Circle of Greed

by Patrick Dillon

  At least, that’s one way of looking at it. There are others.

  One is that Richard Lerach’s own imagination had been fired by the “space race,” and the new frontier that President Kennedy had challenged a nation to explore—a mission to the moon. But in 1960 Bill’s father took him to see Inherit the Wind, an experience that was so galvanizing that Bill told both Gene Carney and Jim Kerr afterward that the movie had changed his life. His natural bent for acting, his concern for social issues, his competitiveness—all of that could be harnessed into a career in the law.

  Perhaps Richard E. Lerach’s real failure, at least in the psyche of his second son, was not his fault at all—was nobody’s fault. The event that left his younger son feeling abandoned, and eventually estranged from the memory of his dad, came on June 16, 1963. It was Father’s Day, three days before Bill was to graduate from high school. Richard Emil Lerach had taken Bill golfing that day, driven them both home, eaten a sandwich, said goodnight, and gone to bed, where he lay down and died in his sleep. He was fifty-four years old. Bill awoke that night to the sound of his mother screaming.

  Frantic, Evelyn called her sister’s house down the street—and Jim Kerr’s father came racing over to try to revive him. The next thing Bill knew, an ambulance arrived at the house, as did his big brother. Nothing could be done. Richard E. Lerach was a victim of a little-known condition called chronic myocarditis. Unknown to anyone, his heart had been compromised by a strep infection that his body had not completely purged. It lay dormant in the lining of his heart, an invidious time bomb that suddenly detonated that fateful June night.

  At this point in their lives the uncertainty, hardship, and heartbreak that Bill Lerach would later attribute to the stock market crash of 1929 did indeed descend. Dick was able to remain at Pitt law school, but Evelyn and seventeen-year-old Bill moved from the Kennedy Avenue house to an apartment in a neighborhood known as Oakland, near Pitt’s campus. Evelyn went to work at the Western Pennsylvania School for the Blind; Bill cobbled together enough scholarship money to enroll at Pitt. Mother and younger son became inseparable, and she became his confidante.

  To his friends, living with his mother seemed a productive arrangement. Peter A. Morgan, a member of Bill’s 1963 freshman pledge class of the Delta Tau Delta fraternity, believed that his friend enjoyed “the best of both worlds” by living with his mother while fully immersing himself in university life: “She encouraged him to make the most of his intelligence and talents, and the fraternity friends helped him grow in self-esteem and social confidence.” Morgan also remembers Lerach as a young man who often dominated any political discussion he happened to be engaged in—on the basis of “facts and forceful argument.”

  By his senior year Lerach was living with three Delta Tau Delta fraternity brothers in an apartment on Shady Avenue. One of them, Erl G. “Puck” Purnell, who went off to the navy and is now an Episcopal rector in Connecticut, recalls that by then the roommates had drifted away from the fraternity scene, though he and Lerach remained active Republicans. Soon both men would break with the GOP as well.

  The way Bill Lerach would rationalize his closeness to his own mother is twofold. First, he identified with Evelyn Lerach—saw in her the traits he hoped to possess. “It is a shame my mother didn’t get a chance in the modern era, she would have been a CEO—she could have been anything,” he said. “She was smart, sassy, combative, manipulative, all the assets to succeed, much more of a role model than my father.” The other way was that he differed from his father—and from most of those in the Lerach clan—by harboring dreams of leaving Pittsburgh.

  After his father died, Bill Lerach would tell his mother that he didn’t want to be ordinary. After graduating from Pitt law school, Dick Lerach would take a job with the kind of big company his father had in mind for his sons, first for three years in New York and then in Pittsburgh, where he joined the legal office of U.S. Steel. There he rose through the ranks to eventually become general counsel of the corporation. When her younger son described visions of something much bigger, Evelyn Lerach would invariably reply that she wanted great things for him, too. But what?

  Perhaps it was the classic movie about the Scopes trial that simmered inside him, or maybe it was a simple lack of imagination. But he decided to follow his brother’s path and apply to Pitt’s law school. Evelyn typed his one-page essay. It passed muster, and Bill entered the law school in 1967. It was a good match from the opening day of classes. His first year in law school, despite receiving a C in a popular class in criminal law, Bill was ecstatic. “I finally found something I can do,” he’d tell family and friends. “It’s what I was meant to do.”

  * Sutton described herself, tongue-in-cheek, as Bill’s former “cousin”—an in-joke in their neighborhood, because she was married briefly to one of Lerach’s cousins. But her loyalty to her high school friend is no laughing matter: in one exchange with the authors, Sutton referred to Lerach as “a political prisoner.”

  3

  THE YOUNG LAWYER FROM PITTSBURGH

  At Pitt, Lerach was active in politics, holding positions in the Young Republicans and in student government. He had a knack for leadership, and although he and others in his circle, such as his roommate Peter Morgan, would change political parties and become committed liberals, a populist, working-class, chip-on-the-shoulder streak ran through Lerach’s political sensibilities then and now. In 1965, as demonstrations against the Vietnam War were breaking out on other campuses, Lerach and Morgan organized a campus rally in support of the troops. “Our take on the antiwar protests [taking place] on other campuses was that they did not show any respect for the soldiers who were fighting the war,” Morgan recalled. “We both had friends fighting in the war, who had not had the benefits of a college deferment.”

  In law school Lerach’s then-conservative politics initially informed his legal philosophy rather than the other way around. In 1972 he coauthored an article for the University of Pittsburgh Law Review asserting that federal judges should exercise more control over “strike suits”—class action securities lawsuits—which were characterized in the article as “procedural monstrosities” that abuse the class action process. The article argued that the real purpose of strike suits is often extortive: “The plaintiff in such an action frequently hopes to use the class allegations as a bargaining weapon to be disposed of when an appropriate premium has been extracted from the defendant.” If anything, Lerach was ahead of his time. Melvyn Weiss, his future mentor, was still four years away from molding his “fraud on the market” theory into federal jurisprudence, and the Republican Party hadn’t yet declared war on trial lawyers.

  By the time those battle formations were drawn along firmly partisan lines, Lerach would be on the other side. Nonetheless, those close to him understood that Bill Lerach had indeed found his calling. He would never get another middling grade and ended up graduating second in the Pitt law school class of 1970. His only worry was money. In June 1968, after his first year of law school, he had married his college sweetheart, Jaylyn Barnard, whom he’d met when both were active in Republican politics at Pitt. Between family expenses and tuition, he was feeling pinched, and he mentioned one day to another friend that he might have to drop out of law school. It was a fortuitous conversation. That friend, Dennis Unkovic, was the son of Alexander Unkovic, one of Pittsburgh’s most respected and beloved attorneys. Dennis told his father about a friend who was this “brilliant” law student but might be unable to finish school. So Bill was hired as a law clerk at Meyer, Unkovic & Scott during his second year in law school—and he remained there until he graduated.

  The partners hoped Bill would join their firm, but by then he had been noticed by Pittsburgh’s top law firm—the venerable Reed, Smith, Shaw & McClay. The white-shoe firm was offering a starting salary of $13,500, while Meyer Unkovic paid its first-year associates something closer to $7,200. Lerach went to the famous firm, engendering no hard feelings from Unkovic as he left. That was ap
parently typical of the philosophical older man. Young lawyers in Meyer Unkovic’s offices would do what corporate defense lawyers often do when their corporate clients are sued; they vent and fume, ingratiating themselves with the client by taking out their ire on the plaintiff’s attorney. One day Alexander Unkovic pulled young Bill aside and told him with a playful smile: “You know what I think of plaintiffs’ attorneys? I think: ‘God bless the man who sues my client!’”

  REED SMITH WAS FOUNDED in 1877 with the express purpose of representing the business interests of Pittsburgh’s wealthiest and most eminent families. The firm’s list of clients reads like a roster of the names on buildings and parks throughout western Pennsylvania: Carnegie, Frick, Mellon, Heinz, Westinghouse. More than 200 attorneys and 350 support staff occupied its Pittsburgh headquarters in the ornate, cathedral-like Flemish-Gothic building. Among them decorum and respectability were de rigueur. But Reed Smith played hardball, and Bill Lerach received, along with a starting salary of $13,500, a continuing education in the law. The firm specialized in defending its well-heeled corporate clients from civil lawsuits. Here Lerach learned how defense lawyers thought, and it wasn’t always pretty. He learned to obfuscate, and to create the veneer of compliance while holding back potentially damaging information, all toward the end of bleeding the plaintiffs of time, money, and energy. These were the tricks of the defense trade, and in his three years at Reed Smith, Bill Lerach learned them. By implication, he also acquired the aggressive tactics he would employ as a plaintiffs’ attorney to counteract them.

  At Reed Smith these lessons started with one maxim: “Almost nothing bad will happen if you have the evidence under control.” At the outset of a lawsuit, the defense knows the facts and the plaintiff does not. So the job of the defense is to keep the plaintiffs from getting the facts in order to prove the case. At Reed Smith this was called “persistent resistance.” Practicing it effectively required an almost passive-aggressive personality. A defense lawyer will look at a subpoena and immediately divine reasons not to produce the sought-after documents: counsel might say that complying with the request would give away the client’s trade secrets or was privileged information for one reason or another. Such tactics didn’t always work, but what did the firm being sued have to lose? At worst, they’d ultimately be compelled to produce documents and witnesses they didn’t want to produce. At best, the plaintiff would lose interest or, even better, become so flummoxed by the delaying tactics that his lawyers missed a filing dead-line—and the case would be thrown out on technical grounds. Stalling was more profitable for defense firms than cooperating: it also meant more billable hours. The inside joke at the firm was that Reed, Smith, Shaw & McClay really stood for “Bleed, Shit, Stall, & Delay.”

  Lerach could do it with the best of them. In one 1975 case Reed Smith represented MSA, the world’s leading manufacturer of industrial safety equipment. The plaintiff was a worker who had been injured so severely while using an MSA protective device that it left him brain-damaged and unemployable. The worker had a wife and children and, more to the point, a savvy and persistent lawyer. As the young associate helping to defend the case, Lerach handled the production of documents demanded by the plaintiff. Poring through hundreds of documents, he came across one from a lower-level MSA employee to a senior executive warning that the product at issue had failed on three or four occasions—and might injure or kill someone who was using it. The employee’s recommendation: issue a warning or withdraw it from the market. Lerach took his finding to a partner on the case, handing him the entire file.

  “There is a very bad document here and you’d better take a look at it,” Lerach said gravely.

  The partner looked at the two-page document marked by a paper clip and read it slowly, Lerach later recalled. Showing no emotion, he casually tore the two pages out, crumpled them, and threw them in his wastepaper basket. “No sense making their job any easier for them,” he explained. “And always remember,” he added as he trimmed away the tiny shards from where he’d torn the document away, “to remove the little pieces of paper left behind.” The veteran litigator looked up at his young associate. “Did you see any other problems?”

  “No,” Lerach replied.

  “Good job, then,” the partner replied.

  In the intervening years when he related this account, Lerach would always be careful to say that the plaintiff eventually received a healthy settlement. He’d also concede that his own reaction then had been not shock but approbation for the job he was charging billable hours to do.

  Yet he was not a perfect fit at Reed Smith, which Lerach attributed to his lack of an Ivy League law degree. There was a culture clash between Lerach and Reed Smith, all right, but it had little to do with diplomas. Temperamentally he was suited for something else. The idea of sitting around hoping a lawsuit would resolve itself because your opponent missed a deadline was anathema to him. He had a restless mind and a confrontational nature—and a gut-level appetite for legal combat. He liked to force the action, not forestall it.

  He would soon get his chance, as part of a big-time lawsuit at Reed Smith. It would also be his last case there—and it would launch him toward the West and into the rarified air he’d told his mother he dreamed of breathing. It would happen more quickly than his bosses expected, but Bill Lerach was a young man in a hurry. This too was a residue from his boyhood family life. His father had died suddenly at fifty-four; his father’s father had died in his fifties too, during the great influenza epidemic of 1919. Three of his four maternal uncles had died before they reached sixty—and the one who lived into his sixties, Lerach’s namesake, “Uncle Bill,” struggled with heart disease. “I saw myself destined for a relatively short performance on Earth,” he told the authors in early 2008, as he prepared himself mentally for the ordeal of a prison sentence. “I think it instilled a sense of urgency, a little recklessness, and maybe behavior that was oblivious to the consequences.”

  LERACH’S OPPORTUNITY WOULD ARRIVE courtesy of Reed Smith’s richest client, Mellon Bank, which by 1974 had acquired dozens of other banks and undergone several reorganizations resulting in a holding company, Mellon National Corporation. Among the thousands of investments it made along the way was $7 million that one of its trusts had invested in a San Diego institution known as U.S. Financial. As with Pacific Homes, the press releases put out by U.S. Financial painted a picture of a thriving and profitable conglomerate. In reality, the firm was little more than a shell that created phony earnings and used the inflated stock to acquire other properties. Robert H. Walter the U.S. Financial chief executive, pleaded no contest in federal court to charges of conspiracy and filing false reports with the Securities and Exchange Commission. He was sentenced to three years in federal prison, which may have pleased the investors but did not get their money back.

  Although Mellon Bank was traditionally a reluctant litigant, trust money was involved, and it had little choice. Mellon’s officers instructed its law firm, Reed Smith, to go after its $7 million. Lerach, who had just turned twenty-nine and was recently separated from his wife, was eager for the assignment. He was paired with J. Tomlinson Fort IV, a Harvard man and buttoned-down Reed Smith partner who was as tradition-bound as Lerach was rebellious.

  Their contrasting styles and personalities engendered tense relations. Tom Fort found Lerach impetuous. Lerach considered the older man a stuffed shirt and called him “Tom Tom Fart-Fart” behind his back to other young Reed Smith lawyers. For his part, Fort was frustrated that the younger man seemed impervious to constructive criticism. Actually, the problem went deeper. It wasn’t that Lerach didn’t want guidance; it’s just that early in the U.S. Financial litigation, he decided he wanted it from someone else.

  Because the U.S. Financial meltdown stemmed from numerous multi-state operations, the lawsuit was under federal jurisdiction. Dozens of claimants, including Mellon Bank, had filed suit. To avoid confusion and to try to achieve some sort of efficiency (which the court had signale
d it would prefer), an attorney representing one of the other claimants had already sought and received classification by the court as the lead plaintiff. The attorney was Melvyn I. Weiss. A federal judicial panel that would assign jurisdiction for the case was scheduled to meet in Colorado, so Weiss called for a strategy meeting of the plaintiffs’ counsels in Denver the night before.*

  When Bill Lerach stepped off the United Airlines flight from Pittsburgh to Denver’s Stapleton Airport, it was his first time west of the Mississippi River. Even in late spring snow still hugged the peaks of the Rockies thirty miles to the west, which he spied through the haze. He and Fort collected their luggage and hailed a taxi downtown to Denver’s venerable Brown Palace Hotel. Instead of going to their rooms, they strode straight through the ornate wood-paneled lobby to the elevators, riding to the eighth floor, where they found room 825, the Eisenhower Presidential Suite. They joined a gaggle of lawyers around a rectangular, mahogany table.

  One of the lawyers, a gruff-looking, intense man with a dark, trim beard and unmistakable New York accent, was calling the shots. This attorney was explaining antifraud provisions of the federal securities acts under Section 10b of the Securities Exchange Act of 1934 and Rule 10b-5 of the Securities Act of 1933. Most of the attorneys, including Fort and Lerach, were familiar with these rules, but no one dared interrupt, so intense, so articulate, and so intimidating was the speaker. His name was Melvyn Weiss.

  Weiss was already earning a reputation as an expert in the arcane legal subspecialty of unraveling auditors’ hieroglyphics and was on his way to becoming an outspoken critic of the big corporate-sponsored accounting firms—one of the earliest voices warning that something had gone terribly wrong with the system.