Bloomberg News

Convicted King of Class Actions Builds Aviary, Regrets Nothing

October 12, 2011

Oct. 12 (Bloomberg) -- Bill Lerach, the convicted felon once labeled the lawyer who brought corporate America to its knees, was giving a tour of his six-acre estate when he noticed pots of bamboo lined up at the end of the driveway.

Not far from the tennis court at his mansion north of San Diego, the disbarred multimillionaire attorney who pioneered securities class-action suits was building an exotic-bird aviary for toucans, hornbills and parrots. The bamboo would be planted to hide poles holding up the enclosure’s net.

“Boy, that stuff is bigger than I thought,” he said as he inspected the bamboo. “That’s good.”

These days, most things are good for the 65-year-old Lerach, who pleaded guilty in 2007 to a $251 million client- kickback scheme.

Having left prison 19 months ago, he’s in a retirement many might envy. On most days, he spends hours tending the boysenberry bushes, blueberries, fruit trees and vegetable garden spread among the lush greenery surrounding his $24 million Italianate home. The house is perched 250 feet above the Pacific Ocean.

Lerach is best known for leading investor litigation that achieved a record $7.2 billion settlement with alleged enablers of Enron Corp.’s historic 2001 collapse, the biggest bankruptcy ever when it was filed. A decade later, he gives an occasional speech, hosts fundraisers at his La Jolla home, guides art students through his museum-quality collection of tribal art, reads and travels. Since his release, he has taken a six-week European vacation, gone fly-fishing in Alaska and hiked up Mount Kilimanjaro on a three-week trip to Africa.

Term of Isolation

While behind bars, Lerach didn’t suffer much, he said, except for a stint in “the hole” for offering a gift to a guard that was interpreted as a bribe.

He did some sweeping as his official prison job, while sharing magazines as a loose sort of currency, a favor inmates returned by doing chores such as making his bed. A former Hells Angels motorcycle gang leader served as an unofficial guardian during much of his prison term, he said.

By the time he got out, he was barred from the profession to which he had devoted his life. Still, he said, he has no regrets for the path he took that put him behind bars.

“I wouldn’t change anything I did,” he said. “I’m proud of my life and what we achieved for people.”

Lerach was feared by executives, accountants and bankers because of the securities fraud settlements he was able to extract. In addition to Enron, his firms won multibillion- and multimillion-dollar settlements from firms including Cendant Corp., Qwest Communications International Inc. and Dynegy Inc.

Targeted by Congress

His work, and that of his partner Melvyn Weiss, helped provoke Congress to pass the Private Litigation Securities Reform Act of 1995 to rein them in.

Republican staffers and some reporters called it the “get Lerach act,” according to the 2010 book “Circle of Greed: The Spectacular Rise and Fall of the Lawyer Who Brought Corporate America to Its Knees,” by journalists Patrick Dillon and Carl M. Cannon.

Their law firm, Milberg, Weiss, Bershad, Hynes & Lerach LLP, dominated class-action suits by investors claiming they were defrauded or misled about the value of a company’s shares. The firm is now called Milberg LLP.

In the Enron case, Lerach sued lenders as well as the company, alleging that banks helped executives manipulate the company’s books to hide debt and inflate earnings.

Bicoastal Firm

Weiss headed the law firm’s main office in New York. Lerach built the West Coast outpost in San Diego before striking out on his own in 2004 to start Lerach Coughlin Stoia and Geller LLP. It’s now Robbins Geller Rudman & Dowd LLP.

Lawyers from law firms that included Weiss and Lerach were among counsel in 43 percent of the 755 securities class action settlements from 1995 to 2005, according to the U.S. Chamber of Commerce. The firm closest to them was involved in about 8 percent of settlements.

Prosecutors said the successes of Weiss and Lerach were won in part by illegal conduct: paying clients and lying about it in court declarations. If the courts had known of the kickbacks to clients, the firms would have been barred from the cases, the federal judge who sentenced Lerach said.

Lerach was unrepentant in an interview, referring to the payments as “a defect” in his work.

“We chose to lead a life in a certain way, at a certain level of confrontation, and in most respects it was enormously successful,” Lerach said. “But it had a defect in it that was exploited by people who were happy to go after us.”

Money for Victims

His approach produced billions of dollars of recovery for defrauded investors, including public pension funds, he said. His lawsuits imposed a “sense of accountability” on errant executives and “made people feel good that there was somebody fighting for them,” he said.

Matt Webb, a senior vice president at the Chamber’s Institute for Legal Reform, took the opposite view, claiming Lerach and his firm used stock price fluctuations and fear “to extort billions of dollars.”

Lerach, whose firm amassed multimillion-dollar war chests to finance their litigation, said the congressional backlash might not have happened if he and Weiss had stayed “below the radar” with simple, sue-and-settle cases. They would have made lots of money, but they wanted to expand the fraud law, he said.

For all his corporate detractors, Lerach had fans. Before sentencing, some 160 people including U.S. Senator Carl Levin, a Michigan Democrat, and consumer advocate Ralph Nader wrote letters supporting him.

No Successor

“There’s nobody on the scene like him today,” said Patrick Coughlin, a former partner, of Lerach. “Big companies, no matter who they are, feared us when they got sued because they knew that he was going to be relentless.”

Webb agreed, saying the “fear factor” of getting on the wrong side of a suit brought by Lerach or Weiss “was enough to make a company think about settling just to make it go away.”

Lerach earned an average of $10.3 million a year from 1990 to 1998, according to “Circle of Greed.” The San Diego Business Journal estimated in 2007 that he was worth $900 million. The book put the number at $700 million. Lerach declined to discuss his net worth or pay.

The former securities lawyer pleaded guilty to a single conspiracy count and was ordered to pay $8 million in fines and forfeitures. He was required to do 1,000 hours of community service and is serving a two-year probation term that ends in March.

Lerach lived for 12 months of his term in a low-security prison near Safford, Arizona, about 130 miles northeast of Tucson. He served alongside drug kingpins, gang members and other inmates doing long sentences.

No Danger

He said he never felt in danger, in part because his age earned him prisoners’ respect. Aside from his unofficial guardian, other inmates, including one nicknamed King Kong, made sure he was escorted when walking around the prison at night.

“I was treated very, very nicely by everybody, with the exception of the white-power guys, who didn’t like me because I hung out with black guys,” Lerach said.

Lerach slept in barracks that held 50 men in bunk beds, except for three months he said he spent in isolation. The officer who thought he was trying to bribe him with San Diego Chargers tickets “took it the wrong way,” Lerach said. He was in a cell with a metal toilet and desk attached to the floor. He had no visitors, no mail and virtually no human contact.

The library is where Lerach spent much of his prison time, along with Greg Domey, the former Hells Angels member.

Intimidating Ally

Domey was serving a 20-year sentence for dealing in methamphetamines and cocaine, according to the Boston Herald. He is “a real intimidating guy,” Phil Muollo, a drug agent who infiltrated the group, told the British Broadcasting Corp.

To Lerach, Domey was a “nice fellow” with whom he spent evenings writing letters and talking about prison life. Lerach said he and his wife helped Domey’s girlfriend get interviews for a hairdresser job in San Diego.

The ex-lawyer said he tried to help fellow inmates when he could with what he knew. Simple problems that most on the outside could easily resolve stymied some of them, such as how to get a Social Security card, he said.

Lerach said he subscribed to so many magazines and newspapers and received so much mail and so many books that the daily haul filled a Postal Service carrying box. He gave publications to fellow inmates, some of whom returned the favor by doing chores for him.

“It’s something that gives you a little cachet and I think helps make friends,” he said.

Injured Veterans

Released from custody in March 2010, Lerach said he completed his community service by advising a program that helps war-injured veterans set up and run businesses.

While on probation, he must ask permission to leave the country, as he did for his overseas trips. Until March, he can’t communicate with other felons without permission. He said he hasn’t talked with Weiss, who spent a year in prison and is on probation.

John C. Coffee Jr., a Columbia University securities law professor, called it a “delicious irony” that the two men’s firms fared better than their competitors after passage of the securities reform act intended to restrict them.

Before the 1995 statute, law firms won control of massive litigation by being first to sue after a company’s stock dropped and triggered suspicions of fraud. As lead counsel, they garnered the lion’s share of the legal fees.

Racing to Court

The “race to the courthouse door” worked well for firms like Milberg Weiss, with stables of clients who owned shares in huge companies susceptible to such litigation. Paying clients helped Milberg Weiss win the race, prosecutors said.

“Something’s wrong with litigation when the lawyers hire the clients rather than the clients hiring the lawyers,” said Coffee. “A 100-share plaintiff is just a bought and paid client of the firm,” unlikely to act as a check on attorney conduct, he said.

The reform act calls for the largest shareholder suing a company for securities fraud to lead class actions. It forces plaintiffs to be more specific than was the case previously about the details of the alleged fraud. Such an investigation requires time and money that some lawyers can’t afford.

Lerach and Weiss satisfied the law by investing in research and developing alliances with institutional clients, such as pension funds, that were often the largest stakeholders.

“They did raise the caliber of securities litigation,” Coffee said. “For a time at least, they were head and shoulders above their competitors.”

Lerach left his firm before his biggest case, Enron, was over. He was behind bars when a Houston judge approved the attorney fees in the case -- $688 million plus interest.

Enron Share

The attorney’s former partners won court approval to give him his share, estimated to be as much as $70 million by the authors of “Circle of Greed.”

When not traveling, Lerach throws fundraising events with his fourth wife and former law partner, Michelle Ciccarelli Lerach, who owns Cups, an organic-cupcake shop in La Jolla.

In June, they hosted their second annual “Berry Good Night,” which brought together organic farmers and chefs for food and wine. They have raised money to send high school students to Ghana to deliver computer equipment, he said.

Lerach keeps up with politics. He gave almost $1.5 million to mostly Democratic candidates and groups in the past decade, none since last year. The donations slowed to a trickle after some candidates returned his money as the allegations against him emerged, according to campaign finance reports.

Barney Frank

Representative Barney Frank, the Massachusetts Democrat who was then chairman of the House Financial Services Committee, returned $2,300 in 2007.

Presidential candidate John Edwards, a former trial lawyer and Senate Democrat, returned $2,300 in 2008 after Lerach was sentenced, and before Edwards’ own legal case began. In an unrelated matter, Edwards was indicted in June and accused of using illegal campaign contributions to hide an extramarital affair. He pleaded not guilty.

Lerach said he wouldn’t be meeting with President Barack Obama during a presidential trip to San Diego, as he might have in the old days.

“I’m damaged goods,” Lerach said.

This summer he took friends and family members, plus his Chihuahua, Tommy, on a 44-day tour of Europe, using an itinerary he planned while in prison. Prosecutors opposed it, but a judge let him go. In September, he made it more than halfway up Tanzania’s Kilimanjaro.

High on Kilimanjaro

“Around 15-16,000 feet,” he wrote in an e-mail at the time. “Views and nite sky defy description. Wonderful plants, trees, monkeys.”

Before he left for Africa, Lerach gave a breakfast speech to 100 San Diego executives and professionals, warning of what he called an ignored crisis: how deregulation, Wall Street greed and a loosening of fiduciary standards are ruining public pension funds. He gives the speech, complete with slide show, whenever asked.

Sometimes he gives law school students a lecture he calls “The Life and Times of Bill Lerach.” He said it has war stories and “a moral, cautionary tale.”

The case is U.S. v. Lerach, 07-00964, U.S. District Court, Central District of California (Los Angeles).

--With reporting by Edvard Pettersson in Los Angeles. Editors: David E. Rovella, Charles Carter

To contact the reporter on this story: Ann Woolner in Atlanta at awooolner@bloomberg.net.

To contact the editor responsible for this story: Patrick Oster at poster@bloomberg.net


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