The Deal of the Century

by Coll, Steve;

  First off the ball was Caspar Weinberger, a shrill and combative Nixon administration veteran whose personal mission under Reagan would be to restore the Pentagon to a position of bureaucratic supremacy in Washington after four years of what conservatives believed was a precipitous decline for the military—in power, prestige, and funding—under President Carter. In an early review of which specific programs, weapons systems, and policies were needed to bolster the nation’s defenses, Weinberger heard from the Defense Communications Agency (DCA) that, in its opinion, dismissal of U.S. v. AT&T should be one of the secretary’s highest priorities. The DCA worked closely with AT&T to design, maintain, and operate the strategic communications network that served military, intelligence, and other national security services. Among other things, this “defense net,” as the system was sometimes called, provided for sophisticated communications between political and military officials in the event of a nuclear crisis. It was the opinion of the DCA staff, as well as of its leader, General Hillsman, that if the Justice department succeeded in breaking up AT&T, the nation’s defense communications system would be severely impaired and its national security threatened. Of course, the communications experts DCA relied on in formulating this view were AT&T employees, who were not likely to offer objective analysis of U.S. v. AT&T. And it was also true that by relying on a centralized, large “sole supplier” such as AT&T for communications, Pentagon bureaucrats enjoyed both convenience and protection from mistakes by smaller, potentially unreliable contractors. The cozy relationship between DCA and AT&T no doubt predisposed the defense department to defend the phone company against the Justice lawsuit. Nonetheless, it was an unavoidable fact that Pentagon officials, all the way up to Secretary Weinberger himself, agreed that if AT&T were dismantled by Justice, the national security costs would far outweigh whatever competitive benefits might accrue.

  By early March, just weeks after Baxter took over, Weinberger’s staff had drafted and the secretary had signed a letter to Attorney General Smith urging that U.S. v. AT&T be dismissed. A copy of the letter was sent to Smith’s office at Justice.

  What followed was a series of miscommunications and misunderstandings that at times resembled a bureaucratic version of a Keystone Kops movie. And when it was over, Howard Trienens and Charlie Brown would have said, the bad guys got away.

  Weinberger’s staff was apparently unaware that, because of his past affiliations with Pacific Telephone, Smith was recused from considering any issues affecting the phone company. So when Smith received the defense secretary’s letter, there was nothing he could have done but pass it on to Baxter. Attached to Weinberger’s letter, however, was another letter from the Joint Chiefs of Staff to the secretary of defense outlining some specific reasons why DCA and other Pentagon officials objected to Justice’s lawsuit. This second letter contained some sensitive information about the military’s defense net, and thus the whole package had been classified “secret” by the Pentagon. Because in early March Baxter had not yet been confirmed by the Senate—that wouldn’t happen until March 26—the new Antitrust chief had not yet received his security clearance and thus was prohibited from reading Weinberger’s communiqué. The letter was placed in the attorney general’s safe. No one at Justice bothered to tell Weinberger or other Defense officials that it would be a few weeks before Baxter could respond to his request. Thus when they heard nothing from Smith, Weinberger and his staff assumed that Justice was ignoring their private approach and was, in effect, challenging them to take the issue public.

  A few weeks later, on March 23, Weinberger testified in a closed hearing before the Senate Armed Services Committee that the AT&T case should be dropped for national security reasons. “It seems to me essential that we keep together this one communications network we now have and have to rely on,” Weinberger said. “None of the systems are going to be useful if we can’t tie them together into an effective communications net. The AT&T network is the most important net we have to service our strategic systems.… I have written to the attorney general and urged very strongly that the suit be dismissed.”

  In early April, Weinberger’s secret testimony was leaked to the Wall Street Journal. Baxter was at first confused and then angry that Weinberger had gone behind the Antitrust division’s back in an attempt to sabotage the case. On the rainy morning of April 9, the day after the Journal story appeared, Baxter held a press conference in his office to respond.

  “Defense department concern is not a new phenomenon,” Baxter told the more than two dozen reporters who showed up to hear him. “It is a position that I think has to be taken seriously. I will take it seriously, but I do not intend to fold up my tent and go away because the department of Defense expresses concern.”

  “Based on your review of the case,” Baxter was asked, “are you confident that the case that the Justice department is bringing is solid, and that you will be able to litigate in both the liability and the relief issues?”

  “Yes,” he answered. “I think the case is perfectly sound. I am sufficiently egotistical to think that if I had been here from the beginning, I would have put together some of those evidentiary packages in a little different way so that they carried on their face, to a greater extent than they now do, the theory that underlies the case. But it is a good case even in its present condition, and we have a very good chance of winning it. It has a sound theoretical core, and I intend to litigate it to the eyeballs.”

  The cameras clicked and the reporters in Baxter’s office exploded in laughter.

  There are few things that journalists in Washington enjoy more than a public feud between high-ranking government officials, and thus Baxter’s remarks about Weinberger’s attempted intervention in U.S. v. AT&T were widely and prominently reported. Now that the controversy was being played out in the newspapers, there was little hope that AT&T could quietly and quickly maneuver inside the Reagan administration to have the case dismissed for national security reasons. Trienens and Brown had not given up hope that Reagan would eventually step in and personally order that the case be dismissed, but clearly, it was going to take more than a letter from Cap Weinberger to do the job. In the meantime, it was up to George Saunders to hold the phone company’s ground in court. In the long run, Baxter, a mere assistant attorney general, could not be expected to fight off the efforts of cabinet-level administration officials such as Weinberger, Ed Meese, and Malcolm Baldrige to drop the case. But until Baxter’s authority was somehow circumvented, it was crucial that Saunders publicly present the best case possible against Gerry Connell—eyeball to eyeball.

  Chapter 18

  Connell’s Deception

  It did not happen because of any one thing. It was not a scintillating question, or a flourishing rhetorical speech, or a surprise witness called to the stand and brilliantly examined; such flashes of style were rarely, if ever, in evidence. Rather, it happened slowly, haltingly, in some cases grudgingly—but nonetheless inexorably. By early April, after three weeks of trial, the lawyers on both sides of Judge Greene’s courtroom had come to the realization that Gerry Connell was putting on a tremendous case against AT&T.

  It was the little things that began to add up, the subtle touches of experience and the nuggets of wisdom accumulated from dozens of obscure antitrust cases tried by Connell over the years in places like Tucson, Arizona, and Cincinnati, Ohio. It was the way he studied Judge Greene, day after day, scrutinizing the judge’s habits, charting his moods, adjusting in tandem the presentation of the government’s case. Connell noticed early on, for example, that when Greene was becoming impatient with a witness, the judge began to tap his pencil nervously and unconsciously, like a drummer. Whenever Connell saw that pencil tapping, he immediately ended his examination of the witness on the stand, or else quickly moved on to the next point. Then, too, it was Connell’s self-effacing style, the way he seemed always to be apologizing to Judge Greene or asking the court’s indulgence. One day, one of the lawyers at the AT&T defense table l
ooked over at Connell and had a flash of insight. Connell was talking to Judge Greene, and, as always, Connell’s voice was mild and steady, his drooping face modestly averted. And then, as happened frequently, Connell paused in mid-sentence, eyes toward the ceiling, searching for a word that had escaped him. “Umm … Uh …” Connell said. And the AT&T lawyer realized: He’s doing it on purpose. He knows what word he wants to use. It’s just part of his act. Connell was like a courtroom version of the bumbling but brilliant television detective Columbo. His self-effacement was not a cynical calculation—it reflected Connell’s actual personality. But it was fundamentally deceptive. And for the AT&T lawyers trying to outwit him before Judge Greene, dangerous.

  All through the blustery month of March, Gerry Connell’s case “went in,” as the lawyers put it. Justice’s presentation of its facts closely mirrored Connell’s personal style: it was dogged, pedestrian, and effective. In the early weeks, there were two or three witnesses each day. Connell began with the telephone equipment part of the case, not for strategic reasons but because it was the only section that was completely ready for trial; the lull in trial preparations caused by the Crimson Sky negotiations had hampered the government more than it had AT&T. The early witnesses were the owners and executives of telephone equipment companies who had been required by AT&T in the early 1970s to purchase the phone company’s protective coupling arrangements for products such as answering machines. Connell examined many of them himself, but occasionally another lawyer from the government trial team would take over. Connell boosted morale among the nearly four dozen young lawyers in his charge during the trial by promising that every attorney on the team would be allowed to examine at least one witness in court. It was a safe idea. All the direct examinations, even those presented by Connell or his senior lieutenants, were rehearsed, question by question, the night before. Connell intended to stick to an old rule of cautious trial lawyering: Never ask a question to which you don’t already know the answer.

  Oddly, Gerry Connell’s case against AT&T was both exceedingly broad and exceedingly narrow. On the one hand, Connell intended to call dozens of witnesses to the stand over a four-month period. Some of the witnesses, such as those called in March, would testify about their attempts to sell telephone equipment in competition with Western and about the problems caused by AT&T’s insistence on protective couplers. Some witnesses would testify about the procurement practices of the Bell operating companies, and about how most of AT&T’s own purchasing—on behalf of its customers, to whom it leased equipment—was done internally, from Western Electric, to the exclusion of outside competitors. Other witnesses would testify that the FCC was incapable of regulating a company as large as AT&T, and that as a result the phone company priced its services and products without regard to their cost.* And finally, in the last section of his case, Connell intended to call a number of “experts” to testify about why it was necessary, given all the previous evidence presented by the government, to break apart AT&T.

  This broad canvas of accusations against the phone company went all the way back to the investigations conducted by Phil Verveer in the early 1970s. Sometimes, the witnesses called by Connell testified about specific events that occurred as long ago as the 1950s and the early 1960s. There was no “smoking gun,” as Judge Greene put it at one point, in the government’s story about AT&T’s monopolization of the telecommunications industry, although the discussion about MCI held by AT&T executives at Key Largo in May 1972 was offered as anecdotal evidence of the phone company’s motives. The real purpose of Connell’s case was to present slowly to Judge Greene a preponderance of evidence about a “pattern” of abusive behavior by AT&T. The idea was that fact upon fact, witness upon witness, issue upon issue, the totality of AT&T’s gargantuan size and of its dominance of the phone industry would seep into Judge Greene’s mind like rain into a groundwater reservoir. And then, during the relatively narrow part of the case that really mattered—the MCI story, the basis for the government’s request for full operating company divestiture—this reservoir of condemning evidence would provide the judge with context and support for the conclusion that AT&T had wronged MCI and should be broken up. The truth was that the MCI case turned on a specific, disputatious, and controversial story: John deButts’ “decision to decide” and the subsequent rulings by the FCC’s Common Carrier Bureau that allowed MCI to sell FX lines to its customers. A jury in Chicago had seen the story one way. Judge Greene might see it another. Strategically, the best protection for Gerry Connell’s government trial team was to hedge its reliance on the MCI story by offering Greene as much additional evidence about AT&T’s monopolistic tendencies as possible.

  Thus from its beginning, the trial of U.S. v. AT&T seemed, to the public, a great, impenetrable muddle. It was impossible for a casual observer to comprehend the testimony of the myriad witnesses paraded before Judge Greene by Gerry Connell. Their stories were not related to a central theme, building toward a climax; each was a splintered tale, an anecdote about the telephone industry in the mid-1970s. Each was confined by its own peculiar details and the character of its teller, the witness, typically an uncharismatic businessman whose words, stilted and riddled with technical jargon, had been rehearsed for days by the government’s lawyers. Even the newspaper and magazine reporters who covered the trial seemed for the most part unable to communicate any essential story to their readers: the government’s case was too complex, too fractured, and, above all, too boring. Within weeks after Connell’s presentation began, the crushing crowds attendant at the opening arguments had thinned considerably, until the daily audience in Greene’s wood-paneled courtroom consisted almost entirely of lawyers and telephone industry executives. The case had become a private drama, played by and for the “experts” who had everything to win or lose by its outcome. So oblivious was the public and the press to this backroom legal poker game that after it was over, and the fate of AT&T had been decided, Business Week reported to its half million readers that the case had never gone to trial. Hardly anyone noticed the mistake.

  Of course, the indifference of the public and the press suited Gerry Connell just fine. The crowds, the lights, and the attention on opening day had made him sweaty and uncomfortable. He was not a showman, like George Saunders. U.S. v. AT&T was by far the greatest challenge of his career—working eighty, sometimes a hundred hours a week, the case had taken him over, to the point where there was little time in his life to think about anything else. All Connell wanted was to do the job right, quietly, patiently, indefatigably, until Judge Greene finally saw things his way.

  The Madison Hotel, across the street from the Washington Post at the corner of 15th and M Streets in northwest Washington, was George Saunders’ home during most of 1981. In Chicago, the headquarters city of Sidley & Austin, Saunders had an apartment and a wife, but he rarely saw either of them. (Saunders’ wife at the time, his second, was an attorney at the law firm of Jenner & Block, the main outside counsel for MCI. Saunders met her on an airplane. She did not do any telephone industry work.) During the government trial, AT&T rented several expensive suites at the Madison on a long-term basis so its top lawyers and executives could live comfortably when they were in town. Saunders’ two-room suite—replete with three couches, two polished coffee tables, a large TV in a walnut cabinet, a dining table with chairs, and a refrigerator—was on the tenth floor. As Gerry Connell’s presentation of the government’s case got under way, the suite became the headquarters for the AT&T trial team when it was away from court. There was a kind of informal hierarchy among the Sidley and AT&T lawyers that set down who was allowed to spend how much time with George Saunders at the Madison. After a day of trial, the lawyers all drifted back to Saunders’ suite for a cocktail-hour rumination of events in court led mainly by Saunders, who poured generously from pitchers of room-service martinis. If Howard Trienens was in town, he would join the group, but Trienens spent most of his time at 195 Broadway in New York with Charlie Brown. By seven-th
irty or eight, the informal discussion gave way to serious planning for the next day’s witnesses. Michael Yauch or John Zeglis, two of Saunders’ key lieutenants from Sidley & Austin, would usher out those lawyers who were no longer needed; if everyone who wanted to be in on the action was allowed to stay, nothing productive would be accomplished. Yauch usually returned to AT&T’s “litigation support center” at 499 South Capitol Street, just below Capitol Hill. There the phone company maintained voluminous files, numbering tens of millions of pages, pertaining to its various antitrust problems. AT&T employed around-the-clock shifts of paralegals, document clerks, typists, word processors, and copy clerks to help George Saunders locate and prepare the documents he needed in court. The AT&T lawyers referred to this expensive and efficient operation as “the back room,” but that March, Judge Greene began to call it “the well-oiled machine.”

  At the Madison Hotel nerve center, the main challenge facing Saunders and his lieutenants was how to devise and implement a cross-examination strategy that would effectively counter the dogged, dispassionate presentation by Gerry Connell.

  Saunders’ courtroom strategy was dictated by a number of factors, not the least of which was his own passionate belief in the rightness of AT&T’s defense. Over the seven years that he had worked on the case, Saunders had memorized virtually every minute detail of U.S. v. AT&T: dates, names, places, and numbers. In his mind, these particulars seemed to be organized and connected into large, sequential, coherent arguments, each related to the other. The whole of his argument—Saunders’ fundamental contention that during the early 1970s, given the exigencies caused by MCI and the FCC, AT&T acted reasonably, not malevolently—was greater than the sum of its parts. Whereas Gerry Connell cut and pasted his argument together, creating a vast collage of disparate evidence, Saunders’ purpose was to transform this collection of unrelated bits and parts into a mosaic, a sweeping and well-defined picture of misguided government regulation and greedy, creamskimming opportunists such as McGowan. If Saunders tried to attack the government’s case on its own terms, if he responded to each of Connell’s anecdotes in isolation, his cause would fail. Besides, that wasn’t how Saunders saw the case. To him, U.S. v. AT&T was not confusing, or unwieldy, or even very complicated. It was a “rip-off” and an “outrage” that AT&T’s competitors, and the government, had twisted the facts around to make AT&T appear the villain, when all the company was trying to do was adapt to change while continuing to serve the public and its shareholders well. The government’s stories, the tales told by Gerry Connell’s parade of businessman witnesses, were either trivial, or irrelevant, or explainable for any number of other reasons: sour grapes from bankrupt companies, confusing or contradictory regulations, rapid technology change, and so on. But to Saunders, that wasn’t the point. The point was that U.S. v. AT&T was really a case about the relationship between the phone company MCI and the FCC—about John deButts, Bill McGowan, Bernie Strassburg, Walter Hinchman, and others. Once you boiled away the fatty stories about protective couplers, operating company procurement, and pricing, MCI was the meat that remained. Before the MCI witnesses took the stand, it was important that Saunders, and Judge Greene, not become too distracted by anything else.