Circle of Greed

by Patrick Dillon

  True to the prediction, Lehman Brothers settled for $222.5 million on October 29. Again, Lerach’s press release was as much a warning to the remaining defendants as a declaration of victory. “We expect that we will achieve even larger settlements or judgments from those defendants whose potential liability is much greater.”

  The message resonated sharply with Alan Salpeter. “We had a gun to our heads,” Lerach’s public tormentor before a jury in the Lexecon case would recall later. Although Salpeter had not been the bank’s attorney when it committed fraud, or when it coughed up the damning evidence against itself to avoid criminal prosecution, he was now stuck with the massive mess it had created for itself. CIBC had admitted its liability. Now it would pay the price. In the late fall of 2004 Alan Salpeter decided to call Bill Lerach before the once-humbled and now-high-flying plaintiffs’ attorney called him.

  Lerach relished the redemptive moment when he and University of California attorney Chris Patti greeted Alan Salpeter in the conference room of the Houston office of the firm now known as Lerach, Coughlin, Stoia & Robbins. Not wanting to linger longer than necessary in Lerach’s moment of absolution, Salpeter got quickly to the point. “My clients have authorized me to offer a settlement on their behalf,” he told the two attorneys, his voice all business but downbeat. “We propose two hundred fifty million dollars.”

  Lerach met the offer with silence. When he finally responded, his voice dripped with incredulity turning to disdain.

  “It’s a joke, right?” he asked. “This is a fucking joke?”

  Salpeter told him it was not. CIBC would pay no more than what it had just offered.

  “Then leave,” Lerach commanded. He stood. Salpeter stood. Lerach walked out. Salpeter, who never even got to unsnap his briefcase, left the building, climbed into his town car, and went to the airport.

  Lerach went to work preparing a summary judgment asking for a massive recovery from CIBC based on the bank’s disclosures to avoid criminal prosecution. Before filing the motion with Judge Harmon, Lerach would make certain that Alan Salpeter got a look at it. The gun that had been pointed at his client’s head was now cocked. Salpeter knew what he had to do. He called Toronto and reached Michael G. Capatides, CIBC’s general counsel and chief administrative officer, and recounted Lerach’s response.

  “It wasn’t unexpected,” he would recall. Nor was the bank’s next move unanticipated. They would have to ante up—way up.

  IN THE WAR ROOM on the third floor of the federal building in downtown Los Angeles, names were being added to the event-filled timelines growing along the walls. As they gazed at the evidence arrayed before them, and contemplated the vast trove of supporting evidence contained in a growing number of storage boxes, the investigators concluded that although they now knew what had occurred, to get convictions—or guilty pleas—they would still need an insider to walk a jury through it. And no insider was going to come knocking on their doors without an incentive.

  Such was the state of the investigation when the team added another member, Douglas Axel, thirty-five, a graduate of the University of California’s Hastings College of Law in San Francisco, a man blessed with both a love of law and a scientific mind. He had earned an undergraduate degree in aerospace engineering from UCLA in 1991. After law school, Axel clerked for a U.S. district court judge and then for the Ninth Circuit in San Francisco, before joining a private firm where he spent four years defending tort claims.

  When Axel first arrived in the prosecutor’s office, he had been assigned to work with Richard Robinson and Michael Emmick on the Milberg Weiss case, but Jeff Isaacs had needed him for another complex fraud prosecution and borrowed him for a time. In the fall of 2004 Axel came back to his former case, which from his fresh perspective, appeared to have grown legs in his absence. Cooperman had provided corroborating physical evidence, the facts McGahan was amassing against Lazar and Selzer seemed solid, and Robinson had compiled a paper trail leading from Vogel to Bob Sugarman and then Steve Schulman. There was direct as well as hearsay evidence against Bershad. It became obvious to Axel that the time had come to spring the trap on an insider—or someone now on the outside who’d once been on the inside. Someone, perhaps, with an ax to grind. There was such a person, and the prosecutors knew who he was. He had once been the second most powerful person in Milberg Weiss West. He’d once been Bill Lerach’s friend, best man, and confidant. Now Alan Schulman was a competitor and an antagonist.

  Then fifty-five, Schulman (no relation to Steve Schulman) had resigned from Milberg Weiss in 1999 and opened the West Coast office of Bernstein, Litowitz, Berger & Grossman. As the onetime managing partner of Milberg Weiss’s West Coast office, Schulman had handled the firm’s finances, which included authorizing expenditures and signing checks. His public battles with Lerach over expenses were well known. His accusations that Lerach had acted recklessly, vindictively, and dangerously had been published by Fortune magazine. His complaints to Mel Weiss about Lerach’s profligate leadership and his ethics were less well known—until Schulman was subpoenaed to appear before a grand jury impaneled in October 2004.

  Schulman sought and was granted immunity from prosecution. With that protection, he spoke freely as a witness and, under the rules of secrecy, without fear that his testimony would become public. Thus he was able, in a lawyerly way and by sticking to the facts, to vent his disdain for Bill Lerach. Schulman detailed Lerach’s early relationship with Cooperman and other Los Angeles plaintiffs. He told of the annual partner meetings when he and others were excluded from the sessions dealing with plaintiff kickbacks. He recounted his battles with Lerach over the excessive compensation paid to John Torkelsen, their star expert witness, and Torkelsen’s contingency arrangement with the firm. When asked to finger a Milberg Weiss executive with intimate knowledge of the kickback scheme, Schulman gave up the name prosecutors had already zeroed in on: David Bershad, his counterpart in the East Coast office.

  A second insider, Robert Sugarman, revealed what he knew as well. His testimony remains secret, but he apparently gave the U.S. attorney’s office what it needed as it tightened the noose around the senior partners of Milberg Weiss.

  The spokes of evidence depicted on the walls of the government’s war room were now leading toward the hub of the circle of deception. The prosecutors, consulting with the postal inspectors and IRS agents, assembled their cases into a consolidated narrative. When it was completed, the draft was circulated through the offices of the twelfth floor, where it eventually reached George Cardona, the head of the criminal division.

  Cardona was impressed. He was certainly mindful of the implications of indicting a law firm, one that had become a political lightning rod, along with its top lawyers individually. As he scrutinized the evidence and reviewed witnesses’ testimony, as he plotted the course of the conspiracy, noting that it still did not lead directly (at least in any preponderance) to either Bill Lerach or Mel Weiss, he felt a prosecutor’s professional misgivings, even in the face of some sentiment around the office that a case could and should, by now, be made. Cardona needed another opinion. So he called Jeff Isaacs.

  Isaacs had already read the draft and was also impressed. Before he gave his opinion, he called Bob McGahan, saying: “Let’s go to lunch.”

  The tree-shaded patio of the Cathedral of Our Lady of Angels and its outdoor café provided an inviting oasis for those who worked in the otherwise stark blocks surrounding the federal buildings in downtown Los Angeles, particularly in the late autumn, when the city could swelter during one of its Santa Ana heat waves. McGahan and Isaacs found shelter at a canopied table and studied their menus. Before the waiter arrived, McGahan told Isaacs he felt he’d gone as far as he could in assembling a case against Seymour Lazar, the man they hoped would prove the tip of the Milberg Weiss iceberg. Isaacs replied that he’d seen the draft and, in his opinion, the whole investigation had reached a critical point of whether to keep investigating, discontinue, or push forward and out into the ope
n.

  Did he have an opinion? McGahan was anxious to know.

  Yes, Isaacs told his younger colleague, previewing what he would recommend to Cardona. “Let’s indict.”

  * Among the many victims of Bernie Madoff’s Ponzi scheme was Mel Weiss. Although the amount of his loss was not disclosed publicly, Bill Lerach estimated it to be between $20 million and $30 million.

  * “I know what I don’t know,” Ebbers would later testify at his own trial. “I don’t know technology and engineering. I don’t know accounting.” The charges against him hinged on the last of those three claims, and the jurors and a federal judge chose not to believe him. But if Ebbers had been more conversant in the technology and engineering components of his business, WorldCom might not have resorted to fraudulent accounting practices—and Ebbers wouldn’t have been hauled into criminal court in the first place.

  * Ebbers did not plead guilty, took his case to trial, lost, and was sentenced to twenty-five years in prison. He was sixty-three at the time and suffering from heart problems. Under federal sentencing rules, Ebbers is ineligible for release until he turns eighty-five. The severity of the sentence appalled his lawyer, Reid Weingarten, and stunned Ebbers, who wept quietly at the defense table as Jones delivered her sentence.

  * Many years after Bush left the White House—during the WorldCom litigation—Coffey’s photograph ran in the newspapers in Houston. By the time he got out of court that day, there were three messages from Bush. Coffey called him back and the former president gushed about Coffey’s success so much that Coffey reminded the tort reform– minded Bush, “You know, Mr. President, I’m a plaintiff’s lawyer.” Bush laughed off the caveat: “I don’t give a shit—you’re great. You’re our guy.”

  25

  THE NOT-SO-PERFECT CIRCLE

  Richard Robinson slipped into courtroom number 1030 unnoticed and took his place at the prosecutors’ table. Within minutes, on November 12, 2004, he would attain a milestone in the prosecution of America’s most feared lawyers. On that morning, in the federal courthouse with views overlooking the Great South Bay on southern Long Island, Judge Joanna Seybert would accept the guilty plea of Paul L. Tullman. Five months earlier, prosecutors had charged him with a single felony count of falsifying his tax returns. Among other phony expenses, the federal complaint said, he had deducted payments to a secretary and support staff that did not exist.

  Tullman, then sixty-nine, and in declining health, had not fought the allegations. On the contrary, he had been extremely cooperative. How it had come to pass that Robinson, an assistant U.S. attorney based in Los Angeles, oversaw the investigation all the way to its conclusion with Tullman entering his plea in a Long Island federal courthouse was owing to an entirely different scam—a concentric circle within the circle of greed, this one relating to a government loan designed to help small business.

  After graduating from law school, Tullman had joined a fledgling New York law firm where he practiced as an associate and subordinate partner until 1981. The law was not his calling, however, and he left the firm to become a stockbroker. In time he became financially well off. Curiously, his wealth wasn’t earned through his market prowess. For more than twenty years, Tullman had supplied the partners in his old firm with plaintiffs for whom the firm would pay. It seemed a perfect circle. When their investments turned sour, particularly if a suggestion of corporate fraud might be worth pursuing, those clients had what amounted to an in-house law firm where they sought redress. When Tullman or an attorney in his old firm spotted a potential corporate target, Tullman would encourage a client to purchase a small number of shares to be strategically situated for a potential lawsuit. If the lawsuit ensued and if the firm earned fees, a percentage of those fees would be returned to Tullman, who would reward his clients as well. The circle, in other words, was warped—and illegal.

  All told, some seventy cases netting more than $100 million in fees were brought by the firm using Tullman-supplied plaintiffs. For his part, Paul Tullman earned more than $9 million from this arrangement over the years. These were the facts he had surrendered while bartering with prosecutors for leniency.

  Richard Robinson had gotten himself deputized as a special assistant U.S. attorney for the Southern District of New York in order to monitor the seemingly unrelated tax case. But it wasn’t unconnected at all. Tullman’s old firm was Milberg Weiss. His presence in the Long Island courtroom that morning in late 2004 was to ensure two important elements of the five-year investigation. The first was to make certain that Tullman’s plea went off without any hitch. Second, he wanted to ensure that the conditions of Tullman’s plea—what he had told prosecutors—would be sealed and kept secret.

  Another aspect of the circle was also coming into focus. Just as Tullman had provided plaintiffs to bring the cases, John Torkelsen, the expert witness for Milberg Weiss, would be conveniently on hand to testify that the damages being sought were fair. Also, he would help the jurors or judges calculate the amounts favorable to the plaintiffs. His incentive to do so was purely economic—he was paid on contingency—and this too was illegal. The more persuasive he was on the stand or in depositions, the greater chances he’d earn a multimillion-dollar payback. That was the theory federal prosecutors in Los Angeles had been pursuing for several years. They’d come hard after Torkelsen. They’d subpoenaed him. They’d questioned him. They’d not been able to shake him.

  Torkelsen had weathered a federal probe of a $50,000 campaign contribution witnesses said had been solicited from the White House by President Clinton. He’d given generously to New Jersey senators Bill Bradley and Robert Torricelli, who were among the recipients of more than $400,000 he had donated to federal elections, along with another $225,000 to support Bill Lerach’s California ballot referendums. He had been a significant player in New Jersey Democratic politics, and beyond. It wasn’t so much that he was well connected as it was that he was frustratingly recalcitrant. The more he dragged his feet, the less enthusiastic prosecutors in Robinson’s office had become in pursuing him. Moreover, he’d stalled them so long that by 2004 Torkelsen hadn’t appeared as an expert witness in a Milberg case for seven years, which made him close to being obsolete as a prosection witness.

  But the game had recently changed. The U.S. attorney’s office in Philadelphia sued Torkelsen, his wife, Pam, his son Leif, and a business associate for scheming to fraudulently obtain more than $30 million in government-backed loans through the Small Business Administration that would be matched—two for one—by investors to help emergent businesses. Among the investors were prominent securities lawyers for whom Torkelsen had been an expert witness. Most prominent among those lawyers were partners at Milberg, Weiss, Bershad, Hynes & Lerach—including Mel Weiss and Bill Lerach. Had they invested in Torkelsen’s company, Acorn Technology, to launder their contingency paybacks? It seemed a logical question.

  The FBI was following up. The Bureau was less interested in Acorn’s investors or the Milberg Weiss connection than in evidence that Torkelsen, his wife, son, and colleague, had engaged in self-dealing, literally stealing the SBA money. Torkelsen was now on the ropes. Besides racking up his second and third drunk-driving convictions within months of each other, his wife was seeking a divorce. The 6,000-square-foot Victorian they’d renovated in Princeton, with a recently added million-dollar marble patio, was on the auction block. On top of those comedowns, Torkelsen knew he could be facing ten years or more for defrauding the government. The man had lived on incentives, Robinson thought. Now the government was moving into position to offer him another. Even if Torkelsen still refused to cooperate, the government might find his wife, who could be facing multiple years of her own, a willing witness.

  With the Tullman plea entered and the terms—ongoing cooperation—sealed in secrecy, with federal prosecutors from another jurisdiction preparing to squeeze Torkelsen and his wife, Robinson headed back to Los Angeles armed with a small, but confident smile about the progress of this case that he had not pe
rmitted himself in more than five years.

  IN SAN DIEGO, Bill Lerach was riding his own wave of resiliency. A federal district court in Dallas had all but handed him the platform for going after Dick Cheney pursuant to allegations that Halliburton employed accounting practices that improperly inflated revenues and earnings from May 18, 1998 (when Cheney was the company’s CEO) through May 28, 2002.

  On June 7, 2004, U.S. District Court Judge David C. Godbey gave initial approval to a $6 million settlement agreement between Halliburton and Private Asset Management, a one-thousand-client financial advisory firm based in Southern California. The agreement was forged between Halliburton’s attorneys and Richard Schiffrin, a partner in a Philadelphia-based law firm specializing in securities suits. Private Asset Management was one of the lead plaintiffs in the case. Another lead plaintiff was the Archdiocese of Milwaukee Supporting Fund, which was represented by Neil Rothstein of Scott & Scott.

  Rothstein opposed the settlement, which he said was forged without his knowledge or that of the other shareholders who had lost money on Halliburton. Rothstein also maintained that this settlement set a bad precedent that was likely to adversely affect the claims of his clients and some 800,000 other defrauded shareholders. Although Rothstein was in the process of appealing the judge’s ruling to the Second Circuit Court of Appeals, realistically there was little he could do to stop it. Then providence intervened. In an August 3 letter to counsel for all the parties in the lawsuit, Judge Godbey stated that he had learned a day earlier that his parents had at some point purchased Halliburton stock for their grandchildren—his children. The shares had passed to Godbey, and he had sold them—he couldn’t remember when—and put the money in a mutual fund trust for his children precisely to avoid conflicts of this nature.