The Deal of the Century

by Coll, Steve;

  In the meantime, there were all these government witnesses, unrelated to the MCI story, who had to be cross-examined. It would be impossible for Saunders to convince Greene that all these witnesses who complained day after day about AT&T’s behavior were liars, frauds, or greedy opportunists. Many of them were mild-mannered, unassuming men, and, like Gerry Connell, they stuck to the facts. They talked about how, even though they had good products, they had trouble selling to the Bell operating companies because of Western Electric. They listed how long it took AT&T to provide them with PCAs back in the early 1970s. They estimated how much money they had lost because of AT&T’s allegedly anticompetitive prices. And when they were done, Gerry Connell would quietly turn to Judge Greene and say, without pretension, “That’s all, Your Honor.”

  So Saunders had to take the offensive. Instead of simply trying to impeach his opponent’s case—the normal goal of cross-examination—he had to begin to present his own argument affirmatively when he questioned Connell’s witnesses. He had to use cross-examination as a platform, exploit it as an opportunity to educate Judge Greene about what really happened in the telecommunications industry during the 1970s. That meant he had to take chances. He had to prod Connell’s witnesses on subjects they knew little about: the FCC, the technical specifications of the phone network, public interest subsidies, the history of the telephone industry. He had to ask questions that were little more than speeches in thin disguise.

  He had to ask questions to which he did not know the answers.

  Early on, for example, Saunders cross-examined a somewhat unusual entrepreneur named Ronald Maxwell, who had been affiliated with Stanford University and who had been called by Connell to testify about the problems his company, called VADIC, had encountered with AT&T during the early 1970s.

  “Let me sum this up …” Saunders said, for the benefit of Judge Greene. “Is it possible, in your opinion, as a philosopher/engineer, designer/inventor, that all we have here is just a good faith dispute about which way to go in a market that was evolving, one in which tariff standards were little understood by the people who were actually involved? Is that what we have here?”

  “Sir,” said Maxwell, “I think what we have here is the prologue of a document.”

  “The prologue of the document?”

  Unexpectedly, Maxwell held up a paper that he had written about his company back in the early 1970s. “The prologue of the document, which characterizes VADIC as rather small and running around beating its chest. And AT&T is rather large. The practical consequence of this to us was we were deprived of a substantial market by the efforts of AT&T.”

  “Just so future generations won’t be deprived of this, I will have you read the prologue of the document into the record,” said Judge Greene.

  “Do you want me to read it?” Maxwell asked.

  “Yes,” said Greene, “you are the witness.”

  “Do I have to read the epilogue, too?”

  “I didn’t see any epilogue.”

  “Some people say it is better yet,” muttered Saunders.

  “‘Hark!’” Maxwell began. “‘Do you hear? That slight patter, some timid squeaks, growing louder. Can it be what I think? Nay, they could not have. Yet, it gathers sound, sounding stronger, with determination. They must be mad. Elephants are dancing, themselves paced by mounting frenzy. Anything will be crushed beneath their supple, stamping feet. I see them. A small cloud rises from their exertions. It’s a herd of mice: the VADIC mice. And they are running, why they are hurtling themselves towards the Elephant Bell! Surely they are doomed!’

  “The epilogue is: ‘As one can easily judge, we have not learned of fate’s wish for VADIC’s mice. Last seen, they were beginning to scurry up the tail of Elephant Bell, hoping, one presumes, to move faster than the giant’s swishing nose and to avoid any excremental indignities. A few mice, apparently confused by physical similarities between the two beasts, migrated towards Elephant IBM, but no one knows what happened when they got near.’”

  All of this was a bit more than Saunders was ready for. “Now,” he recovered, having taken himself far down the path already, “in the opening statement of this case, Mr. Connell, perhaps borrowing your analogy and figure of speech, characterized the Bell System as an elephant and suggested that once in a while it reaches out and crushes someone. VADIC is not anyone who has been crushed, or they … Mr. Maxwell, in your ten years at Stanford University, did you have occasion to make the acquaintance of the writings of George Santayana?”

  “Not that I remember. I did read some of it.”

  “Are you familiar with his criticism of historians who write history as though they are standing in front of the crowd, waving their hands?”

  “Sir, there is a crowd here.”

  “Your version of the story is very selective, isn’t it?…”

  And on Saunders went. Day after day that spring, he personally handled every cross-examination, and increasingly, as happened with Maxwell and his VADIC mice, his questions and speeches carried the courtroom dialogue away from the mundane particulars of Gerry Connell’s accumulated facts. Many times, his larger points hit home. In other instances, Saunders seemed to get more from the witnesses than he bargained for. Overall, the government and AT&T seemed to be trying two different cases around the same set of facts. Connell’s was a determined, if anecdotal, story of widespread malfeasance by the world’s largest corporation; at every opportunity, Connell emphasized AT&T’s almost incomprehensible size. Saunders’ was a sweeping, thematic epic about regulation, politics, and the history of the telephone industry. Since he said very little and only occasionally tapped his pencil, it was impossible, yet, to guess which case Judge Greene believed in.

  Both sides were confident it was theirs.

  *This section of the government’s case was especially complicated and confusing. The government did not try to prove that AT&T priced its competitive products below cost, as would be common in an antitrust case. Rather, Connell tried to show that ineffective FCC regulation and a historically haphazard system of internal cross subsidies allowed AT&T to set whatever prices it liked, depending on how much competition the phone company faced. The attempt to prove this required reams and reams of paper containing AT&T cost studies, FCC cost studies, government cost studies, and so on. When the pricing witnesses—mostly academic economists—were on the stand, the hallways outside Judge Greene’s courtroom were filled with dozens of boxes containing cost studies that might be referred to in testimony. One day, Judge John J. Sirica walked down the hall and, seeing all the boxes, quipped, “I’m glad I only had Watergate.”

  Chapter 19

  Saunders and McGowan

  “Your Honor,” said Gerry Connell shortly after 4 P.M. on the gloomy afternoon of Thursday, April 9, “we are now at the end of my current direct examination of Mr. McGowan.”

  “All right. Mr. Saunders,” said Judge Greene ironically, “do you have any cross-examination?”

  Saunders smiled. Yes, he had a few questions.

  The seven hours of direct testimony by William McGowan that day, the first of four exhaustive sessions the MCI chairman would endure before Judge Greene, had not been one of Gerry Connell’s most effective presentations. This was not Connell’s fault. For days prior to McGowan’s appearance, Connell and Peter Kenney, the Justice lawyer in charge of the MCI section of the case, had worked even later than usual in the trial team’s cluttered, poorly-ventilated offices on 12th Street, preparing for the testimony of the man widely considered to be the government’s most important witness against AT&T. Though neither Connell nor Kenney had worked on the case from its beginning, both were aware that it was McGowan, more than any other person in or out of government, who was responsible for the existence of U.S. v. AT&T. They knew, too, that while the MCI story was by no means the only important evidence they had to present to Judge Greene, it was crucial that McGowan make a good impression on the judge, both in what the MCI chairman said and in how he sai
d it. Without McGowan’s aggressiveness and political savvy in the early 1970s, Justice probably would never have sued AT&T; without sparkling testimony from him now, the case might founder.

  The trouble was that for McGowan himself, so much was different from his early, heady days as an entrepreneurial wizard and self-styled political fixer in the nation’s capital. Back then, MCI was mostly just an idea with potential. It was an ambitious little company that spent its meager funds on rented office furniture and as many lawyers and lobbyists as it could buy. When he attacked the phone company in those days, McGowan seemed like an American populist, akin in spirit to the nineteenth-century family farmers who once decried the concentrated power of eastern banks and railroads. Only McGowan, in his attacks on monopolistic AT&T, was not spawning a political movement or protesting his family’s livelihood. Rather, he was trying to get rich. And during the 1970s he had succeeded, in a big way. By April 1981, when Gerry Connell called him to the stand to testify about his troubles with AT&T and to urge that the phone company be broken up, William McGowan was an extraordinarily wealthy man—richer, for example, than his former nemesis John deButts, whom McGowan once attacked as an aristocrat. The annual revenues of MCI were exploding, and its profits had risen meteorically since the mid-1970’s, when Execunet was launched in competition with AT&T’s regular long-distance service. McGowan’s stock in the publicly-owned company was worth hundreds of millions of dollars. As he testified that April, McGowan was in the process of buying up neighboring property and building a million-dollar addition to his home in the fashionable Georgetown section of Washington, overlooking the Potomac River. Still a confirmed bachelor, he was seen at the finest restaurants about town with beautiful women clinging to his arm—he confided to friends that he almost married several times, “until common sense took over.” He still worked long hours at MCI’s northwest Washington headquarters, chain-smoking cigarettes and voraciously reading five newspapers a day. But with dozens of well-groomed executives and a stable of high-priced lawyers surrounding him, McGowan was no longer “a little guy,” an iconoclastic cowboy capitalist. He was the fabulously rich chief executive of a sprawling, publicly-held corporation. Finally, he had become a fat cat.

  And that April, he was also the chairman of a company that had recently been awarded $1.8 billion in antitrust damages by a federal jury in Chicago, an award that was like an insurance policy guaranteeing MCI’s future growth and profitability. But the award was on appeal and would not be final for months, probably years. If, while testifying for Justice in the government case, McGowan contradicted any of the Chicago testimony that had led to the jury’s award, he could jeopardize the outcome of his $1.8 billion appeal, and indirectly, the future of his company and his personal fortune. In conversations and meetings with the government trial teams, McGowan and his attorneys were unyielding on this issue; they protected their $1.8 billion like it was a newborn infant. Lawyers from Jenner & Block, the firm that had tried the Chicago case, poured over the questions prepared by Connell and Kenney, arguing and double-checking to be sure that McGowan’s testimony was entirely consistent with all that he had said in Chicago. They spent many hours privately preparing the MCI chairman for Saunders’ cross-examination—they were understandably concerned that MCI’s chairman might inadvertently contradict his previous testimony. McGowan’s lawyers were less interested in how Saunders’ cross-examination, which was certain to challenge every aspect of MCI’s history, might affect the government’s case than they were in how it could jeopardize the Chicago award.

  McGowan himself was certain that he could run intellectual circles around George Saunders, as he felt he had done in Chicago. In person, on the witness stand, some people described McGowan as “self-confident.” Others called him “arrogant” and “obnoxious.” The government lawyers were afraid that Judge Greene, a mild-mannered man who appreciated strong intellect but was intolerant of stridency or shrillness, would tend toward the latter view. This, combined with McGowan’s reluctance to take risks during his testimony for fear of losing his $1.8 billion, might lead to a disastrous showing by Justice’s most important witness.

  The seven hours of direct testimony that Thursday morning had been workmanlike, though restricted in range and tainted by McGowan’s smug bearing. Methodically, Connell had walked McGowan through the entire history of MCI: the reasons McGowan had attempted to rescue the company by investing his money in it during the late 1960s; the early, fitful interconnection negotiations with AT&T; the contentious, stage-setting meeting between McGowan and deButts in March 1973; McGowan’s attempt to construct rapidly a national microwave network; the controversy over whether FX was a private-line or a regular long-distance, “MTS”-type service; deButts’ decision to disconnect MCI customers during the FX controversy; and, finally, the breakthrough Execunet filing, which saved MCI from financial collapse. Apart from providing Judge Greene with a sense of the violent early relationship between the phone company and its most serious long-distance competitor, McGowan’s direct testimony tried to establish three crucially important government contentions: First, that there was never any question that FX and the similar service known as CCSA were private-line offerings, which MCI was authorized to sell by the FCC; second, that knowing this, AT&T had deliberately fought with MCI over FX and over interconnection terms in order to harm irreparably its competitor; and third, that McGowan was driven to the brink of financial ruin solely by the phone company’s anticompetitive behavior. If all of that was true—if Judge Greene decided that the industrial warfare carried on between McGowan and deButts in the early 1970s should be blamed on AT&T—then the government’s case was close to being locked up.

  “Mr. McGowan, we have discussed these matters on previous occasions, have we not?” Saunders began, pacing before the witness box to Judge Greene’s left. Ever since Chicago, Saunders had been waiting for this rematch with the MCI chairman. It was a personal as well as professional challenge. Saunders believed McGowan was a manipulative liar, and this time he was going to prove it.

  “It certainly depends on what matters you are talking about,” said McGowan. During a decade of nonstop legal wrangling with AT&T, McGowan had become a sophisticated witness. He challenged the premise of every question, argued vigorously with his examiner, and conceded only the narrowest points.

  “The matters that you discussed on your direct examination, Mr. McGowan.”

  “Yes, many of them.”

  “And there seems to be a difference in our view about the facts with respect to these matters, does there not?”

  “On those occasions, I didn’t realize you were testifying, Mr. Saunders. I testified to my view.”

  “You are aware they won’t let me up there, aren’t you, Mr. McGowan?… Jack Goeken started this company back in 1963, didn’t he?”

  “He started Microwave Communication, Inc., I believe … That company at that time had no employees and did not have them for another year or two.”

  “You didn’t either, did you, Mr. McGowan?… All right. You described how MCI’s application at the FCC winded its way to conclusion. The FCC’s Hearing Examiner rejected the Bell System arguments against creamskimming; is that correct?”

  “I am not familiar with all the details at the tip of my tongue, but the hearing examiner recommended that the application be granted, yes.”

  “And the commission granted the application in a four to three vote; isn’t that true?”

  “Yes, in August of ’69, the vote was four to three.”

  “And the chairman of the commission said this is a ‘typical creamskimming operation’ and an ‘outrage,’ didn’t he?”

  “I can’t paraphrase it to be that exact, but I do believe he dissented and that was one of the areas of his comments.”

  “That is a quote, ‘typical creamskimming operation’?”

  “I cannot verify that.”

  “But in any event, you won, and one of the key votes was cast by Kenneth Cox, wasn’t
it?”

  “There were four commissioners voting in favor. One of them was Mr. Kenneth Cox.”

  “And Mr. Cox left the commission, when was it, September 30?”

  “His term expired in June 1970, and the person who replaced him, I think, came on board in September 1970 and he joined … us as an officer in our firm to handle some regulatory matters.”

  “The next day? Never missed a day on anybody’s payroll, came directly there on October 1 after leaving the commission on September 30?”

  “He came afterwards. I do not know. I didn’t count hours as to whether he came the next day. But at the time he left the government’s employ, he came to work for us, yes.”