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.

By any measure, January 16, 1998, was a historic day for the state of Texas. At the federal courthouse in Texarkana, Attorney General Dan Morales announced the multibillion-dollar settlement he'd brokered with the tobacco industry--money that would flow directly into state, county, and hospital-district coffers for legislators and local government officials to spend as they pleased.

It was surely the greatest accomplishment of Morales' relatively quiet tenure as state attorney general. Such a clear victory, and the prospect of the financial boon it would bring to the state, initially drew praise from Republican Gov. George W. Bush, who was already considered a front-runner for his party's nomination in the next presidential race.

Indeed, both men, despite their opposite party affiliations, should have been able to capitalize on the state's landmark victory against the cigarette makers. There was enough political bounce to benefit everyone involved--especially Morales, a Democrat, who has hinted to the Dallas Observer that he will someday seek higher political office.

How surprising, then, that the settlement, which eventually added up to $17.3 billion, would soon become the center of a vicious partisan fight.

Though Bush had shown little interest in the tobacco negotiations up until then, he and other Republican lawmakers waged an after-the-fact assault on the 15 percent contingency fee that Morales had agreed to pay the five outside law firms representing Texas' interests in the deal.

The contingency arrangement worked out to $2.3 billion--yes, that's billion, not million--in attorneys' fees. The threat of all that money going to lawyers, particularly plaintiffs' lawyers, who have traditionally channeled millions of dollars into Democratic campaigns, along with the possibility that the state might have to pick up some of those fees itself, finally prompted Bush to get involved in February.

He would ultimately fight a half-hearted battle against the attorneys' fees he described as so "unconscionable." In hindsight, his objections were too timid, too vague, and way too late. Perhaps mindful of his own party's ties to tobacco money, Bush talked tough, but eventually backed down. He showed little stomach for a real fight.

Morales, for his part, didn't stand meekly on the sidelines when attacked. He bargained away the state's right to question the amount the lawyers got, then took the offensive--asking the court to fine the governor and the Legislators $25 million in sanctions for supposedly misrepresenting the law when the Republican group attempted to intervene in the tobacco case and slash the lawyers' phenomenal payday.

Morales paid a price for striking back. He lost his chance to bask in the role of the guy who stood alone--with no support from the governor or the legislature--and beat the tobacco industry. Instead of kudos, he got questions--about his character, about his honesty with the governor, about his own stake in the deal.

Bush's attack on the fees would turn up allegations that Morales, a man with a squeaky-clean image bordering on priggishness, had attempted to solicit funds from lawyers in exchange for hiring them to represent the state in the lucrative litigation. A nationally known lawyer from Houston, Joe Jamail, filed an affidavit in federal court supporting that claim.

Though Morales has vigorously denied the allegation, the Observer has spoken with two other lawyers who say Morales solicited funds from them too while interviewing lawyers to represent the state.

The fine print of Morales' deal makes him vulnerable to charges that he set it up to financially benefit two of his longtime associates--lawyer Marc Murr, and Morales' chief political consultant, George Shipley. At the same time, the attorney general gave the state's outside lawyers plenty of latitude in claiming expenses. He only required them to document a small fraction of the estimated $40 million in expenses.

All in all, it's a troubling outcome for two of the state's most popular politicians.

If Morales and Bush seek national office, their actions and decisions in the deal will no doubt be scrutinized closely. As the Observer has found, their respective roles in the nation's biggest-ever legal settlement raise disturbing questions about their integrity, fortitude, and judgment.

Trading Snubs
These days, Bush tries to keep the tobacco deal at arm's length. "Governor Bush was not involved in the tobacco settlement itself, and thus would never attempt to claim credit for it," spokeswoman Karen Hughes wrote in response to questions posed by the Observer. One of the governor's press aides added that, as a rule, Bush doesn't conduct interviews about the tobacco litigation.

If nothing else, Bush's lack of interest is consistent with the off-handed manner in which he greeted news of the impending settlement on January 16.

Early that morning, Morales, who was camped in Texarkana as the settlement's final details were being hammered out, asked one of his assistants to call Bush's office and schedule a meeting just a few hours later between himself and the governor.

Though Morales offered to fly immediately to Austin, his overture was late. That same day, he planned to unveil the deal at a news conference.

Up until this time, Bush had kept his distance from the lawsuit against the cigarette makers. Had he waded into the fight, the governor's past links with tobacco would have made him vulnerable to charges of hypocrisy. After all, as a Republican, Bush had benefited from the industry's largesse to his party. Furthermore, his top political consultant, Karl Rove, had served as a paid advisor to tobacco giant Philip Morris for five years.

As a first-term governor, Bush had generally steered clear of controversial battles. The tobacco negotiations were no exception. He had declined an earlier invitation from Morales' staff to participate in the settlement talks.

On that January day, Bush would once again choose to stay out of the fray.
Morales' aide reported back to his boss that Bush couldn't meet with them. Apparently, the governor had other matters occupying his attention that morning--though it's hard to see what could take precedence over a multibillion-dollar settlement for the state.

As an alternative, Bush's office suggested that Morales brief Alberto Gonzales, the governor's secretary of state, and Terral Smith, Bush's legislative director.

The arrangement smelled like a snub, and Morales responded accordingly. He decided to send someone else to brief the governor's staff.

Bush's aides would wait hours that day for the arrival of Morales' first assistant, George Vega. But he never showed. Amazingly, the governor of Texas learned about the details of the tobacco settlement when everyone in the media did--at Morales' news conference that afternoon in Texarkana.

"We never received a briefing," says Gonzales, who waited all day, expecting to hear from the attorney general's assistants.

Morales and two of his aides chuckle about the episode today. They shrug off any talk of political gamesmanship, saying their no-show simply reflects the frazzled pace of those final days of settlement talks.

Throughout the day, Morales stayed at Texarkana's federal courthouse, where he'd filed the state's case against the cigarette makers two years earlier. Like many other state attorney generals have done since, Morales sued for repayment of Medicaid expenses linked to smoking-related illnesses. He was forced to reschedule his news conference several times that day as final details of the pact were set in place.

"I had to go out to a roomful of reporters three separate times and tell them it was delayed," recalls Morales' spokesman, Ron Dusek.

The episode exposed the deep mistrust that had built up between Bush and Morales, who had once enjoyed an amiable working relationship. That mistrust would very nearly wreck the deal.

Goodbye to Joe Camel
For the state, the tobacco deal rates as a landmark victory. For the first time last month, five tobacco companies began depositing their proportional shares of an initial payment of $350 million into the state treasury. Another $300 million will be channeled directly into counties and hospital districts this year. The cigarette makers will continue making payments for another 25 years.

Drivers will notice another result of the pact: no billboards or buses celebrating the Marlboro man or any other type of cigarette advertising, for that matter. The tobacco companies will also stop distributing T-shirts, caps, and other trinkets promoting their products in Texas.

No one disputes that the overall deal will benefit the state. But the fight over the attorneys' fees connected with the settlement is far from resolved.

On February 5, Bush filed a motion--drafted by Secretary of State Gonzales--to become a party to the tobacco lawsuit so he could protest the fees.

He wasn't the first to voice his objections. A group of seven state legislators and the Republican attorney general nominee, John Cornyn, had already made the same move. The legislators' and Bush's attacks on the fees weren't intended as a direct hit. They didn't ask the court to undo the deal that the trial lawyers had made with Morales; Bush asked only that the state's settlement be separated from the lawyers' fees.

According to the terms of the settlement, the settlement funds and attorneys' fees would come from the same source--the tobacco companies. In theory, then, the more the attorneys got, the less the state would get.

The tobacco companies, however, had agreed to pay the attorneys only what an arbitration panel determined was fair. This presented a potential problem for Morales and the state. If, for some reason, the arbitration panel didn't deem as reasonable the full $2.3 billion that Morales had already agreed to pay his lawyers, then those lawyers were free to demand the difference from the state.

Morales had, in fact, negotiated a deal that may eventually force the state to fork over a portion of the attorneys' fees itself. That aspect of the deal outraged Bush and the Republican legislators.

"We made a conscious decision not to attack the underlying agreement between the state and the tobacco companies and the pretense that this money was separate money from the settlement," says Pete Schenkkan, an Austin lawyer who represented some of the legislators. Instead, Bush and the legislators attacked the lawyers' right to hit up the state for money.

On the public-relations front, Bush's strategy presented problems. Morales, insisting that the lawyers' money was coming from tobacco and wouldn't diminish the state's settlement, lashed out at Bush for holding up the deal. Concedes Ken Hoagland, the director of a Houston-based tort reform group and cheerleader for Bush when he was attacking the fees, "The governor made the best deal he could, given that Dan Morales was saying every day that [Bush] was holding up the settlement. The governor had to get in a daily ping-pong match in the papers."

After six months of fighting in the courts and press, Bush agreed in July to withdraw his objections--at least temporarily. In return, Morales and his team of private plaintiffs' lawyers allowed their fee agreement to be severed from the state's settlement. As a result, the state could begin receiving its money.

At the same time, the lawyers got their first $100 million in fees. But they still must go through several more hoops to determine if and when they'll get the whole $2.3 billion.

If the arbitration panel, scheduled to meet in November, awards the attorneys less, the lawyers can still seek the remainder from the state. Indeed, they have a federal court order protecting their right to do so.

The whole fight could erupt again.

A Friend in Need
For Dan Morales, the tobacco deal should have been the crowning achievement of his political career.

He surprised nearly everyone last December when he announced he would not seek re-election as attorney general, but instead, as a newlywed, would retreat to the financial comforts of work in the private sector.

One month later, he had his tobacco deal in hand. He could have savored it publicly, ensuring that voters would recall it--and him--if the 42-year-old attorney general decides to return to political office, a scenario he hasn't ruled out. (Most speculation about Morales' political future centers on a bid for the governor's seat.)

Morales blew his chance by choosing to take sides with his private attorneys, whose fees are estimated to amount to some $200,000 an hour.

The attorney general insists he had no choice but to stand behind his contract with the group of wealthy Texas plaintiffs' lawyers. He had promised the lawyers when he signed them on in March 1996 that they would get 15 percent of whatever the state won.

"I felt and feel not a just a legal but also a moral and ethical obligation to see to it that the contract is honored. I would not feel right about reneging on the contract simply for political reasons, or simply because it is not smart politics to be associated with plaintiffs' lawyers or to be associated with a large fee or to be seen as adverse to a popular governor. I can see how it might be better politically, but it is just not right," Morales said in an interview with the Observer at his Austin office.

Morales dismisses Joe Jamail's and the other lawyers' allegations that he solicited money from them as "sour grapes," self-serving inventions of the "egos that are involved here with these types of very, very successful professionals."

"Once it is known that they were considered for the potentially biggest lawsuit in the history of the world and rejected, it's not much of a stretch, I think, for me to surmise that they'd like to find some way to justify a reason for them turning us down rather than us rejecting them," Morales says. "This stuff doesn't really surprise me that much."

Strolling to the large conference table in his office suite at the Capitol, Morales, a slightly built man who favors cowboy boots and casual clothing, holds up a can of Texsun. "Do you want some pink Texas grapefruit juice?" he asks with a smile.

That's about as folksy as the attorney general gets.
Unlike other successful Texas politicians--former Gov. Ann Richards, Lt. Gov. Bob Bullock, or even Morales' predecessor as attorney general, Jim Mattox--Morales doesn't possess the swaggering personality that so often captivates Texas' voters. While his office features the requisite bronze sculptures of mustangs and cowboys, the attorney general projects the image of the intelligent, thoughtful Harvard-trained lawyer that he is.

When discussing his future, he chooses his words carefully, avoiding color and weaving his way around questions that demand definite answers. Asked about rumors that he might associate with the New York-based investment banking firm of Donaldson Lufkin & Jenrette, Morales says, "I have made no commitment to anyone and will make no commitment to anyone. I have talked to friends of mine who are in investment banking. Nothing is ruled in and nothing is ruled out."

The son of schoolteachers and grandson of a pastor of the only Methodist church in Rio Grande City, Morales has a background of all-American wholesomeness.

After graduating from public schools in San Antonio, Morales earned a B.A. from Trinity University in San Antonio in 1978. He completed his law degree at Harvard in 1981. As a freshly minted lawyer, Morales moved to Houston and became an associate at one of the biggest corporate firms in the city, Bracewell & Patterson. It was there that Morales befriended another young associate, Marc Murr.

It took only two years for Morales to tire of the high-paid, drone-like existence of an associate at a major firm. In 1983, Morales left for the public sector, starting out as an assistant district attorney for Bexar County. Two years later, he won his first political race and began serving the first of three terms as a state representative.

From his earliest days in Austin, Morales established himself as an unlikely patron saint of politically incorrect causes.

As a freshman legislator, he defied Democratic Gov. Mark White and introduced a tax bill to raise revenues for new prisons. Elected to the attorney general's office in 1991, Morales has made other independent, politically risky moves. In 1994, he dismantled the office's consumer protection division, perhaps the most prominent department under his predecessor Mattox. For Democratic party members who were loyal to Mattox and his posture as the people's lawyer, it seemed that Morales was selling out. But he told a Texas Lawyer reporter at the time: "I'm more concerned about those vulnerable segments of society, the ones that can't take care of themselves, than I am, you know, about the BMW or the Volvo crowd, and I make no apology for that."

To his credit, Morales has used his office to institute some protections for residents of the desperately poor colonias along the border, and has championed litigation to stop development of substandard housing in these towns.

Morales' most controversial position as attorney general--at least in Democratic circles--was his decision not to appeal the 1996 Hopwood ruling. In some people's eyes, it was a betrayal of his ethnic roots.

In the lawsuit that resulted in the landmark ruling, Cheryl Hopwood and three other white students sued the University of Texas in federal court, claiming they were discriminated against when the university's law school would not admit them.

Morales, who admits he may have benefited from affirmative action policies himself at Harvard, refused to represent the state university in its appeal of the favorable verdict for Hopwood. At the time, Morales said he didn't support racial considerations in the university admissions process and saw little chance of success in an appeal. He later broadly interpreted the U.S. Supreme Court's refusal to hear the case as meaning UT could no longer use race as a factor in selecting students.

(Notably, Joe Jamail, the Houston lawyer who has publicly questioned Morales' conduct in the tobacco case, appears to have positioned himself opposite the attorney general in this debate as well. This summer, Jamail, a descendant of Lebanese immigrants, donated $4 million to endow two minority scholarship programs at UT.)

The tobacco case, which Morales filed in March 1996, would give the attorney general his highest profile ever and finally grant him a reputation as a power broker. Up until then, Morales had been a relatively unknown attorney general--especially in comparison with Mattox. Indeed, Victor Morales, the former Democratic candidate for U.S. senator, rose from obscurity in the polls largely because voters didn't know the schoolteacher wasn't the attorney general.

The tobacco suit brought national headlines for Dan Morales. Time magazine featured him in a piece on rising Democrats, saying he "won't be pigeonholed as a liberal or conservative." And in 1996, Texas Monthly named Morales on its list of the state's 20 most intriguing, influential people. As the magazine's headline put it, "A heavyweight in state politics: Taking on the tobacco industry and other foes, Texas' attorney general is smokin'--at last."

With his recent marriage, his first, Morales has given the public some personal sizzle as well. Last year, he wed former Brownwood resident Christine Glenn. Thirteen years younger than her new husband, Mrs. Morales appears stunningly attractive on television.

Her background bears no resemblance to the typical political wife. Morales met the single mother of two at a Better Business Bureau luncheon in Abilene. They got engaged a few months later. Shortly before the wedding, Glenn told her hard-luck story to the San Antonio Express-News. Dispatched to orphanages as a child, Glenn married young to a man she claims abused her. At one point, she resorted to topless dancing to support her children.

In a fairytale turnaround, Morales has altered that bleak economic picture. Last March, the couple purchased a 5,000-square-foot home appraised at $835,000 in a gated community in the exclusive and breathtakingly beautiful Westlake Hills neighborhood of Austin.

The new home has been the subject of much curiosity. How did Morales afford it on his $92,000 salary as attorney general? Records show he bought it from a Houston woman named Tanya Hill, who'd purchased it herself less than a year earlier and never lived in it. Morales' spokesman Dusek says his boss is making monthly payments on the luxury home. "It's possible that once he starts earning more money [in the private sector], he may make some arrangements with regards to the house," Dusek offers vaguely, declining to give any further details about the attorney general's personal business.

Morales initially rejected the Observer's requests for an interview. Dusek said his boss was tired of talking about the $17.3 billion settlement.

Pressed again for an interview, Dusek voiced concern about the Jamail allegations. "Have you talked to Jamail?" he asked before agreeing to approach Morales again. (The Observer made several attempts to contact Jamail, but he wouldn't return calls.)

When he finally did speak, Morales seemed eager to elaborate on the battle over the attorneys' fees. "When I give someone my word, I mean it," he said. "When I sign a contract, I intend to honor that contract. I don't think that is so unusual a position for a public official to take. I am a little bit surprised that there would be those who would even question whether it is a proper thing for a public official to do."

He also argued--not very convincingly--that money was only a secondary concern for the team of lawyers he hired to represent the state, a pack of five firms led by Walter Umphrey, Wayne Reaud, Harold Nix, Eddie Williams Jr., and controversial plaintiffs' lawyer John O'Quinn. "These guys really wanted to do it," Morales said. "They are all millionaires. They are multi-millionaires. They've made plenty of money. I think their motivation was not so much making more as it was taking on this heretofore undefeated industry that had done so much damage to our state and to our nation and to our future over the course of the last 60 or 70 years. They viewed this sort of as I view it--as a mission--rather than just another lawsuit."

Morales also contends that the political cost of reneging on his contract with the lawyers would have been greater than the expense he's paid for backing them. "I would take issue with your premise that I would be exiting office somehow with a more acceptable legal victory had I cut the lawyers off," Morales said. "I think it is not an honorable thing to renege on your contracts for political reasons, or because it will cause you some discomfort in public relations."

With the governor and attorney general having agreed to postpone all further legal fighting until the arbitration panel rules on the fees, Morales made a theatrical display of giving Bush the benefit of the doubt.

"We recognized then and we recognize now that the [tobacco] industry is the primary benefactor to the Republican Party," he said, pausing a minute, laughing, and then adding, "just as trial lawyers are to the [Democratic National Party]. I don't take much offense to the governor's position, given his party affiliation versus my party affiliation. I recognize it would be a difficult thing to take on an industry that essentially represents the biggest backer that his party has. I think the governor's decision to intervene is perfectly understandable. I recognize the political necessity of him doing so as someone who wants to run for president in a presidential primary. He simply cannot allow a Steve Forbes...or Dan Quayle to run a 30-second spot in Iowa...saying, 'Governor George Bush, when he was in office, he presided over the largest contingent-fee, trial-lawyer recovery in the world.'

"I recognize that he had to publicly distance himself and indicate an objection to what probably is going to be the largest fee ever. You know, we're all political players around here. I am just like the governor is."

Morales even suggested, in a somewhat condescending manner, that he had the governor's best interests at heart. "We made overt efforts...to engineer scenarios that would lead us to resolution without hurting the governor politically, or lead us to resolution where the governor could save face or at least claim it was a positive outcome for him," Morales said. "There was never any intention or desire over here to harm the governor politically or to harm his presidential prospects. I'm a Democrat. I'm gonna remain a Democrat. But, you know, George Bush...is a good guy, and I think he'd make a good president. There was never any desire to hurt his prospects."

Morales admitted his attempt to sanction the governor was "very aggressive," and claims he filed the motion "with much regret." He argued he did so because "it was just imperative to me to get this dispute back to the courthouse." Indeed, the motion for sanctions forced Bush's side to respond in court.

"If you leave it in the public arena where the intervenors will be able to say, well, these fees are outrageous...that sells among the citizens of our state, but it is absolutely contrary to the law," Morales said.

Attacking an Industry
Morales wasn't the first state lawyer to take on the tobacco industry. Mississippi Attorney General Mike Moore filed the first state claim against the cigarette makers in May 1994, claiming they owed the government for medical expenses incurred by addicted smokers.

In preparation for his case, Moore devised a novel litigation strategy with a key player in tobacco litigation: Ron Motley, founding partner of the Charleston, South Carolina, law firm Ness Motley Loadholt Richardson & Poole. A man who made his fortune in asbestos-related lawsuits, Motley has become the undisputed leader in tobacco litigation. He helped negotiate the ultimately unsuccessful national settlement with the tobacco industry, and his firm has a role in 29 state suits--including the Texas case.

The Texas team of outside lawyers hired Motley as a consultant soon after filing the case. Interestingly enough, Morales had rejected the Motley firm when he screened lawyers to take the state's case. Motley's partner Joe Rice admits their firm made a pitch to Morales, but the attorney general made it clear he wanted to hire in-state lawyers.

During the early stages of his recruiting efforts in fall 1995, Morales recalls, there was a "real swirl" of activity among prospective attorneys. "I would suspect that there were phone calls being made and drafts and letters and proposals between and among literally dozens of firms involving teams that I never even found out about," he says.

In October that year, Morales interviewed Joe Jamail. The 72-year-old plaintiffs' lawyer was no stranger to big, flashy cases. In the mid-'80s, Jamail had earned the title of richest lawyer in America from Forbes magazine when he prevailed in the Texaco-Pennzoil suit. In a case concerning unfair tactics in a hostile takeover attempt, the jury awarded Pennzoil, Jamail's client, $10.3 billion in damages. The company ultimately settled for a $3 billion settlement, and Jamail took home his cut--estimated to be about $600 million.

With plans to lead the Texas tobacco team, Jamail had assembled two partners from Houston's Baker & Botts, the same firm that had shared in the Pennzoil victory, and a number of other prominent lawyers. At a meeting in the attorney general's conference room in Austin on October 16, 1995, according to the recollection of an individual familiar with notes Jamail compiled two weeks after the event, Morales met with Jamail; the Baker & Botts lawyers; Lee Godfrey, a name partner at Houston's Susman & Godfrey; and Tom Luce, then a name partner at the Dallas firm Hughes & Luce.

On another day in the same conference room, the individual says, Morales met with lawyers Walter Umphrey, Ron Krist, and Wayne Fisher. Krist and Fisher were friends of Jamail's. Umphrey, Krist, and Fisher met with Morales to propose a separate team to work on the tobacco case. Jamail didn't attend the meeting, but according to his notes, learned about it from Fisher.

The Observer has spoken to five of the seven outside lawyers who attended those two meetings with the attorney general. Three of them declined to comment, but two agreed to talk on the condition that they not be identified.

In his affidavit to the Texarkana court, Jamail stated about his meeting with the attorney general that "Morales imposed certain terms and conditions on my retention as lead counsel that I found to be totally unacceptable. I refused the terms and conditions, and terminated the meeting immediately, along with the other lawyers I had assembled to meet with the attorney general. We left the offices immediately...The primary reason for immediately terminating the interview and leaving the attorney general's office, with the other outside attorneys that had accompanied me, was that it was my belief that the unacceptable terms and conditions Mr. Morales stated...were legally questionable and suspect, although the actual legality or illegality is a matter of law for a court."

In his notes, Jamail reportedly states that Morales insisted the lawyers each chip in $1 million for a kitty to "defend myself" against attacks by the tobacco industry, as a condition of getting the state's contract. State statutes forbid public officials from seeking "anything of value" for themselves in exchange for a public contract.

One of the attorneys who spoke to the Observer says he left a meeting with the attorney general because he was convinced Morales was soliciting some kind of bribe. At the time, the attorney says, he suspected that Morales had set up a "sting operation."

Although no one claims Morales was seeking cash to stuff his pockets, another lawyer alleges that Morales stressed the ominous threat the tobacco industry represented to him personally. "You've got to understand I don't have these kind of resources," the lawyers recalls Morales saying.

He also claims, "It was in that context that he said there is one condition that I must place on any one of you...that you are going to have to give $1 million to 'my campaign.'" The lawyer insists Morales used the words "my campaign," although he doesn't know to what campaign fund Morales was referring.

"I looked around and thought, What in the world is going on here?" the lawyer says.

The lawyer concedes, however, that he was on the alert for any unusual suggestions from Morales. Jamail, who had already spoken several times with the attorney general, warned him that Morales might make demands that weren't legal. The lawyer says Jamail warned him to "be cautious" before meeting with Morales.

For his part, Morales denies he ever said anything improper. He says he did make it clear that the lawyers would have to contribute to a kitty to fund the litigation themselves. Eventually, the five firms Morales hired chipped in $2 million apiece, creating a $10 million fund. Morales says he never used the words "defend myself."

"No meeting ever ended up abruptly," he adds. Morales' assistant attorney general, Henry Potter, attended the meeting Jamail claims he left abruptly, and concurs that no such thing happened.

Morales argues that if he had made comments that could somehow be construed as solicitation of a bribe, all the attorneys in the room had a responsibility to contact the authorities. "If there was a shred of truth to the insinuations that have been in the newspaper, every single lawyer in that room would have been obligated to immediately report unethical or improper activities to the bar," Morales says. "You don't have the option to just ignore unethical or improper activity as a lawyer. You have an affirmative duty to report it."

One of the lawyers who spoke to the Observer about the meetings, however, says he investigated the matter with two criminal lawyers and concluded he had no such obligation, especially since the conversations may have been protected by attorney-client privilege. It is, at best, a cloudy area of the law.

Morales acknowledges he talked a lot about the money the lawyers were going to have to spend to finance the case.

"There certainly was discussion, and I think a clear understanding about the fact that I was going to require that our lawyers basically provide a turnkey operation--that is, that every aspect and every component of the case was going to be covered by the attorneys, and that I did not want this office exposed to a dime's worth of expenses," Morales says.

He adds that he doesn't believe that the lawyers making the allegations against him simply misinterpreted his comments.

"I would give these individuals the benefit of the doubt but for the fact that within a matter of days after this meeting in my room, I began receiving phone calls from friends of mine saying, 'Hey, Jamail is spreading that the reason he didn't get the lawsuit is not because you turned him down but because he turned you down,'" Morales says. "And then I think he had to manufacture some plausible reason--just to save face. This is an individual who is used to getting his way. I think there is active mischaracterization, purposeful mischaracterization."

Morales considered dozens of possible teams for the tobacco litigation. But by November 1995, a month after the attorney general's alleged run-in with Jamail, Morales had settled on a five-firm group led by Walter Umphrey.

A Hornet's Nest
Long before he met with Morales about working on the tobacco case, Umphrey, a successful 61-year-old trial lawyer, had distinguished himself as a generous contributor to political campaigns in Texas. Umphrey acquired his wealth through asbestos litigation. Today, he's majority shareholder of a bank in his hometown, Beaumont.

When former Gov. Ann Richards and Jim Mattox competed for the Democratic gubernatorial nomination, Umphrey at first backed Mattox. But when Richards prevailed, Umphrey made up for lost time by channeling $400,000 to Richards in loans and contributions. He also tried to contribute money to Gov. Bush, but according to a deposition of Karl Rove, Bush's political consultant, the governor returned the money.

"We returned the check because we thought it was awkward for him [Umphrey] and the governor," Rove says, noting that Umphrey was Ann Richards' biggest financial supporter.

In a two-week period during December 1995, shortly after he signed up for the tobacco case but before he'd signed the contingency contract with Morales, Umphrey and members of his firm contributed $40,000 to Morales' campaign.

Umphrey has also put up millions to finance tobacco litigation in other states. Like the other plaintiffs' lawyers who participated in Texas' case, Umphrey has pledged not to talk to reporters about the lawsuit. The American Lawyer magazine, however, has reported that Umphrey invested $5 million in Florida's tobacco litigation. Ness Motley lawyers, with whom Umphrey has worked in the past, led the team that sued the tobacco industry on Florida's behalf a month before Texas filed its case. In exchange for his investment, Umphrey will receive from Ness Motley 7 percent of the attorneys' fees that are ultimately awarded in Florida.

In that state, the plaintiffs' lawyers had negotiated a 25 percent contingency agreement. Morales points to that figure while making his claim that he did better for Texas--by bringing the lawyers' cut down to 15 percent.

A federal judge, however, eventually threw out the Florida fee proposal. More to the point, Florida's attorney general and governor--working together--nixed the lawyers' option of billing the state for its fees if an arbitration panel awarded them less than they expected.

Umphrey's investment in Florida's tobacco litigation has raised a question central to the Texas fee dispute: How much of Ness Motley's inside knowledge of the tobacco industry did he tap into while fighting Texas' case?

Because of its participation in so many states' tobacco lawsuits, Ness Motley has access to a pipeline of damaging information on the tobacco industry. The existence of that information could mean that the risks of taking on tobacco litigation weren't nearly as high as Morales might have thought when he negotiated the 15 percent contingency fee.

Contingency fees, by law, are supposed to correspond to the risks of pursuing a particular case. If Umphrey possessed--because of his relationship with Ness Motley--inside information indicating that the risks weren't as high as outsiders thought, he had an ethical obligation to share that knowledge with the state of Texas before signing his contingency-fee contract.

Umphrey "probably had such insight because of his financial investments in the Florida litigation...There is no clear evidence that such private knowledge and special insight was adequately conveyed to general Morales," wrote Geoffrey C. Hazard, a Yale University law professor hired as a consultant by Bush, in an affidavit to the court.

When the Observer interviewed Ness Motley partner Joe Rice, who negotiated Umphrey's investment in the Florida deal, he initially said Umphrey put his money behind the Florida litigation in January 1996--two months before he signed his contingency fee contract with Morales. But Rice later insisted that Umphrey invested in Florida after he signed the contract with Texas.

When contacted by the Observer, Umphrey himself seemed insulted by the whole line of inquiry. He initially said he'd be willing to talk about the case, despite the informal gag order imposed by Morales. But his congenial manner vanished when the Observer asked its first question: "On what date did you invest in the Florida case?"

"I don't think that's material other than to stir up another controversy," Umphrey said. "We did a good job for the state of Texas. I'm not discussing anything else."

Morales argues that no one could have predicted that the states' tobacco cases would lead to such extraordinary settlements. "When we signed the [fee contract], the industry had never lost a suit, never settled a case," Morales says. "Everything...led us justifiably to expect that we were in for the fight of our lives."

Rice, who would eventually help Texas negotiate its settlement, agrees. "The only thing that Umphrey and those guys would have known is that they were jumping into a hornet's nest."

Umphrey and the rest of the Texas legal team knew one thing for sure: They were expected to hire George Shipley, Morales' longtime political consultant, to handle various aspects of the case. "I was sort of forced on them by the AG," concedes Shipley, who has served Mattox, former Gov. Richards, and others.

Morales denies he made Shipley's hire a condition of the deal. "I certainly suggested [Shipley] would be good at it," he says. "I suggested that George was one of the public-relations specialists that I felt had the record to fairly match up with an industry like tobacco."

Ironically, Shipley had ties to the cigarette makers. In 1991, Shipley--nicknamed "Dr. Dirt" for the negative stories he's leaked about political opponents--says he signed on with Philip Morris to help them "evaluate legislation." He stopped working for the tobacco company after a year, and later aligned himself with many of the industry's opponents.

"I knew George [Shipley] was fully committed to the cause, and that he would be the best guy that these individuals could retain," Morales insists.

How much Shipley profited from the deal may never be known, since Morales' office didn't bother to require the outside lawyers to keep full records of their expenses. In fact, the lawyers have documented only $1.6 million of the $40 million in expenses they claim to have incurred in the litigation. Of that $1.6 million, Shipley received $120,000 for nine months of work. His final payoff may be much higher.

When contacted by the Observer, Shipley declined to answer questions about how much he made from the deal.

Mystery Lawyer
Nine months after Morales reached his fee agreement with the lawyers, in January 1997, he formally added another advisor to the mix--his old law-firm buddy, Marc Murr. "Marc's involvement was every bit as critical and substantial to our success as any of the other five firms," Morales says today.

Murr's role, however, isn't at all clear. His name doesn't appear on any of the pleadings, and he must submit a proposal for his fees to the arbitration panel. The panel will consist of three members: Someone selected by Umphrey, an individual chosen by a national committee of plaintiffs' lawyers, and someone picked by the tobacco industry.

Some critics of the deal say Murr, a relatively unknown Houston plaintiffs' lawyer, did little on the case. "As far as anybody knows, Murr did not do anything," says Pete Schenkkan, a partner at Graves, Dougherty, Hearon & Moody, which represented the Republican legislators who tried to intervene in the case.

Murr, for his part, will not discuss his role in detail until the arbitration panel rules. He knows that people are talking about what he didn't do. "I do not concern myself with what is said. My only interest is to protect the state," Murr says.

Morales takes great pains to defend Murr, saying he acted as Morales' personal advisor even before he contracted with the state. "Mark's involvement predates the other five lawyers'," Morales says. "I asked him to be the lawyer to essentially help me put a team together."

Morales says he initially wanted Murr to head up the legal team, but his old friend was preoccupied with another case. Instead, Morales says he relied on Murr to serve as his eyes and ears--basically acting as a watchdog over the state's team of plaintiffs' lawyers. "Although in my judgment, every action that [the five law firms] ever took was in the best interests of the state...I also knew the involvement of the out-of-state lawyers, the involvement of a potential national settlement, the existence of the Florida litigation, and the fact that the Texas team had financial interests in that. I felt mindful of all that. [Murr] was sort of my fail-safe, focused on Texas and nothing other than Texas. I thought it was really important to have one lawyer who was uninvolved in other cases."

For the year after Texas filed the tobacco case in 1996, Morales characterizes the litigation as an uphill battle. At that point, no other states had reached a settlement. "It was fighting tooth and nail for the first 12 months," Morales says. "We put on a full-court press."

The attorney general says he got "initial feelers" from tobacco-industry representatives about a possible deal in the spring of 1997. By summer, the nation began to learn that tobacco was willing to pay rather than fight. A national task force of state attorney generals and tobacco-industry representatives proposed in June a national settlement, which put a cap on the industry's future liability. While that deal eventually fell apart, it set the tone for agreements with the states.

Later that summer, Florida and Mississippi, both represented by Ness Motley, settled their cases with the tobacco industry. Florida got $3.3 billion, and Mississippi got $11.4 billion.

At roughly the same time, the Ness Motley firm--which had led the national, Florida, and Mississippi negotiations, and had consulted with the Texas lawyers--took on a direct role here. "When we resolved the Florida case, we realized it was going to be many of the same witnesses. They [Umphrey and the rest of the Texas team] asked us to get more involved," Joe Rice says.

Out of the Loop
Six months later, on January 16, 1998, Morales reached a deal with the tobacco industry--and stood up the governor's aides. His assistants failed to show up at a meeting to discuss the agreement before it was announced publicly.

The governor's office was in a tizzy that day for other reasons. Alberto Gonzales says Bush was preoccupied with the scheduled execution of Karla Faye Tucker. Her case had attracted worldwide attention, and even some of Bush's fellow Republicans were calling on the governor to pardon her.

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.

A few days later, Morales lashed back, filing a motion to personally sanction Bush and the legislators for $25 million.

While the governor and attorney general sniped at each other, events taking place in another state would help bring a resolution to Texas' fight. In May, Minnesota's attorney general, Hubert H. Humphrey III--who hadn't received any help from the Ness Motley gang--landed the biggest per capita settlement from the tobacco industry to date: $6.1 billion. Minnesota hired just one law firm to fight its case, and it got 7 percent of the settlement, payable over two years.

The Minnesota attorney general had pushed the case all the way to trial. While the jury was deciding a verdict, tobacco decided to settle.

For Texas, the Minnesota pact had immediate and significant consequences. To his credit, Morales had included in his agreement with the tobacco industry a clause giving Texas the right to renegotiate its settlement to incorporate any favorable provision from other state agreements that might sweeten Texas' deal.

Specifically, the Minnesota deal allowed the state's settlement and its lawyers' fees to be severed. It also raised Texas' original settlement amount by $2 billion. Morales could now give Bush his severance and the counties their own money.

Naturally, the governor's camp puts a different spin on the eventual truce between Morales and Bush. Gonzales claims that attempts to reach an agreement between the governor and attorney general only got serious when Texas' team of plaintiffs' lawyers made an end run around Morales.

In May, the lawyers asked to meet with Bush. At the time, the governor wasn't speaking to Morales abut the tobacco deal. Bush agreed to talk to the lawyers only by telephone; his spokeswoman says that the "the plaintiffs' lawyers wanted quick confirmation of the governor's position one weekend, and we arranged for them to speak by telephone."

Bush told the lawyers he wasn't trying to slash their fees, Gonzales says. He just wanted to sever that issue from the overall settlement.

By late July, the federal judge in Texarkana had ordered all the parties to get together and come to terms. Morales agreed to sever the fee issue and let the lawyers take their fight to the state if the arbitration panel awards them less than 15 percent. By that time, Morales will no longer be in office.

As part of the final deal, Bush and Morales agreed to drop all of their motions against each other--including Bush's motion to question Jamail. "They insisted on that," says Schenkkan, who believes Morales' willingness to compromise hinged on that point. "When do we have the so-called settlement? Right after we notice Jamail's deposition."

Bittersweet Victory
For Morales' camp, the $17.3 billion tobacco settlement has yielded a bittersweet victory, given the allegations against the attorney general.

"The irony of all these suggestions is we were very, very careful," George Shipley says. "We did a good and righteous thing. They could just not stand the fact that a Harvard-educated, Mexican-American Democrat had outflanked them."

Charles Silver, the UT law professor hired by Morales to monitor ethical issues for the state's lawyers, says the allegations unjustly diverted attention "from a spectacular result for the state."

Indeed, John Cornyn has threatened to revisit the allegations against Morales if he gets elected--which appears unlikely. Cornyn's spokeswoman, Michele Kay, says "if he wins, he will investigate the whole contract between the lawyers and the state to ensure there was no breach of fiduciary obligations."

Gov. Bush takes his characteristic hands-off approach to this scenario. "That's a decision that would have be made by the new attorney general who will be elected by the people of Texas," his spokeswoman wrote.

Morales, just a few months away from his private-sector career, seems unfazed: "I don't care who looks at it. It's all sour grapes. It's all baloney."

Has the attorney general benefited personally in any way from his relationship with the state's tobacco lawyers? Morales pauses a moment before answering. "I don't know. I guess...when you win the biggest lawsuit in the history of American jurisprudence, I guess that could be a political benefit to you if you decide to run for something later," he says.

"So...did I receive something of value? I guess so. Am I going to capitalize on that? Not now. Four years from now if I run for some office, am I going to talk about it? I think so.

Published:Last week's cover story, "Smoke-filled room," transposed the original tobacco settlement amounts for the states of Florida and Mississippi. The correct figures are as follows: Florida, $11.4 billion; Mississippi, $3.3 billion. We regret the error.

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