Circle of Greed

by Patrick Dillon

  ON JANUARY 19, 1995, the House Subcommittee on Telecommunications and Finance took up H.R. 10, the Common Sense Legal Reform Act.

  The leadoff witnesses at the hearing were James V. Kimsey, chairman of America Online, testifying on behalf of the American Electronics Association, a Silicon Valley organization representing three thousand high-tech companies; and Dennis Bakke, founder and president of AES Corp. The second pair of witnesses? None other than Bill Lerach and Dan Fischel. This was not a coincidence. The session began with remarks from Republican congressman Thomas J. Bliley, the new chairman of the full commerce committee, who left no doubt that the hearings were an attempt not to gather evidence but, instead, to marshal public opinion. Bliley’s opening statement also revealed that the Republicans had refined their target: it was now mostly about class action securities suits.

  “Companies, directors, and auditors are being forced to settle these meritless suits because the costs of defending themselves is prohibitive and the money recovered enriches lawyers while it gives pennies on the dollar to the injured investors,” Bliley said. “As a result, the goals of the securities laws have been skewed. Fraud is not deterred because these suits are filed regardless of fraud.”

  Sitting in the audience, Jon Cuneo winced. In the decade since Ronald Reagan put litigation reform on the agenda, conservatives had honed their argument into a sharp sword. Republicans were now on the side of the little guy, at least rhetorically. As Cuneo saw it, the GOP argument had been reduced to two powerful talking points. Bliley had hit on the first: Pennies for plaintiffs, millions for the lawyers! Several ensuing members of the subcommittee, including a Democratic member who represented Silicon Valley, would hit on the second: You are suing the companies that are bringing the riches of the Garden of Eden to America. Cuneo had warned his fellow lawyers to be prepared for these lines of argumentation, and Lerach had been listening to his friend’s advice. Sitting at the witness table as the Republicans began their presentation, Lerach made a mental note to address these criticisms directly when his chance came to speak.

  Before he could do so, subcommittee chairman Jack Fields of Texas laid the groundwork for the second GOP point that Cuneo had distilled so succinctly. “Just look at some of the facts,” Fields said. “Nineteen of the thirty largest companies in the Silicon Valley have been sued since 1988, with an aggregate settlement value of $500 million … This explosion in speculative litigation has led to less disclosure, not more; companies pursuing more expensive capital rather than the public corporation route; companies hesitant to introduce new drugs and new technologies for fear of failure and the resultant filing of a class action lawsuit.”

  Following House procedures, Fields yielded the microphone to Representative Edward Markey of Massachusetts, the ranking Democrat on the subcommittee, who invoked a different set of horrors—those perpetrated by corporations—and warned that if the legislation was rushed to the floor, as Republicans seemed hell-bent on doing, Congress would be “tilting the scales of justice sharply” away from the little guy and in favor of heartless corporations that sought profit above all else.

  When it came his turn to talk, Chris Cox wanted to talk about ill-otten gains too—but to him that meant trial lawyers’ profits. “We are here today to address a national scandal of corruption on a scale Congress hasn’t witnessed since the days of Eliot Ness and Al Capone,” Cox began. “The only difference between the organized crime of the 1930s and today’s extortion racket run by strike-suit lawyers is that today’s lawyers’ conduct is technically legal.”

  Seamlessly making the Republicans’ recent transition from the McDonald’s coffee case to securities class actions, Cox continued: “At the hands of a small band of amoral plaintiffs’ lawyers and their allies on the bench and in law schools, America is quickly becoming a nation of victims. No injury, real or imagined, occurs in America today without a lawsuit to compensate the alleged victim—whether it is a cup of hot coffee in a woman’s lap in a moving car or a drop in a stock price caused by bad luck in the stock market. Every accident comes with its own lawyer and its own lawsuit.”

  Unlike Lerach, who had coauthored that 1972 law review article criticizing securities lawsuits while at Pitt, Cox had always felt antipathy for such suits. His own attention to this issue dated to the mid-1970s, when he’d coauthored an article critical of such suits for the Harvard Law Review. Unlike Lerach, Cox had not changed his mind—his views about the attorneys who filed them had hardened.

  “The lawyers think they should be able to inflict this kind of injury, often destroying many jobs, wasting America’s resources without any responsibility,” Cox said, looking at Lerach. “This is how Bill Lerach, our distinguished witness today, makes his money. This is how legal extortion works.”

  PRIOR TO HIS APPEARANCE, Lerach had submitted prepared testimony running some 13,000 words, including a raft of exhibits. He and Cuneo had rehearsed Lerach’s testimony the night before at America Restaurant in Union Station on Capitol Hill. His preparation showed. In his actual testimony, which Lerach delivered without benefit of notes, he rattled off all the major points in his written submission—paying close attention to covering Cuneo’s two admonitions—and was conversational and cool, despite the forces arrayed against him.

  “I was happy to accept the invitation of the majority to travel from San Diego here today to offer my testimony and views about H.R. 10—al-though I must say, given the rhetoric I have heard in opening statements, I have some reservations of the wisdom of that,” Lerach began with a wan smile.*

  “Now, there is no question that lawyers are a popular political target today and it appears that lawyers who have devoted their time to representing fraud [cases] and investors are being singled out for heightened criticism,” Lerach added. “I hope … as you pursue these important amendments to the 1934 Act you will keep in mind that while you claim to be taking a swing at lawyers, you are going to end up hitting your constituents in the nose. You are going to end up hitting decent, hard-working people who make money, save money and invest money, and all-too-frequently are victimized by fraud artists and dishonest executives.”

  Cox began his second round of questioning of Lerach by asking him how much money he earned in 1994. This was an ambush, masquerading as a cheeky inquiry, but Lerach was prepared, and he gave the answer he’d tried out on Cuneo the night before. “You know, my mother told me when I was growing up, the most impolite question you could ever ask another person was how much money they make,” Lerach replied. “I don’t ask other people what they make, and I don’t tell other people what I make.”

  But Cox’s intention wasn’t merely to be discourteous; it was to make a point about the trial lawyers’ partisanship and their monetary generosity toward Democrats—a barb aimed at Ed Markey as much as Lerach. Noting that Federal Elections Commission records revealed that Lerach had donated $255,000 in political contributions in 1994, Cox then said, “I guess you made more than that. I won’t embarrass you by asking you how much more than a quarter of a million dollars you make.”

  In his testimony, Dan Fischel made the same point: “In assessing the arguments made by opponents of litigation reform, it is critical to understand that litigation, in general, and private securities litigation, in particular, is a big business,” he said. “Plaintiffs’ class action counsel file hundreds of lawsuits alleging federal securities violations and earn hundreds of millions of dollars in fees from prosecuting these cases every year.

  “The plaintiffs’ bar constitute a cohesive, well-financed and powerful interest group,” Fischel added. “William Lerach, who appears with me on the panel today, a named partner in one of the country’s most successful plaintiffs’ firms, is probably one of the biggest contributors.”

  Several subcommittee Democrats put up a spirited defense of Lerach and the plaintiffs’ bar, going after Fischel with gusto. Markey led the attack, noting Lexecon’s work for Charles Keating and for David Paul, the owner of CenTrust Savings and
Loan, a failed Florida thrift that had also invested heavily in Michael Milken’s junk bonds.

  Markey began his questioning of Fischel with a dig at Cox: “I’m not going to ask you how much you made as a consultant in that field, but we will just assume it is a fairly lucrative practice, as is Lerach’s.”

  “Very lucrative,” replied Fischel.

  “Very lucrative—I appreciate that,” Markey replied. “All sides have done well in this business.”

  “Extremely well,” Fischel agreed.

  The witness’s candor may have been appreciated by Markey, but it didn’t take Fischel off the hook with the Democrats. Markey and, minutes later, Democratic Congressman John Bryant of Texas launched into recitations of controversial Lexecon cases—pointedly mentioning not only its role in the Keating case but the $700,000 that Lexecon had forked over to Lerach’s clients to make the lawsuit go away. Neither Democrat, speaking under benefit of congressional immunity, attached any significance to the legal nicety that Lexecon had technically agreed to a “disposition” and not a “settlement.” Both congressmen pointedly used the word “settle” themselves, and Markey implied that Fischel’s decision to sue Milberg Weiss over the difference was a semantic trick.

  “Mr. Fischel, your firm appeared to settle this case for $700,000,” Markey said. “But Lexecon apparently objected to characterizing what it called a ‘voluntary payment’ to the class plaintiffs as a ‘settlement.’ So what did Lexecon do? Because it didn’t like this choice of words, it filed a lawsuit against the plaintiffs’ lawyers, which included Mr. Lerach’s firm—such a small world—for malicious prosecution.”

  Fischel begged to differ, replying that Markey had made “serious misrepresentations” of the facts. This retort incensed Congressman Bryant. He went back at Fischel over the Lincoln Savings and CenTrust reports that Lexecon had prepared. “Now, Lincoln and CenTrust together account for $3.5 billion that the taxpayers had to shell out, based upon advice that you gave that things were going to be okay,” he said.

  Fischel disagreed with this characterization as well, asserting that Bryant was taking quotes from the report out of context.

  “Then why did you not go ahead and take your case to the jury when you were sued by Mr. Lerach’s firm over here for being a part of the problem at Lincoln?” Bryant asked. “Instead, you decided to settle and pay $700,000 in settlement when you could have taken what you just told me to the jury.”

  Fischel responded to that barb by reading from the court order: “defendants Bankers Trust, Saudi European Bank, Star Bank, and Lexecon Inc. have been dismissed from the case.”

  “Now, Mr. Fischel, one thing you should not do in here is mislead a member of Congress, many of whom are lawyers,” Bryant snapped. “The fact is, I have read what Judge Bilby said … You weren’t dismissed until you paid to avoid having your case taken before the jury.”

  “Congressman, I think one of the important things is [that] congressmen should not mislead the public,” Fischel shot back. “We didn’t pay a cent at the time we were dismissed from the litigation, not one red cent.”

  “I don’t think that is correct,” said Bryant. “Mr. Lerach, would you like to elaborate?”

  “Lexecon paid $700,000 in cash to resolve the claims asserted against it by the victims of Charles Keating,” Lerach replied evenly.

  Irrespective of these fireworks, H.R. 10 passed out of subcommittee, was renamed the Private Securities Litigation Reform Act (PSLRA), and sailed through the House Committee on Commerce in February on a 33– 10 vote, with eight Democrats joining the Republican majority. Such a margin suggested that the full House might pass the bill with a veto-proof margin, crowed Chris Cox, which it did on a margin of 325 to 99. By this time, the bill was much changed and, from the standpoint of the securities plaintiffs’ bar, much improved. Republicans had agreed to strip out the “loser pays” provision. This was a significant win for the securities trial bar, but for the partners of Milberg Weiss it was bittersweet. Although they were winning important concessions, as the bill took shape, it became clear that Milberg Weiss had earned the dubious distinction of having legislation aimed directly at it—a single law firm—and its star litigator.

  At some point Republican staffers in Congress and journalists in the Capitol Hill press galleries started calling the bill the “Get Lerach Act.” For his part, Lerach had taken to deriding the bill as the “Crooks and Swindlers Protection Act of 1995,” a phrase he borrowed from Frank Greer, the Democratic political consultant assisting the National Association of Shareholder and Consumer Attorneys (NASCAT). But it was going to take more than sarcasm to defeat this legislation. While Republicans were united, the Democrats in Congress were divided. So was the legal community. That summer at the annual convention of the American Bar Association, U.S. District Court Judge Vaughn R. Walker of San Francisco expressed the increasing misgivings of many of those on the federal bench. “Securities litigation is like no other,” Walker said. “And the primary feature that distinguishes [such lawsuits] is there’s no client. It’s the rare case where a real plaintiff takes an interest. Most of the time, the clients are purely nominal and cases are driven entirely by lawyers.”

  Whether the legislation designed to curb this type of litigation would be enacted into law was up to the U.S. Senate—and the President of the United States.

  LERACH AND CUNEO HAD higher hopes for the Senate, always proud of its reputation as a more deliberative body, but their optimism was short-lived. Ultimately the Senate side of the Capitol proved just as hostile to securities lawyers as the House side. Nearly all the Republicans were arrayed against them, along with about half the Senate Democrats, including Dianne Feinstein, whom Lerach knew well and had supported in all her political campaigns. Only four Republican senators stood with the plaintiffs’ attorneys, one of whom was John McCain, Lerach’s old dance partner from the Keating Five scandal. (Another was William Cohen of Maine, who would end up serving in Bill Clinton’s cabinet before the decade was out.) It clearly wasn’t enough. On June 28, 1995, the full Senate passed the PSLRA on a 70–29 vote, a margin suggesting that even if Clinton could be persuaded to veto the bill, it would not necessarily settle things.

  As 1995 wound to a close, neither side knew where the president’s heart or head was on this bill—or whether they were in the same place. His senior advisers were themselves divided. Treasury Secretary Robert E. Rubin was believed to head a faction favoring the new curbs. Among those who thought Clinton should veto the bill was Bruce R. Lindsey, the intense and wiry attorney whom Clinton had brought with him from Arkansas to Washington, where he served as a personal consigliere to the president, and Clinton political adviser Dick Morris, whose Rasputin-like political machinations concealed a soft spot for effective governance. Morris asked Cuneo to prepare an informational packet on the legislation.

  “There’s a lawyer I know in New York I want to take a look at this,” Morris said. “His name is Eliot Spitzer.”

  The future New York attorney general and governor—and scourge of Wall Street—counseled against the president signing the bill. But in a conference committee mark-up, where differences in the House and Senate versions of the PSLRA were ironed out, all the impetus was clearly on the other side.

  In the end, the conference committee language stated that the PSLRA “seeks to protect investors, issuers, and all who are associated with our capital markets from abusive securities litigation.” In its final form the PSLRA had ten major components. For starters—and most importantly— it heightened the burden by which a lawsuit could claim “fraud.” Plaintiffs now would have to cite evidence of fraud before proceeding to the discovery stage. Previously, plaintiffs’ counsel would allege fraud in the initial pleadings, confident that the discovery process would provide substantiation of their claims—or, more likely, that the company would settle first. The PSLRA also provided for the staying of discovery until after the defendants’ motions for summary judgment could be heard; and it elim
inated the triple damages under the RICO statute—unless the defendants were convicted criminally of securities fraud.

  In addition, the PSLRA contained provisions for fuller disclosure to all plaintiffs of proposed settlements; set “reasonable” (if undefined) limits on attorneys’ fees; limited damages to the “mean trading price” in ninety-day blocks of time, instead of anomalous dips in the stock that made it seem as though investors had lost more than they had; and in a provision that was extremely important to high tech—and the bill’s most controversial feature—it provided a “safe harbor” for executives who made optimistic predictions about their own company’s anticipated success.

  Making the losing side foot the cost of litigation was one area in which the Contract for America language did not survive.* On the other hand, the final version contained a series of provisions aimed directly at Lerach and his firm. These provisions revealed their critics’ suspicions about how Milberg Weiss got so many clients: the PSLRA prohibited some types of referral fees, set limits on the number of claims that named plaintiffs could file, barred shareholders from buying stock specifically so they could sue, and forbade members of the class from receiving payments disproportionate to their share of the recovery.

  Late in the year, as the legislation headed to the White House, Clinton’s political standing was unexpectedly bolstered by brinksmanship with the Republican Congress on the federal budget. The impasse led to two partial government shutdowns, both of which bolstered Clinton’s standing in public opinion—and his reelection effort. To be sure, the president had many other issues on his plate besides litigation reform.* A grassroots lobbying effort orchestrated by Cuneo and Lerach aimed at opinion makers in cities, counties, and states across the United States was beginning to pay off. Newspaper editorials and op-eds cropped up questioning the wisdom of fast-tracking such an important piece of legislation. When Clinton went home to Arkansas in December, NASCAT placed an ad in his hometown paper urging a veto of the bill. But was there enough time for the securities lawyers to make their case with Clinton?