Circle of Greed

by Patrick Dillon

  Barbara S. Jones was born in Southern California and majored in political science at Mount St. Mary’s College in Los Angeles. After graduating, she moved to Boston and worked as a school administrator while studying social psychology at Boston University. She decided to attend Temple University’s law school and, after earning her law degree, went to work for a Justice Department task force investigating and prosecuting organized crime in New York. By 1977 Jones was working as an assistant U.S. attorney in the prestigious Southern District of New York. She was joined that year by Denise L. Cote, a midwesterner with a Catholic education of her own. “Dee” Cote, one year older than Barbara Jones, attended St. Mary’s College in Indiana when it was the sister college to Notre Dame. From there Cote moved to New York, earning a master’s degree in history at Columbia University and teaching for a year at a Catholic girls’ school in Manhattan. She too abruptly switched gears, leaving the field of education to study law. She graduated from Columbia Law School in 1975, then clerked for a federal judge in Brooklyn.

  By 1977, both women were working as federal prosecutors in the prestigious Southern District of New York under a succession of U.S. attorneys, including Robert B. Fiske, the first special prosecutor who probed Bill Clinton’s involvement in the Whitewater case; Rudolph Giuliani, who would go on to become mayor of New York and a Republican presidential candidate; and Clinton appointee Mary Jo White, the first woman to hold the office. Cote, after a six-year hiatus in private practice in the New York firm of Kaye Scholer, returned under White to become the first female chief of the criminal division. In 1994 Cote left the office when President Clinton appointed her to the federal bench. The following year Clinton appointed Barbara Jones to the bench as well. Although they enjoyed good reputations in the New York bar, neither judge had ever presided over anything like the circus WorldCom would become. Cote was assigned the massive WorldCom civil litigation. Soon afterward Jones would be assigned the criminal cases against Ebbers and five WorldCom subordinates.

  Until WorldCom, Cote had not presided over a shareholder grievance alleging scheme liability. And as Lerach was to find out, she also possessed little tolerance for law firms competing for the same case, especially when it promised huge returns and huge fees. Clinton had appointed Cote and Jones, in part for reasons of diversity and also to send a signal that under his leadership Democrats took crime-fighting seriously. As the litigation unfolded over the next three years, both judges revealed that they retained the mind-set of prosecutors. This would particularly accrue to the detriment of the “Telecom Cowboy,” as Judge Jones gave Ebbers what amounted to a life sentence, while sentencing Scott Sullivan, the accountant she herself identified as the “architect” of the fraud, to only five years.* Meanwhile Dee Cote’s clear sense of right and wrong would create hurdles for the legal cowboy from California.

  The third musketeer in the WorldCom case was yet another former prosecutor from the Southern District of New York, and he would prove a formidable adversary for Bill Lerach. John P. Coffey, whom everyone called Sean, was a former colleague of Cote’s and a rising star at Max Berger’s firm, Bernstein Litowitz. So besides fighting a rearguard action against his own mentor and facing a skeptical New York judge, Lerach was about to undergo the out-of-body experience of squaring off against his heir apparent for primacy in the class action securities bar.

  LIKE BARBARA JONES and Dee Cote, Sean Coffey, a Bronx native and the oldest of seven children of Irish immigrants, was the product of a Catholic education, attending Chaminade High School, an all-boys institution in Mineola, New York, where he excelled enough academically to receive an appointment to the U.S. Naval Academy. He graduated from Annapolis in 1978, accepting his assignment as a spotter on a Navy P3-C Orion, a plane used to track Soviet submarines. He would also serve as a junior officer assigned to the Joint Chiefs of Staff and as a White House military aide assigned to Vice President George H.W. Bush.* A lifelong and highly partisan Democrat whose politics differed utterly from Bush’s, Coffey respected the man who had deferred college for four years to become a decorated Navy combat pilot in World War II. Also, like most of those who worked for the elder Bush over the years, Coffey found Bush Forty-One to be a warm and decent man. While assigned to the White House, Coffey attended Georgetown Law School at night. Given the frequent travel associated with his day job, his professors weren’t sticklers about his class attendance, but Coffey studied diligently—it’s not every law student who could say he’d read his con-law texts while sitting in the Kremlin.

  After retiring from active duty, Coffey took a job as a prosecutor in the U.S. attorney’s office in Manhattan in 1991. For nearly two years he prosecuted complex corporate fraud cases supervised by Dee Cote. A year after she left for the federal bench, Coffey left too, doing a three-year stint as a litigation partner with Latham & Watkins. In 1998 he accepted Max Berger’s offer to join Bernstein, Litowitz, Berger & Grossman.

  The PSLRA may have stopped the unseemly “rush to the courthouse” in securities class action cases, but the system that replaced it had unseemly attributes as well. Securities cases became an insider’s game. Bill Lerach and Mel Weiss had made the transition: their firm had been the most prolific under the old system and was under the new one as well. It helped to be flush with money and fast on your feet—and politically well connected. But Milberg Weiss wasn’t the only firm that fit that description. Max Berger and his partners figured they could play the new game as well as anyone. Bernstein Litowitz intended to challenge Milberg Weiss’s supremacy. Hiring Sean Coffey was a step in this direction. The rules of the road, post-PSLRA, meant courting big clients and their patrons. In New York the state employees’ pension fund was headed by the state comptroller, and Comptroller McCall was a Democrat with gubernatorial ambitions. Accordingly, trial lawyers who coveted the New York State Common Retirement Fund as a client tended to never miss a McCall fund-raiser. Between 1998 and 2002 Bernstein Litowitz, and Philadelphia-based Barrack, Rodos & Bacine, donated some $140,000 to McCall’s political coffers. McCall directed the general counsel of the New York pension fund to invite Bernstein Litowitz and Barrack Rodos to take the lead in the state’s class action against WorldCom and its banks and auditors. That autumn McCall lost in a landslide to Republican Governor George Pataki, but his successor as comptroller, Alan G. Hevesi, had also been courted by Bernstein and by Barrack, and their status as lead counsel for the New York pension fund was unchanged. But would New York be ousted by California? This was the issue raised by Lerach at an August 12, 2002, hearing before Denise Cote.

  The judge’s courtroom was packed with some seventy-five lawyers wanting a piece of the action. Bernstein Litowitz was concerned only with one other firm, Milberg Weiss, and as he listened to Sean Coffey’s presentation, Lerach realized that Coffey was trying to undermine him with Judge Cote. “He might as well be sitting with her,” Lerach whispered scornfully to Weiss, as Coffey addressed the court. “They haven’t even figured out scheme liability.”

  At this point Lerach was asserting that Milberg Weiss’s claim to the case was greater because their clients had cumulatively suffered more harm. That was a compelling argument, Coffey knew, although the premise was debatable. But in seeking out CalPERS and other institutional investors and in focusing primarily on the banks and underwriters of bonds, Coffey was arguing that Lerach was actually impairing the class action against WorldCom and the subordinate defendants. Coffey also accused Lerach of attempting to cherry-pick the best claims, an action that was “denigrating” the judge’s class action, in order to seek a competitive advantage to himself.

  Three days later, on Tuesday, August 15, 2002, Cote delivered her ruling. It was no surprise. “The New York State Common Retirement Fund is appointed Lead Plaintiff,” she ruled matter-of-factly. “Bernstein, Litowitz, Berger & Grossman LLP and Barrack, Rodos & Bacine shall serve as CoLead Counsel for all plaintiffs in the consolidation actions.” Neither Lerach nor his firm merited a mention in the judge’s seven-page
order.

  From the bench Cote looked at Lerach, who still had numerous clients in the WorldCom case, and told him that although he was not the attorney of record in the class action that she was in the process of certifying, he could certainly tag along with lawyers from the lead counsel firms while they conducted depositions. Lerach felt a familiar flush come over his face and knew that Cote and everyone in the courtroom were watching his reaction to this humiliation. He shook his head but bit his lip. “I’m appealing,” he whispered bluntly to Mel Weiss.

  The appeal would be filed before the Second Circuit Court in Manhattan and ask the court’s permission to remove certain plaintiffs—both current and future clients of Lerach’s—from the federal class action. This “opt out” tactic had seldom been tried. It was an audacious end run, and Judge Cote did not take kindly to it.

  While Weiss contemplated whether he wanted the firm to follow their California cowpoke on his wild ride, Lerach went back home and reassured the CalPERS officials that their lawsuit would be heard even if it meant going to state courts. Lerach also spent a good part of the winter of 2002 and spring of 2003 drafting letters to prospective clients—institutional investors with significant losses in the WorldCom bankruptcy, including those that had already signed on to be part of the class action lawsuit in New York, warning them that the defendants were mounting counterattacks to dismiss all bond claims. “We wish to pursue a series of cases in a coordinated litigation throughout the United States and achieve a very significant recovery for them, apart from whatever happens in the class action on behalf of all purchasers of all securities in WorldCom in New York,” he wrote. By the spring of 2003, he had assembled an array of pension funds that would eventually grow to more than forty, and he began filing a flurry of complaints in state courts around the country. Coffey saw this as a cavalier provocation. By staging his revolt, which included continuing to solicit plaintiffs, Lerach was unilaterally engaging in “a de facto class action” when—as a Milberg Weiss partner—he was already part of one. This is certainly how Sean Coffey viewed it, and, more importantly, how Judge Cote saw things. On May 20, 2003, she issued an order that even in the dry language of a federal court order, conveyed her frustration with Lerach. “This opinion addresses a third attempt by Milberg Weiss Bershad Hynes & Lerach to return to state court,” she began. “For reasons discussed below the motion for remand is again denied.” The reasons she cited were, essentially, that under procedures established nationwide by the federal judiciary, an independent panel called the Judicial Panel on Multi-District Litigation had concluded that the class action suits had to be consolidated into one case and assigned to one judge and that judge was her. Lerach had an answer to the criticism that he was horning his way into a lawsuit that had been assigned to two other firms: he had written letters to pension funds as disparate as the Asbestos Workers Local 12 Annuity Fund and the Anchorage Police and Retirement Fund, which were harmed by the bond losses, warning that they were in danger of being cut out of the lawsuit because Berger’s clients, the New York state pension fund, had held no bonds.

  On May 30, 2003, in his rage at Cote’s ruling ten days earlier, Lerach fired off two copies of a threatening letter, overnighting them via UPS to Jeffrey W. Golan of Barrack, Rodos & Bacine and to Sean Coffey, with whom he had actually never spoken. Under Milberg Weiss letterhead, Lerach stated that he was writing on behalf of forty-one pension fund clients who had opted out of the class action and were throwing their lot in with his firm.

  “Our clients have asked us to request that you notify your firms’ malpractice carriers of these obligations which have been placed on your firms by the district court’s Order. Under the terms of the Order you will be responsible for taking significant action which will impact the economic value of our clients’ litigation claims, which, if mishandled, could lead to significant damage to our clients for which your firms may be liable. This is especially troubling to our clients in light of the fact that we believe your client, the New York Common Fund, has interests which conflict with the interests, rights and claims of our clients.”

  When he opened his mail, Sean Coffey stared at the letter, flabbergasted. “He’s telling us not to screw up this case or he’ll sue us!” he fumed to Max Berger. “This guy is off his meds!”

  Berger assumed correctly that Mel Weiss had no inkling Lerach was going to issue such an unusually uncollegial—and empty—threat, and he called Weiss to register his resentment. Weiss, in turn, vented his indignation to Lerach. In his phone call to California, Weiss repeated what Berger had apparently told him: “‘Has Bill Lerach lost his mind? He’s completely off the reservation.’” Then Weiss told Lerach he would be writing a letter to Berger requesting that, on behalf of the firm, the letter Lerach had sent be withdrawn from the files.

  Lerach listened, his teeth clenched. After hanging up, he complained to his San Diego partners: “All Mel cares about is respectability. He craves it. Well, this is it. We are off the reservation.”

  The phrase spoken in anger was prophetic. Lerach was forging ahead with his “opt out” clients to pursue their own litigation against WorldCom defendants—a move that panicked the banks, which were fearful of having to fight a conflagration of lawsuits in numerous venues. Lerach’s tactic was unprecedented for its boldness and scale—as well as its potential disruption to the litigation under way in New York. In effect, Lerach was forswearing the very methods he and Mel Weiss had spent twenty years perfecting into a practice in which they were preeminent. And on June 4, 2003, Weiss followed through on his vow to Lerach, sending a fax to Sean Coffey and Jeffrey Golan, apologizing for his partner’s intemperance and “any inconvenience it may have caused you or the New York State Common Retirement Fund” and asking the recipients to withdraw Lerach’s letter.

  Actually, Lerach’s threat caused neither Bernstein Litowitz nor their clients any inconvenience at all, as Coffey had simply ignored the letter’s demands. Lerach’s missive did, however, seal the inevitability of a process started a decade earlier at Turtle Creek. The letter essentially broke Milberg, Weiss, Bershad, Hynes & Lerach LLP apart.

  When Sean Coffey and Bill Lerach finally met in person, the setting was a courtroom in Birmingham, Alabama, in a mediation session in the class action case against HealthSouth, the once-high-flying firm headed by Richard M. Scrushy, who would later be indicted on fraud charges, convicted in federal court, and sentenced to eighty-two months in prison.

  As in the WorldCom litigation, both Bernstein Litowitz and Milberg Weiss were attempting to take control of the class action. The Birmingham judge gave them each a role—a forced marriage—and on this day in September 2003, Coffey watched Lerach at work. It was an image he never forgot. Lerach sat at his table feverishly going through brief after brief, consulting an impressive array of legal sources—and simply tossing papers on the floor when he was finished with them. Although the teams were working under time pressure without the presence of a jury or the prying eyes of the public, the courtroom was decorous, and Coffey found himself simultaneously admiring Lerach’s industry and appalled at his messiness. His corner of the room looks like a pig sty, Coffey thought to himself. At one point, while the judge was speaking and the lawyers stopped their work, Lerach actually began clipping his fingernails. Worried that the sound would annoy the judge, Max Berger hissed at him, “Bill, will you cut that out?”

  Lerach was unfazed, for he was a man in a hurry. Also, he knew something the New Yorkers didn’t: in this courtroom, promptly at five P.M., a liquor cabinet was rolled out, and Lerach wanted to be ready to imbibe. Coffey and Berger noticed as Lerach poured himself a drink of an amber liquid—Scotch whiskey, they presumed—and then another. Coffey allowed himself a beer and, as he savored its taste, looked up from his seat to see Lerach standing over him.

  “I think you’re a terrific lawyer,” Lerach told him, extending his hand.

  Coffey had perfunctorily shaken Lerach’s hand at the beginning of the day, but this was diff
erent. Coffey did not yet consider himself Lerach’s peer in securities law. He had admired the San Diego lawyer from afar when he began practicing securities litigation, and now Lerach was paying homage to his skill as a lawyer. Yet the memory of that threatening letter in late spring had not gone away.

  “Bill, that’s great,” Coffey replied. “But please: stop sending me those fucking letters.”

  “I had to do it,” Lerach replied, unruffled. “I had to do it for the clients.”

  “Well, it wasn’t the highlight of my day,” Coffey answered. “I can tell you that.”

  “Mine either,” Lerach said in a tone that sounded wistful to Coffey. “It broke up my firm. It would have happened anyway, but that was the last straw.”

  On November 10, 2003, within minutes after arriving at One Penn Plaza, Gary Lozow, the Denver attorney representing his college friend Howard Vogel, set about addressing unfinished business left behind by former Milberg East partner Bob Sugarman. Beginning in 1992, Sugarman recruited Vogel as one of Milberg Weiss’s serial plaintiffs. Sugarman was designated to manage Vogel and see that he was paid through Lozow, and it was Sugarman who certified him as a named plaintiff in dozens of cases, vouching that Vogel had “the same interests in the outcome of the case as the other members of the class,” which was, of course, patently false.

  On October 14, 1992, Sugarman had sent Lozow a retainer agreement offering to pay Vogel 14 percent of fees awarded plus $10,000 for expenses, on a single lawsuit against energy company Valero Natural Gas. The $10,000 itself was significantly more than the amount Vogel had paid for the stock. The case settled for $4.75 million and soon after Vogel’s intermediary attorney received a referral fee for $637,223, plus an additional $10,000, most of which was passed to Vogel. This tidy arrangement netted Vogel more than $2 million over the next dozen years. But one transaction hadn’t been so tidy, which provoked the November 10 meeting between Weiss and Lozow.