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The Trial of Charles Hurwitz 

The beginning and end of the fraud suit against the former Pacific Lumber chief

The anticipation was palpable in a hallway of the Ron Dellums Federal Building last week as the fraud trial of Texas financier Charles Hurwitz, the former owner of Pacific Lumber, was about to get started. Small groups of people gathered outside of U.S. District Judge Claudia Wilken's courtroom. On one side of the hallway a few of Hurwitz's sharply dressed lawyers whispered intently in a last-minute huddle. On the other, a loose-knit collection of Humboldt County environmentalist chatted casually in equally hushed tones. Each group eyed the other with suspicion while they waited for the judge to enter the courtroom, signaling the start of opening arguments.

The trial had all the elements of a big-screen drama -- a match -up between two legal titans, a defendant many perceive to be a rapacious corporate villain and several hundred million dollars hanging in the balance. In the trial's first week -- and, as it turned out, its last -- a powerful U.S. congressman took the stand to testify for the plaintiffs, and on another day tensions boiled over during a recess and the two legendary lead attorneys got into a nose to nose argument that looked like it would end in blows.

There was also the draw of a long-awaited final act in a 22-year saga of upheaval and controversy that changed the landscape of California's scenic northern coastlands, pitted loggers against environmentalists and neighbor against neighbor, and forever altered Humboldt County economy and society.

Former U.S. Representative Pete McCloskey, one of a battery of attorneys representing the two state officials suing Hurwitz, was standing outside the courtroom. He said he was confident in his clients' case and he was eager for the trial to get underway. He briefly ran down the basics of the case to a reporter and, like a dutiful attorney, took advantage of a public relations opportunity to speak highly of his clients' credibility and their motivations for brining the lawsuit.

McCloskey pointed out that he had co-authored the Endangered Species Act in 1973 when he served as U.S. Congressman for California's 11th district. "Hurwitz ran head on into that act in the early 1990s," he said with a barely perceptible wink from underneath a hoary brow. Then word spread quickly through the hallway that the judge was taking the bench.

"You know, I really wish I could sell tickets to what's about to happen in there," McCloskey said, and headed into the courtroom.

The two state officials brought a qui tam (or "whistleblower") lawsuit against Hurwitz on behalf of the United States government. They claimed that as owner of Maxxam, Inc. and Pacific Lumber, Hurwitz defrauded the United States and the state of California governments by falsifying documents to facilitate the $480 million sale of the Headwaters Forest in 1999. The deal put into public ownership 7,500 acres of timberlands that contains a unlogged 3,000-acre stand of redwoods, which at the time was largest contiguous old-growth redwood forest that in private ownership.

The two state officials -- Richard Wilson, the former director of the California Department of Forestry (CDF), and Chris Maranto, a CDF forester -- also claimed the documents were cooked in such a way that allowed Pacific Lumber to surreptitiously harvest more trees on the remainder of Pacific Lumber's 211,000 acres than would otherwise be allowed by federal agreement and state law. If the suit were successful, the judgment, which could have been in the hundreds of millions, would mostly have gone to the United States and California, though a percentage would have gone to Wilson and Maranto.

Instead, in a surprise turn of events, the trial was over almost as soon as it started.

^^^^^

The two plaintiffs were represented by the big-gun law firm of Cotchett, Pitre and McCarthy, which has made some of its reputation by taking on social justice cases. The lead attorney was 69-year-old Joseph Cotchett, a major Democratic fundraiser who has been named one of the top 100 most influential lawyers in the United States for the last 10 years. In the 1980s, he won large settlements for investors in white-collar fraud cases related to the collapse of Technical Equities Corp. In 1990, he was the lead attorney for 23,000 plaintiffs in a case related to the Charles Keating Lincoln Savings & Loan downfall. More recently, Cotchett's firm has been involved in litigation against major corporations including Enron, Worldcom, Global Crossing, Homestore.com, Qwest and the Montana Power Company.

Hurwitz brought in his own heavy-hitting attorneys from Morrison & Foerster, an international law firm with 17 offices in eight countries. Lead attorney James Brosnahan, 75, is one of the firm's senior partners. He, too, has frequently been named as one of the top lawyers in the country. Brosnahan penned the "Trial Handbook for California Lawyers," and has tried more than 140 civil and criminal jury cases and twice made arguments before the Supreme Court. While he has represented many corporation clients, some of his most high-profile cases have been government-related. He was the lead prosecutor in the United States' case against former Secretary of Defense Casper Weinberger for his role in the 1986 Iran-Contra Affair, in which arms were traded to Iran for American hostages. (Weinberger was ultimately pardoned by former President George Herbert Bush.) More recently, Brosnahan was the chief lawyer for John Walker Lindh, an American from Marin County who was captured in Afghanistan in 2001 as an "enemy combatant." Brosnahan is a strong advocate for gay marriage and has publicly called for the California State Supreme Court to rescind Proposition 8, the voter initiative banning same-sex marriage, on the grounds that it is unconstitutional.

Cotchett and Brosnahan were the center of attention in the courtroom. Both men are over six feet tall and both carry themselves in a way that commands attention, though they have very different styles.

Cotchett dresses less conservatively. He wears sports coats and bright-colored ties, and his longish gray hair is combed in sweeping angles. In trial he lets other attorneys on his team tease out the fine points and nuance of argument, while he paints broad pictures for the jury with expansive movements and oral flourishes.

Brosnahan is more staid in his presentation. His suits are usually a conservative light grey, though sometimes they can be a little rumpled. He is more methodical than Cotchett and perhaps more somber though he has an impish quality that has a decidedly Irish effect and is somehow accentuated by his bald pate. Brosnahan has is a penchant for good luck charms. He carries a tattered, pocket-sized copy of the U.S. Constitution in his shirt pocket and his one flashy accessory is large, silver ring handmade by the New Mexican Zuni Pueblo Tribe, which he says acts as a talisman. "It's to ward off evil spirits and obnoxious attorneys," he said with wry smile, and then reached into his pocket and pulled out a wad of lucky $2 bills bound by a rubber band. "And if that doesn't work, I have these."

^^^^^

The trial's focal point was a forestry document known as a sustained yield plan (SYP). Maxxam's SYP served as a 120-year projection of forest density and tree maturity. In theory, the SYP guides the annual rate of tree harvesting and assures a percentage of trees will remain standing after a cut so the forest can properly regenerate. By controlling harvest rates, the SYP also prevents soil erosion and loss of wildlife habitat on land and in rivers and streams.

In his opening statement, Cotchett gave the jury some background about Hurwitz's reign as owner of Pacific Lumber. He had taken over the company in 1986 in an $874 million leveraged buyout that had been mostly financed by "Junk Bond King" Michael Milken. Hurwitz quickly began to sell off company assets -- a San Francisco office building for $31 million and a Pacific Lumber welding division for $325 million -- but he did not use the liquidated assets to pay off debt. Instead he threw out the company's longstanding policy of sustainable harvests, which Pacific Lumber had lived by for decades, and began to cut trees at more than double the rate in order to meet interest payments on the massive debt he had taken on.

"What Mr. Hurwitz did was, he cut trees," Cotchett told the jury and pointed at Hurwitz with a fully extended arm. "They clearcut next to watersheds, which endangered all kinds of animals; spotted owls, the marbled murrelet, ducks and the coho salmon."

Cotchett then moved on to the crux of the case, which is the allegation that under Hurwitz's guidance, Pacific Lumber executives worked with a Redding-based computer modeling company called Vestra Resources to defraud the government. He told the jury that Hurwitz and Vestra produced a sustained yield plan that misrepresented existing tree types, which in turn falsely inflated the number of harvestable trees and tree growth rates on Pacific Lumber's 200,000 acres of timberlands. An approved SYP was one of several critical documents required to close the Pacific Lumber's $480 million sale of the Headwaters Forest to the U.S. government and state of California.

"We will produce experts who will talk about how these models were manipulated," Cotchett told the jury. "The model changed the species of trees so the SYP did not reflect the actual forest."

In 1997, one year before the SYP was submitted to the California Department of Forestry, Hurwitz went to the bond market and borrowed $750 million based Pacific Lumber's major asset -- trees, Cotchett said. And they weren't just regular trees, but old-growth redwoods that are highly valued for their knotless, red-colored heartwood. The 1997 bond sale refinanced the debt Hurwitz had incurred upon taking over Pacific Lumber, but the company remained so encumbered that Hurwitz had to again accelerate the annual tree harvest to meet his loan payments.

U.S. District Judge Claudia Wilken had barred Cotchett from telling the jury that Hurwitz's management of Pacific Lumber had been characterized by hundreds of citations for violating California's Forest Practice Rules and other state laws. Wilken had also barred Cotchett from telling the jury that Pacific Lumber's timber operator's license had been revoked after the company racked up 126 violations in 1997. Pacific Lumber is the only timber company to have lost its harvesting license for repeated violations of state law in California history.

Cotchett called up a photograph to a large overhead screen of a vast mountain slope that had been completely denuded of trees. "That's what he did to pay off debt. The mantra in the forests of northern California was 'cut trees.'" Cotchett said. "There was a fraud committed."

Throughout the first week of trial, Hurwitz has sat in the gallery next to his wife Barbara. Hurwitz defies the image of a 1980s-styled corporate raider (a designation he detests). Despite his wealth, which is presumed to be enormous, he has never needed the ego-based extravagances of corporate jets or stretch limousines. The couple has lived for many years in the same house where they raised their two sons. It's a very nice neighborhood, though not one of Houston's best.

During the trial, nether Hurwitz nor his wife have shown any signs of ostentation. Mrs. Hurwitz has dressed mostly in simply tailored outfits with few accessories, and Hurwitz wears dark suits with dress shoes that look as though they are more designed for walking comfort than to impress. The couple commutes on BART each day from San Francisco to the Oakland courthouse along with Brosnahan and several other attorneys.

During a short recess after Cotchett's opening, Hurwitz politely declined to comment on the attorney's statements. "I've been told not to say anything," he said. "I'm going to wait for my guy to get up there."

Hurwitz attorney Jim Bennett made the opening statements for the defense. Bennett started off his opening by making it clear that the United States and the state of California are not part of the lawsuit, and that no official speaking on behalf of the government has ever said they there was any fraud, or even any flaws, in the Headwaters documents. (In fact, Humboldt County District Attorney Paul Gallegos famously brought suit against Pacific Lumber on just these grounds on behalf of the state of California; the case was thrown out of court.)

In fact, Bennett argued, Hurwitz was largely responsible for the establishment of the Headwaters Forest Reserve, which will remain protected public lands in perpetuity. "Since the 1960s, there had been attempts to put that land into government ownership," Bennett told the jury. "To his credit, Mr. Hurwitz made that deal happen."

Bennett said the current suit was likely invalid because it was filed years beyond the statute of limitations. But the bulk of the defense, he said, would be on issues surrounding the SYP. The integrity of the SYP, and an associated document known as a Habitat Conservation Plan (HCP) were, and are, intact, Bennett said, and added that the company's projections were honest and responsible.

He also promised to produce for the jury government employees and experts who would testify that Pacific Lumber committed no fraud and that Vestra's computer modeling was done based on legitimate, wholesome data.

"Mr. Hurwitz himself will testify to his moral certainty that at no time did he set out to defraud the United States of America."

^^^^^

The plaintiffs were first to present their cases. Perhaps as sign of confidence in his clients' case, Cotchett's first witness was plaintiff Chris Maranto, the CDF employee who, seven years after the fact, discovered the alleged fraud in Pacific Lumber's 1999 SYP. Maranto received a master's degree in forest resources from the University of Idaho and is a California registered professional forester. Since 2000, he has worked for the CDF as a sustained yield forester evaluating complex timber harvest plans submitted by all of the state's industrial timber companies.

Under questioning by his attorney, Philip Gregory, Maranto explained that in 2002 he was analyzing a Pacific Lumber plan to harvest trees on an 8,000-acre property the company had purchased from Eel River Sawmills sometime after the Headwaters sale.

While analyzing the timber harvest plan, Maranto said he discovered that Pacific Lumber had falsely used an estimate of 200 million board feet of standing conifer trees on the property to calculate a proposed annual cut of 7.5 million board feet. (Conifers include both redwood and Douglas fir trees.)

But what the computer modeling did not disclose, according to the plaintiffs, was that much of the inventory was made up of much less valuable hardwood trees, which largely consist of tan oaks. The value of tan oak is so low that is rarely worth the effort to cut and haul it to mill. It is also extremely rare that a timber company would include tan oaks in their forest projections. So rare, if fact, that if they do use tan oaks, they are required to explain why. Pacific Lumber made no such explanation, which created the false impression their projections were entirely made up of conifers.

Because of this, Pacific Lumber falsely inflated its proposed harvest level by 30.4 percent, Maranto said. Pacific Lumber finally received approval to harvest the 8,000 acres, but not until it submitted a projection that actually reflected the harvestable trees standing on the property.

Maranto said it wasn't until 2006 that he learned that, back in 1999, Pacific Lumber had used the same computer modeling software to produce the sustained yield plan required as part of the Headwaters deal. That SYP included forest projections for 211,000 acres of Pacific Lumber property and had by then been used as the guiding document for nearly five years of timber harvests.

Meanwhile, former CDF Director Richard Wilson was developing suspicions of his own. According to the complaint, he learned in 2005 that Pacific Lumber had exhausted its SYP allowable timber harvest for the decade five years early, which indicated a major problem with their harvest plans. Wilson called a meeting with Maranto in 2006 to try and determine what exactly had happened, and together they came to the conclusion that the 1999 SYP Pacific Lumber submitted to close the Headwaters sale was fraudulent, according to the complaint.

Under cross examination, Bennett pointed out repeatedly that Maranto did not work for the forestry department in 1999, when the SYP was approved. Bennett also tried to show through a series of e-mails that Maranto was aware of the computer modeling used in the 1999 SYP years before 2006, when the lawsuit was filed. This is a critical timing element for the defense, because the statute of limitations' clock starts ticking with the knowledge of wrongdoing. If the defense can show that Maranto or Wilson knew details about Pacific Lumber's SYP modeling techniques in 2002, jurors can find Hurwitz innocent because the case was filed after the statute of limitations had expired.

Bennett also got Maranto, and other witnesses, to admit the 1999 SYP had undergone rigorous review over a 26-month period and that no one, after all that vetting, had made the claim the document was somehow misleading or fraudulent.

^^^^^

Courtroom tensions surrounding the testimony of Pacific Lumber attorney Frank Bacik boiled over on Thursday. Cotchett had been aggressively asking Bacik about a $500 million "takings" lawsuit he filed against the U.S. government in 1996. At a certain point during Bacik's testimony, defense attorneys began to make frequent objections.

Apparently Cotchett, who had been asking an uncooperative Bacik questions in a loud, aggressive manner, was getting very close to divulging that Pacific Lumber's timber operator's license had been revoked in 1998 for an excessive amount of logging violations, a fact Judge Wilken had ruled was too prejudicial for the jury to hear.

Before Cotchett was through with his questions, Wilken recessed the court for the day at the usual time of 1:30 p.m. As soon as the jury left the room, Brosnahan, angry at Cotchett's manner and the fact that his opponent had been playing cat and mouse with the excluded information, began using a very loud voice while complaining to the judge.

"Your honor, we have a real problem here," Brosnahan said. "He's ignoring your order."

At that point Cotchett walked up to the bench and began speaking over Brosnahan. "Your honor, I was asking the witness about a document that has already been introduc ..."

"Your Honor!" Brosnahan interrupted in an even louder voice. "If I have to yell to be heard in this court, I can yell just as loud as he can."

Wilken noted for the record that she could not yell as loud as either attorney and asked them to submit written motions regarding their dispute.

With that, the two lead attorneys returned to their tables and began packing up for the day. Then Cotchett must have had a second thought because he walked over to Brosnahan, but before he could speak Brosnahan erupted. "I'll bring you up on charges at 8:15 tomorrow morning," he said. "You know what you were doing."

Cotchett looked stunned and again tried to say something but Brosnahan continued. "I don't want to hear your loud voice! Get over there," he said pointing to the plaintiff's table. Then the 69-year-old Cotchett rose to his full height and took a step toward the 75-year-old Brosnahan, who in turn squared his shoulders to Cotchett and continued. "Get over there, I'm done with you!"

For a several beats there was absolute silence in the courtroom as the two legal titans stood nose to nose and no one was sure the day wasn't going to end in a punch-’em-up. (Imagine the lawsuits.) Then Cotchett shrugged and turned back to the plaintiff's table and attempted to laugh off the encounter.

Outside the courtroom Brosnahan said he was frustrated because Cotchett was apparently going to disobey the judge's order. "There as a motion precluding reference to prior litigation," he said, "and the judge wasn't stopping him."

Cotchett said he wasn't trying to divulge Pacific Lumber's prior bad acts. "We were not going there," he said. "The questions I was asking are already in evidence. What? Once it's in evidence, I can't talk about it? C'mon."

^^^^^

By Friday, the plaintiffs had presented five witnesses, including U.S. Rep George Miller, who testified that the American taxpayer did not get the best value in the Headwaters transaction because of the excessive logging that occurred on surrounding timberlands. One major witness who did not take the stand was Wilson. As director of the CDF, it was Wilson who signed off on the 1999 SYP. He was expected to testify that despite misgivings, he was under incredible pressure to approve the SYP because of the deadline to close the Headwaters deal in March 1999.

In 2008, the Fisher family, founders of the Gap, took control of Pacific Lumber in bankruptcy court and renamed it Humboldt Redwood Company. But the lumber industry is currently in a record-breaking slump and the company's timberlands are not what they once were.

Pacific Lumber's two incarnations -- the pre-Hurwitz timber company that practiced sustainable tree harvesting and was the primary employer in Humboldt County for more than 120 years. And Hurwitz's Pacific Lumber, which wrung all it could from the historic company's infrastructure and its vast timberlands then left it bankrupt -- no longer exist.

Humboldt County residents were watching the Hurwitz trial with an eye towards moving on. They were ready to put the long saga behind them and begin healing divisions and creating new myths, said Scott Greacen, the executive director of the Environmental Protections Information Center, a nonprofit that filed numerous lawsuits against Hurwitz's Pacific Lumber.

Greacen said the Humboldt County power structure that embraced Hurwitz would prefer the whole thing to recede quietly into the coastal mists. "But for the rest of us, how we move forward will depend on the trial's outcome," Greacen said. "If Hurwitz prevails, it will be 'Grrrrrrr, nothing ever changes.' But if he gets dinged, we can begin to cultivate a more mature attitude, because we struggled, we resisted and there was some accountability in the end."

^^^^^

On Tuesday, the seventh day of trial, everything came to a sudden end. In an exchange of e-mails on Monday night, the two sides agreed on a settlement of $4 million. $2.5 would go to the United States, $500,000 to the state of California and the remaining $1 million would go to cover court costs and the plaintiffs' attorneys' fees.

"I'm sorry to hear that," Wilken said of the surprise announcement. "I was really looking forward to see how this was going to come out, though it's always better when there's an agreement."

The jurors had a similar reaction. One juror spontaneously asked, "So this is goodbye?" she said. "Well, when can we expect the settlement to be announced? I really want to know how things came out."

The $4 million settlement was much lower than the $380 million that attorneys had suggested early in the trial.

Plaintiffs' attorney Philip Gregory -- who the jurors had nicknamed "the button man," because he had a habit of fiddling with one of his coat buttons while examining witnesses -- said the plaintiffs were motivated to settle for the lesser amount because they were having trouble linking Hurwitz and Maxxam to the falsified SYP, because the judge had barred testimony and certain documents -- mostly bankruptcy filings -- that would have made a clear connection between Hurwitz and the alleged fraud.

"If the case had gone to the jury yesterday, we had not tied Hurwitz to the computer modeling and hadn't tied the modeling to Maxxam," he said.

Hurwitz's attorneys released a statement saying the settlement in no way is an admission of guilt. "Since the Headwaters transaction closed in 1999, the federal and state governments have never questioned whether the transaction was proper," the statement reads. "The plaintiffs nevertheless sought to gain hundreds of millions of dollars over an alleged fraud that never occurred."

Maranto said he was happy that Pacific Lumber's manipulation of the SYP was made public. "I'm happy word got out as to what happened," he said. "But I wish there could have been more pain."

Outside the courtroom, four of the nine jurors said they were leaning heavily toward plaintiffs Maranto and Wilson. The most compelling testimony, they said, came on Monday with plaintiff witnesses Paul Harper and Greg Blomstrom, forestry consultants at Baldwin, Blomstrom, Wilkinson & Associates. "For me they made it clear how the sustained yield plan had been manipulated with the tan oaks and other things," said juror Karen Coffman. "They spelled things out in a way that made everything come together."

The jurors also said they felt the defense was being manipulative. On Monday, one Hurwitz attorney put up a chart and misrepresented its source; jurors felt like the defense was belittling their intelligence. They were also unconvinced by the testimony of Pacific Lumber attorney Frank Bacik. "It was pretty clear that he was being evasive, hostile and aggressive," said Petaluma resident Linda Solkov, who works for an insurance company. "We could tell he was trying to hide something."

Humboldt County resident Dr. Ken Miller, who had attended the trial all week, said he was disappointed in the settlement. "Hurwitz got away with a massive fraud that destroyed our county on a legal technicality," he said. "This is a lost opportunity to hold him accountable, a lost opportunity to get reparations. It's a tragedy."

Bay Area reporter John Geluardi has worked for the Oakland Tribune, the Contra Costa Times and the SF Weekly.

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