Circle of Greed

by Patrick Dillon

  Sneed’s reading of the new law, he continued, meant that Lerach’s main named plaintiff, Deanna Brody, had not met the threshold required of the 1995 securities law:

  a plaintiff must provide, in great detail, all the relevant facts forming the basis of her belief. It is not sufficient for a plaintiff’s pleadings to set forth a belief that certain unspecified sources will reveal, after appropriate discovery, facts that will validate her claim. In this case, Brody does not include adequate corroborating details. She does not mention, for instance, the sources of her information with respect to the reports, how she learned of the reports, who drafted them, or which officers received them. Nor does she include an adequate description of their contents.

  Of course, as Judge James Browning pointed out in dissent, there was a reason Lerach’s complaint lacked the specificity Sneed was demanding: the plaintiffs hadn’t been allowed to do any discovery. If Sneed’s decision was taken to its logical conclusion, no corporate fraud case would ever be made unless the corporation voluntarily availed plaintiffs’ attorneys of incriminating evidence.

  “Congress plainly intended the Reform Act to raise the pleading standard … but did not intend to restrict the evidentiary bases from which the inference of scienter might be drawn,” Judge Browning wrote. “By holding to the contrary, the majority raises the pleading bar higher than that envisioned by Congress, and places the Ninth Circuit at odds with both the Second and Third Circuits.”

  As far as the technology companies were concerned, this discrepancy worked in their favor—more securities class action suits were filed in the Ninth Circuit than anywhere else. “It’s a blockbuster decision,” gushed Shirli Weiss, a San Diego litigator who had often represented defendants sued by Lerach. Repeating Sneed’s rationale, she added, “The decision requires that plaintiffs state the underlying facts, documents, and sources of information … it prevents plaintiffs from alleging fraud by hindsight.”

  Hindsight, my ass, thought Lerach. This decision all but shut the door to anyone on the outside looking in. The law, as interpreted by Sneed, required plaintiffs to state exactly what they were looking for and why before they could take the crucial next step in discovery. Further, according to Sneed’s ruling, the plaintiffs would have to reveal confidential sources, something not specifically called for in the 1995 act. Sneed had turned the 1995 PSLRA into a corporate protective order. Lerach found the opinion so broad, almost punitive, that he wondered whether Judge Sneed had an ulterior motive.

  Before long he learned something that only increased his suspicions. On July 20, eighteen days after his devastating defeat, Lerach read in The Wall Street Journal an earthshaking announcement by a Silicon Valley giant. A group president from Lucent Technologies, Carly Fiorina, had been named CEO of Hewlett-Packard, making her the highest-ranking—and highest-paid—female executive in the world. It was reported that her compensation package (salary and stock) approached $90 million. Lerach also read with interest about the CEO’s previous tenure as an executive at Lucent, a spin-off of AT&T and a company Milberg Weiss had sued successfully for $500 million. There were varying reviews of her performance, including some suggesting that she had been forced out. More to the point, these news reports indicated that her compensation package began in April 1999, four months before she had taken the HP job.

  Standing alone, this information would have aroused Lerach only to file it away for a time when HP’s financials started to slip. Then he noticed something in her biography that leaped out at him. She was one of three children of Judge Joseph T. Sneed III, a member of the U.S. Court of Appeals for the Ninth Circuit.

  Lerach took in a deep breath, contemplating the implications. Here was a person negotiating a landmark payday as head of an industry giant—a company that had filed an amicus brief as an American Electronics client against his plaintiffs in the SGI case—a case her father was hearing. Tracing back, it appeared that Fiorina and HP had been negotiating while her father was deciding the SGI case. “Guess which law firm negotiated her deal—Wilson Sonsini—the same guys who were defending Silicon Graphics,” he said aloud. “The law is supposed to protect people from this. Judicial proceedings are supposed to be fair. The law requires a judge to disqualify himself from hearing a case if his impartiality might reasonably be questioned.” He could feel his blood pressure rising. “No disclosure was made. Come on! This guy had no business deciding this case.”

  He shouted for a clerk. Get him the rules on civil procedure governing recusal. It didn’t take long. He read it out loud. “The law requires him to disqualify himself …” By now a small crowd was gathering inside and outside his office. “And, get this: even an adult child living outside of the judge’s home … if that child has an interest that could be substantially affected by the outcome of the proceedings … This is mandatory. He should have recused himself!”

  One of the young attorneys wondered, was this grounds for appeal? Lerach was incredulous that such a foolish question would come from one of his own team. “Of course!” He ordered his troops out and shut the door. Then he called Mel Weiss.

  “Here’s how we got screwed,” he told Weiss. “If I were an appellate court judge hearing arguments in a case where lawyers arguing for the company that had gotten my daughter an $80 million to $90 million package from one of the highest-profile public companies in America, I would be prone to decide the case the way the lawyers wanted me to, my daughter wanted me to, and the company she led wanted me to. That’s human nature, right? That’s also why we have recusal rules. This is a tainted precedent.”

  “Are you saying we should go after a judge who has actually been one of the more favorable to us on that bench?” Weiss said. “Or are you practicing some sort of editorial that will have people accusing us of sour grapes?”

  “But this is so corrupt,” Lerach tried to argue. “The legal system is intrinsically corrupt. Financial interests are so pervasive. They impact everyone, even the judges …” He wanted to appeal.

  “If we do, we’ll trigger a firestorm of resentment from judges,” Weiss said firmly. “We can’t afford this. We’ve already brought so much attention on ourselves.” Weiss then got quiet. Lerach knew the message implicit in that silence. “Hold your fire.”

  THE NEXT MORNING, JULY 21, 1999, more distressing news arrived on Lerach’s front stoop. He was reading the Los Angeles Times when he saw this headline: “Former Doctor Is Convicted in Art Fraud.” Quickly, his eyes advanced through the story:

  A former Beverly Hills ophthalmologist was convicted Tuesday of federal charges that he orchestrated the theft of two paintings from his home to collect an insurance windfall in a case that shocked the nation’s art circuit … Steven G. Cooperman, 57, who has become notorious as a plaintiff in dozens of insurance and securities lawsuits, sat stone-faced as a judge read the verdicts.

  Lerach swallowed hard and read on. “He was free on a $1 million bond late Tuesday, but prosecutors were seeking to increase his bail to $10 million. He faces up to 138 years in prison when he is sentenced October 18.”

  Lerach didn’t have to read any further. The implications were obvious. If ever there was a scoundrel ripe for flipping into a government witness, it was Steven Cooperman. He called New York and delivered the news to Mel Weiss. “When was the last time we paid him?” Lerach asked. Weiss didn’t know. He soon found out. The last check—one for $145,305 in the Community Psychiatric Case in California—went out on February 2 of the current year. Too close for comfort, Lerach thought, grateful that he was no longer Cooperman’s handler. Then another thought crept into his mind: this was one more wake-up call to revisit separating himself from the firm of Milberg, Weiss, Bershad, Hynes & Lerach.

  STEVEN COOPERMAN, MEANWHILE, had posted a $10 million bond and returned to his Connecticut estate, now frozen with his other assets as Richard Robinson had announced that the government would seek more than $12 million in restitution. Still seething over his fines and conviction, Cooperman added to his leg
al team Russell Gioiella, a criminal defense lawyer from New York.

  Looking at the number of years Cooperman appeared to be facing and the short time until his sentencing, Gioiella asked the legal equivalent of a Hail Mary pass: “Is there anything, anything you might be able to tell the government to help your case?”

  There was indeed, Cooperman told him without hesitation.

  “It better be good,” Gioiella replied. “Because they won’t accept peanuts.”

  Cooperman said it would be good. Could they meet the following day in person? What he had to say, he didn’t want to say over the telephone.

  TWO WEEKS LATER, in federal district court in San Jose, California, John Torkelsen stated under penalty of perjury that he had appeared as an expert witness in an earlier securities case, Provenz et al. v. Miller et al., a lawsuit whereby plaintiffs alleged that the defendants had exaggerated sales in order to inflate earnings and influence higher stock prices while selling off their shares. Ironically, the defense had prevailed and Torkelsen had not earned his fee. Nonetheless, he stated under oath that he had appeared for the plaintiffs’ attorneys, Milberg Weiss, in the case pursuant to a “non-contingent engagement by the plaintiffs’ counsel.”

  In fact, the opposite agreement was in effect.

  Torkelsen by now had become inured to duplicity. Beginning in 1993, when he had gotten into the “independent”-expert-witness-for-hire business, he had submitted more than $60 million in bills to plaintiffs’ class action law firms, inflating them by nearly $8 million. Now he was attempting another audacious scam. His investment firm Acorn Technology Fund was raking in millions from the SBA to help start small businesses. In fact, the businesses it was helping were other Torkelsen ventures—SemiSystems and TyreLynx. Still another Torkelsen business, Princeton Technology, was inflating bills to SemiSystems. John Torkelsen’s circle of greed was indeed a self-contained loop that curved back into his own bank account. Before his chicanery was discovered, he and his wife and their son Leif Torkelsen fraudulently obtained $32 million in government funds for companies they controlled, funneling at least $5 million to themselves. Torkelsen, his wife, and their son were engaging in the very crimes of self-dealing that he had testified about in court concerning the level of harm caused by securities fraud.

  It would take years for the government to catch on. When it did, Torkelsen would be caught in the vise grips of the law—and would pay dearly for his sins. Having already been convicted of driving under the influence three times, divorced by his wife (who turned witness against him), bankrupt and still owing huge back taxes, and facing tax fraud charges, he would become a subject of intense interest for the federal investigators who held his fate in their hands.

  Torkelsen didn’t hold many cards, but he did hold one: in his possession was a damaging document prosecutors were seeking, the final settlement agreement between Milberg Weiss and Princeton Venture Research, Torkelsen’s consulting firm. It codified, at least in the minds of the law firm’s partners, their remaining obligations under its contingency agreement with the celebrated expert witness. The document insulated Milberg Weiss from certain monetary demands made by Torkelsen at the same time that it compromised Torkelsen: he had denied, under oath, the main point of the memo—that he was, indeed, paid on a contingency basis for his testimony.* Soon Torkelsen would be confronted by a conflict. Either he would cooperate in a complex probe of fraud on the part of well-known securities lawyers—or spend a long time in prison.

  By 1999 the traditional tools of the Milberg Weiss trade—the plaintiffs whom the firm could unleash at a moment’s notice, and their referring, intermediary attorneys—were concentrated under the supervision of the New York office, tended to by Dave Bershad, Steve Schulman, and Robert Sugarman. Three plaintiffs had established themselves as the firm’s premier claimants: Seymour Lazar, through his attorney Paul Selzer of Palm Springs; Howard Vogel, who resided in New Jersey and Florida, through his attorney Gary Lozow of Denver; and Cooperman, now living in Connecticut, through his attorneys James Tierney and Richard Purtich of Los Angeles.

  The big three received nearly $12 million over the years, sometimes in large lump-sum payments. A secondary group of premier plaintiffs included Bruce Bjork, Cooperman’s brother-in-law; his friends Mel Kinder and Ronald Fischman (Lerach referred to Cooperman, Kinder, and Hirschman as “the Beverly Hills coven”); and Paul Tullman, a former Milberg Weiss partner turned stockbroker, who was supervised and paid by Sugarman. All this was transpiring notwithstanding the fact that the PSLRA had explicitly made such payments illegal. The New York partners had agreed to Bill Lerach’s warning delivered in 1996 at the Boulders, but that was an easier admonition to make than to follow. Steven Cooperman, for one, was not someone who would stand idly by while someone shut off the spigot.

  There was no civil lawsuit such as Silicon Graphics to adjudicate these payments, no Judge Sneed who could employ legal language to suspend these referral fees simply because they were not part of the public record—not yet, anyway. Out in Los Angeles, however, a painstakingly meticulous federal prosecutor would soon know more about Milberg Weiss’s complicated and long-standing system of kickbacks to named plaintiffs than all but a handful of the firm’s senior partners.

  * The agreement stated: “No fees or expenses are payable to PVR unless and until and only to the extent or in the amount the court overseeing the firm of Milberg Weiss Bershad Hynes and Lerach in which PVR rendered services to the firm approves and authorizes payment of PVR’s fees and expenses, and such order has become final, is not subject to any pending appeal and has not been modified; and the PVR fees and expenses awarded and approved by the court are actually paid to and received by Milberg Weiss Bershad Hynes Lerach.”

  21

  LET’S MAKE A DEAL

  The first signal arrived with what federal prosecutors refer to as a “soft call.” It reached assistant U.S. attorney Richard Robinson in Los Angeles in early August of 1999. The caller identified himself as Russell Gioiella, a New York attorney with a client who had recently been convicted of fraud. Robinson didn’t recognize the attorney’s name, but he knew the drill.

  “Would the government be interested in information my client might be willing to offer?” the lawyer wanted to know. The prosecutor played along, steering the conversation in a direction that would compel Gioiella to identify his client. Eventually he disclosed the name. He was representing Steven Cooperman. Robinson winced, even though he’d been half-expecting this call. Cooperman, who was scheduled for sentencing after being convicted of art fraud, was facing ten years in prison. The prosecutor’s first thought was that Cooperman was an odious scam artist, hardly credible. Still, he invited Gioiella to continue. And the attorney obliged. If his client was willing to disclose information about another fraud involving millions of dollars, would the government be interested?

  Without committing, Robinson asked: “Would you and your client be willing to come to Los Angeles for a meeting?”

  Gioiella hesitated, and Robinson guessed he was conferring with Cooperman. Then he heard, “Yes.”

  BILL LERACH WEIGHED his options. Contacting Cooperman was out of the question. Besides, the money from the firm had gone to Jim Tierney in the form of attorney referral fees. Nothing illegal about that, at least on the surface. Besides, Dave Bershad had been in charge of the payments. Steve Schulman had been in charge of Cooperman. Just keep your mouth shut, Lerach reminded himself. He would do what came easily to him—submerge himself in his work, scouting new cases, and managing them to the brink of trial or settlement. And at the end of each day, he looked forward to filling his Dixie cup with Scotch and driving north to the Tuscan-style villa that he and Star and their son, Dillon, now occupied among equestrian spreads and orange groves in gentrified Rancho Santa Fe. Lerach made a point of arriving in time to patrol the terraced grounds with his dogs, stopping to nip a blossom here and there and making mental notes where to add new citrus or flowering plants, what to remove and
where to transfer other vegetation. He loved the lapping sound of the huge Italianate fountain that graced the veranda, and he loved the smell of the blossoms in season. He loved the smooth, shiny black and dark green soapstone Shona art figures, some as high as six feet, imported from Zimbabwe. They lent a fantastic aura to his property.

  Just the year before, when Bill Clinton arrived for a fund-raising lunch, the president had been visibly taken with one piece of the African art, a life-size statue of a woman on her knees leaning backward. Without warning, the president strode over to the figure and placed both hands on the object’s chest. To the dismay of the agents in his Secret Service detail, not to mention the astonishment of his hosts and their guests—the Monica Lewinsky scandal had broken only weeks earlier—Clinton kept his hand on the statue’s breasts, gushing in that famous Arkansas drawl: “This is really, really nice.”

  For all of that, only one other encounter (until he learned of Cooperman’s conviction) had actually unsettled Lerach here in his arboreal enclave. That was the ubiquitous presence of his neighbor Gerald Parsky. Also an attorney, Parsky had made a fortune as chairman of a Los Angeles–based investment company. He was a prominent California Republican and had served four Republican administrations. Parsky was rumored to be organizing the California effort for the 2000 presidential campaign of Texas governor George W. Bush. Lerach had been peeved, not amused, when on a previous Clinton visit Parsky’s wife had puckishly posted a “Dole for President” sign on the couple’s front lawn in view of the motorcade.

  More to the point, Parsky had campaigned for Pete Wilson, and when Wilson won the governorship, he’d appointed Lerach’s neighbor to a twelve-year term as a Regent of the University of California. Currently Parsky was chairman, holding considerable clout over the largest public education system in the world, including its multibillion-dollar employee pension plan. More than once Parsky had signaled his disdain for Lerach’s politics and his law practice. As neighbors, Lerach was grateful that ample acreage separated them, but with the Regents of the University of California as a potential client, Lerach couldn’t look across his own orange grove toward his neighbor without feeling anxious that Parsky might be an obstacle.