Circle of Greed

by Patrick Dillon

  An eighth-grade dropout and, like Gagosian, the son of an Armenian immigrant, Kerkorian had come a long way since his father was picking fruit in California’s Central Valley. After flying in the Royal Air Force during World War II—he couldn’t wait for the United States to join the war—Kerkorian flew mail and passengers between Los Angeles and Las Vegas. In 1947 he purchased a small charter airline for ferrying groups to Vegas. It brought in a small fortune, which Kerkorian parlayed into a series of real estate deals, which among other treasures landed him title to the Flamingo and the land under Caesar’s Palace, the new jewel of the Las Vegas strip. But he soon ran afoul of the Securities and Exchange Commission and his lenders. Under pressure from Bank of America, Kerkorian sold most of his Las Vegas holdings, including his private plane. But as he folded camp in Nevada, Kerkorian reminded friends and colleagues to always “keep a back door open.” For him that door was Hollywood.

  Starting in 1969 he had been buying stock in the once-mighty MGM studios. At the beginning of 1970 Kerkorian, by securing more loans from Bank of America, attained working control of the ailing studio, which announced soon after Kerkorian assumed the helm that it would “embark on a significant and far-reaching diversification into the leisure field.” The first big splash would be the MGM Grand Hotel in Las Vegas. Kerkorian would be returning to Vegas as its king. Groundbreaking took place in 1972, with a legion of stars, champagne, and networking entertainment executives.

  The twenty-six-story MGM Grand opened on December 5, 1973, featuring 2,084 rooms, a 1,200-seat showroom, a cavernous shopping arcade, a movie theater, and a jai alai court. The cost to build the world’s largest hotel was $107 million, a price tag that led Bill Lerach to visit Kerkorian’s Beverly Hills office one day in 1977. Lerach was representing shareholders who maintained that the King of Vegas had diluted the value in his own company to save himself from financial ruin.

  The case had been initiated by a New York attorney, Ron Litowitz, a partner at Bernstein, Litowitz, Berger & Grossman, and it was to be heard in the Delaware Chancery Court. That firm would handle the Delaware part of the case, but it needed a West Coast representative, and Lerach had been asked to participate. It was a “derivatives” case, meaning that the alleged cause of action was that corporate executives were breaching their fiduciary responsibility by not operating the company in a way that benefited the majority of shareholders. It was a new area of law to Lerach, and a tricky one. These cases were normally centered in Delaware, a state where the civil courts were considered unfriendly to plaintiffs’ lawsuits.

  “The field was not level,” Lerach recalled. “So plaintiffs did what plaintiffs normally do in that environment, they pestered and pecked and settled their cases cheaply and made their living.” What he was describing was a practice that he would perfect in time—peck and pester until the defendant caved. Others—industry CEOs, members of Congress, even Supreme Court justices—would have a different regard for this practice. They would call such lawsuits “frivolous.”

  Lerach began by demanding MGM’s financials. After poring through these documents, he gleefully described them to Mel Weiss as a “factual goldmine.” The financial statements, loan and sales documents, memoranda of understanding, and demands for repayment on loans provided a map of what Lerach called “a road to hell being pursued with abandon.” Gradually he would put together a picture of Kerkorian that was far different from the cool-hand Las Vegas financial impresario whom the public had known and admired. Kerkorian was running out of money. A gas shortage, the first in modern American history, meant that Americans were neither flying nor driving as much. His two Las Vegas enterprises, his charter airline company, and his hotels were losing money.

  Kerkorian had turned his attention to Hollywood and MGM not because he was enamored with the film industry but because of MGM’s real estate—specifically, its lots in Culver City. He closed the studio’s sales and distribution arm. He sold forty valuable acres. Yet he still owed money to Bank of America, and as construction on the MGM Grand ran late and over budget, Kerkorian had sold off MGM’s props, furnishings, and memorabilia, including the red slippers Judy Garland had worn in The Wizard of Oz. “He’s in hock up to his eyeballs,” Lerach recalled. “Right as these events are reaching thermonuclear crisis, MGM, which hasn’t made a nickel or paid a dividend in years, announces it’s paying a special dividend. Of course the biggest beneficiary is Kerkorian, who owns fifty-one percent of the company.”

  It was an audacious declaration from someone in such desperate straits. The records Lerach and his colleagues were reviewing yielded revealing insights into just how desperate and daring Kerkorian, who emerged a multibillionaire, had been with his gamble. The initial loans to secure the Las Vegas property had been unsecured with Bank of America. Lerach ultimately concluded that the loans to Kerkorian were so tenuous that they threatened Bank of America itself. “They were loaning him money for the interest so they could avoid having to write down the loan,” Lerach said. Over the next ten years Lerach would repeatedly encounter this tactic, which contributed to the demise of Drexel Burnham, Continental Bank, Lincoln Savings and Loan, and other financial institutions of their ilk. He would make his reputation ferreting out such fraud—and suing its perpetrators. “Your interest gets paid and it looks like the loan is current. Bank examiners look for loans that are not keeping current,” Lerach recalled. “The bank was trying to avoid exposure. Kerkorian knew it.”

  With Lerach on his tail, Bank of America chairman A. W. “Tom” Clausen called a meeting with Kerkorian and his attorneys. Bank of America demanded its interest payments. Kerkorian balked, pointing out the delicate situation that both he and Clausen were in, at least until the MGM Grand was up and running. Clausen would not yield: enough was enough. He granted Kerkorian a small amount of time to gather the money, and the two parted civilly. Kerkorian and his attorneys worked every financial network at their disposal. Finally they arranged for a $9 million short-term loan from a bank in Düsseldorf, Germany. When that bridge loan came due, the Germans wouldn’t budge on extending it, despite a personal visit to Germany by Kerkorian. He managed to avoid disaster by selling the studio’s one remaining precious asset—the MGM film library, containing immortal movies such as Gone with the Wind, West Side Story, and The Wizard of Oz. The buyer was Ted Turner, who proved himself as shrewd as Kerkorian. Not only did Turner purchase the multimillion-dollar assets for less than $9 million, he later converted the film library into television content through his Turner Network Television, earning billions in the process.

  For his part, Kerkorian not only dodged a bullet but went on to repurchase MGM and own half the hotel rooms on the Las Vegas Strip, becoming even richer than Turner. But not before, as Lerach liked to recall, “I was right up Kerkorian’s ass.”

  “He had virtually given away the film library,” Lerach said. “He had wasted the corporate asset in a crisis to save his own ass rather than auctioning it off to the highest bidder or taking steps to sell in a way as to maximize its value.”

  This was the basis of the shareholder lawsuit against Kerkorian. After reviewing company documents and those from the Bank of America, and deposing dozens of witnesses including Clausen, Lerach believed he had Kerkorian cornered. As he and Ron Litowitz rode the elevators to the offices of Wyman, Bautzer, Rothman & Kuchel (atop one of the towers in Century City in West Los Angeles) to take Kerkorian’s deposition, the two attorneys discussed using a good cop/bad cop routine. Litowitz would be the diplomat; Lerach would be the bad cop. He could hardly wait.

  They were ushered into a small conference room with a round table. Seated were Frank Rothman, Kerkorian’s attorney, one of his associates, and a clerk. As if on cue, once everyone was in place, Kerkorian sauntered in, glistening with confidence. He wore a lush dark brown suede jacket and brilliant white shirt that contrasted with his lined and tanned face and jet-black hair.

  Lerach unfolded a large file and began his questions, going slowly, plodding ove
r details. Within minutes Rothman sensed that this session was going to be painstaking. After letting a few more questions and answers go by, the attorney interrupted, reminding Kerkorian that he was due for his lunch at the Beverly Hills Hotel in forty-five minutes. Lerach kept his head down and questioned his prey, who, it was clear, had been prepped to provide indefinite, but not untruthful, recollections.

  “Do you remember negotiating loans from the Bank of America?”

  Kerkorian was vaguely aware of them.

  “Do you remember pledging your yacht?”

  Kerkorian couldn’t remember.

  “Your house?”

  Same answer.

  Rothman was growing even more impatient. “When are you going to ask something relevant?” he snapped.

  Lerach shuffled his files and flipped open documents like a card dealer. “Do you remember meeting with executives of a German bank?”

  “I may have. I just don’t remember,” came Kerkorian’s reply.

  No fool, Rothman saw where the line of questioning was heading. Kerkorian had been doing what he was told to do, answer vaguely, avoid direct responses, and volunteer no facts. But now Lerach had him outright lying.

  “Do you remember meeting with German bank officials in New York?”

  Kerkorian had been to New York often—he just couldn’t remember if he had met German bankers there. He was being slowly bled by adhering to Lerach’s script. Rothman could see things falling apart.

  “Are you familiar with Mr. Clausen?” Lerach asked.

  Kerkorian allowed that he was.

  “Do you have any reason to doubt Mr. Clausen’s integrity?”

  Kerkorian saw no reason not to sing the praises of the Bank of America chairman, and he did so, although he did not identify Clausen as his personal loan manager. More documents were produced along with more questions about when the Bank of America loans were due and why Kerkorian had sought financial assistance from the Germans. Lerach could feel heat rising from Rothman, who was beginning to rise from his chair.

  Quickly, Lerach pulled the trump card: “Do you recall the Germans threatening to drag you into bankruptcy unless you paid back your loan?”

  The question had barely left Lerach’s mouth when Rothman was on his feet, towering over the table. “How dare you demean this man! He is a great American. I will not tolerate this kind of impudence.”

  Lerach felt a flush of fear as Kerkorian, who as a young man had boxed under the moniker “Rifle Right Kerkorian,” rose out of his chair as well. But the former prizefighter grabbed Rothman and spun him around and out the door.

  In the elevator Litowitz, somewhat shaken, recovered enough to say: “I think we got their goat.” It was a phrase Lerach would himself utter happily thousands of times over the next thirty years. And he would be speaking of some of the most powerful business chiefs in America.

  Within a week Lerach received a telephone call from his New York colleague. Frank Rothman had called. They wanted no more depositions, no more questions. They wanted to settle. The amount would be well into seven figures.

  For a shareholder derivative settlement, this was huge. Still, Mel Weiss and Bill Lerach (who had not been the counsel of record) believed they had missed an opportunity: Bank of America had not been named a defendant. That was where the deep pockets were. They would not make such an oversight again. In the hundreds of lawsuits they would file in the future, and after the billions they would collect in settlements and awards, neither man could recall ever overlooking another wealthy culpable defendant. For now, however, Mel Weiss was pleased.

  Not long after the Kerkorian settlement, Lerach received a phone call from Weiss. The U.S. Financial settlement was in the works; the settlement with Kerkorian had been more than anyone expected. Weiss had been looking at the New York Times real estate section.

  “There are a couple of nice-looking houses near you,” he told his young partner. “You ought to take a look.”

  Lerach, who had just installed a swimming pool and Jacuzzi in the house he was sharing with his wife, Kelly, on a lovely cul-de-sac in San Diego, demurred. “I don’t read the New York Times real estate section,” he replied.

  “No attorney of my firm is going to be living where you live in a house like that,” Weiss inveighed. “There’s this place up in Del Mar for around $750,000—”

  Lerach gasped, saying he couldn’t imagine paying that much for a house. “Listen to me,” Weiss retorted. “You can afford it. Believe me. You’re going to make lots of money.”

  Twenty-five years later that prophecy would be manifested in full. In 2005 Lerach would move into a La Jolla blufftop mansion nestled into its own peninsula overlooking the sea. The house was the largest single-family oceanfront property in San Diego County. It featured imported limestone, eighteen-foot-tall cypresses, a home theater accessed by an elevator, numerous patios, a pool and tennis court, servants’ quarters, antique fountains from Italy and France, and the breathtaking sobriquet “Jewel in the crown of La Jolla” from the local press.

  The house had been built in 1990, replacing its razed predecessor, the mansion Bill Lerach had first glimpsed from below, the estate once known as the Gagosian mansion.

  6

  OGRE OF THE VALLEY

  In his office forty-nine floors above Penn Station in midtown Manhattan, Lerach’s partner and mentor got struck by gold—or maybe it was gold lust.

  “Seymour Lazar,” the voice at the other end of the telephone told Mel Weiss. “You remember me? I’m the guy you once sued. The Armour lawsuit? You lost.”

  Weiss remembered. In 1973 he’d brought a securities class action lawsuit on behalf of Armour & Co. shareholders, after the Securities and Exchange Commission had accused a group of rogue shareholders (among them Lazar, then a high-profile attorney) of trying to manipulate the price of Armour stock in order to acquire the giant food company. “You do remember me, then?” Lazar continued, in that fateful 1976 phone call. “I’m also the Howard Hughes guy. You’ve heard about that, right?”

  Who hadn’t?

  Earlier that year Lazar had generated sensational headlines along with Los Angeles “palimony” attorney Marvin M. Mitchelson for promoting a sketchy document as the handwritten will of the late billionaire Howard Hughes. It was determined to be a fake, but Mitchelson and Lazar generated buckets of publicity championing the claims of their client, a service station owner named Melvin Earl Dummar. It was only the latest in a litany of legal dustups in which Seymour Lazar had made—or lost—millions of dollars. He was a hard man to keep down, however, and he would again make a fortune while helping Mel Weiss and Bill Lerach reap a windfall of their own. He was trouble, no question, but like all talented con men, he could make outsize greed sound as normal as spring rain.

  Born in 1928, Lazar grew up in the San Fernando Valley and graduated from University of Southern California’s School of Law in 1951, intending to be an entertainment attorney and impresario. He was diminutive, with unlimited chutzpah. His client base included comedian Lenny Bruce, jazz trumpeter Miles Davis, Broadway producer David Merrick, and Johnny Rivers, who told The Wall Street Journal that Lazar helped him negotiate his first recording contract shortly before he generated a string of hits, including “Secret Agent Man.” Lazar’s array of friends encompassed beat poet Allen Ginsberg, criminal defense lawyer Melvin Belli, LSD guru Timothy Leary, and corporate raider Meshulam Riklis. Still another was a young Hollywood cabaret singer from the 1950s. “I was very shapely and nice to look at, but Seymour saw more than that,” recalled Maya Angelou, the singer-turned-poet-laureate. “He knew I was always writing and encouraged me to be more than a cocktail singer.” The two dated and remained longtime friends.

  Lazar, driving a Rolls-Royce and living in Beverly Hills, was ever the boulevardier (he said Pierre Cardin made him a leather suit) when he grew bored with being a lawyer. He had sued his own father, who had disinherited him. But Lazar’s real talent, he soon found, was in predicting mergers and ac
quisitions and trading on the parties’ stocks. Lazar’s broker, B. Gerald Cantor, founder of the then-small Beverly Hills retail firm Cantor Fitzgerald & Co., introduced him to Riklis, who complained to Lazar about being a frequent target of shareholder lawsuits and about the damned attorneys who earned their livings suing corporations and the executives and boards who ran them. Lazar remembered thinking it sounded like an easy way to make money.

  Lazar moved to Palm Springs, where he invested in land that no one had yet envisioned for development, and bought into oil wells. Sitting on the bougainvillea-bedecked patio of his Palm Springs villa, he studied the financial press. Mel Weiss, he saw, had tapped into a growing pattern of corporate misdeeds. That led to his 1976 telephone call to Weiss. “If I read The Wall Street Journal,” he boasted to Weiss, “I can come up with a class action a day.”

  Then he cited the Ampex case, Blackie v. Barrack, a pioneering victory that Mel Weiss had achieved in federal district court less than a year earlier. Prior to Blackie, lawyers could sue for securities fraud only if they could prove that individual plaintiffs had actually read and relied on misleading statements or were kept in the dark by purposeful omissions. The new ruling determined that members of a class did not have to have personally been misled by omissions—or even to have read the statements—in order to collect damages. Accepting the logic of academic theories presented by Weiss and the other plaintiffs’ attorneys, the court ruled that investors could properly rely on the information available to anyone—how the market was responding. An efficient market would reflect all the necessary information about a company; thus the price was an aggregate score of how the stock market reacted to a company’s statements. The market itself was the de facto reader. Of course, the market could be fooled. That was the point. That was why Lazar was calling Mel Weiss. Indeed, this decision would help Lazar change his life. He was offering to help change Weiss’s life too.