“You are too busy being lawyers,” Lazar told Weiss. What the firm really needed, in order to be competitive, was a professional stalking horse—to hunt for securities class action cases. Lazar was offering to sell, not lend, his name as the lead plaintiff.
Weiss was impressed. He wanted to lock in a plaintiff he could count on. His mind moving quickly, he also realized the drawbacks. His practice was based on contingency fees. If he were to advance Lazar for his time and effort, the firm would have to front the money. The only way to pay him would be contingent on the results, just as the firm was paid its fees based on the awards in their cases. Overriding that consideration was another, larger one. In class actions, in order to avoid conflicts with the rest of the class of plaintiffs, it was illegal to pay individual plaintiffs. On the other hand, lawyers referred cases to other lawyers all the time. For this they received referral fees, which were legal. If Lazar would accept deferred compensation, and if he would receive it as an attorney bringing litigation “ideas” to Milberg Weiss for a referral fee, a percentage of the award, then maybe they could do business.
Lazar was way ahead of him. He already worked with a Riverside, California, law firm, Best, Best & Krieger. Why not designate one of the partners in the firm—Paul Selzer, Lazar’s real estate attorney—to receive the referral fees?
Weiss said he would confer with David Bershad, his managing partner, who controlled the accounts payable. Bershad, then thirty-seven, was the polar opposite of Mel Weiss. A philosophy major at Cornell, class of 1961, he graduated from Columbia Law School in 1964, where he’d been a star in the school’s moot court competition. Bershad was reticent, especially when it came to opening the firm’s safe, which was literally locked in a credenza in his office. He would approve the relationship with Lazar only if it flowed through the Riverside law firm and only if the firm filled out a 1099 federal tax form for its referral fee. Weiss then telephoned Lazar, offering him up to 10 percent of the firm’s fee, should they win—and nothing if they lost. Like the firm itself, everyone connected to it had to put themselves at risk. Lazar, who had made courting risk his profession, accepted.
First into the Milberg Weiss stable, Lazar would continue his business relationship with the firm for the next twenty-five years, picking off targets such as Bear Stearns, Lockheed, Pacific Gas & Electric, United Airlines, Standard Oil, Genentech, Denny’s Restaurants, W. R. Grace, New Image, Xerox, Prudential Insurance, Occidental Health, and Standard Oil/British Petroleum in more than seventy lawsuits that returned $44 million to the firm.
IN SAN DIEGO, Bill Lerach was reading the financial sections himself. One day he noticed that the Walt Disney Company had announced what seemed a routine real estate transaction. Lerach’s mind was conditioned to think of the possible grift first, the innocent explanation second. When Walt Disney erected his famous theme park in Orange County, California, he had built a train that ran around the perimeter of Disneyland. The narrow-gauge line had cost $240,000 in 1955. Walt Disney owned it himself, and now his heirs were planning to sell the railroad to the company—in exchange for stock. “Wait a minute!” Lerach said to himself. “Why would the Disney family want more stock in Disney?” A possible answer hit him quickly: “A takeover is coming. They know it’s coming. They know the stock will pop—and they are getting themselves into position to take advantage of this knowledge before their shareholders.”
Lerach has never revealed how he found a willing client to act as a plaintiff—it was not Lazar—but he was the first to file a complaint in Los Angeles Superior Court. Lerach requested the court’s help in speeding up the discovery process of evidence that would enable him to ask for an injunction to stop the sale. The Disney lawyers knew where Lerach was going and wanted to head him off. A hearing was convened.
The small courtroom was made to seem even smaller by the galaxy of Disney lawyers assembled to rebuke Lerach’s intervention. Their body language revealed their disdain. Not only was this upstart from San Diego besmirching an icon; he was insinuating himself into the business affairs of one of the most profitable and respectable businesses in America. There, for the defense, was Leonard S. Janofsky, a partner of one of the foremost firms in Los Angeles and former president of both the California Bar Association and the American Bar Association. Joining the defense team was former head of the American Bar Foundation Seth Hufstedler, whose wife, Shirley, also an attorney, was serving as secretary of education in the Carter administration; Robert Warren, the managing partner of Gibson Dunn and Crutcher, one of the nation’s most distinguished law firms; and half a dozen other legal luminaries. Together they shared hundreds of years of experience in corporate legal matters.
Janofsky scorned Lerach’s action as a predatory “strike suit” aimed at Walt Disney’s beloved widow, Lillian, and other members of the Disney family, but the trial judge reminded Janofsky of the court’s obligation to render justice fairly and treat counsel for both sides with respect. Without fanfare the court granted Lerach’s motion to expedite the discovery process. Before he could file for an injunction to stop the railroad transaction, Lerach received a phone call from a conciliatory Bob Warren, representing the defense. Warren proposed a settlement in return for dropping the case. Lerach agreed.
Within weeks of the settlement Lerach heard the news he had been expecting: the Disney company was indeed the target of a hostile takeover attempt. The man trying to get it was Saul P. Steinberg, a notorious corporate raider, whose Disney foray popularized the term greenmail—the act of taking money midway through a takeover bid just to go away. Helping Steinberg finance the assault on Disney was Drexel Burnham Lambert, along with a rogues’ gallery of other operators, some with their own agendas: Ivan F. Boesky, Sid Richardson Bass, Irwin “Irv the Liquidator” Jacobs—and Lerach’s previous foil, Kirk Kerkorian.
“We sued them again,” Lerach said, referring to a second suit against both Disney and Steinberg for their greenmail deal. The defendants offered to settle for $5 million. The plaintiffs’ attorneys, Lerach and J. Michael Hennigan, a partner at the Los Angeles firm of Hennigan & Mercer, demanded $45 million. The case went to trial in June 1989, five years after it was filed. Michael H. Diamond, a partner at the Los Angeles office of Skadden, Arps, Slate, Meagher & Flom, led the Disney defense team. Diamond would always remember Lerach as being “extremely aggressive and extremely well prepared.”
One of the first to suffer Lerach’s lashes was former Disney CEO Ronald W. Miller, Walt Disney’s son-in-law. Although Miller was a large and physically rugged man—he’d played tight end on the football team at Southern Cal and, for a year, with the Los Angeles Rams—he had been devastated when he was ousted as chairman five years earlier, sobbing at his desk when he received the news.
Now he was to relive some of that grief.
The case was tried in state court, before Los Angeles County Superior Court Judge Abby Soven. This was a case “of blackmail euphemistically called greenmail,” Lerach told the judge passionately. “The raider was enriched [while] the directors were entrenched.” The defendants, he added, “worked together for their own selfish ends.”
When Lerach got Miller on the stand, he asked Miller about his children’s sale of Disney stock one month before the 1984 greenmail payment to Steinberg—after which the stock dropped nearly $15 in two days. Miller expressed resentment at Lerach’s implication. Those who witnessed the exchange saw what would become a characteristic Lerach response: dancing eyes, puckering lips, and an explicit putdown. Lerach asked Disney’s ex-CEO what he did the day after Steinberg launched his takeover bid, reminding the witness that it occurred on a Friday afternoon.
“Did you go to the office?” Lerach asked.
“No. I didn’t go to the office because the conversations were taking place in New York …”
“You went and played golf?”
“Yes.”
“Did the same thing on Sunday?”
“Yes.”
After three weeks of such testi
mony—before the defense even put on its case—Steinberg and Disney’s directors settled for what Lerach had originally proposed: $45 million. The settlement put corporate executives on notice: they could be sued coming or going. As for the particular lead counsel in this case, it was clear that once Bill Lerach got his teeth into a case, he would keep chewing.
Lerach settled into a venue that allowed him to continue honing his skills. By picking and choosing his cases, he was able to bide his time and to choose his prey shrewdly. It would soon be said of him that, like the greenmail artists, he was really demanding payment from those he sued merely to go away; but his technique worked only because he prepared each case as if it were going to a jury trial. After the Pacific Homes case, the Southern California legal community was all too aware that Bill Lerach was confident of his chances with a jury and quite willing to go to trial. This was a fate most corporate defendants and their counsel (and many plaintiffs’ attorneys) dreaded. Jury trials take time, energy, and revenue. Preparation is difficult, and the cost of a trial, with attorneys’ fees and expert witnesses factored in, could run upward of $50,000 per day. Worse, outcomes were unpredictable, a lesson that Lerach himself was to learn later, when he became a defendant in a large civil suit. In these years as a plaintiffs’ lawyer, however, Lerach was perfecting his skill at laying out compelling narratives in court complaints—instruments of torture, he called the documents. In the right-hand corner of every cover of every complaint, Lerach consistently inserted the words: Plaintiffs Demand a Trial by Jury. Attorneys who opposed him, some bitterly, invariably expressed admiration for the thorough level of pretrial preparations undertaken by the senior partner in the West Coast offices of Milberg Weiss.
Another Lerach trait, however, drew fierce contempt from corporate defense lawyers and in boardrooms from Silicon Valley to Wall Street: Lerach simply presumed that deceit and market manipulation were more likely to cause large profits than, say, a particular executive’s business acumen. Lerach fancied that he possessed such a keen sense for corruption that he could practically sniff out the fraudulent deals. What was undeniably true—he demonstrated this time after time—was that Lerach had a knack for boring in on witnesses and defendants during depositions, negotiations, or trials, exposing their vulnerabilities and helping his own case. Whether this was due to the ubiquitousness of frauds, to Lerach’s nose for vice, or simply to his interrogating skill wasn’t really the point. The end result was usually the same: a large settlement and occasionally a large judgment in his favor.
IN 1981 MILBERG WEISS filed suit against an American icon, Mattel Inc. It wasn’t the first time the much-beloved (by kids) company had been sued in a class action securities case—and it wouldn’t be the last. Mattel was launched in 1945 out of a garage workshop in Southern California by Ruth and Elliott Handler. In 1955 the fledgling company rolled the dice by borrowing all it could to advertise its toys on The Mickey Mouse Club. Sales took off. “Barbie,” and then “Ken,” soon followed. By 1963 the Hawthorne, California–headquartered firm went public, and its marketing slogan—“If it’s Mattel, it’s swell”—had become virtually a national anthem. Attempting to grow too big too fast, however, Mattel acquired six firms, four of which flopped; and it decentralized its operations, which increased its overhead. To cover up its mistakes, Mattel played loose with the books. When it came to honest accounting, Mattel was anything but swell.
Mattel signed a consent decree with the SEC agreeing to establish an “audit committee” and purged its executive ranks, but the damage had been done—shareholders lost millions of dollars. Then pioneering securities class action lawyer David B. Gold of San Francisco, Bill Lerach, and a flock of other plaintiffs’ lawyers entered the picture. Five class action securities suits were filed against Mattel; the company would settle them for some $30 million. Even that wasn’t the end of the litigation. Further frauds were detected, and Milberg Weiss would file two more class action lawsuits against the company on behalf of shareholders hurt by Mattel’s mismanagement. (Two decades later, under different management of what had become a huge conglomerate, disastrous executive decisions led to a meltdown of Mattel’s stock price. Bill Lerach would lead litigation that garnered a $122 million settlement for shareholders.)
All that was in the future. On a winter’s day in late 1981 Lerach and Sherrie R. Savett, a young associate at the Philadelphia firm of Berger & Montague, were suing Mattel in a smaller case. Arrayed against them was a formidable Southern California law firm named Irell & Manella and one of its best litigators, Richard H. Borow. Their attorneys, Lerach believed, were thwarting his attempts to ferret out information from witnesses and company officers who might have committed fraud. Dick Borrow challenged the two plaintiffs’ lawyers on issue after issue until Lerach concluded that stalling was part of his strategy—under the theory that the defense team had time on its side because it was being paid by the hour, as opposed to investing its own money in hopes of winning a contingency fee.
Borow’s characterization at the time—and it remains so nearly thirty years later—was that he never forestalled any legitimate discovery requests from the plaintiffs, and that the pretrial tactics used by his firm were zealous but completely appropriate. Either way the strategy inexorably slowed the pace of litigation, for Lerach and Savett were indeed feeling the squeeze of time and money.
The case was being heard in federal court in Los Angeles, where Borow and his colleagues were old hands. They had drawn Judge Manuel L. Real, an owlish-looking but imposing and controversial judge whom Lyndon Johnson had appointed to the federal bench in 1966. Real was controversial as much for the way he handled his courtroom as for his legal decisions. (“This isn’t Burger King,” he would tell lawyers in his courtroom. “We don’t do it your way here!”) He earned the dubious distinction of being the most reversed federal judge by the Ninth Circuit Court of Appeals. Mercurial, tempestuous, and a stickler for detail, Real insisted on a strict schedule—he thought no civil suit should take longer than 120 days to come to trial.
As the Mattel case neared, Lerach and Savett worked eighteen-and nineteen-hour days to prepare. Richard Borow worked hard, too. “Every document we asked for was fought over,” Lerach recalled. “Dick Borow would challenge me every step of the way.” One day, during depositions, Borow instructed one of his clients not to answer a Lerach question.
Lerach thought defense counsel had gone too far. “I’m not taking this crap any longer,” he announced. “I’m going to call Judge Real.”
Calling a judge was not part of the federal court protocol. As Lerach later remembered it, defense lawyers scoffed, advising the young litigator to take two aspirin until the feeling passed. Instead, Lerach picked up the phone. The attorneys were still mocking him. He reached Judge Real’s secretary. He complained to her. He wanted the judge to straighten out the opponents. Suddenly Lerach found himself talking to the judge.
“Is there a speaker phone there?” the judge asked.
Lerach answered affirmatively.
“Are defense counsel there?”
Again Lerach said yes.
“Tell me what is going on,” Real said.
One by one the defense attorneys, all known to the judge, explained that the depositions were taking a little longer than usual, nothing out of the ordinary, the judge could certainly understand …
A moment of silence on the other end of the line was followed by a firm, crisp instruction: “I have a calendar opening at four-thirty this afternoon. At that time we will have a conference call and I will want both sides to present their positions.”
Later that afternoon, the two sides presented their arguments. Borow and his team offered examples of questions that they had deemed improper. Lerach and Savett barraged the judge with examples of questions they had been unable to secure answers for, explaining why the queries were essential to the case moving forward. Lerach and Savett made a point of implying that they were trying to follow the judge’s instructions to be read
y for trial by the date he had set.
Finally the judge’s voice boomed through the speaker phone: “I want these depositions to go forward. I expect these questions to be answered. As for you Mr. Lerach, if you have any more problems, feel free to call my chambers at the end of any day.”
The fight in the Mattel case became so intense and, Lerach thought, so personal that he vowed that after it was over he would never speak to Dick Borow again. Borow was having different thoughts. He wasn’t taking things as personally. He respected Lerach’s pit-bull style, and although he was using every stratagem he knew, he sensed that the plaintiffs’ attorneys were making inroads.
As is customary in civil litigation of this type, the defense attorneys sought a summary judgment—a motion to dismiss the case for lack of evidence. Lerach would always recall opening the hearing on the motion to dismiss on the wrong note: he had the wrong title on a piece of paper, which was the kind of error that typically set Real off. The judge didn’t miss the opportunity to caustically correct the young plaintiffs’ lawyer, but in the end he denied the defense motion and ordered that the trial go forward.
With the case on track for trial, Lerach soon received a call from his nemesis. Dick Borow wanted to know if there was a settlement demand, a call that often signals the beginning of a negotiation to avoid a trial. And so it was in this case. Eventually the parties agreed on a figure of $3.9 million, a healthy amount at the time. More cases, and much bigger payoffs, were coming. In some of those cases, opposing counsel would be Richard H. Borow. Unexpectedly, a mutual respect spilled into a friendship.
“I HAVE THE GREATEST law practice in the world. I have no clients.” It became the quote heard round the boardrooms, used against Lerach by his detractors and self-described blood enemies as proof of his cynicism, his arrogance, his boastfulness, his worthiness of being regarded as “less than pond scum.”
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