Behind the Rise and Fall of a Class-Action King
dealbook.blogs.nytimes.com
March 1, 2010
By Peter J. Henning
William S. Lerach is among the most famous lawyers of the late 20th century, reviled by scores of corporate executives and their attorneys while celebrated by the trial bar and individual investors. Mr. Lerach earned millions of dollars in fees from class-action cases, making more than most lawyers in traditional law firms could ever dream about.
It all came to an end in February 2008, however, when Mr. Lerach was sentenced to two years in prison for his role in making undisclosed payments to representative plaintiffs in his class-action cases and an expert witness who testified for his side.
Mr. Lerach causes nothing if not strong reactions from those who crossed his path. In their new book, “Circle of Greed: The Spectacular Rise and Fall of the Lawyer Who Brought Corporate America to Its Knees,” Patrick Dillon and Carl M. Cannon offer a comprehensive look at Mr. Lerach’s legal career. For those interested in understanding Mr. Lerach’s fall, “Circle of Greed” offers repeated examples of an even more dangerous sin than greed that can afflict a lawyer: hubris.
Early in his career as a class-action plaintiff’s lawyer, Mr. Lerach explained the key to his work: “I have the greatest law practice in the world. I have no clients.” Free to do as he pleased in his cases because he effectively answered to no one, Mr. Lerach allowed his aggressiveness and sharp tongue to get the better of him on multiple occasions.
Clients are an important constraint on lawyers, the restrictor plate on their desire to push as hard as possible for every little victory in a case. They are the human face of a case, forcing attorneys to realize that the reason for legal representation is not simply to feed a lawyer’s ego but to achieve a beneficial outcome for the client. Mr. Lerach operated in the rarified world of class actions, in which he had literally thousands of clients, which meant there was not one present to rein in his baser instincts.
The myth that Mr. Lerach built to justify his class-action work that was aimed at Corporate America was the financial loss suffered by his father, Richard, in the stock market crash of October 1929, so securities class actions were a means of vindicating all those who lost hope in the Depression. As Mr. Dillon and Mr. Cannon point out, while Mr. Lerach’s father lost his family’s inheritance in the stock market collapse, “[t]here is scant evidence that this was the seminal event in Richard Lerach’s life.”
After graduating from the University of Pittsburgh School of Law, Mr. Lerach went to work for one of Pittsburgh’s leading law firms. While serving as a junior lawyer on litigation in San Diego in 1974, Mr. Lerach met Melvyn Weiss, a pioneer of the securities fraud class action. Mr. Lerach joined Milberg Weiss in 1976, and the firm grew to become a leader in class actions, with Mr. Weiss heading up the New York office and Mr. Lerach its San Diego outpost.
Mr. Dillon and Mr. Cannon trace how at about the same time that the firm, which took on the name Milberg Weiss Bershad Hynes & Lerach, began paying secret fees to people who agreed to serve as the representative plaintiff in their cases. In those days, securities class actions were a race to the courthouse, with the first to file often controlling the litigation. Called “pets,” these plaintiffs were lapdogs willing to serve Milberg Weiss while taking a cut of any settlement in the case, while telling the court that they had received nothing more than what any other class member got from the case.
When your opponent is your enemy, and you can say whatever you want because there is no client there to restrain your baser instincts, then at some point you will step over the line and perhaps eventually pay a price. For Mr. Lerach and Milberg Weiss, that price came in the form of Professor (and later Dean) Daniel Fischel of the University of Chicago Law School. In a class-action trial involving Nucorp Energy in 1988, Mr. Lerach for the first time faced Mr. Fischel and took a rather dim view of him, saying to a colleague that “someday I’m going to wipe that grin right off” Mr. Fischel’s face (although he used a vulgarity to refer to Mr. Fischel).
Crossing paths with the professor in another case two years later when he introduced himself, Mr. Lerach said, “I know who you are. And I will destroy you.” In the Lincoln Savings and Loan case in 1990, widely viewed as the symbol of the savings and loan crisis that took hold in 1990, Mr. Lerach was true to his word when Mr. Fischel’s consulting firm, Lexecon, was sued as part of the class action. At a Christmas party while pursuing the case, Mr. Lerach loudly proclaimed that he wanted to bury Mr. Fischel “under the courthouse steps.”
As part of the eventual disposition of the case, Lexecon returned the fees it earned from Lincoln Savings and Loan. But the Milberg Weiss lawyers made a crucial mistake: they did not have each side execute a release of all claims arising from the litigation. That small error allowed Lexecon and Mr. Fischel to sue Milberg Weiss and Mr. Lerach for trying to interfere with his business by improperly suing it to ruin his reputation as an expert witness. When Lexecon v. Milberg Weiss eventually came to trial in Chicago in 1999, Mr. Lerach paid the price for his unrestrained comments about Mr. FIschel.
Mr. Dillon and Mr. Cannon paint a particularly vivid portrait of Mr. Lerach’s cross-examination by Lexecon’s counsel as he tried to fend off the implications of his earlier statements about Mr. Fischel and the screed he wrote after the Nucorp Energy trial. The cross-examination eviscerated Mr. Lerach, making him look more like a dissembler than a high-powered attorney. Interlaced with the trial testimony is Mr. Lerach’s reactions during and afterward, such as when he forlornly called his then-wife on the telephone and said, “Star, we are getting killed.” One almost feels sorry for him at that moment, although the authors make it clear that this was something he brought on himself. The firm paid $50 million to settle the case after the jury returned its verdict in favor of Lexecon.
It was not just a legal academic who reacted strongly to Mr. Lerach’s tactics — much of Silicon Valley had felt his wrath whenever their volatile stocks took one of their periodic nosedives. His name even became a verb: a company was “Lerached” when Milberg Weiss filed its inevitable lawsuit after a report of missed estimates caused the stock price to drop.
When Republicans took control of Congress in 1994, they immediately went after the trial lawyers, citing Mr. Lerach as an example of legal excesses. Congress passed the Private Securities Litigation Reform Act, and among its provisions was the elimination of the “race to the courthouse” by requiring the judge to select among the potential plaintiffs who lost the most money from an alleged fraud in picking the class representative. A “pet” could no longer be the nominal representative of the class.
In a twist, however, the new law actually helped Mr. Lerach because he immediately saw that if he could recruit institutional investors he could then win the coveted position as counsel to the class.
Even as Milberg Weiss continued to thrive under the new law, federal prosecutors in Los Angeles in late 1999 began the painstaking task of putting together a criminal case against the firm and four of its name partners for making secret payments to plaintiffs and an expert witness. The criminal case began almost by accident when one of the “pet” plaintiffs, trying to avoid a substantial prison term, spilled what he knew about Milberg Weiss. Over the next nine years, prosecutors painstakingly pulled together a case that resulted in the conviction of four of the named partners in Milberg Weiss and the firm itself.
Despite the criminal investigation, with the demise of Enron and its accounting firm, Arthur Andersen, in early 2002, Mr. Lerach had a case in which portraying corporate greed and malfeasance was almost as easy as showing devotion to mom and apple pie. Perhaps more importantly, Mr. Lerach was overseen by a sophisticated plaintiff, the Regents of the University of California, and “Circle of Greed” shows that the lawyers from Milberg Weiss did their jobs very well. Odd as it may seem, the Private Securities Litigation Reform Act worked to make Milberg Weiss a better counsel for a class action.
Despite the success in Enron, any hope Mr. Lerach had of fighting the criminal case ended when his former partner, David Bershad, agreed to cooperate in the investigation. He had been in charge of the secret payments and kept detailed records, so his testimony would undermine Mr. Lerach’s defense that only untrustworthy convicted felons comprised the prosecution’s case against him.
The final chapters of “Circle of Greed” make for compelling reading, even though readers know how things turn out. As the Enron class action moved to completion, Mr. Lerach had to remove his name from the firm he formed after leaving Milberg Weiss a few years earlier when he agreed to plead guilty.
But was his crime all that significant? In one sense, the answer is “No” because it is hard to identify any real victims from making the secret payments. But the answer is “Yes” because Mr. Lerach showed an utter disregard for the legal system, and any defense of the Milberg Weiss payments devolves into an argument that “the end justifies the means.”
Mr. Dillon and Mr. Cannon have written the type of book that, like “Den of Thieves” and “Smartest Guys in the Room,” helps to explain an era. One can make too much and too little of Mr. Lerach’s impact on the legal profession. He was a lightning rod, to be sure, but unlike generals who are lauded for “winning” a battle fought by their troops, he rolled up his sleeves and worked as hard as any associate or partner at his firm. “Circle of Greed” sketches his good and bad sides in equal measure, being neither a fawning portrait nor a hatchet job.
Next Monday, Mr. Lerach is scheduled to be released from federal custody. As a result of his guilty plea, Mr. Lerach lost his license to practice law, which will keep him out of the courtroom. Could he get it back one day? America loves a second act, so perhaps in a few years the paperback edition will need a new epilogue because I would not rule out a return to the law for someone like Mr. Lerach.
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*Peter J. Henning, writing for DealBook’s White Collar Watch, is a commentator on white-collar crime and litigation. A former lawyer at the Securities and Exchange Commission’s enforcement division and then a prosecutor at the Justice Department, he is a professor at the Wayne State University Law School. He is currently working on a book, “The Prosecution and Defense of Publc Corruption: The Law & Legal Strategies,” to be published by Oxford University Press. |
