Subject: California Lawyer Article*

By Gabe Friedman
On a bright morning last February, William S. Lerach walked down the narrow hallway of a federal courthouse in Los Angeles. Dozens of his friends, relatives, and former law partners packed the corridor.
Within hours, a judge would sentence him to prison. Yet Lerach navigated the crowd like a party host, clasping hands, greeting former colleagues, and chatting up their spouses.
Lerach looked a little pale, but he seemed impressively calm. A few reporters hovered nearby with notebooks out, watching him with the detached air of primatologists. He graciously sauntered over to say hi. His daughter Shannon, a graduate student, leaned against the corridor wall. As the hearing time neared, she caught his attention momentarily. Apparently put off by her father's nonchalance, she told him: "Don't smile." He nodded back at her.
It would have been out of character for Lerach to lose his composure at this point. He'd spent three decades publicly accusing corporate executives of fraud. Privately, however, Lerach had compared the ordeal-pleading guilty to fraud himself and surrendering his bar license-to attending his own funeral.
Six months earlier, Lerach had commanded a 190-lawyer firm from the penthouse office of a glass tower overlooking San Diego harbor. Since the late 1970s, he and his partners had been pumping out securities-fraud class actions, accusing nearly every major corporation in the United States. At age 61, he still set a furious pace.
The lawsuits returned billions of dollars to investors. And even though business executives called the class actions "legal extortion," his success was undeniable. He won many battles, earned many millions of dollars, and generated scores of headlines. But his ascent to the top of the plaintiffs bar also attracted the wrong kind of attention. In 1999 federal prosecutors in Los Angeles began a probe of Lerach and the
New York firm where he was then a partner, Milberg Weiss Bershad Hynes & Lerach. At first, the investigation appeared to focus on whether Milberg Weiss secretly paid plaintiffs to be in its class actions.
But rumors also swirled about the firm's relationship with stockbrokers, its payments to a damages expert, and various other questionable dealings. The prosecutors moved at a maddeningly slow pace, year after year reconvening a grand jury and continuing to poke around the firm's business practices.
There still had been no move from the prosecution when, in 2004, the offices of Milberg Weiss separated. The West Coast partners regrouped as Lerach Coughlin Stoia Geller Rudman & Robbins. But in 2006 prosecutors found a credible witness who would testify that he'd received more than $2 million from Milberg Weiss over the course of a decade for serving as a plaintiff in class actions. In May of that year, the grand jury indicted the firm and two of its partners for allegedly paying illegal kickbacks to named plaintiffs and hiding the scheme from trial judges. The indictment marked the first federal criminal prosecution of a major U.S. law firm.
Though Lerach was later revealed as "Partner B" in the indictment, he was not charged. But when one of the two named defendants pleaded guilty a year later and agreed to cooperate with prosecutors, charges against Lerach appeared increasingly likely.
Last August, Lerach resigned from practice. His defense attorneys quickly cut a deal: Lerach would agree to plead guilty to a felony, forfeit $7.75 million to the government, pay a fine of $250,000, and serve some prison time.
Lerach's legal career was over. Now, six months later in a stuffy courthouse hall, all that was left for him to do was make small talk.
At 9 a.m., a federal marshal pushed open the doors to the courtroom of U.S. district Judge John F.
Walter, and the crowd filed in. Walter, a former federal prosecutor noted for his fiery temper, gazed sternly at the defendant. "The most egregious wrong that a lawyer can commit is first to commit a fraud on his clients," the judge declared. "[T]he second is to commit a fraud on the court. And that's exactly what was done in this case."
Summarizing the allegations, Walter said that Milberg Weiss initially paid cash to its plaintiffs: Senior partner David J. Bershad would collect funds from Lerach and other partners and "kept that cash in a safe in his office." But as the fee awards became more substantial and cash payments impractical, intermediary law firms were engaged "to funnel the kickback payments to Milberg Weiss's stable of paid plaintiffs." To conceal the true nature of the arrangement, Walter said, Milberg Weiss and the attorneys
"would enter into sham or phony agreements that falsely state" the attorneys had earned a referral fee or done other work on the case.
As Walter spoke, Lerach sat expressionless at his counsel's table, slowly rubbing his hands against his neck. Then, after nearly two hours of discussion, he stood to address the court. He began by thanking the court, a person in the probation office, and another in pretrial services who had helped his family
"endure the unendurable." After that, in a strong Pittsburgh accent, Lerach spoke directly to the judge: "I pled guilty in this case because I was guilty," he said. "I knew what I was doing when I did it was wrong. It

was, as they say, felony stupid. ... The conduct is completely and absolutely unacceptable from anyone, let alone a lawyer, and I know that."
Walter then called a recess. Ten minutes later he trotted up to his seat behind the dais with a sheaf of papers in hand. "I've wondered on several occasions during the past week what type of sentence Mr.
Lerach would have imposed on what he frequently, publicly, identified and labeled 'corporate scam artists' or 'wrongdoers,' or a fellow attorney, if they appeared before him for sentencing [on] a similar charge," he read from a prepared text. "I had no difficulty in concluding that he would be the first to recognize that a sentence must be substantial."
In short order, Walter pronounced the maximum prison sentence possible under Lerach's binding plea: 24 months at a federal correctional institution. "He doesn't need any rehabilitation," Walter explained. "We're just sending him there to warehouse him and to punish him. There is the need for retribution." The federal marshals then reopened the doors, sucking the air from the courtroom as the crowd spilled back into the hallway. For a moment, prosecutors and friends alike seemed taken aback by the judge's harsh edict. His former colleagues-some of whom had predicted that Walter would instead go easy-now briskly walked away, discussing transportation back to San Diego.
For months, some of those partners had privately fumed that the case was nothing but backdoor tort reform. At bottom, they complained, Lerach's crime was ignoring the procedural rules that lawyers swear to uphold. He and his partners conspired to pay plaintiffs at least $11.4 million, and they permitted the plaintiffs to lie about it in court. But those plaintiffs had helped Milberg Weiss settle hundreds of shareholder cases for billions of dollars, which generated $216 million in attorneys fees. If Lerach had achieved superior results-as everyone agreed he had-who was hurt by the violation of court rules? Bill
Lerach's prosecution seemed less a criminal matter than an attack on the plaintiffs bar by the Justice
Department of a Republican administration.
In a farewell email sent firmwide before he retired last August, Lerach wrote, "I've ... always understood that when you spend decades challenging powerful interests, the powerful interests will fight back with a vengeance. Sometimes when you take the bull by the horns, you get gored-this is the business we've chosen."
That last phrase was lifted from Francis Ford Coppola's The Godfather: Part II. In the movie scene, gangster Hyman Roth tells Michael Corleone, "When [a Las Vegas casino owner] turned up dead, I let it go. And I said to myself, this is the business we've chosen; I didn't ask who gave the order, because it had nothing to do with business!"
That Lerach would invoke dialogue from a character based on gangster Meyer Lansky raises intriguing questions about his own self-image. It may also hint at what it really feels like to compete in the plaintiffs bar, where Lerach developed his career.
In 1966, Congress passed amendments to the Federal Rules of Civil Procedure, including a revision of FRCP rule 23, that liberalized class action pleadings and procedures. Lawyers who filed class actions could work on a contingency basis and ask the judge to award attorneys fees ranging from 25 to 40 percent of the total recovery.
Marshall B. Grossman, a Bingham McCutchen partner in Santa Monica who cut his teeth as a plaintiffs lawyer in the late '60s, says the business was surely lucrative. But he also was disturbed by its
"unseemly" aspects-including copycat lawsuits and attempts by lawyers "to engraft themselves onto litigation they had nothing to do with"-and so he left the practice.
"There came a point in the late '70s when I did not like what was going on," Grossman says. "There was a race to the courthouse, where dozens of firms filed the same suit. There was competition for plaintiffs. Deals had to be cut with other lawyers ... and it just spun out of control."
It was in precisely this atmosphere that Bill Lerach thrived. Lerach began his career as a corporate lawyer at Reed Smith Shaw & McClay in Pittsburgh. He encountered plaintiffs attorney Melvyn I. Weiss in
San Diego, where the two lawyers each were involved in litigation against the same bankrupt real estate business. Impressed by Weiss's New York firm, Lerach proposed in March 1976 that he open a West
Coast office in San Diego. Weiss agreed, and the new office thrived.
Unlike some of his competitors, Lerach developed a reputation for being honest-if volatile-and he could be a model of civility at his law firm. "I've never forgotten [that] when he first actually met me, he took both my hands and said, 'So you're the one,' " wrote Kathryn Lichnovsky, Lerach's longtime secretary, in a presentencing letter to Judge Walter. "I'd been his night-typist (my second job), and he knew my work."
Over the next 30 years, Lerach showed Lichnovsky a generosity that seemed to mark many of his personal relationships. Even as he employed cutthroat tactics to rise to the top of the plaintiffs bar, he showered wealth and opportunity on those around him.
Other presentencing letters describe his largesse: He hired his housekeeper's son, who later became a paralegal; he loaned his chauffeur money at no interest to buy a house; he gave his Nissan Maxima to
Lichnovsky; and he even let her teenage sons use his ski condo in Colorado.

But all the expressions of personal support aside, Lerach's success in class actions depended on secret arrangements with paid plaintiffs to secure lead counsel status. According to his plea agreement,
"Lerach and other conspiring partners and the paid plaintiffs understood that, to the extent necessary, they would make or cause to be made false and/or misleading statements in documents filed in federal
Class Actions (including complaints, motions, and under-oath certifications) and in under-oath testimony and other discovery."
In the late 1970s, Milberg Weiss began working with Seymour M. Lazar, a semiretired millionaire who lived in Palm Springs. Lazar claimed that he volunteered himself and his family members as named plaintiffs for class actions in exchange for Milberg Weiss agreeing to take on the cases. Weiss later admitted, in his own racketeering plea agreement in March, that he offered Lazar a percentage of the firm's attorneys fees for his participation. The payments would be made to intermediary lawyers "with the understanding and intent that the money would be distributed to or used for the benefit of the paid plaintiffs." The Milberg Weiss lawyers who knew about the deals understood that they had to be kept secret.
According to Lerach's plea, Lerach believed that discovery of the payments "could have resulted in, among other things: (a) the disqualification of the named plaintiff from serving as a class representative in that action and other Class Actions; and (b) the disqualification of Milberg Weiss, including the conspiring partners, from serving as class counsel in that action and other Class Actions."
Though the payments stayed under wraps, in time the firm's use of serial plaintiffs began to attract comment. In a 1993 case in Dallas, Lerach's lead plaintiff, Steven Cooperman, acknowledged in court papers that he had already served as a lead plaintiff in 38 securities class actions. U.S. district Judge Joe
Kendall noted dryly that Cooperman must be "one of the unluckiest and most victimized investors in the history of the securities business."
Then Republicans won control of Congress in 1994 and the rules changed. Tort reform rose to the top of the legislative agenda as part of Newt Gingrich's "Contract with America." Christopher Cox-then a
Republican congressman from Newport Beach and now chair of the Securities and Exchange
Commission-made the case for a new law.
"We are here today to address a national scandal of corruption on a scale that Congress hasn't witnessed since the days of Eliot Ness and Al Capone," Cox told a subcommittee hearing in January
1995. "The only difference between the organized crime of the 1930s and today's extortion racket run by strike-suit lawyers is that today's conduct is technically legal."
By December, Congress had passed the Private Securities Litigation Reform Act (PSLRA) of 1995.
Lerach personally made a last-ditch effort to defeat it, attending a political dinner with President Bill
Clinton. Clinton vetoed the bill, but enough congressional Democrats joined the vote to override and make it law.
Under the PSLRA, the test to select lead plaintiffs is no longer "first to file" but rather the "largest financial interest." To survive a motion to dismiss, complaints must provide specific allegations of fraud.
Pretrial discovery-the tool Lerach had used so successfully to uncover corporate wrongdoing-is barred until after the court rules on the pleadings. And for the first time, the PSLRA addressed legislatively the ethical issues of using repeat plaintiffs and paying compensation to class representatives.
"The 1995 legal reforms were intended to kill class actions by changing the lead plaintiff rules to make it necessary for larger institutional investors to take the lead role," says Stephen Diamond, a professor at
Santa Clara University School of Law. "Proponents of the change thought that these institutions would not step into that role. But that has not turned out to be true."
Indeed, after the PSLRA took effect, some plaintiffs firms tried bundling individual investors, so that their collective losses would qualify them as lead plaintiffs. Other lawyers recruited large public-employee pension funds that held millions of shares of a target company's stock: These institutional investor clients could show the huge losses in stock-drop cases that were needed to qualify for the coveted lead plaintiff position. At Milberg Weiss, the partners in New York split with those in San Diego about how to adapt to the new rules. Lerach favored the institutional approach, and in 1997 he hired a lawyer with longtime ties to labor unions to target managers at Taft-Hartley pension funds as clients. But according to one partner,
Milberg Weiss as a whole was still skeptical of relying on institutional investors as lead plaintiffs.
By 2004 differences between the offices produced a split, with the West Coast partners becoming
Lerach Coughlin Stoia Geller Rudman & Robbins. At that point, according to the sentencing memo submitted by Lerach's defense attorneys, "any practice of compensating class plaintiffs in post-PSLRA cases in which Mr. Lerach was personally involved ended." But it was a pre-PSLRA client-Steven
Cooperman, the hapless investor in Dallas-who kickstarted the prosecution's investigation of Lerach.
Cooperman was a Beverly Hills ophthalmologist who retired as part of a deal to settle malpractice allegations by the California Medical Board. In July 1992 he reported the theft of two paintings-one a
Picasso, the other a Monet-from his Brentwood home. He eventually settled an insurance claim for $17.5 million. But in 1997 the FBI located the missing paintings in Cleveland, where they had been kept all

along at Cooperman's request.
Two years later, Cooperman was convicted of insurance fraud and faced up to ten years in prison. So he promised prosecutors a bigger target: Bill Lerach. Cooperman told prosecutors that, over the years, he and his friends and relatives had received $6.5 million in fees for agreeing to be plaintiffs in Milberg Weiss class actions.
Still, Cooperman was a convicted felon, and perhaps the only person in Brentwood with less credibility than O. J. Simpson. The last overt act he alleged linking Lerach to the conspiracy occurred in
1996. And, according to prosecutors, Milberg Weiss was taking an "expansive" view of privilege over witness statements and documents, which obstructed the investigation. Assistant U.S. Attorney Robert J.
McGahan in Los Angeles adds that none of the Milberg Weiss attorneys who participated in the plaintiffpayment scheme was willing to cooperate with prosecutors.
Meanwhile, Lerach's firm was riding high. According to PricewaterhouseCoopers, a record total of 483 securities cases were filed nationwide in 2001; Milberg Weiss filed approximately 60 percent of those, and more than 80 percent of the cases that were filed in California. According to the firm, institutional clients made up half of its caseload-up from 5 percent before the PSLRA. In February 2002 the firm filed suit on behalf of the University of California regents against top executives of Enron Corp. and its accounting firm, Arthur Andersen. That litigation settled in 2005 for $7.2 billion, the largest sum ever recovered in a group of securities class actions.
But also in 2002, prosecutors made their first big move against Milberg Weiss: Serial plaintiff Lazar and his intermediary lawyer were indicted for their alleged involvement in a paid-plaintiff scheme with a
"New York law firm." A former Milberg Weiss partner soon found himself in front of the grand jury.
Granted immunity, the former partner pointed prosecutors to a third serial plaintiff: Howard J. Vogel.
It seemed improbable that the criminal prosecution of Milberg Weiss would rest so heavily on the slight, 61-year-old shoulders of Vogel, a retired mortgage broker living in Florida. Yet Vogel's story proved critical to the government's case.
According to prosecutors, Vogel had sent his personal attorney to negotiate his payments with Melvin
Weiss at the firm's New York office above Penn Station. A month later, in December 2003, the firm sent a
$1.1 million check to the attorney as a lawful "referral fee" that ultimately landed in Vogel's bank account, according to his 2006 plea agreement on perjury charges.
Lerach's defense attorneys, John W. Keker and Elliot R. Peters of San Francisco's Keker & Van Nest, contended that no one had ever alleged Lerach knew about the payment to Vogel's attorney. "Mr. Lerach has pointed out, if he had known about it, he would probably be on trial for murder [of his law partners] rather than for paying plaintiffs," Keker told Judge Walter. But prosecutors cited the payment as evidence of an ongoing conspiracy in which Lerach had earlier involvement.
The indictment of May 2006 brought charges against Milberg Weiss Bershad & Schulman as well as name partners Bershad and Steven G. Schulman. It's possible that prosecutors also could have filed against Weiss, who was later identified as "Partner A" in the indictment and figured prominently in Vogel's testimony. But they didn't. Perhaps they hoped to pressure Bershad and Schulman to cooperate by letting it appear they believed that Weiss and Lerach were floating above it all.
A year later, however, Bershad and Schulman were still fighting the charges, and prosecutors tried a new tactic. If both defendants would plead guilty to a felony, the government would recommend light prison sentences. And even these could be wiped away with cooperation, the prosecutors indicated. But they said that both men needed to accept the offer-neither could alone. Bershad, perhaps worried that he might end up taking the fall, reportedly wanted to take the deal but could not persuade Schulman to do so. At that point Bershad's defense attorneys started talking with the prosecutors.
Within weeks of Bershad's plea deal, Keker called George S. Cardona, acting U.S. Attorney in Los
Angeles, to begin negotiations on behalf of Lerach. Even though prosecutors finally had a credible witness against his client, Keker still believed he had a strong defense. Prosecutors had been unable to compile much evidence that Lerach actually made cash payments to plaintiffs. Without that, Lerach's lawyers could argue that his conduct was not illegal. But as a practical matter, such a technical defense was unlikely to appeal to a jury.
In September, Keker and Peters struck a deal with prosecutors: Lerach would plead guilty to one count of conspiracy to obstruct justice and make false declarations under oath. They negotiated a binding deal that capped the maximum prison sentence at two years. As a precaution, another federal judge was called in to review the deal, so that if Judge Walter took the unusual step of rejecting the binding agreement, he would have to rule against one of his colleagues.
Keker and Peters also exacted a laundry list of promises from prosecutors. The government agreed not to prosecute Lerach "for payments to or for the benefit of stockbrokers, non-lawyers, and/or entities to serve as plaintiffs." It agreed not to prosecute Lerach on a number of leads discovered in connection with payments the firm had made to John B. Torkelson, the damages expert prosecutors had been investigating. And it agreed not to prosecute Coughlin Stoia or two of its senior partners, Patrick J.
Coughlin and Keith F. Park, for violations of federal law arising out of "non-prosecution conduct" related to

payments to Torkelson when the pair were partners at Milberg Weiss.
At the same time, Lerach's defense team filed court papers denying key allegations cited in the plea deal, including that Lerach had ever made a direct cash payment to Cooperman. Finally, Judge Walker noted at the sentencing hearing, Lerach "chose not to implicate others or assist the government in the prosecution of the remaining defendants in this case, and prepared to stand alone and accept his punishment." Two weeks after Lerach's sentencing, Torkelson, the expert, agreed to plead guilty to working on a contingency basis for securities class action firms. Although Torkelson was supposed to be an independent witness, prosecutors said, he reduced his fees by millions of dollars when class actions failed, and added charges when the cases were successful. The plea agreement cited an application to the court, signed by Coughlin and Park, seeking reimbursement for the firm's expenses in one case it won, including about $146,000 for expert witness fees paid to Torkelson.
"Any suggestion that anyone here did anything improper in this matter is inaccurate and irresponsible," Coughlin Stoia said in a statement.
If Lerach had pleaded to protect his former partners, Coughlin did not seem especially grateful.
Though he declined to comment for this article, he ignited a minor firestorm in February with his comments to another reporter. "Yes, Bill was a household name and brought good and bad," Coughlin told the National Law Journal. "But he's been in the press under that investigation for years. With all due respect, our competitors hammered us every time we walked in the door, anywhere. That doesn't happen anymore." At Lerach's sentencing, Assistant U.S. Attorney McGahan told Judge Walter that the justice system would fall down if "one of the most prominent members of the bar" were allowed to walk away from wrongdoing without tough punishment.
"Judge Walter wondered how Mr. Lerach could have lost his moral compass," McGahan says. "I suspect [Lerach believed that] everyone's corrupt. When you conclude no one else in the game has a moral compass, it's easy to lose yours."Body Text
Gabe Friedman is a reporter for the Los Angeles Daily Journal.

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