Between the Alps and a Hard Place

by Angelo M. Codevilla

  Since corporations pass the cost of class action lawsuits on to the customers as part of the cost of doing business, such suits end up taxing some citizens for the benefit of others—specifically for the benefit of the Democratic Party and its constituents. Unsurprisingly, the most successful combination in the field of class action suits has been between federal officials—almost always Democrats—and state and local Democratic Party officials, preeminently Democratic state attorneys general as well as lawyers associated with the Democratic Party. During the late 1990s this practice became so closely identified with the Democratic Party that Republican state attorneys general formed their own association and increasingly refused to take part in class action suits. In the Swiss case the class action suits aimed at taxing a whole foreign country on behalf of a constituency of the U.S. Democratic Party.

  Note that class action suits without trial, which some of their practitioners defend as a way of tackling social problems despite a gridlocked political system,5 are essentially private actions made possible by access to public power, both judicial and executive. They cut ordinary voters out of decisions on public policy as well as about taxes.6 They are also actions by public officials acting as private citizens but with all the advantages of public office. The ostensibly voluntary settlements in which these suits end absolve public officials of responsibility for their actions on behalf of the plaintiffs because, after all, the parties themselves “agreed” to the deal. These trials of power are unalloyed by the responsibilities of public office.

  For Edgar Bronfman’s campaign against Switzerland, the class action suit was the likeliest means of actually ensuring that some Swiss would pay. That is because even in the 1990s there was a limit to the power that the U.S. government, or any government, could exercise over a foreign country without taking official action. All the Swiss government had to do was call the U.S. government’s bluff. Was the Clinton administration really ready to explain to Congress and the American people why they ought to treat Switzerland as an enemy? The Swiss don’t make very convincing villains. The roughly five hundred American companies that have operations in Switzerland would probably not have cooperated with any of the Clinton administration’s unofficial calls for an economic boycott because they would have been hurt by Swiss retaliation. Could any major American company have been pressured into joining sanctions against the Swiss? Not likely. So, since dragging the American people as a whole into a confrontation with the Swiss was never an option, concrete pressures would be limited to what Democratic officials could do without taking actions that would expose them to public opposition. Through purely discretionary power, Democratic officials could have disinvested state government retirement funds in Swiss banks and companies. Although this was small stuff, it would have exposed these funds’ managers to the ire of contributors whose accounts would have been hurt.

  As for the Swiss government, however willing it might have been to pay the kind of money that Bronfman demanded, its hands would have been tied by the sort of national referendum that always accompanies major decisions in Switzerland.

  Given these difficulties, the campaign could be sure of “closing the deal” only if it could actually cause so much trouble for some Swiss company in the United States that the company would conclude that settling was the cheapest alternative. That is why Bronfman needed a means of pulling the campaign entirely within U.S. borders and into a friendly venue. The class action suit became the weapon of choice. As with domestic class action suits, the amount of the settlement would be just a bit less than what would lead the defendant to go out of business or to fight.

  The practical difficulties were disposed of quickly. The WJC had nothing but contempt for the plaintiffs’ lawyers who had been working up suits against the Swiss. It nevertheless entered the suits because they were the ideal vehicle. For their part, the plaintiffs’ lawyers distrusted the WJC but realized that it could bring to bear the pressure of public officials who were beyond the reach of the lawyers themselves.

  Three sets of lawyers brought the original formal suits. In the eastern district of New York the cases were Weisshaus et al. v. Union Bank of Switzerland et al. plus four others; the northern district of California saw Markorivikova et al. v. Swiss Bank Corporation et al.; and Rosenberg v. Swiss National Bank was filed in the district court for the District of Columbia. Formally, the WJC was only an “organizational endorser,” and as such it signed the settlement agreement. But because it had superior political connections it also negotiated the agreement and had the major influence in the all-important distribution of the proceeds. Moreover, the Swiss side began to pay attention to the suits only when the WJC joined them, because only Bronfman’s connections with American politicians could make real trouble for them, and only the same politicians who were behind the trouble could come close to guaranteeing that the first payoff would be the last.

  In sum, power in the end game turned out to lie not so much in direct diplomatic support from the Clinton administration, in the press reports generated by Senator Alfonse D’Amato, or in the Eizenstat report. Rather, it lay in the existence of a vulnerable target company within U.S. borders, and of a judge who would accept his plaintiffs’ breathtaking claim to be the representatives of countless victims of the Holocaust. Above all it depended on Democratic New York City Comptroller Alan G. Hevesi, who could impose upon the company costs far greater than Bronfman’s demands.

  Hevesi, whose family in Hungary had been decimated in the Holocaust, was a lifelong supporter of Jewish causes. He was also the epitome of Democratic Party careerism. First elected to the New York State Assembly in 1971 from the borough of Queens, Hevesi became the assembly’s Democratic whip in 1978. After unsuccessful attempts to advance in state government, Hevesi was elected city comptroller in 1993 when a corruption scandal forced New York’s Democratic Party to drop its first choice, Elizabeth Holtzman. In office, Hevesi sought to build credits within the party and with its donors to become the Democratic nominee to succeed New York City Mayor Rudolph Giuliani. His actions in the Swiss case improved his prospects.

  A Suit Grows in Brooklyn

  The venue of the WJC’s suit against the Swiss banks was not chosen at random. No venue for a class action suit is left to chance. Making sure the right judge is in charge of a case is a high art. Although friendly judges abounded in Washington, D.C., California, and elsewhere, the main effort was in Brooklyn, New York. The city is the world’s financial center. It is also a place where nearly all officials somehow depend for their careers on the Democratic Party. Not incidentally, New York has more Jews than Tel Aviv. But why Brooklyn rather than Manhattan? The federal judge in Brooklyn, Edward Korman, was a reliable ally. Korman himself was a Democrat, appointed to the federal bench through the patronage (“senatorial courtesy”) of New York’s Democratic senator, Daniel Patrick Moynihan, who followed the priorities of Brooklyn’s very tight Democratic organization.

  That organization’s workings came to national attention in 1999–2000, after two local lawyers decided they had not received their proper cut of patronage from the Kings County (Brooklyn) courthouse. The lawyers turned over to state officials (who then brought in the FBI) details of how Brooklyn’s Democratic Party controls the appointment of judges, who then hand out lucrative administrative assignments to lawyers who support the Democratic Party. A party insider described these revelations as “radioactive.”7 But the only thing new about the revelations of partisan corruption was that former insiders had made them publicly. That judges in Brooklyn at all levels are selected and work as part of a corrupt party machine has been an open secret for a century.

  Unsurprisingly, Judge Korman accepted the non-self-evident contention of the plaintiffs and the World Jewish Congress that they represented vast classes of individuals victimized by the Swiss banks and government—an assertion that the plaintiffs made no effort to document. The judge left the details of the nature of the class, and of the plaintiff’s precise relationship with
the class, to be worked out as part of the settlement. In other words he allowed the plaintiffs to pursue a campaign of pressure, one result of which would be that the defendants would be forced to agree to the plaintiffs’ right to exert the pressure. Judge Korman managed not to express any substantive judgment on either the claim of representation or the substance of the charge. But what he did was enough.

  Here is how the banks were made to pay. On December 14, 1997, Undersecretary Eizenstat convened a meeting in Zurich with Switzerland’s top bankers, the WJC’s Israel Singer, and the plaintiffs’ lawyers. Three facts dominated the meeting. First, the Swiss public’s increasingly outraged reaction at the campaign made it inconceivable that the Swiss government would meet the Americans’ demands. If the demands were to be met, the banks would have to do it. Second, a week earlier Alan Hevesi had gathered like-minded state and local officials, including many Democratic state treasurers, at New York’s Plaza Hotel. The meeting had authorized sanctions (such as withholding licenses and disinvesting in Swiss banks) if the Swiss did not pay. Hevesi had required executives of the main Swiss banks doing business in New York to face this hostile audience. Third, Undersecretary Eizenstat and the Clinton administration feared that the confrontation they had helped set up between their U.S. clients and Switzerland was spiraling into a real international crisis. This could force Clinton to choose between stranding his domestic clients or fighting a battle that the American public would likely disavow. Therefore Eizenstat convened the meeting to broker a settlement.

  Although the Swiss bankers were willing to pay, they discussed only sums somehow tied to the dormant accounts. After all, it seemed to them that this is what the fuss was about, and that is why they had agreed to pay for a massive audit of their bank records headed by former U.S. Federal Reserve Chairman Paul Volcker to determine the outer limits of the value of such accounts. What was the point of the Volcker inquiry if they were to pay an amount unrelated to it? But the fuss was not really about the accounts. So, no deal.

  The two sides met again, in January 1998, in Eizenstat’s State Department office. The U.S. government’s participation in private suits had been anathema to American law, based as it is on the distinction between public and private, as well as on official impartiality in private disputes. But Eizenstat, using the influence of his position in the Clinton administration, pressured the Swiss side to negotiate a settlement unrelated to the amount in the dormant accounts. Later, Eizenstat argued that he had acted to bring about “justice.”8 Friends of Eizenstat say that his breach of American legal practice had been for the sake of sparing the Swiss the worst consequences of “a crazy American legal system.”

  The Swiss got the message that they would have to pay an amount unrelated to any objective criterion, and in return asked that any amount agreed upon serve to immunize their banks and their country against further suits. The budding agreement, however, was nipped by the arrival of the WJC’s Israel Singer, who managed to anger both the plaintiffs’ lawyers and the Swiss with high demands backed by the specter of what his friend Alan Hevesi could do. In subsequent meetings, Singer would bring Hevesi along because, he said, “I didn’t want to be shooting blanks.”9

  And indeed Hevesi was shooting live ammo. If the banks had not agreed to a settlement, his committee would apply sanctions against Switzerland. More important, he himself would act to deny the operating license for the merger of the Union Bank of Switzerland and Swiss Bank Corporation, which would create UBS, Europe’s largest bank. Hevesi had set March 26, 1998, as the deadline. On March 24 he formally objected to the merger, due to take place in July. These banks have hugely profitable operations in New York—some $4 billion per year. Had the two banks not been merging and thus had they not needed a new license, bringing pressure against them would have required moving against existing licenses, something that would have required much more exposure on the part of judges and officials. But in fact Hevesi could bring enormous pressure to bear simply by opposing the new license.

  This put Stuart Eizenstat and the Clinton administration in a bind. Foreign policy is supposed to be the exclusive responsibility of the federal government. But now, a city official and like-minded fellow Democrats were about to start a real economic war that was sure to be more trouble for the Clinton administration than the support of the lawyers and Jewish organizations was worth. And it was a war that the Clinton administration had primed them for, albeit unofficially.

  Eizenstat went to New York to try to damp the fire he had done so much to start. At this point the banks could have made a powerful bargaining chip out of the contrast between the Clinton administration’s intense desire to avoid an international incident and the substantial unity of Swiss public opinion. But by this time the banks were thoroughly spooked. On March 26 the Swiss formally agreed to Eizenstat’s proposal that they stop insisting on merely paying out sums related to the dormant accounts and instead negotiate a higher, comprehensive, “rough justice” amount unrelated to any datum. In exchange for that agreement, Alan Hevesi held off sanctions until June 30. But since he had already objected to the scheduled July merger, he had set up the biggest possible sanction, one that would cost the banks 300 million francs per month.

  As the talks moved back to Eizenstat’s State Department office, the Swiss government announced that it would not contribute to the settlement. The last public policy connection had fallen away. Now the issue had come down to how much the two banks would pay for the U.S. Democratic Party’s permission to do business. In his U.S. government office, but of course unofficially, Eizenstat suggested that the Jewish groups’ demands of $1.8 billion and the Swiss offer of $300 million be reconciled at $1.25 billion. On June 30, on Eizenstat’s advice, Hevesi formally dropped his objection to the merger. But when the Swiss banks’ final offer came in at only $530 million, he angrily vowed to resume the objection. Also, beginning in September, Hevesi’s committee of state officials would disinvest from all Swiss companies the state pension funds they managed. But by then the banks had long since given up thoughts of fighting.

  The final act began when Judge Korman—could he possibly have felt the Clinton administration’s pain?—invited all parties to dinner near his courthouse, where he asked both sides to outline the case that each would make in a trial. No one doubted that this was in fact the trial, though unencumbered by rules or responsibility. Having heard the arguments, Korman advised the defendants that the courts could possibly make them pay far more than what they had offered, and the plaintiffs that conceivably none of their evidence might be admissible in the federal court system—especially in courts of appeal. Since he would have a lot to say about what evidence would be allowed and what amount would be set, he was not “shooting blanks” either. Then he suggested a settlement figure of $1.25 billion. Perhaps serendipitously, this was exactly as much as Eizenstat had suggested. The two sides got the message, and on August 12, 1998 they settled on that figure.

  Once the banks, the WJC, and the plaintiffs’ lawyers had seen the wisdom of the Clinton administration’s recommendation, Alan Hevesi ceased to have trouble with the license. The threat of sanctions evaporated quicker than it had materialized. Officially, Hevesi, Judge Korman, the Senate, and even the Clinton administration had done nothing. No votes were recorded, no formal accusations made, no formal actions were taken, no judgment on evidence was made. Everything was done officiously.

  So, the resolution of the anti-Swiss campaign came down to the mundane capacity of officials to use public offices for private purposes informally to force private party “B” to pay their friends in private party “A.” In January 1999, as the banks were setting about paying $1.25 billion over three years—just under 10 percent of profits—Richard Capone of the now merged UBS mused how much cheaper it would have been to buy influence in New York’s ruling Democratic Party, just as businesses do with ruling parties in much of the world: “But it never occurred to me that in America we would have to pay bribes.”10


  Clean Hands

  Bribes? On January 26, 1999, Melvyn I. Weiss, lawyer for one of the plaintiffs, declared in court: “Don’t ever let the Swiss government get away with saying they are absolved because of this.”11 But absolution is precisely what the settlement agreement says that the defendants bought for $1.25 billion. Judge Korman’s provisional acceptance of the settlement agreement closed the five cases in his court. Plaintiffs’ lawyers in Brooklyn were able to guarantee that the settlement would also cover the cases in California and the District of Columbia. This showed that the individuals in whose names those suits had been brought had been mere pawns. Nevertheless, although it was certain that the banks would pay money to organizations, it was by no means sure what those organizations would do with the money or even what the banks payments would exempt them, or Switzerland, from.

  The agreement began by laying out the plaintiffs’ allegations: Switzerland collaborated with the Nazi regime and unlawfully participated “in a scheme” to retain class members’ accounts. The Swiss also dealt in looted assets. They profited from slave labor because the Reich’s economy during the war depended in part on slave labor, economic resources were fungible, and Nazi Germany deposited in Switzerland some of its proceeds. Finally, the Swiss tried to cover up their role. Then the agreement stated that the Swiss side did not agree with the allegations, that each side believed that it could uphold its case in court, but that both had chosen the settlement instead: $1.25 billion would purchase the end of the anti-Swiss campaign and preclude further suits relating to World War II. The court stated that it was taking no position with regard to either side’s claims, and that it was not about to argue with the parties’ agreement—it had nothing to do with it. This, of course, was insincere.