William Lerach was called the knee-capper of corporate America.

He sued the big names in corporate America –  and few were immune from his class action securities litigation.

Over three decades of practice, he and his partners at the law firm Milberg Weiss recovered more than $40 billion in fraud judgments for shareholders.

Then in 1995, corporate America organized to get Bill Lerach.

They drafted and passed a bill through Congress called the Private Securities Litigation Reform Act (PSLRA).

The insiders in Congress knew it as The Get Lerach Act.

“I remember having dinner with a lobbyist from the accounting industry in Washington, D.C.,” Lerach told Corporate Crime Reporter in an interview last week. “It was the middle of that fight. I don’t recall his name. But he was effective. He looked me right in the eye and said – Bill, you are too prominent and we are going to get you.”

And they did get you. How did you end up being prosecuted and sent to prison?

“The private securities bar, like many businesses, had a certain number of warts and blemishes,” Lerach said. “No business is perfect. A practice developed in splitting fees with referring attorneys. And it turned out that the referring attorneys shared that money in many instances with the plaintiffs in the cases. It’s an inducement and reward for them to undergo the strain and the service and the attacks they get from the defense bar.” 

“Everybody knew it was going on, but nobody would talk about it for obvious reasons. As sometimes happens, somebody within a web got in trouble for conduct that none of us had anything to do with or knew about. And he got in big trouble. And when the prosecutors got him in a box, he did what people do. And he told on us. It generated a six year, $35 million criminal investigation from the Department of Justice. And it was a tough go, because we had to prosecute our cases and run our business while we were defending ourselves.”

The PSLRA law was known as The Get Lerach Act. Was it your sense that the criminal prosecution against you and Mel Weiss was part of the corporate campaign to get you?

“There is simply no question about it. And remember, a prosecution of lawyers, especially lawyers of our status and notoriety, had to be approved by the Attorney General himself. All of our files were seized. Prosecutors literally went through millions and millions of documents.” “We simply were not able to survive that degree of scrutiny in that political climate. I’m not resentful about it. I’m okay. It’s just simply part of the process.”

What did this PSLRA do? And what impact did it have on the practice?

“I spoke with our adversaries. And I know what they were up to. They created a heightened pleading standard so rigorous as to give any district court judge unlimited license to throw the case out on the grounds that it was insufficiently particular or failed to allege a strong enough inference of scienter or knowledge.”

“It was a terrible rule and took predictability out of the situation because the judge could do whatever they wanted. As part of that, they created the ability for a class certification order to be appealed immediately to delay the case for years and allow hostile appellate courts to get their hands on a trial court ruling in contravention of the final judgment rule. It also limited damages.” 

“And of course, it created a safe harbor, which is a license to lie in forward looking statements. It has completely debased corporate disclosures. You look at a press release today, the disclaimers are longer than the press release, which some wizard from Harvard Law School thinks up to try and think of every imaginable event. So, it has crippled enforcement.”

“Yes, the cases still get brought. Yes, the good cases get settled because they are so good that even the law and the judges can’t stop them. But you are not getting appropriate recoveries for the victims. That’s what that law did.”

“It also created the lead plaintiff provision, the largest loser, as we call it. That was meant to take the cases away from us, the private bar, and allow institutional investors to intervene and stop the lawsuits. That was Stanford Law Professor Joseph Grundfest’s little gem and it completely backfired.”

“In 1995, a law review article was published titled – Let the Money Do the Monitoring. It raised the prospect of how institutional investors could control large class action lawsuits so as to get rid of what the corporations viewed as frivolous lawsuits.”

“The idea was picked up, adopted and advanced by Professor Grundfest, who saw it as a way for institutional investors to come forward and use the lead plaintiff mechanism to seize control of cases that the corporate community viewed as frivolous and have them dismissed.”

“Grundfest brought together a group of institutional investors at a conference at Stanford Law School to try and rile up the community, to use the PSLRA to take control of these cases which we were bringing against tech companies, and get what they viewed as these horrible, frivolous cases dismissed.”

“We showed up at the conference and made our case in and one such case – we laid out the facts. And we effectively won over the institutional investors based on our arguments.”

“So in short, they wanted to use the lead plaintiff provision to destroy the ability of the traditional plaintiffs’ bar to bring these cases, and that completely failed. In fact, over time it has led to a greatly increased litigation presence and activity by institutional investors that in many instances has led to larger recoveries.”

“I used to say – you know, they told everybody we had horns and a tail. But when these institutional investors actually met us and looked at what was being done to them, they were furious. And today, who are the plaintiffs in the cases? The institutional investors who were supposed to come in and stop these cases. It is the ultimate example of the law of unintended consequences. And it’s probably why private securities litigation survives today.”

When you were practicing, did you have a sense that the law was actually working in controlling and deterring corporate wrongdoing?

“One simple way would be to compare the amount of corporate and accounting wrongdoing today to the way it was twenty-five years ago. I don’t think it’s materially less.” Lerach said. 

“But I never bought the idea that private litigation was an effective deterrent. It was more of a punishment, an exposure and a penalty. The system is set up to defeat deterrence. The corporations indemnify the corporations. The wrongdoers use corporate money to buy huge insurance policies. You can’t get their insider trading proceeds.”

“So, yes, there’s a big lawsuit. It’s inconvenient. And they bellyache about it. But at the end of the day, it doesn’t cost them any money. And you certainly can’t say the accounting industry has been deterred by what happened to them – even the destruction of Arthur Andersen. The media today is filled with articles about how horrible corporate accounting is all over the world, despite what we went through.”

“I’m in favor of private enforcement. It’s good for the lawyers who bring the cases. It gets some money back to the victims. And it calls wrongdoers to account. But I don’t think you can deter corporate wrongdoing. The incentives are too strong. All you can do is try to tap it back.”

What about tort cases? Let’s look at the Boeing case, for example, where 347 people died in two plane crashes. Even in an egregious case like that, all of the Boeing cases have been settled. 

Not one of the Boeing cases has gone to trial – and the two-thirds of them have been settled already. You would think that a trial would deter future corporate crime – there would be depositions of the CEOs, there would be public attention to the trial. Instead, the imperative is to settle, settle, settle.

Doesn’t that undermine justice?

“It would depend on the amount of settlement,” Lerach said. “What happens there is that it is a highly specialized aviation bar. They know all of the defense lawyers. It’s what you were alluding to. It’s not collusive and it’s not wrong. But there is a protocol almost. The event has occurred. The plaintiffs lawyers assemble the case. And ultimately, you know there is going to be several billions of dollars changing hands. And it’s going to change hands because no one is ever going to get to depose the CEO of Boeing or show those horrible documents. They won’t permit it.” 

“You want to talk about something that’s wrong in litigation? It’s secrecy – secrecy of pre-trial documents. It’s outrageous. It’s terrible. And the plaintiffs’ lawyers are to blame for that too. When I was practicing, we would fight that. We fought it in Enron. And the judge ruled in our favor. There is no reason for this kind of evidence to be kept secret. That undermines the real worth of litigation. The real worth of litigation is exposure. And it undermines deterrence.” 

What is stopping a judge from lifting these gag orders or secrecy orders on pre-trial documents?

“It’s discretionary. Most judges want lawyers to be compliant and agreeable and not create big fights in front of them. Most judges figure – okay, it’s a big litigation. The plaintiffs are going to win someday. They’ll get paid. We don’t need to have a big controversy here about these documents. The defendants are insisting that they be sealed. In many cases, there is almost a presumption in favor of secrecy. I just really hope the plaintiffs’ lawyers will fight harder on that. The law is mixed. It’s not as good as you would want it to be.”

The plaintiffs lawyers are reluctant to anger a judge. If a judge wants to accelerate the case toward settlement, and the plaintiff lawyer says – I want to make this information public and go to trial – that’s going to anger the judge. 

Why are judges biased toward settlement and not toward transparency and openness?

“Because transparency and openness require hard work – running trials, allowing for contested arguments by skillful lawyers. Your life as a judge is just easier if you go along,” Lerach said. 

“And look, there are a lot of wonderful judges. Please don’t misconstrue my remarks. But judges are human beings.”

“And where do federal judges mostly come from? They are former assistant U.S. Attorneys who are politically benign. And as prosecutors, they can get confirmed. Where else do they come from? Out of big law firms, where people have been seasoned as partners. They may not be the best partners. And they may not want to work six or seven days a week as people do in big firms. And they get placed onto the federal bench.” 

“When that becomes the core of the federal judiciary, that’s not necessarily a favorable situation for plaintiff lawyers.” 

Then let’s look at the plaintiffs’ bar. Clearly, in the vast majority of these cases, the plaintiffs’ lawyers are also biased toward settlement for the same reason. They don’t want to go to trial because their payday is secured with these settlements. To prepare for trial and offend the judge and move the judge off the ball –

“You have put your finger on the essential economic dynamic that drives this litigation. And it’s not necessarily bad. You can’t try every case. If you did, the judiciary would collapse. There has to be settlements. There has to be processing.”

“When we were active, we had 300 to 400 cases. Some of those cases are going to simply be – process, settle, pay the bills. The skill is for you as a manager is – can you identify within that universe the eight, nine, ten, twelve, fifteen cases that have the right mix of merit, judge, venue where you invest your effort, your time and risk to try and do good for that case, but also to benefit the practice and the overall litigation? You simply can’t prosecute every single case without restraint.”

The corporate criminal practice is moving toward a settlement practice also. When we started this publication 38 years ago, federal prosecutors would investigate a case, and if there was sufficient evidence, bring it to a plea agreement or to trial. If they didn’t have sufficient evidence, they wouldn’t bring the case. Now, almost all major cases are settled with deferred and non prosecution agreements. 

It’s a question of power. I can tell the size of the defendant based on the settlement. If it’s a plea agreement and the defendant is not being represented by a major law firm, then it’s a smaller company. 

If it’s a deferred or non prosecution agreement with a major corporate law firm, it’s a major United States company or a major foreign multinational. 

“The Democratic administration – because politically they are dependent on corporate money, Wall Street money, the accounting firm money, corporate community money – they have become soft on prosecuting big corporate cases.”

“On the other hand, these cases are hard to prosecute. These corporate executives are smart. They are surrounded by lawyers and experts. They get opinions. They insulate themselves. To us, we might say – the conduct there is so bad they ought to be prosecuted. But when you get into it, proving criminal intent can be difficult.” 

“So what are the results? A system whereby deferred prosecution agreements and big fines paid with corporate shareholder money, not the individual wrongdoers money, create headlines, create statistics for the prosecutors and a perfectly acceptable world for the corporate criminals where they can just go on with their conduct paying for it with the shareholders’ money. Now that’s not a good system.”

[For the complete q/a format Interview with William Lerach, see 38 Corporate Crime Reporter 5(12), January 29, 2024, print edition only.]