Circle of Greed

by Patrick Dillon

  Meanwhile, working through Dallas attorney E. Lawrence Vincent and with the help of Rothstein, the archdiocese fund had nearly completed its brief urging the court to permit it to dump Lerach. Just as Lerach had added union muscle to his own lineup of plaintiffs, the archdiocese fund solicited a worthy stand-in. It was the firm of Boies, Schiller & Flexner, more specifically David Boies. The fifty-five-year-old Yale Law School graduate and founder of his firm possessed a stellar résumé. He had represented IBM in an antitrust case that the government had unsuccessfully tried. Turning around, he had represented the government in its antitrust lawsuit against Microsoft. He had represented New York Yankees owner George Steinbrenner in a lawsuit against Major League Baseball and defended CBS in the libel suit filed by former Army General William Westmoreland. He helped American Express win $4 billion in a suit against Visa. He’d had a key role in defending Bill Clinton during impeachment, and he’d played a leading part on the legal team battling for Al Gore in the infamous 2000 Florida recount. In 2003 Boies had even represented Andrew Fastow in the first round of depositions in the Enron case.

  Understanding the exquisite delicacy of the Halliburton disorder, Boies signaled his willingness to take on the role of lead counsel, but only after the unfinished business of removing Lerach had been accomplished.

  And so, by the second week of November, attorneys for the archdiocese fund informed Lerach that they planned to file a motion in federal court in Dallas with Judge Barbara Lynn, to remove Lerach Coughlin and Neil Rothstein’s former firm, Scott & Scott, as lead counsel in the lawsuit against Halliburton. They cited the criminal investigation of Lerach and claimed a lack of responsiveness to requests for all documents between the two law firms as the main reasons. Rothstein was to remain a “special counsel.” Although the choice of Boies as a replacement camouflaged it, another rationale for jettisoning Lerach—perhaps the more incandescent reason—involved politics. The plaintiffs decried what they described as Lerach’s public posturing in trying the Enron case and, more particular to their own case, his stated intention of pursuing Vice President Cheney. The petition was filed on November 22. Lerach didn’t know who to be angriest at, and there was no shortage of possible culprits.

  His frustration came to a head in the San Diego office conference room in early December, as lawyers from Lerach Coughlin frantically prepared a countermotion to try to hang on to the case. One young attorney, Ramzi Abadou, a relative newcomer to the firm, was troubled by the developments. After graduating from Boston College Law School in 2002, he found himself under Lerach’s wing. The bond had been forged earlier when Abadou, as a college undergraduate, worked summers as a document clerk.

  When Abadou—whip-fit, personable, but intense—joined the firm as an attorney, Lerach set him to work developing new clients. Abadou knew he was being groomed and was grateful for the opportunity. He also had been taken with Lerach’s professional comportment, particularly the way he prepared for battle. “When you take a guy like that who already knows almost everything and prepares with the zeal of a new convert to the law, he’s just unstoppable,” he had told colleagues.

  But during the summer and fall of 2006, Abadou was drilling into dry holes in search of new clients. And he could point to the reason—the criminal investigation. He too was encountering a backlash about Lerach’s public pronouncements of going after Cheney. To Abadou, this had become counterproductive. When the crisis over being dismissed from the Halliburton case arose, Abadou counted himself among a nonvocal group of Lerach Coughlin lawyers who thought the best thing to do would be to bow out gracefully.

  At the strategy meeting, Abadou voiced his concerns, urging Lerach to consider withdrawing. He even suggested the firm issue a press release saying that while the firm regretted the client’s decision, in the best interests of the class, the firm would offer to help Boies, Schiller & Flexner get up to speed as quickly as possible. While Abadou idolized his boss, he hadn’t accurately analyzed him.

  Lerach went ballistic. “I will not be told what to do!” he screamed. “This is my firm. This is my case. This is personal.”

  No one knew whether he meant because Rothstein had betrayed him or if he was referring to his visceral antipathy for Dick Cheney, a man whom he’d never actually met—and no one had the courage to ask.

  Later, Abadou reflected: “He shouldn’t have told anyone. He should have just taken Cheney’s deposition and then said something about him later.”

  * Elkind also coauthored, along with Fortune reporter Bethany McLean, Enron: The Smartest Guys in the Room, a best-selling 2003 book documenting the Enron scandal. A 2005 documentary film based on the book won the Independent Spirit Award for Best Documentary Feature and was nominated for Best Documentary Feature at the 78th Academy Awards. Bill Lerach provided commentary throughout the film.

  27

  A NARROW DEFINITION of DECEIT

  On November 1, 2006, Geralyn Maher, a calendar clerk for the Fifth Circuit Court of Appeals in New Orleans, drew three judges’ names from a wheel in a high-stakes courthouse version of Bingo. For the case of the University of California Regents v. Credit Suisse First Boston, Merrill Lynch, and Barclays, the names that emerged from the wheel were Jerry Edwin Smith, James W. Dennis, and Rhesa Hawkins Barksdale. In their hands would lie the future of scheme liability. From what Bill Lerach knew about the three men, he was not encouraged.

  Jerry Smith was a Reagan appointee from the Texas border town of Del Rio known primarily for writing the majority opinion striking down affirmative action at the University of Texas Law School, a decision that would be superseded seven years later by the U.S. Supreme Court’s 5–4 decision upholding affirmative action at the University of Michigan Law School. The next jurist, James Dennis of New Orleans, was appointed by President Clinton in 1995. Although he had figured in few noteworthy decisions, Lerach considered him sympathetic toward victims of corporate fraud. He was happy with Judge Dennis. The remaining member of the panel was Rhesa Barksdale of Mississippi. Appointed by President George H.W. Bush in 1989, Barksdale was a 1966 graduate of the U.S. Military Academy. In his book The Long Gray Line, Pulitzer Prize–winning journalist Rick Atkinson traced the experiences of Barksdale’s West Point class in Vietnam and quoted the then-young cadet as saying: “I look forward to going to Vietnam. Every American has a commitment to go to Vietnam to do his part.”

  Following his combat tours, Barksdale left the Army and graduated from the University of Mississippi Law School, clerked for Justice Byron White on the Supreme Court, entered private practice, and was teaching at Ole Miss Law School when Bush tapped him for the Fifth Circuit. A conservative, business-friendly Republican, Barksdale was rumored to be short-listed for Supreme Court when Bush’s son came into office.*

  The three judges’ names were disclosed in January 2007, less than two weeks before the panel was to hear oral arguments. Looking to try to change the equation, University of California attorney Chris Patti noticed something about Barksdale. That distinctive last name was the same as that of Jim Barksdale, the flamboyant founder of Netscape, the once-dominant Internet browser. Patti checked and learned that the two Barksdales were brothers. Was it something they could use to get Judge Barksdale off the case? He called Lerach to confer.

  Lerach told him that Milberg Weiss had sued Jim Barksdale and that he was a defendant in a current Lerach Coughlin lawsuit against AOL/Time Warner—Barksdale served on its board. After he hung up the phone, Lerach directed an associate, Eric Isaacson, to draft a motion calling for Barksdale’s recusal. Speed was essential, and Isaacson finished in two days. The motion reached the clerk’s office in New Orleans with little time to spare—but enough for Judge Barksdale to recognize that he had no choice but to step aside. When they heard the news, the plaintiffs’ attorneys rejoiced, then held their collective breath waiting for the next selection. But their luck had actually taken a turn for the worse. The final judge hearing the banks’ appeal would be E. Grady Jolly.

  Mean
while, in a courthouse in St. Louis, in a case with no Enron or Lerach Coughlin lawyers involved, the fates of Lerach’s plaintiffs took another hit. The case was Stoneridge Investment Partners v. Scientific-Atlanta and Motorola Inc. It began in August 2000 when top officers of Charter Communications, a St. Louis cable company, realized they were not going to make their numbers. Their solution was to cook their books by entering into “wash” transactions with two of their suppliers, Motorola and Scientific-Atlanta. Charter asked those companies to charge $20 more than market price for the digital boxes that customers were required to have in their homes. In turn, Charter directed their vendors to return the extra money in the form of advertising revenue that Motorola and Scientific-Atlanta neither wanted nor needed—at five times the going rate. This allowed Charter to make it appear to analysts and investors that they were reaping millions more in advertising dollars than was really the case.

  Charter ran this shady arrangement by its accountant, Arthur Andersen, which said it could not recognize the “advertising” payments as revenue if they were, in fact, tied to the purchases of the boxes. In late September, Charter ginned up misleading written agreements with Motorola and Scientific-Atlanta setting the price of the boxes at the higher amount and including contracts to purchase advertising—as separate agreements, even though they really weren’t—and then backdated the agreements to August. When the accounting tricks came to light, four of Charter’s top financial officers pled guilty to felony conspiracy charges, two of whom went to prison.

  In the ensuing civil litigation, Charter agreed to pay $144 million to settle with its major outside shareholder, Stoneridge Investment Partners of Malvern, Pennsylvania. But Stoneridge attorney Stanley Grossman also sued Motorola and Scientific-Atlanta (which, significantly as it would turn out, later became a unit of Cisco Systems). This was a classic example of scheme liability, Grossman argued: Charter simply could not have pulled off the fraud without being joined in the ruse by the two vendors.

  Citing the Supreme Court’s Central Bank decision, however, a federal district judge in St. Louis determined that the defendants, at worst, had aided and abetted the cable company and could not be sued. Grossman appealed, but in April 2006 an appellate panel in St. Louis upheld the dismissal.

  Months later in Pasadena, California, a three-judge panel of the Ninth Circuit—one member a Reagan appointee, one a George H.W. Bush appointee, and the third a Clinton appointee—heard a case called Simpson v. AOL Time Warner, which had a set of facts similar to those of Stoneridge. The plaintiffs, the California State Teachers Retirement System, were represented by Joe Cotchett, Lerach’s Lincoln Savings colleague. Cotchett argued that a sell-and-buy-back scheme between the media giant and an Internet real estate company constituted a deception concocted for one purpose—to defraud investors. Lerach bolstered Cotchett’s argument in an amicus brief, emphatically identifying the alleged chicanery as “scheme liability,” not aiding and abetting. The SEC, now headed by Lerach’s old adversary Christopher Cox, surprised many by allowing SEC senior counsel Michael L. Post to also submit a friend-of-the-court brief in support of the plaintiffs. The Ninth Circuit agreed that a trial should go forward.

  With dueling appellate court decisions, the Eighth Circuit’s ruling on Stoneridge would not necessarily be binding in the UC Regents’ Enron case pending in the Fifth Circuit and, indeed, might be overturned. Lerach phoned Stanley Grossman to discuss how they might rebound from an adverse ruling by the Eighth Circuit. This wasn’t an academic conversation: the Supreme Court had accepted Grossman’s appeal. A hearing was set for April 2007. In agreeing to hear the Stoneridge case the high court was agreeing to define just how far it had intended the tentacles of its Central Bank decision to stretch.

  ON WEDNESDAY, DECEMBER 6, 2006, Steve Schulman asked Mel Weiss to meet him for breakfast the next day. There he delivered the news that his criminal trial date had been set for January 2008. Schulman’s attorneys were advising him that he faced an uphill battle with the prosecutors in Los Angeles and to devote all his energy to fighting the charges. Therefore he was resigning from the firm.

  On Friday, December 8, Weiss dutifully issued a written statement praising Schulman as a “brilliant lawyer,” and giving no hint of the stress Schulman was under. “This was his decision,” Weiss said blandly, “and doesn’t imply anything other than he wants to do his own thing.” Schulman reiterated his earlier pledge to “vigorously fight the indictments, while Sam Singer, his designated spokesman, added that his client had been planning to leave Milberg Weiss for some time. Singer flatly denied the speculation that Schulman might be cooperating with the prosecutors.

  What Schulman did not admit was that he was terrified of going to the penitentiary. As far as the Los Angeles prosecutors were concerned, however, he wasn’t yet doing anything that would keep him out of a prison cell. That would soon change, even if it meant others would have to do time behind bars instead, including the man he had invited to breakfast on this December day—and also his famous protégé—Bill Lerach.

  ON MONDAY AFTERNOON, February 5, 2007, Patrick Coughlin entered the three-story granite John Minor Wisdom U.S. Court of Appeals Building on Camp Street in New Orleans, to take his place at the respondents’ table. Under his arm he carried a copy of the 182-page response to the banks’ petition for what amounted to immunity from liability. With him to show support was his mother, who took her place in the visitor gallery. Joining her was Bill Lerach, his wife, Michelle, Judge Irving, University of California attorney Chris Patti, and Lerach Coughlin partner Byron Georgiou and his wife, Therese. Appearing for the petitioners were Stuart J. Baskin on behalf of Merrill Lynch, David H. Braff (the Sullivan & Cromwell attorney representing Barclays), and Richard W. Clary (of Cravath, Swaine & Moore, representing Credit Suisse First Boston). The three judges, Smith, Jolly, and Dennis, strode solemnly to their chairs at the head of the bench.

  Judge Smith opened by praising both sides for their clear and compelling briefs. Then the questions began. They were courteous but rigidly focused on precedent and the evolution of the cases cited by counsel back to Central Bank. The questions, Coughlin thought to himself, especially those from Jolly and Smith, had a federalist bent, which seemed to reinforce the attorneys for the banks. This alarmed him. Judge Dennis remained mostly silent.

  Coughlin and Lerach considered Judge Dennis their best hope. If previous decisions were any indication, Judge Jolly was going to be a tough sell. So the plan was to focus their arguments for Judge Smith and hope if they were able to persuade him, Jolly might go along. Even if he didn’t, a 2–1 vote would carry the case. Smith, therefore, was considered the key. It was Smith who seemed to be challenging Coughlin to convince him that it was the deceptive conduct of the banks and the reliance on their conduct by the plaintiffs that had caused the plaintiffs harm. Coughlin applied Lerach’s scheme liability reasoning, arguing that the conspiracies entered by Merrill Lynch, Credit Suisse, and Barclays with Enron were so integral to Enron’s frauds that, when it came to liability, Enron and the banks were indistinguishable.

  As the plaintiffs’ attorneys and their families departed the courthouse two hours later, they could not say they had won or lost, although to Coughlin, it felt as though the judges were trying to save the banks. Coughlin and his mother split off, and the Lerachs and their party continued past Canal Street into the French Quarter where they encountered evidence of Mardi Gras, the second annual celebration since Hurricane Katrina had devastated the city. They arrived at their destination, Nola, a happening new restaurant with a decor of light wood and exposed brick operated by celebrity chef Emeril Lagasse. Their party was seated, and as they scanned their menus, Judge Jolly walked in accompanied by two men.

  The trio strode past Lerach and his friends without acknowledgment or eye contact. During their meal, however, Jolly surprised Lerach by rising from his seat and walking over to the table where the Californians were seated. Displaying gentlemanly decorum, he made brief small tal
k before mentioning, as all New Orleans residents did in those days, the ongoing suffering that Hurricane Katrina had left in its wake. As he took his leave, Jolly intoned in his Mississippi drawl, “We want to thank y’all for comin’ and helpin’ our economy.” With that, he turned and returned to his table.

  The exchange struck Lerach as patronizing, as if they were in New Orleans by choice, and he felt a flash of his famous temper. As the judge and his party rose to leave, Lerach rose too and positioned himself near the doorway. Seeing the obstacle, the judge altered his stride, stepping around Lerach without speaking or making eye contact. Lerach returned to the table and let out a deep sigh. “I suspect we’ve lost,” he said.

  On March 19, his premonition was proven true. In a 2–1 decision, with Judge Jolly writing the majority opinion and Judge Dennis dissenting, the Fifth Circuit sided with the banks. The panel couched its ruling in conciliatory language, conceding that their decision “may not coincide … with notions of justice and fair play.” But the judges clung fiercely to the crimped reasoning of Central Bank and, taking a narrow definition of deception, upheld the petitioners and decertified the shareholder class action against the banks.

  “Presuming plaintiffs’ allegations to be true, Enron committed fraud by misstating its accounts, but the banks only aided and abetted that fraud by engaging in transactions to make it more plausible; they owed no duty to Enron’s shareholders,” Judge Jolly wrote for the court.

  Lerach and his colleagues were incensed. Al Meyerhoff, a Lerach Coughlin partner who had led the fight against the Marianas sweatshops, analyzed the ruling this way: “The effect of the opinion is to allow investment banks to both charge fees and escape liability for constructing and carrying out transactions that they understand have no other purpose than to falsify financial results reported to investors.”