Baker Boyz used firm escrow accounts in Ponzi scheme
The SEC Receiver's federal lawsuit against Baker Donelson, Jon Seawright, and Brent Alexander will proceed after U.S. District Judge Carlton Reeves dismissed their motion to dismiss last week.
The SEC is trying to claw back illegal profits earned by Lamar Adams and promoters of a $164 million Ponzi scheme based on phony timber investments. Adams is incarcerated in federal prison for 19.5 years after he pleaded guilty to one count of wire fraud.
Receiver Alysson Mills represents the SEC in recovering
assets for later distribution to the victims. Her efforts include
suing promoters who received commissions as well as the Butler Snow and
Baker Donelson law firms. She sued to recover over $16 million in commissions from several "promoters" who helped Adams sell his phony timber investments to unsuspecting investors. Butler Snow recently settled the case for $9.5 million.
Jon Seawright is a lawyer at Baker Donelson while Brent Alexander was a lobbyist at the firm. Seawright and Alexander created a timber investment fund, Alexander Seawright Timber Fund I, in 2011 that would invest in Madison Timber. They began pitching the investments to Baker Donelson clients. As happened so often in this case, the investments were part of the Ponzi scheme. Ms. Mills sued the two "promoters" as well as their employer, Baker Donelson for conspiracy, aiding & abetting, gross negligence, and negligent retention and supervision.
Ms. Mills claimed victims “reasonably believed” their investments in Madison Timber and Alexander Seawright Timber Fund I, were “backed and promoted by, and had been vetted by, Baker Donelson.” Earlier post with copy of complaint and more information.
BD filed the motion to dismiss in February 2020.
The opinion begins with a recitation of the case as Judge Reeves reports Baker Donelson allowed Seawright and Alexander to use firm escrow accounts to funnel money from firm clients to Lamar Adams. The Court stated:
The receiver says Alexander and Seawright repeatedly lied to their victims. They lied when they claimed to have their own money invested in the fund. They lied when they promised to personally inspect the timber tracts in question. (According to the amended complaint, email correspondence reveals that “inspection” meant “[grab] a cooler of beer and make a loop.”) And they lied when they promised to inspect Adams’ contracts with timber mills. No such contracts existed.
The scheme looked more stable than it was because Baker Donelson was involved. Alexander and Seawright ran the scheme out of their Baker Donelson offices. They described it as a “friends and family” fund for preferred Baker Donelson partners and clients. Seawright, a transactional attorney, drafted subscription agreements and other investment documents, and sent them to Adams from his Baker Donelson email account. The pair also targeted Baker Donelson clients who had recently closed transactions with the firm.
Baker Donelson, in turn, let the two move money through the firm’s escrow accounts, lending an air of authenticity and safety to the scheme. It looked like a sanctioned team activity: other Baker Donelson attorneys referred new victims to Alexander and Seawright, generating clients, while the firm’s runners were used to pick up investors’ checks, serving the clients. Baker Donelson let Alexander and Seawright use the firm’s offices for presentations, meetings, and “closings.” The receiver claims that “numerous” other Baker Donelson employees worked with Adams “for the purpose of finalizing investments in Madison Timber.”
The receiver alleges that Alexander and Seawright made approximately $1.6 million from the scheme, not including the cash bonuses that Adams occasionally gave them. As the money flowed in, however, neither Alexander, Seawright, nor Baker Donelson ever called a landowner, checked a title, called a lumber mill, or asked why the landowners’ signatures often looked the same. They ignored the glaring red flag the guaranteed return represented, and instead marketed it as a sign of stability. They even ignored feedback from prospective investors that the timber market simply didn’t work like this, including feedback that this “nearly riskless opportunity” where “lawyers did the tax work” and “the opportunity was unaudited” was, in truth, suspicious. No one acted on these red flags, despite the likelihood that some modicum of due diligence would have brought down the Ponzi scheme.
The Court nixed Baker's claim that Ms. Mills lacked standing to sue the law firm. . Baker argued Ms. Mills represented Mr. Adams instead of the victims. Mr. Adams had his investors sign contracts that included an arbitration clause. The Jackson law firm asked the Court to force the Receiver to submit to arbitration.
Judge Reeves rejected Baker's claim just as he denied similar arguments made by Butler Snow. The Court ruled Ms. Mills represents the investors and thus the arbitration clause is unenforceable.
Baker contended it was not responsible for Alexander and Seawright because they acted outside the scope of their employment. The Court was unpersuaded and denied Baker's argument :
The receiver has sufficiently alleged that this investment scheme, including the subscription agreements Seawright drafted for it, was part and parcel of a bundle of services Baker Donelson provided to its preferred transactional clients; that these services occurred during Baker Donelson’s working hours and in its offices; and that they served Baker Donelson’s interests. Far from being an unaffiliated frolic, the receiver’s allegations regarding consistent, repeated use of Baker Donelson staff and resources—most glaringly, the firm’s escrow account—suggest that there was knowledge of and some benefit to the firm from knowingly facilitating Alexander and Seawright’s investment activities.
The Court also rejected an attempt to dismiss the case because the firm claimed it didn't know the Baker Boyz were part of a Ponzi Scheme. Judge Reeves quickly shot down that bird:
In a similar case arising out of the Stanford litigation, however, the district court found that “an ordinary degree of supervision” supports an inference that the employing firm was “aware to some degree of [its employees] tortious conduct.” ... “Any further analysis of this issue requires factual development more appropriately considered on a motion for summary judgment.” Id. This Court agrees.
Of particular salience, to this claim and others, are the questions about the use of Baker Donelson’s escrow account. It is one thing to secretly operate a side business out of your office. An employer cannot know everything you do on company time. Suppose the evidence generated through discovery shows that Alexander and Seawright were truly out on their own, abusing their positions without their employer’s knowledge. In that case, Baker Donelson will have strong arguments at summary judgment. On the other hand, the allegations regarding the use of the firm’s escrow account presently suggest Baker Donelson’s knowledge and ratification of the investment scheme. An escrow account is subject to greater oversight than, for example, one’s work email account. Discovery is the right place to determine to what extent the evidence bears out this allegation.
The defendants won one small battle. Judge Reeves agreed with the firm and dismissed the Receiver's RICO claim since no defendants have been convicted of RICO violations. Such a conviction is required before a RICO civil suit can proceed.
34 comments:
But, they did the due diligence, which consisted of driving around looking at some pine trees without any idea of who owned them, probably while billing their firm for time and travel while probably enjoying a beer or two. I am not very sympathetic.
Say what you will about his politics, but Reeves is an exceptionally lucid legal writer. I'd be surprised if he weren't on the Fifth Circuit before Biden's term is up.
I had several escrow accounts during my legal career and never made a profit on any of them.
What's the tenure of the 2 partners now that the court wrote:
"Suppose the evidence generated through discovery shows that Alexander and Seawright were truly out on their own, abusing their positions without their employer’s knowledge. In that case, Baker Donelson will have strong arguments at summary judgment."
This would make for strange bedfellows going forward.
@9:05
What is Reeves' political persuasion?
when does she claw back profits from investors?? How much is that? Where is the analysis? The biggest pot remains untouched. wonder why?
No blessings in the federal building.
E & O Insurance...it's a thing!
Also comment at 9:51 really needs some punctuation. Should be 'profits' because wasn't it all based on fantasy accounting and fraud?
True thugs never go down. The Baker gang will be just fine.
You wash money through an escrow account and suddenly the stakes change.
Daily reports are generated at big firms and the numbers are worshipped.
During the halcyon days of timber money flowing in they were unstoppable
Now not so much
If you think law firms circulate escrow account reports to anyone but the lawyers with the client relationships, you are mistaken.
E&O insurance does not cover violations of law, and if it is determined that Baker Donelson and/or the Boyz violated the law, then whoever their insurance carrier is will flat-out deny those claims.
E&O Coverages do not cover fraud. No way they pay. Let that sink in for while.
E and O coverage will cover this
It covered BS already and it will pay in this instance.
The coverage is for the members who should have known this was not above board.
And FYI insurance companies ever write “crime policies” which cover financial theft by management companies…..think Ridgway Lane.
So Seawright's still employed by BD. What about Alexander? Did he get walked out of the building? If so, why is his partner still a shareholder?
E&O Coverage does not cover deception...which means lying to customers. If you thought you were buying a a Rolex watch...but it's not a Rolex..then the seller is guilty of deception. The E&O Coverage will however cover your legal expenses, but not the claim itself if the insured is found guilty of fraud.
@9:28 -- He's on the woke side of liberal, and it shows in many of his opinions.
But nobody can deny he's an outstanding writer, showing occasional flashes of Scalia-like ability to communicate legal concepts simply and persuasively, albeit in the opposite ideological direction.
I see Brent taking his solitary walks in our neighborhood almost every day, midmorning and midafternoon. So, no, he doesn't appear to be at Baker Donelson anymore - unless he's working from home.
4:05
You are not in the legal profession it is clear.
There are people around these guys who are charged with managing their business and when you fail to properly supervise then that’s an error and or omission. There are a hundred other ways to plead this within coverage and baker has about 1,000,000,000 in coverages if not more as they close huge transactions.
Please stop playing lawyer
Does Seawright still work there? If so, that is crazy. . .
@ 12:24
E&O insurance, like malpractice insurance, does not cover fraud.
No E&O coverage is very clear.. a significant signature missing.. Expired Notary,
Wrong date, that is the correct basis. Insurance Companies are risk management companies.. they have a whole legal
Department that sniffs out fraudulent behavior.. so good luck with that theory.
the mississippi state bar is conspicuous by their absence on all this........just like they were with butler snow. this is proof that politically connected big law firms can get away with just about anything.
>>What is Reeves' political persuasion?<<
He's an Obama appointee.
"E&O" is short for "errors and omissions." Fraud is neither an omission nor an error in common or insurance terminology, it is a willful act. While a firm can obtain coverage for employee theft/fraud, E&O isn't that. This will or at least should turn on the facts as to what Baker management knew, either actually or implicitly.
Yada Yada Yawn. Meanwhile, McHenry was allowed to skate with a million point 3 in commissions. No clawing attempt directed at his stash.
'Sources say' he's assisting Mills. But he doesn't have enough sense to be doing that. Clearly, he was simply allowed to skate and avoid the claw-back. Only Mills knows why.
Attn 4:52 I have known McHenry for many years. He has plenty of faults, but being stupid is not one of them. He is plenty smart. By the way, this was not his first rodeo. Ask someone about his sales of non existent (banned) farm chemicals in the Mississippi delta years ago! He skated on that one, but was run out of the delta.
I looked up Reeves' educational history, and was pleasantly surprised to see a Delta kid from JSU made it through UVA Law. That's pretty, pretty, pretty good, all things considered.
Too bad he's not more like Clarence Thomas and the more conservative justices from the political side of things.
Where does Trustmark Bank stand with bankrolling/enabling Mr. Adams? A certain someone at the bank kept alerting them to the scheme but they didn't listen. Are they not involved in the litigation?
"They ignored the glaring red flag the guaranteed return represented, and instead marketed it as a sign of stability. They even ignored feedback from prospective investors that the timber market simply didn’t work like this, including feedback that this “nearly riskless opportunity” where “lawyers did the tax work” and “the opportunity was unaudited” was, in truth, suspicious. No one acted on these red flags, despite the likelihood that some modicum of due diligence would have brought down the Ponzi scheme."
The bank did file an SAR.
A SAR was filed in 2014 so why did the feds let it go 4 more years? there's your reg flag. but that will be buried right next to Jimmy Hoffa. There is no accountability at the top. And we're all to blame for that.
Trustmark did all the correct paperwork. The Feds dropped the ball.
If employees can be monitored on bathroom and lunch breaks surely Trustmark including others could do a drive by site evaluation to see and or inspect timber land and cuttings if nothing else but for educational purposes to use in slideshow presentation. Just wondering how insurance pays off on this while Not accepting responsibility.
Asking for a friend:
Does a SAR have a box to check for "ponzi" or "hollywood front "?
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