Smoke-filled room

When Dan Morales brokered Texas' $17.3 billion tobacco settlement, he blew away Governor Bush. He also made sure his friends got a few puffs.

Gonzales admits that Bush's camp knew a tobacco settlement was close to completion. At one point, Morales' first assistant George Vega had asked, "Do you want to be at the table?"

"I said no," Gonzales recalls. "We felt it would be disruptive and inconsistent with the posture we had taken for two years."

Though they declined to participate in the talks, Bush's people still wanted to know what was going on. A few days before the settlement was announced, Gonzales says, he called the New York lawyers representing the tobacco industry to get some information on the status of the settlement talks. Gonzales claims he learned from these lawyers that Morales was misrepresenting his relationship with the governor's office.

The tobacco lawyers told him that "the attorney general had been keeping the governor's office fully advised." Gonzales says he made it clear that Bush had been kept out of the loop.

Morales' camp says Gonzales undercuts his own claim by admitting that Bush was invited to participate. "They were invited to the table, but they weren't informed," huffs Harry Potter, the assistant attorney general who handled day-to-day management of the tobacco litigation for his boss.

Morales explains he had to be coy about the status of the negotiations with the governor because of Karl Rove's past ties to tobacco. (Rove is Bush's chief political consultant.)

"I recognized early on that confidentiality was absolutely critical," Morales says. "I was just absolutely convinced that we had to keep the circle as tight as possible. Frankly, I was still a little bit nervous about the fact that the governor's chief strategist was the main Philip Morris guy. I have no reason to believe that Karl Rove would have taken overt action to try and undermine my position. I understand he went off the [Philip Morris] payroll, but I don't think he can blame me for being a little bit nervous about not wanting to show my cards to the guy who had been representing the other side."

When the deal broke, Bush offered some muted praise, then scrambled to read the fine print. "We spent the week after the settlement looking at the agreement," Gonzales says.

Bush's camp soon found out that the state was potentially on the hook for some of the lawyers' fees if the arbitration panel didn't award the full 15 percent contingency fee.

Morales had even given up the state's right to question a federal judge's January 22 decision to ratify the fees. This was an unusual concession on the state's part. "In my experience, I have never seen lawyers ask their client, as a condition for submitting their fee claim for a judicial determination of reasonableness, to sign an agreement abandoning the client's right to dispute the lawyers' fee claim in court," Bush camp expert Geoffrey C. Hazard wrote the court.

Morales contends he didn't give away his right to appeal the fees for nothing. By agreeing not to appeal, he squirmed out of a provision in his contract with the lawyers allowing them to renegotiate their fees if expenses exceeded $10 million--which they did by far. Also, he got a concession that he wouldn't have to pay the fees as quickly as he had originally agreed.

Bush was most concerned that the state would end up forking over money for a portion of the lawyers' enormous fees. Gonzales didn't believe Morales' assurances that the federal government would actually pick up the remainder of the fees if the lawyers didn't get what they wanted from the arbitration panel. He says he contacted the feds and found they had no such interpretation of their obligations. That's when Bush made the decision to intervene, Gonzales says, with the limited goal of ensuring the state wouldn't have to pay.

Cornyn, the Republican nominee for Morales' successor as attorney general, and Troy Fraser, an old chum of Bush's and a state legislator, had already struck the first blow for tort reformers in February, filing motions to intervene. Their haste shows they understood that whacking plaintiffs' lawyers is a game that plays well with Republican voters. Bush submitted his motion shortly afterward.

Objections to Morales' proposed tobacco settlement soon arose from other quarters. Several hospital districts and counties, including Dallas, realized that Morales had bargained away their right to sue the tobacco industry in the future without giving them direct control over any of the settlement funds. Morales made an embarrassing flip-flop on this issue, first saying he hadn't negotiated on behalf of the counties, and then, when tobacco threatened to rip up the deal, stating that the local governments had no right to sue.

In their motion to intervene, the counties asked for a different lawyer than Morales to represent them because they believed the attorney general's interests conflicted with theirs. Richard Mithoff, a Houston plaintiffs' lawyer who used to work with Jamail, agreed to represent Houston's Harris County in its claim.

By mid-May, the Bush and Morales camps had made risky, headline-grabbing claims in court. The legislators aligned with Bush filed a motion to question Jamail about Morales' alleged solicitation of funds, and attached a copy of Jamail's affidavit.

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