Dan Morales’ New Friends

Louis Dubose. The Texas Observer. October 28, 1994. p.1

“My litigation schedules did not slow down in election years,” former Attorney General Jim Mattox said in an interview last week. “But I’ll say this. I made a lot of enemies. And if you look at some of the more aggressive AGs in the nation, in terms of litigation, we were not always awarded with promotion or advancement when we sought another office….When you anger powerful interests, there’s a price to be paid.”

Mattox’s successor, Dan Morales won’t have to pay that price. By the end of his third year in the office that Jim Mattox left when he ran against Ann Richards in the 1990 Democratic primary, Morales had completed a purge of most of the assistant attorneys general who might have angered the powerful interests who closed the door on Mattox when he ran for the U.S. Senate in the Democratic primary in May.

The abrupt nature of their firing or hasty resignations sent an unequivocal message to others in Morales’ office who would use litigation and investigations to afflict the powerful in this state—and to the powerful interests who might have been afflicted by aggressive attorneys general. “Lawyers know they are on a short leash and there are a number of businesses, like car dealers, who know they are a protected class,” said one former assistant AG who was fired by Morales.

“Morales has fired attorneys because they were doing their jobs and aggressively and outspokenly protecting consumers,” said Tom Smith of Public Citizen’s Austin office. “It seems to me that he’s trying to send a signal to his fundraisers. He’s trying to send a signal that major industries in the state don’t have to worry about him.”

“This is not about personnel,” said a former assistant AG who worked for three attorneys general. “It’s about policy.” The policy implications associated with the lawyers Morales sent packing are important:

• Joe Crews, an aggressive Dallas lawyer who had been hired to direct the consumer protection division shortly after Morales was elected, was named a special assistant attorney general and moved out of consumer protection after two years there. As consumer protection division chief, Crews had outlined an ambitious litigation schedule and, according to several sources interviewed for this story, encouraged his staff to file consumer protection suits and praised them when they succeeded.
• William O. Goodman, who after 20 years service was second in charge in consumer protection, was dismissed and, according to several sources, had to fight for a four-day extension to meet with and brief his replacement and to leave instructions for caseload management after his departure. Goodman had directed the investigations and litigation against private psychiatric hospitals that was clearly the most important achievement in court during Morales’ tenure.
• Ed Salazar, a 13-year veteran who had helped Goodman with the psychiatric hospital cases, which netted the stated approximately $5 million in fines and services, established a new set of guidelines that stopped the large psychiatric hospitals’ substance abuse units from “bounty hunting” in public schools and required that patients be seen by a psychiatrist within 72 hours before being admitted to a hospital, was fired when he disagreed with a decision to drop one defendant from an insurance case.
• Ann Kitchen was the architect of the most important single piece of consumer legislation advanced through the Legislature by the Attorney General’s office during Morales’ tenure: the law requiring non-profit charity hospitals to provide a certain amount of indigent and charity care in order to maintain their tax-exempt status. For her achievement, Kitchen, who had spent seven years as an assistant AG, was interviewed by Sam Donaldson of ABC News, invited to testify before a Congressional committee looking for mechanisms to regulate non-profit hospitals and abruptly fired by Morales.
• W. Scott McCollough, the head of consumer protection’s public agency representation section who, according to the Texas Lawyer, last September “had argued for state agencies in a key utility ratemaking case before the Texas Supreme Court”— was given several hours notice to clear out of his office. When told he had less than a day to tie up loose ends of 10 years with the Attorney General’s consumer protection office, McCollough told First Assistant Attorney General Jorge Vega that he was working on 92 cases, many of which involved arcane utilities and communications law. McCollough said he pleaded with Vega for at least one additional day, as he had a trial scheduled the following morning at 9 o’clock and there was a possibility that the case, involving rate structures and $5 million in benefits for the state, could be settled. Vega— who dismissed most of the attorneys generals that were sent packing— telephoned McCollough later the same day to tell him that he had discussed his request with Morales: “I met with the, with Dan and we discussed what we had talked about this morning. And we’ve decided that we are going to go ahead and proceed with your termination, effective today… Before you leave today, you could go visit with Tom Perkins and turn over your keys and whatever else you think you need to give him,” (McCollough, expecting the ax to fall, taped and transcribed his conversations on his final day in his office.)

Others who left the agency were Mary Keller, a first assistant attorney general who moved on to the Department of Insurance; Rose Ann Reeser who had directed the charitable trust division; Stephen McIntyre, director of the consumer protection office in Lubbock, who made news when he intervened with the Federal Reserve Board in a bank acquisition and compelled the new bank owners to provide $25 million in credit in the minority community, and to stop all redlining practices; Gary L. Bledscoe, a 14-year veteran and director of the civil rights division; Nancy Lynch, who headed Morales’ environmental division until she was fired, and Steve Gardner, director of the consumer affairs protection office in Dallas.

“Dan Morales didn’t gut the agency when he took over,” his press secretary Ron Dusek said in a telephone interview. “He gave nearly everyone the opportunity to show that they could adapt to his style, that they could promote his agenda. It took him two years of watching the agency slowly before he could see what he wanted to do.”

What Morales wanted to do with consumer protection, Dusek said, was file lawsuits that helped “the little guy.” “Some people,” according to Dusek, “resisted and wanted to continue to do the “high-profile, press-generating” cases against cereal companies rather than the nursing-home cases that are filed day after day.” Those people, Dusek said, all “at-will employees,” had to go.

Many went quietly to other government agencies or private practice, leaving Morales or his press office to explain what happened. Some, particularly those who moved to other government agencies where they could use the subspecialties they developed working the AG, are reluctant to talk for the record. Others, now in private law practice, are more outspoken.

“Absolutely untrue,” Crews said when asked about employees in his division resisting Morales’ attempts to remake the agency. “Nobody ever received any notice that we were doing anything wrong… I would talk to Dan before I would take on one of these wild-eyed notions. I would give him all the caveats, warn him that we were going to piss people off, tell him ‘You’re not going to like some of the problems this will create.’ He never once said, ‘that’s a little too far out there, let’s not do that.’”

In fact, Morales’ hiring of Joe Crews suggests that the AG did not initially intend to shut down his consumer protection division. Crews had established a reputation as one of the state’s more progressive lawyers and when first interviewed by Morales he laid out an aggressive consumer protection agenda, suggesting that he would push the division harder than it had been pushed under Jim Mattox. (The staff at consumer protection came to refer to his e-mail messages encouraging them to pursue investigations as “crews missiles.”)

Crews would later encounter Morales’ lack of enthusiasm for what Dusek might describe as a “high-profile, press-generating case.” After Lubbock consumer affairs attorney Steve McIntyre intervened with the Federal Reserve Board and compelled a Minnesota bank to end redlining in a Texas bank it was acquiring, Crews said, “There was not even a press release. He didn’t seem to want any publicity.” Nor did Morales want to push the bank to do anything more that it had readily agreed to do. “Steve wanted a permanent injunction and 15 to 20 million more in lending [in the minority community that had been reclined]. We were told ‘no,’ to take what was offered and shut down.”

When asked to respond to Dusek’s account of Morales’ program to change the way the agency, and in particular the consumer protection division, operated, every former assistant attorney general interviewed for this story (some on the record and others off the record) responded as Crews did.

“That simply never happened,” McCollough said. “And if it were true, what’s the point? The point isn’t that we had two years notice. The point is that he wanted to create folks that wouldn’t be aggressive and take on utilities, that wouldn’t take on insurance companies, that wouldn’t do health-care cases. It would have taken me longer than two years to learn that system.”

“Mattox would always tell us to push, push, squeeze, squeeze,” said Ed Salazar, who has sued Morales over his firing. “We were the good guys, we were suing on behalf of consumers. And our office made money for the agency.” Like the other former assistant AGs, Salazar said he never got the word from “the eighth floor” that he should be anything but aggressive in his pursuit of consumer protection lawsuits. “If anything, we were being given the green light,” Salazar said, producing an e-mail printout from his supervisor, dated less than a month before Salazar was fired- urging him to “Push!”

That the division made money contradicts what Dusek cites as one of the reasons for the changes at consumer protection. (Morales refused to be interviewed for this story, saying, through Dusek, that he did not want to talk about personnel issues.) Dusek said the Attorney General’s office has limited resources and prefers to use them helping “old people in nursing homes”— rather than suing “cereal companies, pyramid schemes and cruise ship operators on behalf of consumers who weren’t satisfied with their cruise.”

Mattox, who sued cereal companies, would ask the Legislature for “seed money,” then push the consumer protection division, the agency’s cash cow, to operate like a law firm and bring in its own money in legal fees and fines. That money then could be used to file suit on behalf of people in nursing homes.

“We would conduct an investigation, bring the party to the table after we had the goods on them, and then talk settlement,” Salazar said. “We’d file the suit and the settlement on the same day.” An example cited by Salazar and several other assistant AGs who were dismissed, was the private psychiatric hospital litigation. The first hospital that settled agreed to pay $1.2 million in legal fees. Two others immediately lined up to settle, for different sums of money, but accepting the same injunctions that limited aggressive marketing practices the hospital chains used to fill empty beds. “We had taken down all the major players except one,” said one of the assistant AGs dismissed by Morales. “Forty-one percent of all freestanding psychiatric hospital beds were under injunction and we had changed the way they were doing business in this state.” Crews gives veteran assistant AG Bill Goodman credit for the psych-hospital success.

Morales seems to have little interest in that sort of consumer-protection litigation. In fact, in a deposition he gave in a civil suit filed against him by one of his former consumer protection lawyers, he admitted that he hasn’t yet read the pleadings of the lawsuit cited as the cause of termination for the employee who had Morales defending himself in court. “Ronald Regan knew more about his administration than this guy does,” Salazar said of his former boss.

In his three terms in the Texas House of Representatives, representing a San Antonio district, Dan Morales was known as a law-and-order conservative and a moderate on some social issues. Out of Harvard law school in 1981, he went to Houston to work for Bracewell & Patterson, a large, corporate law firm. By 1982 he had returned to Bexar County to work as an assistant district attorney. By 1985, he was serving in the House, where his experience as a DA seemed to inform much of his voting. For the working poor, he once said in an interview on the House floor, crime is the issue. As the representative of a poor inner-city district, an aggressive stance on criminal justice issues was the very least he owed his constituents, Morales argued.

“The attorney general has beefed up the law enforcement function of the agency,” Dusek said. “He’s not trying to turn it into a law enforcement agency; however, the attorney general was requested on numerous occasions by law enforcement for some type of support measures.”

Twenty lawyers were added to the agency’s small criminal justice division in 1993 and its budget was doubled to $6.8 million. Morales also moved Drew Durham, a former county attorney from West Texas who is currently the deputy attorney general for criminal justice, into his inner circle.

Durham got the attention of environmentalists last month. At a property rights rally in Georgetown, where he lives, he said: “There’s no endangered species in Sterling County because… we killed them all…. I’m the chief executioner, “for the state of Texas, Durham said, according to the Texas Lawyer, “and I don’t think that speaks well for the warbler.” Durham referred to the golden-cheeked warbler, a species the U.S. Environmental Protection Agency is trying to protect in Central Texas, where a landowners’ and developers’ fight against the feds’ habitat protection program has grown into a movement to undo the Endangered Species Act at the local level. At Georgetown, Durham was representing the Attorney General.

Durham also directed the AG’s lobbying during the last session, and three former assistant attorneys general from consumer protection said they often found him an obstacle to their work with legislators. In an interview with Bob Elder of the Texas Lawyer, Crews confirmed that. According to the Lawyer, “Toward the end of the 1993 session, top aides at the AG’s consumer protection division met to discuss strategy for the session’s final hectic weeks. Frustrated by a lack of communication with Durham, consumer chief Joe K. Crews told his division chiefs to fan out and defend the consumer agenda and he would face the heat with Durham later. ‘I could not find out what was going on with Durham,’” Crews told the Lawyer. “The communication level was just off.” Crews characterized his department’s dealings with Durham in the Legislature as “an awful, awful” process. “It was certainly very clear that what we had done was looked upon with extreme disfavor by Drew and Drew’s staff,” Crews said. After he was moved out of consumer affairs, Crews hung on through the redistricting lawsuit then resigned to practice law in Austin.

For Attorney General Dan Morales, the firings have brought on another problem. Laywers can be adversarial, even downright litigious. Information that would never have seen the honest light of the Texas sun shakes loose in the discovery process and it doesn’t always square with the “spin” an agency puts on a particular decision. Two lawsuits filed against the Attorney General, one by Ed Salazar and one by Scott McCollough, have brought some factual material into the foreground.

Although it is not the stated intention of either of the civil suits, both seem to pose the question advocates have been asking: “Why’d you do it, Dan?” (And how were the decisions made?)

Salazar contends that Dan did it because a decision was made that certain monied interests were off limits. He cites two lawsuits he filed against insurance interests. In both suits, one defendant was dropped while others remained parties to the suits.

One suit involved credit life insurance and was filed against two furniture retailers, Lack’s Furniture Center of Victoria and Edelstein Furniture Co. of McAllen. Pressure to drop Lack’s from suit, according to Salazar, came after Melvin Lack, a large Democratic funder, visited Morales in Austin.

In a deposition, Morales admits that Melvin Lack visited him and that, because of a technical error in naming the defendant, it was determined that the suit against Lack’s would be dropped. “Well, his counsel was present,” Morales said in response to a question from Salazar’s attorney. “His counsel indicated that the investigation that had transpired and the subsequent filing of the lawsuit were erroneous in terms of the subject matter of the litigation and most importantly with the propriety of this defendant being the proper party to the litigation… the target of our investigation was not Mr. Lack’s company and indeed was another company which had Lack’s in the name.” No lawsuit was ever pursued against the other company with Lack’s in its name Morales admitted. He also described Melvin Lack as “a friend” and under questioning admitted that Melvin Lack had contributed to his campaign. If Lack’s had to be dropped, so did Edelstein, Salazar decided, but the suit finally was pursued by filing against the insurer rather than the retailers who sold the insurance in exchange for a substantial part of the commissions.

A similar request to drop one defendant from a lawsuit in November led to Salazar’s firing after he threatened to resign because the Texas Farm Bureau was to be “nonsued” while Allstate and State Farm continued as defendants. Although it appears that there was some disagreement between Salazar and his division chief, Crews, on the Farm Bureau suit, dropping one party suggested that something more was amiss. (All three parties might ultimately be dropped, because when Morales publicly said that the Farm Bureau case was without merit, Allstate and State Farm filed motions requesting that their suit be discontinued for lack of merit.) The litigation began with a Farm Bureau consumer complaint about the company’s depreciating insured items- in this case a boat- while continuing to charge a premium based on the full value of the insured goods. “When the boat was stolen the policy holder got something like $6,000 instead of the $16,000 he was led to believe his policy covered,” Salazar said. When suits were filed against one company for a specific practice, others engaging in the same practice were also sued, Salazar said.

Even the attorney for the Farm Bureau was caught by surprise, according to news reports published at the time. “We were discussing settling the suit,” Salazar said, “and they decide to drop it?”

Morales quickly distanced himself from the controversy. He said the lawsuit was not authorized and that he had no knowledge of it. But, as an October 8 press release prepared in his office announced the suit against the three insurance companies, he was quickly entangled in facts. In deposition, Morales later said “I would surmise or speculate that the press office has released a thousand press releases… but that the reason that this caught— that this particular instance caught my attention is because it is the only instance in which I can recall that a press release was issued from the agency without authorization or approval by me or by my first assistant.”

Morales also said in a sworn deposition that he had heard nothing about the settlement of the Farm Bureau suit until reports associated with Salazar’s firing appeared in the press in November. “I became aware of it after all of the public activity and after reading the stories with regard to statements made by Mr. Salazar intimating a connection or a relationship between Mr. Salazar’s termination and that lawsuit or the dismissal of that lawsuit.” But a page from Morales’ office memos, obtained through an open records request filed by McCollolugh’s attorney, has the attorney general informed of the settlement on October 26, almost a full month before the order to drop the case was issued. An electronic message from Joe Crews to Morales, transcribed by Morales’ secretary, reads: “Fred Lewis and Ed Salazar are meeting with Lee Yeakel, consul for TX Farm Bureau tomorrow to settle the case.” (Another office memo obtained by McCollough has utilities lobbyist Charlie Evans, a former legislator, phoning in a request to see Morales for “5 min to deliver check.”)

In his deposition, Morales said he was aware of public speculation about the political implications of dropping a suit against the Farm Bureau but that he had had no contact with representatives of the company. The Texas Farm Bureau is more than an insurance company: it sells tires and other products to its members and can serve as an campaign organizing base in rural Texas. It also has endorsed Morales in the general election.

In the course of his credit-life investigations, Salazar informed by another lawyer in his office that we should take his investigation to where the money is– car dealerships. “These furniture guys were small potatoes. Their average retail installment contracts were $700. Car dealerships were $17,000.” They were, Salazar believed, pressing customers to buy credit-life policies on automobiles and Salazar and other staff members wanted to determine if insurers were splitting fees with car dealerships.

If they were, he would file a public-interest version of the private lawsuit that had linked Clayton Williams to questionable lending and insurance practices.

Salazar believes that the investigation he began on car dealerships and their insurance practices sealed his fate with the Morales leadership team. He has been told that Morales met in October with Gene Fondren, a lobbyist who represents automobile dealerships; George Shipley, a powerful Austin-based Democratic consultant and lobbyist who advises moderate-to-conservative Democrats; assistant AGs Jorge Vega and Drew Durham and deputy AG Gay Erwin, a former aide in Lloyd Bentsen’s Senate office. (Erwin is not an attorney.) Others interviewed for this story refer to the same meeting, which included everyone on Morales’ leadership team and one lobbyist. During his deposition, Morales said he regularly met with Shipley but, oddly, the lawyer doing the deposition didn’t ask about Fondren. When the question was asked of Jorge Vega in a Travis County district court last week, he said such a meeting didn’t occur.

With Salazar’s firing, the aggressive pursuit of car dealerships ended, according to a former associate AG who stayed on after most Mattox holdovers were gone. A credit-life case against major lenders on mobile home sales also seems to have fallen between the cracks after the consumer protection purge. Salazar said one company was prepared to settle for $450,000 and to agree to change the way it did its insurance business. Others, he said, would follow.

It just could be that the aggressive pursuit of consumer fraud is history. As is the aggressive implementation of the new charitable hospital law; and it is the early application a new statute that determines how the law will be applied in the future. New agency-wide rules require all investigations to be approved by First Assistant AG Jorge Vega and are clearly aimed at the consumer affairs division. ‘If they are too restrictive, too cautious, then they could cause disappointing results,” said Jim Mattox.

“We don’t hear of anything going on over there,” said Public Citizen’s Tom Smith. Kevin O’Hanlon, who served as an assistant attorney general under Mattox, said “Morales has crippled his consumer protection division and I haven’t heard a good explanation of why he did it.”

“Perhaps,” said one of the assistant AGs interviewed for this story, “part of the problem is that Gay Erwin, who has run a Senate office where political loyalty is important, is now running the Attorney General’s office the same way.

“But maybe,” he added, “it’s the Attorney General himself. He is not a hands-on type like Mattox and even White. I’m afraid Dan Morales just doesn’t have a real abiding interest in that institution.”