Corporate Chicanery

Hello, it’s Tuesday, September 19, 2017, and another violent Atlantic storm is on course to ravage the same Caribbean islands raked by Hurricane Irma two weeks ago — and on a direct heading for Puerto Rico. Weather experts are warning of devastating wind damage, 9-foot storm surge, and flash flooding on that beautiful island.

Ten years ago today, a human gale that had wreaked havoc throughout corporate America finally blew itself out. This tempest had a name, William S. Lerach, and on this date in 2007, the San Diego-based class-action attorney woke up for the first time in his adult life with no cases to try: The day before, he’d admitted to federal prosecutors to using kickbacks as a way of recruiting plaintiffs in more than 150 class-action lawsuits against U.S. companies.

“From a historical perspective, this is the fall of a titan,” proclaimed Columbia University law school professor John Coffee. “Bill Lerach did not invent the securities class-action lawsuit. But he converted it from being an irritant and a nuisance to public corporations to being a major threat.”

As part of a plea bargain, Lerach agreed to pony up $8 million — $7.75 million in unlawful gains, and a $250,000 fine — and agree to serve a federal prison sentence of up to two years. Some rival attorneys whom Lerach had done battle with openly rejoiced at the fall of a lawyer they’d suspected of ethical shortcuts. Executives from Silicon Valley to Wall Street breathed sighs of relief. No longer would Lerach file a “quick-strike suit” alleging wrongdoing on no more evidence than a dip in a company’s stock price. Prosecutors expressed satisfaction that the rule of law had been enforced.

All of that was true, but something else was true, too: Corporate fraudsters also breathed sighs of relief, knowing they’d be less likely to be held to account for their dishonesty.

In the 1970s and 1980s, as the Los Angeles Times noted, fear could be instilled instantly in the most cold-blooded American CEO by six short words: “Bill Lerach is on the phone.”

Yes, federal prosecutors uncovered evidence that Lerach and his law partners reaped over $200 million in legal fees using legal improprieties. But that was a small portion of their business. Representing investors against corporate sharks who fiddled with their books to fool investors while engaging in insider trading, Lerach, his mentor Melvyn Weiss, and their partners recouped some $40 billion in settlements or legal awards — $7.2 billion from Enron alone.

Why did companies settle so often? To hear their CEOs and legal counsel tell it, these class-action suits were little more than greenmail schemes. It was a smarter business practice to pay off Lerach and his ilk and resume operations. Besides, the risk of losing at trial was too great: For one thing, insurance covers settlements, but not jury findings of fraud.

Although much of that explanation made sense, it wasn’t the whole story.

When respected companies with reputations for honesty, such as Hewlett Packard, fought back, Lerach usually folded his tent. Why didn’t more companies do that? The depressing answer is that insider trading and other shenanigans were endemic in corporate America. Lerach and his partners would allege fraud on the flimsiest of evidence, but it amazed even these plaintiffs’ lawyers — and disillusioned them — how often they found it.

Instead of cleaning up the ethical mess, corporate America and its political allies in both parties set about altering the rules of litigation. Referendums in California backed by supposedly liberal Silicon Valley CEOs made it harder to file such lawsuits. The 1994 Republican “Contract With America” targeted class-action securities suits, and after the subsequent GOP takeover of Capitol Hill, Congress passed The Private Securities Reform Litigation Act of 1995, dubbed the “Get Lerach Act.” The U.S. Supreme Court went through some unusual mental calisthenics to immunize accounting firms and other third-party actors from class-action securities lawsuits — even when their fraud was obvious and massive.

So Bill Lerach was disbarred and went to prison. But he didn’t remain silent. He cautioned that without the threat of securities class-action suits, boardroom buccaneers would have no real deterrent to corrupt behavior; he predicted that the Securities and Exchange Commission was weak, understaffed, and disinclined to police Wall Street; he warned us that a tsunami of bank fraud and corporate chicanery was on the horizon — and that consumers were utterly unprotected.

He was soon proven right.

Carl M. Cannon

Washington Bureau chief,  RealClearPolitics

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