IN CONNECTICUT, COOPERMAN HAD become Steve Schulman’s plaintiff. For his part, Bill Lerach was relieved. When Cooperman had called Lerach, telling him about the art theft, the Los Angeles police weren’t the only ones putting two and two together. Lerach certainly had his suspicions. How could he not? He’d been dealing with Cooperman for ten years. So when he read in the newspapers that the art had surfaced in Cleveland, when he saw the names J. J. Little, Jim Tierney, and Steven Cooperman, Lerach experienced a sense of gratitude that Cooperman had fled to Connecticut, for all intents and purposes removing himself from Milberg Weiss West.
Which is why, in the early fall of 1998, when he received a phone call from Jim Tierney, Lerach’s internal alarm bells again sounded. “Can you meet me for lunch?” Tierney asked. Fearing the phone might be bugged, Lerach did not ask what the invitation was about. They agreed to meet the next day at the Hotel Bel-Air in Beverly Hills. When Lerach hung up, he called Mel Weiss in New York and told him of Tierney’s request. Weiss warned him to be careful.
The next day, feeling nervous, Lerach parked at the valet spot and entered the sumptuous pink-terracotta Mediterranean-style spa and resort. Tierney was waiting at a table in the uncrowded dining room. Lerach looked around, noting how quiet their surroundings were, and suggested, “It’s a nice day, why don’t we eat outside?” even though the tables were closer together and filling with guests. So they adjourned to the terrace, to a table overlooking swans cruising on a small lake. Lerach, dressed casually in a polo shirt, noticed that Tierney wore a coat and tie. “Jim. Please take your coat off,” he insisted. Tierney, the former federal prosecutor, looked bewildered and then laughed. “Bill, I’m not wearing a wire. I promise.” But he took off his coat.
The two sat, and immediately Tierney let Lerach know why he’d called. “Okay, we have a problem.” Lerach felt his stomach tighten. “I didn’t get my money, Bill. I’m due one million dollars, and I haven’t seen a check. Where is it?”*
Lerach braced himself. “I don’t know what you are talking about,” he half whispered. Tierney said he’d submitted his invoices months earlier for cases that had been settled. He’d called Steve Schulman, who’d looked into the problem. The invoices had been received, Tierney was assured, and the checks had cleared the bank. “But I never cashed those checks because I never got them,” Tierney insisted.
Lerach said he would investigate. That afternoon he went to the Los Angeles office of Milberg Weiss and called New York, speaking directly with David Bershad, the firm’s managing partner.
Clearly alarmed, Bershad said he would recheck the books, adding: “He’d better not be lying.”
Less than a week later Bershad called Lerach. “Tierney’s telling the truth,” he said gravely. Bershad had retrieved copies of the checks from the bank. They had been endorsed to the account of Steven Cooperman. Tierney’s signature appeared on the backs. “It’s not Tierney’s signature,” Bershad said. Then he added a shock: “I gave those checks to Cooperman. He was here and said he’d bring them to Tierney.”
Now the firm really did have a problem. Cooperman, their star plaintiff, to whom the firm had paid more than $6 million over the years, had extorted them. And they had no recourse.
“We certainly can’t go to the cops,” Bershad told Lerach, stating the obvious. “I’ll take care of this.” He would have another check drafted and forwarded directly to Tierney.
Lerach phoned Tierney and told him what had transpired. Without mentioning the art theft and his part in it, or his subsequent cooperation with the FBI, Tierney then said: “I certainly didn’t want to have to take action against Dave Bershad for being negligent. But you guys should not have trusted Steve Cooperman.”
* Two years later Katalinas would be disbarred and fined for diverting more than $300,000 in savings and bonds into his own account from a client whose finances he had been managing.
* Although she has since retired, Curry remained constrained from disclosing the precise nature of the technology, which is still being utilized by the FBI.
* The amount remained in dispute. Former Assistant U.S. Attorney Robert McGahan recalls the amount “being in the lower six figures.”
18
PHOENIX RISING
Even before Proposition 211 crashed and burned—even before Congress passed the “Get Lerach Act”—Lerach was beginning to tire of the eternal chase. There were not only too many enemies, there were too many competitors. The constant “race to the courthouse” was a grind. The surreptitious payoffs to their stable of professional plaintiffs were feeling like extortion payments.
Even if few dared accuse Milberg Weiss directly, the firm’s opponents had come to suspect there was some chicanery to their methods. The earliest versions of the GOP anti–“strike suits” legislation contained provisions prohibiting plaintiffs in a class action from receiving extra remuneration. Although Lerach’s tangling with Chris Cox during the January 1995 House hearings made headlines, two other exchanges with members of the subcommittee got more to the heart of the matter. When it was his turn to question Lerach, Dan Frisa, a Republican congressman from Long Island, wasted no time:
“Mr. Lerach, if you could, could you explain briefly how clients find you?”
“Well, they find us in a variety of ways,” Lerach had replied, explaining that he’d been bringing fraud cases for a number of years, with some success, adding, “so there are a lot of investors throughout the country who know us from their participation in prior successful class actions lawsuits—”
“Excuse me, I just want to clarify,” Frisa interjected. “So you have repeat clients?”
When her opportunity arose, California Democrat Anna Eshoo, whose congressional district encompassed most of Silicon Valley, approached this issue more directly, even if she had no inkling of the full picture.
“Mr. Lerach, has there ever been a case where you have gone out and sought a shareholder and tapped them on the shoulder and said, ‘We think that there is something that you need to be made aware of’?” she asked. “Is it in every case that you know of … that a shareholder—more than one shareholder—came to you wanting you to obviously look into it, represent them?”
It wasn’t clear from Eshoo’s deferential phrasing that she understood just how dark the suspicions ran in Silicon Valley toward Lerach. Her query certainly did not contemplate the machinations of Seymour Lazar—let alone the crimes of Steven Cooperman—yet Lerach himself knew where such questions could lead, and he chose not to parse, but to deny unequivocally.
“We do not solicit plaintiffs,” Lerach replied. “It is not necessary. When people are furious, when these stocks are cut in half in one day and they find out there is insider selling, the phone rings. We do not solicit plaintiffs.”
This line of inquiry attracted little attention, but Lerach had noticed and reacted accordingly: an alternative version of the Private Securities Litigation Reform Act, drafted by Lerach and Cuneo and offered by Ed Markey, contained a prohibition against filing class action lawsuits before actually having genuine clients. The Democrats’ compromise went nowhere, and Lerach’s acquiescence to a reform that would have undermined Milberg Weiss’s own business practices was promptly forgotten.
Late one afternoon in the spring of 1996, however, at a Milberg Weiss retreat at the Boulders resort in suburban Phoenix, Bill Lerach, Mel Weiss, and Dave Bershad huddled for drinks at the hotel bar. Noting that the prohibition against paying plaintiffs was now codified into law, Lerach recalls taking each man by the hand as if in a small half circle. “Look, we can’t pay plaintiffs anymore—we can’t do it,” he told them. “No más.”
The New York partners agreed, but their assent begged the question of what the firm’s new business model would look like. In Central Bank, the Supreme Court had made it tougher to go after the bankers and accountants who facilitated corporate fraud. Congress had followed up that decision by enacting PSLRA, which made it difficult to sue those perpetrating the frauds unles
s the plaintiffs had some kind of whistleblower embedded inside the offending corporation. Nonetheless Lerach exhorted the lawyers in the San Diego office to keep filing cases, which they did.
On January 10, 1997, Lerach and his partners filed suit against Net-Manage, a Silicon Valley firm that made Internet servers and connectivity-related software. The suit alleged NetManage’s officers reaped $14 million in insider trading “before the truth regarding NetManage’s business and finances was revealed.”
A week later they sued the officers of Read-Rite Corp., a maker of recording heads for hard disk drives. “Seven of the individual defendants unloaded 86 percent to 100 percent of their Read-Rite holdings, while the eighth—Read-Rite’s chairman and CEO—sold off 69 percent of his holdings,” a Milberg Weiss press release stated.
On January 24 Lerach went after Sunglasses Hut on the grounds that its officers concealed evidence of sluggish sales, increasing inventory, and marketing problems—and stock dumping by top executives. On February 24 Milberg Weiss led a consortium of plaintiffs’ lawyers who sued America Online in federal court in Alexandria, Virginia, alleging that AOL founder Stephen M. Case and seventeen other AOL officers and directors reaped some $95 million in “insider trading profits.”
And so it went, all through 1997 and into 1998. “One thing that is very clear is that plaintiffs have not gone away—the courthouse door is still open,” said Stanford Law School professor Joseph A. Grundfest, not altogether approvingly. Grundfest, a former Securities and Exchange Commission member, coauthored a study of the effects of the PSLRA that backed up this impression with hard numbers. According to the study, the number of securities class action suits had held steady, at about 150 per year. There was one significant difference, however. Before the “Get Lerach Act” had passed in 1995, Milberg Weiss had accounted for 30 percent of all such strike suits nationally. By early 1997 Grundfest was reporting that this percentage had doubled—to roughly 60 percent.
“I warned Congress before passage of the act that one very negative consequence would be to chill the assertion of meritorious claims, especially by smaller law firms,” Lerach responded. “My firm is larger, better capitalized, and we made a decision that we are not going to withdraw, that we would continue to fight for what we believe in.” Although Lerach’s observation sounded self-serving, it was literally true. Other plaintiffs’ lawyers had simply abandoned the field, while Milberg Weiss had doubled down on its bets.
San Francisco litigator Steve Sidener was one example. Sidener had been filing class action securities cases for eleven years, most of them in concert with class action securities pioneer David Gold. In their salad days Gold and Sidener had unearthed some of the most breathtaking examples of fraud in Silicon Valley, including their case against Miniscribe, the disk drive company that padded its sales by shipping bricks. Gold had died in 1995, the year that the PSLRA had passed, however, and the following year Sidener hung out his own shingle—as a general law practice, not as a security class action firm. “The dance is over,” he told friends.
Sidener wasn’t alone. The dance hall was cleared of numerous competitors. A law aimed at Lerach was now directly helping his law firm: a less crowded sprint to the courthouse meant that Milberg Weiss attorneys could take the time to draw up stronger complaints. In other words, the PSLRA raised the threshold for making a lawsuit stick, but by decimating Milberg Weiss’s competitors, the reform law made it easier for Lerach to draw up lawsuits that were more likely to meet this higher standard of proof.
Another factor that served to make Milberg Weiss an even bigger player in the field of class action securities lawsuits was subtle differences of interpretation in the various appellate circuits over the extent to which the Supreme Court’s Central Bank decision shielded “aiders and abettors” in securities fraud cases. Justice Anthony Kennedy, perhaps to keep his tenuous majority together, had carefully drafted his opinion to ensure that the immunization conferred on ancillary players was not absolute. “The absence of 10(b) aiding and abetting liability does not mean that secondary actors in the securities markets are always free from liability,” Kennedy had written for the court’s 5–4 majority. “Rather, any person or entity, including a lawyer, accountant, or bank, who employs a manipulative device or makes a material misstatement (or omission) on which a purchaser or seller of securities relies may be liable as a primary violator under Rule 10b-5.”
What did this language mean in practice? The answer soon revealed itself: it meant different things in different circuits.
In New York, the Second U.S. Circuit Court of Appeals devised a “bright line” test under which secondary players could be held liable only if they made a publicly attributed misstatement of fact or material omission that was relied upon by the investing public. The test case was Wright v. Ernst & Young, brought on behalf of Irene Wright, a named shareholder, by a New York law firm, Wolf, Haldenstein, Adler, Freeman & Herz, in litigation concerning the activities of BT Office Products.
The case against Ernst & Young hinged on a January 30, 1996, press release issued by BT Office Products touting its growth in 1995 and predicting a bang-up 1996. Auditors at the firm soon concluded that an accrual problem noticed by Ernst & Young, but not initially thought to be a problem, was indeed serious. BT Office Products revised its 1995 financial performance, and its stock promptly lost 25 percent of its value. The Irene Wright class action suit alleged that Ernst & Young’s “recklessness” was the primary cause of the problem, noting that the accounting firm had “signed off” on the January 30 press release.
Ernst & Young’s attorneys argued that because it had made no false statements of its own about BT—had made no public statements at all, actually—the suit was a back-door attempt to resurrect “aiding and abetting” liability. The Second Circuit agreed, noting in its August 6, 1998, decision that the press release in question had not attributed its sunny forecast to Ernst & Young, meaning that the auditor had communicated no misrepresentations to investors, either directly or indirectly.
Meanwhile the appellate district with the most class action securities claims drew a different inference from Central Bank. The Ninth Circuit discerned another criterion that came to be known as the “significant role” standard. This was a Milberg Weiss case, filed against a Silicon Valley company named Software Toolworks and its accountant, Deloitte & Touche. In letters to the SEC, Software Toolworks wrote that it “anticipated” revenues for the next quarter of between $21 million and $22 million. Privately, the company provided information to Deloitte raising doubts whether such numbers were attainable. Yet the company had shown those letters to Deloitte and referred the SEC to two Deloitte auditors for further information. This made the accounting firm liable, to the minds of the Ninth Circuit judges, who noted the company’s SEC presentation had been “prepared after extensive review and discussion with … Deloitte.” The appellate court’s conclusion: “Central Bank does not absolve Deloitte on these issues.”
Out of this ambiguity would come the theories of “scheme liability” that Lerach would apply to the huge banks, accounting firms, and other entities that enabled a landmark fraud otherwise known as Enron.
IN THE WAKE OF THE PSLRA, Lerach had started doing what he hadn’t done since his days as a young lawyer in Pittsburgh, scrambling to find clients. He began calling on potential plaintiffs. One of the first was James P. Hoffa, president of the 1.4 million-member International Brotherhood of Teamsters, an organization with $16 billion in assets—and no appetite for losing it, since the money represented the pension funds of its members. Lerach made himself known to the hierarchy and fund managers of numerous other labor organizations. They included the California Steel Workers; the Alaska Electrical Workers Pension Fund; the gigantic California Public Employees’ Retirement System (CalPERS), and the California State Teachers’ Retirement System, the largest and third-largest pension funds in the country, with more than $300 billion under management; the University of California Retirement Sy
stem and the retirement system for New York and New Jersey and Illinois; investment councils for various states from New Mexico to New York; various archdioceses of the Roman Catholic Church, and pension managers for Wisconsin’s public employee unions.
Jon Cuneo said that his friend did some of his best work in the years after 1996. Lerach retooled himself, his firm, and how he practiced law, and did it without firing lawyers or missing a beat. Bill Carrick said that Lerach reminded him of an ambitious young presidential candidate, flying all over the country, working fourteen-and sixteen-hour days, making his presentations to pension managers from coast to coast. Even the lawyers in his own firm who were used to his manic pace marveled at his energy. Under the new rules, being first to the courthouse wasn’t enough. Judges would determine the counsel of record in class action fraud cases, and they usually picked the law firm with the most juice, the most expertise in the particular case, and—more than anything—the law firm that represented the client or entity that had lost the most money.
And a lot of money was out there to be lost.
Hundreds of billions of dollars were in play. Miles of fiber optics being laid daily, much of it fueling a dot-com boom for which Lerach expressed early and loud skepticism. “Dot-con,” he would come to call it. Emerging permutations of the telecom industry and information technology grafted themselves into the much-heralded New Economy. The stock prices of these start-ups floated like snowflakes, and price-earning valuations defied gravity. As Wall Street speculated wildly, new classes of victims with deep pockets would soon emerge—Lerach could just feel it. And so he began to cultivate the fertile fields of a new prospective turf. Once Lerach controlled market share, and once fraud arrived on the backs of new companies but under the same old skins of greed and self-dealing, lawyering would follow as sure as “night follows day.” That’s what he promised his colleagues in San Diego and New York.
Circle of Greed Page 31
