FORTUNE, September 4, 2000
The King of Pain Is Hurting
By: Peter Elkind Reporter Associate(s): Doris Burke
Loathed because he's so mean, feared because he's so powerful, Bill Lerach is the lawyer everyone in Silicon Valley hates. His enemies think payback is at hand. They may be right.
In a huge office with a marble-topped bar and a perfect view of San Diego Harbor, paunchy, red-faced, Brillo-topped Bill Lerach--wearing a pitted-out green shirt, khaki slacks, white socks, and Top-Siders--is executing the sort of smash-mouth legal strategy that makes him the lawyer corporate America loves to hate. A partner rushes into his office with word of some recalcitrant adversary. "I'd haul his ass into court and smack him," Lerach advises. A young attorney stops by with a stock chart he plans to use as evidence in a shareholder suit Lerach is bringing. "Cut it off here," instructs Lerach, moving the line demarking the onset of the alleged corporate malfeasance. A friendly colleague buzzes through with an update on a thorny matter. "If they don't put up a shitload of money," Lerach declares, "the lids on the silos are coming off!"
Lerach, 54, is king of the shareholder class-action suit--the kind of suit that is routinely filed when a company announces bad news and its stock plunges. His domain lies literally at his feet, in dozens of bulging files sprawled across the carpeted floor, each of which contains the presumptive dirt on a public company he is suing--or is about to sue--for "securities fraud." Lerach's past triumphs are evident too. A 15-foot row of Lucite "tombstones," stacked three high atop a bank of cabinets, memorializes the billions in out-of-court settlements that his 160-lawyer firm--New York City-based Milberg Weiss Bershad Hynes & Lerach--has extracted from U.S. corporations over the years. Lerach's personal take since 1989 exceeds $100 million.
Lerach is the lawyer who single-handedly turned shareholder litigation into a lucrative volume business. "Milberg West"--the firm's California outpost and Lerach's personal fiefdom--operates as a kind of litigation factory, churning out lawsuits almost as efficiently as Intel churns out microprocessors. According to a 1997 study, Milberg had gone after 59% of all companies sued for securities fraud nationwide during the previous year; in California the Milberg share rose to a staggering 83%.
Many of the cases, of course, involve Silicon Valley companies, which, with their inherently volatile stocks, have been Lerach's bread and butter. Not surprisingly, Valley executives tend to view him as "lower than pond scum"--as Cypress Semiconductor CEO T.J. Rodgers once memorably put it. Yet time and again, those same CEOs have chosen to settle Lerach's suits for millions. They do this because of a business calculation he has shrewdly exploited: that it's cheaper and safer to pay him off than go to trial. John Doerr, Silicon Valley's most prominent venture capitalist, has called Lerach a "cunning economic terrorist."
Despite having some of the most powerful people in American business as his sworn enemies, Lerach long appeared unstoppable; his grip over shareholder litigation was too powerful, his "business model" too ruthlessly efficient. But now, for the first time, the King of Pain seems vulnerable. Last year a Chicago jury hit Milberg Weiss with a $45 million judgment for abuse of the legal process, after a five-week trial that focused squarely on Lerach's reputation for vindictiveness. (Fearing additional punitive damages, Milberg Weiss settled the case for $50 million.) A federal law passed in 1995--specifically targeting Lerach's style of litigation--has begun to take its toll. Cases that once went to Milberg Weiss as a matter of course are now as likely to go to Lerach's competitors. Plaintiffs firms that were long under his thumb are in open revolt. The Lerach machine is starting to break apart.
What's more, FORTUNE has learned, Lerach's legal tactics--as well as some dubious financial dealings--prompted a challenge within Milberg Weiss. Lerach's former top lieutenant, California managing partner Alan Schulman, accused Lerach of awarding excessive fees to other law firms as a quid pro quo for contributing to his pet political causes. There are also serious questions, FORTUNE has learned, about the propriety of Lerach's financial arrangements with the firm's long-standing "damages expert." Indeed, in the wake of these questions, members of Milberg's executive committee secretly debated ousting Lerach, a step that could have destroyed the firm.
Instead, it was Schulman who departed; he recently told FORTUNE he considers Lerach "reckless," "vindictive," and "dangerous." "I did not want to be in a law partnership with him anymore," Schulman added. "That's why I left the firm."
Lerach dismisses such charges as just another effort by his powerful enemies to hurt him. "My view is, your article is coming about because the business community went to FORTUNE and got this written.... I really believe that," he says. "Once you become a public figure, you're just fair game." He shrugs nonchalantly. "I don't care what people say about me," he adds. "I care about what I think about myself."
Bill Lerach is explaining what he needs to file one of his infamous shareholder class-action lawsuits: "Stock drops. Insiders trading. A revelation of bad news. You're not going to have that and come up dry. It's not going to happen." Plainly, it doesn't take much--which is one reason Lerach is so reviled in corporate America. As the nation's CEOs see it, Lerach routinely files suit without any evidence that fraud has been committed. What's surprising is that Lerach is so willing to admit it. His rationale is that his long experience has given him an unerring instinct for corporate wrongdoing. "It's almost like having X-ray vision," he boasts. "I'm almost always right. I'm seldom wrong." Then, once Lerach is allowed to begin discovery--and search for damning internal documents--well, at that point, the game is pretty much over. "You can always find a document to incriminate them," he says.
To be sure, there are plenty of lawyers who sue at the drop of a hat. But none are as loathed--or feared--as Lerach, either inside or outside his profession. What makes him loathed is that he is mean: a belligerent, vengeful, foul-mouthed bully. What makes him feared is that he is powerful. Many of those who spoke to FORTUNE about Lerach describe him in Godfather-like terms, likening him to a ruthless don, willing to do whatever it takes to protect and extend his turf. To that end, Lerach developed an unprecedented system in which other plaintiffs firms were expected to pay tribute to Milberg Weiss to do business in California. This system, which allowed Lerach to dominate shareholder litigation there, is what is now threatened.
Lerach began his career, strangely enough, working the other side of the fence. In college he was a rock-ribbed Republican, even leading a rally in support of the Vietnam war. After graduating from the University of Pittsburgh Law School, he joined Reed Smith Shaw & McClay, a local white-shoe firm, where he did work for such clients as Mellon Bank and U.S. Steel. But in 1976, Lerach was recruited to the plaintiffs bar by Mel Weiss, the co-founder of Milberg Weiss, one of the earliest firms to focus on securities work. At the time shareholder litigation was a backwater, its practitioners viewed as bottom feeders. Because these firms were invariably small and underfunded--and dependent on contingency fees--they had a hard time taking on big companies. Few cases ever went to trial; the high-powered legal teams employed by corporations simply outlasted the plaintiffs. Weiss thought that if he could attract some good defense lawyers to his side, he could level the playing field and gain a measure of status, which he craved. Lerach agreed to join the firm but insisted on opening an office in San Diego, where he wanted to relocate--even though there was very little shareholder litigation in California.
From the start Lerach displayed all the traits for which he is now so well known. He was, first of all, a very good lawyer. A brilliant legal strategist and a cunning tactician, Lerach expanded shareholder litigation by dreaming up new types of claims and naming new kinds of defendants--not just companies, but their accountants, bankers, lawyers, and PR firms. Over time he honed the perfect boilerplate securities complaint--virtually guaranteed to survive early-dismissal motions by the defense. He worked like a dog; even today, he routinely drafts complaints into the wee hours of the morning. And he was tenacious: If a federal case was dismissed, he'd appeal. Or refile in state court. Or wait for another opportunity to sue the company. "It's like the Dracula movies," says David Lisi, an attorney at the Palo Alto firm of Fenwick & West, who has squared off against Lerach. "You think you've put a stake in his heart, and he's back again."
But Lerach was also a bully. He would scream at defendants in settlement meetings, making vituperative threats to bankrupt their company and go after their personal assets. "I'm going to take away your fucking condo in Maui!" he told one during a typical tantrum. "I'm going to take away every penny you own!" On another occasion he interrupted a defense lawyer trying to make the case for his clients' innocence. "This is just so irritating!" Lerach barked. "I don't care who your clients are. I'm going to make their bones bleach in the desert."
He respected no boundaries--not even those imposed by a judge. In an early case against a company called H&H Oil Tool, after his original plaintiff had been disqualified, Lerach defied a judge's order and used a company-supplied shareholder list to find a new one. The judge was so furious that he removed Milberg from the case and made it pay $53,687 in attorneys' fees for the defense.
He was extraordinarily vindictive. In a 1983 episode, when an attorney moved to block a Milberg suit, Lerach told him he'd see to it that his firm never practiced in the securities field again. He later sued the firm twice in separate cases. Years later Seagate Technology CEO Al Shugart, after being sued by Lerach, launched a public campaign against "abusive litigation." Lerach sent him a business card with the message, "Dear Al: More is coming." Eleven days after settling the first case, Lerach sued Seagate again. (In all, Lerach sued Seagate four times.) Most defense attorneys contacted by FORTUNE declined to speak on the record--precisely because they feared he would find some way to retaliate. "There is a difference between him wanting to beat you, and him wanting to kill you and piss on your grave," explained one California defense attorney (who, needless to say, declined to be named).
Finally, Lerach was fearless. Unlike most lawyers who filed securities cases, he was absolutely willing to go all the way to trial--where Milberg Weiss proved itself capable of winning big. In 1991, for instance, Milberg took two Apple Computer executives to trial and emerged with a stunning $100 million jury verdict. Though the award was overturned by the judge--and the case ultimately settled for "only" $16 million--the episode had a dramatic effect. Recalls Xilinx general counsel Tom Lavelle, who was then at Intel: "It put a huge scare into Silicon Valley." After that, companies that might have thought about fighting Lerach were suddenly eager to settle.
To truly comprehend why Bill Lerach is in trouble today, you have to understand how his rise was founded on control and intimidation. Which brings us to a ritual known as the "whack-up." This was the key to Lerach's power--the method by which he dominated shareholder litigation in California.
His aim was to ensure that Milberg Weiss was named lead counsel in any suit the firm brought. For class-action lawyers, winning appointment as lead counsel is the Holy Grail. The lead counsel gets the biggest fees, controls the litigation, and even decides how much to pay the other firms in the case. Traditionally, the first lawyer to get to the courthouse, aggrieved plaintiff in tow, got the nod. And indeed, no firm was faster than Milberg, which was known to file complaints within hours of a big drop in a company's stock--hardly enough time, of course, to establish fraud.
Over time, however, Lerach set up what amounted to a patronage system, which assured him a crack at almost every shareholder case filed in California, whether he was first or not. It began when Lerach went to the East Coast lawyers who competed with Milberg's New York office, and told them that if they brought West Coast cases to him, he'd make it worth their while. Since they didn't normally bring such cases, he was, in effect, giving them entree into this new market he was building. The catch was that Lerach wouldn't serve merely as local counsel, like most lawyers brought into a case by an out-of-state firm. Instead he had to be at least co-lead counsel. In practical terms, that meant Lerach ran the show.
Next he set about turning his new collaborators into "captive firms." As these joint cases dragged on for years, Lerach invited the East Coast firms working on them to station a lawyer or two in San Diego permanently--and sublease space in Milberg's offices. At least four firms did just that. This arrangement, too, came with a price: The captive firms couldn't file a West Coast case without cutting Milberg in.
From there he began the process of keeping potential upstarts in line. As Silicon Valley exploded and California's securities practice became more lucrative, a few East Coast firms decided they didn't want to play second fiddle to Milberg. Some tried to sidestep Lerach by joining forces with other California lawyers; a few West Coast firms even tried to expand their securities business without dealing in Lerach.
Invariably, the renegades were treated harshly. Lerach would hijack their cases by getting his allies to file similar complaints--and then back Milberg when it came time for a judge to appoint lead counsel. If Lerach won (and he usually did), the insurgents would not only be shut out of that case but also might get squeezed in some of the hundreds of other suits in which Milberg was calling the shots. (Which is not to say that they wouldn't be Milberg allies sometime in the future. "In the plaintiffs bar," Lerach used to tell Milberg lawyers, "we have no permanent friends, no permanent enemies.") Everyone got the message. Instead of rushing to the courthouse, East Coast lawyers with a hot case called Lerach at home at 5 A.M. to stake their claim with him. Says one prominent defense lawyer: "No one filed a class action on the West Coast without bringing it to Lerach and saying, 'Do you want to be in?' " He almost always did. "Bill would rather have half of every case than only be in half of the cases alone," says a veteran plaintiffs lawyer. "It keeps the monopoly going."
Then came the "whack-up": the ritual in which Lerach settled all accounts once a case came to its profitable conclusion. Lerach would take the overall lawyers' fee approved by the judge--usually 25% to 30% of a settlement--and dole it out among his supplicants. There were always more lawyers involved--four, six, even eight firms--than were needed to staff the case. Some had done nothing more than supply a presentable plaintiff; others had loyally backed Lerach for lead counsel. Those that did the work would submit memos to Milberg detailing the time and money they had put into the case. Ultimately, however, Lerach divided the pie however he wanted--and firms claiming similar hours sometimes got widely disparate fees. Though Lerach was regularly doling out millions of dollars, the subordinate firms were not allowed to know how much anyone else was being paid.
There was another way Lerach controlled litigation: He filed an astounding number of lawsuits. Rounding up plaintiffs was no problem. In addition to lawyers and brokers who brought him plaintiffs, Lerach had a list of shareholders who owned stakes in hundreds of companies and allowed him to attach their names to his complaints--and then stayed out of his way. ("I have the greatest practice of law in the world," Lerach once boasted. "I have no clients.") He also had lawyers on staff whose only job was to draft complaints--and monitor the financial wires, looking for new companies to sue. Like any fast-growing business, Milberg was in constant need of new revenue sources. "We were under enormous pressure to file everything that could conceivably be filed," says a former Milberg lawyer. When one colleague complained that there were no damages in a certain matter, Lerach ordered him to look closer. "Don't tell me there's no case there!" he scolded. And the Lerach lawsuit machine was made complete by John Torkelsen, a damages expert based in Princeton, N.J. Torkelsen's calculations of shareholder losses routinely supported the hundreds of millions of dollars Lerach sought--and he was fabulous in front of a jury should a company decide to fight.
For Silicon Valley companies especially, a number of which Lerach sued repeatedly, dealing with Milberg became predictable--"like paying a toll to cross the Bay Bridge," says San Francisco defense attorney Doug Schwab. They called it "getting Lerached." (Time Warner, FORTUNE's parent, and AOL, its soon-to-be merger partner, have both been sued by Milberg Weiss. Time Warner settled a 1991 suit for $5.5 million, while AOL paid $35 million to settle a 1997 suit.) Invariably there'd be a little tussling, perhaps a year or two of discovery, and then settlement talks would ensue. And if the defendants weren't ready to pony up, Lerach would start bullying them. He had a standard lecture about the stark realities of doing business with Milberg Weiss. "These cases are like shoeboxes in my shoe store, and I've got hundreds of them," he'd explain. "I don't need to settle this case; I'll be glad to go to trial. I'll just take another shoebox off my shelf."
Nine out of ten cases settled--some without any discovery. The companies had insurance that picked up most of the tab. For Milberg the risk of "contingency litigation" was minimized. "It became an incestuous relationship between the plaintiffs and defendants," says a prominent California defense attorney. "It made a lot of lawyers on both sides of the bar--including me--wealthy. But it made you want to take a shower every time you settled one of these cases and left the room."
A pretty good Milberg case might bring a $10 million settlement, with the firm bagging the lion's share of a $3 million fee, plus expenses. "You have enough of those," says a former Milberg partner, "you have a very, very profitable law firm." By the mid-1990s, Milberg had become very profitable indeed. In 1995, for instance, Milberg Weiss made $112 million. It employed around 100 lawyers--an enormous number for a firm that depended on contingency fees--half of whom were in San Diego. The rewards, however, were heavily concentrated at the top, with Lerach and Mel Weiss getting more than $15 million each. The firm's finances were a closely guarded secret, shared only with the executive committee.
It's important to note that Lerach didn't always win. Sometimes his complaints were dismissed, and there were even a few occasions when he voluntarily dropped a suit after being persuaded he had no case. In retrospect, though, there was one loss Lerach suffered that would matter more than all the others put together: the Nucorp Energy case.
The case was tried in 1988. Alleging that a bankruptcy filing by the company was the result of corporate fraud, Lerach filed a $200 million class-action suit, targeting Nucorp, its bankers, investment bankers, accountants--even a big minority shareholder. Although Nucorp's directors settled for $41 million, several of the secondary defendants refused to go along.
Lerach decided to try the case personally, and boasted it would produce the biggest jury award in the history of securities litigation. After a six-month trial the deliberating jurors asked for a calculator, presumably to calculate damages. Lerach insisted that they be provided with one that had space for a nine-figure sum. When the jurors instead found for the defendants, Lerach was stunned.
Both the Wall Street Journal and Barron's credited Lerach's defeat to one man: Daniel Fischel. A conservative lawyer-economist from Chicago, Fischel was a partner in a high-priced corporate consulting firm called Lexecon. As the defense's star expert witness, Fischel convinced the jury that the Nucorp investors' loss was due to a decline in oil prices--not to fraud.
The Nucorp trial had two lasting results. First, Lerach never again tried a case himself. (He hired a former federal prosecutor to try Milberg West cases.) And second, he began a vicious, decade-long feud with Fischel, an adversary who would turn out to be as cunning, resourceful, and relentless as Lerach himself.
At this point, we need to ask a simple, obvious question: How rampant is corporate fraud? To listen to the howls of rage from those who have been Lerach's targets, you'd think it doesn't exist. But that's nonsense. Over the years there have been plenty of shocking examples of companies cooking the books, recording imaginary revenues, even shipping bricks instead of products to inflate profits and hype their stocks. Think back to Cendant, to Waste Management, to McKesson HBOC--or to Informix, the Menlo Park, Calif., software company that got caught inflating profits and paid a $108 million settlement (mostly in stock) in a Milberg-led case. Indeed, the SEC has long championed the role of plaintiffs lawyers in policing corporate behavior.
In interviews, both Lerach and Mel Weiss play this angle to the hilt. "I represent people who have been defrauded," declares Lerach. "I sue companies as often as they deserve to be sued." Adds Weiss: "This is a unique operation we've built here. The victims of America have never been served this well."
To be sure, Milberg Weiss has helped bring some high-profile fraud cases that have recovered huge sums, most notably the $800 million the firm won in litigation involving Michael Milken. But it's ludicrous to suggest that most of the 350 companies Milberg is currently suing are engaged in fraud. And the notion that Lerach-style litigation acts as a deterrent is dubious. Stanford law professor Joseph Grundfest, a former SEC commissioner, goes so far as to describe the current system governing securities fraud as "nuts." As he sees it, class-action settlements amount to nothing more than an unproductive "transfer payment" from current shareholders to past shareholders--with big contingency fees skimmed off the top. "The plaintiffs lawyers are getting a cut of the money that flows from our left pocket to our right pocket," he says. Even in those cases involving genuine wrongdoing, he adds, the individual perpetrators rarely pay anything out of their own pockets, thanks to insurance and indemnification policies. Nor do the shareholders get much--generally no more than 15% of their losses, studies show. "Fraud is wrong," says Grundfest. "It has to be punished. But what we have here is a shell game."
Inevitably, the outcry over Le-rach's tactics moved from Silicon Valley to Washington, D.C. Republicans, responding to lobbying from technology companies and the big accounting firms, included shareholder litigation reform in their 1994 Contract With America. When the GOP won the House of Representatives later that year, California Congressman Christopher Cox, who had written that portion of the Contract, introduced a bill to make it law. The Lerach-style shareholder lawsuit, proclaimed Cox, was "legalized piracy on the high seas of the new economy."
This was an important moment for Lerach; it took him from the courthouse, where he was the undisputed king, to the halls of Congress, where he was hopelessly overmatched. A major donor to the Democratic Party--his contributions over the years have totaled more than $1 million--Lerach decided to lead the fight against the bill himself. It was a big mistake. By making himself so visible, he gave his opponents a very fat target. When Lerach showed up to testify at one subcommittee hearing, Cox likened securities lawyers to Al Capone. His first question: "Mr. Lerach, how much did you make in 1994?" Over the next few months, as the abuses of shareholder litigation were aired in the halls of Congress, Milberg Weiss became Exhibit A. Lerach's own words--such as his infamous claim that "I have no clients"--were used to demonize him.
The Private Securities Litigation Reform Act passed Congress in 1995--with enough Democratic votes to overcome President Clinton's veto. "The way to understand the reform act," says one Silicon Valley securities lawyer, "is that it was a bill of attainder against Bill Lerach. He really pissed off too many people."
The new law did not put Lerach out of business, of course. But it took dead aim at his most controversial practices. For instance, it targets "lawyer-driven litigation" by directing that "lead plaintiff" status--which determines the lead counsel--go not to the plaintiff who files first but to the investor who has suffered the biggest loss. It requires judges to dismiss complaints that lack specific allegations of fraud. It gives limited immunity to the accountants. It bars discovery--where Lerach usually finds his "incriminating documents"--until after the judge has ruled on whether the case should be dismissed. And it gives legal protection to "forward looking" forecasts made by company managements. Thus Lerach can no longer use a CEO's optimism about the future as prima facie evidence of fraud.
It is rare indeed for the U.S. Congress to single out a private citizen and publicly thrash him. It's even rarer when the citizen responds by flipping Congress the bird. But that, in effect, is what Bill Lerach did. Instead of slinking back to San Diego and laying low, he launched an audacious California voter initiative aimed at reclaiming everything he had just lost--and more. It was an act of hubris--and overreaching--exceeding anything he had done before.
Perhaps you remember this initiative. It was called Proposition 211--the "Lerach Initiative"--and it received enormous nationwide publicity as it was being fought in the fall of 1996. Silicon Valley was galvanized as never before; John Doerr personally took charge of the anti-211 campaign. Some $40 million was raised to beat back the initiative, which lost by a margin of almost three to one. A good thing, too: Had it passed, Prop. 211 would have made California state courts Lerach's personal playground. Among other things, it would have lowered the standard for proving fraud in state court, allowed punitive damages for the first time in shareholder suits, and made corporate officers personally liable. And it wasn't just confined to California companies. Under Prop. 211, any company could be sued there--as long as it had one California shareholder.
Lerach raised $12 million in the losing effort. By far the biggest contributor--at a reported $4.8 million--was Milberg Weiss itself. Lerach put up hundreds of thousands more out of his own pocket. John Torkelsen, his damages expert--who was also a major donor to the Democratic Party (he attended one of Clinton's infamous White House coffees)--added $225,000. The rest came from other plaintiffs firms--the ones whose livelihoods depended on Lerach's largesse. Many of them hated what Lerach was doing; they saw Prop. 211 as another of his foolish provocations of Silicon Valley. But what choice did they have?
For years firms that did business with Lerach had kicked in money to his political causes. ("There was definitely an understanding," says a former Milberg partner, "that if you participated with the firm in cases, you were expected to contribute when Bill called upon you.") But this was on a different scale. In addition to "requesting" contributions, Lerach masterminded a plan to impose a 5% "tithe" on all California fees Milberg West distributed in the whack-up.
Even within Milberg Weiss, Lerach's Prop. 211 campaign--and his heavy-handed fundraising--did not go over well. His biggest critic was Alan Schulman, the firm's California managing partner, who also served on Milberg Weiss' executive committee. (Lerach and Weiss were its co-chairs.) Schulman had arrived at Milberg in 1983, and made around $5 million a year. He and Lerach were close; Lerach even served as best man at Schulman's wedding. Schulman was hardworking, smart, and tough; those who saw the firm in Godfather-like terms cast Schulman as Lerach's consigliere.
Yet Schulman had always been uncomfortable with the way Lerach mixed the firm's business with his political fundraising. And with the Prop. 211 campaign, he felt Lerach had gone too far. In addition to his belief that Lerach's strong-arm tactics were inappropriate, he had a second, more serious concern. Lerach, he believed, was using money that rightfully belonged to the partners to overpay firms in the whack-up--as a quid pro quo for their contributions to 211. Certainly Schulman was in a position to know: He had access to Milberg West's books, and was the person most familiar with how Lerach operated.
Lerach denies that he overpaid in exchange for political donations. But he acknowledged to FORTUNE that he has always been willing to give "something extra" out of Milberg's share to firms that he has "a warm working relationship with." He adds, "It's part of building relationships. How we choose to divide our fee is our business."
When Schulman took his concerns to the executive committee, however, the group, over Lerach's vehement objections, cut off the firm's funding of Prop. 211. (Weiss and Lerach say this was only because by then the initiative was so obviously doomed.)
Schulman was also becoming increasingly agitated about the financial relationship between Lerach and Milberg Weiss' damages expert, John Torkelsen. Over more than 20 years, Torkelsen's firm, Princeton Venture Research, not only had made tens of millions working for Milberg--by far its biggest client--but also had become the damages expert of choice for the entire plaintiffs side of the securities bar.
Theoretically, expert witnesses are supposed to be objective. In reality, most experts tend to favor one side over the other. In the case of Torkelsen, his assiduous courting of plaintiffs lawyers was legendary. He sent thousand-dollar gift baskets as baby presents, and he invited his many friends in the plaintiffs bar to an annual black-tie Christmas party that was mind-boggling in its extravagance. At one, guests arriving in Torkelsen-provided stretch limos were heralded by buglers and greeted by costumed Disney characters. Entertainment was invariably provided by a big-name act: Little Richard one year, Aretha Franklin another.
Lerach and Torkelsen were friends. They vacationed together in the British Virgin Islands. Torkelsen and his 50-person staff did so much work for Milberg West that Princeton Venture Research opened a San Diego office. Torkelsen, of course, knew exactly what Lerach expected when he brought him into a case: a study that showed that a huge damage award was called for. He consistently delivered.
He also consistently delivered outsized bills. He'd submit a bill for $150,000--an appropriate fee for a lengthy case--for a suit that had settled quickly and should have cost only $40,000. Schulman, who had been given checkbook authority at Milberg West, would refuse to pay, triggering ugly confrontations with Lerach, who viewed such matters as his personal prerogative.
There was a second Torkelsen issue: Milberg was effectively paying him on a contingency-fee basis--a big ethical no-no because expert witnesses are not supposed to have a financial stake in litigation. The California bar association code specifically states that lawyers should not pay witnesses "contingent upon the content of the witness' testimony or the outcome of the case."
Yet two former Milberg partners say it was widely known that the firm paid Torkelsen on contingency, and a partner at another plaintiffs firm that used Princeton Venture says Torkelsen told him flatly that "he did cases on a contingency basis for Lerach." Indeed, in a 1998 sworn deposition Torkelsen admitted what amounts to working on contingency even as he was denying it. Under intense questioning, he described an arrangement in which he would defer payment until Milberg Weiss had gotten its money--often a matter of years--and said that on "several occasions" when the lawyers had recovered nothing, he'd never been paid.
In an interview Torkelsen adamantly denied that he ever worked on a contingency basis for Milberg. "They pay us as we go," he told FORTUNE. "That's important for our own integrity." Lerach also denied it. "They were paid on a case-by-case basis," he said. "The basic compensation arrangement with John was that he would always get paid--win, lose, or draw."
Mel Weiss, however, acknowledges that Torkelsen did work for Milberg on a contingency basis in many cases--but defends the arrangement by explaining that the firm always wrote him a check before he had to be deposed or take the stand. This, of course, would allow Torkelsen to testify truthfully that he'd been paid. Insists Weiss: "There's nothing wrong with hiring an expert on contingency until that person takes the stand. When he takes the stand, he has to be fully paid."
In the 1998 deposition Torkelsen faced another serious allegation: Los Angeles attorney Marshall Grossman accused him of charging Milberg extra in cases with big recoveries to make up for getting paid nothing in cases that came up dry. This would be highly improper; it would mean that Lerach's clients in one class action were getting hit up to pay Torkelsen for work he'd done for a different set of clients. Again, FORTUNE spoke to a well-placed source who confirms the charge. "John told me, 'If I didn't get paid in one case, I simply tacked it onto another one, and Milberg said they would pay me,' " the source said. "John was not on a pay-as-you-go. It was always on a success basis." Both in the deposition and to FORTUNE, Torkelsen denied receiving such makeup payments. And Lerach denies authorizing them.
In late 1997 the New York office of Milberg Weiss received a troubling inquiry from Torkelsen's bank in New Jersey. It turned out that the damages expert, who lives a conspicuously opulent lifestyle, was deeply in debt. He owed almost $6 million to the IRS, which had filed tax liens against him, and had another $5 million in troubled bank loans. The reason the bank was calling Milberg was that Torkelsen had pledged $10 million in Milberg receivables against his $5 million debt. Why hadn't Torkelsen been paid--for more than 50 cases, some of which had been closed for years? Because his financial arrangement with Lerach was obviously not "pay-as-you-go." Not that the bank cared; its only issue was whether Milberg was good for the money.
The New York partners were stunned--both at the news that Torkelsen was in such financial trouble and at the astronomical sum he claimed Milberg owed him. But as Mel Weiss and David Bershad--another of the firm's name partners--looked into the matter further, they were in for another shock: According to the bank, whenever Torkelsen had assigned a Milberg receivable as collateral, Milberg West confirmed that it had been billed for the amount Torkelsen was claiming. Torkelsen says now that Lerach personally approved his invoices.
Weiss and Bershad summoned the damages expert, who confirmed his financial woes. Weiss issued firmwide orders to cut him off. Deprived of his biggest source of revenue, Torkelsen laid off almost his entire staff just weeks before Christmas--though he still threw his annual black-tie bash. And according to a lawsuit filed by American Express, Torkelsen and his wife ran up more than $1 million in delinquent credit card charges. That amount, American Express alleged, included hundreds of thousands of dollars that Torkelsen fraudulently charged at his wife's antiques store to obtain cash. (The suit has since been settled. Torkelsen, who says he has repaid the credit card debt, insists that American Express falsely accused him of fraud "to force a settlement.")
Ultimately, Milberg Weiss orchestrated a bank refinancing of Torkelsen's debt; two senior partners signed documents at the loan closing. Milberg paid just $2.5 million to retire Torkelsen's $10 million in receivables. For his part, Torkelsen insists there was nothing bogus or inflated about his bills, but that he accepted a severe haircut to put the episode behind him. Torkelsen has now resurfaced in the expert business, opening a new firm, Equity Valuation Advisors. In fact, the damages expert was recently spotted accompanying Lerach to a settlement meeting in a class-action suit.
What does Lerach say about Torkelsen's problems? He shrugs them off: "He's paying his taxes, and he settled the case. No different than what a lot of people do in litigation." Lerach denies approving inflated receivables.
After the Torkelsen debacle, everything came to a head. Schulman and Lerach, once close allies, were barely on speaking terms. Lerach's petty vindictiveness and political shenanigans--they had finally become too much for Schulman. In the fall of 1998 he took his concerns to the firm's co-founder. "He's going to destroy everything you've built," Schulman told Weiss. "He's going to take us all down with him." Then he issued an ultimatum: "Either he goes or I go."
Even though Lerach had made them all millions, the senior partners on the executive committee seriously weighed Schulman's demand. Two of them, with Weiss' knowledge, even consulted an outside attorney to explore the process required to oust Lerach. Ultimately, it was Weiss' call. Such a move would surely trigger a bloody war, and in the end, Weiss didn't have the stomach for it. Late one night in December 1998, as Schulman pressed Weiss in his room at a Texas hotel--where the executive committee was assembling to decide the year's compensation--he got the final word. "I can't do it," Weiss told him. "I'm not breaking up the firm." (When asked by FORTUNE whether the executive committee had considered removing Lerach, Weiss replied, "I won't discuss with you whether this firm was ever in jeopardy or in danger of being split apart.")
Schulman left Milberg last fall. This past January he opened a San Diego office for a Milberg rival, New York-based Bernstein Litowitz Berger & Grossmann. "Milberg Weiss was a great law firm," he said in a statement to FORTUNE. "I still have tremendous respect for Mel Weiss and David Bershad and many other lawyers there, but Bill Lerach is not one of them. Bill's reckless and vindictive behavior has done significant damage to the reputation of the firm."
Just months after Schulman's attempted coup, his prophecy came to pass. Catastrophe hit Milberg Weiss--and it was brought about entirely by Lerach's vindictive behavior. Since the late 1980s, Lerach had been trying to put his old archenemy from the Nucorp case, Daniel Fischel, out of business. Instead, Fischel turned the tables--and came a lot closer to succeeding than Lerach.
Fischel, now dean of the University of Chicago Law School, spent much of his career as an expert for hire, just like Torkelsen--but for the defense. His career had been greatly enhanced by his victory over Lerach in Nucorp. A free-market ideologue, Fischel commanded $390 an hour, and he worked enthusiastically on behalf of many of the more infamous figures of the 1980s, including Michael Milken. Another Fischel client was Charles Keating, head of the failed Lincoln Savings & Loan, who went to prison for fraud.
After Lincoln was seized by the feds in 1989, in the biggest thrift failure ever, Milberg became co-lead counsel in a $1.2 billion class-action racketeering suit. During discovery, plaintiffs lawyers found several reports Fischel had written for Keating claiming that Lincoln was "sound." Lerach decided that this was just what he needed to nail Fischel--and added his firm, Lexecon, as a racketeering defendant in the Lincoln suit. When other lawyers asked Lerach why he was bothering with Fischel, whose involvement seemed peripheral at best, Lerach explained, "I want to put the little fucker out of business." Says an attorney who worked on the case: "To Lerach, Dan Fischel was like the whale was to Captain Ahab."
Though Lexecon was dropped from the case in 1992--after paying the plaintiffs the $716,960 fee it had earned from Keating--Milberg aggressively wielded its complaint as a weapon, trotting it out, for instance, in an unsuccessful effort to disqualify Fischel in the 1991 Apple case. In chambers a Milberg attorney told the judge that Fischel was "a crook" who "helped Lincoln Savings carry out one of the largest frauds in the country."
Fischel was furious at the way his name was being besmirched. But unlike the Silicon Valley executives, he refused to just pay Lerach and go away. In 1992, Lexecon sued Milberg for abuse of process (among other things)--and eventually asked for $209 million in damages. Over the next six years, despite a string of legal setbacks in various courts, Fischel pursued the case with a relentlessness that can only be described as Lerach-like. In 1998 he finally caught a break: The Supreme Court revived the case and sent it to Chicago--Fischel's home turf. The trial began in March 1999.
And what a trial it was! Fischel's lawyers vividly cast Milberg as a gang of thugs, seeking to kneecap an enemy who threatened its franchise. A string of characteristically aggressive Milberg behaviors were recounted to make the point. There was the episode when Fischel introduced himself to Mel Weiss during a break in a big court proceeding, and Weiss told him, "I'm going to destroy you." There was the 1992 missive sent by a Milberg lawyer noting that the firm had located material that could help portray Fischel "as the reprehensible slob that he is"--and inviting the recipient to provide "additional dirt." There was even testimony about Milberg lawyers' contacting Lexecon clients, suggesting that they drop Fischel because he was tainted goods. And on and on.
You could argue, as Milberg lawyers do today, that the trial was a classic example of how unfair litigation can be: how you can get a judge who won't allow the jury to hear your evidence but gives free rein to the other side; how statements can be taken out of context; how benign documents can appear damning; how hard-nosed business practices can be made to look vicious. Or you could argue that the episode was an example of chickens coming home to roost. Milberg was finally getting a taste of what it had doled out all those years.
The jury, for its part, had no doubt: It returned a $45 million verdict for Lexecon after deliberating for less than a day. When the judge announced that testimony on punitive damages would begin the next morning, Milberg's senior partners realized the firm was in jeopardy. Because they would have to post a bond covering the entire damage award before they could appeal, the addition of hefty punitives might bankrupt the firm. On the spot, they decided to accept Fischel's settlement terms: $50 million, paid within 24 hours. (As it turned out, Milberg may have miscalculated. According to The National Law Journal, the jury had already decided that no punitive damages were in order.)
When FORTUNE asked Lerach what lessons he had learned in the Lexecon affair, he was unrepentant. "Don't get transferred to Chicago," he said. "That's what I learned."
As for Fischel, who declined to talk to FORTUNE for this story, he recently sent a thank-you note to a Milberg Weiss lawyer who had made a donation to the University of Chicago Law School. "I'd love to...discuss how we can send more of our students to Milberg Weiss," Fischel wrote. Apparently Lerach isn't the only one with a philosophy of "no permanent friends, no permanent enemies."
If you ask Bill Lerach today how his firm is doing, he'll say, unenthusiastically, "Our business is okay. Doing all right." In fact, the King of Pain is hurting. The torrent of bad publicity from the Lexecon suit is only part of Lerach's problem. Profits in 1998, it was revealed during the Lexecon trial, were $91 million, nearly 20% less than in 1995. Two other senior lawyers, in addition to Schulman, have left the partnership--as have a raft of midlevel partners. Emboldened competitors, such as Bernstein Litowitz, where Schulman now works, have been winning control of big cases--while emboldened companies such as 3Com have been choosing to fight Milberg in court (see box). And judges are tossing out far more securities complaints than before.
The real issue for Lerach is that the PSLRA, the 1995 congressional reform act, has changed the rules of securities litigation, and Milberg Weiss has been slow to adapt. For instance, the "lead plaintiff" provision--which handed control of the case to the investor with the biggest loss--gave a huge advantage to law firms with big institutional clients, particularly public pension funds. Milberg is anathema to most such clients. Meanwhile, Bernstein Litowitz is representing, among others, the pension funds for the states of New York, Louisiana, and California. In the high-profile Cendant case--the largest securities-fraud recovery ever, with a $3.2 billion settlement--Milberg was shut out. Bernstein Litowitz shared the role of lead counsel with the Philadelphia firm of Barrack Rodos & Bacine--a longtime "captive firm" that recently moved its California lawyers out of their subleased space at Milberg West.
At first Lerach tried to get around the law by aggregating hundreds of individual plaintiffs and arguing that he had assembled the "entity" with the biggest loss. After a few years courts stopped buying that argument. He has since resorted to tactics that look, well, a little desperate. In the ongoing securities-fraud case against Waste Management--likely to also be huge--he used private detectives to go after a competing firm called Weiss & Yourman, a past Milberg ally. According to a sworn affidavit filed by a Weiss & Yourman partner, Mel Weiss himself warned that "blood will flow" if the firm didn't "back off" its bid for lead counsel. (Mel Weiss denies making the statement.) In the end, neither firm won out.
On two occasions, to get a foothold in one case, Lerach attacked the few big institutional clients that Milberg's New York office had been able to attract in other cases. Lerach has also taken actions that have prompted pointed judicial rebukes. In one instance a judge labeled Milberg's efforts to solicit clients "misleading if not intentionally deceptive"; in another, a federal judge called Milberg's conduct "outrageous," and denounced its tactics as "precisely the sort of lawyer-driven machinations that the PSLRA was designed to prevent." (Weiss calls the judge's comments "out of line.")
Perhaps most damaging of all, last year the Ninth Circuit Court of Appeals sustained a lower-court decision to throw out a Milberg case against Silicon Graphics. The lower court's grounds? Milberg hadn't shown that company executives had acted with "deliberate recklessness." Thanks to this new, tougher interpretation of the reform act, securities suits in California have been getting dismissed in record numbers.
Securities cases are now harder to bring, slower to settle, and more difficult to win. Lerach's tried-and-true techniques don't work the way they once did. In response to these new market conditions, Milberg Weiss has been trying to diversify. It has jumped into the antitrust arena--suing Microsoft, for example--and won some big recoveries against life insurance companies.
On the East Coast, Milberg Weiss has become a respected member of the legal community, and Mel Weiss, at 65, has the status he always craved. He is widely acknowledged as the dean of the class-action securities bar, and travels the world in a private jet. He has garnered praise for his part in negotiating a billion-dollar settlement for survivors of the Nazi Holocaust. Weiss was even retained by IBM--to help defend it in a class-action securities suit!
On the West Coast, Lerach remains a pariah. A few years ago his third wife, Star, generously agreed to host a fundraiser for cerebral palsy at the Lerachs' home. But when word got out about the arrangements, many of the group's members announced that they would boycott the event if it were not moved. Even to benefit charity, they would have nothing whatsoever to do with Bill Lerach.
REPORTER ASSOCIATE Doris Burke
Enough, Already! After being sued nine times by Milberg Weiss, 3Com decides to fight back.
Since 1989, Santa Clara networker 3Com has been named in nine lawsuits by Milberg Weiss. With one case now approaching trial, 3Com has decided to stand and fight, hiring Uber-litigator David Boies to take on Lerach.
Milberg's nonstop litigation against 3Com is evidence of either (a) a deeply corrupt company or (b) what's wrong with class-action attorneys. For Lerach, the answer is obvious: "3Com is a company that has gotten itself in trouble, for whatever reason, on more than one occasion. The cases that are pending against them are extremely strong, where there is massive insider selling."
3Com, of course, sees it differently. General counsel Mark Michael insists that 3Com has done nothing more sinister than make some strategic mistakes in an industry full of tough competitors and volatile stocks. Yet its 2000 bill for defending Milberg suits will top $5 million. Says Michael: "If you look at the amount of money involved--particularly given the dubious beneficiaries--it doesn't seem to be socially constructive." Here's a look at one company's on-going struggles with Milberg Weiss.
1. In re 3Com (1989): Stock drops, Milberg sues. Case settles four years later for $9.85 million.Silly Suits When Bill Lerach is on the prowl for lawsuits, even Pikachu is fair game.
2. Frimmer v. Benhamou (1993): Milberg sues after 3Com misses quarterly earnings. 3Com considers suit so frivolous, it voluntarily gives Milberg a box of internal documents. Case dropped.
3. Manaras v. Madge Networks (1993): 3Com is named co-defendant in case involving a stake in a startup. Milberg accuses 3Com of dumping Madge shares on inside information before a big stock drop. Case dismissed.
4. In re U.S. Robotics Shareholders (1997): Derivative suit filed on behalf of modem maker's investors; claims they were shortchanged in acquisition by 3Com. Settles for $500,000, all of which goes to lawyers. Plaintiffs' reward? A copy of U.S. Robotics' latest 10-Q.
5. Hirsch v. 3Com (1997): State suit triggered by stock drop, earnings shortfall, after company slashed prices to match competition. Trial looming, maybe by year-end. Boies on deck. Snickers Lerach: "We'll see if David Boies comes to California to try a securities case. He's going to get beat if he does."
6-7. In re 3Com (1997): Federal suit alleges accounting, disclosure, and inside-trading abuses involving U.S. Robotics merger. Additional state suit on hold pending federal outcome.
8. Euredjian v. 3Com (1998): Federal case filed one day before deadline, with help from evidence gathered in companion state case (No. 5). By May 2000, Milberg has done little discovery. With trial set for fall, Lerach drops the suit.
9. Gaylinn v. 3Com (1999): Third Lerach stock-drop suit pending in federal court. Overlapping filing infuriates co-counsel in 1997 federal suit (No. 6), who unsuccessfully moves to remove Milberg. Case dismissed twice; Lerach has refiled again. "I don't know what we do to deserve it," says 3Com's Michael. "I'm convinced that if Bill Lerach were general counsel of a public company, Bill Lerach the plaintiffs lawyer would sue him. Even Bill Le-rach could not avoid Bill Lerach."
Silicon Valley CEOs think the cases Bill Lerach files against them are frivolous. They don't know the half of it. Here's a look at some Lerach legal moves that are really frivolous.--Sought class-action status on behalf of Milli Vanilli fans on grounds that they were defrauded because the pop group lip-synced its songs. Though fans got a $3 rebate for each Vanilli CD they'd bought, and $2.50 for each concert stub, Milberg got shut out."In the plaintiffs bar," Lerach was known to say, "we have no permanent friends, no permanent enemies."
--Sued Mike Tyson and boxing promoter Don King for depriving fans of a fair heavyweight title bout after Tyson bit off a piece of Evander Holyfield's ear. Case dropped.
--Sued souvenir vendors at Nascar Winston Cup stock-car races for price fixing. Under the proposed settlement, Nascar fans will get a few bucks' reimbursement or discount coupons good for the purchase of more souvenirs--after producing receipts, proof of attendance, or sworn affidavits. The lawyers are asking for up to $3.4 million.
--Slapped a racketeering claim on 4Kids Entertainment, the licensor of Pokemon cards, alleging that it was operating an illegal gambling enterprise. The suit sought class-action status for parents of boys between ages 6 and 9. Oops! 4Kids had been a Milberg East corporate client for years. Milberg quickly dropped the suit, but not before 4Kids fired the firm. (Coincidentally, 4Kids leads our list of America's fastest-growing companies in this issue.)
--Filed a class-action suit against the manufacturer of Citrus Hill Fresh Choice orange juice for misleadingly labeling it "fresh." Under pressure from the feds, the company had already relabeled the juice. But Lerach announced he would go after "many, many millions" in ill-gotten profits, with the money to be distributed to consumers or given to charity. Instead, the judge refused to certify the class after Lerach's plaintiff testified that he never actually thought the juice was fresh.
In Silicon Valley, dealing with Lerach's lawsuits was "like paying a toll to cross the Bay Bridge."
In serious financial trouble, Torkelsen told his bank that Milberg Weiss owed him $10 million.
"I can't do it," Weiss finally said, as Schulman pressed him to oust Lerach. "I'm not breaking up the firm."