The fall of William Lerach

Was America's most fearless lawyer a gladiator in the fight against corporate greed, or more interested in creating lawsuits for fees than helping victims pursue real justice? By Stephen Foley

He terrorised corporate America for three decades, but the country's most fearsome and fearless lawyer is retiring this week in something close to disgrace. Company chief executives, to a man, are all thinking the same thing: good riddance to Bill Lerach.

For many individual investors, he is their gladiator in the fight against corporate greed, the showman who turned up to a Houston court room with a box of shredded Enron documents and a promise to fight for justice. But even for investors, his departure might be a mixed blessing – and the exact mixture will be debated for years.

"Ever since I saw the pain on my father's face when he told me how it felt to lose everything in the crash of '29," Mr Lerach wrote in his farewell missive to staff this week, "I've never forgotten that when corporations commit fraud, ordinary people are hurt and real people's lives are destroyed. All too often I've seen similar pain in the faces of victims of the debacles at Enron, Dynegy, Qwest, WorldCom, AOL/ Time Warner, Pacific Homes, and so many more."

Mr Lerach virtually invented the US system of class actions for securities fraud, the most aggressive practitioner of a system that can be demanding millions of dollars in compensation for investors within hours of an unexpected drop in the share price. He says he is clawing back something for the little guy when malfeasance occurs in the boardroom, and he can reel off an impressive list of occasions when he has done just that. He has also expanded the scope of successful class actions in securities fraud to extract compensation from the advisers, bankers, contractors and even public relations firms that worked with the company in question and who either helped perpetrate a fraud or should have raised more questions.

But his detractors say he has orchestrated an extortion racket that profits from corporate bad luck. Either way, he is the rotund, bespectacled face of a litigation industry that has dramatically increased the costs of doing business in America, and reduced profits for shareholders commensurately.

At the heart of his fiefdom in San Diego – at the law firm Lerach Coughlin Stoia Geller Rudman & Robbins, and before that at Milberg Weiss, – legal eagles monitor the financial newswires for the unexpected piece of bad news, the sniff of a corporate scandal, the plunge in the shares. Then they swing into action, tapping a network of friendly shareholders for those who are sitting on losses, launching a class action suit, demanding access to company documents they believe will provide evidence of fraud, putting on the tracks a whole legal train that more often than not results in a multimillion-dollar settlement from a terrified company.

In a perfect world, it is the legal system working to everyone's advantage. Wrongdoers pay a financial penalty. Investors who sign up to the eventual settlement get back at least some of their losses. The law firm takes its cut, sometimes up to 30 per cent of the settlement.

Most observers would be happy at that bar two things. First, the settlement often comes even in the teeth of vehement denials of any wrongdoing, the result of a straightforward calculation that it is better to settle and tap the corporate insurance policy for payment than to fight and risk a messy and distracting court case that could still result in a jury verdict against you. The first plaintiff himself is barely involved in the case, just a name for the main page of the lawsuit. In reality, it is Lerach v Corporate America. The lawyer once boasted that he had the best law practice in the world – "I have no clients".

And second, Bill Lerach is to many people who have dealt with him a foul-mouthed bully, prone to grudges and multi-year feuds. He is notorious for screaming at executives, in a bid to intimidate them into settlements. "I'm going to take away your fucking condo in Maui," he scream-ed at one. He is "lower than pond scum," in the memorable words of T J Rodgers, the chief executive at Cyp-ress Semiconductor, a Silicon Valley company that was (in the accepted parlance there) "Lerached". In 1999, Milberg Weiss was forced to pay $95m after a damaging case brought by one of the rival law firms repeatedly targeted in one of his feuds, where Mr Lerach was accused of abuse of process and his threats and bully tactics were colourfully exposed in a Chicago court room.

Christopher Cox, the current chairman of the Securities & Exchange Commission, who introduced a bill to curb class action suits when he was a Congressman in the Nineties, proclaimed Mr Lerach was practising "legalised piracy on the high seas of the new economy". Opponents have long pointed to Mr Lerach's own luxury lifestyle to suggest that he was not so much a supporter of the little guy after all..

Such was the opprobrium that Mr Lerach's self-defeating appearances before Congress brought down on him that the new laws had enough support to override a veto by President Bill Clinton, to whose Democratic Party Mr Lerach is long-time donor.

Yet no one from the outside had seemed able to destroy him. The Cox laws required that a lead plaintiff in a class action actually be the institution that had suffered the biggest losses, but Mr Lerach was by then so powerful and successful that he no longer needed his network of standby small shareholders. Institutions such as Calpers, the California state pension scheme, and the University of California, which was the lead plaintiff in the Enron case, came to him.

How has he fallen so far, so fast? Just last year, Mr Lerach was enjoying his greatest triumph, harvesting more than $7bn from the banks and other advisers to the collapsed energy firm. His boast was no idle one: the fund collected thanks to his efforts on Enron really is the largest ever collected to compensate corporate fraud.

The seeds of his downfall were planted in the early days of his old firm Milberg Weiss, the ambitious New York legal practice he joined in 1976 and for whom he set up Milberg West, its San Diego operation. Federal prosecutors have been engaged in an investigation of the firm that has spanned most of this decade and only recently began to bear any fruit. Mr Lerach's friends have characterised it as a politically motivated witchhunt. But what it has found, according to the charges laid against the firm and several former partners – although not, as of today, Mr Lerach or the founder Mel Weiss – is that several of the lead plaintiffs were paid millions of dollars in illegal kickbacks in order to buy up small shareholdings and sit ready to participate in class action suits. The picture that emerges from the allegations is just what the critics have alleged all along: that Mr Lerach's old firm was more interested in manufacturing lawsuits for the fees than it was in helping real victims pursue justice.

One former Milberg Weiss partner has agreed a plea deal and is co-operating, and the Department of Justice is not yet ready to say it has abandoned a trail it hopes will lead to Mr Lerach himself. He vehemently denies any wrongdoing, as do the indicted parties, but he has decided to retire to spend more time with his lawyers. In doing so, he hopes to spare the new firm he created in 2004, when arguments led to a final clash with Mel Weiss.

His exit came in typical style: with a rhetorical flourish. "I've treasured the opportunity to stand up and fight on behalf of these people, the honorable and innocent victims of dishonorable and despicable greed," he told colleagues. "But I've also 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."

Companies who paid the pricein claims by Milberg Weiss

* The collapse of Enron was made for Milberg Weiss. Massive fraud and lying to investors that led to perhaps the most notorious corporate collapse in US history meant a bonanza for the firm. It won a record $71bn (£36bn) on behalf of investors, and secured its biggest payday, estimated at more than $1bn.

* William Lerach headed the case against RJ Reynolds Tobacco over its ad campaign for its "Joe Camel" brand, where he argued that the mascot was an apparent attempt to attract a new generation of underage smokers. He won $10m from the company and a pledge to invest in anti-smoking campaigns.

* The firm filed a class action suit in 2000 against Apple after the computer maker talked up the prospects for its pre-iPod product line and then revealed disappointing sales figures. The computer manufacturer's shares lost three-quarters of their value on the news, and paid the price.

* Milberg Weiss filed a class action claim against telecoms giant AT&T for its role in defrauding consumers who called in on supposed games of chance to toll, 900-number programs. It won punitive damages from AT&T, and secured a $60m settlement from rival MCI.