Circle of Greed

by Patrick Dillon

  Scientific-Atlanta and Motorola had retained Mayer Brown, the Chicago-based law firm Lerach had faced in Nucorp, Lexecon, and earlier Enron cases. This time the Mayer Brown attorney would be Stephen Shapiro, who had appeared before the Supreme Court more than a dozen times. Offering support was Joe Grundfest, the former SEC commissioner, Stanford professor, and frequent Lerach critic, who told The Wall Street Journal that supporters of the plaintiffs have “been running this more like a political campaign than a Supreme Court brief.”

  So was the other side. Virtually every Wall Street bank, and many of the nation’s most prominent Fortune 500 companies, along with brigades of free market economists, lawyers, and pundits had lined up on the side of Charter Communications’ vendors. Just as an earlier generation of Republicans had caricatured the infamous McDonald’s spilled coffee case, conservatives now singled out Stoneridge as a poster child for litigation run amok. It was easier to play this card in an obscure business dispute like Stoneridge than it would have been in the Enron case. Securities litigation, Secretary of the Treasury Henry M. Paulson, Jr., had proclaimed the previous November—without mentioning Enron—is the “Achilles’ heel of our economy.”

  John Engler, former Republican governor of Michigan and president of the National Manufacturers Association, put it this way: “For America’s global economic strength, Washington’s biggest decision in 2007 will not be made in Congress or the White House but in the Supreme Court.” Echoing this sentiment, the editorial page editors of The Wall Street Journal called Stoneridge “the business case of the year.” The Economist went further, terming the case “by general consent the most important securities-litigation clash for a generation.”

  The Bush administration was of two minds, apparently because the president was conflicted. He was no fan of the plaintiffs’ bar, but George W. Bush had been burned by his perceived closeness to Ken Lay and the spate of corporate fraud cases unfolding on his watch. In his first term, Bush had given a major speech about corporate responsibility that surprised many people, which he followed up by signing Sarbanes-Oxley. Bush’s ambivalence filtered out from the White House to other executive branch agencies and offices, including the SEC chairman’s suite occupied by Christopher Cox and the solicitor general’s post manned by Paul D. Clement.

  One of the youngest solicitor generals in U.S. history, Clement was establishing himself as among the finest legal minds in the country. He was conservative—of that there was no question—but the former star student at Harvard Law performed skillfully in a challenging political environment for a lawyer with intellectual independence. Among other things, Clement had cautioned the Bush administration officials that their plans to water down Environmental Protection Agency rules governing ozone protection contradicted the agency’s previous submissions to the Supreme Court and had warned White House lawyers of the adverse implications of the administration’s policy regarding indefinite detention of Guantánamo prisoners—even while arguing the government’s position before the Supreme Court.

  Historically and statutorily the solicitor general and the SEC commissioner, although appointed by the president, are insulated somewhat from the political pressures emanating from the White House. Chris Cox had inherited a staff that believed private class action securities lawsuits were one of the most effective weapons in policing corporate larceny, and he had allowed the SEC to file an amicus brief in favor of the plaintiffs before the Ninth Circuit. His staff was inclined to do likewise in Stoneridge. This time his board was split, with two Democratic members of the SEC favoring the plaintiffs and the two Republicans being against. Cox, the former California congressman who had played a lead role in passage of the PSLRA and who had singled out Lerach for personal condemnation, surprised the legal community by siding with the Democrats.

  By statute, the rules governing whether the SEC files amicus briefs are different before the Supreme Court; the 3–2 vote was really to ask the solicitor general to convey the commission’s view to the high court. This, Clement was ultimately unwilling to do because it did not reflect the view of the administration or, as became clear, of President Bush himself. Treasury Secretary Paulson was on record as favoring curbs on securities lawsuits, and after the SEC vote was taken, White House economic adviser Al Hubbard, a close friend of the president, told the Associated Press that Bush believed federal securities regulators, not shareholders, were the proper watchdogs over bad corporate actors. “We think the SEC is the right entity to bring those lawsuits and make sure investors are protected,” Hubbard said. “We are a society that is overly litigious.”

  Clement believed that if two parts of the executive branch hold divergent policy perspectives while holding “equally legally viable” positions, the solicitor general was obligated to ask the White House for guidance. When Clement did this in the Stoneridge case, he was informed by William K. Kelley, a lawyer in the White House counsel’s office, that the president believed the most important public policy consideration at play was reducing the number of “unnecessary lawsuits.”

  The upshot was a nuanced thirty-six-page brief from the solicitor general arguing against the plaintiffs. In it, Clement acknowledged the value to shareholders of investor lawsuits, but he laid down a subtle marker: although the SEC supported such litigation, Clement essentially responded that the SEC shouldn’t be foisting off its own responsibilities for ensuring honest conduct in the nation’s boardrooms solely onto private sector lawyers. Using the logic of the Central Bank case, Clement also pointed out that nowhere in their pleadings did Stoneridge Securities allege that it had been duped by public statements made by Scientific-Atlanta or Motorola. Finally, Clement noted that Congress had had ample time to amend the Central Bank case but had not done so. “Congress considered, then rejected, a proposal to create an express right of action for aiding and abetting,” he wrote.

  To those who knew Clement, this was the nut of his argument: whether or not the Central Bank case was bad law, only Congress could fix it now. The same month longtime Lerach nemesis Joe Grundfest published a paper with the same conclusion. The title said it all: “Scheme Liability: A Question for Congress, Not for the Court.”

  To Lerach and the plaintiffs’ bar, relying on the reasoning of the Central Bank case took securities law into an Alice-in-Wonderland world where words no longer had any objective meaning. The Eighth Circuit and now the solicitor general, they believed, were employing circular logic. Yes, it was true that shareholders didn’t rely on Scientific-Atlanta and Motorola’s deceptive conduct when they purchased stock in Charter Communications, and that it was Charter’s public statements they relied upon. Yet Charter simply could not have made those public assertions without the collusion of its vendors. It was all well and good to essentially call for tighter SEC enforcement, but how could the shareholders recover their losses?

  By the summer of 2007 it was out of the hands of politicians, government lawyers, and plaintiffs’ attorneys. The case was now in the arms of the justices of the Supreme Court—at least those who hadn’t recused themselves, or who had recused themselves and then vacated their recusal, and those who didn’t recuse themselves but perhaps should have.

  IN EARLY SUMMER The Wall Street Journal and various online outlets reported that David Bershad was talking to prosecutors. One headline on a respected Web site referred to Bershad, a Cornell graduate, as the Ivy League Joe Valachi—the first Mafia member to publicly disclose not only the existence of the mob in America but its inner workings.

  This news confirmed Lerach’s worst fears. In Los Angeles, Bershad, sixty-seven years old and facing the real possibility of a prison sentence of twenty years or more, was detailing for prosecutors Mel Weiss’s trips to Florida carrying cash for plaintiffs as a way of avoiding paper trails. He described the slush fund paying the plaintiffs, set up in New York with Lerach’s participation, and how the partners were repaid by income from the firm—money withheld from unknowing partners. He disclosed the deal Weiss had struck with
Howard Vogel’s attorney to pay his plaintiff-client, well after the PSLRA forbade such payments. He detailed the payments to Seymour Lazar, who would now face charges of perjury, and to his attorney, Paul Selzer.

  Three weeks later, on July 9, 2007, Bershad entered a guilty plea in the Los Angeles courtroom of U.S. District Court Judge John F. Walter. Once entered, the plea was made public. In its most telling section, paragraph eighteen, Bershad was said to “cooperate fully with the USAO, the Internal Revenue Service and the United States Postal Service.” Robert Luskin, one of Bershad’s defense lawyers, proclaimed: “David Bershad is committed to making amends for what he has done.”

  Separately, Bill Lerach, Mel Weiss, and Steve Schulman took notice and began making plans. Heeding Pat Coughlin’s counsel, Lerach began writing letters to his clients, and those letters, sent in secret, contained words he would use in his retirement announcement before the end of the summer. He also began planning what he would say to his former wife Star and to his three children, Gretchen, Shannon, and Dillon. And what he would say in court, when he pled guilty.

  Steve Schulman began rethinking his own holdout. He called his own lawyers, dropping his indignant and defiant tone. Now his concerns centered on how he could salvage a minimum prison sentence. He knew the price would be high. He’d have to tell prosecutors everything. But with Bershad in ahead of him, he might not be able to improve on what his former partner probably had already told the prosecutors or was about to tell them; Schulman sensed the window for his own opportunity shutting. He too was authorizing his representatives to initiate negotiations for a plea.

  Mel Weiss called Ben Brafman, his attorney, and told him he was redoubling his defense. As far as he was concerned, he was still “Partner A” in the indictment. They should continue to prepare for a criminal trial.

  In the war room in Los Angeles, assistant U.S. attorneys Richard Robinson, Doug Axel, and Bob McGahan were working on a new indictment. It would supersede the previous citation against the law firm of Milberg, Weiss, Bershad & Schulman. New allegations would be made and a new name added: that of Melvyn I. Weiss.

  ANOTHER WEDDING BROUGHT Bill Lerach and Mel Weiss together during the summer of 2007. This event took place in a villa outside Bologna, Italy, where Tara Lazar, the Italian-trained culinary artist and daughter of Seymour Lazar, was married.

  At first Weiss had balked at attending, telling Lerach that any overt gesture toward their indicted friend and coconspirator would draw undue attention to them. “For Christ’s sake, Mel,” Lerach had responded, “he’s been a loyal friend for over twenty years. He loves you. We owe him support. Besides, we’re honoring his family. The prosecutors aren’t going to care. Michelle and I are going. You and Bobbi should too.”

  Lerach knew the pathway to Weiss’s vulnerabilities—appeal to his pride and sense of honor. Weiss said he’d talk it over with his wife.

  Which is why, on the afternoon before the wedding, Bill and Michelle Lerach found themselves sitting at the bar of their hotel near the grand Piazza Maggiore in the heart of old Bologna with Bobbi Weiss, Mel Weiss’s wife of more than forty years. Showing his appreciation that Mel and Bobbi had decided to join the celebration, Lerach asked her how she was faring under the pressure of the investigation. She seemed startled by the question but kept her composure. “I just don’t understand why they don’t understand all those good deeds he’s been doing all his life,” she replied. “Bill, why won’t they excuse this?”

  Neither Lerach nor Michelle had an answer.

  Late the next afternoon, the wedding party assembled in the ancient piazza. From there they would travel by bus to the historic Villa Dolfi Ratta in the city of San Lazzaro di Savena, about six kilometers from Bologna. As they waited, Lerach and Weiss encountered each other, and the younger man suggested they take a walk through the giant square.

  The two strolled on Etruscan cobblestones burnished by millions of feet over half a millennium to the piazza’s statues of high order—Neptune, Pope Gregory XIII, and a Madonna. The heat of the day had passed, and the soft light that enveloped everything, filtered by old growth above and around them, took on a gauzy, languid disposition that provided momentary asylum.

  Gently but imploringly, Lerach tried one last time. “Mel, I’m going in. You’ve got to come with me. It’s the only way.”

  Weiss took a step backward and looked benignly at his protégé. “I’ve already told you. They want you more than me.”

  “I’m going, Mel,” Lerach repeated, trying to dislodge Weiss.

  “Godspeed,” Weiss replied.

  The wedding commenced at sunset, with Tara Lazar’s cousin Rabbi David Lazar marrying the couple under the chuppa, the traditional Jewish matrimonial canopy. Afterward, as they were about to sit down to the wedding supper at a huge horseshoe table seating 150 guests, Lerach spied a roaming photographer. He grabbed Lazar by one tuxedoed arm and Weiss by the other and proposed loudly, “Let’s get a photograph of the three conspirators!” Weiss shrieked in horror and bolted.

  Seymour Lazar’s newly married daughter Tara witnessed the scene, which some guests found amusing. Tara didn’t. “It broke my heart,” she recalled.

  * Apparently he wasn’t conservative enough, or perhaps not young enough: When a vacancy arose in September 2005, Bush selected Samuel Alito for the court instead.

  28

  A BROAD DEFINITION OF DECEIT

  For months, rumors had been rampant, not about whether he would step aside but when. Since early June the Lerach Coughlin Web site had broadcast this message: “As has been speculated on Internet blogs and in newspaper articles, after thirty-five years of successfully practicing law, Bill Lerach is considering retirement. The investigation into allegedly improper activity at Milberg Weiss has continued for almost seven years, and Mr. Lerach is cognizant of the fact that although our firm has never been a target of this or any other investigation, the investigation should not become a distraction to our firm and its ongoing work.”

  In his office high above the city of San Diego and its harbor stretching all the way to the Pacific, from where he’d personally reordered wealth in America—wrenching it from corporations, along with their banks, auditors, and insurance companies, and redistributing the money (minus his own cut) to private and institutional investors—Lerach composed to friends and colleagues his final memo, his farewell. The phone rang. Calling was Dillon, his eleven-year-old son. A Boy Scout who had attained the rank of Star—two levels shy of Eagle Scout—Dillon had every reason to be proud. That wasn’t why he was calling on this summer’s day. At camp some other boys had called him “a cheat—just like your father.” Dillon was upset.

  Months earlier, in school, as news accounts began speculating about his father’s possible indictment, Dillon’s teachers had taken him aside, consoled him, and tried to persuade him that his classmates didn’t read newspapers. Obviously, that wasn’t true. Now he was being ridiculed, and he wanted to know why. Before calling his dad, the boy confronted Star, his mother, demanding to see the articles written about his father. She reluctantly turned over clippings she’d been keeping, and Dillon had read every one.

  “Dad, I need to know,” he told his father when he called. “Did you do the things that they accused you of in the paper?”

  Nervously, Star eavesdropped, hoping her former husband would neither deflect that question nor stick to the party line about the system being against him because of what he had accomplished.

  “Yes, Dillon, I did the things they said,” Lerach softly told his youngest child. “I did something wrong and I have to pay a price … You will have to make decisions later in your life that will be hard.” Lerach held his breath, listening to the silence on the other end of the phone.

  “I’m glad you didn’t lie to me,” he heard his son say. “I still love you.”

  A week later, on the last day of August, following a brief ceremony akin to striking the colors, Lerach’s name was deleted from the rolls of the firm. F
rom now on the only attorney Lerach would be working with was John Keker, his defense lawyer.

  CONTRARY TO WHAT HE had initially told Keker, the prospect of serving three years in prison unsettled Lerach. At his bidding, Keker countered with eighteen months. The prosecutors held firm. After frustrating exchanges, one of the attorneys on Keker’s team suggested judicial mediation. The concept called for a judge other than the trial judge to review the evidence and arguments and arrive at a resolution that not only would satisfy both the prosecution and defense but would be likely to withstand the scrutiny of the judge who would ultimately pass sentence on Lerach.

  Keker floated the idea to George Cardona, the practical-minded prosecutor, whom he respected. The acting U.S. attorney agreed, provided the mediator would be U.S. District Court Judge A. Howard Matz, a Harvard Law graduate and former criminal defense lawyer. Matz had overseen the grand jury hearing evidence in the case and, with the exception of the trial judge, was the jurist most familiar with the facts.* What’s more, with Matz, a sixty-four-year-old Clinton appointee, little time would be wasted. His chambers were next door to those of Judge John Walter, who was overseeing all the Milberg Weiss criminal court cases. Matz and Walter were not only neighbors in the federal courthouse but friends as well.

  Judge Matz believed Judge Walter would never accept an eighteen-month sentence. Matz ultimately advised both sides that twenty-four months might be the magic number to reach a deal—along with a fine of several million dollars.

  Speaking for the government, Cardona agreed with the terms: there would be no separate indictment of Lerach, nor one against anyone in his firm or the firm itself. Lerach would not be compelled to testify against anyone. There would be no freezing of assets. This time there would be little resistance from Bill Lerach. And with the agreement would come vindication for Richard Robinson and the rest of the government lawyers. With Lerach’s guilty plea, the complaints about a political vendetta would have to go away—or so they assumed.