Circle of Greed

by Patrick Dillon

  In early October 1997 Vogel had read a research report containing a negative financial analysis of Oxford Health Plan, a huge HMO. Within days he’d set up a trust named the Howard Vogel Retirement Plan, of which he was the sole trustee. On October 8, the trust purchased fifty shares of Oxford stock for $3,918. As he later told Sugarman, his intent was to position the trust as a named plaintiff in a securities fraud class action. On October 31, following instructions from Sugarman, Vogel signed under penalty of perjury a court certification stating that the trust had not purchased Oxford Health “in order to participate in any private action arising out of federal securities laws” and would “not accept any payment for serving as a representative party on behalf of a class beyond plaintiff’s pro rata share of any recovery”—a standard and mandatory declaration in the wake of the PSLRA.

  In 1999, with the Oxford Health suit still under way, Sugarman called Vogel to tell him he was leaving Milberg Weiss and that a Milberg Weiss partner named Steve Schulman would take over managing Vogel’s relationship with the firm. On June 27, 2003, Milberg Weiss was awarded a $40 million fee in the settlement with Oxford Health. Vogel received a subsequent phone call from Schulman instructing him to direct his attorney to call Mel Weiss to arrange for Vogel’s share of the settlement. A few days later, Vogel received a phone call from Schulman. Weiss was uncomfortable with discussing the proposal over the telephone. Could Vogel’s attorney meet Weiss in New York?

  “We are under investigation,” an apologetic Weiss told Lozow, when the two met on November 20. But when they concluded their meeting, Lozow was assured his client would receive a payment. Because the fees were so large, and Milberg Weiss had other payment obligations, it was to be considerably less than 14 percent, but Vogel’s share would still be in excess of a million dollars. Less than a month later Lozow received a check for $1.1 million. With it came a cover letter dated December 18, 2003, and signed by Schulman confirming the payment “reflecting your share of court ordered attorneys’ fees in consideration of our clients in connection with Oxford Health.” Another check for $120,000 arrived days later, with another note repeating the first. Both bore the signature of the person who signed the checks, David Bershad. On January 8, 2004, following Vogel’s instructions, Lozow wired $1,205,932.37 to a bank account controlled by Vogel. The circle was complete.

  THROUGHOUT THE AUTUMN OF 2003, Sean Coffey noticed with increasing exasperation as Lerach continued poaching clients in the WorldCom case. On October 29 he sent Judge Cote a letter asking her to issue a cease and desist order. This incited a flurry of replies and motions. Cote, like a referee who feared losing control of the players on the football field, summoned both parties to a hearing on November 13 to hash things out in person. Each side made its case: Coffey said that Lerach, having lost lead plaintiff status, was undermining the class for his own benefit. As of October 3 he had signed up forty-seven clients (although some had since defected), and had done so by urging them that time was of the essence. This was ironic, Coffey maintained, because by urging them to opt out of the class, Lerach was actually putting his own clients in danger: the federal statute of limitations provisions protected plaintiffs in a class action from having the clock run out on them, but it wouldn’t necessarily protect Lerach and his renegade pension funds—in fact, the defendants had already been arguing for dismissal on those very grounds.

  Lerach offered what defense he could. The letters were not solicitations, he said. The firm had been merely responding to requests from concerned clients. Rather than try to steal plaintiffs, he had rendered a legal opinion, sought by some of the plaintiffs, on the state of the litigation—and why those who bought bonds might be disadvantaged by being with a class of those who bought stock. He even tried to persuade Judge Cote that the letters were covered under the First Amendment. Under prodding by Cote, the underlying source of the friction between plaintiffs’ counsel also emerged at that hearing. Originally Mel Weiss had been in discussions to represent the New York State Common Retirement Fund—only to be waved off by Lerach. Milberg Weiss was a house divided. The hearing adjourned, to await Cote’s ruling.

  It came four days later, on Monday, November 17, 2003, in the form of a stern nineteen-page ruling that kept the WorldCom case on its current course—and altered the very pecking order in America’s plaintiffs’ bar.

  First, the judge set forth the background of the case as she saw it. She then parsed four letters that Lerach and those working with him had subsequently written to various pension funds—and ticked off the reasons she found them deliberately misleading. For instance, in a May 23, 2003, letter to an attorney representing an asbestos fund, Lerach maintained that defendant banks were already moving to dismiss bondholder claims from the class action. “The May 23 letter did not mention that just days before, on May 19, the Court had largely denied the motions to dismiss the class action complaint,” the judge wrote in plain, but obviously peeved, prose. And so her decision went, page after page. In her findings section, the judge wrote that it was important to enunciate some “bedrock truths.” One of them, she said, was that “Milberg Weiss has engaged in an active campaign to encourage pension funds not to participate in the class action and instead file individual actions with Milberg Weiss as their counsel.”

  A second bedrock truth, she said, was that “at this stage, Milberg Weiss is running the coordinated individual actions as a de facto class action.” Another: “The communications with Milberg Weiss have resulted in some confusion and misunderstanding of the options available to class members.” She then listed nine examples of Lerach’s muddying the waters of litigation. In the end, Cote stopped short of giving Coffey everything he asked for, which was an order essentially handcuffing Lerach’s ability to prosecute the civil case the way he saw fit, for the first “bedrock truth” the judge had mentioned was that “every investor who has suffered a loss” had a right to seek redress.

  But if the judge denied Coffey’s request to rid the New Yorkers of Lerach altogether, she also put the kibosh on Lerach’s gambit to answer to no court at all. In the last part of her order, Cote took forceful steps to regain control over the information flow in her case. She did this by instructing Coffey to draft a “curative,” an order that would communicate to all parties—and potential parties—where things stood, not in Lerach’s mind, but in hers, advising them of their available options.

  What Dee Cote had done in November 2003 was reestablish her own priority, which essentially boiled down to another “bedrock” value cherished by Milberg Weiss attorneys, East and West, and by those with Bernstein Litowitz and with Barrack, Rodos & Bacine: the banks and other WorldCom defendants would have to answer for their fraud. Moreover, the curative order left Coffey’s firm as co–lead counsel—and Coffey himself as the first among equals among the cocounsels—while freeing Lerach to keep the clients he already had. (He would hold on to forty-one of the forty-seven.) Judge Cote could not, however, repair what was broken between Bill Lerach and Mel Weiss. Quite the contrary, after what had transpired in that hearing, and after Judge Cote’s order laid it bare to the world, the only thing left to do was what Lerach had predicted to Coffey in that Birmingham courthouse.

  Mel Weiss viewed the whole WorldCom imbroglio as a professional embarrassment, and he told Lerach so. As in a marriage gone bad, words were spoken that could not be taken back. Some of them concerned the federal investigation. Mel Weiss was convinced that the prosecutors were after Lerach. Even if it was a government vendetta, as Lerach insisted, it didn’t matter. William S. Lerach was a liability to Milberg Weiss and therefore to Melvyn I. Weiss. The firm had announced its plans to eventually split in two the previous June. Following the New York hearings, neither saw any reason to wait any longer: Both men returned to their offices to begin drafting the terms of separating the two-hundred-twenty-attorney firm—the largest of the plaintiffs’ securities bar.

  They would divide the firm’s capital, cases, and clients. Secretly, but not insignifi
cantly, they concurred that the partners in the separate offices would have a say in how the firm responded to the criminal investigation. In other words, even if the feds’ main focus was on Lerach, Weiss and colleagues such as Dave Bershad and Steve Schulman would offer counsel and extract from Lerach a promise to protect them in return. As for the clients? Weiss and his lawyers would retain a huge lawsuit they had initiated against every major Wall Street bank for their hands in inflating and manipulating numerous IPOs, and several other cases, including their suit against Martha Stewart. Lerach and his colleagues would keep their Enron case and whatever they could salvage out of the WorldCom mess. One more point in the agreement, which was announced on May 2, 2004: both firms would share fees from cases that had been started and conjointly litigated prior to and after the breakup. At the time, the arrangement appeared logical and mutually beneficial. Eventually, this stipulation would also benefit the prosecutors.

  JOB LAZAR, SEYMOUR’S SON and a lawyer himself, also got a piece of the Milberg Weiss action. In March 1995, after the firm received a $969,000 fee in a United Airlines class action (Job’s half-brother Adam had served as plaintiff), the firm sent a $250,000 check dated March 10, 1995, to Job, identifying the money as “your participation in our fee” from the United suit. Bob McGahan had found this peculiar. In his experience as a private attorney and now an assistant U.S. attorney, he’d never come across a referral reward that had consumed such a great percentage of the overall fee. McGahan’s curiosity was aroused further when he learned that the Oregon State bar had suspended Job Lazar’s license to practice law earlier in 1995. Although the younger Lazar had applied for reinstatement, he’d been working in real estate, not the law.

  Tracing the flow of money, government investigators discovered that three days after the check was sent to Job Lazar, it was deposited in his wife’s personal account. And they found other Milberg Weiss checks that had been sent to Job Lazar. Although smaller than the United Airlines fee, they were not insignificant amounts. One was for $125,000, another for $50,000, and still another for $75,000—a pattern of referral fees to an attorney who was no longer an attorney.

  Investigators traced other cashed checks sent from Milberg Weiss to a Palm Springs law firm and specifically to Paul Selzer, a partner. The checks bore the signature of David Bershad, usually accompanied by a notation, “participation in the most recent fee.” Some were even more specific: “In recognition of your contribution to the legal effort in the Denny’s litigation.”

  At this point in the investigation, neither Lazar (who referred all entreaties to his lawyer, former assistant U.S. attorney Thomas H. Bienert, Jr.) nor Selzer had cooperated directly or answered subpoenas specifically. Cooperation had come, however, from another source. The subpoena to Best, Best & Krieger that had yielded Daniel Olivier’s “smelled fishy” memo had convinced the Los Angeles prosecutors to keep applying the pressure.

  After reviewing the accumulated evidence with his colleagues Richard Robinson and George S. Cardona, as well as postal inspectors Jim Harbin and Catherine Budig, McGahan raised the possibility that the prosecution had finally found a weak link in what was obviously a coordinated and nearly impenetrable circle composed primarily of lawyers or people who had acted on the advice of their attorneys. That link might be Job Lazar—and possibly his ex-wife, Audrey.

  On May 6, 2003, Harbin flew to Portland, Oregon, and interviewed Audrey Lazar. Evidently, her divorce from Seymour Lazar’s son had not been amicable. Audrey was eager to cooperate with authorities. What did she know about the $250,000 fee in the United Airlines case? She knew plenty. In fact, she had initiated the transaction, she told the investigators. In 1995, while still married, she and Job had gotten in over their heads on a home remodeling project in the Portland suburb where they lived. Job Lazar was estranged from his father and didn’t want to ask for help. But Audrey told the investigators that she and her father-in-law had retained a strong relationship. It was she who asked for the money. Within days a check for $250,000 from Milberg Weiss arrived. Like other checks, this one bore the signature of David Bershad. She even recalled the cover letter noting; “your participation in our fee in the United Airlines litigation in accordance with our agreement.”

  Harbin spent nearly two weeks trying to locate Job Lazar before finally obtaining a cell phone number. On May 17 he reached Lazar, who said he was not pleased to be contacted and not inclined to cooperate. Harbin had managed to deliver a message, however: after the phone call, the younger Lazar retained an attorney.

  In early July, McGahan and Harbin flew to Portland to meet with that attorney, Michael Greenlick in the old federal building, while Lazar remained in an adjacent office. The prosecutor and postal inspector laid out their evidence, pointing to the kickbacks from Milberg Weiss and even displaying IRS statements that they said had been dummied up by Lazar. McGahan signaled that he would seek authority to be designated a special assistant in the Oregon U.S. attorney’s office, granting him power to pursue an indictment against Job Lazar. “What am I going to do with your guy?” McGahan wondered aloud for effect.

  “Thank you very much, that was helpful,” Greenlick replied. “We’ll get back to you.” The meeting lasted less than twenty minutes.

  When McGahan returned to his office the following day, a voice mail awaited him. Job Lazar was willing to meet and discuss what he knew. On July 28, in Los Angeles, Lazar and his attorney met with McGahan, Harbin, and Catherine Budig at the federal building. “I do not want to go to jail for my father,” Job Lazar said quietly.

  The prosecutors weren’t after Job Lazar, but they had been waiting for five years for someone on the inside to walk them through the maze. Now they had that person. Seymour Lazar was a serial plaintiff for Milberg Weiss, and he had made millions over the years, his son told the investigators. And he had recently learned that his father’s wife had received close to half a million dollars in fees. Afterward McGahan reviewed the testimony and retraced the paper trail, appraising Job Lazar’s place in the criminal narrative that he and his colleagues were piecing together along the walls of the government war room. The prosecutors were now in possession of strong circumstantial evidence showing that over his twenty years as a Milberg plaintiff, Seymour Lazar had repeatedly denied under oath that he was getting paid. Now the search turned to reaching someone inside the actual conspiracy itself, a witness who could paint an indelible picture for a jury, so that they could not only indict but convict Mel Weiss, David Bershad, Bob Sugarman, Steve Schulman, or even more tenuously, but possibly, Bill Lerach.

  IN WASHINGTON, D.C., criminal investigators for the Enron task force had put together their own narrative, and it was so compelling that Bill Lerach, leading the civil action against the Enron defendants, called it a Christmas gift.

  Months of probing documents and hours of depositions yielded a clear picture of how Canadian Imperial Bank of Commerce had fit into the Enron scheme. As the U.S.-based savings and loans had done in the mid-1980s, CIBC had transformed itself from a conservative lender and safe repository for savings into a reckless investment juggernaut. Starting in 1998, CIBC had participated in complex financial transactions with Enron, earning millions of dollars in fees from the rogue company. Only one thing eluded the proud and newly ambitious financial institution. It had not been designated a “Tier One” bank by Enron, meaning that it was not on the company’s list of “favored” lending institutions. To curry favor, bank officials got creative. CIBC began helping Enron move assets off its books by financing “special purpose entities” created by Andrew Fastow. These allowed Enron to book positive earnings and cash flow at the end of each quarter. CIBC, in turn, received its reward in the form of “Tier One” status. This upgraded distinction gave CIBC entry into Enron’s circle of greed.

  In ensuing years, CIBC became an equity holder in many off-the-books transactions intended to create the appearance of greater cash flow and earnings for Enron. When confronted with what the Justice Department had une
arthed, the Canadian bank agreed to accept responsibility and cooperate in the criminal investigation of Enron.

  “We’ve seen recently that corporate corruption extends far beyond cooking one’s own books,” Deputy Attorney General James B. Comey, Jr., announced on December 22, 2003. “Third-party facilitators have played a critical role in allowing corporate misconduct to happen, whether it be outside counsel, accountants, advisors, or as we see in this case, a bank whose financing schemes fueled Enron’s misdeeds and damaged the integrity of the financial marketplace.”

  In San Diego and Houston, where Lerach’s Enron team was about to take a few days off, Comey’s pronouncement was greeted with unrestrained glee. The Justice Department had made the scheme liability case against the Canadian bank. What’s more, looking at the civil lawsuit from the perspective of proportionate liability, CIBC had been a major offender and therefore had put themselves at greater risk than other Enron defendants. It meant, Lerach estimated aloud in a team meeting conducted via conference call, that they could be looking at a disposition in excess of a billion dollars.

  Enron defendants began contacting the attorneys for Enron plaintiffs. The honeyed word settlement suddenly hung in the air. The consulting and mediating team of Judge Irving, Bob Fairbank, Ken Klee, and Rock Hankin was literally beginning to pay off. Through Judge Daniel Weinstein, a federal mediator in San Francisco, the Bank of America settled on Saturday, July 3, 2004, for $69 million. “We anticipate this settlement will be the precursor of much larger ones in the future, especially with the banks that face liability for participating in the scheme to defraud Enron’s common stockholders,” Lerach said publicly.