Circle of Greed

by Patrick Dillon

  THOM MROZEK, SPOKESPERSON FOR the U.S. attorney’s office for the Central District of California, spent most of Monday, September 17, preparing the press release that his office would issue the following morning. When he finished, it said: “William S. Lerach, formerly a name partner in the law firm now known as Milberg Weiss, has agreed to plead guilty to a federal conspiracy charge and acknowledge that he and others agreed to conceal from judges in federal courts Milberg Weiss’ secret payment arrangements with named plaintiffs in class-action lawsuits.”

  Gleeful voices from Wall Street to Silicon Valley shouted out their predictable hosannas when called upon for reaction by the financial press. In certain quarters within the nonbusiness media, however, it sounded almost as if a kind of buyer’s remorse had already kicked in.

  The San Jose Mercury News, the closest thing to a paper of record for the high-tech industry, was emblematic of that ambiguity. It published an epitaph that gave Lerach his due without demonizing him: “For the past two decades, the dreams of Silicon Valley executives have been plagued by two great foes. To the north, there lies Microsoft. And to the south, there is Bill Lerach, whose San Diego law firm filed numerous securities class-action lawsuits against valley companies. But Lerach’s crusade is over.”

  “He’s obviously had a profound impact,” Steve Schatz, an attorney at Wilson, Sonsini, Goodrich & Rosati, was quoted as saying. “He was clearly one of the most significant lawyers in the country. And this is accordingly a significant event.”

  Another significant event was unfolding in Los Angeles, although it would take months to resolve. In mid-July, shortly after Dave Bershad entered his guilty plea and as Lerach and Keker were nearing their agreement with the prosecutors, Ben Brafman, Mel Weiss’s attorney, called Lerach with a question. “Bill, are any of those two-year sentences still available?”

  Lerach did not think so, but he replied that the only way to find out was to ask the prosecutors. Brafman subsequently did just that, although what he heard were terms that his client could not yet abide. Because Weiss had been holding out for so long, any deal would also have to include a guilty plea on the part of Weiss’s law firm and would require a hefty fine. Even then, prosecutors informed Brafman, Weiss would likely be facing several years, not just one or two in prison. It was too much. Even with Bershad in the fold and Lerach about to come in and Schulman likely to follow, Weiss dismissed the idea of a plea bargain before Brafman had begun to negotiate in earnest.

  During the weeks leading up to Lerach’s plea, Steve Schulman’s attorneys were concluding negotiations with Robinson, McGahan, and Axel. As part of the agreement, Schulman agreed to testify that he and Weiss had conspired to conceal secret payments from judges. The plea was entered on September 20 and averted a possible twenty-year sentence. Schulman had given them every reason to be confident. The same day he entered his plea, a seventy-five-page, twenty-count superseding indictment was issued against the firm of Milberg Weiss and against its founder, Mel Weiss. The charges were breathtaking in their accuracy and scope, beginning with detailed payments to Seymour Lazar and his attorney Paul Selzer, and ending with conspiracy to pay kickbacks to Howard Vogel. In all, the complaint outlined fraudulent acts that netted the firm at least $250 million in attorneys’ fees.

  FOR THE REGENTS OF the University of California, the news of Lerach’s plea and subsequent indictment of his former firm gave all the more credence to the roles of Judge Irving and his team as intermediaries handling the Enron case. Urgent phone calls between Pat Coughlin (speaking for the Coughlin Stoia attorneys), Judge Irving, and Chris Patti (speaking for the university) brought reassurance that the entreaty to restore the plaintiffs’ certification for lawsuits against the remaining banks would still be made in the Supreme Court. In fact, a motion was being prepared to consolidate the Enron case with the petition by the Stoneridge plaintiffs. As it stood, the high court had agreed to hear Stoneridge, and by conjoining in that case, Chris Patti, Judge Irving, and the Coughlin Stoia attorneys believed they would have a better chance of being heard.

  Meanwhile, under Judge Harmon’s direction, the lead attorneys prepared a motion to distribute $7.2 billion to the plaintiffs in the Enron settlements. An accompanying motion for attorneys’ fees was due in federal court around the first of the year. The indictments and guilty pleas did not wipe out the settlements, although lawsuits demanding that the fees be nullified were certain to follow.

  ON THE MAIN FLOOR of Bill Lerach’s La Jolla villa, his home office featured a deep, four-foot-wide fireplace, a twelve-foot ceiling, a view through French doors to the garden, the size and scale of which sometimes made puttering more of an engineering conundrum than a landscaping issue. Nearly replicating his San Diego office, documents competed with documents and news clippings for space on his desk, where only one area was sacrosanct, that holding the wicker basket containing Tommy, his companionable Chihuahua. Above the fireplace on the forty-eight-inch flat panel screen, the CNBC financial channel was on anytime he occupied the room, and even when he wasn’t, and on this day, Tuesday, January 15, 2008, the screen held his attention. The subprime meltdown continued to rage. Citigroup, the largest U.S. bank, reported losses of nearly $10 billion for the fourth quarter and announced it would cut dividends to investors by 41 percent. Banks, investors, mortgage brokers, and accountants were blaming each other for the losses now heading into the trillions of dollars.

  Hadn’t he predicted all this?

  On this morning, a legal case before the Supreme Court shared the top of the news with the subprime mess. The heart of the case that the Supreme Court would rule on this morning was whether Charter Communications’ vendors—Scientific-Atlanta and Motorola—could be seen as schemers who were themselves culpable in helping lead Charter’s investors astray. His own law firm was asking for as much as $30 billion in recoveries in a similar case against the remaining Enron defendants. His colleagues had tried but failed to persuade the high court to link the two cases. Although not directly involved, Lerach had shaped the strategy for how the Stoneridge plaintiffs were going after third parties, just as he had led the way in the Enron case. Lerach’s firm had joined thirty state attorneys general in lobbying for the plaintiffs, even filing their own briefs with the high court. Lerach’s firm had even covered the Stoneridge plaintiffs’ costs. Lerach also had dispatched Dan Newman, a seasoned communications and political operative, to Capitol Hill. There Newman enlisted Pennsylvania Republican Senator Arlen Specter and Connecticut Democratic Senator Christopher Dodd, chairman of the banking committee, to write letters to the court supporting the plaintiffs’ arguments.

  With his own clients maneuvered out of the case directly, Stoneridge was now the proxy for his former firm’s lawsuit against Enron’s third-party schemers. As the drama built toward a climactic landmark, some curious developments unfolded.

  After the high court agreed in March 2007 to hear Stoneridge, Chief Justice John G. Roberts, Jr., and Justice Stephen G. Breyer recused themselves. Neither gave any explanation, but a review of their 2006 financial disclosure forms revealed that both justices owned somewhere between $50,000 and $100,000 of stock in Cisco Systems, which had acquired Scientific-Atlanta in 2005. Rumors were rife among the lawyers involved in the case that one or both judges might sell their stock and rejoin the case.

  That is ultimately what occurred. But, on September 20, 2007, the Supreme Court put out an official announcement without elaboration stating that Roberts had reentered the case. Court watchers, extrapolating from Central Bank and other business law cases, believed that the lineup was now stacked against plaintiffs’ lawyers. Six of the nine justices on the court in 2007 sat in 1994. Three of them—John Paul Stevens, Ruth Bader Ginsburg, and David Souter—had dissented in the Central Bank case. Justices Antonin Scalia and Clarence Thomas had joined Anthony Kennedy’s majority opinion. Among the three new judges were Roberts and Samuel A. Alito, Jr., both staunch judicial conservatives. The third new justice, Stephen Breyer, was a
Democratic-appointed liberal who essentially seemed uninterested in business law. Besides, he held to his recusal in Stoneridge. Pat Coughlin, waiting in the wings with his Enron case, was hoping for a 4–4 tie. Such a result would have left the Eighth Circuit’s decision intact and thus wouldn’t have helped Stanley Grossman or his Stoneridge investors—but it would have definitely put the Enron case, which was next in the queue, front and center. And siding with Enron’s banks wouldn’t have been easy—even for justices with lifetime appointments.

  Shortly before 8:30 A.M. Pacific Time, the news arrived. The high court ruled 5–3 against the Stoneridge petitioners. Writing for the majority, as he had in Central Bank, Justice Kennedy ruled that investors were not entitled to damages because they did not rely on the statements of the two accused companies when they chose to buy and hold the Charter stock.*

  “Absolutely ridiculous,” Lerach hissed, when Darren Robbins, a young partner at the firm where Lerach’s name had recently been removed, called to get his take on the decision. “Of course they didn’t rely on their statements; there were no statements. They relied on Charter’s fraud!” Lerach was now screaming into his cell phone and at his television screen simultaneously. “And how did Charter commit the fraud? It got help from third parties. What’s Charter going to do, tell shareholders to ask Scientific-Atlanta and Motorola if they had cooked the numbers to help Charter cook its books? Blow the whistle on the liars who helped it lie?”

  Lerach was furious, not surprised. Unfinished business remained with the remaining Enron defendants, but the Supreme Court seemed intent on denying him and his former firm that business. By turning back the Stoneridge plaintiffs, the justices had said that third parties—such as the Enron banks, accountants, and lawyers—even though they colluded in the fraud, could not be sued if investors did not rely on them directly.

  “God damn Kennedy!” Lerach continued to shout at the television. “He should have recused himself! His goddamn son is a director of Credit Suisse First Boston! His own blood relative has a vested interest in how the Stoneridge case comes out. Now he’s set the table. Our case is dead.”

  Then he made a quick calculation. If the remaining Enron defendants had been forced to settle—or even better, if Paul Howes and Pat Coughlin had managed to get them into trial in Houston—and the ultimate payout would have even approached $20 billion to $25 billion, then his own take would have been $100 million, before taxes. Now, with this precedent, it would probably be nothing at all.

  Lerach was reaching, but not by much. Had his plaintiffs, the Regents of the University of California, been able to argue along with the Stone ridge plaintiffs, they would have petitioned to have Kennedy removed from the case because his son Gregory, as an executive of one of the defendants, had a vested interest in the outcome of the case.

  Officially, Bill Lerach was retired, but no visitor would have sensed it. His house, his garden, and his view of the Pacific were to be his Elba, where he was supposed to work in exile. But the emphasis was still on work, not retreat. Adjacent to the fireplace and opposite the windows to the garden rose five wide, eleven-foot bookcases, filled with videos but mostly books. Together with two similar-size bookcases along a wall separating his home office from a smaller communications center containing computers, telephones, and his faxes, the shelves held more than two thousand volumes—biography, politics, philosophy, literature, World War II history, history of religion, history of civil rights, history of our markets, and the world economy. This impressed his friends who guessed he had read every one. He demurred a bit, saying, “Most of them,” then added, “but I do remember just about everything of what I’ve read.”

  This sagacity had covered up his own admitted insecurities and served him in preparing for legal battles with the top CEOs in America as well as those Olympian lawyers educated at Harvard, Yale, and Stanford who had been favored with judicial clerkships and connections through their preordained networks to the so-called top-tier law firms—Sullivan & Cromwell, Mayer Brown, Ropes & Gray, Cravath & Swaine, Davis Polk, Milbank Tweed, Vinson & Elkins, Gibson, Dunn & Crutcher, and even Reed Smith, his own former firm. He had prepared better, worked harder, framed and presented his cases more clearly. He had won over judges, juries, and journalists—some journalists, anyway. He had made plenty of enemies in business and the bar, some of whom didn’t mind admitting that they were jealous of all the money Bill Lerach had made for himself and his partners. And yes, he’d made many friends along the way, too, and soon he was going to draw on those friendships to help him in his biggest fight yet—the one for his freedom.

  And so, even with the sound of the talking heads blazing away on television analyzing the dark financial news and the infuriating Supreme Court decision, William S. Lerach plunged back into what he’d been working on frantically for weeks. With his trusty black felt-tip Sharpie pen, he began scribbling edits onto a ninety-page document. This was the tenth version of what would ultimately be his memo to U.S. District Court John Walter, who was scheduled to sentence him on February 11, 2008. The memo was essentially a plea for leniency from the federal guidelines stipulating that he serve twenty-seven to thirty-three months at the discretion of the judge.

  The legal brief Lerach was editing and re-editing, adding statutes on sentencing and citing previous cases whose outcomes could be interpreted in his own favor, was one of two final salvos he would fire in his withering self-defense. The second was a bundle of more than 150 reference letters from a wide array of allies, opponents, friends, and family members, including his former wife Star, and former clients. Federal and state judges who had heard his cases were among the petitioners for lenience, as were public officials such as U.S. Senator Carl Levin of Michigan and political activist Ralph Nader.

  University presidents and law professors submitted letters, including one by Mary Crossley, dean of the University of Pittsburgh Law School, Lerach’s alma mater. Citing previous lectures Lerach had delivered to Pitt law students, she had made the judge an offer: “Given Mr. Lerach’s extensive experience as a litigator, he would be able to offer students valuable real world illustrations of how major litigations are conceived and the interplay of substantive law with procedural rules,” she wrote on December 21, 2007. Intending no irony, she also proposed that Lerach deliver lectures on legal ethics and professional responsibilities—who more than he knew the perils and pitfalls of legal ethics? What’s more, Crossley was proposing that Lerach’s teaching commitment begin in January 2009, a date only seven months after he was to enter prison.

  Not only did the audacious prospect of reducing his prison time by more than two-thirds animate him, the very idea that he could become an educator, post partum, to the pugnacious practice of the law, and the bloody business of it, inspired his imagination. Lerach could envision himself lecturing, not necessarily confined to law, but teaching a new generation about the history of our markets, our financial systems, capital ideology, regulation, and what his friend Robert Monks (author, investor, activist, and a founding trustee of the Federal Employees’ Retirement System) called the “competing interests of corporations and society.”

  The phone rang again, interrupting his reverie. Ed Iwata, a reporter for USA Today, was seeking his response to the Supreme Court decision. No, he had nothing to say on Stoneridge. That wasn’t his case, and because of his predicament, he wasn’t allowed to comment. Did he have opinions? When did he not?

  “One thing I might suggest, Ed,” Lerach said. “Find out whether Justice Kennedy might have recused himself from that case. Find out what his son, I think his name is Gregory, does for a living. You might start by calling Credit Suisse First Boston.” He waited, letting the reporter process the connection. “That’s right. CS First Boston, one of our Enron defendants. Good luck.”

  Lerach hung up. Then gazed out the window at the garden, thinking, conjuring. What was that Shakespeare line near the end of Julius Caesar? He waited, as if standing before a jury, timing his delivery: “‘M
ischief, thou art afoot. Take thou what course thou wilt.’” Then he added a line of his own. “Now go do thy work.”

  “DOES LIABILITY EXIST UNDER rule 10b of the Securities Exchange Act of 1934 and Securities and Exchange Commission Rule 10b-5, where an actor knowingly uses or employs deceptive devices and contrivances, as part of a scheme to defraud investors in another public company, but itself makes no affirmative misrepresentations to the market?” The question was posed by the petitioners seeking to gain certification from the Supreme Court in order to resume their lawsuit against the remaining Enron defendants.

  One week after the Stoneridge verdict, Justice Kennedy recused himself when it came time to answer. Justice Breyer did rejoin his colleagues, and together they voted unanimously not to hear the petition. What’s more, the justices did so without comment. Their silence was universally understood to mean that with the Stoneridge decision, scheme liability making secondary parties as culpable as primary perpetrators of fraud was essentially dead. Stoneridge was now the law of the land.

  If these machinations by the high court not to hear the petition of the Regents of the University of California seem Kafkaesque in hindsight, especially considering what happened subsequently to the economy, they seemed that way at the time to Bill Lerach and his dwindling circle of allies and beleaguered band of San Diego–based partners. By the time Stoneridge and, by proxy, the remaining Enron cases were decided, Lerach and those associated with him had been neutralized as critics of capitalism’s excesses. Considering what was just around the corner—a deep global recession exacerbated at every turn by unbridled corporate greed, along with fraud and incompetence on an unimaginable scale in the executive suites and boardrooms of the nation’s top financial institutions—the failures to heed his warnings about corporate capitalism’s impending implosion did not really come at Lerach’s expense. They came at the expense of every person in this country who owned stocks and bonds and who’d been planning on using them to buy a home, send a kid to college, or to retire.