The carnage has been epic, almost straight out of Hollywood. Wall Street's largest and most venerable companies, freed from New Deal regulations, gorged on billions of dollars in junk subprime mortgage-backed securities and now lie in ruins, their stock a fraction of what it was once worth. Pension plan managers and untold millions of investors gasped as their retirement savings vanished in a matter of months. The lawsuits are coming. All this tableau needs is a pack of crusading lawyers to stand before the Bear Stearns headquarters, wave a stack of documents, and declare before the press that Wall Street's moneymen will pay for what they've done.
But this time around, that probably won't happen, not with the right panache. Because the two men who virtually invented the shareholder lawsuit, who transformed a seedy, arcane area of law into one of the country's most critical instruments of financial accountability, are going to prison. Melvyn Weiss and Bill Lerach, whose firm, Milberg Weiss, was once the most feared plaintiffs' law partnership in the country, have agreed to plead guilty to felony charges of racketeering and obstruction of justice, stemming from a federal investigation into an alleged bribery scheme that has been in operation for 25 years. Lerach is scheduled to report for a two-year prison term on April 21, and Weiss will be sentenced in the next few weeks. Wall Street's most hated adversaries will never practice law again—just when the country's investors need them most.
It's almost impossible to understate the impact Weiss and Lerach had on securities litigation. Before the two men partnered up in 1976, the deck was stacked against investors; big companies had an army of legal talent who could outlast the small-bore plantiffs' law firms, which worked on commission and inevitably ran out of money. But Lerach cooked up a template for securities complaints that could easily survive dismissal motions and move on to trial. In addition, he pioneered new strategies that knocked companies back on their heels, going after a firm's bankers, accountants, and lawyers. Finally, Lerach was tireless and hyper-aggressive, sinking his teeth into public companies and ripping out million-dollar settlements.
Around the country but particularly in Silicon Valley, executives learned to fear Lerach, who regarded his practice as a populist crusade and spoke to CEOs like no one had ever done before. Fortune magazine dubbed him the "King of Pain" and recounted legends of his tirades against senior executives. "I'm going to take your fucking condo in Maui!" the magazine reported Lerach screaming at one defendant. During a settlement conference, Fortune added, Lerach told an attorney, "I don't care who your clients are. I'm going to make their bones bleach in the desert."
According to David Lisi, a partner at Howrey LLP who defended dozens of shareholder lawsuits against Milberg Weiss' depredations, Lerach was a master performer, playing the press and intimidating lawyers with an almost unconscious flair. "I remember one time when I was down in his office in San Diego," Lisi says. "The waiting room had this huge fish tank, with these beautiful tropical fish. Bill comes out, and it just happened to be feeding time. And he turned to me and said, 'Plaintiffs' lawyers fighting over a fee.' So he acts like we're buddies, and then we go into the conference room. He said, 'Lemme tell you what. I'm going to go after this company, I'm going to destroy this company, I'm going to take everything they own, I'm going to burn it to the ground unless you settle.' Then he looked at his watch and said, 'I gotta go.' "
Thanks to such tactics, Milberg Weiss' corporate defendants have paid out $45 billion in judgments and settlements. But critics claim that when Weiss and Lerach trained their sights on Silicon Valley in the early 1990s, they extorted millions in phantom damages from an industry defined by its volatility. Because the tech sector is so dependent on emerging technologies and markets, stock prices tend to fluctuate wildly through no fault of a company's leadership. But Weiss and Lerach employed the same old technique of waiting for a stock to drop and filing suit days later, repeatedly going after Seagate Technology and Apple Computer. (When Seagate CEO Alan Shugart starting complaining about the lawsuits to the press, Lerach mailed him a note: "Dear Al—there's more coming.") Tech industry leaders complained of "paying a toll" to Milberg Weiss to do business and turned Lerach's name into a curse word.
"There were numerous companies that were sued for securities fraud that shouldn't have been," says Steven Schwartz, who spent years defending tech businesses against Milberg Weiss. "Those cases frequently settled, because the theoretical damages are enormous, often in the hundreds of millions of dollars. So given the risk/reward ratio, companies were frequently forced to settle, even though the case lacked merit."
In an era when Congress and the presidents of both parties never saw a financial regulation they couldn't destroy or ignore, it fell to them (and their fellow in disgrace, Eliot Spitzer) to dream up new ways to hold America's financial institutions to account. If this is Lerach's lowest moment, his greatest has to be the Enron scandal, when he thought up the legal strategy that targeted the company's banks and lenders, and ultimately secured more than $7 billion in settlements for defrauded investors.
But Lerach's ambition eventually destroyed him. According to Duke law professor James Cox, Lerach's bravado, swagger, and overreach may have single-handedly prompted congressional action in 1995 to sharply limit the scope of class action lawsuits. In 2006, after a seven-year investigation, federal officials indicted Lerach's firm on charges that lawyers paid secret kickbacks to professional plaintiffs as part of a decadeslong conspiracy to game the class-action system and snatch the coveted lead-attorney position in lawsuits. After 30 years of glory, Lerach and Weiss are headed to jail.
With the kings of pain out of commission, other lawyers have already filed shareholder lawsuits against some of the biggest financial players involved in the bursting of the subprime bubble. In fact, two of the largest suits—against Bear Stearns and Merrill Lynch—have been filed by Coughlin Stoia, which Lerach set up when he split from Milberg Weiss in 2004. Still, no one left at Coughlin will pursue them with quite the panache, shameless hostility, and populist anger of Bill Lerach. According to Cox, most institutional investors now prefer a discreet approach, choosing boutique law firms that will handle everything behind closed doors.
And that's a shame. Because no one did pissed like Lerach did pissed. At a time when the retirement futures of so many millions of Americans are in jeopardy, the nation's mom-and-pop investors need a self-promoting egotist who will burst a blood vessel on the courthouse steps on their behalf. "What would Bill do?" asks Lerach's longtime adversary David Lisi. "Look at what he did with Enron. … There's no question in my mind that he would be going after these banks, he'd be slaying them publicly, he'd be portraying them as guilty of fraud. I can't think of anybody who's quite like Bill."