Circle of Greed

by Patrick Dillon

  Lerach had certainly been supportive of Clinton and his political party. The year before, he’d attended one of Clinton’s notorious “White House coffee” fund-raisers, immediately afterward forking over $90,000—half in his name and half in his wife, Star’s—to the Democratic National Committee. One had to be careful playing a card like that with a sitting president. The year before, when one of the guests at a White House coffee, a wealthy Asian immigrant, started to ask Clinton in broken English for a specific regulatory favor, Lerach had winced in horror and amusement. The man was quickly shushed by aides and other guests.

  With the deadline for the veto looming, Lerach could not contain himself. While in Washington for a White House Christmas party, Lerach found time at a fund-raiser preceding the party to buttonhole his old friend. Under Clinton, the Democratic Party had become a relentless fund-raising machine, and at a December 7, 1995, event at the Hay Adams Hotel across from Lafayette Square Park, the president had been caught on film boasting to the wealthy donors how their “soft money” contributions had been used. (By law, those large chunks of money had to go to party-building endeavors.) Clinton regaled the donors by relating how it had been funneled into television ads that had helped convince Americans that the government shutdown was the Republicans’ fault.

  Ten days later Clinton dropped by a similar event at the Hay Adams, the one in which Lerach was in attendance. He’d been warned not to press the point of a veto too directly with Clinton, but as Lerach observed Clinton, he thought to himself, I’ve got to get him alone. I’ve got to talk to him. As Clinton was getting ready to take his leave, Lerach approached the president, who greeted him by name.

  “That securities bill is coming your way,” Lerach told Clinton. “You have got to stop it.”

  “Don’t worry,” Clinton assured Lerach with a knowing nod.*

  But Cuneo, Lerach, and the rest of the securities lawyers were plenty worried. Clinton had issued only six vetoes as president—five of them relating to the budget stalemate of 1995—and Congress had never overridden him. There was always a first time. The opposition was better funded than the securities lawyers were and, in Congress, better organized. Not only were Republicans nearly unanimous in support of the bill, but the Democrats’ rank and file remained divided. Moreover, in the Senate, the position of influential Connecticut Democrat Christopher J. Dodd had hardened against them. The compromises added to the bill were enough, Dodd believed. The insurance industry—so influential in his home state—needed relief. Dodd was hardly the only liberal to break with the trial lawyers. So did Feinstein, Maryland’s Barbara Mikulski, New Jersey’s Bill Bradley, and Tom Harkin of Iowa. A populist, Harkin was emblematic of something else as well: Lerach had made enemies within the Democratic Party. Earlier in the year Harkin’s fellow Iowan Ted Roth, the San Diego high-tech executive befriended—and later sued—by Lerach had visited Harkin. “I don’t give a fuck about the merits,” Lerach had said when Roth called and tried to settle the thing amicably.

  Senator Harkin cared very much about the merits of the PSLRA, and a couple of nights before the Senate vote on whether to override Clinton’s veto, the senator called Roth at home. It was about midnight in Washington.

  “I just got a call from the White House—the president wants to talk to me in an hour about this legislation,” Harkin informed Roth. “You gotta give me some ammunition.” Roth obliged. He didn’t bore Harkin with facts and figures. He simply related to a fellow Democrat his tale of being sued because Alliance Pharmaceutical’s stock had gone down pursuant to a government-mandated delay in clinical trials. White House aides were learning to their dismay that, thanks to Lerach, Dodd’s job of rounding up votes was easier than Clinton’s.

  Bruce Lindsey would call NASCAT’s chief lobbyist from the White House. “Okay, Jon, who do we have the president call?” Cuneo would give him a list of lawmakers believed to be on the fence, only to get another call from Lindsey three hours later and report: “The President called these senators—but Dodd had already talked to them.”

  The denouement of the “Get Lerach Act”—the Private Securities Litigation Reform Act of 1995—was ultimately anticlimactic. On December 19 Clinton vetoed the bill—his sixth veto of the week—while issuing a statement that read more like a law review article than a presidential veto.

  Clinton’s explication was widely ignored—and derided by both sides. “This is a payoff to a major, fat-cat trial lawyer,” said Michael Collins, the spokesman for Tom Bliley. Collins made it clear he was referring to Lerach, whose firm had donated $180,000 to Democrats in the first six months of 1995 alone. Lerach claimed to a Washington reporter who phoned him that he had not discussed the bill with Clinton—that he hadn’t needed to take that step. “My opinion is known to everyone in Western civilization,” Lerach said. “The legislation is horrible. It will result in incredible fraud against elderly people and pension savings.”

  It was a Tuesday night, and a light snow was falling in Washington. Normally, a snowfall just before Christmas would have cheered a lifelong Washingtonian like Jon Cuneo, but inclement weather notoriously snarls things in the capital city, which was also in the midst of a second government shutdown, and as he looked out the window of his Capitol Hill office, Cuneo worried whether the president’s veto—issued hours before the PSLRA was to become law—wouldn’t physically reach the House of Representatives in time to be official. It did reach the House, but it didn’t matter. Newt Gingrich had plenty of Democratic votes for an override, as did Senator Dodd, who was at the time chairman of the Democratic National Committee. The House vote came the next day. The override succeeded with room to spare, on a vote of 319–100. Two days later, on December 22, 1995, Dodd and the Senate followed suit, 68–30.

  Eleven months earlier Lerach had been summoned to Washington to testify against this legislation. He had known he was walking into an ambush but had hoped he could help shape the debate. He was unsuccessful in achieving that goal, but that didn’t necessarily mean his argument lacked merit. Time would tell, as it does with most legislative reforms. Considering what would happen to the U.S. economy in the next dozen years, perhaps Congress should have paid more attention to Lerach. In his opening statement to the House Subcommittee on Telecommunications and Finance in January, he had cautioned that dire consequences would result if Congress rushed the Private Securities Litigation Reform Act into law.

  “The fraudsters and the dishonest people are there, and if the prohibitions against fraud are removed, they will come forward—they will become more active,” Lerach had told Congress. “In ten or fifteen years you will be holding another hearing with the debacle in the securities market that will make you remember the S&L mess with fondness.”

  This warning would prove prescient. In fact, regarding the time frame, his prediction proved too conservative. Another reckoning was coming, and it would arrive sooner than even William S. Lerach expected.

  * The American Trial Lawyers Association kicked in $2.5 million, 92 percent of which went to Democrats. Of the individual law firms in the United States, the $587,000 donated to candidates by Milberg Weiss partners ranked second only to Akin Gump, the highly placed Washington lobbying shop. But nearly one-quarter of the Akin Gump money went to Republicans. Not so with Milberg Weiss—every dollar of its partners’ contributions went to Democrats.

  * Lerach received no such parochial consideration from the San Diego congressional delegation. Although not a member of the subcommittee, Republican congressman Brian Bilbray of San Diego showed up at the hearing—in support of Chris Cox, not his hometown law firm. “These lawsuits amount to legalized blackmail,” Bilbray testified. “We must reform this law so we can stop criminalizing innovation.”

  * The bill did contain a face-saving, very watered-down version of “loser pays” that wouldn’t kick in unless the plaintiffs’ attorneys were guilty of actual misconduct in bringing the claim.

  * Besides the demands of the budget and the PSLRA, the pres
ident was wrestling with the burden of his own libido. On November 15, the second day of the shutdown, the president visited the office of White House chief of staff Leon Panetta. There the forty-nine-year-old chief executive made eye contact with Monica Lewinsky, a twenty-two-year-old unpaid intern from California. Lewinsky lifted her jacket to show Clinton the straps of her thong underwear. By that night, they were having sex in a room adjacent to the Oval Office.

  * Conservative critics of Lerach—and of Clinton—have maintained that Lerach lobbied Clinton at the White House for the veto. Lerach countered that he had never discussed the PSLRA with the president. Apparently, neither version was accurate. Lerach did indeed discuss the legislation with the president, he now concedes, but not at the White House. Lerach revealed the Hay Adams conversation in an interview with Pat Dillon at the Federal Correctional Institution in Safford, Arizona, on October 19, 2008.

  16

  REVENGE OF THE NERDS

  Out in Silicon Valley, they smelled blood. High-tech executives ranging in disposition from the temperate Ted Roth to the animated Al Shugart believed their longtime adversary was wounded and that their chance had come to drive a stake through his heart.

  Shugart was still smarting over Milberg Weiss’s three lawsuits against Seagate, as well as Lerach’s “more is coming” response to his advertisement asking for high-tech executives to send him their business cards if they’d been Lerached. Five years later, flushed in the afterglow of their victory in Washington, Shugart faxed a message to Lerach: “Dear Bill, more is coming.”

  Precisely what was coming was a series of statewide referendums aimed at Lerach, his law firm, and his imitators designed to curtail, if not end, class action securities lawsuits brought by the “Strike Suit King” and his imitators.

  Since 1911, when California governor Hiram Johnson and his Progressive Party enacted laws allowing voters to recall governors and judges and to place initiatives on the ballot for a direct vote of the people, the state had enjoyed, if that is the right word, a form of direct democracy. The Progressives’ motivation was to break the griplike control that corporations, particularly Southern Pacific Railroad, held over the legislature. Now Lerach’s long-suffering adversaries in the high-tech industry were planning to use direct democracy against him. It wasn’t quite like taking on Southern Pacific, although in the minds of certain executives, it was just as vital. Passage of the “Get Lerach Act” warmed the hearts of entrepreneurs and computer geeks up and down the West Coast.

  In their visions of a future with a defanged Bill Lerach, no longer would innovators have to couch every expression of optimism about their company’s latest invention in dry, lawyerly language. No longer would the prospect of a dip in their company’s stock price leave them tossing at night in a cold sweat. No longer, two days after that drop in their company’s publicly traded shares, would a cookie-cutter lawsuit arrive at the door under Milberg Weiss letterhead accusing them of fraud. No longer would they or their fellow CEOs be profanely berated by Lerach at high decibels during settlement conferences. No longer would they, founders of profitable companies employing thousands of workers, be identified as perpetrators of “fraud” in court filings and called “evil” or “a crook” by Lerach in public interviews. No longer would they write seven-figure checks to make the threat of a calamitous jury verdict go away. Most of all, never again—after having written those checks—would they be forced to listen, seething silently, to the Lerach lecture or to read about their supposed moral failings in news coverage of a post-mortem Lerach press conference.

  The mid-1990s was a time of invention and disruption and success on the West Coast. Tech stocks helped push the Dow Jones Industrial Average over 5000 for the first time in history. Newsweek dubbed 1995 “The Year of the Internet.” It was a period of untrammeled wealth. The only snake in the modern Garden of Eden was Bill Lerach, his firm, and his legal emulators. In 1996 the American Electronics Association, high tech’s Santa Clara County California–based trade association, revealed that fifty-three of its one hundred largest firms had been subject to class action securities suits—some more than once—and most of them had been filed by Lerach.

  T. J. Rodgers, the CEO of Cypress Semiconductor in San Jose, compared Lerach in interviews to a carjacker. “He’s a greedy guy,” added Al Shugart. “Imagine the feeling of powerlessness,” Intuit co founder Tom Proulx told Gary Rivlin, a knowledgeable Bay Area technology writer. “Someone accuses you of fraud. You know with absolute certainty that it’s a lie. You want to fight, but then you find out you really don’t have the opportunity. You’re a dumb businessman if you fight it. So you settle.”

  Silicon Valley was united by one thing amid the political election season of 1996: it wanted to make Lerach’s business model illegal. The field commander of the anti-Lerach army was Tom Proulx (pronounced “Prew”), a political neophyte who believed he had devised an ingenious and preemptive counterattack against Lerach that would protect high-tech executives from future securities lawsuits.

  Proulx helped raise $12 million to put three measures on the March ballot in California. The first was Proposition 200, which called for rewriting the state’s auto insurance laws so that California would essentially become a no-fault state. No matter who was at fault in an accident, insurance companies would pay the claims of their own policyholders. Huge punitive damage awards would be curbed. The second, Proposition 201, picked up where Congress had demurred while passing the Private Securities Litigation Reform Act: it called for a “loser pays” provision in California securities litigation. The third, Proposition 202, restricted attorneys’ fees to 15 percent of any settlement in civil litigation.

  Three separate proposed changes in state law, with one target: lawyers.

  The first salvo in the antilawyer ad campaign was a shark-finned Cadillac, presumably driven by an unscrupulous attorney, chasing an ambulance through the streets of San Diego—Lerach’s town. Called the “terrible two hundreds” by the lawyers, the initiatives were placed on the ballot on the day of California’s March presidential primary in their sponsors’ hopes that the 1996 Republican nominating contest would draw conservatives to the polls. Thus did the federal “Get Lerach Act” beget the California “Get Lerach Initiative,” conveniently paired with a couple of other measures that his adversaries believed would make it easier to pass.

  They were mistaken. For starters, the major insurers wanted no part of a protracted initiative war with the attorneys, and they sat the fight out. The computer guys were also wrong about the image of attorneys. Cadillac ads notwithstanding, millions of voters had a soft spot for trial lawyers too. Notwithstanding Frank Luntz’s adroit massaging of the Republicans’ message, Bill Lerach had not supplanted Perry Mason in Californians’ imaginations—at least not yet—and on March 26, 1996, all three of the antilawyer “terrible two hundreds,” including the “Get Lerach Initiative,” went down to defeat.

  But the fight was not over.

  EVEN BEFORE HIS VICTORIOUS sweep in the California initiatives, Lerach began laying the groundwork for a counteroffensive. He would use the referendum process himself to make his adopted state permanently safe for class action securities suits. He was counting on support from his friend in the White House as well as other powerful Democrats. One was Bill Carrick, a transplanted South Carolina political consultant who managed Dianne Feinstein’s campaigns—and who was advising the Clinton reelection effort in California. Carrick had met Lerach six years earlier during Feinstein’s 1990 campaign for governor when Feinstein, then mayor of San Francisco, was in a fight for the Democratic gubernatorial nomination with Attorney General John Van de Kamp. Lerach harbored a covert grudge against Van de Kamp—he thought the attorney general could have been more aggressive on behalf of Charles Keating’s victims—and his feelings were about to be secret no more.

  “Dianne is in this heated primary with Van de Kamp when Bill calls me,” Carrick recalled many years later. “He says, ‘I’ve got all these
Keating victims, and they want to be for you. Let me help you set up an event.’”

  The Lerach-planned rally took place in a San Fernando Valley school. Carrick made certain the news cameras were there—he had hoped a dozen victims would show up—and when Lerach brought his Lincoln Savings survivors, they numbered three hundred strong. “Bill was a folk hero to those people,” said Carrick. “Then he gave this stem-winder of an introduction. They all went wild for Dianne. I was impressed.”

  Feinstein won the 1990 nomination over Van de Kamp but lost in November to Senator Pete Wilson, who went on to serve two terms in Sacramento.* Carrick and Lerach stayed in touch after that campaign, frequently sharing their views on candidates and campaigns. “He had damn good political ideas almost all the time,” Carrick believed.

  The summer of 1996 was not one of those times. Just as Tom Proulx had mistaken his meteoric rise in the cutthroat competition of Silicon Valley for political acumen, Lerach mistook his March victories for voters’ validation of his business practices. The defeat of the “terrible two hundreds” could have been the end of it, but Lerach had spent hundreds of thousands of dollars gathering signatures to qualify his pro–securities class action initiative, Proposition 211, for the November ballot. “The Silicon Valley guys had worked him over pretty hard,” recalled Carrick. “So Bill went ahead to try and enact 211. He said to me, ‘Let’s see if we can pass this.’”

  The searing nature of his recent experiences in Washington had reminded Lerach of the reasons he’d left the East in the first place—and of why Southern California was where he felt truly at home. By 1996 he had grown disillusioned with Washington politics and all three branches of the federal government: Congress had morphed him into Public Enemy Number One; a president he had supported generously had done little to help him in his hour of need; and worst of all, the U.S. Supreme Court had turned on the plaintiffs’ securities bar in a 1994 ruling that seemingly arrived out of the blue.