Circle of Greed

by Patrick Dillon

  He wasn’t alone in this assessment. Peter Lattman, the estimable writer for Fortune Law Blog and no enemy of business, found the court’s logic so restrictive as to constitute a perversion of fair play: “Executives owe honest services to those shareholders, and one of the most basic is to report finances accurately,” he wrote. “This time I’m with Lerach.”

  Regardless, the upshot was that Paul Howes and his huge team of lawyers, experts, and assistants had been shut down. They had put in thousands of hours preparing for a trial that was scheduled to start in two weeks, which had a hundred witnesses, including Andy Fastow, lined up to testify, along with hundreds of depositions and millions of documents and exhibits to throw at the defendants in support of the arguments Pat Coughlin was ready to present to a jury. Judge Melinda Harmon had no choice but to postpone the trial. To Howes, the former U.S. Marine and Vietnam combat veteran, the decision by the Fifth Circuit was “a gut shot.”

  Richard Clary felt a letdown even though his side had won. As the lead defense attorney for Credit Suisse, he had prepared for five years for a trial that now wouldn’t happen. Poolside in Florida on the afternoon of March 19 when his BlackBerry sounded, one minute he was jubilant, he told The American Lawyer, the next he was disappointed. “But,” he added, “I’m probably less disappointed than Lerach.”

  Lerach was more than disappointed. “What this pretty much means is that the courthouse door was slammed in the face of the Enron victims,” he told reporters angrily. “We think the decision is wrong under the law, and we think it’s unfair to the victims of the worst securities fraud in recent memory to be denied the chance to even prove their case against the banks.”

  But it had not ended the possibility that class plaintiffs would get their day in court, to pursue crooked bankers, he added. The most recent setback by the Fifth Circuit simply ratcheted up the disagreement over the scope of primary liability. Two other appellate courts were already in conflict, and now this one had joined the fray. A remedy was at hand, and Lerach announced it: “We are going to seek review in the U.S. Supreme Court as quick as we can.”

  DURING THE WEEKEND OF February 24, Lerach tried to take his mind off the news expected out of U.S. District Court Judge Barbara Lynn’s Dallas court on Monday. For weeks, the Clinton appointee had deliberated on who should stay and who should go as plaintiffs’ counsel in the Halliburton case—and who should serve as designated lead counsel suing the company once run by Dick Cheney. On Sunday, Lerach and his wife went to a colleague’s home for a buffet dinner and viewing of the Academy Awards. The Oscar for best picture went to The Departed. Lerach tried not to project too much into that, except that Martin Scorsese’s movie evoked dark implications about a brash young man who’d crossed the line and the sinister father figure who had led him there.

  The next morning Judge Lynn announced that while she was not asserting that Lerach’s firm had done “anything unethical, immoral, or otherwise improper,” she was ruling in the best interests of the Archdiocese of Milwaukee Supporting Fund in finding that its relationship with Lerach Coughlin “was no longer productive.”

  Halliburton—and anything the vice president may have done—would now be David Boies’s challenge, as Judge Lynn also approved the archdiocese fund’s request to replace them with the firm of Boies, Schiller & Flexner. Attempting to be philosophical, Lerach found himself wondering whether, seven years earlier, if David Boies had been successful in his representation of Al Gore and Joseph Lieberman in their challenge to the election of George W. Bush and Richard B. Cheney, he would have even sued Halliburton in the first place. The standard Lerach answer would have been: This wasn’t personal. It was strictly business. In this instance, he admitted long after the fact, that claim would have been disingenuous.

  THE LIGHT, AIRY, but intimate decor of L’Atelier restaurant in the Four Seasons Hotel at East 57th Street and Park Avenue helped offset the mood at the table where Bill Lerach and Mel Weiss met for dinner. It was Sunday, May 27, 2007, the day before Memorial Day. The two legal leviathans were sitting across from each other at a time when the divide between the high-rise offices overlooking San Diego Harbor and those at One Penn Plaza was the greatest in their history together. This division went unmentioned. The talk began with shared consolation for mutual defeats in different federal courts. For a moment it was like old times, especially when Lerach regaled his former partner by telling him how close he’d come to deposing Dick Cheney. That prompted harmonic vitriol from both men toward the Bush administration and its dark princes. The conversation turned to family, mutual friends, reminiscences of past cases, victories on behalf of their clients and themselves—triumphs, they said, on behalf of society. As the conversation began to sound like an epilogue of their many years together, what was on both Bill Lerach’s and Mel Weiss’s mind eventually insinuated itself.

  The government had made overtures to both of them to settle the score. Lerach repeated what the prosecutors had been conveying: work out a negotiated disposition, one that might require a hefty but doable fine, an acknowledgment that mistakes had been made, accept some oversight and get on with business. His mentor looked at him sharply. “You’re a higher profile than me,” he said raspily, almost sounding sympathetic to his younger colleague.

  Lerach felt himself tightening and knew his face was beginning to turn red. “Mel, the statute of limitations on Cooperman has all but run out on me,” he said. To which Weiss retorted tersely, “Congratulations.”

  Lerach turned the conversation. How was Mel getting along without Dave or Steve? Weiss’s reply startled him. Some of the other partners, the younger ones, were pestering him to resolve the government’s beef with the firm. “But without Dave and Steve, I have no one to veto my decisions. I’m not settling.”

  “Have you heard from Dave?” Lerach asked.

  “No. I haven’t called him,” Weiss replied, dabbing at his mouth with his napkin. “And he hasn’t called me.”

  With the meal over, the men stood and walked slowly to the restaurant entrance where Weiss’s town car was waiting. They shook hands, each placing their free hand on the other’s shoulder. As the limo turned the corner and drove out of sight, Lerach lingered outdoors in the warm evening, running an equation through his mind: Dave won’t give Mel up. But he would give me up. But to give me up he would have to give Mel up. Bill Lerach was rarely confused about anything, but he was now: he felt neither consoled nor free from harm. And something else had been nagging at him, something he hadn’t shared with his longtime friend and former partner.

  Three months earlier, on Wednesday, February 7, 2007, at an evening event at the Sheraton Hotel in Birmingham, Pat Coughlin, whose name appeared second to Lerach’s in the lineup of the firm’s name partners, had taken him aside. The reason both men were in Alabama was to attend Coughlin’s engagement party. Coughlin asked Lerach to step away from the celebration with him. As they walked into the lobby, Lerach noticed his friend and colleague was looking hesitant, and he started to needle him about the pending nuptials. That wasn’t what was bothering Coughlin, and it wasn’t what he wanted to discuss. Uneasily, he suggested to Lerach that he should consider taking a leave of absence until the criminal investigation had run its course. From his partner and confidant, Lerach heard words he hadn’t ever thought possible: “Bill, you could be hurting our firm.”

  The morning after the dinner with Mel Weiss in New York, Bill and Michelle were sitting over coffee in the terminal at Newark International Airport awaiting their flight home when his cell phone rang. He recognized the number of the caller. It was Mel Weiss. Lerach excused himself and walked into the concourse area.

  “I just got off the phone with Ben Brafman,” he heard Weiss say. “Dave’s going to cut a deal. Our friend has been cooperating.”

  When Lerach returned, he could tell that Michelle was reading his face, which he figured was flushed with worry. “That was Mel,” he told his wife. “I didn’t like what he said.”

  L
ater—in the emotion of the moment they couldn’t remember if it was before or after they entered the first-class cabin of the aircraft—Lerach turned to his new wife and said, “We’re done.”

  Later, both would recall the transcontinental plane ride, always long flying east to west anyway, being extenuated to an excruciating degree by Weiss’s message. They would remember the fits and starts of their talks that would carry into the night once they reached their villa on the hill. Together the husband and wife, both lawyers, hashed out the imbroglio that had finally and fully become part of their lives.

  “I thought I was safe,” Lerach said late one afternoon as the couple left the house, walking toward their outlook over the Pacific. “I was wrong.”

  Dave Bershad, Lerach explained carefully to his spouse, had been meticulous, keeping legal pads with all the transactions—the payments and credit due. He and Mel had set up the firm’s secret coffers to pay plaintiffs for their services and repay the partners for their contributions.

  To some degree, the firm’s secrets had been revealed earlier to Michelle, through both the indictments and her husband’s persuasive explanations of why the indictments would not touch him. Smart enough to draw her own conclusions, she had known what she was getting herself into when she became Lerach’s fourth wife.

  But she was not about to relinquish her standing as an attorney, not in her own home, not with her husband under fire. She recited the facts. Cooper man was a bad witness. The statute of limitations might have lapsed. Lazar had not been prompted by the firm to sue targeted companies.

  “We can fight this,” she insisted. “We both know you can win. What they have is … what? Torkelsen? Another felon who could also be impeached. Then what?”

  “Lazar,” he told her. “He got paid. He stood in front of a judge and swore he was not being paid.”

  Besides, Lazar was ailing. He was vulnerable. If he got beaten down and finally shaken, he might cooperate. And Vogel? Lerach hadn’t known much about him, had never met him, but Lerach had willingly taken a piece of the Oxford Health settlement that Vogel had helped them get, even though he had no idea whether Mel’s firm was still paying him to be a plaintiff. “I could kill Dave for doing this,” he said. “I could be wanted for murder instead of fraud.”

  Their intense discussions continued. The specter of prison rarely came up, but when it did, Lerach became more, not less, resolute about what he must do. Suddenly he was the CEO he had made a career of suing. He now felt, as those CEOs must have, that he was essentially being extorted.

  “I can fight this,” he told his wife, “and even if I have a 90 percent chance of winning, what happens if I lose?” He was not being rhetorical. He’d already been holding out, and under the federal sentencing guidelines the longer a suspect repudiated the government’s charges, the more the potential for a heftier penalty. In essence, it was not so different from the formula Lerach had used to secure big settlements from those he sued. Mel Weiss would be called to testify against him, he reminded his wife, so would Dave Bershad and Steve Schulman. In fact, they could likely lessen the sentences they were facing if they agreed to testify against him.

  Recalling Pat Coughlin’s exhortation, Bill told Michelle: “The longer I fight this the more it hurts the firm. They could get indicted.” There was also the question of the Enron settlement—no small matter. As much as $700 million could be coming to the firm from the settlements already hammered out. Lerach’s own take could be as high as $70 million. He did not want to put that money at risk. With a win in the Supreme Court against the nonsettling banks, the Enron payout could double.

  Finally, addressing the 10 percent chance he would lose if, as Bernie Ebbers did, he insisted on going to trial—and those odds might be higher—Lerach looked at his wife of all of six months and said solemnly: “I could be gone for twenty years instead of one or two.”

  On the Wednesday after Memorial Day, Jon Cuneo answered a cell phone call in Hawaii. Immediately he recognized Lerach’s voice. “Jon, we found out over the weekend that Dave has flipped. This is bad news,” Cuneo heard Lerach say. “I may have to work out a negotiated disposition.”

  Cuneo thanked his friend for the heads-up and put down the phone, stunned. He knew immediately the implications of the alert: disbarment, disgrace, the end of Bill’s run as lead lawyer in Enron and any other securities cases, probably prison. That day Lerach also directed Kathy Lichnovsky to call John Keker, his defense attorney in San Francisco, and make an appointment, “the sooner the better.”

  In Los Angeles the prosecutors remained less than certain about the strength of their case against Lerach. They too were aware that Cooperman’s credibility was shaky—Keker had pointed it out to them in an earlier meeting, when he told the government lawyers: “I have a black heart. I will eviscerate Steven Cooperman on the stand.” The government had no real evidence that Lerach had paid a single plaintiff following passage of the PSLRA a dozen years earlier. John Torkelsen was not cooperating, and his wife, Pam, could only furnish hearsay testimony.

  The key, then, was Bershad. So in the early weeks of June they were pleased to see Cristina C. Arguedas, his attorney, with Bershad in tow. Uniformly they would later praise Arguedas for guiding Bershad through his testimony, which prosecutor Douglas Axel characterized as “direct and very helpful.”

  One week after Memorial Day, in Keker’s stylishly understated three-story office tucked into a brick courtyard located in San Francisco’s Barbary Coast neighborhood, Lerach paced, refusing to sit. He was blunt. He was willing to cop a plea. But he would cooperate with the government against no one but himself; not against Mel Weiss, not Milberg Weiss, and certainly not Lerach Coughlin or any attorneys connected to the firm. Prosecutors would have to promise to pursue neither his old firm nor his current one and not to try and freeze the Enron fees or enjoin his firm from pursuing their appeal against the remaining banks with the Supreme Court.

  Then he turned slightly conciliatory, asking Keker: “How much time do you think I have to serve?” Keker, who had managed to get four years shaved off Andy Fastow’s sentence (partly because he persuaded Fastow to cooperate in both the criminal and civil Enron cases), said he would try to negotiate what is known as a section 11(c)1(c) plea agreement under the federal rules of criminal procedure. That would mean trying to predetermine a cap on how long he could serve.

  “I’ll do three years if necessary,” Lerach told his attorney.

  Still, it would involve some judicial discretion, Keker replied. It would also mean paying a big fine. Lerach balked.

  Keker held firm. “That’s what they’ll want, Bill,” he said, underscoring his client’s demands by reminding him that walking into the U.S. attorney’s office with both guns blazing wasn’t the way to begin negotiating.

  “What if Mel comes with you?” Keker asked.

  Lerach was taken aback, but not for long. Within a week Lerach and his lawyer flew to New York. The afternoon meeting took place at the Ritz, at a table beneath a window overlooking Central Park. Lerach and Keker sat on one side, Weiss and his attorney Ben Brafman on the other.

  Lerach got right to the point. “John thinks we can do only about a year if we go in together,” he offered. “We can negotiate to keep our firms intact, but we’ll have to admit some wrongdoing and pay a fine. I’ll even volunteer to do more time than you.”

  The words had barely left Lerach’s mouth when Weiss replied, “No. They want you, not me.”

  Brafman, whom Lerach had assumed favored a negotiated plea, amplified Weiss’s answer. “My client is a great humanitarian. He has led a generous and philanthropic life. He is a pillar of the community. He will not humiliate himself.” To which Weiss added: “If we go to trial in this town and get a couple of Jews on the jury, we’ll win.”

  On their way to the airport to fly home, Keker told his client that Weiss and Brafman had a few surprises coming. “Fat chance of getting a change of venue to New York,” he told Lerach. “When Bersh
ad opens, the dam will burst.” The pointed message was really aimed at his own client.

  Keker’s next trip would be to Los Angeles to begin negotiating with acting U.S. attorney George Cardona and Richard Robinson and his team. Immediately, Keker sensed the government lawyers were in the mood to make a deal. What he did not know was that the prosecutors had been seriously debating only weeks earlier whether they had a strong case against Lerach—or one good enough to take to a jury at all. But as Keker had foreseen, Bershad was indeed the watershed witness.

  Bill Lerach, his client, was willing to admit guilt, pay a fine, and even do time, Keker told the prosecutors. He would not cooperate in any prosecution against his former partners in either New York or San Diego, and he wanted a binding agreement. “If my client makes a public statement or his plea becomes public and then backfires, we will not go forward,” Keker announced. Then he suggested a prison sentence—one year.

  Cardona was in no mood to make a deal and have it publicly fall apart, either. But prosecutors were contemplating a prison term of between thirty months and three years, Keker was told to tell his client.

  IF STONERIDGE V. SCIENTIFIC-ATLANTA had been a medieval battlefield, the view of the field would have been dominated by a vast array of opposing forces, their war flags at full staff and flying colors, horizon to horizon.

  Influential Democratic committee chairmen on Capitol Hill who had always been supportive of Lerach—and vice versa—weighed in on the plaintiffs’ side. With a quiet assist from Jon Cuneo, Barney Frank, chairman of the House Financial Services Committee, and John Conyers, Jr., chairman of the House Judiciary Committee, filed an amicus brief in the Stoneridge case, saying that “if the Supreme Court decides against investors in this case, third parties will effectively be immune from suit no matter how reprehensible their conduct.”