Making good on their end of Lerach’s promise, public pension funds acted as lead plaintiffs in fourteen securities lawsuits in 1998 and seventeen in 1999. The number would rise farther and faster in the coming years.
Getting clients was one thing. But even as he was realizing new opportunities, Lerach and his fellow class action securities lawyers would encounter one roadblock after another resulting from the PSLRA. One experience in particular set the tone for a bitter war between plaintiffs’ attorneys and district appellate courts that would last well into the coming decade. It was a case that previously would have been a slam dunk—the kind that would have been settled so fast, it probably wouldn’t have made the newspapers outside Silicon Valley.
The case involved a company called Silicon Graphics Inc. (SGI). Based in Mountain View, California, SGI produced high-end, commercial workstations featuring 3-D graphics, with uses ranging from health care diagnostics to digital graphics used in the entertainment industry. In the amped-up early 1990s, SGI was a buzz company, and its stock prices reflected its prominence. At its peak the corporation commanded $7 billion in market capitalization. The problem was competition. Personal computers that were far cheaper, with fast, complex computing capabilities, including high-speed video processing, had hit the market. By mid-decade SGI’s sales were in a funk. Desperate for fresher products, SGI announced it was on the brink of developing “must have” industry-changing components. Accordingly, its stock zoomed from $20 to $50 per share. But no further product announcements were forthcoming.
In the fourth quarter of 1996 SGI starting losing money. Its stock plummeted. In November 1997, a year after he had helped defeat Lerach’s Proposition 211, SGI’s chairman Edward R. McCracken resigned; Gary Lauer, head of the company’s world trade division, stepped aside as well. The company laid off more than one thousand people—10 percent of SGI’s workforce. Prior to the stock collapse, with no new products actually in the pipeline, SGI executives, including McCracken and Lauer, sold 300,000 shares of SGI stock, generating $7.4 million for themselves.
Although Milberg Weiss was not the first to jump on the case, Lerach’s quick maneuverings put his firm in the position of lead counsel. In short order Lerach’s legal team discovered evidence suggesting that SGI’s former and current officers had tried to negotiate an exchange of convertible stock for $200 million worth of outstanding debentures. “To do this, the officers had to artificially inflate the price of its stock,” Lerach wrote in the complaint. Once the debt was exchanged, insiders were able to sell their stock, he wrote. He took note of a company announcement that its fourth-quarter fiscal 1997 results showed improvement over the previous five quarters. But it didn’t take long to discover the reason: the company had booked orders from future quarters against its fourth-quarter results. Voodoo accounting.
The class action lawsuit against SGI on behalf of stock purchasers was filed in the federal Northern District of California on October 17, 1996, and it drew attention nationwide. This lawsuit would be the first of its type since the 1995 PSLRA. While the evidence mirrored dozens of previous, successful cases, the barriers for introducing evidence had been substantially raised. Lerach and his legal team quickly learned just how high.
Milberg Weiss partner Len Simon argued the case on behalf of the plaintiffs. He was opposed by an old foe, Bruce Vanyo of Wilson Sonsini. The judge was Fern Smith, a Stanford Phi Beta Kappa and Stanford Law graduate, appointed by President George H.W. Bush. Appearing in court to argue against the defense’s motion for a summary judgment dismissing the suit, Simon presented a straightforward case. He argued that the lawsuit should proceed because “based upon a review of SGI’s SEC filings, securities analysts reports and advisories about the company, press releases issued by the company, media reports about the company, and discussions with consultants,” SGI executives had committed fraud for their own enrichment. Vanyo’s defense also was relatively direct. There was no conscious intent to misrepresent, he contended. Judge Smith agreed, saying “motive, opportunity, and non-deliberate recklessness may provide some evidence of intentional wrongdoing, but are not alone sufficient scienter (knowledge of wrongdoing) unless the totality of the evidence creates a strong inference of fraud.”
Simon was mortified. Previously, you had merely to get inside a company’s financial statements and records to prove your case. Now the judge was saying that you had to get inside the defendant’s head.
An appeal was filed before the Ninth Circuit. Based in San Francisco, the district’s jurisdiction covered nine western states ranging from Alaska to Hawaii to Montana to Arizona, with California at the center, making it the largest district in the nation. Twenty-eight judges sat on its benches. The three-judge panel chosen to hear this appeal was composed of Judge Joseph T. Sneed, James R. Browning, and a district judge assigned to hear the appeal named John S. Rhoades.
Sneed was considered the strongest voice of the three. In the past he had not shown overt hostility to plaintiffs’ class action suits. A 1947 graduate of the University of Texas Law School, he worked summers as a cowboy on his uncle’s ranch in the Texas panhandle. A brilliant student, he was offered a teaching job at UT Law School and became an associate professor in 1951, spending ten years on the faculty before moving to Cornell Law School, where he taught until 1962. From Cornell he moved to Stanford Law School, then became dean of the Duke University Law School. In 1973 he moved to Washington, to join the Justice Department, serving as deputy attorney general. Within the year President Richard Nixon appointed him to the federal appellate bench.
The case had been submitted and argued over two days in June 1998, with various interest groups, most prominently the American Electronics Association, representing three thousand high-tech companies, weighing in on behalf of the defendants. It would be more than a year before the court would rule. In the meantime William Lerach had pension fund managers to woo—and an unpleasant date to keep in the city of Chicago.
19
VENDETTA
The road to the federal courthouse in Chicago had taken nearly six years and a path through a federal courtroom in Arizona, where the case of Lex-econ v. Milberg Weiss Bershad Hynes and Lerach for “malicious prosecution, abuse of process, tortious interference (intentionally damaging another’s business prospects), commercial disparagement and defamation” was heard and dismissed by U.S. District Court Judge John M. Roll.
Alan Salpeter and his colleagues Michele Odorizzi and Mark Hansen had desperately tried to get their case out of Phoenix—out from under the shadow of Charles Keating and Lincoln Savings. Salpeter had initially filed his lawsuit in Chicago, but Jerold Solovy, the wily chairman of Jenner & Block, whom Milberg Weiss retained as counsel, persuaded the federal court in Arizona to transfer the case to itself, arguing successfully that since Arizona was where “a massive document depository is located,” it would be more efficient to hear this case where the documents were easily obtained and where there was no need to bring a new judge up to speed.
That was precisely what worried the Lexecon lawyers and why the legal team appealed the transfer to the Ninth Circuit Court of Appeals, but they didn’t prevail. Only appellate court Judge Alex Kozinski dissented, warning that self-transfer constituted “a remarkable power grab by federal judges” and exceeded the authority Congress had granted the courts. Salpeter was no longer on the case. His colleague Mark Hansen, a Harvard Law graduate and former federal prosecutor, petitioned the U.S. Supreme Court for a hearing. On March 3, 1998, in a unanimous opinion written by Justice David Souter, the Supreme Court agreed with Hansen—and Kozinski—ruling that the case could be refiled in Chicago. A University of Chicago alum drew the case. U.S. District Judge James B. Zagel, a fifty-seven-year-old graduate of Harvard Law, had been director of the Illinois State Police before President George H.W. Bush appointed him to the federal bench. Alan Salpeter had tried numerous cases in his court.
“We have a good rapport,” Salpeter told Fischel over lunch at the exclusive Sta
ndard Club in downtown Chicago.
At first Fischel had been puzzled as to why Salpeter had telephoned him. “I thought you had abandoned me,” he told the attorney.
Salpeter said he had only decided not to lead the case in Arizona. Now that it was back in a more favorable venue, he was set to go. Quickly, he presented the game plan. It was simple. “I think we can show that in your case, we had lawyers thinking they could act above the law,” Salpeter said. “If we can show this, we’ll win.”
Although he thought it important to convey confidence to Fischel, later, as he was preparing for trial, Salpeter felt a private sense of dread. I’m taking on the most powerful class action lawyers in America, he thought. If I lose this case, Lerach will be coming after me for the next twenty years.
Now that the case was headed for a showdown in Chicago, Mel Weiss and Bill Lerach were experiencing their own foreboding. “We do not want to get into a jury trial,” Weiss had more or less castigated his junior partner during one of their daily strategy phone sessions. “We cannot afford to lose this. Get us out.”
But there was no way.
JUST WEEKS EARLIER, on January 15, 1998, with Janet Mangini standing beside him, Representative Henry Waxman, a California Democrat, held a press conference in Washington. Holding sheaves of documents before television cameras, Waxman said, “Our worst fears about what the tobacco companies might be doing to get kids to smoke were justified.”
Mangini, Pat Coughlin, Bill Lerach, and the legal team from tiny Bushnell, Caplan & Fielding had imposed their demands on giant R.J. Reynolds. As a trial date had approached during the summer of the preceding year, R.J. Reynolds CEO Steve Goldstone (the same lawyer who had been sent packing from the Nucorp case) caved under mounting pressure. But if the company wanted to settle, it would have to do much more than make Joe Camel go away. It would have to release to the public its previously secret documents detailing studies about youth smoking and its campaign to target youth smoking. This it consented to do. The company also agreed to spend $10 million in California to educate young people on the health hazards of smoking.
That sounded like a lot of money, but by way of comparison, when the accounts were finally settled, Milberg Weiss would end up expending more than 75,000 attorney hours and nearly $30 million on the case. Henry Waxman, noting that he didn’t use the term lightly, had publicly called Pat Coughlin—along with Mangini, Jon Cuneo, and Louise Renne—a “hero.”
Coughlin had committed six years, obsessed night and day, and turned a lawsuit into a landmark cause. Yes, there was glory, as Lerach had predicted. Still, Coughlin knew, as did his colleagues in the firm, that glory was something you had to be able to afford to pursue. At times like these the tension was palpable between the Milberg Weiss partners’ idealism—using the law for justice—and their desire to use torts as a means to obtain enormous wealth. Still, Coughlin had brought honor to the firm at a time when that was exactly what it needed. How could anybody accuse Milberg Weiss of being money-grubbing scumbags, as some were fond of labeling them, when he and his team had performed such a huge community service?
If they were to take a hit from the New York partners for spending so much time for a relatively small reward, so be it, Lerach told Coughlin. If it meant breaking up the firm, Lerach ruminated to himself, maybe the path was revealing itself.
IRRESPECTIVE OF JOE CAMEL, Alan Schulman was still receiving outsize bills from John Torkelsen, and Lerach was still justifying them. The coup de grâce, at least as far as Schulman was concerned, had occurred at the end of 1997. The firm’s partners, Lerach and Schulman among them, had been hearing Torkelsen complain that he owed $6 million to the IRS, despite the millions he had been receiving from Milberg Weiss. What’s more, PNC, Torkelsen’s New Jersey bank, had contacted Milberg Weiss to report that Torkelsen was arrears to the tune of $5 million in bank loans—and had pledged as collateral $10 million in receivables from at least fifty Milberg cases that had not yet been decided. The bank had one question: was Milberg Weiss standing behind the money? Mel Weiss and Dave Bershad were stunned. They were about to receive an even bigger shock. The bank was in possession of sign-offs from Milberg Weiss indicating that when Torkelsen offered a Milberg receivable as collateral, he was able to furnish bills the firm confirmed it had received. Over his repeated objections, Schulman told Mel Weiss, Lerach had personally approved Torkelsen’s invoices.
The subsequent phone conversation between Weiss and Lerach was predictably taut. “Dave [Bershad] and I have decided to cut him [Torkelsen] off. You are not to hire him on any future cases,” Weiss demanded, barely audible, trying to control his rage.
Lerach tried to defend his friend.
Weiss wouldn’t hear of it. Then his voice turned even more ominous. “There are people at the firm who want you out,” he told his protégé. “They think you are drawing too much attention to yourself and therefore to us. They think you are destroying everything we’ve built. How can I defend this?”
“Because I bring this firm more money than all the others combined,” Lerach replied. “Because you cannot afford to lose me.”
Months later Lerach’s challenge was put to the test. “Either he goes or I go,” Schulman said, giving Weiss a simple ultimatum.
Over the next several weeks Mel Weiss seemed to turn noticeably inward, his appearance even more sullen, and his eyes more downcast than usual. Some blamed the upcoming Lexecon lawsuit. Others knew the squeeze that his two warring San Diego partners had put him in.
Just days before the firm’s annual executive committee meeting, Weiss called Bershad into his office. “Dave, I can’t do this,” he sighed, knowing his decision would cost him an able litigator in Schulman’s exit.
ELEVEN YEARS NEARLY to the day had passed since Bill Lerach last faced a jury. Now, late in the morning of March 18, 1999, in a Chicago federal courtroom before four women and five men, he was being asked questions like “Do you consider yourself a vengeful man?” and “Is ‘little fucker’ a term you use?” Even: “How much money did you earn in 1992?” A deal had been proffered at the last minute to avoid such questioning. It was his idea. Milberg Weiss would contribute $10 million to the University of Chicago’s School of Law in Fischel’s name if he would drop the lawsuit. Fischel flatly refused.
Thirteen days earlier the case of Lexecon v. Milberg Weiss Bershad Hynes and Lerach had begun in Judge Zagel’s courtroom, with opening arguments signaling that the jury was in for a fierce and nasty show. Alan Salpeter, representing Daniel Fischel and Lexecon, started by telling the jury he would present evidence that Bill Lerach and Mel Weiss had not only sued Fischel and Lexecon under false pretenses in the Lincoln case but had threatened Fischel both personally and professionally. Citing the Nucorp case, Salpeter related that Lerach had been gloating, only hours prior to the jury verdict against the plaintiffs. “Milberg couldn’t defeat Dan Fischel in a fair debate in the courtroom,” Salpeter told the jury, “so they plotted to put him and his firm out of business.”
In short, Salpeter said, this case “is about a vendetta. It’s about revenge; it’s about greed, it’s about lawyers who abused the legal system to line their own pockets, it’s about lawyers acting above the law to destroy my client.” His colleague, Mark C. Hansen, went even further, accusing Lerach and Weiss of lying and destroying and concealing evidence.
In his defense of Lerach and Weiss, Jerold Solovy rephrased a firm memo calling Fischel a “money-hungry, reprehensible slob,” saying instead: “I would call him a very neat, slick, greedy, avaricious person who ought to attend to his duties at the University of Chicago and not intrude upon this courtroom.” While conceding that the Milberg Weiss lawyers had used coarse language in conjunction with Fischel’s name, Solovy contended that in the rough-and-tumble world of litigation, epithets were not uncommon. Precluded by the judge’s pretrial ruling from showing evidence connecting Lexecon to Charles Keating—“the greatest perversion of justice,” Solovy would complain aloud he could only tel
l the jury that he would prove that at one time Milberg Weiss lawyers had good reason to include Lexecon among the defendants.
Fischel appeared first, taking the stand shortly after ten A.M. on March 9. Displaying a series of charts, he traced a sudden and then steady decline in Lexecon earnings from the time of its inclusion in the Lincoln lawsuit and beyond. Profits dropped from $17 million in 1990 to approximately $10 million in 1991, when Lexecon was first named as a defendant, he testified. Then profits continued to drop with fewer referrals and less business. As a result, he calculated a deflated price of $63 million that Lexecon finally sold for on December 31, 1998. He did not tell the jury that the purchaser was his old friend and convicted felon Michael Milken or that he had authored an apologia for Milken in 1995 entitled Payback: The Conspiracy to Destroy Michael Milken and His Financial Revolution.
Salpeter directed Fischel to recall Milberg Weiss attorney Pat Coughlin’s attempt to discredit him with the trial judge. “After the Apple trial in 1991, California law firms weren’t interested in hiring us anymore,” Fischel told the jury. “They stopped us in our tracks, they prevented us from growing in terms of profits as well as revenues, but they profited tremendously during that same period.”
In two days on the witness stand, Fischel wove a compelling narrative that withstood withering (and mostly overturned) objections from Solovy, as well as aggressive cross-examination from Ronald L. Marmer, Solovy’s partner in the Jenner & Block law firm.
Lerach had seen this movie before. To him, it was like a recurring anxiety dream, a nightmare in which you’re in a swimming pool and you can’t move, or you are being chased and your legs are too sluggish to respond. In this case, it was Lerach’s tongue that couldn’t function. He was trapped at the defendant’s table, forced to watch silently as Fischel gave answers that Lerach knew were coming, answers that in his mind distorted reality, the sort of answers that Fischel had given to cover the tracks of bandits such as Charlie Keating and Michael Milken.
Circle of Greed Page 32
