William Lerach isn't the type of guy who brings out ambivalence in someone. People generally hold two views of the flamboyant, high-powered San Diego attorney who's made a mint representing investors in class-action suits against many of the nation's largest corporations.
The first view is that Lerach (pronounced LEER-ack) is a champion of wronged shareholders everywhere, holding reckless companies to account for acts of negligence and fraud. The second is that he's a power-mad trophy hunter who has undermined the reputations of countless companies whose only crime was to hit a stock price downturn. Those in the latter camp, understandably, are feeling pretty good lately.
On Monday, October 29, Lerach pleaded guilty in Los Angeles federal court to felony conspiracy in connection with a scheme that enriched himself and his former law firm, Milberg Weiss Bershad & Schulman, now known as Milberg Weiss. Lerach, now 61, admitted before U.S. District Judge John F. Walter that he helped provide $11.4 million in illegal kickbacks to parties agreeing to serve as lead plaintiffs in civil actions. The tactic generated an estimated $250 million in legal fees for about 25 years.
The punishment is anything but severe. Lerach, who acrimoniously left Milberg Weiss in 2004 to form Lerach Coughlin Stoia Geller Rudman & Robbins (from which he has left as well), faces only one to two years in prison. The $8 million he owes the government in penalties and fines pales before his more than $100 million in personal income over the years. What's more, he remains eligible to collect tens of millions more from the $7.2 billion settlement his new firm extracted from Citigroup, JPMorganChase, Canadian Imperial Bank of Commerce and other defendants for their roles in the Enron collapse. And once out of prison, he will be allowed to serve as a "non-legal consultant." All in all, it's a sweet deal.
Meanwhile, the dominoes are falling at Milberg Weiss. Lerach is merely the latest of more than a half-dozen people thus far to plead guilty in a case stemming from a federal investigation that began in 1999. Two of them were lead partners David Bershad and Steven Schulman, each indicted by a grand jury in May 2006. Firm co-founder Melvyn Weiss, 72, along with the firm itself, have pleaded not guilty and have rejected settlement overtures.
In his plea, Lerach admitted he "crossed a line and pushed too far." That operating style was a lifetime in the making.
William Shannon Lerach was born in 1946, destined to mistrust the stock market. Way back in September 1929, his father, Richard, having received a substantial inheritance, had gone to work as a stockbroker, investing all his wealth in stocks. The following month the market crashed, wiping him out and relegating him to selling metal parts. If someone were to make a movie about his son, this would be the perfect back story.
As a young adult, William Lerach found his niche in law, graduating second in his class at University of Pittsburgh Law School and landing a job with Pittsburgh's elite firm of Reed Smith Shaw & McClay. Though he made partner in record time, he became highly uncomfortable over the way the firm treated opposing clients, especially in one case where a shareholder appeared to have a legitimate case but lost.
Convinced he was playing for the wrong side, Lerach in 1976 took a job with the New York firm of Milberg Weiss, which was looking to expand. Lerach opened a branch in San Diego, specializing in suing companies for securities fraud. The office came into its own a decade later, when Lerach launched a succession of cases against Silicon Valley disk-drive maker Seagate Technology. In the first case, Lerach's firm squeezed a $5 million consent decree from Seagate, payable to 17,000 shareholders.
Milberg Weiss smelled blood. In short order, the firm would emerge as an S.O.B. litigation powerhouse, filing scores of class-action suits each year. By the fall of 2006, Milberg Weiss boasted of having won $45 billion worth of settlements from a long list of defendants, including AT&T, Lucent, WorldCom, Microsoft and Prudential Insurance. Bill Lerach's reputation as a populist legal firebrand was cemented. To admirers, he was right up there with John Edwards, Willie Gary and Joe Jamail, someone who could scare the living daylights out of the high and mighty. "I just always wanted to represent people who had been hurt or cheated or defrauded to get a recovery," he said in an interview with his law school alma mater.
In his pursuit of justice, Lerach would get rough with adversaries. One of favorite tactics was to scream at CEOs. He shouted at one executive: "I'm going to take away your f***ing condo in Maui! I'm going to take away every penny you own!" Those were strange words coming from the owner of a mansion in San Diego's exclusive Rancho Santa Fe community, plus vacation homes in Steamboat Springs and Hawaii.
His drive to win also had a political motive, and he didn't hesitate to reveal it. "We are clearly pro-worker, progressive Democrats," he remarked not long ago. "Anybody who knows us knows that about us -- they know our heart's in the right place." Many of his clients included labor union-managed funds and other entities tied to the Democratic Party.
Lerach long has plowed a substantial portion of his wealth into party campaign donations. This past September, the San Diego Union-Tribune reported that since 1993 he had contributed $1.28 million to candidates in federal elections, plus substantial sums to Democrats running for state office. During 1993-95 alone, he'd given around $500,000. That kind of generosity bought access to the White House when crunch time arrived.
In late 1995, the Republican-controlled 104th Congress had passed legislation, the Private Securities Litigation Reform Act (PSLRA), designed to restrict the ability of lawyers to bring forth class-action suits. As an underhanded compliment to the man from San Diego, supporters dubbed the measure the "Get Lerach Act." Among various provisions, the PSLRA would give greater authority to judges in determining lead plaintiffs and mandate full disclosure to investors about proposed settlements. The tech industry in particular had been clamoring for action.
William Lerach happened to be a good friend of President Bill Clinton. During the 1992 campaign, Lerach even hosted a fundraiser for him at his Rancho Santa Fe home. On December 15, 1995, Lerach attended a White House dinner. Four days later, Clinton vetoed the legislation, though Congress would have the last laugh, overriding the veto. Lerach has disputed any insinuation that he influenced the president's action. "I was at a dinner with President Clinton and 500 other people," he recalled. "I shook his hand and never spoke to him about the bill. There were 20 lobbyists on the other side who were at that dinner." Either way, his standing in Silicon Valley wasn't helped. Somehow the new law didn't end the Milberg Weiss juggernaut. According to the indictment, the kickback scheme lasted through 2005. Milberg Weiss partners would provide up-front cash to individuals or groups to serve as lead plaintiffs, as it is illegal for a plaintiff to receive any portion of the legal fees. The firm then would award partners bonus payments equal to the kickbacks they'd paid out. Lerach and his colleagues, according to court documents, employed this tactic in about 180 cases.
Reprehensible as Lerach and his partners were, they mirrored much of what has gone wrong with the legal profession. Plaintiffs' litigators, by their nature, seek maximum settlements for their clients -- there's nothing new about that. But more than ever, they employ bizarre and intrusive tactics of discovery. And if their case goes to trial, they will go to shameless extremes to manipulate jury emotions. (Having seen Willie Gary explain his methods, I personally can attest to this.). Those two factors, applied in tandem, can work wonders in getting companies to settle early. If Lerach hadn't been up to the task, many other lawyers happily would have taken his place. Further, corporate corruption remains a fact of life. A company does neither itself nor the free enterprise system any good by committing acts of malfeasance and hiding them from the public. Such actions are precisely what make the plaintiffs' bar appear as noble white knights. Markets require personal integrity from all participating parties to be efficient. Without integrity, disaster looms, especially with pay structures in place that encourage deception. University of Virginia business professor Jared Harris recently concluded that executive compensation packages heavily geared toward stock options and other performance incentives have been a major factor behind corporate crime.
In the wake of his guilty plea, Lerach has been trying to justify his take-no-prisoners litigating style. In a guest article for the November 11 Washington Post, "Loser CEOs, Raking It In," he complains that he is "being held accountable for overzealously pursuing...corporate scam artists" like Bernard Ebbers (WorldCom) and Dennis Koslowski (Tyco). Lerach in particular cited recently deposed Stan O'Neal of Merrill Lynch and Charles Prince of Citigroup, each of whom cost their companies billions by investing heavily in subprime mortgage loans, yet collected golden parachutes. Such practices, he emphasized, are now "a way of life in American executive suites."
Now Lerach is right to denounce corporate boards that reward failure. The respective roughly $160 million and $100 million in stock, stock options and other benefits that O'Neal and Prince are getting as part of their termination packages (quite apart from their inflated salaries) are preposterous. But in absence of evidence of force or deception, a company's policies ought to be its own business. If a firm has to take its lumps for bad business decisions, it should do so at the hands of investors, great and small, who decide how to arrange their asset portfolios. Corporate governance can't be independent when faced with the constant threat of a massive class-action lawsuit.
The ultimate problem is that William Lerach decided to be Robbin' Hood as well as Robin Hood. He, too, got greedy. As much as the money, he was enticed by the prospect of a Democrat-led moral transformation of America. For him, a higher end justified underhanded means. A sharp stock price decline anywhere signaled payback time on behalf of his father. Lerach's downfall is tragic in the Greek sense, but it is nothing to mourn.