In San Diego, the Shareholders’ Scimitar
Richard Lerach loved Wall Street. When he reached the age of legal majority, he plowed his inheritance into stocks, leveraging his holdings by borrowing against his shares. The year was 1929.
When the margin calls came, he borrowed from his mother and siblings, feeding cash into the market until the family fortune was gone. He spent the rest of his life selling nuts and bolts in Pittsburgh.
William S. Lerach is his revenge. From his base in San Diego, where he heads the California office of Milberg Weiss Bershad Specthrie & Lerach, Richard’s woolly-haired 45-year-old son has made himself into the legal scourge of America’s public companies.
As a lawyer, his prime weapon is the shareholder class action, in which a suit brought on behalf of a few losing stockholders is certified to represent all those similarly aggrieved. The defendants are usually a group of officers and directors, the company itself, its underwriters and any lawyers or accountants unlucky enough to have been involved. They’re usually accused of lying about or omitting material facts in violation of securities law.
Lerach may be the foremost practitioner of this art, exceeded only by his longtime mentor and New York law partner, Melvyn Weiss. Richard D. Greenfield, a Haverford, Pa., lawyer who is one of their chief rivals in the field, says Lerach’s reputation alone “strikes fear into the other side.”
He’s ideally situated. California’s growth, particularly the growth of high-technology businesses, inevitably makes work for him, and a tough Bar exam keeps out interlopers. Even the judiciary is sympathetic.
“The courts are much more favorable to plaintiffs in California than elsewhere, both state and federal,” Greenfield explains.
The trouble is that corporate miscreants rarely pay personally for the losses they cause. Worse, these cases rarely come to trial, and according to Stanford law Prof. Janet Cooper Alexander, their merits don’t matter when they settle out of court.
Analyzing 17 initial public offerings by computer companies in 1983, Alexander reports in February’s Stanford Law Review that of the nine that were sued, six settled for about a quarter of what was at stake. Two others settled for less as a result of factors unrelated to merit, she found.
Still, the woods are full of crooks, and Bill Lerach is a way for investors to get some money back when they get fleeced. He’s probably one of California’s most necessary evils, although some people only agree with half that description.
M. Laurence Popofsky of Heller, Ehrman, White & McAuliffe in San Francisco, a leading Lerach opponent, says his nemesis is an excellent and ethical lawyer. But he says his clients take a different view.
“ Blackmail is a hard word,” says Popofsky. “But it is one which my clients invariably use.”
Nowadays, no business debacle seems complete before Lerach’s arrival. His targets have ranged from Barry Minkow, the carpet-cleaning whiz kid, to Charles H. Keating Jr., the savings and loan kingpin.
He’s also sued Walt Disney Co., Apple Computer, San Diego Gas & Electric, Mesa Petroleum, Drexel Burnham Lambert, Michael Milken, Ernst & Young and Ivan F. Boesky. His 45-lawyer office is pressing more than 150 shareholder class actions now. He even sued Milli Vanilli on behalf of record buyers fooled by their lip-synching.
Having Lerach on your side is like money in the bank. Two years ago he was quoted in California Lawyer magazine as saying he “achieves a significant settlement” in 90% of the suits he files.
Expediting matters are a few shareholders who crop up regularly as Lerach plaintiffs. The American Lawyer has said one William Weinberger was a plaintiff in a dozen Lerach cases.
Having Lerach on your side might even be fun, given his great personal affability and his readiness to draw and quarter the opposition. Working in blue jeans from an office turned upside down by his tornado-like work habits, Bill Lerach is colorful and refreshingly honest.
“People try to pretend the law is not a business,” he says. “Baloney! It’s a big business.”
Especially for Lerach, who probably makes more than $600,000 a year (“We make as much as we can,” he says cheerfully) and was recently named one of America’s 100 most influential lawyers by the National Law Journal.
Lerach sees no direct connection between his father’s losses and his own calling, but regards himself as an avenger nevertheless. Working from 8 a.m. to 1 a.m. daily, he puts in 3,000 billable hours a year, breaking only for dinner with his family. Lunch is a ham sandwich and potato chips at his desk. When his own office gets out of control, he adjourns to a nearby conference room until he’s wrecked it too.
“He doesn’t have any hobbies or habits,” says Vincent Bartolotta, a friend since both attended University of Pittsburgh law school. “He just works.”
The financial press is a major source of inspiration, and an entire room at his firm is devoted to black binders full of clippings, with a custom-designed index.
It takes an unusual lawyer to do this kind of work. Lerach works entirely for contingency fees, meaning huge outlays of time and expenses for an anticipated return. When a local Federal Express manager learned that Lerach was part of his foursome, he delightedly insisted on paying for the round of golf. Milberg Weiss is apparently his biggest customer in San Diego, Lerach says.
Shareholder suits can take years to work their way through the courts, and although some shareholders--his clients--gain recompense, others end up losing. Companies fight Lerach with shareholder funds, after all, and insurers of directors, officers, accountants or attorneys usually pay 50% to 80% of the settlement.
“Our legal system basically socializes risks and transfers costs,” Lerach admits, adding that the real problem is lax law enforcement.
“Crime pays in this country,” he says. “There is very little deterrence to securities fraud.”
The result is a system that, by Alexander’s estimate, pays lawyers on both sides as much as the plaintiffs get. That hasn’t dampened interest in shareholder class actions, a record 315 of which were filed in the United States last year.
Lerach is in the news again this week. He plans to ask the state Supreme Court to overturn a lower court ruling that bars shareholder class actions in California courts. Most such cases are filed in federal court.
