Notorious trial lawyer William S. Lerach made a career and multimillion dollar fortune driving unprecedented shareholder class-action litigation − sometimes over as little as a one-day drop in a company’s stock value – which served, among other things, to destroy or significantly weaken many jobs-providing, wealth-creating companies. Yet in the November 11 edition of the Washington Post he criticized at considerable length corporate “CEOs who line their pockets while making stupid decisions that rob shareholders and pensioners of billions of dollars.”
Talk about the pot calling the kettle black.
Lerach, acting essentially as a CEO himself, led his former law firm, Milberg Weiss, in an illegal conspiracy to pay off a stable of ready-made, on-call shareholder plaintiffs, according to the Justice Department’s 2006 indictment of the entire firm, as well as Lerach and other individuals. His recent guilty plea includes an agreement, yet to be approved by a federal judge, which will have him serve at least a year in prison and pay an $8 million fine.
Apparently still in denial, however, Lerach’s article would have readers believe his criminality was a response to bad corporate leaders acting in zealous pursuit of personal gain. The problem is that he, too, was one of those bad actors. And his article and history of litigation abuse makes clear that he will not or cannot distinguish between lawful, if unsuccessful business decisions and criminal acts, such as those he or the ringleaders of the Enron fraud perpetrated.
Indeed, Lerach confuses the larger-than-anticipated losses of Citigroup and Merrill Lynch in the subprime mortgage market with his own illegal transgressions. The boards of the two financial powerhouses held their respective CEOs responsible for their bad business decisions by dismissing them. No criminal allegations have been made with respect to the actions by the former Citigroup and Merrill Lynch chiefs.
Like all fallible human beings, corporate executives can make poor judgments. But when they commit self-interested crimes they cross a bright line. In this regard, Bill Lerach may have more in common with those he criticizes than he's willing to admit.
A September 2004 expose in Fortune magazine reported that Lerach once boasted, "I have the greatest practice of law in the world. I have no clients," meaning that it was he and his law firm, not shareholders seeking legitimate redress, who were actually generating the giant and hugely lucrative wave of securities litigation.
Lerach and his former firm were so zealous in their pursuit of damage awards from defendant companies that a Chicago jury in 1999 "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," according to Fortune. Fearing additional punitive damages, the firm settled the case for $50 million.
Much of this could have been foreseen in the 1980s when, instead of letting injured persons take the initiative by seeking legal help, overly aggressive solicitation of clients by trial lawyers become more common. With the ultimate solicitation, paying clients to sue, Lerach crossed that bright line into criminal conduct.
Unfortunately, Lerach-like conduct is no longer uncommon.
As I testified recently before the House Transportation and Commerce Committee regarding litigation within the railroad industry, representatives of the United Transportation Union pleaded guilty to accepting payments of up to $30,000 from a law firm for steering union members with injury claims to that firm. Meanwhile, CSX Inc. investigated asbestos claims brought against it in West Virginia and discovered that the doctor who purportedly signed off on the medical evidence adduced by plaintiffs in those cases could not be located. As it turned out, there’s no record of any doctor by that name.
A federal district judge in Texas has essentially declared fraudulent thousands of asbestosis and silicosis claims wherein the same chest X-ray was used again and again for different claimants. And a federal grand jury in New York is investigating similar claims there.
Tying these and many comparable instances back to business decisions and our economy, it should be clear that fraudulent and otherwise corrupt lawsuits take a sizeable, anti-competitive toll. Every dollar spent defending against or settling such lawsuits is a dollar that won’t be spent on research and development, job creation, worker and retiree benefits, new technologies, training, or shareholder dividends.
Since the nation’s Trust Busting era began well over a century ago, holding the leaders of American corporations accountable for their decision-making has been of great public interest, driving the motivations of countless regulators, legislators and courts. Collectively, the three branches of government endeavor to balance protections for consumers, shareholders and the public at large with the flexibility business leaders need to be productive, provide employment for American workers and otherwise positively contribute to our successful and dynamic capitalist economy.
After the Enron episode, Congress promptly enacted tough anti-corruption laws with stiff penalties to hold business leaders accountable. In our post-Lerach world, Congress should strongly consider enacting legislation to hold corrupt trial lawyers similarly accountable, especially if, as Lerach himself suggested, the plaintiffs’ bar is to act as the fourth branch of government, unchecked by constitutional protections, in an undemocratic quest to “regulate” others with threats of financially devastating bet-the-company litigation.