by Coll, Steve;
Settlement negotiations began quickly and seemed promising at first. Meeting in neutral cities such as Tulsa, Oklahoma, and Nashville, Tennessee, settlement teams from Pennzoil and Texaco discussed in detail a swap of oil and gas reserves that would give to Hugh Liedtke the assets taken by Texaco. There was talk, too, about a friendly merger between Texaco and Pennzoil that would include a top position in the new company for Liedtke. (In the first hours after the verdict was handed down, excited analysts speculated that the easiest way for Texaco to avoid a bankruptcy filing would be for the company to launch a hostile takeover attempt against Pennzoil.) But plummeting worldwide oil prices during the first weeks after the verdict complicated the negotiations. In fact, so far did oil prices fall early in 1986 that it began to appear that Pennzoil was far better off with the cash awarded by the jury than it would have been if it had acquired three-sevenths of Getty Oil. Texaco vice-chairman Jim Kinnear even calculated that if Pennzoil’s bid for Getty Oil had succeeded, Hugh Liedtke’s company would have wound up with a negative net worth by the end of 1986. Instead, because of its courthouse windfall, Pennzoil was one of the few large oil companies not deeply shaken by the oil price collapse. Texaco faced a double whammy: plummeting prices and a multibillion-dollar civil judgment.
In January 1986, the settlement talks ended when Texaco presented the Pennzoil board of directors with a merger offer far below Liedtke’s expectations. The Pennzoil chairman responded by publicly attacking Texaco’s management for the first time since the verdict, calling its offer “almost laughable” and declaring that McKinley and his executives were running their company as a “fiefdom.” Liedtke said that he didn’t see “a chance of doing anything except litigating.” McKinley, stunned at Pennzoil’s response to his merger offer, said that he was “surprised at Pennzoil’s characterization of our settlement discussions. Texaco has been dealing in good faith in all settlement negotiations.”
Thrust into a demanding period of crisis management, McKinley and his executives never conceded that they had done anything wrong. The adjectives they employed most frequently to describe their predicament were “absurd” and “outrageous.” A battery of public relations and legal firms was retained to press Texaco’s appeals in courts and in the forum of public opinion. Editorial comment about the case was roughly divided along regional lines; Northeastern newspapers took up Texaco’s cause, while a number of Texas papers sided with Pennzoil, particularly in response to Texaco’s implicit attacks on the integrity of the Texas legal system. In the appeals process, Dick Miller’s role in the case was predictably diminished; rumors began to circulate among the downtown Houston law firms that Miller, Keeton, Bristow & Brown was on the verge of dissolution. Texaco retained the renowned Manhattan litigator David Boies, of Cravath, Swaine & Moore, to lead its appeal effort, focusing the attack on Judge Casseb’s jury charge and the evidentiary rulings made by Farris early in the trial.
Stoical to the end, the Texaco executives in White Plains fortified the bulwarks and led their defense unyieldingly. Under heavy pressure, however, the unified front presented at trial in courtroom 151 began to fracture. A new wave of lawsuits, promulgated mainly by Texaco shareholders who saw the value of their stock plunge in the aftermath of the verdict, strained the binding force of Texaco’s much-maligned indemnities. The museum sued Texaco in California, seeking to have the alleged terms of its indemnity enforced. The old Getty Oil directors, themselves under siege from class-action shareholder lawsuits, sought to defend themselves with some independence from Texaco and complained that McKinley’s lawyers had failed to defend Getty Oil’s integrity during the Houston trial. In White Plains, the pressure on the Texaco board of directors mounted. Late in 1986, chief executive John McKinley retired and the directors appointed Jim Kinnear in his place. Al DeCrane, whom many expected to be named to the top slot, was relegated to the post of chairman and promised to work cooperatively with Kinnear. McKinley said that he recommended Kinnear over DeCrane for the top job because of the former’s extensive operating experience in the oil business. (DeCrane was trained as a lawyer.) But it was also true that Kinnear was the Texaco executive least involved in the Getty Oil merger, and he was regarded both inside and outside the company as an open, accessible, and flexible leader, at least relative to DeCrane and McKinley.
Early in 1987, Texaco was devastated by the long-awaited appellate decision in the Texas state courts: the panel upheld all but $2 billion of the original $10 billion judgment, leaving Texaco liable for a total of $9.1 billion, with interest, more than enough to bankrupt the company if the judgment was enforced. When the U.S. Supreme Court weighed in two months later with its opinion on the appellate bond issue—ruling unanimously for Pennzoil—Texaco’s worst fears were realized. During a frenzied week in April, 1987, Texaco’s executives tried to negotiate a settlement with Pennzoil and simultaneously asked the Texas courts to exempt it from the state’s bond requirements. Both efforts failed. In settlement talks, Texaco offered $2 billion in cash; Liedtke insisted on $4 billion. The Pennzoil chairman was stunned when, instead of attempting to narrow the settlement gap, Texaco filed for bankruptcy protection. The stocks of both companies plummeted. By the spring of 1987, the old adversaries were still slugging at one another, only this time under a bankruptcy judge’s supervision.
Meanwhile, Gordon Getty, the man so much at the center of the events leading up to Texaco’s expensive predicament, was himself deeply embroiled in litigation. In the Matter of the Sarah C. Getty Trust, the suit filed against him by his relatives back in November 1983, with the support of Getty Oil management, dragged on and on, resembling with increasing exactness the fictional probate suit Jarndyce v. Jarndyce described in Charles Dickens’ legal satire, Bleak House. The “family settlement” proposed in 1984, in which the vast Getty fortune would be divided into four separate trusts—one for Gordon, one for J. Paul, one for the heirs of George Getty, and one for the heirs of Ronald—was stalled by tax problems and family bickering. The actual fortune, billions strong, continued to sit in its court-ordered form of U.S. Treasury bonds, generating hundreds of millions of dollars in annual interest. And since the dozens of lawyers involved in the case took their millions in fees out of the interest payments, none of the Getty clients had an urgent financial incentive to expedite a settlement; indeed, it was conceivable early in 1987 that the question of Gordon’s right to serve as sole trustee might actually be resolved in an embarrassing public trial.
Gordon himself seemed not to be bothered by the prospect. Dividing his time between his Broadway mansion in San Francisco and his new Fifth Avenue apartment in New York, he devoted himself mainly to the creation and performance of his musical compositions. He felt no sadness over the loss of Getty Oil. “I have no feeling on that score,” he declared in an interview late in 1986. “I assure you my father wouldn’t have, either. My father loved nothing better than buying in a low market and selling in a high market. He did it just as fast as he could without any twinge of remorse over getting rid of a long-held asset.
“Now, I don’t think I made any wrong moves,” Gordon continued, reflecting on the long course of his dealings with Sid Petersen, Hugh Liedtke, and John McKinley. “That trip to London was certainly a waste of time, but I don’t think it was a setback. I don’t think there were any setbacks that I can identify in the years of the trust’s relationship with Getty Oil. I can’t think of any lost ground.”
The specific “message to corporate America” intended by the jurors in Pennzoil v. Texaco was perhaps lost amid the surging publicity and legal campaigns conducted by Texaco and its adversaries in the immediate aftermath of the trial; because of the astronomical size of the judgment, the issues discussed during those campaigns had far more to do with money and law than with the ethics or economic appositeness of the great era of Wall Street merger-making in the 1980s. Still, whether it was a cause or merely a symptom, the verdict did seem to signal the end of a heady, speculative phase in Wall Street’s most
bullish cycle since the go-go years of the late 1960s.
Even before the shocking, takeover-driven insider-trading scandal first uncovered by the arrest of a young Wall Street merger banker named Dennis Levine in May 1986, there were signs that some of the merger game’s leading players had recognized that the frenzy was out of control. Marty Lipton, for example, whose large law firm and equally considerable personal reputation had risen in tandem with the takeover boom, testified before Congress in April 1985 that “takeover abuses have become a pressing national problem.” Worried that debt generated by mergers would lead eventually to crisis, Lipton lamented, “Unfortunately, the future has no political constituency.… While different in form, what we face today is not different in substance from what happened in 1928 and 1929. Leverage produces great results on the way up, but no economy ever goes in a straight line, and high leverage inevitably produces a crash when an economy turns down.” Cynics on Wall Street responded to Lipton’s warning by blithely accusing the lawyer of hypocrisy—Lipton had already cashed in on the merger boom, so where did he get off trying to plug the flow of latecomers to the game?
With the indictment on insider-trading charges of the celebrated takeover arbitrageur Ivan Boesky late in 1986, however, a sudden chill swept through the great Wall Street investment banking houses. The game, it now seemed, was up. Throughout the 1980s merger boom, Boesky had been the Street’s leading speculator in takeover stocks, often buying huge blocks of shares in advance of a takeover announcement and then making tens of millions when the merger was consummated. Boesky attributed his prescient stock purchases to dogged “research” into upcoming takeovers and to his own genius for trading, which he compared in an interview to the artistic talent of Renoir. It turned out, however, that Boesky was merely buying illegal inside information from prestigious Wall Street merger bankers.
Before his dramatic fall, Boesky published a book entitled Merger Mania in which he detailed the trading formula he supposedly used to make money speculating on takeovers. In the book, he provided a blow-by-blow account of his trading in Getty Oil stock during the fall of 1983, trading which eventually reaped him more than $50 million in profits. Following his guilty plea, Boesky pledged to cooperate with the Securities and Exchange Commission in its ongoing investigation of Wall Street speculators and investment bankers. At least one of the bankers prominently involved in the taking of Getty Oil, the dashing Marty Siegel, quickly received a subpoena. Within weeks, Siegel was singing. He told federal investigators that he had been for years accepting suitcases full of cash from Boesky in exchange for passing inside information about takeovers to the speculators. The details of their relationship were appalling—the increasingly paranoid Siegel standing in hotel lobbies awaiting Boesky’s swarthy bag men, coded phrases passed between the two by telephone, secret year-end meetings in a Manhattan coffee shop called to square their annual accounts. It turned out that Siegel had tipped Boesky about Getty Oil virtually as soon as he was retained by Gordon Getty in the fall of 1983, thus ensuring the speculator’s huge profits in the deal. As the government’s investigation continued, it promised to eventually lay bare, once and for all, the conduct of Wall Street’s most controversial bankers and lawyers during the period of their ascendancy over American finance and industry.
Siegel’s fall was portrayed and easily comprehended in the terms of classical tragedy. A young man, gifted, handsome, ambitious, arrives on Wall Street, achieves enormous success, but is destroyed by his own insatiable greed. Certainly, that overlay fit the story. But there were indications that Siegel’s fall was far more complex than that—it was suggested, for example, that his relationship with Boesky took hold not merely to shore up overdrawn personal accounts, but to further Siegel’s career as a merger specialist. With Boesky rushing in advance to Siegel’s deals, huge blocks of stock fell into hands friendly to the investment banker. It was this systemic connection, the sense that legitimate and scandalous practices in Wall Street merger banking were not easily distinguished, that began to unsettle the country as news about insider trading unfolded. So it had been sixty years earlier, in the 1920s era of stock pools and bear raids on the Street. To clean up the mess then, Roosevelt appointed one of Wall Street’s most notorious manipulators, Joseph P. Kennedy, to head a new regulatory agency. More appalling than the idea itself was the fact that it actually worked: Kennedy did energetically clean up his brethren. Slowly, the influence of Wall Street over American business ebbed, and amid the poverty of the Depression, the most scandalous practices were eradicated. By 1987, it was apparent that the cycle had been renewed: the regulators were in ascendance over Wall Street and in time normalcy would be restored to the relations between industry and finance. All of that would come too late for the Getty Oil Company and for Texaco as well. Like Marty Siegel, Texaco had tried to take something and by doing so nearly destroyed itself. (Unlike Siegel, Texaco transgressed unwittingly.) Both stories were versions of the central metaphor of the times: Wall Street, for a decade hungrier and hungrier, finally consumed by its own appetite.
Epilogue
They were sitting in the Manhattan offices of Trans World Airlines Inc. chairman Carl C. Icahn one morning in December 1987, when one of Icahn’s Wall Street lawyers started explaining exactly how the biggest lawsuit in U.S. history would play out in the bankruptcy court and how the U.S. Supreme Court would rule. Joe Jamail, the Texas “sore back lawyer” who won the case for Pennzoil at trial and who figured to pocket as much as $400 million if the suit was ever resolved, listened for three or four minutes, which is about how long he could listen to something he didn’t want to hear.
They had come to Icahn’s office to cut a deal: Jamail, Pennzoil chairman J. Hugh Liedtke, and a handful of the other lawyers involved in the case. After wallowing in Texaco’s Dickensian bankruptcy proceedings since the previous April, Pennzoil v. Texaco had again come to life, and once more the puckish Jamail was at the center of things. Carl Icahn, an enormously successful corporate raider who had gained control of TWA Inc. in a hostile takeover, had decided there was potential for profit in Texaco’s travails. After the stock market collapse in October 1987, he had purchased about 15 percent of Texaco’s stock at fire sale prices from Australian investor Robert Holmes a Court. Icahn’s plan was to use his clout as a major stockholder to force a settlement between Texaco and Pennzoil. Once freed from the uncertainties of its unprecedented legal troubles, Icahn figured, Texaco would watch its stock price rise gloriously, and he would make millions. If that didn’t happen, then Icahn could always attempt to buy Texaco himself. But to cut the deal that was essential to his plans, Icahn needed Pennzoil’s Liedtke and Jamail.
And now Jamail was saying that he had heard enough, that he was leaving. “I’m done. Let’s go, Hugh,” he drawled to Liedtke. “I’ve heard all the shit I’m going to hear.”
“Don’t get mad,” Icahn told Jamail. “That’s not going to solve anything.”
“I’m not mad. I’m just bored.”
“Where are you going?”
“I’m going to get a cold beer.”
“It’s only eleven o’clock in the morning,” Icahn observed.
“Now, look, you can’t be my guardian,” Jamail answered, his voice animated with a playful malice. “I’m going to get a cold beer. And you’re invited.”
“All right,” Carl Icahn said. “Let’s go.”
They found a tavern, threw back a few beers, and began to talk. Jamail sketched out a scenario for Icahn: he suggested that the lawsuit could probably be settled for less than $3.5 billion. He urged Icahn to visit Texaco and press for a deal. “You’re the big, bad bogeyman now, not me,” Jamail told Icahn, whose reputation for launching hostile takeovers had indeed seemed to spook Texaco in recent weeks.
Meeting several times over the next ten days with Liedtke and Texaco chief executive James Kinnear, Icahn began the shuttle diplomacy that on December 18, 1987, produced a signed $3 billion settlement of the Pennzoil lawsuit. Once th
e settlement was approved by Texaco’s bankruptcy judge, the payment was made—in cash, by wire transfer—on April 7, 1988, the same day Texaco emerged from bankruptcy protection. On that day, Pennzoil v. Texaco officially ended.
The impetus for Texaco’s historic settlement was a stunning decision by the Texas Supreme Court in November 1987 to uphold all of Pennzoil’s $10 billion judgment without a formal hearing. The Texas high court justices did review thousands of pages of legal briefs submitted by the parties, but they were apparently so convinced of Pennzoil’s righteousness that they declined to hold oral arguments in the matter. At first Texaco was merely outraged, railing in public and to the press that the Texas state court system was fundamentally corrupted by campaign contributions and open graft. Soon, however, the company began to see that anger would do little to solve the enormous problems created by the Texas Supreme Court’s decision. For one thing, the ruling sparked Icahn to make his huge purchases. For another, it left only one chance for Texaco to win its case on appeal—at the U.S. Supreme Court.
Under the U.S. court system, matters of law and justice are sharply divided between state and federal courts. The U.S. Constitution, with its familiar amendments and guarantees, governs most of the important federal law. But the Pennzoil case had been filed and then tried in Texas state court. Afterwards, appeals had been made, and turned down, in the Texas Court of Appeals and at the Texas Supreme Court. When it lost before the Texas high court in November 1987, Texaco could obtain a hearing before the U.S. Supreme Court only if it could show that an important federal issue was at stake—for example, if it could show that Texaco’s constitutional rights had been violated. Nearly all the factual and legal issues debated at the trial of Pennzoil v. Texaco were beyond the U.S. high court’s jurisdiction because they involved matters of state law. The Supreme Court would agree to hear the case only if four of its justices were convinced that a compelling constitutional issue needed to be addressed. And while Texaco’s lawyers ably dredged up a number of federal issues to present to the court, most observers expected the high court to turn the company’s appeal down. (Only about 3 percent of petitions to the U.S. Supreme Court are heard by the court’s nine justices.) If the Supreme Court declined to hear Texaco’s appeal, then the Pennzoil judgment would be final. In all likelihood, Texaco, the country’s third-largest oil company, would have to be liquidated in order to satisfy Pennzoil’s claim.
