On Wall Street that spring, a trader at Alliance Capital Management placed a big bet on behalf of the state of Florida pension fund. With a series of keyboard clicks that would continue throughout the spring and summer of 2001, he committed the fund to 7.7 million shares of Enron stock (a transaction that would lose $325 million within the year). Another trader, this one at Amalgamated Bank, the nation’s largest union-owned savings institution, made a series of purchases for 115,000 shares. In Oakland, California, a financial manager in the office of the treasurer of the 180,000-member University of California Retirement Fund electronically purchased 200,000 shares of Enron stock through an index fund at an average price of $73 per share. This was just months after a portfolio manager in the same office, alerted by Enron’s ebullient reports that were echoed by the analysts, had clicked on ENE, the Enron ticker symbol, and electronically purchased 1.5 million shares of Enron stock at $70 per share. These transactions, and others like it, would ultimately cost the fund nearly $150 million.
Other public employee pension funds would join the Enron financial parade. The state workers of Georgia invested enough to lose $127 million. Within a year, so did those in Ohio ($114.5 million), New York City ($110 million), and Washington State ($103 million). CalSTRS, the pension fund for California schoolteachers, would lose $49 million. CalPERS, the pension fund for California state employees, would lose $40 million on a bogus Enron energy project. John Zegarski, a manager of construction facilities for Enron Broadband, would be one of more than 10,000 Enron employees whose 401(k) retirement accounts were inextricably linked to Enron’s fortunes. During the first quarter of 2001, using the company’s human resources accounting, his 401(k) manager would purchase 500 shares at $84.50 per share.
Enron’s stock rose by nearly $15 per share, matching its last great peak at $84 a share, on January 2, 2001. Between that date and the end of the month, Enron insiders unloaded 1.36 million option-shares for $82 million worth of profits. Then the company began its rocket ride into bankruptcy.
Four months later, on August 15, and less than one month after Enron was named the seventh-ranked company among the Fortune 500, the company issued a press release. Jeffrey Skilling, who had been named CEO in February, would be leaving the company “for family reasons.” The announcement escaped no one’s notice. Earlier reports had estimated that Skilling’s take-home for the year would exceed $136 million with a combination of stock sales, salaries, and bonuses. Ken Lay would earn more than $184 million through the same stock sell-off and salary and bonuses. Andrew Fastow, the Enron CFO, would earn $33 million through stock sales, another $30 million through internal partnerships, and $3 million in bonuses, before announcing that he too would be resigning.
“These guys don’t quit for family reasons,” Bill Lerach told his colleagues at a meeting in his San Diego office. “Let’s start digging.”
Within weeks the stock had taken a predictable tumble and was still falling when Ron Luraschi, a senior vice president at Amalgamated Bank in New York, received a phone call from Lerach. The California lawyer revealed that he had done his homework, noting to Luraschi that Amalgamated had been founded by garment workers in the 1920s and that, after being hit hard by the Depression, its succeeding generations of officers had carefully monitored its portfolio. Then he got to the point of his phone call: “Do you have a position in Enron?” Luraschi replied in the affirmative, noting ruefully that as of that day Amalgamated’s Enron holdings were down $20 million.
Lerach asked whether the bank would be interested in taking the lead in a securities class action against Enron and its enablers. Luraschi was certainly inclined, although he’d need to run it up the flagpole at Amalgamated. Lerach understood that but informed Luraschi that time was of the essence. He left the banker with one final thought. “This case will dwarf Lincoln Savings,” Lerach said.
Within a short time Luraschi returned Lerach’s call. Amalgamated was on board. Lerach reached for his bullhorn, stepped into the hallway, and announced an all-hands meeting. When enough of his colleagues had assembled, he told them what had just transpired and announced what he intended to do. “We’re going to take on just about every Wall Street bank and some of the biggest law firms in the country,” he said, his face glowing with glee.
Already Kathy Lichnovsky had commandeered a conference room where the team would set up operations. Within days it would be endearingly dubbed the “war room,” as a palpable current of energy coursed through it and out into the hallways and offices of the firm. To Lerach, these times were always the best, these dizzying, almost giddy moments, when the mission was understood by all and the battle flags were struck, when the adrenalin and the camaraderie were running high, no blood yet shed over a crucial and costly mistake.
For the moment, the new big client model appeared to be working—the “Get Lerach Act” would only make Milberg Weiss even richer. Because of the scale of the Enron case and because of the competition that he knew he would face handling this litigation, Lerach would be spending twelve hours a day hunkered down in the firm’s war room. He demanded that his staff keep pace as he reconstructed Enron’s malfeasance with his patented multicolored timeline, the visual aid that had impressed so many judges and juries—and defense lawyers who urged their clients to settle when they saw it. He cajoled his staff into unearthing vast numbers of duplicitous Enron public declarations and glowing analyst statements. He demanded well-researched legal citations that would sharpen his points of attack in the legal complaint, whose preamble started with a quote from a December 2001 Fortune magazine article: “Start with arrogance. Add greed, deceit, and financial chicanery. What do you get? A company that wasn’t what it was cracked up to be.”
Nearly eighteen months later, when Lerach had finished writing the complaint and filed it on May 14, 2003, the document would run to a length of 653 pages. Kenneth Lay, Jeffrey Skilling, Andrew Fastow, and other officers and directors would have already been indicted on a combined 124 counts, with multiple charges ranging from securities fraud, to money laundering, to insider trading, by a federal grand jury in Houston, and separate trials, criminal and civil, were scheduled in the same city where Enron had ruled, and where 20,000 Enron employees were out of work.
In the meantime the attorneys working with Lerach dared not complain about the hours and the pace, or his nonstop demands—nor even that Enron and Bill Lerach were ruling their lives. They knew, as did their boss, that for a plaintiffs’ lawyer, this was a case for the ages.
Eventually Milberg Weiss would accrue costs totaling $130 million in the Enron litigation. That staggering sum came in the form of equivalent billable hours, payments to outside counsel and outside experts, and out-of-pocket expenses associated with essentially setting up a satellite law firm in Houston. Their fee stood to be many times that amount, of which the partners and associates working feverishly on the Enron case were keenly aware. What none of them knew, however, what none of them could have known—including Bill Lerach himself—was exactly what the senior San Diego partner would have to do to make sure that the firm realized this windfall. If anyone had an idea about that, it was Richard Robinson, an honest, if sometimes timorous federal prosecutor who had come to realize that Steven Cooperman represented the tip of an iceberg—an iceberg that now lay in the path of the good ship Milberg Weiss.
* Lerach has denied paying Cooperman. However, prosecutors located evidence in Lerach’s handwriting, convincing them the attorney did pay Cooperman.
22
THE HUNTERS AND THE HUNTED
On Tuesday morning, January 22, 2002, a white van parked in front of the Bob Casey Federal Building on the northeast side of Tranquility Park in downtown Houston. Three men and one woman wearing dark business suits emerged. One was Bill Lerach. The others were his law partners Paul Howes, Patrick Daniels, and Michelle Ciccarelli.
They were met by a scrum of reporters, photographers, television camera crews, and onlookers. After introducing themselves to the
media, Lerach reached inside the van and retrieved a large open cardboard box. Raising it over his head and then lowering it for the cameras, he announced that the contents were shredded documents—Enron documents.
“It’s a smoking howitzer! It doesn’t get any worse than this,” he called out hoarsely. “Call the cops. Something has to be done here.” This Lerachian display became one of the mighty metaphors for the Enron debacle. Lerach announced that his firm was filing a lawsuit on behalf of thousands—including Enron employees—against the fallen energy giant and its officers and directors, along with the banks, accountants, analysts, and law firms that had helped them commit one of the greatest frauds of our time. Then he and Howes and the others entered the courthouse to attend a hearing on behalf of plaintiffs whose attorneys had also filed their own complaints. Some sixty separate lawsuits were filed before a federal judge who was consolidating the complaints. At the top of the list of plaintiffs were the Regents of the 155,000-employee University of California, the nation’s largest public education institution. They, along with twenty subordinate plaintiffs and thousands of individuals, were represented in the class action lawsuit by Milberg Weiss. Just two months earlier Howes and a team of lawyers and accountants handpicked by Lerach had descended on Houston. Armed with employee names and addresses, the Milberg Weiss investigators had gone door to door seeking witnesses and evidence they might possess. The team rented suites at the Four Seasons Hotel, eight blocks from the courthouse, and set up a Houston version of the San Diego war room. One day the Milberg Weiss lawyers encountered in the hotel lobby a gathering of out-of-work Enron employees attending a job fair the company had set up.
Recognizing a serendipitous opportunity, Howes handed out business cards to disillusioned ex-Enronites. One person led to another, and finally he was introduced to Maureen Castaneda, a laid off exchange-rate analyst in Enron’s foreign investments division.
“They’ve been shredding documents,” she confided to Howes.
He encouraged her to elaborate, which she did. The shredding began just after Thanksgiving, she told him. It continued through the 2001 Christmas and New Year’s holidays, and it was still taking place when she walked out the door in mid-January.
Howes asked Castaneda if she’d managed to get a look at the documents. Yes. Ignoring company directives, she had collected boxes of shredded documents and taken them home. With no job, she explained, she had planned to leave Houston—and needed packing material. Once she began examining the contents, she noticed that some of the shreddings were decipherable. She offered to show them to Howes. They arranged a meeting in an out-of-the-way parking lot.
On January 18 Howes inspected the material. By now he’d done enough research on Enron’s chicanery to do his own deciphering. He saw references to Jedi II and Chewco and knew these were the off-the-books partnerships set up by CFO Andrew Fastow and facilitated by the banks from which conspirators reaped millions. Castaneda handed the material to Howes and, observing his euphoric reaction, offered to appear as a witness. With the partially shredded incriminating papers in hand, Howes phoned the San Diego war room to tell Lerach, who listened intently. “Paul, I really don’t care what happens to you in the next forty-eight hours,” he said, “but whatever you do don’t lose those goddamn documents.”
Three days later, on January 21, Lerach arrived in Houston and got his own view of their bombshell. Since the 1995 PSLRA had raised the barriers of pretrial discovery for plaintiffs, requiring them to show specific allegations when petitioning the court for certification, having actual evidence of malfeasance in hand was a rare bonanza. Lerach was so elated, he called Christopher Patti, the counsel for the University of California Regents, telling him of the discovery—and of his own confidence in the case he was about to make.
A MONTH AND A HALF EARLIER Lerach and newly recruited partner Byron Georgiou had attended a forum for institutional investors at the Stanford University Faculty Club. Lerach’s interest in attending the Stanford conference was threefold: size up potential business, check out the competition, and pitch his own firm. After recounting his firm’s greatest hits, Lerach mentioned that he and his colleagues were representing a New York bank that had lost tens of millions of dollars in the Enron collapse.
In his talk Lerach described putting the concepts of secondary liability to the test in securing billions in settlements from the accountants and banks that had helped Charles Keating. This made an impression. David Russ, the treasurer for the Regents of the University of California, approached Lerach and Georgiou after their presentation. The university’s losses in Enron continued to mount, he told them. “Why don’t you come up and talk to our people about getting involved in your case?”
The following week Lerach, Georgiou, and Paul Howes visited the eighth-floor offices in downtown Oakland housing more than three dozen University of California attorneys. James Holst, the university’s general counsel, and Patti, who specialized in complex litigation, joined David Russ. Patti was familiar with Lerach, having served on the losing side as a defense attorney for Apple Computer while in private practice. “They really managed their arguments well,” Patti told his colleagues before the meeting. “They are very effective lawyers.”
Lerach was highly motivated to impress them. His initial complaint, filed in federal district court in Houston, listed Amalgamated Bank as its lead plaintiff. Although the bank had purchased 115,000 shares of Enron stock and millions in debentures, its $20 million in losses was nowhere near that of several other named plaintiffs in separate and potentially competing lawsuits. The pension funds of New York and Florida had joined to file their own suit, claiming combined losses of $440 million. Although strict adherence to the PSLRA dictated that the plaintiffs with the largest losses should lead the case, the law left room for judicial discretion, based on the quality and experience of the respective plaintiffs’ legal teams. Another lawsuit filed by firms in Atlanta and Wilmington, Delaware, claimed combined losses of $300 million for their clients, pension funds in Alabama, Georgia, Ohio, and Washington State. In order to go forward, Lerach would have to land a plaintiff of sufficient size and stature to sway the judge in his favor. UC would certainly fit the bill. Presiding over the nine-campus, 183,000-student, 155,000-employee network with a portfolio of $54 billion, the twenty-three-member board of regents had not taken the estimated $150 million hit from Enron lightly.*
Lerach outlined the case to be made, reiterating his theories of scheme and secondary liability, as he had done at Stanford. There was a chance that with UC joining the lawsuit, he could line up other plaintiffs in addition to Amalgamated in a consolidated attack. In legal briefs—and press conferences—Lerach and his partners would hit on this analogy: Enron and the banks jointly planned the bank robbery—and the banks not only provided the getaway car, they drove it. To impress upon his potential clients his grasp of the case, Lerach unfurled his patented graphic, a multicolored taxonomy of Enron’s collapse during the class period, beginning in August 1998 and peaking in December 2000 when the stock reached $96 a share, to its crash just twelve months later. The university, he vowed, had a chance not only to recoup its losses but also to realize billions more. Sweetening the presentation, Lerach reminded the UC treasurer and attorneys that his firm, as it did in all cases, would litigate on contingency, a significant factor given the length of time involved and the furious opposition the plaintiffs were certain to face.
After the Milberg Weiss lawyers thanked their hosts and left, the UC colleagues recapped the presentation. The firm had the resources and was probably the best equipped to meet the challenges of a long legal battle. But would it be a proper partner? Would it accept university oversight? The next day Lerach sweetened the pot for the university lawyers—and laid any doubts about his firm to rest. In a conference call with Patti and Holst he offered to discount the firm’s fees—8 percent on the first billion dollars in damages, 9 percent on the second, and 10 percent on the remainder. “I am confident we can ge
t more than three billion dollars for you,” he added. Lerach also stressed to his potential clients that the clock was ticking in Houston. The decision on which law firm or plaintiffs would lead the case would be made soon.
On Friday, December 21, the university announced it was joining the class action lawsuit against twenty-nine senior executives and board members of Enron, the international accounting firm of Arthur Andersen, and major Wall Street banks. So when Lerach reported to Patti on January 22 that he and Howes had highly incriminating evidence in their hands—the shredded documents—and that he believed the judge would name them lead plaintiff, Patti was greatly relieved. It helped ameliorate a nagging issue regarding the retaining of Lerach and his firm: throughout the preceding autumn, rumors circulated that a criminal grand jury was convening in Los Angeles. The Los Angeles Daily Journal, a legal newspaper, reported that the target of their inquiry was the law firm of Milberg, Weiss, Bershad, Hynes & Lerach.
ON THE THIRD FLOOR of the federal building in Los Angeles, still another war room was under construction. Far more spartan than its counterparts in San Diego and Houston, this space squared by 120-foot walls, under a dimly lit, low ceiling was designated to house the evidence Steven Cooperman had been providing, along with many other boxes of records and memos and court cases involving Milberg Weiss and possibly other serial plaintiffs. Cooperman had been making frequent trips from a federal prison hospital on the grounds of the former Fort Devens Army Base outside Ayer, Massachusetts, where he had begun serving his time following his sentencing on July 2, 2001. Facing the possibility of ten years or more behind bars, Cooperman had received a relatively lenient sentence of thirty-seven months. Terms of the sentence rendered by U.S. District Court Judge Edward Rafeedie were kept under seal so as not to tip potential defendants in the ongoing investigation of the extent of Cooperman’s allegations.
Circle of Greed Page 37
