defrauded investors and by the idealism and zeal of her new boss.

  “He had more energy than anyone else in the firm,” she recalled. “His commitment was infectious and the complaints and briefs he wrote were impeccable.” She and the other attorneys remembered Lerach’s insistence that their court materials be error free. “If you made a mistake on a brief, and if a judge called you on it, there would be hell to pay,” she remembered. “On the other hand, if a judge complimented someone on a brief, he would be proud.”

  On her first case working with Lerach, the team won an $18 million judgment. “For me, then, that was a big win,” she said. She was grateful for the opportunity Lerach had given her. Lerach was likewise impressed. His already strained marriage to Kelly was about to end. And Star Soltan would soon become his third wife, and bear him a son.

  BY NOW LERACH HAD perfected for his disciples a formula that amalgamated economics with morality. While preparing for a case, he would produce a series of charts showing a timeline, the price of the target company’s stock, its corporate earnings, the value of the directors’ stock options, and a record of insider stock sales during the period covered by the class action lawsuit. Pointing to a spot on the chart, he would say: “Here is where the declining stock price would have met the option price. That makes the option worthless.” Then he would retrace to a point on the timeline before the stock started its decline: “Here is the stock price when the managers began flooding us with reassuring public statements.” He’d move his finger to another point indicating profits at the time of the rosy statements: “Here is how depressed earnings were when management began making its fair weather statements.” Then he’d move to another point showing an upward trend in stock prices: “And here is where the insiders started unloading their stock.” He’d then follow the timeline to a point where management issued devastating news: “Here is where the ordinary investor—you and me and our clients—got stuck holding the bag.”

  Alarmed CEOs throughout Silicon Valley and Wall Street found Lerach’s analysis overly simplistic and his methods highly objectionable. There were coincidences in the business world, as the Hewlett-Packard case revealed: unforeseen market competition, unforeseen missteps in an obscure division causing a chain-reaction impact on the bottom line, ruthless tactics by overseas competitors. All of this placed U.S. companies, especially emerging ones in volatile markets, at potential risk. And risk, after all, is what drove much of American capitalism.

  “How is a CEO supposed to avoid liability?” Thomas Lavelle, in-house counsel for chip-making giant Intel, complained to a business magazine after being Lerached in early 1993. “Should he just tell investors not to invest in his company because he can’t give an ironclad guarantee they won’t lose money? If you believe Lerach, then this industry is staffed by people who commit fraud repeatedly.”

  Lerach paid a news service to track all news coverage of him, and he saw Lavelle’s quote. His reaction: “The fact that you go to church on Sunday doesn’t mean you’re incapable of securities fraud on Monday.”

  Going tactical, Lerach would begin pushing the hot buttons. Once his class action gained certification, discovery was granted. It was akin to the opening of fishing season with no limits. Wilson Sonsini attorney Bruce Vanyo, who had defended Hewlett-Packard as well as dozens of other Silicon Valley companies against Lerach, came up with a term for Lerach’s tactics. He called it the “break-your-business” method. The alternative, as it was often presented during pretrial negotiations, was to settle. Lerach, while never indicating that he was eager, was always open to reaching a price point and letting his targeted company get on with its business.

  His formula worked against Carol Bartz and her company Autodesk, a leading maker of design software for architects and industrial designers. A product flop, a poor quarterly report in the fall of 1992, and a precipitous drop in stock brought a hasty response from Lerach. Wilson Sonsini attorney Boris Feldman was hired to defend the company, and when he sized up the situation, he was not encouraged. Having had no previous experience with class action litigation, Autodesk had no D&O insurance. The veteran attorney knew the risk to Autodesk’s bottom line: the company faced a “break-your-business” situation. Still, Feldman spent nearly as much time persuading Bartz, the CEO, to enter into a settlement negotiation as he did preparing to defend the company in a trial. Finally a $5.5 million settlement was agreed upon. The paperwork was complete and the payment scheduled. Then Bartz committed a near deal-breaker.

  Early in 1993, shortly after Bill Clinton’s victorious campaign, the president-elect invited Bartz and other tech executives to an economic summit in Little Rock. When it came her turn to speak, Bartz related the details of the recent class action lawsuit against her, citing the threat to her business, and called for tort reforms against securities lawyers who were impeding entrep
reneurship.

  Lerach was paying attention to the Arkansas economic summit. In August 1992, two weeks before the Democratic National Convention, he had made a stunningly large $100,000 “soft money” contribution to the Democratic Party for use in electing Bill Clinton and other Democrats to federal office. He did not do so with the expectation that the party would suddenly champion tort reform. So Lerach, incensed by Bartz’s plea for relief from trial lawyers, called Feldman: “Fuck her, we’re not settling. The deal is off!” Feldman reminded Lerach that the settlement had been signed and that, as far as he knew, Autodesk had already authorized the money. “Fuck you, too. You might as well move to South America because you’re never going to practice law again,” Feldman remembers Lerach saying before adding his own rejoinder. “He knew they couldn’t get out of it. But that was full Bill. He could be so unpleasant.”

  To avoid such unpleasantness, companies were now settling out of court at a rate of eight in ten cases. In 1992 alone, more than 202 shareholder lawsuits had been filed nationwide, 72 of them Milberg Weiss cases.

  It took three years and $1.4 million in fees to Wilson Sonsini lawyers before Adaptec chairman John Adler finally threw in the towel. Lerach was not wildly elated. Three years of litigating, deposing witnesses, sorting through the evidence, and filing motions, and no more than $4.3 million to show for it was not within the business model—except for the fact that during those years Adaptec was one of more than 170 lawsuits the firm would file on behalf of plaintiffs, nearly 60 percent of all shareholder lawsuits nationwide. More than $700 million was paid in settlements during that period with about $227 million in fees going to the plaintiffs’ firms. Between 1992 and 1993 the profits at Milberg Weiss jumped more than 90 percent. And because of the scale of its business, the firm could afford long fights, for even minor settlements, knowing that it injected fear (not to mention loathing) in boardrooms where tense conference calls between CEOs, even competitors, and lawyers were taking place. The stakes were not just about paying settlements. The stakes involved the diminishing ability to attract top-flight directors, who were becoming wary of risking their reputations as well as their wealth in stock options. CEO recruiting was taking a hit. Tech-savvy people grumbled about fleeing to protect their nest eggs. Venture capitalists held tighter to investment money, worrying about throwing good money at the likes of Bill Lerach. Cypress Semiconductor CEO T. J. Rodgers, whom Lerach had sued three times, spoke for an entire industry when he posed the big question: “How to get rid of this scourge who’s lower than pond scum?”

  IN THE SAN DIEGO offices of Milberg, Weiss, Bershad & Lerach, Pat Coughlin was trying to rid the world of a different sort of scourge: in one word, tobacco. His father had died of lung cancer in 1985, and his mother had recently been diagnosed with emphysema. Both had been lifelong smokers. “I looked at the age which most people start smoking, and I realized that most of them can’t make lifelong decisions at that age,” he would say, pointing to a recently released Journal of the American Medical Association report demonstrating an increase in teen smokers and alleging that tobacco companies were targeting teens through marketing and advertising. His class action lawsuit, filed in San Diego Superior Court, had charged the tobacco companies with “manipulating nicotine to addict smokers and with conspiring not to develop or market safer cigarettes.”

  Within the firm there was some consternation with Coughlin’s lawsuit. Since 1913 more than eight hundred cases had been filed against tobacco companies, and not one had gone the way of the plaintiffs. After maintaining for years that the health hazards related to their products were uncertain, the tobacco industry’s argument had evolved into a more elusive line of defense. If a person chose to smoke, the tobacco makers could hardly be blamed. If there was a culprit, it was free will. So Coughlin set out on a different attack, examining whether the industry had hidden damaging evidence about the toxicity and addictive nature of its products. In other words, he was searching for evidence of fraud.

  In San Francisco sole practitioner Janet C. Mangini had been reading a newspaper article focusing on R.J. Reynolds Tobacco Company’s cigarette advertising. The article quoted three Journal of the American Medical Association studies concluding that the popularity of Camel cigarettes had increased markedly within three years after the company introduced a cartoon character to carry its banner in advertising campaigns. The character was named Joe Camel. Children as young as six recognized Joe, the studies stated, as children of a previous generation recognized Mickey Mouse.

  Mangini was not a consumer fraud specialist. But she was bothered enough to mention the tobacco company studies to Alan Caplan and Philip Neumark, attorneys at the firm of Bushnell, Caplan & Fielding, from whom she rented an office. What if they could prove that R.J. Reynolds had set out to sell its products with minors in mind? What if they began focusing on Joe Camel promotional advertising and collateral such as caps, jackets, mugs, and other Joe items that presumably appealed to youths?

  Then one of them had an even brighter idea. Why not call the most powerful shareholder class action law firm in America? On the receiving end of that phone call, Bill Lerach immediately began to envision the crossover between Pat Coughlin’s case and the one Janet Mangini was proposing. “They’re putting Joe Camel on lunch boxes and claiming they’re targeting blue collar workers, not kids,” Alan Caplan told Lerach. Although they had no documents stating that R.J. Reynolds was specifically targeting a youth market, by filing a lawsuit, the plaintiffs might pry open a door to discovery. Lerach understood. He also understood how arduous the battle would be. What’s more, the fee amount might not be as large as the San Francisco lawyers anticipated. Why? Because the legal attack would ask for injunctive relief—to force R.J. Reynolds to send Joe Camel into permanent exile without seeking damages. Still, he committed his firm to shoulder 80 percent of the workload. This made the Bushnell lawyers happy. Mangini was also pleased to be the named plaintiff.

  Mangini v. R.J. Reynolds Co. was filed in San Francisco Superior Court in December 1991. R.J. Reynolds retained H. Joseph Escher III to defend it. A 1977 University of Chicago Law School graduate, Escher began sketching out a defense, enlisting his colleagues at his San Francisco firm of Howard, Rice, Nemerovski, Canady, Falk & Rabin as sounding boards: “Can you hold an advertiser liable because the advertising might encourage someone to break the law? Is there anyone who thinks that no advertisement for beer is appealing to twenty-year-old men who can’t legally purchase beer?” The answers to those questions would break new legal ground.

  Filing a motion to dismiss the case, Escher argued that under the Cigarette Labeling and Advertising Act, the federal government regulated all tobacco advertising and promotions, therefore any individual or state claim was preempted by federal law. A San Francisco judge agreed. Lerach and Coughlin were undeterred. “It just means we appeal under the argument that R.J. Reynolds is targeting underage kids in the state of California,” Lerach told Coughlin. “Let’s get the state involved, some cities, too.”

  Coughlin put in a call to San Francisco city attorney Louise Renne. Would the city join the case? She did not hesitate. Meanwhile Associate Justice Donald B. King of California’s First Court of Appeals sided with the plaintiffs, ruling that there was enough evidence showing R.J. Reynolds was targeting San Francisco kids with its Joe Camel ads that the case could go to trial. The news startled Escher, who appealed to the state Supreme Court. Coughlin went to notify his law partner, who appeared distracted by the piles of cases promising big payouts. After a moment Lerach swung his chair around, appearing to peer out the window to the splendid harbor below. Then he swung it back, grinning. “There’s glory for all of us in this. I’ll argue the case myself!”

  SEYMOUR LAZAR HAD PROVED to be a great plaintiff. And Milberg Weiss, in turn, made good on its end of the bargain. From 1984 through 1993 Lazar’s name appeared in more than a dozen successful cases ranging from Standard Oil, to biotech research company Genentech, to Beverly Hills Savi
ngs and Bear Stearns. Milberg Weiss did well in those cases, earning in excess of $10 million in fees, and so did Lazar, earning $1.4 million against less than $10,000 in losses. By comparison, the thousands of class action plaintiffs the firm represented received an average of sixty-five cents on every dollar lost.

  Lazar had followed up on Mel Weiss’s admonition to find himself an intermediary lawyer, choosing a longtime legal adviser and Palm Springs neighbor Paul T. Selzer. A 1965 Stanford Law School graduate, Selzer was a managing partner of Best, Best & Krieger, a hundred-year-old Southern California law firm. With a handsome chiseled face, athletic physique, and full head of white hair, he had the mannerly bearing of a senator. Selzer preferred to practice land use law in the desert cities in and around Palm Springs, living comfortably with his family while maintaining a status as one of the social pillars of the resort and retirement community. Through the arrangement Lazar made with Milberg Weiss exchequer Dave Bershad, checks would be sent to Best, Best & Krieger to defray Lazar’s “legal bills” with the firm. It would take years for one of the young partners to wonder, in what would be an incriminating memo, why the income from Milberg Weiss seemed to exceed the amount owed to the firm by Lazar.

  On the East Coast another stalking horse had joined the stable. His name was Howard J. Vogel, a forty-seven-year-old real estate mortgage broker living with his wife, Eugenia, in Englewood, New Jersey. Both were acquaintances of Robert Sugarman, a new partner in the Milberg Weiss New York office. Vogel, a laconic and bookish man who had suffered from polio as a child, told Sugarman that he was intending to retire and, through a retirement fund, began investing. One of his first big plays, a $10,000 investment in Valero Energy Co., a huge Texas refining company, came a cropper. As far as he could tell, there were insider sell-offs. He wanted to lead a lawsuit, and he wanted $1 million for sticking his neck out. Sugar-man took the offer to Bershad and Mel Weiss. They agreed to set up a meeting. When they did meet, David Bershad and Steve Schulman countered with 14 percent of their fee, well over the normal 10 percent they’d been sending Lazar (for whom they sometimes made exceptions upward) and Steven Cooperman. They also offered to reimburse Vogel the $10,000, provided they won the case. Then they told him to get an intermediary lawyer, which he did.