He had been describing to a Forbes reporter the business model of Milberg West, as it was now called, especially by Lerach’s colleagues at Milberg East. Actually, Lerach’s early business model was no model at all—it was essentially a race to the courthouse, with the goal being to be the first to file. Lerach had no previous experience drumming up cases and was new to California, so initially his cases came from eastern referrals, most of them from his own firm, which was now officially named Milberg, Weiss, Bershad, Schulman & Lerach.
And though Seymour Lazar’s gambit to Mel Weiss was particularly brazen, it seemed—to Milberg Weiss’s partners, at least—the next logical step in an emerging legal specialty: class action security lawsuits. Law firms pursuing such cases were nurturing a pool of people willing to purchase small shares of stock in hundreds of companies listed on the New York Stock Exchange. By so doing they became potential clients. In a way, class action lawsuits on contingencies were more like attorney-client investments. Success in such cases bred more success, and the word circulated in the plaintiffs’ bar: there were two sizzling-hot trial lawyers to call on behalf of their clients. The first was San Francisco’s David Gold, the dean of the West Coast class action lawyers; the second “it” barrister was none other than Bill Lerach, the upstart who was beginning to carve up big companies and carve out large fees. Both were viewed as highly competent and tough. And they got results, sometimes in tandem. Lerach and Gold combined on several high-profile cases. One was against Memorex, one of the first suits against a Silicon Valley company, which returned $25 million. Another was a suit against Washington Public Power, or WPPS (pronounced “Whoops”), the largest municipal bond default in history ($2.5 billion), which, after Milberg Weiss took the case to trial, yielded a series of settlements that recovered $750 million for shareholders, the largest ever reached at the time.
With these settlements came renown among the plaintiffs’ bar—and other lawyers came knocking on Lerach’s door. That meant he set the rules of the game. A partner of another firm, preferably but not always Milberg East, would bring Lerach plaintiffs in class action lawsuits, presumably with big potential payouts. Lerach started to draw the line at a minimum $5 million potential fee, which meant targeting at least $50 million for a judgment or settlement. He would file the suit on the West Coast, and he would control the case, either as lead or as cocounsel, while the referring law firm was responsible for its client.
“These suits were not clientless, but obviously clients had minimal impact because they lack the sophistication to control them [the lawsuits],” he said in a magazine interview. “They are just shareholders. I don’t consult with them on tactics, although I keep them posted. Client involvement would restrict my ability to litigate with budgetary considerations.”
By the late 1970s the flow of clients from east to west became so great that Lerach had no need to generate his own. Seymour Lazar became a regular after receiving his first payback of approximately $40,000 on April 19, 1984, for acting as a plaintiff in a civil case in San Mateo County, California. Lerach was enjoying a litigator’s dream. He was being bankrolled by Milberg East, which took care of all administrative concerns, and he had a steady stream of plaintiffs. “All I had to do was bring the cases,” he said.
Lerach’s workload increased exponentially. Soon he perfected a kind of modern assembly line that would have done the industrial barons of turn-of-the-century Pittsburgh proud. It didn’t produce machines, or steel beams, or any product. It produced lawsuits. By the late 1980s Milberg West was filing—and settling—securities class action lawsuits so fast, and for so much money, that Lerach designated a firm partner named Keith Park to see the paperwork through on the settlements. Park was known for being meticulous, not showy. He was the first lawyer Lerach hired in Milberg Weiss’s California office, and he lacked the stomach for the pressurized, high-wire litigation that made the firm notorious. Likewise, Lerach lacked enthusiasm for the tedious follow-through required on his cases. Yet Park’s paperwork was hardly unimportant. As the firm’s fee on many of these settlements was worth millions—or tens of millions—dotting the i’s and crossing the t’s on the negotiated paperwork was an essential task.
In time, the fees became so large that just a few days’ delay in being paid could mean the loss of a significant sum of money. For this reason Lerach instituted a new policy with the companies, lawyers, and insurers who sought to avoid a trial by paying a settlement: interest on the agreed-upon amount—generally about 8 percent—began on the day of the handshake cementing the deal. Many of the lawyers opposing Lerach would rather have knifed him in the gut than shake his hand. But shake his hand they did, and the money rolled into Milberg Weiss’s coffers.
His firm so dominated the field of class action securities lawsuits that “if other firms did not come to us with California cases, they very much risked being excluded altogether from these cases,” Lerach wrote in an article, recounting the history of Milberg Weiss. This was another line that would come back to haunt him. He would later be characterized as a “Godfather, or Mafia-like character,” who either blackmailed other firms into referring their cases and clients or was capable of muscling out the competition. He would not argue with at least some part of that assessment.
Meanwhile machinations in Washington helped cement Lerach’s position.
In March 1980, with deregulation all the rage in politics, Congress passed the Depository Institutions Deregulation and Monetary Control Act. The new law, hailed as the first sweeping reform of U.S. banking laws since the Great Depression, had a number of provisions, among them lowering the level of funds that banks and savings and loans (known as “thrifts”) had to keep in reserve; letting state-chartered banks charge the same interest rates as federal banks; and allowing thrifts to offer trust accounts and to make consumer loans up to 20 percent of their total assets. This act was signed into law by President Carter, who in his last State of the Union address singled it out as one of his signature achievements.
The following year a Democratic House and a Republican Senate passed an even more sweeping law called the Depository Institutions Act, which largely unfettered savings and loans from their historic function of providing home loans. Signed enthusiastically by Ronald Reagan on October 15, 1982, this measure raised the ceiling of consumer lending to 30 percent of assets, authorized thrifts to make commercial, corporate, and agricultural loans of up to 10 percent of their assets, and raised the ceiling on the thrifts’ direct investment in nonresidential real estate to 40 percent of their assets. The new law, President Reagan assured the nation while signing the bill, “will make the thrift industry a stronger, more effective force in financing housing for millions of Americans in the years to come.”
The optimism of Carter and Reagan would not prove to be well founded. Such deregulation unleashed a class of unscrupulous savings and loan executives on an unsuspecting public—and sowed fertile fields in which Lerach could litigate. In the meantime new technologies being developed in California were making it ever so much easier to commit fraud, to manipulate financial markets, and to filch on a massive scale. Lerach and his partners would be waiting for these bandits too, using the same technologies against them.
FOR BILL LERACH AS for the rest of the country, the Computer Age was ushered in with the faint beep, beep, beep sound of the Soviet satellite Sputnik that circled the globe in 1957 to general amazement and not a small amount of panic. Lerach’s father initially thought it a communist hoax, but he and his wife and sons joined the other families on Kennedy Avenue, including Gene Carney’s, to peer into the October sky looking for the thing.
In Washington, the space race was more than a diversion. Suddenly money was available for aerospace firms to build rockets and for paving companies to build the interstate highways, envisioned as a necessary component of civil defense in the event of nuclear war. Bill and Gene Carney—then eleven years old—were so inspired by Sputnik that they dabbled with their own rudimentary rock
ets. Plastic rockets, powered by water pressure, worked best for them, although they never solved the problem of reentry. Their little devices seemed to prefer to land on the roofs of houses in the neighborhood.* The boys made parachutes out of old handkerchiefs, tying them with string to rocks and small toys, and threw them as high as they could into the air. As a grown man, Bill Lerach and his firm would file class action lawsuits against the major companies that produced America’s rockets: Lockheed Martin, Boeing, Rockwell International, Northrop. He would also file class actions against the great semiconductor firms that invented and sold the integrated circuits that made the rockets fly: Intel, Advanced Micro Devices, Cypress Semiconductor, IBM, LSI Logic, and National Semiconductor.
In the late 1970s and early 1980s Lerach was the skunk—albeit a bespectacled skunk in an expensive suit—in Silicon Valley’s garden party. Garden orgy was more like it. The celebrated high-tech companies that did so much to increase American productivity and remake the U.S. economy were experiencing their first great market run, capturing venture capital, going public, securing more money, and publicly promoting CEOs as the visionaries who would produce a galaxy of life-changing products. Time magazine featured a group of new IPO zillionaires in a cover story “Golden Geeks,” dubbing them “Instantaires.” This was not an isolated example. As vainglorious pronouncements were spouting daily from Silicon Valley, a kind of unreflective euphoria emanated from California, sweeping the country. America, it seemed, was pandering to wealth. The unleashing of venture capital and the harvesting of it—raising more than $50 billion annually to launch five hundred public companies a year—was encouraged by successive occupants of the White House, cheered by a pliant Congress, and protected by an undermanned SEC. Lerach publicly made note of the market volatility of these highly capitalized start-ups, as well as the pressure on corporate officers to lure investors. It was a recipe for fraud, he often warned, adding ominously that the flight from San Diego to San Jose, the gateway to Silicon Valley, would take just over one hour.
In Palo Alto, the heart of Silicon Valley, a small law firm, McCloskey, Wilson & Mosher, was launched in 1961 by three partners. Paul N. “Pete” McCloskey, Jr., a Marine Corps Korean War hero, would later enter Congress as a maverick Republican, come out in early opposition to the war in Vietnam, and be the first House member to publicly broach the idea of impeaching Richard Nixon.* Prior to all that drama, however, McCloskey and his partners had quietly discovered a recipe for rapid growth: help build the companies you represent. It required entrepreneurship, capital, and infrastructure; its prime practitioner would be Larry W. Sonsini, a former high school quarterback who, despite his slender physique, played on the freshman rugby team at the University of California. He attended law school at Berkeley, too, and was hired directly out of Boalt Hall by McCloskey, Wilson & Mosher in 1966. Sonsini had been told by a law school mentor: “There’s something going on down in The Valley. There are a lot of young businesses starting, and they’re companies that are going to have to go public.” What his mentor was suggesting was that well-positioned business lawyers could pretty much print their own money.
Sonsini quickly found himself at the crossroads of venture capital and invention. He networked, signing on as counsel to nascent semiconductor companies such as LSI Logic, Cypress Semiconductor, and National Semiconductor. Soon he would add hardware and software firms that would help give the U.S. economy and stock markets an unprecedented rocket ride.
The strategy was to represent start-up companies, help them grow through all stages of development, and not only retain them as clients but also maintain an equity role. Wilson Sonsini represented Apple Computer, a start-up they also helped stake. In 1980, when Apple went public—the largest offering since Ford Motor’s IPO in 1950—Sonsini and his partners in the eight-lawyer firm earned a fortune. During the next five years, seventeen more lawyers were added to the firm’s litigation arm alone. By 1988 the firm had grown by more than 100 percent, and its profits per partner averaged $430,000, almost $100,000 more than the partners at big San Francisco firms were earning. Naturally, those partners took notice.
By 1989 more than forty major national law firms had opened up offices in Silicon Valley. “That was a period of raw greed,” Wilson Sonsini partner Boris Feldman recalled in a magazine interview. “Greed was always an important component in the Valley, but it was sort of restrained greed: the sense that if you build a good company, you’ll be rewarded for it. But during that time framework, what people forgot was the element of building value. It was much more like a gold rush. The values in the Valley were, if not corrupted, then certainly strained.”
As Mel Weiss had predicted, greed had become a growth industry. Another set of beneficiaries were the directors and officers of companies that underwrote liability insurance. Beginning in the 1930s, Lloyd’s of London introduced coverage for company board members and officers who had previously not qualified for indemnification policies. With the rewriting of the rules of civil procedure in 1966, making it easier to launch lawsuits against corporations, and with Mel Weiss’s fraud on the market strategy putting ancillary participants in play, directors and officers found themselves at greater risk regardless of whether they were affiliated with a primary or a secondary defendant corporation. By the mid-1980s, insurance records showed that 31 percent of all publicly held companies and 42 percent of all banks had experienced at least one securities claim against them. Consequently, nearly 95 percent of Fortune 500 companies took out such insurance, called D&O policies, protecting their directors and officers from being personally liable.
One important caveat played into the hands of plaintiffs’ attorneys: the “dishonesty exclusion.” A carrier would be exempt from paying a claim if the company making the claim had committed fraud or willfully violated securities law. On the other hand, by settling without admitting to any dishonesty, a company could collect on its D&O claim. Thus, the incentive was to settle, even a spurious claim. By the end of the 1980s the average settlement was $8 million.
From this specter emerged an unlikely poster boy. Not that he needed the speaking fees by then, but Bill Lerach became one of the insurance industry’s most sought-after speakers. “I’d go in and scare the shit out of their clients,” he later recalled mischievously. “And after I’d leave, the insurance company would raise its policy rates.”
Within the growing competitive reality of securities litigation, another trend began attracting notice: the number of repeat plaintiffs, especially in cases filed by Milberg Weiss, East and West. One such plaintiff, William Weinberger, a retired accountant from Pompano Beach, Florida, was party to ninety such securities fraud cases. In one lawsuit, defense lawyers asked Weinberger about it. The serial plaintiff, then eighty-eight years old, testified that he had subscribed to a newsletter called New Issues, a tout sheet on new companies going public during the first big wave of public offerings. Weinberger said he’d bought about one hundred shares of nearly every new company the newsletter ballyhooed, saying: “As long as I paid for the service, I used the service.”
Many of those investments turned into instruments for filing lawsuits. At the outset, at least, Weinberger was not in league with Milberg Weiss; he just bought these stocks knowing that, sooner or later, there was a good chance Lerach would sue the companies, and he’d get an added dividend. He was not even the most litigious of the plaintiffs, called “pets.” Attorney Tower Snow, a frequent Lerach opponent, observed sarcastically: “I mean, Mr. William Weinberger [was] the most defrauded man on Earth. He’d been individually defrauded by 120 public companies.”* For his part, Lerach played it straight. “There are hundreds of investors willing to step forward and sue and vindicate their rights if they know the opportunity is there,” he responded.
The opportunity was there all right, and Lerach started getting referrals from all over the country: from attorney Alfred G. Yates, Jr., an old pal from Pittsburgh; from Philadelphia lawyers Leonard Barrack, Richard Greenfield (whose lim
ousine license plate read: Rule 23), and Richard S. Schiffrin; from Steven J. Toll, a respected Washington, D.C.–area securities attorney; and from various partners in an array of New York firms that often competed with Milberg East. Lerach’s phone would ring in California, and it would be one of his own partners on the line complaining about Lerach’s temporary alliance with one of these lawyers on a security case.
“Why are you doing business with that son of a bitch?” a Milberg Weiss attorney would ask Lerach. “He screwed me in Delaware.”
“Well, we’re gonna give them a chance to make good in California,” Lerach would reply. “And it still goes to our bottom line.”
So intense was the competition to be first to the courthouse, Lerach would often receive telephone calls at five A.M. Pacific Coast time. Most people receiving a call at that hour worry about a loved one. Lerach worried about how fast he could get dressed. The phone would ring at some ungodly hour of the morning, and Lerach would turn over in bed and say to Kelly: “New business.”
He was simply rolling in cases. He didn’t need more plaintiffs. What he needed was a reliable expert witness with a bent toward plaintiffs’ lawsuits. Mel Weiss, always there when Lerach needed him, was about to provide this too.
JOHN TORKELSEN WAS A Princeton graduate, class of ’67, a mannerly and politically connected investment banker thriving in the start-up arena, sometimes relying on subsidies from a federal small business assistance program. His two companies, Princeton Venture Research and Equity Valuation Advisors, specialized in valuing and appraising public and private companies, primarily start-up technology companies. Torkelsen oversaw forty-seven employees, many of them MBAs, and he frequently entertained bankers, investors, innovators, and politicians at his 6,000-square-foot Victorian on Library Place, just a few blocks northwest of old Nassau Street and the Princeton campus.
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