Circle of Greed

by Patrick Dillon

  Although the matter was trivial—the judge offered in his letter to opt his children out of any Halliburton class action—Rothstein saw his opportunity, and leaped at it. He sent a letter to the court stating that federal rules require a judge to step aside, “however small” his or her financial interest in the case. Godbey recused himself. Fatefully, the case was transferred to U.S. District Court Judge Barbara M. G. Lynn. On September 10, pulling no punches, the Clinton appointee called the $6 million agreement inadequate. “What made your case so bad so fast?” the judge asked Schiffrin. “That’s what I don’t understand … I find this proceeding peculiar because … all of a sudden the great case becomes positively rank.”

  When Rothstein called San Diego to relay the news, Lerach was already at work on an amended complaint, while publicly licking his chops at the prospect of deposing Cheney—of grilling the sitting vice president under oath. What’s more, all evidence gathering, including the transcripts of the deposition, would be made public, Lerach had insisted. The prospects reached beyond reclaiming some $3.1 billion in estimated losses. Lerach was in position to wage a public opinion campaign against the Bush White House. He would, he announced, proceed vigorously.

  Instead, Lerach would find himself attempting to douse flames much closer to home, beginning with the panic induced by the indictment of one Seymour Lazar and his attorney. Richard Robinson had come back from New York and was ready, at last, to light the fire he had taken nearly five years to set.

  26

  ALL FALL DOWN

  Criminal complaints against Seymour M. Lazar and Paul T. Selzer were leveled formally by a grand jury in Los Angeles, which on Thursday, June 23, 2005, handed down a seventeen-count indictment against them on an array of charges including mail fraud, money laundering, and conspiracy to obstruct justice—all relating to Lazar’s receipt over the years of “secret and illegal payments” for work as a professional plaintiff.

  The five-and-a-half-year investigation revealed itself in the painstaking text of the initial indictment, which ran sixty-seven pages in length. It did not name Lerach or Weiss or even identify their old law firm. Within the legal profession, however, it was widely assumed that this might be the first of several indictments. That revelation also unlocked old memories of those who had worked with—or against—Lerach in the past.

  In San Diego, Colin Wied, his cocounsel on the Pacific Homes case, couldn’t help but recall how Lerach had denied years earlier—without being asked—that he paid clients to find lawsuits. Jon Cuneo remembered his friend’s blanket denial of wrongdoing when the Los Angeles criminal investigation became common knowledge in 2002. Some of the lawyers who’d lost the race to the courthouse—and some whom Milberg Weiss had sued over the years—couldn’t help but ruminate over Lerach’s flat denial the year before to Forbes: “I never paid a plaintiff.”

  Government prosecutors had amassed a body of evidence that said quite another thing. According to the indictment, the $2.4 million in illegal kickbacks that Lazar had received came in fifty class action lawsuits against publicly held U.S. corporations. The unnamed firm in the indictment—the government identified it as “the New York firm,” but everyone in the trial bar knew it was Milberg Weiss—realized $44 million in fees in those cases, the government said.

  Debra W. Yang, the U.S. attorney in charge of the L.A. office, preferred to let her office speak through the indictment against Lazar and Selzer—for now—but others in the nation’s long-standing debate over tort reform were not so shy.

  “The government is fifteen years too late,” groused Al Shugart, one of Lerach’s favorite targets.

  In the Silicon Valley, talk even turned to suing Lerach and his firm to recover the money they’d paid out to his clients over the years. “Maybe [a previously sued company] could try to come up with a malicious-prosecution theory, or some kind of abuse of process,” Wilson Sonsini partner Bruce Vanyo mused aloud. “There’s going to be some very angry people out there.”

  Mel Weiss issued an obligatory statement saying that he was “outraged” about the “baseless” allegations. A few days later William W. Taylor III, a defense lawyer retained by Milberg Weiss, issued a more specific denial: “Neither Milberg Weiss, nor any of its attorneys, had any knowledge of a secret arrangement between Mr. Lazar and his law firm, if one existed.”

  Chris Mather, a spokesman for the Trial Lawyers of America, went further, saying: “This sounds like another example of the Bush administration attacking someone who opposes their political agenda.”

  An unbowed Lazar echoed this theme. He picked up the phone himself when a reporter from his local newspaper called for a comment. “I thought I was doing a lot of good, actually,” Lazar told The Riverside Press Enterprise.

  Lerach was uncharacteristically reticent, and Pat Coughlin declined comment, but others spoke on their behalf. John Keker, the defense lawyer whom Lerach had come to admire in the Enron case—he represented Fastow—had quietly been retained by Lerach himself. In the wake of the Lazar indictment, Keker was not quiet at all. He alluded to both the Halliburton and Enron cases and said darkly that Lerach had made “powerful enemies” while aggressively going after corporate fraud.

  For their part, the government attorneys leading the criminal investigation had already left clues that when it came to Milberg Weiss and Lerach Coughlin—Milberg East and Milberg West—prosecution was not necessarily a zero-sum game. “Once you go out and indict someone, you’ve gone out and crossed the Rubicon,” warned Columbia University law professor John Coffee. “Once you indict someone, you have put events irrevocably in motion.”

  LERACH’S OFFICE HAD SAID he was in Europe when the Lazar indictment was announced. It didn’t announce that he’d been celebrating the scalps he had taken that very month. On June 14, 2005, nine days before Lazar was indicted, JPMorgan had settled its Enron liabilities for $2.2 billion. Four days before that Citigroup had come in at $2 billion. It was starting to become clear that the Enron settlements would eclipse the record $6.13 billion that Wall Street firms paid to settle the WorldCom litigation.

  Bill Lerach’s life seemed to be moving in opposite directions at once. On August 8, 2005, The Wall Street Journal reported that prosecutors had granted immunity to Alan Schulman and that he had testified before the Los Angeles grand jury. The next day Lerach announced his $2.4 billion settlement for his Enron clients with the Canadian Imperial Bank of Commerce—nearly ten times Alan Salpeter’s initial offer. And so it went for the better part of a year. The federal investigation was hardly slowing him down, although one question that arose, as Robinson and company proceeded at a Chinese water torture pace, was how the burgeoning criminal case would impact Lerach’s lawsuit against Halliburton.

  The first inkling came courtesy of Neil Rothstein, Lerach’s ally on the Halliburton lawsuit. Rothstein’s firm, Scott & Scott, had initially been listed as cocounsel with Milberg Weiss on the case. Rothstein had taken a leave of absence from the firm before quitting and becoming “of counsel” to the Archdiocese of Milwaukee Supporting Fund to ensure he kept a piece of the action. Now the tables were turned, and Rothstein was relaying concerns of the clients: “The Justice Department is investigating both Halliburton and you.” Lerach responded that he had not been named in any criminal indictment, adding that he had every confidence he would not be.

  Nonetheless, Rothstein was worried, and on May 18, 2006, a federal grand jury in Los Angeles validated his concerns. Another set of indictments was handed down. This time they were against the Milberg Weiss firm itself. That morning Rothstein reported the unpleasant news to Paula N. John, the president of the archdiocese fund. She berated Rothstein for failing to alert them of Lerach’s impending plight. It was clear to Rothstein that his own standing on the case was in jeopardy because of his association with the San Diego lawyers who had once been part of Milberg Weiss. He delivered a message to Lerach: There was a good chance Lerach’s firm would get kicked off the Halliburton case. Lerach’s response
was quick and sharp: he would fight to keep this case. Privately, he was choking back feelings of self-doubt—a rare emotion for him—and trying to ignore a sense of foreboding.

  THE LONG-ANTICIPATED INDICTMENT of Milberg Weiss was 102 pages long and charged the firm and two of its name partners, David J. Bershad and Steven G. Schulman, with multiple felonies, including obstruction of justice, perjury, bribery, and fraud. No law firm in the United States as prominent as Milberg Weiss had ever been indicted, and this time Debra Yang was front and center.

  “This case is about protecting the integrity of the justice system in America,” the U.S. attorney declared. “Class-action attorneys and named plaintiffs occupy positions of trust in which they assume responsibility to tell the truth and to disclose relevant information to the court. This indictment alleges a wholesale violation of this responsibility.” The indictment covered activity spanning the years 1981–2004, included new charges against Lazar and Selzer, and named as coconspirators Steven Cooperman and Howard Vogel. Yang stated publicly that Cooperman, previously convicted in the art fraud case, was cooperating with the government. She also noted that Vogel had signed an agreement to plead guilty and forfeit $2 million and that he too was assisting in the prosecution. Although Bill Lerach and Mel Weiss were not named in the indictment, they were plainly referenced in the complaint, appearing ominously as “Plaintiff A” and “Plaintiff B.”

  The circle was closing.

  All Lerach would say publicly was that neither he nor members of his San Diego firm were named in the indictment. He expressed sympathy for his former partners—along with his confidence that they would be exonerated. Those who knew him from a distance were struck by the mildness of the response. Those who were privy to what was on his mind knew that Lerach was starting to quake—and that he had his reasons. To at least one person he trusted, Lerach confided: “I did a lot of stuff.”

  Among plaintiffs’ firms and their allies across the country, considerations of self-preservation started to come into play. What about the other firms that had split fees with Milberg Weiss? What about all those politicians who had taken their money and done their bidding? Sean Coffey, now managing partner of Bernstein Litowitz, quietly began going though his firm’s records looking for payoffs to plaintiffs—he found none—while also scouring the firm’s payments to plaintiffs’ witnesses such as John Torkelsen for evidence of impropriety.

  Elected officials were not allowed to undergo this process in private. On May 24, 2006, six days after the indictment, New York attorney general Eliot Spitzer, a Democratic candidate for governor, made a show of announcing that he was returning $124,000 in political contributions from the tainted firm. Other beneficiaries of Milberg Weiss took the opposite tack. On June 9, 2006, four Democratic members of Congress leaped to the firm’s defense. A half-page ad appeared in the New York Times. At the top appeared the letterhead of the Congress of the United States. Beneath was the headline: “Statement on the federal indictment of Milberg Weiss.” And below that came the following message:

  The Justice Department’s crusade against trial lawyers, the first line in the average citizen’s protection against corporate greed, has taken a new low in the indictment of an entire leading law firm in the plaintiffs’ bar.

  Three House members from New York—Charles Rangel, Carolyn McCarthy, and Gary Ackerman—signed the statement, as well as Robert Wexler from Florida. All but Wexler had received significant political donations from Mel Weiss and his partners.

  Such bravura did little to hearten Pat Hynes. At a lawn party in the Hamptons in June, the star Milberg Weiss litigator huddled with a former colleague from the U.S. attorney’s office in Manhattan named Pamela Rogers Chepiga. Hynes’s friend was now a partner in the New York office of Allen & Overy, one of the five so-called “magic circle” of London law firms with international reach. Pam Chepiga told Hynes that her firm wanted to upgrade its U.S. practice. While the remainder of the conversation was private, what resulted became known within days.

  Hynes asked for a meeting with Mel Weiss, and when the two convened, she told him she would be leaving the firm for one in the McGraw-Hill Building, a few blocks north. Weiss was not surprised, but he was taken aback by her demand that her severance package include her full partner’s share several years into the future, which meant she’d be cashing in on cases that were still pending. She had Weiss over a barrel and he knew it. The last thing he or the firm could afford was to have an embittered Pat Hynes telling inside stories—particularly to prosecutors. “And believe me,” Lerach would observe. “She knew a lot.”

  By this time the exodus was in full swing, notwithstanding Mel Weiss’s best efforts to prevent it. In the evening of July 28 he rented a 160-foot party yacht, the Duchess, disembarked from the Chelsea Piers at 41st Street, and carried Milberg Weiss partners and guests down the Hudson on a sunset cruise that would take them past Ellis Island and the Statue of Liberty. The celebration seemed to more than one guest to be contrived—a heroic effort by Mel Weiss to show grace under pressure. Two dozen attorneys had left the firm, and competitors all over Manhattan were fielding calls from remaining Milberg Weiss attorneys. “It’s heartbreaking,” Weiss confided wistfully to a reporter for the New York Observer. “Because people worked so well together, and we serviced our clients in the most remarkable way—and we still do.” Then he added: “How can it be the same? It’s impossible.”

  Out in California, months earlier, Lerach had performed a nautical display of his own, albeit unwittingly. Michelle Ciccarelli, with help from Kathy Lichnovsky, Lerach’s daughter Shannon, and a few others, conspired to celebrate Bill’s sixtieth birthday by commandeering the USS Midway, a decommissioned aircraft carrier at anchor in San Diego Harbor. The party was a surprise for Lerach, who was told he was going to give a speech to insurance underwriters, and he showed up with a PowerPoint presentation under his arm. Unbeknownst to the honoree, his brother, Richard, had flown west to emcee the party. The Pittsburgh contingent also included Gene Carney, with whom Bill had last shared a birthday celebration fifty years earlier, and various Pennsylvania cousins and family friends. Although the government investigation was dogging the firm, those not associated with the law firm detected no pall over the event. Quite the contrary: when Lerach found out he wouldn’t be needing his PowerPoint to speak to this audience of 350, he turned the tables on Michelle with a surprise announcement of his own.

  “In a triumph,” he announced, “of optimism over experience,” he was going to marry for the fourth time. Then he impulsively informed everyone aboard the Midway that they were invited to the wedding.

  KEN FEINBERG WAS CHEERED that his clients, the banks that had not yet settled in the Enron litigation, expressed in their initial joint meetings a willingness to negotiate. Lerach’s concept of scheme liability had given them pause, as had the billions of dollars in settlements already disgorged. Only one attorney, Stuart Baskin, representing Merrill Lynch, seemed to be looking to take the fight to a higher court. Baskin certainly had encouragement from his client. Lawyers representing four Merrill executives convicted criminally in a bogus transaction involving Nigerian barges, had pressed for and won an opportunity to present oral arguments asking the U.S. Court of Appeals for the Fifth Circuit to strike down their federal court conviction. To Baskin, who’d been editor of the Stanford Law Review and a clerk for Supreme Court Justice Brennan, the idea that his client could be held accountable for primary liability by buying and selling back Enron property in a structured business deal was objectionable on its face. He was itching to challenge Judge Harmon’s ruling.

  In Lerach’s mind, the scenario most likely to play out called for the banks to feign that they were planning to appeal, as a way of increasing their leverage, while negotiating with Feinberg to settle. Yet they would simultaneously appear to be preparing to battle Pat Coughlin and Paul Howes in Harmon’s court, even knowing it to be inhospitable territory. To his dismay, as well as Feinberg’s, the defendants weren
’t bluffing. On July 17, 2006, defendants Credit Suisse First Boston, Barclays, Merrill Lynch, and the law firm of Vinson & Elkins filed petitions in the Fifth Circuit challenging Harmon’s granting of class certification of the plaintiffs in the Enron class action.

  Credit Suisse argued in its appeal that the appellate court should resolve an unsettled matter over whether secondary actors could be held for primary liability—directly attacking Lerach’s pioneering theory. Credit Suisse’s attorneys also sought to defy Judge Harmon’s position on presumption of reliance, saying the plaintiffs could not argue they had acted directly on Credit Suisse’s misrepresentation or omission of essential information. In essence, the petitioners were reprising the 1994 Central Bank precedent that Lerach had managed to circumvent in Judge Harmon’s court. Barclays and Merrill more or less proffered the same argument.

  The seventeen-judge Fifth Circuit was broken into three-judge panels hearing cases in Louisiana, Mississippi, and Texas. Its headquarters was in New Orleans, where the courthouse was named for John Minor Wisdom, one of the “Fifth Circuit Four”—the southern appellate judges who had valiantly faced the reality of implementing the Supreme Court’s Brown v. Board of Education decision in the Deep South. Lerach, a history buff, considered New Orleans a fitting venue for shareholder plaintiffs who would not have possessed their standing as a class without the equal protection that the Fifth Circuit judges had implemented forty years earlier.

  Times had changed, however. The Fifth Circuit bench of 2006 was an altered body. More than half of its judges had been appointed by Presidents George H.W. Bush and his son George W. Bush. Five others were Ronald Reagan appointees; only the remaining three had been appointed by Bill Clinton. All of those Republican presidents had run for office vowing to appoint judges who “interpreted” the law rather than made it. Not coincidentally, underlying its strict constructionist bent was a reflexive adherence to free market principles.