Super lawyer Bill Lerach wins again. This time, it's with Californian voters. Next up: multinationals?
A cluttered office overlooking San Diego's majestic harbour may seem an unlikely base for a near nuclear battle over shareholders' ability to sue. But when this issue was fought out before California's voters in March, Bill Lerach's executive suite became, at least symbolically, the epicentre for a counter-revolution that will impact thousands of investor relations officers across the US and beyond. Some may want to take cover now.
The revolution itself was the 1994 take-over of the US Congress by the Republicans, and with it a push to curtail America's run-away litigation mania. That resulted in 1995's passage of the Private Securities Litigation Reform Act, which makes it more difficult to bring a shareholder class action in federal courts, in part by giving companies a 'safe harbour' to give forward-looking analysis and commentary.
The counter-revolution was the recent, successful effort by plaintiff attorneys, allied with consumerists and others, to ward off a move to institute similar reform for litigation brought through the California state court system. The efforts were offered to voters in the form of three separate propositions: Prop 200, 201 and 202.
Voters trashed all three in the late March statewide referendum, the same election that saw Bob Dole clinch his Republican nomination drive and Bill Clinton run unopposed among Democrats.
Even by American standards, the referendum donnybrook was an expensive and no-holds-barred fisticuff, fueled by two wealthy and self-interested constituencies: Silicon Valley executives on one side and the plaintiff attorneys on the other. Each side spent close to $15 mn.
Most of those funds went into vitriolic TV ad spots. One of the more extreme, by way of example, opened with a shot of disgraced and now jailed banker Charles Keating. The image then dissolved into a picture of Seagate Technologies CEO Alan Shugart, who has jousted with Lerach in court. An announcer darkly tells viewers that Shugart 'has been taken to court for insider trading by consumers who recovered millions in settlements. Protect yourself against the next Charles Keating.'
Shugart, who in 1979 founded the new world's leading disk drive manufacturer with $5 bn in annual sales and some 65,000 employees around the world, is suing the attorney's campaign organisation for libel.
Lerach, a transplanted Californian who has grown mighty rich representing shareholders in class action suits against corporations, became the poster boy for lawyers through his success and through his visibility in a sue-happy US. In some circles being hit with a class action suit by your shareholders is known as being 'Lerached'.
Indeed, out of his expansive, unruly office in recent years has come a steady stream of court filings and litigation papers that, depending on your point of view, are either sapping America's corporate vitality, or leveling the playing field between the vulnerable little guy and otherwise all-powerful corporate chieftains.
Which side you are on will most likely determine what you think about Bill Lerach, and whether you believe the California vote is an aberration of the macro trend toward a more conservative America, or the first sign of the Republican Revolution's demise.
What is unassailable is the stunning successes Lerach and his colleagues have enjoyed. His firm - Milberg, Weiss, Bershad, Hyne and Lerach - is indisputably the nation's premier shareholder litigation plaintiffs representative, having generated some $4-5 bn - yes, that's billion- in recoveries and settlements during the last two decades. Many of the defendants are technology-based companies in Northern California and other high-tech belts, in large part because of the volatility of their products and the resulting roller coaster rides their shares take. In fact, an estimated 60 per cent of publicly traded companies in Silicon Valley have been sued by their shareholders, though not all by Lerach's firm.
In early March, it was Lerach, though, who filed suit against Apple Computer for its allegedly excessive pay of inept top executives. In a blow against the idea that legal documents are full of legalese inaccessible to the rest of us, Lerach's court filing argues straightforwardly: 'Over the past several years, Apple's officers and directors have virtually destroyed one of the most valuable corporate franchises in American business history, wiping out billions in public shareholder equity, while stuffing their own pockets with excessive salaries, bonuses, termination payments and other perks.'
There's not a lot of subtlety there, and it is a formula that clearly works. Industry newsletter Securities Class Action Alert estimated the 50-lawyer Milberg, Weiss's share of its victories and settlements at about $250 mn during the last two years alone. Forbes magazine pegged Lerach's personal income in 1994 at $7 mn.
Lerach and his wife have given a slice of that income - some $480,000 since 1993 - to candidates for federal office, making him the second largest individual political donor in the US during that time, published reports say. Milberg, Weiss contributed more than $2 mn in the recent California fight.
Corporate America's opinion - especially technology CEOs' - is hardly muted about Lerach. Words like 'scum' and 'greedy' and 'parasite' get bandied about with regularity.
Lerach himself seems to enjoy the fuss. On an office wall is a clip from The New York Times: 'Pit Bull of Silicon Valley,' the headline screams.
In a recent interview in San Diego, the frizzy-haired, portly and hyper-kinetic (he drinks coffee in large mugs, seemingly in one gulp) 50-year-old mixes an aw-shucks 'right time at the right place' self-effacement with an evangelist's uncompromising zeal, all offered in perfectly crafted sound-bite morsels. He's been interviewed before, and he's good at it. The guy flies in fifth gear at all times, but with something of an impish sense of humour.
The thoughts come spewing out in easily digested nuggets: 'The privilege of running a public company is not to run it into the ground,' he says about the reasoning behind the Apple litigation. 'You assume substantial responsibilities.'
On the motivation driving those behind the California referendum: 'Silicon Valley executives want to get rid of shareholder litigation, but they knew that they couldn't go out and say that to voters. It would be like root canal work without the anaesthesia. So they packaged it in larger measures.'
On today's CEO: Many 'rule their corporate empires like potentates of old. What they hate is a legal system that calls them to be accountable.'
On why many believe that excessive litigation is a drag on economic growth and a deterrent to innovation and entrepreneurship, and thus an obstacle to America's competitive might: 'Years of Chamber of Commerce and insurance company propaganda have taken their toll.'
On whether CEOs (and IROs) should be rejoicing over the Congressional moves: 'I won't dance on any graves just yet.'
The journey to California legal superstardom began 'back East,' in Pittsburgh, Pennsylvania, smack in America's industrial heartland. Raised in that city's North Side - then a middle-class ethnic neighbourhood and now a down-and-out largely black area - Lerach's father worked for a while as a shoe salesman, despite his college education.
Winning scholarships, the younger Lerach attended the University of Pittsburgh and then its Law School. From there, Lerach made his first big score. Hired by the blue-blood Pittsburgh law firm of Reed Smith, Lerach became the upper crust firm's youngest partner after just five years, developing a speciality in public offerings.
Had it not been for an encounter with top New York plaintiffs lawyer, Mel Weiss, Lerach might have settled into the affluent, unremarkable life of a provincial lawyer. But the rapport with Weiss - 'Mel was the cleverest guy I've ever met. We bonded.' - and the realisation that 'my personality was not suited for defense work,' led him to look West.
In 1976, Lerach moved to San Diego to start up a new office for Milberg,Weiss. Then gold struck. In the early 1980s, California's technology sector took off in what Lerach calls 'the greatest bull market in the history of Western civilisation.' And with it, a dramatic jump in the number of technology stocks brought to market. Sharp-eyed lawyers had a new - and lucrative - arena.
'That's been my career ever since,' he says. So Lerach wins again. Silicon Valley executives gambled that they could drive Lerach and his type into oblivion.
Instead they gave them the mantle of the people's blessing.
Where Next?
Having overcome the wrath and well-financed machinations of California technology executives, where to next for Lerach and other shareholder plaintiff attorneys?
Multinationals seeking to raise capital in the US, for starters. Lerach says he sees a 'repeat pattern' of fraud and misleading communications coming from non-US companies. 'There have been too many causalities for this to be just bad luck.' Non-US executives and their advisers are not 'steeped in the culture of compliance and disclosure that underlies US securities markets.'
On the day Investor Relations visited Lerach, the lawyer was finalising documents to initiate a suit against a group of British venture capitalists. That Lerach continues to feel no small dose of thrill from the staking of opponents was evident in his rapid-fire outline of the facts - all the while, a finger jabbing at a computer printout of the stock price history of the company to be challenged.
The allegation is that the London bankers had solicited investors in the US knowing that the company was about to tumble. 'The ink was barely dry' on their disclosure statements, Lerach says, before the stock started a fast plunge downward. 'At the time the company went public, (its backers) knew that would happen.'
Stay tuned.