Holst said he was grateful to hear the endorsement and explained why, with the stakes so high and the politics so sticky, they needed an independent consultant.
“Do you mind if I call Bill?” Irving inquired. Holst did not mind.
“Aha,” Lerach responded with a laugh, when the judge called. “So they want adult supervision.” It was not a hard pill for Lerach to swallow. Irving had represented the plaintiffs magnificently in Lincoln, negotiating huge settlements from big, tough defendants. Lerach felt relieved to have Irving watching his back as well as the university’s and told him so.
Judge Irving called the UC counsel’s office the next day to accept their offer. He also told them he needed them to hire a team that included a bankruptcy expert, a securities lawyer, and a lawyer who happened to be an accountant. They agreed. Thus began the process of insulating the lead plaintiffs in the landmark Enron lawsuit from the very attorney who was suing on their behalf. Within the week Irving began assembling his team. Gerry Parsky in particular was pleased with Judge Irving’s choice of a securities expert, a lawyer named Robert H. Fairbank, who was considered one of the best business attorneys in the nation. Fairbank, while a partner at Gibson, Dunn & Crutcher—the old-line, Republican-heavy Los Angeles firm where Parsky had also been a partner—had specialized in “bet the company” cases. He had also been on the defense side in several Milberg Weiss lawsuits.
Within a week Fairbank and Irving identified their bankruptcy expert, Kenneth Klee, a Harvard Law School graduate who had served on several legislative panels including the House Judiciary Committee from 1974 to 1977, where he helped draft the nation’s bankruptcy code. For their accounting specialist, the team chose R. N. “Rock” Hankin, a former Price Waterhouse general partner and professor of accounting at UCLA’s school of management who was then the chief executive of a management-consulting firm that bore his name. Fairbank was well acquainted with Hankin, having used him as an expert witness against Milberg Weiss.
From the outset, Irving made it clear that the team would review, but not write, the Milberg Weiss cases against the defendants. They would also look at similar large cases—Cendant, WorldCom, for instance—and try to find valuable lessons from successes and mistakes in pleadings, legal doctrine citations, anything that would make the job of Lerach’s legal team easier and comfort their mutual clients at the University of California.
“I DON’T WANT TO use the term, but ‘penis envy,’ that’s almost what it is,” Bill Lerach was explaining to veteran journalist William Greider, national affairs correspondent for The Nation magazine. “It’s like, ‘Gee, when the CEO of that company over there is making $20 million, I ought to make $24 million.’ Then the other guy says, ‘Well if he makes $24 million, then I’ve got to make $30 million.’”
The subject of the interview was corporate greed. In the summer of 2002—with a consolidated lawsuit under way against dozens of defendants connected to Enron, with others against AT&T, Global Crossing, Qwest, and AOL Time Warner, with still another lawsuit in the final draft taking aim at Martha Stewart, and with an eye on Halliburton and WorldCom—Lerach had proudly positioned himself as America’s greatest fighter of corporate corruption, even as the U.S. attorney’s office in Los Angeles was investigating him for similarly motivated conduct.
“The CEO ultimately gets brought down by the very personality characteristics that made him successful in the first place,” Lerach explained. “How did these guys get to the point where they control a big public company? It’s not because they take ‘no’ for an answer. Their whole life has been fighting and overcoming people who say ‘No, you can’t do it, don’t do it, it’s illegal.’ These guys say, ‘To hell with you, we’re doing it, we’re getting it done, nobody can stop me.’”
Those who knew Milberg Weiss’s business practices intimately thought Bill Lerach was talking about himself when he critiqued his adversaries in this way. He emphasized to Greider, for instance, that companies such as Enron, Global Crossing, WorldCom, and Halliburton had paid millions in campaign contributions. Chief among their beneficiaries were George W. Bush and John McCain. Lerach was a major political donor himself and had been for years. Yet he made a point of outlining the daisy chain of contributions linked to policy decisions—the interlocking circles of greed that entwined the White House and offices on Capitol Hill.
Another point stressed by Lerach was more straightforward: in 2000 court awards to plaintiffs in private securities lawsuits amounted to $4.9 billion, compared to $488 million recovered by the SEC. The following year $1.9 billion was recovered by private plaintiffs’ attorneys versus $522 million by the SEC. As 2002 was shaping up, he estimated that private attorneys would win nearly $3 billion for their clients, at least twice as much as their governmental counterparts. His own firm had recovered $1 billion from Drexel Burnham compared to $650 million by the SEC. From the Washington Public Power settlement, Milberg Weiss had returned $750 million to shareholders—the SEC zero. Clients recovered $630 million from Lucent, while the SEC settled for $25 million. The message: when it came to enforcing securities laws, private attorneys delivered the goods.
If anyone needed further proof, he could now display his first scalp in the Enron litigation. On August 26, 2002, Andersen Worldwide, a Swiss-umbrella company separate from the Chicago-based firm that had audited Enron and earned $50 million a year for “consulting services,” announced it was settling with plaintiffs in Lerach’s lawsuit for $40 million. Noting that this amount was small compared to the $20 billion in estimated losses to Enron creditors and shareholders, University of California lawyer Jim Holst announced: “We regard this settlement only as a first step in obtaining recovery for the class and will continue to pursue damages from the remaining defendants.”
From Lerach’s perspective, time now favored them, as did the playing field. The “Get Lerach Act” provided that when a case went to trial, the jury could find the degree of liability of the defendants and extract awards to the plaintiffs proportionately. However, if a defendant settled early, any subsequent judgment would be discounted by the previous settlement. The incentives to settle early were now greater than before the PSLRA. As in criminal cases where sentencing guidelines punished holdouts, those who settled first now usually settled for less.
AS SHE ASSUMED HER DUTIES as the new U.S. attorney in Los Angeles, Debra Yang inherited a case that had divided her office. It was one thing to allege ethical violations against a prominent and powerful law firm. It was quite another to bring criminal charges. Where were the victims? Who was really damaged? Milberg Weiss cases had been certified by sitting federal judges. Most had settled by virtue of agreements with defendant companies outside of court or with the court’s supervision. Some awards had been returned by juries. So where was the fraud?
Explicit guidelines had been set three years earlier by then-deputy attorney general Eric Holder, outlining what could and should be considered criminal conduct by a business or corporation. In the autumn of 2002 prosecutors in the Los Angeles office of the U.S. attorney’s office were uncertain whether their budding case against Milberg, Weiss, Bershad, Hynes & Lerach or its individual partners met the Holder guidelines. One skeptic was Jeffrey Isaacs, deputy chief of the major fraud division. Isaacs was not timid. He had successfully prosecuted Credit Lyonnais for using shell companies as fronts to acquire Executive Life Insurance, for which the French-owned institution forfeited $775 million. In 1997, along with Michael Emmick, he’d prosecuted Arizona governor Fife Symington for fabricating information enabling him to fraudulently secure millions in bank loans.
Aware of the doubt about their case felt on the twelfth floor where Yang and her top deputies presided, Emmick and Richard Robinson had cast a net for more witnesses and evidence, but it was so wide they were having trouble hauling anything in. In the process, they would uncover what appeared to be similar abuses in other firms as well. “Do we want massive litigation that would be more like a government reform or do we want
a sharp and efficient prosecution?” they asked each other. For economy’s sake, the government lawyers would choose the latter, going after the firm with the greatest market share, thus sparing dozens of other firms.
So far, other than Steven Cooperman (a convicted art thief), James Tierney (Cooperman’s accomplice), and Richard Purtich (who’d helped Cooperman scam the insurance companies), the prosecutors lacked key and credible witnesses. Robinson knew that to have a winning case, the feds could not simply parade a cast of witnesses who had been granted immunity or been promised reduced sentences as incentives to testify. At some point he believed he would have to produce witnesses who had no other motive but to tell the truth. He was determined to bring the case, and equally determined to make it tight, even at the risk of being accused of overstrategizing and micromanaging, a rap leveled at him in the previous regime. He had a new boss now but lacked any feel for her patience or even her politics.
Robinson, a Democrat, knew that Lerach’s very public lawsuit against Enron and his routine denouncements of Bush and Cheney probably made the famous trial lawyer persona non grata in the White House—and, therefore, with the new leadership in the Justice Department. So any premature and unfounded prosecution would certainly bring allegations of a political vendetta. Perhaps that was the notion Lerach was already trying to plant with constant criticism of the president and vice president. Robinson wanted no part of such a debate. His best course was a careful one. Caution lent him comfort because he could easily rebut any challenge by saying that the cases he tried were complex and required meticulous assembly. No one could accuse him of rushing to judgment. He was a responsible government servant, and his integrity and therefore his self-esteem rested on the thoroughness of his preparation.
Still, three years had passed since Cooperman’s attorney had first called, offering to flip his client. Cooperman was now nearly finished serving his prison sentence. Fortunately for Robinson, however, Cooperman’s shenanigans—even while in prison—would buy the prosecution more time. Chronically ill with heart disease, Cooperman had been forging his doctor’s signature on documents required to receive disability payments—some $40,000 a month—that were routed to his wife. When the insurers began calling, Nancy Cooperman told federal prosecutors. Worse, Cooperman soon confessed, he had at times used the prosecutors as couriers to forward his fraudulent forms to the insurance companies. Robinson and Emmick were furious. The credibility of the star witness had taken another felonious dip, and their sketchy case took a step backward.
News of Cooperman’s latest antics did nothing to boost the twelfth floor’s confidence in the thirty-six-month investigation against Milberg Weiss. What’s more, Robinson and Emmick were experiencing trouble getting approval from the Department of Justice in Washington for the subpoenas they wanted issued to all the law firms that had done business with Milberg Weiss. Since this was a RICO investigation, under the Holder guidelines, “main Justice,” as the DOJ headquarters was called, had to approve all such subpoenas. “They won’t even return our phone calls,” Robinson complained to Emmick. Robinson had discovered from mining legal databases that at least two plaintiffs—Seymour Lazar and Howard Vogel—had lent their names to Milberg Weiss lawsuits many dozens of times. But court documents did not indicate whether Lazar and Vogel had been exclusively Milberg Weiss plaintiffs. The prosecutors had also unearthed a pattern of large “referral fees” to lawyers representing the two plaintiffs. Were those kickbacks? That was literally the million-dollar question. Or perhaps a better question, one that Yang and her top deputies were starting to ask, was: When to pull the plug?
Isaacs thought the questions fair. He also had an idea. For all Robinson’s strengths as a strategist and meticulous prosecutor, he sometimes was inclined to investigate to all eternity. Isaacs decided they needed some fresh legs. Emmick would soon be reassigned to the high-profile espionage-related prosecution of Katrina Leung, an accused double agent who worked for both the FBI and the People’s Republic of China. To fill the vacancy, Isaacs selected a recent addition to the office.
Thirty-nine-year-old Bob McGahan had quickly established himself trying drug, gang, and immigration cases, the assortment routinely assigned to newly hired assistant U.S. attorneys. After graduating from Georgetown Law School with honors in 1993, he’d joined a boutique Washington law firm and found himself, with growing dissatisfaction, defending wise-guy criminals, the same types he was now prosecuting for the U.S. government in Los Angeles. He yearned to work on white-collar crime, and so when Isaacs offered him a chance to fill the vacancy on Richard Robinson’s team investigating possible plaintiff kickbacks by a high-flying law firm, he eagerly accepted.
Once inside the windowless war room across from the courthouse, McGahan was quickly brought up to speed. The investigation had one eager witness (Cooperman) and two not so eager (Tierney and Purtich), none of whom would be any prize in front of a jury. Subpoenas had been issued but had yielded little. “A third-year associate in a rinky-dink law firm could destroy Cooperman on the stand,” Isaacs told McGahan. The key would be to prove the existence of kickbacks between the firm and other plaintiffs it hired. So far the only kickbacks, it seemed, had arguably been Cooperman’s to himself. Finally, however, McGahan was told something compelling. There were other suspects. Their names were mounted on the timelines taped along the wall. While relating what they had learned about them, Robinson and Emmick paused at Seymour Lazar. His name had appeared more than sixty times as a plaintiff in Milberg Weiss cases. His penchant for dodgy deals made him a candidate for the type of fraud Cooperman described. McGahan was delighted with the challenge Robinson assigned him. His mission would be to sharpen the government’s focus on Lazar.
IF THE APPOINTMENT OF Irving to look over Lerach’s shoulder brought relief to Judge Harmon, she would not reveal it, at least for the record. For the moment she was preoccupied with the defendants’ motions for a summary judgment to be dismissed from the Enron case. The plea had been delivered jointly and separately by the defendants in forty-one separate motions, most of them one hundred pages or more, each requiring responses from Lerach and his team, many of which he drafted himself.
Adding to the pressure on Lerach was the firm’s annual retreat—attendance mandatory—this time at the Barton Creek Lodge and Spa in Texas’s Hill Country outside Austin. There was certain to be more tension than normal between the West Coast and East Coast offices because of a dispute over securing Enron plaintiffs. Steve Schulman and others in the New York office had made a preliminary run at gaining a lead plaintiff for themselves, but Lerach had preempted his own partners by securing the UC Regents. Dutifully, Lerach and his Enron team showed up, but in what seemed an in-your-face gesture, instead of packing golf clubs, the Milberg West lawyers brought their binders, fax machines, word processors, and legal pads.
“Bill was like a dog at a hot stove, standing over the fax machine,” recalled Alexandra Bernay, who worked with Lerach to construct the motions countering the defense call for summary judgment. “The other members of the firm were out playing golf, jogging, playing tennis, water-skiing. We just sat around this big, windowless, business center and worked and worked and worked, never seeing the sunlight.”
By the third day, the tension and fatigue and outdoor deprivation began to take their toll. Breaking into tears, Bernay asked her boss: “Please, can I just go get a pedicure?” Lerach looked at her as if she had wounded him. “Okay Xan,” he conceded. “But how long will it take?”
Even with a critical deadline looming, Lerach steadfastly observed his own ritual, however. When the clock struck five, out came the Johnnie Walker Blue Label. Work would continue, and no matter how many drinks he’d tossed back and no matter the time of night, Lerach’s focus remained acute, at least in the eyes of those working with him.
They were literally writing their way around the hurdles that the PSLRA had attempted to impose on plaintiffs’ pleading standards as well as the immunity the Supreme Court se
emed to confer by virtue of its Central Bank decision on those who “knowingly aided and abetted” securities. It was as if the court had seen Enron coming, Lerach complained. But he would soon see about that. His argument was this: Even secondary actors could commit primary violations, and therefore they were just as guilty and liable as the primary actors when they lie and mislead. The banks and accountants had concocted side bets to keep billions of dollars in debt off the balance sheet for Andy Fastow and others at Enron based on phony valuations of Enron stock. When the fraudulent deals were inserted on the books, Enron, with the help of the underwriters, would pump out phony earnings reports, and the market would react, and as it did, share prices would rise. Once it began, this cycle of deception between the banks and underwriters and Enron, vouched for by Andersen, would continue until the fraud finally fell in on itself. To this end, Lerach would argue, the banks, underwriters, and accountants did more than help disguise Enron’s true worth from shareholders, while insiders became rich. They helped finance and promote these schemes and were as culpable as the company itself. The argument had been made, in one form or another, in various circuits, but not in a case with this kind of scope—or in one that seemed surely destined for the Supreme Court.
For all his reputation as a pest and a bully or as a relentless “strike suit” extortionist, Lerach thrived in this rarefied arena of legal scholarship—and intellectual brinksmanship. One of the signs of his nervous delight was his compulsive licking of the lenses of his oversize glasses, a source of amusement and reassurance for his acolytes. It meant that the master was feeling his groove. He’d need it in this case. In Enron he was attempting to do nothing less than circumvent a Supreme Court decision aimed at his own business model and an act of Congress aimed at him personally. Before filing the massive legal motions to counter the defendants’ move for dismissal, he had an associate do a computer search of the document making sure that “aiding and abetting,” terms that were antithetical to the Supreme Court’s Central Bank decision, appeared nowhere in it. He substituted “schemed” or “scheming” instead. From here on out, the defendants weren’t the only ones on trial. So was the doctrine of “scheme liability.”
Circle of Greed Page 40
