Attorney Bill Lerach makes his living filing class-action lawsuits against high tech companies. His latest initiative - Proposition 211 - has finally inspired Silicon Valley to fight back.
Speaking with forked tongue
A strange virus is gripping Silicon Valley, but it's not in the computers. Techies and venture capitalists who would much rather tweak new products than get out the vote have suddenly caught election fever. More correctly, it's been forced on them.
Fear, not love, has made the Valley wake up and smell the politics. If passed on the November 5 ballot, California Proposition 211 would render high tech companies prey to multimillion-dollar lawsuits for every downward slip in their stocks, suits that Silicon Valley execs call "absolute extortion." The controversial measure attempts to circumvent reforms passed by Congress in December 1995 that made it tougher to bring securities class-action suits in federal courts. Instead, courts in the Golden State would become a dumping ground for the band of law firms that churns out these suits.
There's more. Punitive damages would be allowed in securities fraud actions for the first time. Proposition 211 would also prohibit caps on contingency fees and wipe out a 1993 court ruling that disallowed class actions in California based on company forecasts that don't pan out.
The measure packs a final stinging blow. Proposition 211 would allow trial lawyers to go after the personal worth of corporate directors - a nightmare provision that could potentially send packing the scores of Menlo Park venture capitalists who sit on Silicon Valley boards.
Who's the culprit? A thousand fingers point to William Lerach, a San Diego trial lawyer branded by the high tech industry as Public Enemy Number One, owing to the millions he's gleaned in securities fraud settlements from Silicon Valley's finest. With offices in California and New York, Lerach's firm of Milberg, Weiss, Bershad, Hynes & Lerach has filed hundreds of securities class-action lawsuits, which critics say are often without merit.
"He's an exceptionally smart, shrewd, entrepreneurial, economic terrorist," says John Doerr, an alumnus of Intel Corp. and partner at the venture capital firm of Kleiner Perkins Caufield & Byers. Doerr has served on the board of directors at eight high tech companies; five have been hit with class-action lawsuits when their stock slipped. Three of those chose to settle rather than fight, even though defense lawyers called the accusations meritless.
In the past decade, Doerr says, the cost of defending these companies has risen to a whopping US$120 million in settlements, attorney fees, and directors' and officers' insurance. Doerr figures that would pay 200 first-rate engineers for a decade.
About one-third of the 319 shareholder suits filed between 1991 and 1994 were against high tech companies, according to a study by National Economic Research Associates in White Plains, New York. Merit notwithstanding, most chose to settle rather than get into a protracted legal battle. More than $709 million was paid by these companies in 95 settlements; attorneys took a cool $227 million in fees off the top. The biggest chunk of legal fees went to Lerach's firm, and its share is on the rise - Milberg, Weiss took 45 percent of the fees in cases settled from 1991 to 1994. Lerach's take rose to 52 percent of fees collected in high tech cases settled by June 1996, according to a recent NERA update.
Speaking with forked tongue
For years, horror stories about Lerach and his sharp language have been traded like tales from the crypt. A favorite involves Carol Bartz, chief executive at Autodesk Inc., who was invited to an economic conference that President Clinton held in Little Rock, Arkansas, in 1993, shortly after his election. Autodesk was then in the middle of a class-action suit with Lerach and had a settlement offer pending. In the midst of the conference, however, Bartz had the temerity to raise the topic of reforming Lerach's brand of securities fraud lawsuits. Lerach got wind of this and at a later meeting with Bartz hit the ceiling, shouting at her and her lawyer and threatening to call off the deal.
It took more than a dose of Lerach's invective to raise the dander of John Adler, chair of Adaptec Inc. In December 1990, after more than four years of record-breaking profits, Adaptec gathered analysts and announced it would miss projected revenue numbers by 20 percent. The announcement went out over the business wire and Adaptec stock dropped 20 points.
Within four days, Lerach's office filed the first suit, alleging securities fraud. Adler was incredulous. "It basically said we were all crooks who ran the business in the interest of management and couldn't care less about shareholders," Adler says. "The whole thing was nothing more than a fishing expedition."
Adaptec spent three years fighting the suit, ultimately supplying 1,500 boxes of documents to comply with document production requests. The company eventually paid $4.3 million to settle the legal action (half from its own pockets, the other half picked up by insurance) in addition to a $1.4 million bill from its defense lawyers, led by Palo Alto's Wilson, Sonsini, Goodrich & Rosati.
While Lerach's firm has made a bundle on these types of suits, he can also feign outrage at their very existence. Lerach was once left out of a $30 million securities settlement by Sun Microsystems. "He was so infuriated," Doerr recalls, that he filed suit in California state court, accusing Sun's directors of squandering its money by paying too much. Sun eventually paid Lerach $1.5 million to go away.
Lerach has hinted that he knows his type of lawsuit has little merit. Witness the case he filed against Alliance Pharmaceutical Corp. of San Diego. Before his company was sued, Alliance executive vice president Ted Roth knew Lerach vaguely, having bumped into him at a few fundraisers for the Democratic Party.
Roth first grappled with Lerach in 1992, shortly after his company announced a delay in the human trial for a blood-substitute product. Lerach sued within 48 hours. Roth and his lawyers met with Lerach and offered him carte blanche to come to the company and pore over its records. Roth recalls Lerach telling him that he didn't give a damn about the merits ("You can't print what he said," Roth blushes) and called the case "strictly a matter of economics." With an expert ready to estimate damages at $100 million, Lerach was only interested in talking settlement. Otherwise, he warned, Roth would be wasting his time.
Alliance was not content to play Lerach's game, which they considered to be outright legal extortion. A federal judge dismissed the action in 1995. Lerach's firm appealed but finally dropped the case in June of this year, when it drew a panel of appeals court judges not sympathetic to class actions. But Alliance spent more than $2 million in legal fees going the distance with Lerach. Its scientists, called into deposition after lengthy deposition, also spent untold hours educating Lerach's associates.
Most companies would rather cut Lerach a hefty check than go through the hassle of a protracted courtroom fight. But T. J. Rodgers, president and CEO of Cypress Semiconductor Corp., would rather die than settle. Rodgers savors the moment when lawyers from LA's Weiss & Yourman - a "Lerach clone," he says - sued Cypress for fraud then immediately brought up the topic of settlement. "My exact quote was, 'You will get the first nickel out of me when you pry it out of my cold, dead fingers.'" When the suit was dismissed, Rodgers framed the decision and hung it on his wall. But his defense cost him $1 million in legal fees.
__ Footprints in the snow__
In 1995, Adler and Doerr were among the Silicon Valley execs who took their gripes to Washington. Last December, the Republican Congress took heed, overriding a presidential veto to pass the Private Securities Litigation Reform Act, designed to curb some of the wilder antics of Lerach & Co. For instance, the law now limits investors from filing more than five securities class actions in a three-year period. In the past, "professional plaintiffs" like the late William Weinberger turned up repeatedly in suits filed by Lerach's firm. When he was deposed in a 1986 case, Weinberger had racked up 33 suits alleging securities fraud. Another 45 were pending. Weinberger died in 1993 at age 95. (He may have been old, but at least Weinberger was breathing. When Lerach sued Digital Microwave Corp., his firm neglected for more than a year to inform the San Jose federal court that the investor named in the original complaint had died.)
The restrictions haven't stopped the suits but have slowed them down. A case in point is Lerach's suit against Silicon Graphics Inc. SGI announced January 2 that it would not meet projected earnings, triggering a 16 percent stock drop. Securities filings showed that company insiders sold their shares prior to the announcement. In the old days, Lerach probably would have sprinted to the courthouse with a class action. Instead, Lerach took 24 days to work up his fraud suit.
On the eve of the filing, I met with Lerach - who has since adopted a low profile, declining press inquiries - in his office in San Diego. Posters tacked on his wall depicted a rogues' gallery of executives like Rodgers and SGI CEO Edward McCracken, comparing their desire to keep "ordinary people out of court" with the fraud cases against them. Lerach, 50, seemed undaunted.
Indeed, when he talks about corporate wrongdoing, Lerach speaks with evangelical zeal. His words spill out rapid-fire, his voice cracking and hands waving. By comparison, the average visitor seems as inert as the technicolor saltwater fish on display in the tank in Lerach's lobby. And while Silicon Valley laments that stock-drop cases are frivolous, Lerach sees it far differently. "Stock drops are what alert people," he says. "The sharpness and the suddenness of the decline is circumstantial evidence that the company previously concealed" the bad news, he says. To Lerach, insider selling is the guilty "footprints in the snow."
Lerach's Silicon Graphics fraud suit charges that insiders left huge footprints by "unloading" shares at the same time they "made a series of misleading statements" to the market. SGI countered these charges in its motion to dismiss, accusing Lerach of relying on "a favorite tactic" by citing stock sales. "This case is just what Congress had in mind" when it urged an end to abusive lawsuits, reads the brief filed by the company. The suit is still pending in the courts.
__ Protecting "ordinary working people"__
The group pushing Proposition 211 originally wanted to call the initiative the "Retirement Savings and Consumer Protection Act," but state officials didn't buy the widows-and-orphans line. Instead, they labeled it the "Attorney-Client Fee Arrangement-Securities Fraud Initiative."
Still clinging to their symbols of heartbreak, pro-211 lobbyists are calling their group the Citizens for Retirement Protection and Security. But you won't find many average citizens among its financial supporters. All of the $7.5 million raised to date came from the dozen or so law firms around the country that have honed these class-action lawsuits to an art. Lerach's firm bankrolled Proposition 211 with a hefty $3.6 million contribution. The Weiss & Yourman firm contributed another $600,000.
Proposition 211 begins with a lengthy preamble citing that "millions of Californians work hard, pay their taxes, and save their money" and laments that "ordinary working people" are often denied access to justice because they "cannot afford" to hire a lawyer. Then it gets down to business, describing how it would allow lawyers, for the first time, to seek punitive damages in investor class actions. Proposition 211 also prohibits the restriction or impairment of contracts to pay counsel. Translation: no regulation of attorney fees. Finally, it would prevent a corporation from indemnifying an officer or director found individually liable in an investor fraud suit.
Jonathan Cuneo, a DC lawyer who lobbied for Lerach in Congress, has been shuttling to California for the Proposition 211 effort. According to Cuneo, pulling the plug on indemnification will make corporate officers more responsible when they make rosy announcements about a company's future prospects. "This is not just about punishing, it's about deterrence," he says. "Generally, in these cases, it is the top executives themselves who are making misrepresentations to the marketplace while pocketing millions of dollars in insider sales."
For Silicon Valley, the real bombshell is that the personal worth of many a venture capitalist who sits on a high tech board would be on the line. Result? "We will all resign as directors," warns Michael Moritz of Menlo Park's Sequoia Capital, backer of legends like Oracle Corp., Cisco Systems, and, more recently, Yahoo! Moritz isn't just blowing steam. "Why would you jeopardize everything you've spent a lifetime building?" he asks. "Why would you put it at risk?"
Other high tech entrepreneurs also would be packing their bags. Take Judy Estrin, president and CEO of Palo Alto-based Precept Software Inc., a year-old manufacturer of Internet and intranet video software. Estrin, who's founded two other Silicon Valley companies, says she may not take Precept public if 211 passes. And she'll resign her board positions "the day after" the election.
The upshot? The quality of corporate boards will decline, as some of the most tech-savvy people flee in a desire to protect their nest eggs. "This will totally change the dynamics of Silicon Valley," Estrin says. The potential for disaster stirred Moritz and Estrin to become political activists for the first time in their busy lives. In two days, Moritz raised $1 million from his clients.
The figure would impress Tom Proulx, the Intuit cofounder who began Silicon Valley's anti-211 crusade. This spring, Proulx raised $12 million from friends in the high tech industry to pass ballot initiatives that would have made California courts the most inhospitable in the nation to securities fraud suits. But in March they went down in flames. A political neophyte, Proulx admits to some mistakes. The present campaign to defeat 211 is more broad-based than his fledgling effort earlier this year.
High tech honchos got a boost when President Clinton, who dissed high tech execs with his 11th-hour veto of the federal law, came out against Proposition 211. (Many Valley execs have in turn announced their support for Clinton's reelection.) There's also a cyber flair to the campaign. The Stop 211 group has linked its Web site (www.stop211.com/) to the networks at top companies.
Fired up, Silicon Valley execs claim the political battle is on. Proulx's group, the California Technology Alliance, has hired a lobbyist to represent it in the state capital - something Lerach's firm did a decade ago. The fruits of those efforts will be decided at the polls in just a few weeks. "In politics, the best defense is a good offense," cracks Dan Schnur, former adviser to California Governor Pete Wilson and a radio and television commentator. "Hopefully, Bill Lerach has awakened the sleeping giant."
