Enron and the Class-Action Warrior

Excerpt from The Times. The Andrew Billen Interview

November 19, 2002

“Bill Lerach is America's number one security fraud buster, loathed in boardrooms from the Pacific to the Atlantic, but his glee was more than Schadenfreude. The Enron crash satisfyingly proved that he had been right all along about corruption in high placemen....

“‘Well, there seems to be a bigger one coming along all the time, but no, Enron is certainly the biggest I've handled to date,' he booms. ‘It's not only that it's big in dollars — and it is big in dollars — it's the high-profile nature of the case. It's the landmark nature of the wrongdoing, the way it began to change attitudes and led to calls for increased scrutiny of corporate behaviour. And then with WorldCom coming on after it ... In combination, those two scandals have changed the landscape in the United States.'...

“His dispassion in a moment of minor victory contradicts both of the main takes on him. One is that he is as avaricious as the corporations he exposes. Milberg Weiss has been built up by filing class-action cases on behalf of embittered investors against firms whose value has fallen on the stock exchange. Some cave in so soon, admitting nothing, that it has been called legalised extortion. It is certainly so lucrative that Milberg Weiss fights bare-knuckle to keep its share of the action....

“The more charitable opinion of Lerach is that his disgust at corporate excess is genuine, and that it dates, as he claims, to his childhood in Pittsburgh and what happened to his father in the Wall Street Crash.

“‘My dad,' he says, ‘had the misfortune of coming out of college and into his trust fund, because his father had died young, in '29. He went to work as a stockbroker, and ended up losing all of his money, and all of his mother's money, and all of an aunt's money. It destroyed his life. He just never, ever, ever got over that experience.'

“Lerach Sr. who became a nuts and bolts salesman, died in 1963, too early to enjoy the post-war boom, let alone the endogenous Nineties, when, effortlessly it seemed, new technology and new markets sent the Dow and Nasdaq ever upwards. Then Enron succeeded where Osama bin Laden had failed and the economic juggernaut crashed into reverse gear....

“And it's all down to the greed of a few executives? ‘No, I don't buy the few bad apples analysis. I think, unfortunately, that there are a lot of bad apples in the corporate community. There was also a breakdown of corporate culture.

“‘One executive saw the other executive making more and wanted more himself and it simply got out of control People were willing to cut corners aggressively, if not commit fraud, to get the kind of financial results they wanted to justify the kind of payments to themselves they wanted.'...

“‘And how do you not let a bad quarter happen? You preship, you don't recognise doubtful accounts, you do any of the kind of things that executives can do to manipulate the earnings.'

”The gatekeepers who were meant to prevent such sleights of hand were the accounting firms, investment bankers and lawyers, the independent professionals. ‘But we had a horrific breakdown of the gatekeeper system,' Lerach says.

“The gatekeepers were tempted into the parlour. The accountancy firms became consultants and audited the transactions they had helped to structure. The investment banks, charged with placing their ‘Good Housekeeping Seal of Approval' on securities issues, became ‘like producers of brochures, just throwing this stuff out on to the public.' As for the lawyers, he believes quite simply that they got into bed with their clients....

“‘If the prime perpetrators of a couple of these high-profile frauds walk away with their ski homes intact, their mansions homesteaded and protected, as they are under the laws of Texas and Florida, what does it matter if they go to jail for a year or a year and a half at one of the United State's country club facilities? I don't think that's going to satisfy people.' ...

“When he started practising law in Pittsburgh, his clients were some of the big corporations he is now so suspicious of. Then he was introduced to Melvyn Weiss, ‘the smartest guy I'd ever met in my life'. Weiss was taking advantage of a 1967 Supreme Court ruling which gave permission for class action suits, in which a single case could be brought on behalf of a group of plaintiffs. It was of great use to civil rights campaigners, but it also appealed to aggrieved shareholders, who, thanks to the principle of no-win/no-fee, risked nothing by suing....

“He moved to San Diego, where Milberg Weiss now conducts half its business, and began a career suing Silicon Valley icons such as Apple and Intel. By the late Eighties and early Nineties, as mergers and flotations proliferated, corporate America was feeling the pain. When the Republicans won the 1994 mid-term elections, the new congress overturned a Clinton veto and passed the Private Securities Litigation Reform Act, a measure squarely aimed at putting Lerach out of business by limiting shareholder litigation....

“His 500-page complaint against Enron names 80 defendants, including what remains of the accountants Arthur Andersen and nine of America's most powerful investment banks: a mighty dragon, many heads. No real saint would enjoy wielding his sword quite as much as Bill Lerach seems to, but which pensioner will begrudge his victory when those greedy, vainglorious heads eventually roll?”

MW

This article originally appeared in the first quarter 2003 edition of the Corporate Governance Bulletin.