While strolling along the La Jolla shoreline one day, a young lawyer visiting San Diego happened to glance up at an enormous mansion perched on the bluff above. The attorney envied the owner and wondered what expensive art decorated the home. The time was the 1970s, the house was known as the Gagosian mansion, and the lawyer was an unknown associate from Pittsburgh named William S. Lerach. No one had heard of him at the time, but they were about to.
Within two years, Lerach would bring suit against three companies that had been owned or overseen by three of the mansion’s titleholders. He didn’t do it for the house, but it wasn’t a coincidence either. If you owned a mansion and a company in California, you stood a good chance of being sued by Lerach, according to Circle of Greed, a revealing new biography of the rise and fall of the controversial attorney by Patrick Dillon and Carl M. Cannon.
A case against San Diego’s U.S. Financial Corp. introduced Lerach to the city that would be his future home, and the beauty of the La Jolla coast convinced him to stay.
From his office high above downtown, he personally reordered the distribution of wealth in America, the authors write, “wrenching it from corporations, along with their banks, auditors and insurance companies, and redistributing the money (minus his own cut) to private and institutional investors.” His biggest victory — Enron — also created the enduring image of the Brillo-haired figure standing outside a Houston courthouse with a box of shredded documents.
Lawyers and judges respected his hard work and meticulous preparation. Outside the courtroom, however, Lerach was widely reviled as a shakedown artist. Wired magazine spoke for Silicon Valley, a frequent Lerach target, when it labeled him a “bloodsucking scumbag.” In his own eyes, he was a corporate crime fighter doing a job that regulators couldn’t or wouldn’t do. His practice was based on corporate greed, and there would be no shortage of cases over the next two decades.
His targets included Charles Keating of Lincoln Savings & Loan, Michael Milken of Drexel Burnham and Ken Lay of Enron. His cases settled for millions or tens of millions of dollars, which made him as rich or richer than many of the executives in his crosshairs. In the 1990s, according to Circle of Greed, Lerach and his partners earned more than $100 million each.
In 2005, he moved into the six-acre estate on the same La Jolla bluff that he had spotted as a young attorney many years earlier. Three years later, he moved into federal prison.
For decades, Lerach and his firm, Milberg Weiss, had been committing fraud to fight fraud. The partners had been secretly (and illegally) paying kickbacks to plaintiffs in class-action cases that earned Milberg Weiss $200 million in fees. Lerach pleaded guilty to conspiring to obstruct justice and lie under oath. “The whole conspiracy corrupted the firm, and it corrupted it in the most evil way,” Judge John Walter said in sentencing Lerach to two years in prison.
Paying plaintiffs was a way of solving one of the problems in Lerach’s line of work: finding clients. Traditionally, clients hired lawyers to represent their interests. Milberg Weiss filed the lawsuit first and then found the clients. If a publicly traded company’s share price tumbled, Lerach and his team would swiftly file suit, claiming the management had failed to disclose all relevant facts. It was a mad dash to the courthouse, with the winner getting a big slice of any settlement.
A shareholder’s name had to go on the lawsuit, and, with its stable of paid, “professional” plaintiffs, Milberg Weiss could and often did win the race. Those plaintiffs bought stocks expecting that they would decline in value so they could position themselves to get kickbacks from Milberg Weiss.
The hitch was the named plaintiff could not have a stake in the outcome beyond that of any other plaintiff. Some of Lerach’s plaintiffs clearly did — they got a much bigger share of the recovery.
An unlikely series of events led to Lerach’s fall, beginning in 1992 when paintings by Monet and Picasso were stolen from the home of Steven Cooperman, a former Beverly Hills eye surgeon. The art theft was exposed as a multi-million dollar insurance fraud. Cooperman, hoping to cut a deal, revealed that Lerach’s firm had paid him more than $6 million to represent him in dozens of class-action lawsuits.
Cooperman told investigators that over steaks, he had struck a deal with Lerach for 10 percent of any settlement. These payments were made to Cooperman’s attorney disguised as attorney referral fees, which were legal. Other plaintiffs worked out similar deals. One of Milberg Weiss’ expert witnesses was also on the payroll.
At one time, Lerach had seemed unstoppable. A drop in a public company’s share price would set his lawsuit factory in motion.
Fighting Lerach was costly, time-consuming and draining. Most companies preferred to settle, which only convinced Lerach that they were hiding something. Typically, executives or board members didn’t bear the costs of litigation (Enron being a rare exception). Money moved from one group of shareholders to another. Those who owned shares when the fraud occurred were paid by those who didn’t.
When San Diego’s Alliance Pharmaceutical was hit with a Lerach lawsuit in 1992, about 90 percent of all class-action securities lawsuits were settled out of court. Alliance’s Ted Roth knew Lerach personally; their daughters both attended Torrey Pines High and were friends. Roth tried to explain that Alliance’s share price had fallen due to a government-mandated delay in clinical trials, but Lerach wouldn’t hear it. “I don’t give a fuck about the merits,” the attorney told him. It was nothing personal. “It’s business.” Instead of caving, Roth spent $2 million to fight back. Judge Irma Gonzalez in San Diego threw out the lawsuit, and shortly before a federal appellate court was slated to hear arguments, Lerach dropped the case.
So many executives had been “Lerached” by 1995 that Congress tried to curb the flood of shareholder lawsuits with what became known as the “Get Lerach Act.” In the book, Lerach, a major Democratic donor, confirms suspicions that he personally lobbied President Clinton for a veto. “Don’t worry,” the president told him with a “knowing nod.” Clinton did veto the bill, but both houses of Congress easily overrode it.
The new law hardly slowed Lerach down. He traded in clients like Cooperman for bigger, more powerful ones like CalPERS, the largest pension fund in the United States.
Another big Lerach client was the University of California’s pension plan. UC handed him what became the biggest case of his career, the lawsuit against the massive fraud known as Enron, claiming that executives had lied to investors, which cost them billions of dollars when the company collapsed.
The then-chairman of the UC Board of Regents, Gerald Parsky, was Lerach’s neighbor in Rancho Santa Fe. Parsky chaired Bush’s 2000 campaign in California, where he was seen as the president’s majordomo.
Parsky pulled him aside at a party and warned him not to make an issue of the president’s friendship with Enron CEO Ken Lay, according to Lerach. “If you take this lawsuit into the White House, I will see to it that you are removed from the case,” Parsky told him. Even Lerach, who rarely said no, assured Parsky he would steer clear.
Enron was the largest recovery in class-action history. When a Houston judge awarded $7.2 billion to Enron investors in 2008 (and $688 million in attorney fees), Lerach was in the U.S. penitentiary in Lompoc. While battling corporations that acted like criminals, Lerach had become one himself.
Lerach spent most of his career railing against corporate fraud, but his practice also depended on it. Had he been able to end greed in executive suites and boardrooms, Lerach would have put himself out of business. In fact, the opposite occurred: the scale of wrongdoing grew to an unimaginable scale, and his fees grew along with it.
That’s not to say that Lerach was wrong about corporate America, only the wrong messenger. While testifying to Congress back in 1995, he issued this eerily prescient warning: “In 10 or 15 years you will be holding another hearing with the debacle in the securities market that will make you remember the S&L mess with fondness.”
If only someone had listened.