Circle of Greed Page 4

  “The trend of case law has been the rejection of legal niceties to assure full recognition of the unincorporated association as a separate legal entity,” the court wrote.

  The appeals court didn’t stop there, although it could have. Delving into the United Methodist Church’s own organizational texts—helpfully supplied in its legal briefs by plaintiffs’ counsel—the court also refuted the Methodists’ contention that the church was a loose confederation of like-minded souls and agencies. “In summary, UMC is a highly organized religious body working through specific agencies to accomplish laudable goals.”

  That left one issue: what if this lawsuit would undermine such “laudable” social goals? That trepidation had undone Ross Tharp. The appellate court, while not minimizing the potential ramifications, did not shy from it. “This concern, legitimate as it may be, is properly placed with the religious body to consider before becoming involved in commercial affairs and [cannot] be considered in our resolution of the issue before us,” Justice Wiener wrote. “A religious organization should not be relieved of its lawful obligations arising out of secular activities because the satisfaction of those obligations may, in some tangential fashion, discourage religious activities.”

  This unanimous ruling left the Methodists aghast. In desperation they sought refuge in the U.S. Supreme Court, even knowing relief was improbable. The first stop in the federal litigation was in the courtroom of respected U.S. District Court Judge Edward J. Schwartz.* Lerach had rushed this case into court, largely to avoid Tharp, and his haste showed: in a hearing to determine whether the plaintiffs’ complaint could be certified as a class action, the weakness of the case became apparent—the main flaw being that Lerach’s plaintiffs were elderly people with faulty memories and mixed feelings about their own lawsuit. Church lawyers had exposed these vulnerabilities during their depositions—made “mincemeat” of his clients, Lerach would say. After about an hour Judge Schwartz called a recess.

  “We’re getting killed here,” Lerach whispered to his cocounsel, David Yardley. “They are beating our brains out.”

  Schwartz had a different reaction. After the break, the judge told the lawyers that they might have a strong case for class action status, but that he wasn’t going to certify the class with elderly witnesses who were plainly confused. There is no transcript of his remarks, but Lerach remembers hearing Schwartz say: You find plaintiffs who can represent the class, and I’ll certify the claim.

  A federal judge known for his fairness and prudence is unlikely to have phrased his thoughts precisely this way. What is true, however, is that the federal judges Lerach faced in court over the course of his high-impact legal career—right up until the last jurist, the one who would sentence him to prison—tended to be more sympathetic to him than to his fellow lawyers, the media, or even the public. If you asked some of these judges why, they would answer that Lerach earned their respect by the comprehensive preparation he put into each case, and because he knew the law and was quick on his feet in the courtroom—and was clearly dedicated to his clients. Something else might have been at work as well, and not just in the Pacific Homes case. Lawyers are trained to be advocates, while judges must remain impartial. But all judges were lawyers first, and some of them seemed to live vicariously through the swashbuckling Lerach, who, whatever anyone else could say about him, was an impassioned and articulate advocate.

  Whatever Schwartz actually said, Lerach regained his swagger when it came to the Pacific Homes case. “He saved me, and he saved the case,” Lerach recalled later. “And boy, did we find plaintiffs!”

  The trial that would finally decide the fate of the Pacific Homes residents took place in state, not federal, court—even though Schwartz did affirm the class, and the U.S. Ninth Circuit Court of Appeals upheld his ruling without comment. Witwer and his legal team knew that getting relief from the Supreme Court was a long shot, but by then (this was mid-1979) they were frantic. So they tried the high court too. “To defend the lawsuit would require a restructuring of the … denomination to create a monolithic unit, able to speak with one voice and act in a unified manner,” the Methodist lawyers wrote in their petition seeking emergency relief from the nation’s highest court. “To default would threaten each local church, conference and board with judgment against whatever is later deemed ‘association’ property in its control.”

  The Methodists had an ally: the National Council of Churches, the umbrella organization of all mainstream Protestant churches, filed an amicus curiae (a “friend of the court” brief) warning that the California rulings, if allowed to stand, “would unconstitutionally abridge the free exercise of religion, for it would necessarily force all religious denominations to reexamine and reorganize their internal church policies in light of the unprecedented potential for civil liabilities.” The Supreme Court was unmoved. As in 1978, the high court declined to hear the case. The church’s fate—and William Lerach’s first landmark case—would now be in the hands of a San Diego jury.

  Before that happened, Lerach and his team, heeding Judge Schwartz’s admonition, decided to choreograph a narrative so evocative in its human drama that it would simply overwhelm the Methodists’ defenses. At a meeting of several dozen of his most active plaintiffs, all of whom were potential witnesses, Lerach had an inspiration.

  “A trial is like putting on a play or making a movie,” he told them. “We tell a story. It’s our story. We write it. It has to be the truth, but we weave our best information together and use it to tell your stories. You are going to be actresses and actors in this movie we’re going to make. How many of you were in high school plays when you were young?”

  As numerous wrinkled hands shot in the air, and the faces of the retired Pacific Homes rebels broke into well-worn smiles, Lerach continued:

  “Here’s what we’re going to do,” he said. “We are going to have auditions.”

  IN THE TWO-YEAR PERIOD between the instigation of this litigation and the trial, Lerach was able to assemble a massive amount of paperwork from Pacific Homes. These documents, although not as vivid as the witnesses who would testify at trial, told their own story and set the predicate for the dramatic production Lerach would direct. His exhibits included newspaper articles dating back to 1958, business cards of Pacific Homes employees, advertisements and brochures aimed at soliciting new residents, marketing plans, official stationery, conference newsletters, press releases and other public relations efforts, tax records, internal church correspondence that discussed the Homes’ tax-exempt status, letters to the IRS, public statements of clergymen and UMC officials, minutes of conference meetings and other church memos, public speeches of church officials, phone directories, letters between UMC officials, nursing home certification documents, Methodist yearbooks dating back to 1927, retirement homes industry awards, balance sheets, and the transcript of that smuggled tape recording warning that only a “chain letter” could keep Pacific Homes afloat.

  It was a mountain of physical evidence, and each page was gathered—then offered to the court—to bolster at least one of the two great pillars of Lerach’s case. The first was that Pacific Homes had always presented itself publicly, and functioned privately, as an official arm of the Methodist Church. “The United Methodist Church owned, controlled, sponsored, and endorsed Pacific Homes,” he would tell the jurors in the case. “This was truly a United Methodist Church retirement home and these defendants are responsible for its financial collapse.” His second contention was that the retired ministers running the homes—Pacific Homes’ board of directors was appointed by Methodist leaders—had known for a long time that their business model was failing. But instead of facing reality, they kept signing up new residents, using their lump-sum payments on operating costs instead of investing that money for the future. This was essentially fraud, although Lerach was careful not to use that word.

  “The money was misused,” he told the jurors. “The money was gone by 1976. It should have had over twenty million d
ollars in life-care reserves. It was all gone.”

  The trial began on August 13, 1980, in the courtroom of Judge Focht, an amiable jurist chosen as Ross Tharp’s replacement. Focht had learned, as the two sides wrangled over pretrial motions all summer, that the litigation would be testy, and that the rival teams of lawyers genuinely disliked each other. Thirty years later Samuel Witwer, Jr., still remembered with distaste finding out that the Supreme Court had denied the church’s motion—in a taunting phone call from Lerach.

  In front of the jury, however, Lerach employed charm instead of ridicule. “I rise to speak for 1,730 elderly persons,” he said in an opening argument, in which he painstakingly explained to the jury of eight women and four men what a class action was—how his 168 plaintiffs represented all the homes’ residents. Lerach, who had taken pains to crop his wild blond Afro before jury selection began, was careful not to alienate churchgoing jurors. He made a point of mentioning the many good works of the Methodists, even acknowledging their noble intentions when launching the retirement homes. One question raised by the case, Lerach told the jurors, was “How could something that should have been so good end up so bad?”

  During a trial spanning nearly four months, Lerach sought to furnish the answer to that question himself. Incompetence and cowardice—with a dose of fraud—were the answers he implanted in the jury’s mind. Humanizing this harsh judgment were the eminently sympathetic elderly residents who’d cast their lot with Lerach.

  The lead-off actress in his theatrical production was a frail eighty-one-year-old widow named Josephine Owen. Taking the stand at ten A.M. on August 19, 1980, she began under Lerach’s gentle prodding to relate how she became interested in Pacific Homes. “After my husband died, I was alone and my children felt I shouldn’t live alone,” she testified. “Being a Methodist, I was naturally interested.”

  It was a deft beginning for Maestro Lerach, who in the trial’s opening scene had introduced the concept of his clients’ vulnerability, their piety, and an unshakable faith that Pacific Homes and the United Methodist Church were one and the same. Mrs. Owen’s observation, in fact, brought no fewer than four defendants’ attorneys to their feet in objection. Judge Focht, already weary of the ill will between the legal teams on the first day of testimony, heard them out, annoyance showing on his face.

  It didn’t matter. The trial’s dynamics were set in the first few days—and never significantly varied. In their own opening statements, the defendants’ attorneys made the same argument to the jury that they had to the California appeals court. Samuel Witwer, Sr., had handed off the lead role to Allan Reniche, who offered the jury an alternative to Lerach’s view of Methodism: “The only glue is volunteerism,” he said. “The only thing that really holds Methodists together is love.”

  It was a sweet sentiment, and the church lawyers pushed their hardest, but they didn’t have much material to work with—and Lerach had an arsenal.

  “What do you need in a trial?” Lerach rhetorically asked the young lawyers assisting him. “You need victims!” And he kept producing them. His second elderly witness was Eric J. Ettles, a retired seventy-two-year-old engineer who told the jury that he had been attracted to a Pacific Homes facility called Casa de Mañana because of ads he’d seen stating that it was backed by the Methodist Church. “This gave us full protection with all these guarantees we needed, backed by a religious organization,” he said. “We couldn’t see how we could go wrong.”

  Judge Focht allowed Lerach to read the deposition to the jury of a former Pacific Homes publicity director named Abbie Sargent. She had died a month before the trial began, but Lerach had taken her deposition in 1979. Sargent had testified that from 1963 to 1968 the main thrust of Pacific Homes’ promotion plan was to recruit new residents by playing up its ties to the Methodist Church. “It was our strongest point,” she said.

  For three months the trial went this way. When Lerach rested his case in the first week of December, the Methodist lawyers didn’t bother to put on a defense. Methodist church negotiators had already approached Lerach with the idea of a settlement. Coopers & Lybrand, one of the world’s “Big Eight” accounting firms, which had signed off on the books, had seen the handwriting on the wall a year earlier, immediately after the California appellate court decision. Within a week of that ruling, in fact, Coopers & Ly-brand had settled with Lerach, opting out of the litigation for $1 million. It turned out to be a bargain for the accounting firm. The settlement agreement forged during the first week of December cost the United Methodist Church $21 million.

  And so, on December 10, 1980, plaintiffs’ lawyers William S. Lerach, Melvyn Weiss, and Gregg A. Johnson, and assistant Kathy Strozza, assembled in the San Diego courtroom of presiding Superior Court Judge Edward T. Butler. Joining them were ten lawyers representing the church and its affiliated agencies, among them Samuel Witwer’s son, along with two other bankruptcy lawyers representing Pacific Homes itself. “An unlikely looking jury,” Butler quipped while looking at the attorneys arrayed in his courtroom’s jury box. The presiding judge then read the terms of the agreement:

  The Annual Conference agreed to pay $21 million in cash, $15 million of it up front, the rest in increments of $1 million per year through 1986.

  Approximately $5 million of that amount was designated to the members of the Barr class action suit—the residents themselves.

  The balance of the money, less lawyers’ fees and expenses, was to be used to reorganize Pacific Homes and to provide supplemental medical and convalescent care for those residents in need of it.

  The monthly fee schedule paid by Pacific Homes residents was to be restored to the lower amount stipulated in their life-care contracts.

  The conference would establish a “resident assistance fund” that would ensure that no Barr class member would ever be forced to leave Pacific Homes for lack of funds.

  The residents would have representation on Pacific Homes’ board of directors, to ensure that their interests were protected.

  If Pacific Homes ever found itself with excess cash flow, the money would be used to repay current residents for any payments they had previously made in excess of their contracts.

  “I would like to think perhaps that finally the spirit of Christmas settled over this courtroom today,” Butler said. “Finally an atmosphere of cooperation and a willingness to adjust and to settle very substantial differences between very sincere and dedicated groups of litigants.”

  In the nine months since the lawyers had wrangled over jury selection, much had happened; the American people had rejected the incumbent U.S. president, Jimmy Carter, and installed Ronald Reagan in the Oval Office. And while the Pacific Homes jurors had been cloistered in trial, hearing about the foibles of a do-gooder group that had bitten off more than it could chew, the United States entered an era of go-go capitalism that would make a star—and a pariah—out of the lead plaintiffs’ attorney. Former government regulators such as Kenneth L. Lay would see that big money could be made in a deregulated environment that began under Carter and accelerated under Reagan. In the spring of 1981 Lay headed to Houston to run a Houston energy company that would morph into Enron. That year John McCain would meet Charles H. Keating, Jr., at a dinner of the Navy League in Arizona that would provide entrée to a scandalous alliance. Bernard J. Ebbers and a host of market manipulators were beginning to see the possibilities open to them if government regulators turned a blind eye. In 1980, at the time of the Pacific Homes trial, CEO pay was forty-two times the pay of the average worker in the United States. Twenty years later CEOs would make 531 times the amount of their workers.

  In 1980, at least in San Diego, the business of American business wasn’t yet epitomized by high-profile takeover artists, corporate raiders, and privatizing buccaneers dedicated to amassing more wealth than they could ever have spent in three lifetimes, at the cost of breaking companies apart, laying off workers, and moving jobs offshore. Nor was the profession of the law yet exemplified by rapaci
ous trial attorneys whose monumental judgments and staggering legal fees amounted to a redistribution of wealth in its own right.

  Judge Butler, speaking as the traditionalist he was, gave voice to the ethos of a sun that was setting. “This settlement is not to be taken, as I see it, by anybody as being a victory for anybody but the community of San Diego, the residents of the homes, and the various church and other entities that are involved here.”

  It was an appealing sentiment, but in the aftermath of the Pacific Homes case, almost no one viewed the result that way, starting with the retired mostly Methodist residents themselves—and their legal team. Photographs taken after the settlement show a beaming Lerach standing amid a sea of elderly clients, mostly women, who looked upon the young lawyer as their personal champion. This heroic theme was also present in a pair of sketches done by one of the two sons of Kathy Lichnovsky, a San Diego legal secretary who helped Lerach during the case by typing up motions at night and who went on to become his able and longtime administrative assistant. The drawings show a mounted Saint George, an early Christian paragon who is invariably depicted on horseback, killing a dragon with his lance. The dragon is labeled the Methodist Church, a bitter pill for the Methodist officials who went through this crucible of a case. The more significant feature of the drawings, however, is that the face of the third-century saint is that of Bill Lerach.

  Another metaphor invoked in those halcyon days—this one by the journalists covering the case—was the 1925 Scopes Monkey Trial, which had tackled the issue of teaching evolution in the public schools. In this analogy Lerach was Clarence Darrow, with the Methodist lawyers, particularly Samuel Witwer, Sr., cast as the foil, as William Jennings Bryan.