So What's the Truth About Dan Morales and Tobacco?

He says he took on entrenched corporate interests against impossible odds and won a $17 billion settlement for the state of Texas. His critics say he needlessly paid hefty fees to greedy trial lawyers and then tried to cut one of his pals in on the action. Now the question is whether his hopes of being governor have gone up in smoke.

"DIME CON QUIÉN ANDAS, Y te diré quién eres" is commonly translated simply as, "You are who you friends are." But in describing a Democratic primary in which two Mexican American candidates are running for governor, the literal translation of this expression is the better choice:

"Tell me who you walk with, and I'll tell you who you are."

Certainly it was a better choice to parse the political behavior at San Antonio's Martin Luther King Day parade on January 21. On that day a group of the city's most powerful and influential Democratic politicians linked arms and marched down Martin Luther King Avenue. At one end of the line was former San Antonio mayor and Clinton Cabinet member Henry Cisneros. Flanking him were congressmen Charlie Gonzalez and Ciro Rodriguez; state senator Leticia Van de Putte; state representatives Art Reyna, Trey Martinez Fischer, and Ruth Jones McClendon; county judge Nelson Wolff; and various candidates for the city council and the local bench.

On the south side of the avenue, a bit removed from Cisneros and his rainbow coalition—and far less conspicuous—walked another of San Antonio's native sons. Wearing Western boots, a pinstripe suit, a bright white shirt, and a striped tie, former Texas attorney general Dan Morales waved, smiled, and shook hands. "Hey! Dan Morales. I'm running for governor," he repeated, as he worked the line in front of the modest houses that lined the street. "Hey! Good to see ya!" Morales had come home to San Antonio, but this time, he was on his own. There was no exchange of pleasantries with his former mentor Cisneros. Not one of the two dozen politicians leading the parade was supporting Morales in his race for governor. All but Nelson Wolff, who can't endorse candidates because he is a judge, were backing the other Democrat in the race, Tony Sanchez.

Ever since he won election to the Texas House of Representatives in 1985 without the blessing or the backing of any local political machine, Morales has made a career out of going his own way. He's always had his reasons, even if they were sometimes hard for fellow Democrats to understand. If he was the loneliest member of the House Mexican American Legislative Caucus when he carried a criminal justice reform package his colleagues opposed, he did it because he was a former prosecutor and a law-and-order conservative. If he made national headlines as the maverick Hispanic attorney general who opposed race-based admission at the University of Texas, he did it because he believed affirmative action harmed minority students. Morales angered many in his party, but he was undefeated against Republican opponents, turned out Hispanic voters in record numbers, and because he was only 34 when he was elected attorney general in 1990, had a longer shelf life than most of the party's aging stars. If they weren't completely sold on a conservative, Harvard-educated Presbyterian with a limited command of Spanish, Texas Democrats were not going to walk away from Dan Morales either.

That was then. Everything changed after Morales brought his now famous lawsuit against the tobacco industry. On its face, the suit was a grand success. Morales hired a team of five private attorneys—known collectively as the Big Five—and forced the nation's tobacco companies to pay the state $17.3 billion in damages. Few had believed he could win the suit, let alone a settlement worth billions of dollars. But along the way Morales did something that no one yet has quite been able to explain: He signed a contract that resulted in $506 million being awarded to his friend Marc Murr, a Houston lawyer who was never seen in the Beaux Arts federal courthouse in Texarkana, where the tobacco trial was held. At least, Murr wasn't seen until shortly before the case was settled—about the time attorneys' fees were being negotiated. The Big Five together made $3.2 billion—the biggest legal killing in history. But they had been out front, highly visible, had risked some $30 million of their own money, and would have gotten nothing if the state had lost. When Murr showed up to collect his paycheck, he based his claim on a contract with Morales that the principal lawyers in the case say had been executed in secret and later, by Morales' own admission, backdated.

A questionable $506 million deal for a friend who had not worked with the trial team was too much to swallow—even for a public that had lost its gag reflex when it came to politics and corruption. But that wasn't Morales' only problem. First, Houston lawyer Joe Jamail—probably the most successful trial lawyer in America in the past thirty years—had accused Morales of soliciting a kickback when he tried to recruit Jamail to sue the tobacco companies. Second, Morales became a punching bag in the 1998 election for attorney general, even though he decided not to seek reelection: Republican nominee John Cornyn made the tobacco fees the centerpiece of his campaign. Third, the U.S. Attorney's office launched an investigation into Morales' handling of those fees. That investigation has now dragged on for more than two years but has yet to produce an indictment.

Indeed, Morales appears to be running two campaigns, one for governor and another against a federal grand jury that meets every Tuesday in the basement of the federal building in Austin. He has raised no money since the end of 1997, when he announced he would not seek reelection. But since July 1999, he has spent $516,627 of the funds left in his officeholder's account; $458,429 was paid to lawyers.

Exactly why Dan Morales would risk destroying a promising political career to arrange a $506 million fee for an old friend is one of the deepest mysteries of Texas politics. The controversy he created might have faded away gradually, along with his name and reputation. But now that he is running for governor, it seems like a good time to ask the question again: Why did he do it?

IN SEPTEMBER I REQUESTED AN interview with Morales to gather information for a book I am writing on the Texas tobacco lawsuit. Out of the public eye for two years and still waiting for the final disposition of a criminal investigation that seemed to have no end, he said he was willing to talk—if his lawyers would allow it. A week later he called back and told me his attorneys had said there was no problem. When we first spoke, he was still considering a run for the U.S. Senate seat being vacated by Phil Gramm. He was communicating with Ron Kirk, the mayor of Dallas, who was hoping for a clear field so that he could resign and begin a Senate campaign. And he was closeted with his own team of criminal attorneys, plotting a defense against possible federal charges.

We spoke at length about his role in the tobacco case. In a one-on-one conversation, there is not a more convincing, earnest, or intelligent politician than the perennially youthful Morales. And this time he was giving no ground, making no compromises. He wanted, he said, to explain why he had done what he had done. He wanted to set the record straight. And he wanted people to understand what he had done in the context of an unconventional political career in which he has often taken his own road.

Morales was elected attorney general in 1990 after three terms in the state House of Representatives. He took office in 1991, when Democrats still held the House, the Senate, and most statewide offices. Within a few days of his arrival, Lieutenant Governor Bob Bullock and House Speaker Gib Lewis called Morales to a legislative summit in the Speaker's office to devise a redistricting plan favorable to Democrats. When Bullock, who was widely feared at the Capitol, said he would direct redistricting lawsuits, Morales interrupted him. "In the past one hundred and fifty years the attorney general has represented the Legislature in redistricting matters," Morales said flatly. "Now the state's first Hispanic attorney general is going to be told he can't represent the state. Governor, I don't think that's going to sit too well with your Hispanic legislators."

Morales says that the 61-year-old lieutenant governor leaped from his chair and slapped him across the face. "You little Mexican piece of shit!" Bullock shouted, as an aide restrained him. But Morales refused to back down. In spite of Bullock's protests, he did handle the redistricting lawsuits. When I asked why he had challenged Bullock, Morales said simply, "I'm an independent person, and the office of attorney general requires independence."

The new attorney general soon became famous for keeping his own counsel and for taking stands that seemed to defy conventional wisdom. There was perhaps no better evidence of this than his decision file a lawsuit that at the time seemed to have little chance of success against the tobacco companies. Even before Mississippi attorney general Mike Moore filed the first state lawsuit against the industry in 1994, Morales had been dispatching his assistants to national conferences to organize seminars for attorneys general willing to take action against the tobacco companies. Texas, like other states, had incurred huge expenses in treating the victims of illnesses caused by tobacco.

The main problem with any lawsuit was that, at the time, no tobacco company had ever paid a dime to any plaintiff. The cigarettemakers' defense attorneys relied on a bulletproof "personal choices" defense: The smoker was aware of the health risks involved with the product, so the industry couldn't be held responsible for tobacco-related diseases or deaths. Knowing that such a suit would be both extremely risky and hugely expensive for taxpayers, Moore conceived of the idea of using private lawyers working on something like a contingency basis to sue the tobacco companies. In standard contingency fee agreements, the plaintiff's lawyer incurs all costs and gets paid—up to 33 percent of an award or settlement—only if he prevails. The State of Mississippi, rather than an individual, would be the plaintiff.

Morales decided to adopt a similar strategy. He knew that the Texas Legislature would never appropriate $10 million to $20 million to fund a tobacco suit tried by the attorney general's staff. And he believed that staff attorneys in the AG's office could not take on the tobacco industry, even if the money was available. Morales talked to lawyers from more than a dozen firms and had at least two meetings with Houston trial attorney Joe Jamail, who he decided was too independent.

The deal Morales cut with the Big Five tobacco lawyers—Walter Umphrey, Wayne Reaud, John Eddie Williams, John O'Quinn, and Harold Nix—represented no risk for the state. The lawyers would bankroll the lawsuit. Only if the state prevailed would they collect a 15 percent contingency fee. (In the end, the fees did not come out of the state's settlement, as tort reformers and radio talk-show hosts frequently complain. The settlement agreement stipulates that the attorneys' fees be paid by the tobacco companies, separate from the state's monetary award.) The lawyers brought to the courtroom decades of experience in trying complex cases: asbestosis in Beaumont and Port Arthur, chemical carcinomas in plant refineries in Houston, class-action breast-implant suits across the country. Walter Umphrey, the Beaumont lawyer designated the managing partner of the trial team, described the group as "tobacco's worst nightmare. They couldn't money-whip us, which is how they win most of their cases, and they couldn't take our clients away from us." On March 28, 1996, Texas became the seventh state to file in the national tobacco war started by Mike Moore.

TEXAS V.AMERICAN TOBACCO WAS in most ways Dan Morales' finest hour. Even before the suit was filed, he proved he could play in the same league as Big Tobacco. When the tobacco companies tried to intimidate him with a push poll—a political tool designed to disseminate negative information about its subject—Morales served notice to every contract lobbyist on tobacco's payroll that all their files were subject to pre-trial discovery. In response, six of the biggest names in the Austin lobby walked away from their tobacco clients, leaving the industry underrepresented as the legislative session began. Morales strongly suggested that the lawyers hire his political consultant, George Shipley, to coordinate strategic thinking and public relations. Shipley has a reputation as a tough inside player. And it was probably no coincidence that Democratic legislators who had worked with Shipley in the past began to file anti-tobacco bills, which had the companies defending themselves against legislation in Austin while they defended themselves against litigation in Texarkana.

If Mississippi started the states' march to the courthouse, Texas was the first state to file in federal court and the first state to file under the Racketeer Influenced and Corrupt Organizations (RICO) Act, originally designed as a tool to prosecute the mafia. A successful RICO case would have resulted in the tobacco business being declared an illicit enterprise and regulated by the state and the companies being forced to pay treble damages. "The lawyers representing Mississippi told us we were screwing everything up when we filed the RICO suit," Beaumont attorney Wayne Reaud said after the industry settled. "But it put enormous pressure on the industry."

When the judge ruled that the RICO claim would be tried first, the pressure became unbearable. Rather than defend itself against a RICO suit, Big Tobacco capitulated. In January 1998 the judge signed a preliminary agreement that secured a $15 billion settlement for the State of Texas. When Minnesota settled, a clause in the Texas settlement agreement providing that no state would get a higher per-capita settlement than Texas pushed the amount up to $17.3 billion.

Morales had presided over what could be described as the perfect lawsuit—with the exception of two remarkable flaws. The first involved the payment to Murr. Back in January 1997, at a meeting at the Four Seasons Hotel in Austin, Morales told the Big Five that he was hiring at least two more lawyers in the tobacco case: Marc Murr, a trial lawyer he had worked with in Houston shortly after graduating from Harvard, and Will Pryor, a Harvard classmate who had once worked for Morales as an assistant attorney general. The Big Five objected. "We don't need any help trying this suit," Umphrey told Morales. He said he would resign if Morales persisted, and the other four attorneys working for the state said they too would quit.

There are two versions of what happened next. According to the Big Five, Morales backed down and then went out and hired Murr and Pryor without informing any of them. This claim is supported by Harry Potter, who said that Murr and Pryor were hired in secret and that he found out about it later and informed the outside lawyers. Morales insisted that that is not true—that the protests by the five lawyers were common under such contracts and that they, in effect, had backed down. He insisted that he told them that he was going to hire both Murr and Pryor anyway.

Whatever the case, Pryor quickly backed out of the contract, which did not become public until January 1998. Murr did not. Though he had spent none of his own money in a case that cost the five other lawyers more than $30 million—they had to pay the full cost of litigation since the state paid no legal expenses—he showed up with a contract that allowed him to claim $506 million in attorneys' fees. After the Big Five protested, Murr submitted his contract to an arbitration panel and was awarded 1.5 percent of the settlement, or $260 million. Murr's arbitration deal was not only bold but odd, because Morales, as attorney general, got to appoint two of the three panelists. And Murr, as the disputant, appointed the third. Two months later a national arbitration panel with members appointed by the tobacco companies and the Big Five met in New York and awarded $3.2 billion to the Big Five and only $1 million to Marc Murr.

News of the Murr deal exploded "like a gigantic stink bomb in the middle of the fee proceedings," said Charlie Silver, the University of Texas law professor hired by the five trial lawyers as an independent ethics counsel. "It was the only plausible basis by which the entire settlement could be challenged." And challenged it was. The magnitude of the fees and the five trial lawyers' history of contributing to Democratic candidates had Republicans racing to Texarkana to file motions to protest the fees. They were encouraged by Morales' announcement that he would not run for reelection—as it turns out, a costly political mistake. As a lame duck, he was even more vulnerable.

Among those protesting the legal fees were Governor George W. Bush and one of the candidates for the office Morales was vacating: John Cornyn. Both filed motions challenging the fee agreement. Several days after Cornyn took office, he began an investigation that extended beyond Murr's contract and included the payment of fees to the five other lawyers. And of course the settlement and the lawyers' contracts became the focus of a federal investigation.

The second flaw was Jamail's May 1998 affidavit alleging that Morales had solicited $1 million from him to get in on the tobacco deal. The charge made headlines, attracted the attention of the FBI, and shocked many in the legal community who had trouble believing that the straight-arrow attorney general would do such a thing.

Morales offered a different version of what happened. He said he did indeed mention the figure of $1 million, not as a bribe or a kickback, but as the amount of money that Jamail would have to front. "What he says is not true," said Morales. "We were asking each firm for at least one million dollars to fund the litigation." (It ended up costing much more than that.) And he told me he never offered Jamail, on any terms, any part of the tobacco deal. The reason he did not, Morales said, is because he felt Jamail would be too hard to manage. "We interviewed him, but I doubted that Jamail would do what I told him to do," Morales said. His comments are consistent with what assistant attorney general Harry Potter said to me in May 2001, four months before my interview with Morales. "I was in a meeting with Jamail in August or September 1995, and he was so independent it was evident that he would be impossible to control," said Potter. "The attorney general had to call the shots."

WHY HAS MORALES INSISTED—AGAINST considerable evidence and the combined opposition of the Big Five—that Murr deserved $506 million? That is a difficult question to answer, in part because Morales has conceded nothing and will not admit that he did anything—anything at all—wrong. He insisted, for example, that there were six lawyers with whom he had contracts. He spoke of Murr as "the sixth member" of the state's tobacco team and said he played as important a part in the tobacco suit as any of the Big Five. The trial lawyer community is a small club and Morales was never part of it, but Murr was; so Morales hired Murr to work as his adviser, which explains why Murr was not arguing motions in Texarkana. "Marc was the only guy I had a personal relationship with," Morales said. "He had a plaintiffs practice, had done a lot of plaintiffs work. He was very active helping me identify and track down appropriate firms to represent the state. Information on personal stuff you need to know to work with these guys." If Murr had no equity in the case for which he could have demanded a $506 million fee, he also had no conflict of interest. "The problem we ran into with the Umphrey group," Morales said, "was that they had a number of relationships with lawyers in other states and so there was a potential for conflict of interest." Murr was impartial, Morales said. His only interest was in the lawsuit filed in Texarkana. As for the Murr contracts that Cornyn claims are backdated, Morales explained that almost every document on file in the courthouse in Texarkana has been revised.

But in spite of Morales' support, Murr backed down. On May 6, 1999, he renounced all claims to any fees from the tobacco suit, an action that Morales told me he regrets. "Marc didn't have the stomach for a public fight," he said. "These guys are different. They sue each other over money all the time. They don't give a damn if there is a public fight."

All of which leaves Dan Morales alone again on the political stage. The suggestion that he may have done something wrong is even more bewildering in view of his reputation as a squeaky-clean public official. "He used to return the complimentary coffee cups the lobbyists and trade association guys would leave on our desks," said Kingsville representative Irma Rangel, who shared an office suite with Morales in the House and who reflects a view held by many in the Capitol. "Dan would never do anything improper." Said Harry Potter: "He had always been the most honest public official I had ever known. That he would consider accepting a kickback was the most ridiculous thing I had ever heard."

THAT WAS BEFORE HE HEARD what Morales was doing in November. In yet another bizarre turn in the story, Morales decided to go after his old friend Potter in court. Alleging that after Potter left the AG's office he "denigrated Murr's role in the tobacco litigation" in statements to reporters, Morales asked a judge to order Potter's deposition and others (even though a formal suit had not been filed). Potter's lawyer Jim Richardson said that Morales and his lawyers are simply using Potter to gain insight into the federal investigation. Once Potter is under oath, the criminal defense lawyers working for Morales can ask Potter what he told the federal grand jury. "It wouldn't be the first time a civil suit has been used to get in the back door of a criminal investigation," said Richardson. Morales' lawyer Paul Coggins said the motion he filed is only an attempt to gather information to determine if a suit will be filed. But in a strident response he filed in court, Richardson said Morales attacked Potter to deflect criticism while he runs "his current political campaign for the United States Senate."

That wasn't the only surprise. A month after his motion to depose Potter, Morales shocked the political world in Texas by announcing that he was running for governor. He did so fifteen minutes before the filing deadline. One day earlier he had talked to Henry Cisneros, who, like everyone else these days, finds Morales' behavior unusual. "He was running for the Senate," Cisneros said. "He called me at home and asked me if I would wait a few days before I announced that I was endorsing Ron Kirk in the Senate race. He didn't want an old friend to endorse his opponent on the same day he announced he was running. I said fine. He was a friend, and he should have his day in the sun. It could have been a ruse, but it's hard to figure out." Morales' former consultant, George Shipley, is working for Tony Sanchez and would only say he doesn't understand what Morales is about these days.

Riding to San Antonio in Morales' black Lexus, I found myself wanting to believe him. He said his request to take Harry Potter's deposition includes an offer to give his own deposition and finally set the record straight. He said he also wants to depose Big Five lawyer John Eddie Williams to determine if Potter compromised the state's interests by going to work for Williams after leaving the AG's office.

Morales said his supporters urged him to get into the governor's race so that if elected he could protect the billions in tobacco money from Republicans who would use it to plug a deficit instead of paying for children's health care. He said he also wants to finish the work he started in the colonias and to see that public education is adequately funded.

But with much of the money he raised before 1997 already spent on attorneys' fees, few endorsements from key politicians, and even his former mentor Henry Cisneros proclaiming his support for Tony Sanchez, there is a sense that Dan Morales is running out of friends. Out of money. And out of time.

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