Having survived still another firm retreat, Lerach and Mel Weiss returned to doing what had helped them attract so much attention in the first place—finding fraudsters and getting on their tails. On August 20, in New York, the firm filed a class action lawsuit on behalf of purchasers of securities of Martha Stewart Living Omnimedia. The complaint essentially rode the government’s investigation of insider trading between Stewart and her friend Sam Waksal, who helped her dump shares of ImClone one day before the biopharmaceutical company issued a devastating quarterly report sending its share prices plummeting. The lawsuit launched against Martha Stewart was tonic for Mel Weiss, who gleefully announced that he would try the case himself. Privately, he expressed satisfaction when an opposing attorney, Howard Sirota, told Forbes magazine: “Mel Weiss is manipulative, deceptive and ruthless … he works twenty-five hours a day at getting more—more money, more power.”
IN HOUSTON, JUDGE HARMON was doing her best to compartmentalize the looming collision of a government investigation of Milberg Weiss and the firm’s full-ahead litigation against big-name defendants. She had her own big-name defendants to deal with, and now Bill Lerach had upped the stakes by filing a motion asking the judge to rule that all Enron-related documents obtained from the defendants remain unsealed and available to the public. The plaintiffs’ lawyers had so far been stymied in retrieving any documents from the defendants, who were protected by the PSLRA from having to furnish subpoenaed documents to Lerach’s team until Judge Harmon had resolved all defense motions asking for dismissal from litigation. The defendants did, however, have to turn the material over to government investigators, and Lerach was seeking a back-door way to get a look at it.
On June 15 a criminal court in Houston, just down the hall from Judge Harmon, handed Lerach the keys to the kingdom. A jury convicted Arthur Andersen of obstructing justice, stemming from its massive document shredding. Now the evidence Andersen had not destroyed was publicly available—and it would provide, from an accounting perspective, a blueprint to the money-shuffling and phony transactions between Enron and the banks. On October 31 the plaintiffs were handed another victory. The federal grand jury sifting through the mass of criminal evidence indicted Andrew Fastow on seventy-eight charges of conspiracy, fraud, money laundering, and numerous other counts. Money laundering alone carried a possible sentence of twenty years in prison, and securities fraud could result in a ten-year term, the Houston Chronicle noted the following morning. The paper also mentioned the possibility that his wife, Lea, who had received some of his ill-gotten money, might be prosecuted as well, which the newspaper suggested gave the government leverage toward securing Fastow’s cooperation.
Defense attorneys in the civil case against their Enron clients took notice. Andy Fastow’s testimony could ruin their cases. Lerach also took notice of the presence of Fastow’s attorney, John Keker, thinking that if Fastow had hired one of the shrewdest criminal defense lawyers in the nation, the former Enron CFO must be in deep trouble. He made a mental note to invite Keker to make his client available as a witness for the plaintiffs in the civil case.
Joe Grundfest, the former SEC commissioner and Stanford Law School professor who had hosted the event where Lerach had made contact with his future Enron clients, had been following the litigation closely. In September, as Grundfest read about the case, one article caught his attention. It was a piece in California Lawyer that began by recounting the legal maneuvers that the Enron plaintiffs and defendants had waged over the summer. Then Grundfest got to this passage:
Many of Lerach’s opponents are praying for grand jury action. “If the allegations have substance,” says one white collar defense lawyer, “it would indicate that certain firms have been soliciting plaintiffs to bring class action suits. If true, the allegations would contribute to the belief that most of these lawsuits are manufactured.”
Grundfest was taken aback. It was as if the writer had been reading his mind. All along, Grundfest had been distrustful of the nation’s most feared plaintiffs’ lawyer. “He uses fraud to fight fraud,” he had told colleagues privately. From what he was reading, it appeared that others shared his suspicion.
In the nearby Palo Alto offices of Wilson Sonsini, Boris Feldman had also been following the events in Houston and the press leaks out of Los Angeles. His reaction to the investigation against Milberg Weiss differed from Grundfest’s. Feldman was surprised at what he’d been reading. In his mind, Milberg Weiss was—as Mel Weiss had professed—the Rolls Royce of plaintiffs’ law firms. For all their adversarial encounters in and out of courtrooms, Feldman held Lerach and his firm in high professional regard, commending them on the elegance and originality of their complaints and the clarity of their briefs—and even on their conduct during negotiations. “This sounds like something some chop shop in New Jersey or Brooklyn would do,” Feldman told colleagues. “Not Milberg Weiss.”
So far the trickle of dark news had not dissuaded Judge Harmon from continuing to view Milberg Weiss as viable representatives of the Enron plaintiffs. On December 18, in a 306-page ruling, she denied the motions of JPMorgan Chase, Citigroup, Credit Suisse First Boston, Canadian Imperial Bank of Commerce, Barclays Bank, the accounting firm Arthur Andersen, and Vinson & Elkins, Enron’s corporate legal counsel, to be dismissed from the case. Fraud claims against Bank of America and Lehman Brothers were dismissed, but the claims of liability against the two banks remained. In announcing her decision, Judge Harmon also upheld the plaintiffs’ motion for unsealing and making available to the public documents provided by the defendants during discovery. “This decision confirms the validity of our legal claims against the major defendants,” Lerach said in a written statement, “and leaves in the case defendants with resources to pay substantial compensation to the class. It should also open the way for discovery, which has been stayed pending the decision to commence.”
While the words were measured, the reaction in the San Diego offices of Milberg Weiss was not. Amid the euphoria, Melinda Harmon’s ruling had opened hunting season for the plaintiffs’ lawyers. “The lids are off the missile silos,” Lerach declared—and some five dozen Milberg Weiss lawyers took to the field.
IN LOS ANGELES THE net cast by the prosecutors had begun turning up more names of interest. Beginning in 1992 and continuing until the subpoena was sent to Seymour Lazar in January 2002, his wife had been a plaintiff in numerous Milberg Weiss lawsuits. So had his mother-in-law. His daughter’s name appeared in several others—and his son’s as well. A check of relatives of Howard Vogel uncovered a similar pattern. Robinson knew what needed to happen next. They would ask for subpoena power to find tax records, bank records, or any other means of following a paper trail—tying the plaintiffs to kickbacks from the firm. That effort would produce, from the files of the Southern California offices of the law firm Best, Best & Krieger, a little time bomb. It came in the form of an eight-year-old internal memo written by a land use lawyer named Daniel Olivier. In 1994, when he authored the memo, Olivier had been at the firm eleven years. His mentor had been another land use attorney, Paul Selzer, the patrician senior partner, whose clients included Seymour Lazar, the polymath risk taker whose ventures included land speculation. Selzer was about to leave the firm and start his own, and he wanted the arrangements with his clients, Lazar among them, put into writing to ensure a smooth transition.
Olivier, preparing to inherit some of Selzer’s clients, found the instructions from his former boss contradictory and decided to recount them in a memo. “Seymour Lazar has requested that Best Best & Krieger treat monies received from Seymour’s class action law firm in New York as current income of Best Best & Krieger, not as Seymour’s funds held in trust,” a perplexed Olivier wrote, noting that Best, Best & Krieger had done nothing with the New York firm that would have merited referral fees. Yet the fees were designated by Selzer to help pay Lazar’s legal bills at Best, Best & Krieger. Even more incongruous, the fees were far in excess of those bills. Writing further, he related
: “Mr. Lazar does not wish to have this relationship documented. He points out that this relationship has been going on for years.”
He circulated the memo selectively and did not include Selzer. The reason was explicitly declared: “We have indicated to him (Lazar) on several occasions our concern over participating in some type of conspiracy to defraud the Internal Revenue Service or to otherwise violate the laws prohibiting plaintiffs in class actions from receiving fee splits.” Finally, Olivier concluded: “This just smells bad and probably would to an investigator.”
The memo was tucked into desks and cabinets; more than a decade would pass between the time it was authored and the moment prosecutors got their hands on it. It smelled bad all right. It was just what Robinson and McGahan had been searching for. They finally had something tangible against Milberg Weiss that had nothing to do with Steven Cooperman. Now they would pick up the pace.
24
THE PATIENCE OF JOB
Little in the way of personal exchanges now entered the preamble of the regular business conversations between Bill Lerach and Mel Weiss. Once there had been rambling, reciprocal check-ins about their families, or (usually from Mel to Bill) the latest stock market tips. A few years back Mel had even bragged about his inclusion in an exclusive investment fund run by a friend by the name of Bernie Madoff. Told it was a sure thing, Lerach flinched. “Sure things” touted by Mel often did not pan out.*
On this day Weiss was furious with his protégé and let him know it. “I just got a call from Max Berger,” Weiss said stonily.
Lerach knew Max A. Berger as a star partner of the big plaintiffs’ firm Bernstein, Litowitz, Berger & Grossman. The firm was representing the New York State Common Retirement Fund, the lead plaintiff in the WorldCom case. Bernstein Litowitz was a frequent “friendly” competitor for big cases and cocounsel on others, especially in the Southern District of New York, Mel Weiss’s home turf. In the familiar low-pitched growl that sounded as if it were coming from the lair of a crouched beast, Weiss told Lerach: “He says you are undermining this case.”
Lerach was not surprised. Ever since he and Byron Georgiou had approached the huge California Public Employees’ Retirement System, the largest pension fund in the United States, about suing WorldCom for misleading investors in a May 2001 bond offering, he had expected pushback from Weiss. His partner and his New York friends did not appreciate Lerach’s poaching. In Lerach’s mind, however, even though most of the litigation—criminal and civil—was destined for New York courts, Milberg Weiss West had as much right to the case as any firm in New York, even Milberg Weiss East.
WORLDCOM CHIEF BERNIE EBBERS practically boasted of his own ignorance. “The thing that has helped me personally,” he said to Time magazine in 1997, “is that I don’t understand a lot of what goes on in this industry.” Five years later that didn’t sound so smart. WorldCom had consistently paid far too much for the many telecom companies it had acquired, it did a poor job of integrating those companies into its own business model, and it failed to discern that available new technologies meant long distance rates were going down, and fast.* In any event, the Justice Department’s blocking of a merger with Sprint caused trauma at both Sprint and WorldCom headquarters. In the case of WorldCom, the damage was permanent.
WorldCom’s stock price began a steady decline from its $60-per-share range in 1997 to $30-something per share by the summer of 2000. In September of that year Ebbers borrowed $50 million from the company to cover his own margin calls on debts he owed to purchase shares of his company’s now-depressed stock. On October 26, 2000, WorldCom announced that it was writing off $685 million, sending its stock plummeting below $8 per share. That $685 million, it turns out, was the least of the company’s problems. Under pressure from Ebbers to “hit the numbers,” WorldCom CFO Scott Sullivan directed three midlevel accounting managers to cover up a projected first-quarter 2001 shortfall of $771 million by shifting operating expenses to capital expenditure accounts. This continued for a year. In all, some $3.8 billion in fraudulent accounting practices had taken place. By then, the spring of 2002, the three accountants were spilling the beans to the FBI, the SEC, and the U.S. attorney’s office.
Naturally, Ebbers and Sullivan had outside help. As the feds focused their firepower on criminal wrongdoing in WorldCom’s Mississippi boardroom, Bill Lerach and other plaintiffs’ lawyers began focusing on the fraud’s enablers. Lerach spent three weeks constructing his patented chart with its jagged timeline showing the rise and collapse of WorldCom stock from $15 on October 1, 1996, to nearly $70 in June 1999, to less than $10 in March 2002. His chart noted key dates and the major events—the booking of uncollectible bills as revenue, capitalizing operating costs to inflate apparent cash flow, failing to write down overvalued goodwill, inflating assets and net worth, taking excessive “merger” charges to inflate apparent earnings—that comprised the fraud and set the stage for WorldCom’s fall.
When he and Byron Georgiou flew to Sacramento and met with CalPERS officials, they had little difficulty persuading the pension fund managers to join the legal battle to reclaim their investment in WorldCom from the banks and underwriters—CitiGroup, Bank of America, Deutsche Bank, JPMorgan, Lehman Brothers, Credit Suisse First Boston, and UBS Warburg—that had pushed the fraud onto the market.
“Forget class action, we’re going to call this mass action,” Lerach told CalPERS officials, including Mark Anson, CalPERS’s chief investment officer, and Kayla Gillan, its chief counsel. He invited the nation’s largest, richest institutional investor to take the lead in a litigation involving as many as fifteen other plaintiffs. He posted his chart, pointing out where and how CalPERS lost its hundreds of millions, and watched the eyes of his prospective clients bulge with indignation. “We have beautiful claims against these banks,” Lerach told his small, attentive audience. “All you have to do is sit back and enjoy the ride while we get your money back.”
One of the subordinate members of the CalPERS group identified himself as an investment officer and raised a mild objection. “What about suing Citibank and JPMorgan? We have to do business with these people.”
Anson, his boss and a man reputed to be almost priestly in his demeanor, pounded the table and said, “Fuck them! All that matters on Wall Street is a basis point [a means for calculating interest rates]. They’ll be back selling us something else in a week.”
Lerach and Georgiou exchanged looks, trying to keep their glee in check. They stood, shook hands with their hosts, and left their business cards on the table. Then Lerach did something else. Since it appeared that his chart had helped incite the indignation he had hoped for, he gave it to Anson as a souvenir.
Anson accepted the gift and immediately turned to the bond buyer who had balked at suing the banks. “Here,” he said, handing him the chart. “You put it in your goddamn office so you can look at it every day.”
In the elevator, as they were giving each other high-fives, Lerach said to Georgiou, “I like their spirit.”
The next day Kayla Gillan, the CalPERS in-house lawyer, called Lerach. “Let’s go,” she said.
When Lerach had initially called Weiss to convey the news, he was startled to hear Weiss’s negative reaction. Just as he had unilaterally drummed up the CalPERS business without telling Weiss, so had his mentor been doing his own business development, working his own political contacts, beginning with H. Carl McCall, comptroller for the State of New York. “I just talked to Carl McCall,” Weiss told his partner. “The state portfolio suffered a huge loss in WorldCom’s collapse. We’re going to be retained by the State of New York. This will be great for us.”
Now it was Lerach’s turn to signal his lack of enthusiasm. “Mel, quit it,” he barked into the phone. “You can’t do this, we already have a client and it’s huge.”
Lerach then recited the comparative attributes of the respective clients. As for the California public employees, there was nothing like them in the country. CalPERS had 1.6 million members
, had double the assets of the New York client, and claimed more than $400 million in WorldCom losses. Furthermore, those losses were directly tied to now-worthless bonds that Citigroup, JPMorgan Chase, Bank of America, and Deutsche Bank had underwritten. Strictly interpreting the PSLRA, Lerach tried explaining, Lerach’s clients had superior standing for controlling the case.
Weiss wasn’t satisfied. “This is humiliating,” he said angrily. “The State of New York … You mean to come in here with a California client and take over a case in New York?” Lerach wouldn’t back down.
The conversation ended, but not in a stalemate, as far as Lerach was concerned. He would push on, preparing a complaint that would win the day in any courtroom. Actually, Mel Weiss intuited something that his West Coast–based partner did not: like Bernie Ebbers, whose criminal case would also be wrested from outsiders by a New York court, Lerach was heading into hostile territory. Lerach had discovered in Chicago during the Lexecon trial how huge a factor home field advantage could loom—and he was about to learn this lesson all over again.
IN ADDITION TO Max Berger and Mel Weiss, three other New York legal fixtures would set the course for the WorldCom litigation—and the respective fates of Bernard Ebbers and Bill Lerach. The first two were female federal judges who had been appointed to the bench by Bill Clinton. The women were friends and former prosecutors in the U.S. Attorney’s Office for the Southern District of New York. The third was a former officer in the U.S. Navy. The three worked together as federal prosecutors, and even after they left that life, they tended to see bright lines in the law—and to stay on their side of it.
Circle of Greed Page 41
