Circle of Greed

by Patrick Dillon

  Their first big case, the test case of Weiss’s entrepreneurial legal theories, was a lawsuit on behalf of shareholders against Dolly Madison Industries. This suit accused the multistate conglomerate of fraudulently leveraging shareholder money to acquire more than thirty companies in an eighteen-month period. It accused the company of hyping these acquisitions and concealing the financial impact on shareholders in order to inflate the stock price. In short order, the company began writing down its assets and the stock price tanked, but not before insiders in the company unloaded their shares. Further, the company’s auditing firm, Touche Ross, one of the renowned Big Eight, had signed off on the books. They too were defendants, under Weiss’s “fraud on the market” theory.* The big accounting firm was defended by Louis J. Goffman, one of the lions of the Pennsylvania bar, but by the end of an arduous trial in the summer of 1973, Touche Ross settled for $2 million.

  Although paltry in comparison to settlements they would negotiate in the decades ahead, $2 million was a huge amount to recover in 1973. Its impact was even greater: not only could a class action for fraud be waged against the main defendant, it could be successfully deployed against third parties, whom Weiss famously called “schemers.”

  Free enterprise was about to enter American civil jurisprudence. It was no longer about the law but the business of the law. On both personal and professional levels, Mel Weiss was onto something big with these new strategies. In his mind, he could do good work, gain respect, and make money. In one of the first class action lawsuits against a major accounting firm, the defrauded investors would get some recompense for their losses at Dolly Madison. For making it happen, the law firm of Milberg Weiss earned $500,000.

  Milberg Weiss’s ascendancy to the top of the plaintiffs’ bar would be meteoric. Weiss was already prosecuting another lawsuit in California—in Silicon Valley, although few people called it that yet—against officers of a high-tech company called Ampex. Weiss would employ the “fraud on the market” strategy in that case too and have his legal theory affirmed by a federal appellate court.

  WEISS’S SECRETARY HAD RESERVED suites for the U.S. Financial plaintiffs’ legal team at the private oceanfront La Jolla Beach and Tennis Club, a luxurious haven within a wealthy enclave, the town of La Jolla, about a twenty-minute drive north of San Diego proper. Lerach and Tom Fort wondered why, if they would be spending most of their time in meetings or in court in downtown San Diego, Weiss had insisted they decamp so far away in the midst of a resort they would not have much chance to enjoy. Their doubts evaporated as soon as they were shown to their rooms overlooking the unblemished, honey-colored sand beach stretching for nearly a mile both north and south. Lerach opened the sliding glass door to his veranda and stood transfixed, listening to the boom and crash of the surf, watching the walkers and joggers, casually enjoying spectacular scenery and perfect weather on a winter’s day. He had been on the ground for only an hour, but the moment delivered a couple of epiphanies. First, if this was the style in which Mel Weiss preferred his entourage to travel, Lerach was all for it. The second was the realization that this was where he wanted to live forever.

  The next morning they trekked to the federal courthouse in downtown San Diego. A decrepit three-story building, a blend of classicism and Spanish colonial revival designed to recognize San Diego’s Hispanic heritage, it had been constructed in 1913 to house the U.S. Post Office, federal offices, and courtrooms. The difference between “quaint” and “deferred maintenance” was obvious to the attorneys as they mounted the steps to the designated courtroom. Lerach flung open the embossed leather door to a room that looked like a throwback to the set from Inherit the Wind. It was tiny and packed with lawyers as well as the onlookers anxious to watch them try the biggest civil case in San Diego history.

  As he was about to take his seat in the crowd, Lerach noticed the door to the judge’s chambers opening slightly and closing and then opening again. From the opening he saw a pair of eyes anxiously regarding the crowd as a performer might from behind a curtain on opening night.

  Then the bailiff announced: “All rise.” The Honorable U.S. District Court Judge Howard B. Turrentine strode through the door and to the bench.

  An elfin man in his early sixties, Turrentine was a native Southern Californian, graduating from San Diego State College and earning his law degree from the University of Southern California. He had served as a Navy lieutenant commander in World War II, then returned to San Diego, where he set up a private practice until being appointed to the county Superior Court bench by Governor Ronald Reagan. A Republican and a friend of C. Arnholt Smith, Turrentine subsequently received an appointment to the federal bench by President Nixon in 1970. Still relatively new, Turrentine was the type of jurist one of the defense lawyers had had in mind in Denver when complaining that no judge in San Diego was sophisticated enough to try a complex financial case.

  As the judge took his seat, he scanned the courtroom. Lerach recognized the same eyes that had been peering through the crack in the door.

  “Good morning,” said the judge. “I have a few matters of housekeeping. First, I wonder if the attorney who suggested that there is insufficient experience among the judges in this city to try a case as financially complex as this one is in the courtroom.”

  A hard silence ensued, followed by the sounds of people shifting in their seats, making themselves smaller. From the rear of the room a hand went up.

  “Would you come up here where I can see you?” ordered the judge.

  William R. Norfolk, a young hotshot out of Duke Law School working for Sullivan & Cromwell, one of the world’s prestige law firms, and representing Goldman Sachs, climbed sheepishly out of his seat and shuffled toward the bench with the body language, Turrentine thought, of a schoolboy being sent to the principal’s office.

  “Young man,” said the judge, taking the measure of the New York attorney, “before this case is over, I think I’m going to prove you wrong.”

  Indeed, Turrentine did prove his mettle during the ensuing months, mediating while attorneys for the plaintiffs and defendants battled over interpretations of borrowing and lending versus investing, translating financial statements and auditors’ and analysts’ reports, challenging each other’s expert witnesses, and haggling over the meaning of thousands of documents, posters, graphs, and charts. Neither side was willing to give ground on even the most minor points unless Turrentine moved them along. Eventually the crowd, dulled by the deluge of numbing facts and arcane presentations, began to recede. At the end of each day the withered and frustrated plaintiffs’ lawyers would retire to their side of the downstairs bar in the Westgate Plaza Hotel while the defendants’ attorneys convened in another corner. Occasionally, if something mutually entertaining had occurred in court that day, the two teams would join each other for rounds of drinks. Earlier, on one such day, the plaintiffs’ lawyers were baffled by a batch of documents the defense had turned over. They seemed to lead nowhere, until Weiss weighed in.

  “Is this what you are looking for?” Weiss asked the team, reaching into a pile of documents and pulling out a few and explaining their implications as if performing a card trick.

  It was blind luck, but Weiss’s colleagues were in awe. His theatrical streak was often on display after hours as well. As he contemplated what had brought him to California on this case, Weiss would survey the opulence of the hotel bar, verbally noting the fate of its creator, C. Arnholt Smith, and feel compelled, even in the company of the defense lawyers, to raise his glass and remark, to reassure all present, especially his underlings: “Thank God for greed. Here’s hoping it’s a growth industry.”

  WITH WEISS AND SENIOR COLLEAGUES from the other New York firms taking the lead in trying to prove that their clients’ losses were directly attributable to Goldman Sachs, Union Bank, and Touche Ross’s scheme to help U.S. Financial commit fraud, Lerach found himself taking depositions with defendants and negotiating with their attorneys behind the scenes. And he also fo
und enjoyment in punching and counterpunching, especially if his side was drawing the most blood.

  The case dragged on. Judge Turrentine, determining that the litigation was indeed complex, concluded that he ought to hear it himself on the grounds it might be beyond the comprehension of a jury. By this time Lerach, Fort, Weiss’s colleague Irving Morris, and other attorneys had lined up key witnesses—real live victims—who would testify that they had been harmed by U.S. Financial’s fraud and by Touche Ross—and they wanted a jury to see them. Weiss challenged the judge’s ruling, and Turrentine submitted it to the federal Ninth Circuit Court of Appeals. While it languished there, Lerach continued to negotiate with the defense lawyers for a settlement.

  THE EVENING OF MARCH 29, 1976, Weiss invited Lerach to join him for dinner at the Beverly Hills Hotel in Los Angeles. It was Oscar night. They took their seats indoors at the Polo Lounge and ordered cocktails. Weiss wasted little time getting to the point.

  “You’ve done a good job in steering the settlement effort,” he assured Lerach. “This case is still going on for a long time, but I’m confident that we’re going to get a huge, big score.” Then he told Lerach that he had to return to New York and needed someone on the ground in charge in San Diego.

  “We had come to like each other,” Lerach recalled. “We were kindred spirits.”

  Weiss invited Lerach to join his firm. “He wanted me to conclude the case in California and then move to New York … I said: ‘I don’t know. I don’t want to do that. I’m going to make partner at Reed Smith this year. I’d like to see if I can stay out here. I’d really like to move to California.’”

  Weiss seemed surprised. “I don’t know whether there will be any more work going forward out here,” he said, adding that nevertheless he’d mull over the idea of a California office and talk it over with his partners in New York.

  Lerach had another demand too. He wouldn’t join Milberg Weiss unless he was made a partner going in.

  Weiss was taken aback for a second time but quickly recovered when the drinks arrived. The two men dined and ordered more drinks, and then, at Weiss’s urging, they walked out of the dining room to the front entrance of the hotel. A red carpet had been laid out, and people were collecting on either side. Within minutes a limousine pulled up. Out stepped Richard Burton and Elizabeth Taylor. Lerach thought it was as if the whole scene had been staged by Mel to win him over.

  Ultimately, a settlement in the U.S. Financial case would indeed be negotiated—for $62.5 million, the largest settlement for this type of case in history—but that would not happen until early 1978, when the Ninth Circuit reversed Judge Turrentine and ruled that the case could go before a jury, which was a presumptive death knell for the defendants. Turrentine would later award the plaintiffs’ lawyers 25 percent of the settlement fee, which pleased Reed Smith, Lerach’s old firm, and Milberg Weiss, his prospective employer, which received $5 million of the bounty.

  In 1976, long before the settlement, Lerach traveled to New York, meeting and passing muster with Weiss’s partners. Lerach joined the Milberg Weiss firm, receiving a $40,000 salary with the designation of partner and a small percent of the overall fees. With the same negotiating panache that he was developing with legal adversaries, Lerach persuaded Weiss to allow him to remain in San Diego, at least as long as he could stay in business. A big dreamer, even he could not have foreseen the cases and the fortune that would come his way.

  BILL LERACH’S MOVE WEST must have been a blow for Evelyn Lerach, who by now was affectionately known as “The Commander” in the Lerach clan, but she kept her tacit agreement with her ambitious younger son and did not try and talk him out of leaving. In fact, she agreed to drive to California with him. So in March 1976 Bill and Evelyn Lerach climbed into Bill’s white and blue Pontiac LeMans, stuck his fat dachshund named Gus between them on the bench seat, and set out for a weeklong road trip across the United States. If Evelyn never remonstrated with her younger boy for leaving her behind, she did give him a bit of grief over one aspect of his makeover—and that was his decision to alter the pronunciation of the family name.

  In the Ohio River Valley the name “Lerach” is pronounced “Lyric,” like the words to a song, which is how his brother, Dick, and most of their kinsmen pronounce it to this day. Bill, explaining that he was tired of correcting people, changed its sound to “Leer-ack,” with the emphasis on the first syllable. Bill may have had another reason for changing it, a reason so idiosyncratic that few would have believed it: to his ear, it sounded less Germanic that way.

  This, among many other bits of family lore, arose one day in late January 2008 as the two Lerach bothers, Bill “Leer-ack” and Dick “Lyric,” took their own road trip through the bleak western Pennsylvania landscape to Morgantown, West Virginia. Although the purpose of the excursion was grim—they were going to visit John Torkelsen, Bill’s onetime chief expert witness, now serving time in federal prison—the conversation in the car was tender, entertaining, and at times humorous.

  When the subject of their father came up, Bill blurted out a one-word description: “Cheap!”

  “Conservative,” countered Dick.

  “Cheap,” Bill repeated.

  “Frugal,” Dick offered.

  “Aggressively and dedicatedly cheap,” Bill said, and his older brother started laughing.

  On the matter of how to pronounce the family name, however, and where the name comes from, it was Dick who was the more persuasive.

  “Our father pronounced it ‘Lyric,’” said Dick.

  “Changing it was the only thing mother ever criticized me for her entire life,” replied Bill.

  “It’s a German name,” said Dick.

  “They were French Huguenots who ended up in Austria,” replied Bill. “I just don’t want to be German!”

  Dick was ready for this: “In the spring of 1867, our great-grandfather emigrated to a part of the Austro-Hungarian Empire known as German-Bohemia,” he said. “They were ethnic Germans living outside of Germany. Today it’s part of the Czech Republic.”

  “So, not from Germany …,” interjected Bill.

  “There are seventy Lerachs in the world, they all live in Germany, and one is even named Adolf,” Dick continued, a smile playing at the corners of his mouth. “I met one of them, and he said, ‘Isn’t it a shame we lost the Fatherland … but at least some of our people made it to Argentina.’”

  Bill couldn’t help but smile at this unwanted information, which was delivered deadpan by a brother he loves deeply. But remaking yourself into something that you believe is better—longing to be something noble—is not a habit easily discarded. “It could be that they were really French Huguenots who ended up in Alsace Lorraine,” Bill mused aloud, apropos of no known facts. “And Huguenots, as you know, are good people …”

  * As Washington geared up for war in 1942, the SEC was moved temporarily from the capital to Philadelphia, which is where these events occurred.

  * Freeman, in a 1993 foreword to a Fordham Law Review article discussing the fiftieth anniversary of Rule 10b-5, recalled the quote in nearly identical language: “Well, we’re against fraud, aren’t we?”

  * Weiss’s legal theory on Dolly Madison was revealed in a subsequent paper: “Why Auditors Have Failed to Fulfill Their Necessary Professional Responsibilities—What to Do About It,” Abraham J. Briloff Lecture Series on Accounting and Society, School of Management, State University of New York at Binghamton, 1992.

  5

  A HOUSE ON THE HILL

  Occasionally, while still ensconced at the La Jolla Beach and Tennis Club during the U.S. Financial case, Lerach would allow himself the luxury of strolling to the water’s edge and taking in the oceanfront view. When he gazed north past the pier (which serviced the University of California’s Scripps Institution of Oceanography), he would scan the caramel-color cliffs, focusing on a single spot. Atop an arrowhead-shaped bluff, the most prominent formation, high above the beach, and overlooking the Pacific
perched an enormous mansion. Lerach regarded the copper roof with its green patina and imagined what art treasures lay inside or what beauty its gardens held for an exploring guest or its owner, whom he envied. Once he imagined out loud who might live in such a colossus. An eavesdropper, who shared Lerach’s admiration for the clifftop mansion, said breathlessly: “That’s the Gagosian mansion.” No elaboration was offered. None was needed.

  Earl Gagosian, the son of an Armenian immigrant, had started in the hotel business at twenty-three, as a construction supervisor with TraveLodge. He advanced to vice president, then left to launch Royal Inns of America, serving as president and chairman for seven years and building seventy new hotels. Before going bankrupt in the mid-1970s, Gagosian managed to build the 17,000-square-foot mansion on nearly six acres overlooking the ocean high above La Jolla. Its succession of owners included an Iranian coffee baron, a federally protected witness (rumor had it), an acquisition-minded entrepreneur by the name of Edward L. Burns, and billionaire financier Ron Burkle.

  Within two years of sighting the mansion, Lerach would bring suit against three companies—Inns of America, Nucorp, and Occidental Petroleum—that had been owned or overseen by three of the mansion’s title-holders, Gagosian and Burns and Burkle. Although Lerach didn’t do it because he coveted the house, it wasn’t quite a coincidence, either. As the 1970s gave way to the 1980s, if you owned a mansion and a company in California, you were increasingly likely to eventually be sued by William S. Lerach. One of his big early lawsuits, and one of his first memorable encounters, would involve a friend of Gagosian’s. His name was Kirk Kerkorian.