THE FACTS IN Central Bank of Denver v. First Interstate Bank were not in dispute. In 1986 and 1988 a quasi-public agency called the Colorado Springs–Stetson Hills Public Building Authority raised $26 million in bond sales for a planned residential and commercial development in Colorado Springs. To show potential investors that their money was safe, the Authority named a respected Colorado financial institution, Central Bank of Denver, as the trustee of the bonds.
While the 1988 bond offering was taking place, Central Bank appraisers became concerned. Land values in that part of Colorado had declined significantly since the original 1986 appraisal, yet this drop was not reflected in either the appraisal or the paperwork for the second bond offering. When the senior underwriter for the 1986 bonds alerted Central Bank officials to the discrepancy, Central Bank confronted the developer about it, but was assured that $10 million worth of improvements at the site made the appraisal valid and the bond holders’ investments safe. Central Bank agreed to delay an outside appraisal until after the 1988 bond offering was concluded. This proved to be a mistake. The Stetson Hill project went belly-up, and the authority defaulted on the bonds.
First Interstate had purchased $2.1 million worth of the bad bonds and sued Central Bank on the grounds that the delay in getting the outside audit was so feckless as to constitute the aiding and abetting of a fraud. Nothing in the 1934 Securities Exchange Act had expressly authorized private sector securities suits—let alone third-party liability for aiding and abetting fraud—although lower courts had allowed both since the 1940s, without a peep from Congress or the Supreme Court. A careful observer of the court, however, might have detected latent enmity for class action securities lawsuits that went back to the earliest days of Milberg Weiss’s success.
In 1975 the Supreme Court agreed to hear an appeal brought by Manor Drug Stores against Blue Chip Stamps. The facts of the case were atypical for a securities lawsuit: Blue Chip, under an antitrust consent decree to divest, was accused of offering unduly pessimistic predictions about its financial future, which the drugstore chain claimed had discouraged it and other prospective investors from purchasing shares. A U.S. District Court judge dismissed the suit, saying that Rule 10b-5 of the 1934 Securities Exchange Act was simply not elastic enough to include injuries from entities that had declined to buy stocks. A federal appeals court, finding enough evidence of chicanery, disagreed and reinstated the lawsuit. The Supreme Court surprised many legal observers by taking the case and even more by overruling the appellate judges.
Writing for the majority, Justice William H. Rehnquist noted: “When we deal with private actions under Rule 10b-5, we deal with a judicial oak which has grown from little more than a legislative acorn.” Rehnquist also went beyond the facts in the instant case, going so far as to describe securities litigation as being “vexatious” to business. A plaintiff with even “a largely groundless claim,” he wrote in the 1975 case, can create an irresistible urge for executives to settle rather than fight.
Apparently because the circumstances of the Blue Chip Stamps case were so singular, neither the 6–3 decision, nor the language of opinion penned by the future chief justice, altered the state of securities law for the next two decades—until the Central Bank case reached the high court in 1994. Rehnquist, it turned out, had himself planted an acorn that grew into an oak.
In a contentious 5–4 decision written by Anthony Kennedy, the court went beyond the facts in the Colorado case and issued a ruling that called into question whether third-party liability securities suits could be brought at all. Kennedy’s decision employed two separate arguments. First, it ruled that third parties could not be held liable for either material misstatements or omissions unless they had actively participated in deceiving the public themselves, apparently on the grounds that—as Dan Fischel had maintained many times—it was difficult to demonstrate that the omissions and misstatements of third parties directly resulted in investors purchasing the securities in question.
“A plaintiff must show reliance on the defendant’s misstatement or omission to recover under 10b-5,” Kennedy wrote. “Were we to allow the aiding and abetting action proposed in this case, the defendant could be liable without any showing that the plaintiff relied upon the aider and abettor’s statement or actions.” Kennedy was joined in his opinion by Rehnquist, Sandra Day O’Connor, Antonin Scalia, and Clarence Thomas.
In its second rationale, the court’s majority pointed out that Rule 10b-5 makes no mention of third-party liability. The question before the court was “not whether imposing private civil liability on aiders and abettors is good policy but whether aiding and abetting is covered by the statute,” Kennedy wrote. “Policy considerations cannot override our interpretation of the text and structure of the act.”
This assertion, and the court’s blithe disregard for established precedent, clearly irked the minority, led by Justice John Paul Stevens, along with the rest of the high court’s liberal wing: Harry Blackmun, David Souter, and Ruth Bader Ginsburg.
“In hundreds of judicial and administrative proceedings in every circuit in the federal system, the courts and the SEC have concluded that aiders and abettors are subject to liability under 10 (b) and Rule 10b-c,” Stevens wrote. “All eleven Courts of Appeals to have considered the question have recognized a private cause of action against aiders and abettors … Indeed, in this case, petitioner assumed the existence of a right of action against aiders and abettors, and sought review only of the subsidiary questions whether an indenture trustee could be found liable as an aider and abettor based only on a showing of recklessness.”
That reasoning did not carry the day. Instead, under the guise of being strictly constructionist, the majority overturned a precedent so well established that the plaintiffs hadn’t even asked for the relief they were granted. Moreover, the majority’s hair-splitting about whether investors relied on specific omissions or deceptive statements of outside auditors and trusts begged the question of whether victims of securities fraud could be compensated for their losses at all. If the court’s ruling in Central Bank was taken literally, a fraudulent operator could say he had relied in good faith on a reputable third-party expert—auditors, trustees, or consultants. When the plaintiffs then turned for relief by suing the third parties for aiding and abetting in the fraud, those third parties could say, “The Supreme Court says you can’t sue us.”
This was circular logic—a classic catch-22—but you couldn’t appeal a Supreme Court ruling. The only place for relief was Capitol Hill, except that Congress had turned Republican and declared open season on Lerach and the rest of the securities plaintiffs’ bar. To Lerach, California’s legal system was looking better all the time.
WITH HELP FROM Jon Cuneo and Bill Carrick, Lerach was framing Proposition 211 in stark and simple terms: his initiative would make California a haven for retirees and investors—and hell for anyone who would cheat them. Proposition 211 (the number, incidentally, that law enforcement officers in California used over their police scanners to designate a robbery in progress) would have prohibited the California legislature from restricting attorney-client fee arrangements, allowed CEOs or directors to be found personally liable for fraud committed by their business, and shifted the burden of proof for securities violations back to the defendants.
Striking while Charles Keating and the Lincoln Savings and Loan scandal were still fresh in the public conscience, a Lerach-sponsored front group called Citizens for Retirement Protection and Security told California voters: “Congress gutted the law that allowed the victims of Charles Keating’s fraud to recover most of their money … According to the Federal Trade Commission, Americans are losing one billion dollars a year to investment swindlers.” As part of the strategy, Lerach brought out his bilked Lincoln Savings and Loan clients for one last dramatic reprise. At a California Public Employees’ Retirement System (CalPERS) hearing in Sacramento, the Keating victims were in full force.
“Bill Lerach looks after the pe
ople who need looking after—the little guy,” said eighty-four-year-old Sam Epstein, a North Hollywood resident who said he had recovered most of the $65,000 he lost in Keating’s S&L scam. “If you’re wondering, do I think he makes too much money, hell, no. I think he deserves every penny he gets.”
This was Lerach’s answer to the ads accusing him and other plaintiffs’ lawyers of being ambulance chasers. Inside the legal profession, the phrase then applied to attorneys who took securities cases on contingency was “bounty hunters.” In the narrative constructed by Cuneo and Lerach, with help from Carrick and Democratic pollster Paul Maslin, Lerach and his ilk were neither ambulance chasers nor bounty hunters. They were defenders of the working class.
Lerach was convinced he was about to rout the high-tech industry again, but Jon Cuneo had no such confidence. Politics was in Cuneo’s DNA, and he could sense a losing hand as instinctively as a professional poker player. He had grown up in Washington, the son of a lawyer-turned-newspaper columnist who had done legal work for journalistic legends Walter Winchell and Drew Pearson. Cuneo attended St. Albans, an exclusive, all-male Washington prep school. From there he’d gone to Columbia University and then Cornell Law School, where the nation’s white-shoe law firms would identify by their second year the students they wanted for high-dollar civil work. Although he excelled at his studies, that life wasn’t for Cuneo. By the time he graduated from law school, he realized that he found big-firm civil litigation about as exciting, in his words, as reading the back of an airline ticket. So he returned to the city of his youth, landing policy jobs with the Federal Trade Commission and later as counsel to the House Judiciary Committee, where he served under famed New Jersey congressman and Judiciary chairman Peter W. Rodino, Jr., of Watergate fame.
Cuneo had not succeeded in preventing the “Get Lerach Act” from passing Congress, but Lerach certainly did not blame him. The two men had become close, and in September 1995, even before the fight over the PSLRA was over, Lerach had invited Cuneo to a strategy session in San Francisco to discuss the “terrible two hundreds,” along with Lerach’s own counteroffensive, Proposition 211. Seniors’ groups were represented, as was the California Trial Lawyers Association. Although no one was designated as the field general, Lerach knew who he had in mind for the job. Over the Thanksgiving weekend he called Cuneo at home to see if he would consider playing an active role in California.
Lerach had originally petitioned the state to have Proposition 211 titled on the ballot “The Retirement Savings and Consumer Protection Act.” Republican Attorney General Dan Lungren wouldn’t go for that and gave it a less positive-sounding title: “The Attorney-Client Fee Arrangement Securities Fraud Initiative.” Nonetheless, all summer it held a lead in public opinion surveys, although early polling in referendums is not always significant. Sabotage from Republicans such as Lundgren was to be expected. More ominously, Lerach and his allies had received squirrelly responses when they had solicited President Clinton’s support. But that summer some unusual political alliances were forming in California and Silicon Valley around Lerach’s ballot proposition. For starters, influential venture capitalist L. John Doerr had taken the reins from Tom Proulx as the chief organizer in opposition to the Lerach initiative. For another, Silicon Valley was playing both sides of the street: although Doerr still publicly claimed to be a Republican, he openly admired Al Gore and had attended the Democratic National Convention that summer in Chicago.
Wiry and hyperkinetic, John Doerr was a forty-five-year-old former inventor and design engineer for Monsanto (and later marketing manager for Intel, the giant chipmaker). For sixteen years as a venture capitalist and entrepreneur, he personally helped shape the Silicon Valley, betting on emergent companies such as Intuit, Netscape, Amazon, and Sun Micro systems.
From the outset of the information age, prominent Democrats hoped the moguls of these new industries would gravitate toward their party. The politicians trying to woo the techies called themselves Atari Democrats, after the company that invented Pong, one of the first video games. “We prefer Apple Democrats,” quipped tech-friendly Colorado congressman Timothy Wirth. “It sounds more American.”
Atari was a Japanese word (although a California company), but Apple Computer would indeed have been a better symbol because Apple CEO Steve Jobs was a liberal Democrat who in 1996 gave $100,000 to the Clinton campaign. It wasn’t nearly as much as Bill Lerach, but it was a lot, and it was the tip of an industry’s iceberg. Doerr enlisted Jobs in the effort to defeat Proposition 211. Doerr’s involvement was key, and if Lerach and Mel Weiss had known more about Silicon Valley politics, they might have been more worried.
Like many Silicon Valley movers-and-shakers, Doerr had found it disconcerting, during the fight over the PSLRA, that Lerach enjoyed such easy access to the president. Doerr craved that kind of clout for his industry, and several young Democrats arrived on the scene about this time to help Doerr achieve his goal. One was a Californian from a moneyed family named Wade Randlett, who had an Ivy League education, a law degree, and a passion for politics. Randlett believed he could make a name for himself—and do the Democratic Party a lot of good—by making the Atari Democrats’ long-standing dream come true. At age thirty-one, Randlett had established himself as one of the top “bundlers” in the Democratic Party. (Bundlers raise large amounts of cash for the party, by getting dozens—or hundreds—of donors with similar interests to write checks that are then given in one large tranche to the party, or to a specific candidate.)
Doerr and Randlett met for the first time on July 2, 1996, at a fundraiser for one of the stars of the centrist, pro-business Democratic Leadership Council, Connecticut senator Joe Lieberman. It was held at the San Francisco home of Sanford “Sandy” Robertson, one of Doerr’s fellow high-tech venture capitalists. Doerr had already vowed to his partner Brook Byers that he would “crush” Lerach and his initiative. Now he’d found someone—a Democrat, no less—who could help him do it. With Doerr’s blessing, Randlett virtually ran the anti-Lerach campaign out of Kleiner Perkins’s headquarters on the Sand Hill Road near Stanford University, which that summer and autumn featured a huge banner reading “NO ON 211.”
The air war against Lerach was conducted by Goddard Claussen, the top-drawer Sacramento-based media campaign consultancy responsible for the “Harry and Louise” ads that helped derail then–first lady Hillary Clinton’s 1993–94 health care initiative. The firm’s first wave of television ads began with a scare tactic: “The wealthy East Coast lawyers are coming,” and the picture of some presumed shyster emerging from a Learjet. (“Jon, do you think they are talking about me?” Lerach asked his confidant impishly.) Lerach was so sanguine because demonizing him had failed in the March referendum, and he believed it would fail again.
Doerr had a similar perception. He needed something big, and during a presidential year nothing was bigger than the endorsement of a front-running incumbent—unless it came from the president and his challenger. First, the anti-Lerach forces set about nailing down Bob Dole’s support, which wasn’t a hard sell—Dole had little use for trial lawyers—and on August 6 the Republican nominee came out in opposition to Proposition 211. The next day President Clinton arrived in Silicon Valley for a campaign stop that was essentially hosted by Steve Jobs. Immediately prior to his campaign event, Clinton met privately with Jobs, Doerr, and a handful of other top Valley executives and assured them that he was also opposed to 211. White House chief of staff Leon Panetta dutifully passed this information along to the traveling press corps: “He believes securities laws should be done on a national, rather than state-haphazard basis,” explained Panetta.
Others suggested baser motives. Just as Silicon Valley had noticed when Lerach could contribute oodles of money to Clinton, and then get a private audience with the president, Steve Jobs’s $100,000 contribution did not pass unnoticed in the tech community, and it was hardly the last of its kind. Prop 211 had opened a spigot. In mid-September Clinton attended a fund-raising
dinner in Sunnyvale, California, for a dozen well-heeled business leaders—the price tag was $50,000 per plate. This new generosity on the part of high-tech executives toward Democratic candidates suggested a different—or at least, an additional—rationale for the president’s change of heart than Panetta’s good-government explanation. “Clinton wants to nail down California, and our high-tech community needs his support to defeat Prop 211,” George Sollman, chief executive of San Jose’s Centigram Corp., told Time magazine. “So there you have an equation.”
Lerach, after all he’d done for the president, learned of Clinton’s betrayal in the newspapers. “Say goodbye to the Lincoln bedroom,” he glumly griped to his wife, Star.* Lerach had been hoping that Bill Carrick’s job as an adviser to Clinton’s California campaign would help keep the president neutral, but the fix had been in all along. Earlier that summer Randlett had squired Doerr around at the Democrats’ Chicago convention, Doerr’s entrée being assured by Simon Rosenberg and Celia Fischer, two other well-positioned “New Democrats” who had been with Clinton in 1992. If Doerr was cultivating prominent Democrats mainly so he could undermine Proposition 211, the party professionals were using him to advance their own agenda—namely, getting their party, and their president, more in the ballgame when it came to high-tech political contributions, activists, and votes. In John Doerr, Lerach had met his match.
“I’ve learned in politics that you cling to rich donors, great spokespeople, and people who get shit done,” Fischer said later. “Doerr is all three.”
Late that summer polls showed the measure tightening, although Lerach’s side remained ahead. Fund-raising now became an issue. In April and May Cuneo and Carrick had set up focus groups to delve more deeply into citizens’ attitudes. What they heard in those sessions had utterly taken the wind out of their sails. “When we brought up ‘securities,’ half the people thought we were talking about alarm systems for their homes,” Cuneo recalled later. “I didn’t know whether to laugh or cry.”
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