Banks and companies commit massive fraud at will. Until recently, regulators have just looked the other way. Corporate lobbyists have greased the palms of politicians of both parties, who have passed legislation sheltering plutocratic thievery. The fleeced shareholder has little redress. San Diegan Bill Lerach — once the most-feared lawyer in America — has been complaining about this for years, and he’s been right. He and other class-action lawyers stepped in when government wouldn’t pursue wrongdoing, but now they have been hog-tied.
But Lerach, who recently emerged from an almost two-year stretch in prison, is greatly responsible for this rigged game. As an attorney who filed hundreds of class-action suits against corporations, he became a bigger fraudster than a lot of the companies he was pursuing. First, he filed many dubious suits, rejoicing when 90 percent of the companies decided to settle for millions of dollars rather than spend the time and money fighting. That stratagem wasn’t illegal, but it was grossly unethical — the classic shakedown. Companies called it getting “Lerached.” Second, Lerach and his firms paid fat kickbacks to shifty characters to become plaintiffs in those lawsuits. That was illegal, landing Lerach in prison.
Now he is out, residing comfortably in one of the county’s most luxurious spreads, a cliffside villa in La Jolla. He is worth an estimated $700 million. The government made him pay a mere $7.5 million for his crimes. The profane, volatile, bullying Scotch guzzler and work addict — now on his fourth marriage — can no longer practice law but is preparing to teach a course at the University of California Irvine School of Law.
Lerach and his onetime partner, New York lawyer Melvyn Weiss (who also went to prison), prided themselves on being populists working assiduously for the little guy. But their own words and deeds belie that claim. An excellent new book, Circle of Greed, by former San Diegans Patrick Dillon and Carl Cannon, quotes Weiss in the early years of the two lawyers’ careers: “Thank God for greed,” said Weiss over drinks. “Let’s hope it’s a growth industry.”
According to the New York Times, Lerach boasted at another time, “We’re no angels. We’re driven by the profit motive just like everyone else.… Am I in it for the money? Yes.” While Lerach and Weiss raked in as much as $16 million a year, the investors they claimed to champion brought in, on average, about 15 cents on the dollar, according to Fortune magazine. So much for populism.
The New York–based law firm was named Milberg Weiss Bershad Hynes & Lerach. The San Diego–based western branch was headed by Lerach. But the hotheaded Lerach and the older, more measured Weiss were doomed to split. They did. In 1994, Lerach founded a San Diego law firm. He is no longer there, of course.
Full disclosure: Dillon and Cannon worked at the San Diego Union during a short time when I was there. I knew them but not well. And throughout my career at the Union, Union-Tribune, and the Reader, I was more critical of Lerach than the authors: I feared that his scorched-earth approach would lead to legislation that tied the hands of all securities lawyers representing fleeced investors. It did. The Private Securities Litigation Reform Act of 1995, which some called the “Get Lerach Act,” restrained the lawyers suing on behalf of aggrieved shareholders. As a columnist, I very reluctantly favored the legislation — only because of Lerach’s depredations.
Circle of Greed began as a collaboration between Dillon and Lerach. But as the Justice Department pursued Lerach’s illegal activities, the book was put on the shelf. Dillon recruited his friend Cannon, and ten years later, they completed a book about Lerach, not one coauthored by him. He has said the authors were fair. Although I think the book is too sympathetic to Lerach in parts, it is tough on him, and it is essential reading for those wanting to understand the rampant fraud of the era, including that committed by Lerach, Weiss, and their cronies. “Bill Lerach was no monster, but he had indeed gone after fraud by committing fraud,” write the authors.
Lerach and his team would monitor stock movements. If one stock stumbled, they would check to see if management had made bullish projections and insiders had sold some shares. Bingo! Lawsuit. The natural target was Silicon Valley tech firms, whose stocks were volatile and whose scientific advances often did not pan out. Lawsuit in hand, Lerach and his minions would launch the infamous “race to the courthouse.” The first law firm to file a suit would often become lead counsel, thus controlling the suit and being in line to get 30 percent of the winnings.
“The race to the courthouse was unseemly — no question about that,” admits Lerach.
The 1995 act was designed in part to thwart that unsavory race. Lead plaintiffs’ selection would be based upon the clients’ stake in the investment — not on who filed first. And the suits had to be more carefully drawn up. The act also barred shareholders from buying stock specifically so they could sue. Milberg Weiss had been paying such professional plaintiffs under the table, thereby elbowing out other law firms in the race.
This game was supposed to end in 1995, but Milberg Weiss’s main bribe recipient kept gathering loot until 1999, taking 10 percent of the attorney fees — a grossly illegal arrangement because plaintiffs in a class action getting a kickback have an incentive to settle the case, thereby cheating fellow plaintiffs.
As it turned out, Milberg Weiss had chosen the wrong people to be paid plaintiffs. One was Dr. Steven Cooperman, a defrocked ophthalmologist with a heavy debt load resulting from his taste for high living. He had posh homes in Los Angeles and Connecticut; he was hardly the tatterdemalion client Lerach claimed to represent. After a spending spree, Cooperman faked a theft of a Monet and Picasso from his home. He got $17.5 million of insurance for the two paintings — far more than he had paid for them. But eventually the paintings showed up, the feigned theft was revealed, Cooperman went to the slammer and, to get a reduced sentence, sang — on Milberg Weiss and, specifically, Lerach, who had arranged the payments at a lunch meeting at a tony L.A. restaurant.
Another paid plaintiff was Seymour Lazar, an eccentric retiree in Palm Springs. He had collected $2.4 million in kickbacks from Milberg Weiss. Like Cooperman, he had bought little pieces of many companies so he could jump to the courthouse on command as an aggrieved investor.
Lerach and Weiss initially resisted the government’s investigation, insisting it was politically motivated, but Lerach finally capitulated, followed by Weiss. “I did a lot of stuff,” Lerach confided to a friend, according to the book.
Lerach insists that he was responsible for few frivolous suits. His foes “exaggerated the small amount of abuse present,” he says, but he would get a strong argument from companies such as Hewlett-Packard that spent bundles of money getting Lerached. He points to his successful suits, such as the $7 billion recovered in Enron, which came well after the 1995 legislation. And there is no arguing the point: Lerach was a brilliant legal strategist. He just fouled his own nest.
“The book is not so much about the lawyers but about the business of the law,” says Dillon. And it’s a tawdry business.
“It’s a pretty inefficient system for making investors whole,” says Cannon. It was inefficient when Lerach rose to prominence, and unfortunately, it still is.