Against both companies, Lerach, who has brought some 600 class-action cases to date, is now casting a wide net of responsibility. Representing the University of California Board of Regents in the $25 billion Enron suit, he has made headlines by suing nine investment banks, including J.P. Morgan Chase & Co. and Citigroup, as well as the company’s legal counsels and what’s left of Arthur Andersen. Lerach is also pursuing many of the same banks in state courts on behalf of three California pension funds, including the California Public Employees’ Retirement System, for the banks’ involvement in a May 2001 bond offering for WorldCom.
All this might have been avoided, he says, if the PSLRA hadn’t been passed. Many of the disgraced executives at WorldCom, Enron, Adelphia, and elsewhere “would have been sued earlier and publicly exposed.” And that, says Lerach, would have had “the prophylactic impact on corporate conduct that private litigation and securities law was always meant to have.” Specifically, Lerach blames the law’s tighter filing standards and its safe-harbor rule, which protects executives who make forward-looking statements, for the surge in executive chicanery.
The slew of executives being sued has put the 56-year-old Lerach back in the spotlight. Recently, he sat down with CFO deputy editor Lori Calabro at his office in San Diego, surrounded by 10-Ks, legal briefs, and other documents, to sort through the mess created by recent financial fraud. Lerach makes no apologies for his tactics, or for the millions he has made from suing companies.
“I really love the American financial markets. There’s nothing like them in the world,” says Lerach. “And if we can play a role in making those markets healthier, we play a constructive role in society. And if we make a lot of money while we do that, then we are like a lot of other people who contribute positively to society, whether it is a brain surgeon or an entrepreneur or a corporate executive.”
You’ve been warning about “accounting rot” and “massive securities fraud” for years. Do you feel vindicated?
Someone once told me that the four worst words in the English language are “I told you so.” But we told people this was coming. And it wasn’t just because we are skeptical by nature or that we represent investors suing public companies. Remember, in case after case, we got to see the internal financial records, the accounting work papers, of these companies that were secreted from public view by protective orders.
What did you observe?
We saw case after case of deliberate falsification of financial results. We saw the way the investment banks got IPO business or secondary business by promising that an analyst would issue a favorable report as soon as the quiet period was over. And while many times the consulting done by the accounting firms was concealed, we saw enough to realize that the fees were way higher than generally thought. But did I think this was going to happen? Honestly, I didn’t really foresee this kind of massive blowup. I don’t think anyone could have.