Jan. 19, 2002, 8:58PM

Smoke hasn't cleared over Morales

Plunge into governor's race resurrects controversial settlement in tobacco case

Copyright 2002 Houston Chronicle Austin Bureau


AUSTIN --Democrat Dan Morales' surprise entry into the governor's race stirred up some lingering smoke from the $17.3 billion settlement he won for Texas from tobacco companies as state attorney general four years ago.

Morales hopes it will encircle his head in a halo, while detractors hope it will choke off his attempted political comeback.

But investigations into his relationships with outside lawyers involved in the tobacco case promise to produce a contentious campaign issue, particularly if Morales wins his party's nomination and faces Republican Gov. Rick Perry in the fall.

His main opponent for the Democratic nomination is wealthy Laredo businessman Tony Sanchez.

Morales repeatedly has denied any wrongdoing, including an allegation that he tried to help one lawyer friend obtain millions of dollars in legal fees for little or no work on the tobacco suit.

Voters "can smell the difference between an allegation that has real merit and one that is politically motivated," he said.

By most standards, the big bucks that Morales negotiated for the state and county governments to settle a federal court lawsuit against cigarette makers over smoking-related health care costs should have been a crowning achievement to his eight years as Texas' chief lawyer.

And he was applauded by health care advocates grateful for the hundreds of millions of tobacco dollars that started flowing into the state treasury during each budget cycle.

But no sooner had Morales announced the settlement in January 1998, about 11 months before leaving office, than Republicans -- including then-Gov. George W. Bush -- started battering him over the high legal fees in store for a team of private trial lawyers he had hired to handle the case.

Five lawyers, all major Democratic donors, eventually were awarded $3.3 billion by a national arbitration panel. Even though the fees are to be paid by the tobacco companies over a period of years and didn't come from the state's share of the settlement, Morales' detractors -- including civil justice reformers -- complained that the fees were excessive.

The controversy intensified when trial lawyer Joe Jamail of Houston, who was interviewed but wasn't hired for the tobacco suit, accused Morales of soliciting $1 million from lawyers he considered hiring. Jamail said the money was to be used to help Morales fight political or public relations attacks from tobacco companies. Morales and the lawyers who were hired adamantly denied the allegation.

Before leaving office in December 1998, Morales also tried to convince the fee-setting arbitration panel to award a longtime friend, Houston attorney Marc Murr, $260 million for work on the tobacco case.

Morales said Murr made important contributions to the suit, but other lawyers in the case said he did little, if any, work on the litigation. Arbitrators awarded Murr only $1 million.

After succeeding Morales, who didn't seek re-election in 1998, Attorney General John Cornyn began investigating the legal fees. Cornyn now is seeking the Republican nomination for the U.S. Senate.

In separate probes, federal investigators in Houston and Austin also began looking into Jamail's allegations and the attempted Murr payments. Federal grand juries in both cities subpoenaed records from Cornyn.

Federal authorities won't comment, but neither investigation so far has produced any criminal charges.

Morales' lawyers say he has never been questioned by federal investigators and hasn't been formally notified that he is a target of prosecutors. But a number of his former staffers in the attorney general's office reportedly have been interviewed by the FBI.

Since leaving office, Morales has spent thousands of dollars in leftover political money on legal fees.

Cornyn, in a federal court filing almost three years ago, accused Morales and Murr of falsifying signatures and backdating two contracts in which Murr was hired to represent Texas in the tobacco suit. One day after Cornyn leveled his accusation, Murr withdrew a claim against the state for $260 million in legal fees.

Last fall, one of Morales' lawyers, Paul E. Coggins, asked federal prosecutors to officially close their investigation into the Murr controversy and to send Morales a letter that, in essence, would clear the former attorney general and could be made public.

So far, there has been no response from the U.S. attorney's office in San Antonio, which has jurisdiction over the case.

Coggins said the Murr-related investigation, which began in 1999, has "far outlived any opportunity to bear fruit."

Another Morales attorney, Sam Millsap of San Antonio, said Morales' legal team used to have occasional informal conversations with prosecutors but hasn't heard anything for months.

"We don't expect there will be any indictment. If there were to be an indictment, it would be as outrageously political as anything I've seen," Millsap said.

The investigation of the Morales-Murr matter began when the U.S. Department of Justice was part of a Democratic administration. Now, Republicans are in charge, and the man at the top, President Bush, helped lead the fight against Morales over the tobacco legal fees when he was governor.

Moreover, the new U.S. attorney for San Antonio and Austin, who may have to decide whether to seek a grand jury indictment of Morales, is Johnny Sutton, a Bush appointee and criminal justice policy adviser in the governor's office under Bush.

Some Austin insiders have speculated that one reason Morales is seeking elected office again is to discourage an indictment -- or to be able to charge that an indictment from a Republican Justice Department was politically motivated.

But Millsap said that kind of talk is "utter balderdash."

Millsap has known Morales for 25 years. As Bexar County district attorney in 1983, he hired Morales as a misdemeanor prosecutor.

Morales has said that "every allegation of unethical or improper activity is absolutely untrue."

He predicted that his war against tobacco companies will be a campaign asset, even though trial lawyers are a frequent target for Republicans.

He said voters are more interested in the money the settlement is providing for health care than they are in disputes over lawyer payments.

"I can lay claim to the biggest civil judgment ever obtained for the citizens of Texas," he said.

Harry Potter, who was Morales' top state lawyer on the tobacco suit, was among those interviewed about Murr by the FBI after Morales left office.

Potter, now in private law practice in Austin, has declined to discuss what he told federal investigators.

But according to a source close to Cornyn's separate probe of the case, Potter told investigators that Murr admitted to him only a few weeks before the tobacco suit was settled that he didn't have a contract to represent the state against cigarette makers.

In preparation for his new political race, Morales two months ago took the unusual step of publicly accusing Potter -- whom he had once praised for his work on the tobacco suit -- of misrepresenting Murr's role.

Morales suggested, in a petition filed in state district court in Austin, that Potter acted to minimize Murr's fees so that the other outside lawyers could be paid even more than their $3.3 billion. Morales suggested that Potter hoped to be rewarded with a job offer from one of the other law firms.

Denying the allegation, Potter said he was "shocked, saddened and disappointed" by Morales' action.

Four of the lawyers who shared the $3.3 billion in tobacco legal fees -- Walter Umphrey and Wayne Reaud of Beaumont, John Eddie Williams of Houston and Harold Nix of Daingerfield -- are supporting Sanchez against Morales in the race for the Democratic gubernatorial nomination.

At last report, the fifth lawyer, John O'Quinn of Houston, was trying to decide between the two. He did not return calls from the Chronicle.

If history is any guide, all five lawyers will make large contributions to a number of Democratic candidates and causes this year.



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