Lerach, Bill - "I Am Guilty" - Vanity Fair

I Am Guilty

by Bill Lerach June 2, 2008

Editor's Note: You are about to read the words of a convicted felon. ­Until recently, Bill Lerach waged a one-man war on big business—he was the most feared class-action lawyer in America. He and his New York firm, Milberg Weiss, were a machine that made publicly held companies pay: Enron,Tyco, WorldCom, Martha Stewart Omnimedia and others, all taken on and, in many cases, taken down by Lerach and his partners on ­behalf of aggrieved shareholders. In the course of his war, he and his firm made a fortune. Then it all came ­crashing down. In March, ­Lerach pleaded guilty to charges that he made illegal payments to plaintiffs, who essentially were hand-picked to get suits against ­corporations rolling in ­exchange for kickbacks from Lerach and his team (his partner, Melvyn Weiss, faces similar charges).

In May, Lerach began ­serving his two-year prison ­sentence for conspiracy. In ­response, he has written a ­remarkable document, partly an attack on the corporations and government officials who brought him down, partly a ­finger-wagging indictment of the system that made him rich, and partly an attempt to rationalize what he did.

My Side of the Story
I am guilty. Because I committed acts that prosecutors and a judge decided were crimes, I’m on my way to a federal prison for 24 months.

As I go, I’d like to tell my side of the story. I pleaded guilty, so this is not an appeal for sympathy. I merely want to raise some questions that haven’t been addressed in the media and deserve a more nuanced discussion than is possible in the course of a criminal case.

First, some background. I specialized in securities class-action suits—cases brought on behalf of individual shareholders against powerful corporations. I was accused of participating in a conspiracy in which my former law firm, Milberg Weiss, gave some plaintiffs a portion of the fees we earned. While lawyers divide fees with other lawyers all the time, bar associations have deemed it unethical to split fees with non-lawyers. In addition, because false documents had been filed with the courts concerning those fees, prosecutors accused me of conspiring to make false statements—a federal crime.

Now, about the payments: Prior to 1995, paying plaintiffs wasn’t illegal under federal law. In fact, courts sometimes approved small "bonus" or "incentive" payments to plaintiffs. After the 1995 Private Securities Litigation Reform Act, however, these special payments were prohibited, and plaintiffs were required to submit sworn statements that they would not receive any.

In my plea agreement, prosecutors cited a single false declaration filed in late 1996 by someone who had been part of a paid-plaintiff arrangement. The plaintiff 's case was dismissed; there was no recovery and no legal fee, and the plaintiff received no money.

So why did I plead guilty? If you haven’t been a defendant in a federal criminal prosecution, let me tell you, it is not a fair fight. Prosecutors have virtually unlimited discretion to determine which charges to pursue. They structure indictments with multiple counts and money-laundering claims to threaten a defendant with huge financial penalties and the possibility of a long prison sentence. This creates draconian pressure to plead guilty.

The prosecutors hold all the cards. The judge holds the gavel, and from the defendant’s perspective, it might as well be a bazooka. The judge is free to ignore sentencing guidelines and impose an even harsher sentence. And because prosecutors and the judges both work for the government, there is a disturbing synergy in the entire process. Like a nonconformist during China’s Cultural Revolution, a defendant in a federal criminal case is forced to bow and humbly express guilt, regret, and contrition. You speak only to affirm your guilt and sorrow. If I hadn’t pleaded guilty, the judge could have sentenced me to seven years instead of the 24 months I now face.

I don’t cite these facts to dispute that prosecutors proved I committed a crime. But I do suggest that the story is a lot muddier than many think. Some believe the legal system is a shiny, sharp-edged machine that computes the indisputable truth from the facts with airtight legal logic. In reality, as anyone who has experienced the legal system up close knows, the law is full of soft edges and subjective decisions. Some matters are black-and-white, but there is also no shortage of gray.

Let me clear up some misconceptions about my case. The government contended that the people on whose behalf we sued were damaged by the fees paid to plaintiffs. This is false. Milberg Weiss was an aggressive firm and achieved superior results. The legal fees in our cases were earned based on the work done and the results achieved. If some of the lawyers’ fees were shared with plaintiffs, that didn’t diminish the amount of money they could win; it simply reduced our fee. No payments that were made should distract from the fact that justice prevailed in these cases and the rights of victimized shareholders were upheld.

Other misunderstandings relate to the role that fee sharing played in securities class-action suits before 1995. Most of the pre-1995 plaintiffs in securities cases were individuals who suffered small losses. If their cases had merit, courts let them go forward. If they were flawed, courts threw them out. Groups of people for class-action suits were routinely certified by courts with the knowledge that these plaintiffs were figureheads, giving lawyers the go-ahead to represent a class of defrauded investors. The courts scrutinized the legal fees and then awarded them after giving class members an opportunity to object.

Prior to the 1995 act, Milberg Weiss did not voluntarily pay plaintiffs a share of its fees out of the goodness of its heart; we did it to stay competitive. Paying plaintiffs was an industry practice. Neither class members nor competitive law firms were disadvantaged or harmed by it.

A more fundamental point is this: The world’s wealthiest and most powerful corporations approach securities cases as a war of attrition. The companies do everything in their power to persecute and inconvenience overmatched individual plaintiffs in hopes that they will conclude that it isn’t worth the trouble and drop their cases. Lengthy interrogations; brutal depositions; meticulous searches through plaintiffs’ private financial information, tax returns, and unrelated investments; even the use of private investigators—these are all the norm.

Our experience told us that whistleblower plaintiffs require incentives to come forward to act on behalf of a large number of victims. If these plaintiffs weren’t willing to stick their necks out, there would be no class-action suits, no recovery, and victims would get no justice at all.

In suits filed against contractors accused of defrauding the federal government, the whistleblower who spots the fraud or brings the suit gets a cut of the recovery, which is sometimes worth millions of dollars. It’s a remarkable double standard: The feds split the take from successful government-contract-fraud suits with plaintiffs but imprison lawyers who share their fees with ­someone who helps bring a successful securities-fraud suit that benefits thousands of investors. Go figure.

Let me offer an example: Brown v. Board of Education, the landmark case that outlawed racial discrimination in public schools, was a class-action suit. Let’s assume—and of course, there is no evidence that this happened—that the lawyers compensated the plaintiffs for the considerable inconvenience and hassle they endured for years after bringing the case. I suspect you would find such ethical impropriety tolerable and certainly not criminal. But under our current system, it wouldn’t be legal.

Given my jail sentence, what is the future of class-action suits? What will happen to stockholders who have been victimized by corporations? What kind of system do we want?

Perhaps what could come out of my case is a rethinking of the class-action system. The rules against splitting legal fees with nonlawyers are meant to prevent lawyers from paying what are known as cappers or runners to attract injured plaintiffs for filing personal-injury suits. Some undereducated workers or accident victims who did not understand their rights to sue and did not have access to lawyers would not have brought lawsuits were it not for these runners. Lawyers retained by big companies worked hand in hand with the powerful interests they represented to create a system of restrictions and prohibitions designed to protect themselves. The origin of the rule against splitting legal fees with nonlawyers had nothing to do with stopping frivolous litigation. In my view, it had to do with preventing litigation, period.

The motivation was similar for the now discredited rules prohibiting attorneys from advertising. The same interests that fought class-action suits erected these barriers to free communication. If ordinary people don’t know about their legal right to pursue dishonest stockbrokers, insurance and drug companies, and makers of dangerous products, then those groups will face far fewer suits, meritorious or not.

Legal rules allocate power and control behavior in societies. Historically, legal rules have been weapons used to keep things the way that the people who control the state want them to be. The rules protect them from others, including those they oppress, cheat, and injure. At the end of the day, what we choose to excuse, condemn, and punish often depends on values that are difficult to articulate but are nonetheless strongly felt.

So it is with class-action litigation. I believe that class-action suits provide ordinary people with access to the courts so that they can stand up to companies and interests seeking to hurt or take advantage of them. This system treats everyone fairly, regardless of how much money they have. Others look at it and see no redeeming virtue, just abusive, extortionist suits that let lawyers make a lot of money. But I don’t believe that the price fixers who cheat consumers, the polluters who hurt our environment, the tobacco companies that target children, and the dishonest drug companies that conceal negative results of studies or lie about drugs’ side effects should be allowed to operate with impunity.

What kind of legal system do we want? One that allows lawyers to pay plaintiffs a share of fees earned in prosecuting meritorious cases, or one that discourages meritorious cases because plaintiffs cannot share in the fees and are thus unwilling to endure the torment of serving as the plaintiff ?

Most shareholder lawsuits are valid and settled based on their merits. The Securities and Exchange Commission has repeatedly recognized the importance of private enforcement. So have the courts. Members of Congress have stressed the importance of private-­enforcement suits. The repeated financial frauds of Wall Street and public companies—and the recoveries obtained for victims by class-action suits—attest to this fundamental truth.

The federal government profits by hundreds of millions of dollars every year from a system in which plaintiffs expose wrongdoing by drug companies, Medicare providers, and defense contractors; sue them on behalf of the government; and get a cut of the recovery.

Today, most stockholder cases are brought by institutional investors—particularly pension funds. Many of these are dangerously underfunded, in no small part because of the losses they have suffered as a result of fraudulent conduct in the financial markets. Any reward that goes to a pension fund for serving as a plaintiff in a meritorious case will not benefit the trustees or managers of the fund personally. Rather, the money will help the workers and retirees who are the fund’s beneficiaries. If we compensate securities class-action plaintiffs by giving them a cut of the recovery or lawyers’ fee, we align their interests with the victims they represent. The more they and their lawyer recover for the fraud’s victims, the bigger the payment they share. What is wrong with that?

In today’s antilitigation climate, in which the Supreme Court has recently turned its back on Enron victims and consistently ruled in favor of Wall Street, drug companies, and other corporate interests, there’s little chance that reforms will be adopted. But times will change. As the inexorable efforts of corporate interests and their judicial allies to restrict access to the courts mount and go unchecked, and companies are not held accountable for their misdeeds, public opinion will turn against such a one-sided system. Perhaps someday, a young scholar or legislative aide researching a way to fix the system will see some virtue in changing the status quo.

Prosecutors have discretion in deciding what cases to bring and what charges to assert. At what point do ethical violations become serious enough to be considered criminal cases that should be prosecuted? Obviously, federal prosecutors, who are ­presidential appointees, can exercise their discretion selectively or punitively, for political reasons. And the political influence exercised by the Justice Department under the Bush administration has been well documented—think of ­Alabama governor Don Siegelman and the several U.S. attorneys who have been fired.

One of our plaintiffs was “paid” through a law firm that had long been closely associated with—and represented—the Republican Party in California. If a conspiracy to make an undisclosed fee split was the crime, why wasn’t the law firm that actually made the fee split with the plaintiff prosecuted?

On the other hand, I sued Halliburton for securities fraud and accused Dick Cheney, then Halliburton’s C.E.O., of pocketing $40 million via insider trading—a suit that the court allowed to move forward and could have resulted in my taking Cheney’s deposition had I stuck around. My partners and I were also high-profile Democratic activists who had contributed millions to the party and its causes. This may all be a coincidence, but if you are in my shoes, it’s a disturbing one.

Am I angry about all this? Of course I am. The Justice Department has investigated my old firm for the entire time Bush has been in office. The U.S. Attorney in Los Angeles who oversaw our case later went to Gibson Dunn & Crutcher, which has essentially become the West Coast branch of the Bush Justice Department, having landed a lucrative partnership and a high-paying post monitoring a deal the Justice Department has brokered.

The prosecutors never identified a single case that I filed as frivolous. Those cases were won or lost based on their merits. We earned the legal fees awarded in the cases we won through hard work. Before me and my partners, no one had ever been prosecuted for splitting a legal fee with a plaintiff. The conduct was industry practice. Yet the Justice Department wanted it to be criminalized and found a federal statute to use. Then the power of the system was brought to bear. I was unwilling to risk my firm or my partners, or getting a seven-year jail ­sentence. So I pleaded guilty.

I’ll see you in 24 months.