The Deal of the Century

by Coll, Steve;

  Another reason Kauper was worried about how Saxbe treated Garlinghouse was that AT&T was about to offer a public bond issue worth several hundred million dollars. Garlinghouse had pleaded with Kauper to consider the bond issue if Justice ever decided to file suit, since a poorly timed announcement of a lawsuit as sweeping as this one could cost AT&T millions in the market. Kauper had agreed to be especially careful.

  Clearwaters began the briefing by presenting Saxbe with the legal arguments developed by his own and Vetveer’s investigations. He talked about “bottleneck monopolies” and Western Electric’s captive control of the telephone equipment market. Then he told the attorney general about AT&T’s presentations to division staff and repeated Garlinghouse’s arguments about the public interest. He also mentioned the bond issue, and closed by emphasizing Kauper’s admonition: “You must make AT&T realize that the staff has made this recommendation, and that you will consider AT&T’s arguments.”

  Saxbe spit some tobacco juice and trained his eyes on Clearwaters. “Keith, they’re going to try to stall us, aren’t they?”

  Clearwaters tried to hedge. He didn’t want to agitate Saxbe. Even though he had Hugh Morrison as a witness, Clearwaters thought that Kauper would never believe he had tried to dissuade Saxbe from rash action. “Any company with lawyers as qualified as AT&T’s is going to use any means available to avoid a lawsuit,” he said.

  “That means they’re going to stall us, aren’t they?”

  “Yes, it does,” Clearwaters conceded.

  “Thank you.”

  Shortly before eleven, Kauper returned from the White House and the AT&T lawyers arrived. Clearwaters said little to Kauper about the Saxbe briefing. At the appointed hour, the group gathered in the attorney general’s conference room, which adjoined Saxbe’s fifth-floor office. It was a rich, august room with a high, arched ceiling and studded, red leather chairs. In the center was a twenty-foot walnut conference table. Saxbe sat at the end of the table, beneath an arch painting by Leon Kroll known as Justice Triumphant, which depicted a white-robed woman and a black-robed judge assisting a group of destitute field workers. On the other side of the room, in the arch above the AT&T lawyers, was another Kroll lunette, called Justice Defeated, which showed the same workers being carried off to slavery.

  John Wood, a Washington lawyer retained by AT&T, stood up to begin AT&T’s presentation. Mark Garlinghouse, the company’s general counsel, was seated beside him.

  “Mr. Saxbe,” Wood began, puffing on a pipe, “before we start our presentation, I’d like to know exactly what your state of mind is on this case. It might help me shape my arguments to you.”

  Saxbe paused, spit, looked at Wood, and said, “I intend to bring an action against you.”

  If the room had not been filled with a dozen controlled and detached lawyers, it would have erupted in shouting. Clearwaters didn’t know whether to laugh or cry, so he bit his tongue. Wood did his best to appear unmoved, and he attempted to proceed with his vain presentation. Garlinghouse shot a few angry glances at Kauper and Clearwaters.

  Kauper scribbled a note on a page from his yellow legal pad, folded it, and passed it down to Clearwaters.

  What the hell did you tell him? it read.

  Clearwaters put the note in his pocket and scribbled on his own pad, Exactly what you told me to tell him. He passed it down.

  Another note came back to Clearwaters—nobody was listening to Wood’s arguments, not even Saxbe. Shouldn’t we notify the SEC? it asked.

  They should. Whenever the Justice department filed a major suit against a company, it was required to notify the Securities and Exchange Commission (SEC) immediately so that trading in the company’s stock could be suspended. The purpose of the rule was to prevent anyone with “insider” information on the lawsuit from speculating in stock and to prevent a sudden run on a company’s stock before it had a chance to explain the lawsuit and reassure investors.

  Quietly, Clearwaters got up from the conference table and excused himself. He stepped around the corner, then down the stairs to his office on the third floor, where he called Stanley Sporkin at the SEC. He told Sporkin about what had just happened at the meeting. “I’m just calling to be sure you’re apprised of the situation,” Clearwaters said.

  “Well, are you going to sue them or not?” Sporkin asked.

  “This is a very strange situation. I don’t really know. I think that we’ll try to talk to the AG in private after the meeting. But I’ll tell you this, I know what the AG’s state of mind is.”

  “OK,” Sporkin said, “I’m going to stop trading in their stock.”

  Clearwaters trundled back up to the conference room. When he entered, he interrupted Wood’s presentation to announce that the SEC had just suspended trading in AT&T’s stock. The AT&T lawyers tried hard to maintain their composure, but it was clear now that someone was soon going to lose his temper.

  “I think this might be an appropriate time for a recess,” Tom Kauper suggested. “Let’s reconvene in a few minutes.”

  Kauper, Clearwaters, and Saxbe crossed under the painting of Justice Triumphant into the attorney general’s private office. They sat down, and Clearwaters began immediately, “General, you’ve put me in an embarrassing position. I know that’s your prerogative, but I think the least we should tell these gentlemen is that we’re going to go to lunch and consider their presentation.”

  “You do what you want,” Saxbe replied nonchalantly. “I’ve got a luncheon engagement already. You and Tom can go out to lunch if you want.”

  Saxbe returned to the conference room and told Garlinghouse, “We will be in discussions. No final decision has been made. Clearwaters will call you after lunch.”

  Kauper and Clearwaters walked around the corner to Hamil’s, a favorite Justice department restaurant at 10th and E Streets. Both men liked Mark Garlinghouse, who had made it clear before the lunch break that he felt hurt and personally betrayed by Saxbe’s preemptive announcement. Kauper and Clearwaters discussed the personal guarantees both had made to Garlinghouse and also talked about the problem of AT&T’s bond issue. Antitrust chief Kauper was not backing down from filing a suit, exactly, but he was worried that Saxbe had not done the right thing.

  They found Saxbe in his office after lunch, and Kauper repeated his concerns about the bond issue, the assurances that had been made to Garlinghouse, and the necessity that Justice at least appear to have considered AT&T’s arguments seriously.

  Saxbe, however, was losing patience with Kauper’s pristine lawyering. “Look,” he said gruffly, “I’ve backed you all the way. Do you want me to file the case or not file the case?”

  Clearwaters, who was standing next to Kauper, thought that if the Antitrust chief said no, Saxbe would fire him on the spot. But Kauper turned up his palms. “File it,” he said.

  At 195 Broadway in New York, John deButts was in a meeting with his board of directors when Mark Garlinghouse sent in a message from Washington. It read, “They’ve filed the case.”

  DeButts happened to be chairman that year of the United States Savings Bond campaign. Later in the day, he called William Simon, Ford’s secretary of the treasury, to tell Simon that the bond-selling campaign had exceeded its objective two months ahead of time.

  “Well, John, that’s just wonderful,” Simon told him. “What a tremendous contribution you’ve made to your country.”

  “Well, it’s got a helluva way of showing its appreciation,” deButts said angrily.

  “What do you mean by that?”

  DeButts told Simon that he had just learned Justice was going to sue AT&T in an attempt to break apart the Bell System and that trading had been suspended in AT&T’s stock. Simon was surprised and upset. He told deButts that the lawsuit had never been discussed in a cabinet meeting. “Let me find out something about this.”

  Simon called the White House. No one there had heard anything about the filing of a sweeping antitrust suit against Bell. President Ford was sightseeing
in Japan and obviously had not been consulted.*

  Simon then tried to call Saxbe, but the attorney general had left his office for the day. He had gone pheasant hunting.

  On Friday, two days after the suit was filed, John deButts held a press conference in New York to discuss his company’s problems with the Justice department. “It just doesn’t make any sense to me,” the AT&T chairman told reporters. “I can’t understand why Justice would take an action that could lead to dismemberment of the Bell System, with the inevitable result that costs would go up and service would suffer. And anybody who says that won’t be the case is just plain wrong.”

  DeButts told reporters that the cost of a year’s telephone service for the average American was seven times cheaper than in most European countries, and was less expensive than in any other country in the world. “Our service,” deButts added truthfully, “is better today than it’s ever been by just about any standard you care to use to measure it.”

  In Washington, Bill McGowan responded with glee to deButts’ comments. “The fact that deButts said the suit is astonishing to him is in itself astonishing,” the MCI chairman said. “The suit gives another statement of credibility to our industry.”

  His credibility in the nation’s capital would be short-lived, but for the moment, McGowan was triumphant. He had lured AT&T onto his chosen ground—politics—and now the giant monopoly was reeling. For the next several months, McGowan would retire to his corner office in northwest Washington to plan MCI’s final blow.

  *In an interview ten years later, Saxbe conceded that he never talked with Ford about the lawsuit while Ford was president. Saxbe insisted, however, that during a luncheon meeting with Ford in Saxbe’s office, while Ford was still vice-president, Saxbe told him that he thought the lawsuit was a good one and that he would probably file it while he was attorney general. Ford and Saxbe never discussed the suit again until after it was filed.

  Chapter 7

  Stillborn

  Phil Verveer was sitting in his car on the campus of Georgetown University, where his wife had come for a doctor’s appointment, when the news came over the radio: The government had filed its antitrust suit against AT&T. In a matter of days, the entire case would be handed over to him, but the political appointees in Justice’s front office had not bothered to tell Verveer that they were planning to file. Verveer was just a staff lawyer; his job was to execute the policy handed down by Saxbe, Kauper, and Clearwaters. The Justice department’s political appointees had decided that the Bell System should be broken apart, but from now on, the appointees would spend precious little time worrying about how to do it.

  That was Verveer’s concern. And while there was no question that Phil Verveer was a bright and highly capable lawyer, there was no doubt, either, that at thirty-two years old, he was vastly inexperienced in the management of complex litigation. He had never been involved, even peripherally, in any case as big as this one, where there was so much at stake, where the issues were so complex, and where the disputes that had given rise to the case were in a state of continuous flux. Of course, few others in the division had ever worked on such a complex case, either. Verveer was regarded as a rising star—his superiors were relying on his obvious potential. Still, it would be years before U.S. v. AT&T came to trial, maybe as long as a decade, and during that time the case could be won or lost, depending on how the pretrial strategy was handled. Moreover, this was not some obscure legal dispute soon to be gathering dust in a dark corner of the U.S. District Court file room. It was a political case, highly visible, one in which Congress, the FCC, and even the White House were certain to take an interest. Navigating the case through such treacherous political terrain would require savvy, wit, courage, and experience.

  Most lawyers in Verveer’s position would have looked at U. S. v. AT&T as the ultimate career litmus test, a case that would make or break their professional reputation. But while Verveer certainly considered the case to be a serious personal challenge, he was motivated by much more than narrow, professional self-interest. Indeed, he considered himself to be on a kind of mission of justice, a crusade against the nefarious practices and stark arrogance of the Bell monopolists. As he grew older, Verveer’s black-and-white world view would dissolve into shades of gray. But in late 1974, there was nothing subtle about the young, committed lawyer’s assessment of AT&T: the phone company was morally wrong, it was evil, and it was up to Verveer to serve the public interest by enforcing the antitrust laws against it. This was not just a job—it was a calling.

  In the Evening Star building on 11th Street, where Verveer set up shop under the general supervision of Hugh Morrison, a team of government lawyers was hired who shared Verveer’s view of the case. Nearly all of the new staff lawyers were very young and passionately liberal, and more than a few had been campus activists in college during the 1960s. They had rallied for Robert F. Kennedy in 1968 and for George McGovern in 1972, and they saw the AT&T case as a way to “bring focus” to their political instincts. They were friends, too—some had known each other in school—and they quickly developed an unusual, emotional camaraderie. They considered Verveer, who was older and seemed to them a man of extraordinary moral and religious conviction, to be their leader, a kind of priest of the liberal, Catholic, Kennedy cult so much in flower in America during the mid-1970’s. Under Verveer’s guidance and because of the benign indifference of Hugh Morrison, who had dozens of other lawyers in his section to worry about, the group soon became isolated from the normal, bureaucratic ebb and flow of the Justice department. They were happily on their own, unfettered by Justice’s internal political squabbles and free to pursue the mission of “socially important work” that bound them together.

  And immediately on the horizon appeared the enemy, in the person of George L. Saunders, Jr., partner in the Chicago law firm of Sidley & Austin, a man who would devote the next eight years of his life to defending AT&T against the courtroom attacks of MCI and the Justice department. If John deButts, AT&T’s arrogant and aristocratic chairman, was in Verveer’s eyes the king of Bell’s evil empire, then Saunders was deButts’ sinister counselor, the mastermind of court intrigue. To Verveer, Saunders stood for everything that was repugnant about the legal profession: amorality, calculated selfishness, and corporate greed. Saunders was a brilliant man, to be sure, and perhaps he even deserved to be called a genius, but Verveer and his team of lawyers believed that Saunders used his gifts not to make the world a better place but to enrich himself through the protection of AT&T’s monopolists.

  Saunders was in fact a warm and affable fellow, and later he would earn the affection of many of the Justice lawyers who opposed him. But in the winter of 1974–1975, when the case got under way, Verveer and his lieutenants detested him, mostly for what he represented.

  Saunders was an unabashed fat cat, a smooth, luxuriant attorney who wore expensive suits, drank martinis like they were water, and smoked more than a dozen cigars a day. He had been born and raised in Birmingham, Alabama, the son of a house painter, and was the first member of his family ever to attend college. He went because even at age fifteen, when he graduated high school two years ahead of schedule, his extraordinary intellectual gifts were obvious—his mind was like some strange machine. He had nearly total recall of the most complex and obscure facts, and he could effortlessly organize knowledge in sophisticated, well-developed models. The lawyers who worked with him later tried to describe this capacity to others by saying that it was like Saunders had a giant flip-chart in his head that he could summon up instantaneously, search for the information he needed, and then flip forward to make his next point without ever skipping a beat. He could stand before a judge, without notes, and speak in eloquent paragraphs for three hours or more.

  He was a tall man with long limbs, and usually he carried a pot belly from all the martinis and fine food he consumed. His face was strangely birdlike, beaked and quick with energy. When he talked, which was often, Saunders liked to stroll around a
room, gesturing to emphasize his points, and so he seemed to soar like some great flying ostrich, born on the wings of his words. The deep pleasure he found in those words and in the warming of a good argument was often apparent on his face; it was an expression partly of satisfaction, partly of arrogance, but mostly of irresistible, unbridled joy.

  Verveer and the government lawyers who worked for him were intimidated by George Saunders, and for good reason. Within just three months after the government lawsuit was filed, Saunders had sabotaged Verveer’s mission to break up the phone company.

  When the government antitrust suit was filed on November 20, 1974, George Saunders was in New York working on the MCI case with his mentor, Sidley & Austin managing partner Howard Trienens. Trienens was the liaison between Sidley and AT&T, and he had represented the phone company on various matters for more than a decade. Trienens was a brilliant though serious and reticent man, professorial in demeanor. He spent a lot of time with Saunders, whom he had hired and anointed as Sidley’s star trial attorney. The contrast between the two lawyers was vivid: Saunders was gregarious and boisterous; Trienens was quiet and controlled and was very devoted to his wife and three children. Trienens frequently traveled on business with his wife, and Saunders often found himself at dinner with the couple. In the midst of one of his typically long monologues, Saunders would look across the table and see Trienens with his head bowed in silence. Saunders would stop talking and look down, only to find that Trienens had a legal brief out and was quietly editing it under the table.

  Saunders wanted desperately to be the lead attorney for AT&T on the government case. The MCI case, which Saunders was already in charge of, was, eight months after filing, just entering the discovery phase, in which both sides would spend years exchanging and cataloging documents to be used during the trial. Saunders could leave that work to others and thus be free to make the early arguments for AT&T against the government. Trienens, too, wanted Saunders to run the government case. Not only did he consider Saunders to be one of the brightest lawyers in the country but he also knew that if Sidley & Austin got the case, the firm would earn tens and tens of millions in legal fees from AT&T over the next five or ten years. As Sidley’s managing partner, Trienens was one of the firm’s key “rainmakers,” lawyers who cultivate good relations with big-spending clients like the phone company. Only one thing stood in the way: the New York law firm of Dewey, Ballantine, Bushby, Palmer & Wood, which, until now, had been AT&T’s principal antitrust counsel. The Dewey firm had defended AT&T against the government antitrust case that had ended in tainted settlement in 1956. During the last weeks of 1974 and in early 1975, Trienens and Saunders maneuvered to push Dewey out of the way, and by February they had succeeded. DeButts and Mark Garlinghouse put Saunders, under Trienens’ general supervision, in charge of the government case. The coup left some partners at Dewey bitter for years.