“Those are numbers that are down there” was all Lerach could muster in his reply.
“So it was just an honest mistake on your part in making that allegation?” Hansen asked.
Solovy tried to object, accusing Hansen of being argumentative. But Lerach answered anyway: “All I can tell you is I did not have this letter at the time the fifth amended complaint was prepared.”
“But the allegation is clearly a mistake, isn’t it?” challenged Hansen.
“If I had had this letter, I would have alleged it differently,” Lerach sputtered. “I did not have this letter at the time we prepared the fifth amended complaint.”
Hansen asked Lerach if he was aware that then–economic consultant Alan Greenspan had given three separate opinions hailing Lincoln’s solvency to the FHLBB. “Were you aware, Mr. Lerach, that Mr. Greenspan had represented to the Federal Home Loan Bank Board that in his opinion Lincoln had, through skill and expertise, transformed itself into a financially strong institution that presents no foreseeable risk to the Federal Savings and Loan Insurance Corporation?”
“I don’t know whether I knew he had said that at the time,” Lerach answered.
“Were you aware of that opinion at the time you sued Lexecon and Daniel Fischel as racketeers for a billion dollars in the Lincoln case?” Hansen asked.
“I don’t know whether I was or not,” Lerach answered.
Finally, Hansen shut the door, “You didn’t sue Mr. Greenspan, did you?”
“No, we did not sue Alan Greenspan,” Lerach’s answer faded with the end of the day. He returned to the defense table, slumped into his chair, turned to Solovy, and said: “I was up there for target practice.”
ON SUNDAY, APRIL 4, Alan Salpeter was home composing his closing arguments when his phone rang. On the other end was Mike Cypers, an attorney with the Los Angeles firm of Alschuler, Grossman, Stein & Kahan. He and Salpeter had worked as co counsel on several cases, becoming friends. Cypers had been following the Lexecon case and had a question: “Would it help if a witness came forward and said he’d attended that Apple Computer party when the Milberg guys were high-fiving and bragging about putting Fischel out of business?”
“Peel me off the ceiling,” Salpeter told his friend.
Cypers told Salpeter that Mike Sherman, one of the Alschuler lawyers, had previously worked in the San Diego office of Barrack, Rodos & Bacine, a firm assisting Milberg Weiss on the Lincoln lawsuit. As Cypers explained, the most recent issue of the National Law Journal carried an account of the Lexecon trial, noting how contentious and even coarse it had been. The allegations against Lerach and his motivations for suing Dan Fischel in the Lincoln case, along with Lerach’s strong denials of stating publicly that he wanted to put Fischel out of business, had caught Sherman’s attention.
He had attended the Milberg Weiss victory party at the Omni Hotel. More than once he had heard Dan Fischel’s name raised in reference to Apple’s defense. And more than once, he’d heard “that little fucker” and “he’s dead as a witness … he’s out of business,” raised by more than one Milberg partner, including Lerach. What he had read of Lerach’s quotes in the National Law Journal did not square with what he knew.
Sherman’s account had reached Cypers, who was appalled. Maybe Salpeter would like to hear more from Sherman. Salpeter called him immediately, asked Sherman to relate what he had overheard at the Milberg Weiss party, and inquired if he would be willing to repeat it for the judge and jury.
“No. I’ve got to work with these guys,” the San Diego lawyer replied.
“Would you duck a subpoena?” Salpeter persisted.
Realizing that he could be compelled to testify, Sherman said he would sit still for a deposition, but that it must stipulate that he was an unwilling witness. Salpeter said he’d have an attorney in San Diego within a day or so. He then called Hansen and told his trial colleague: “We’re going to turn Lerach into Pinocchio.”
Salpeter contacted Judge Zagel and told him he and Hansen wanted to introduce new evidence. On April 8, with the jury seated, Salpeter rose and said: “Your honor, we would like to call a rebuttal witness … Can we douse the lights?” Video monitors were placed before the jury but stationed in position for all in the courtroom to see. The lights went down, and the jury saw Michael Sherman, under deposition, repeating the words “that little fucker is dead.” And telling the jury he had heard it more than once from several Milberg Weiss attorneys but specifically from Lerach.
When the lights came up, Salpeter faced the audience and announced: “That’s all we have, your honor. We are ready for closing arguments.” At the defense table Jerold Solovy was speechless, and Bill Lerach boiling.
CLOSING ARGUMENTS COMMENCED ON April 9. Alan Salpeter led off by telling the jury that he believed he and Hansen had delivered on the promise they had made when the trial began twenty-one days earlier. They had demonstrated that Milberg Weiss had an ulterior motive in suing Lexecon, which was to drive Dan Fischel out of business, and that they acted on this plan and had done actual financial harm to him and Lexecon.
He reminded the jurors of the testimony of those who participated in the Nucorp case, including David Gold and Stuart Kadison, ardent opponents who agreed that following the Nucorp loss Lerach had been “livid, furious, and out of control.” Digressing momentarily, Salpeter said that if the Lexecon case were a chapter in a book, he might entitle it “Lawyers Above the Law.” Then he deferred to Kadison, “Elder gentleman, lawyer for fifty years, from Los Angeles. I think I like his title better. ‘Shabby Business.’
“These are people who have no respect for the very legal system that pays them millions and millions of dollars,” he added. “They don’t respect judges, they don’t respect juries, they don’t respect their clients. All they respect is money.”
Pointing to Lerach, Salpeter continued his diatribe: “One of his favorite sayings is: ‘Revenge is a dish best served cold.’ He compares himself to a bounty hunter. Can you imagine that, a lawyer who compares himself to somebody who hunts people down for money? He likened himself to a snake. No wonder lawyers have a bad name in our society.’”
Once more, Salpeter guided the jury through Lexecon’s yearly drop in revenues, attributing this harm to Lerach’s lawsuit against his client and referring to the charts they had seen previously. “Lexecon was sold for $63 million. It should have been sold for $152 million,” he said, giving the jury not-so-subtle hints on calculating damages.
Solovy followed, trying his best to placate the jury by telling them that Lerach, his client, had admitted that the scalding memo he wrote castigating jurors was “dumb.” The thrust of his closing argument was this: “Milberg Weiss had a duty to their clients. And their primary purpose was not to hurt Fischel and Lexecon. Their primary purpose was to help the 23,000 people they represented.” In a rambling discourse lasting forty minutes, he reconnected Lexecon to Lincoln Savings and Loan, trying to justify the Milberg lawsuit naming Fischel’s firm as a defendant. “This institution was in the tank. And that’s why the government wanted to shut them down. And that’s why Lincoln was paying Mr. Fischel and Lexecon $1.1 million to stop that from happening.
“And if this were a case about vendetta and revenge, look over there [at the plaintiffs’ table], ladies and gentlemen of the jury. There is the vendetta and revenge … They cannot let go of what happened nine years ago. Milberg defendants are sitting here in the courtroom, their income being discussed publicly, et cetera. So where is the vendetta coming from? You decide that.”
Hansen was invited to make final arguments. Since Salpeter had basically covered the burden that the plaintiffs’ lawyers were under to make their case, he reverted to what he had already employed—an attack on Lerach. Once again he cited Fischel’s testimony in the Nucorp case and Lerach’s presumed emotional extrapolation of the jury’s reaction. “This is the same Mr. Lerach who comes into this court and says ‘I was calm as a cucumber after Nucorp … As for the memo I wrote, a
calm memo saying all the awful things about women and teachers.’ We are not saying Mr. Lerach really believes those things. I don’t think the evidence shows that he does. We’re saying Mr. Lerach was hot-headed, and impetuous, and very unhappy about Nucorp.”
Hansen continued: “And you should read that memo, because he gives an explanation for it that shows you just how untruthful he was on this witness stand, among lots of other things. He said ‘I was writing that memo as an exercise in self-criticism.’ Try and read that memo as an exercise in self-criticism. ‘Gee, what a mistake I made in not realizing jurors are idiots. Gee, what a mistake I made in not realizing that fat people aren’t happy-go-lucky. How wrong of me not to understand that women can’t be persuaded. How foolish of me not to realize that jurors forget up to eighty-five percent of what they hear.’ That’s not self-criticism. That shows you what kind of story Mr. Lerach tells on the witness stand.”
At the defense table both Lerach and Solovy tensed. Objections were not allowed in final arguments. By now Star had returned home and Lerach was glad she was gone.
Banging the drum one last time, Hansen said: “Ladies and gentlemen, you will see the evidence is before you to prove that the only motive that Milberg had in suing Lexecon and Fischel was to hurt them and put them out of business and make more money. They acted more like mobsters than like lawyers. They effectively put out a contract on Dan Fischel.”
By three P.M. Judge Zagel had completed jury instructions, and the panel filed out to choose a foreman and begin deliberations. Within hours came a request. Could the jury review the reports Lexecon had done on behalf of Keating and Lincoln? Lerach was elated to hear this, as was Solovy. Did it mean they were accepting the defense argument and making the link between Lexecon and Lincoln? “Oh shit,” Salpeter remembered saying. Neither side knew at the moment that the jury had only one question. Did Daniel Fischel’s name appear on the Lexecon reports that went to the FHLBB on behalf of Lincoln? The answer was as testified to—no, it did not.
At three P.M. Monday, April 12, the jury returned to the courtroom. Lerach smiled confidently while the two plaintiff’s attorneys sat stone-faced, as did their client. Then came the announcement. The jury had found for the plaintiff and determined that $45 million in compensatory damages should be awarded the consulting firm. For the second time in a decade Lerach shook his head in horror and disbelief at a jury verdict against him. Nor was this to be the jury’s final word. They would continue to deliberate punitive damages. Judge Zagel ordered a hearing to begin the following morning.
This set off a frenzy that lasted well into the night. Although Salpeter told the judge he planned on calling only three witnesses—Mel Weiss, Bill Lerach, and Len Simon, whose initial oversight in failing to secure a release had put the firm at risk in the first place—he and Hansen returned to their offices and began drafting their arguments for punitive damages. In this phase, they could expose the net worth of the defendants, not just what had been exposed during the trial examination but the value of their homes, their personal property such as art, and their investments. It could also be revealed that Weiss, an inveterate gambler, had taken home considerable winnings from casinos in the Bahamas over the years. Salpeter decided to go for another $45 million.
About two A.M. the lawyers received a call from one of their colleagues. Settlement talks were in the works. Robert A. Helman, the recently retired chairman of Mayer Brown, whom Salpeter had suggested oversee any negotiations, was meeting with Milberg partners Pat Hynes and Dave Bershad. No matter; settlement talks were one thing, preparing for a hearing was another. Hansen and Salpeter continued working throughout the night. When the two Mayer Brown attorneys walked into court at eight thirty the following morning, Fischel was already at the plaintiffs’ table. Salpeter noticed Pat Hynes at the door to the courtroom. Like them, she looked like she had been working through the night. Hynes asked to speak with Hansen, while Salpeter took his seat next to Fischel.
Within minutes Hansen joined them. “They want to settle the whole thing for $50 million,” Hansen reported. Fischel balked. Hansen leaned into Salpeter, saying quietly but firmly, “Talk to him.”
Salpeter asked Fischel to join him in the hall. “Dan, get real. You’ve already got $45 million out of the jury. Now you’ve got another $5 million out of these guys.”
Fischel cracked a smile. “Are you telling me I should do it?” he asked. Salpeter shook his head yes.
“All right, but I want the money today, in cash, all of it,” Fischel said. Salpeter gulped and Fischel said: “Otherwise we get on with the hearing.”
When Judge Zagel entered, Salpeter rose and announced a settlement had been reached. He conveyed the terms, watching the reactions of Lerach and Hynes, as they found themselves on the losing end of the biggest abuse-of-power verdict and settlement in history. And now Salpeter was telling them the money had to be wired to a Lexecon account by five P.M. He saw what he expected to see—utter shock on their faces. Adding to it, Judge Za-gel said he would send the jury home, adding, as if Fischel’s demand were the most reasonable thing in the world, that if the money had not been transferred by five P.M., and if he had to preside over a punitive damages hearing, he would triple the penalty.
As they adjourned, testy words were exchanged among the Milberg Weiss lawyers. They hadn’t protected themselves from a lawsuit that never should have been filed. They had upped the settlement offer to $20 million, but Fischel had refused because Milberg Weiss refused to admit misconduct. Now they needed $50 million quick, and the firm had only $5 million in liability insurance. The rest would have to come from the partners themselves.
Lerach called home. Unable to disguise his dismay, he told Star: “We got whacked for $50 million,” and directed her to sell bonds and other securities—empty the portfolio. How much? He didn’t know exactly, “just sell.” Within hours, she had $18 million ready to wire to Chicago. Mel Weiss had already contacted Dave Bershad. How much could the firm muster? Not enough to meet the obligation. He directed Bershad to get on the phone to the banks and any lenders he could think of for short-term borrowing.
Just past noon the wire transfers began flowing to Chicago, from San Diego, from Milberg Weiss accounts in New York, and from several New York banks. Before four P.M. Eastern Time, $50 million was settled in a bank account set up on behalf of Lexecon and Daniel Fischel.
By the end of that day Mel Weiss had scheduled a crisis meeting with his partners. Lerach could return to San Diego; what had to be done could be done by teleconference. But he wanted Lerach available, as well as Len Simon. And in New York he wanted Pat Hynes, David Bershad, and Steve Schulman present at the meeting. Everyone on the list knew the agenda—a letting of blood and money.
20
FRAUD BY HINDSIGHT
Two and a half months after the Lexecon verdict, a three-judge panel in the Ninth Circuit issued a 2–1 decision in the Silicon Graphics case. The July 2, 1999, opinion, written by Judge Sneed, was a hammer blow that threatened to cost Milberg Weiss a lot more than the $50 million it had forked over to Fischel and Lexecon.
Sneed, with the concurrence of a federal district judge who had been assigned to the panel temporarily, rejected the plaintiffs’ appeal—and put the West Coast circuit at odds with the Second Circuit Court of Appeals, which had reached a decidedly different conclusion in a New York case. Upholding Judge Fern Smith’s interpretation of the 1995 Private Securities Litigation Reform Act, Sneed wrote: “Congress intended to elevate the pleading requirements above the [Second Circuit] standard requiring plaintiffs merely to provide facts showing simple recklessness or a motive to commit fraud and an opportunity to do so … Accordingly, we hold that a heightened form of recklessness, i.e., deliberate or conscious recklessness, at a minimum, is required to establish a strong inference of intent.”
In Sneed’s telling, the “Get Lerach Act” had indeed gotten Lerach—as well as taken care of the Milberg Weiss class action model, and any other plaintiffs’
attorney who emulated it. Sneed’s prose was wordy and at times dense, and his logic was not always easy to follow. But his conclusion was unmistakable: Congress had simply outlawed Milberg Weiss’s bread-and-butter style of litigation.
“[Plaintiff’s] assertions in the complaint differ very little from the conjectures of many concerned and interested investors,” Sneed wrote.
At one time, an immensely successful company and its officers state publicly that the company will continue to succeed. The officers then sell a noticeable quantity of shares at a considerable profit. Shortly thereafter, the company takes a turn for the worse and suddenly, suspicion abounds … In the absence of greater particularity and more incriminating facts, we have no way of distinguishing [these] allegations from the countless “fishing expeditions” which the PSLRA was designed to deter. Congress enacted the PSLRA to put an end to the practice of pleading “fraud by hindsight.”
Bill Lerach believed that there was plenty of evidence of fraud right in front of the judges’ noses. He had alleged in the complaint that every bit of the negative news that Silicon Graphics had made public on January 17, 1996, had been known to its officers much earlier, meaning that SGI had been making public representations it knew to be false. The support for that contention was a standard Milberg Weiss paragraph—formulated after passage of the PSLRA—stating that this assertion was “based upon the investigation of their [plaintiffs’] counsel, which included a review of SGI’s SEC filings, securities analysts reports and advisories about the company, press releases issued by the company, media reports about the company and discussions with consultants.”
Sneed was dismissive of that assertion. Echoing the language of the trial judge, he referred to it as the “boilerplate section” of the Lerach-drafted complaint and maintained that it was an insufficient basis for a fraud allegation because it failed to aver “with particularity all facts on which [the plaintiff’s] belief is formed.”
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