Tuesday, June 15, 2021

Baker Donelson Accuses Judge & Receiver of Making Up Facts

Baker Donelson certainly isn't afraid to defend itself.   U.S. District Judge Carlton Reeves dismissed Baker's motion to dismiss in the Lamar Adams case in May.  The SEC sued the firm in 2018, alleging it allowed a partner and lobbyist to use firm resources as they allegedly peddled phony timber investments to firm clients. 

Judge Reeves said Jon Seawright, Esq. and Brent Alexander used the firm escrow accounts to swindle their victims.  However, SEC Receiver Alysson Mills admitted recently that she never actually saw the financial statements and thus did not have actual proof the Baker Donelson escrow accounts were used.  Judge Reeve's opinion stated:

Baker Donelson, in turn, let the two move money through the firm’s escrow accountslending 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 revelation of the use of the escrow account ranked between a hand grenade and a bombshell.  It moved the firm  in the Alexander Seawright universe.  The firm wasn't at the table but the news placed it at in the same building, and maybe in the same room.  

However, Baker Donelson argues there is one small, minor, teeny-weeny problem with the Court's decision: the Receiver never mentioned the use of the escrow account in her complaint because it is simply not true.  The firm argued:

The Court’s May 5 Order held the Receiver sufficiently alleged that Alexander and Seawright were acting within the scope of their employment.  Order at 8.  In support of that conclusion, the Court cited three alleged facts: (1) Alexander and Seawright used “the firm’s escrow account”; (2) Alexander Seawright Timber Fund I, LLC was “part and parcel of a bundle of services Baker Donelson provided to its preferred transactional clients”; and (3) the timber fund “served Baker Donelson’s interests.”  

None of those three things is alleged in the Amended Complaint.  The Receiver never alleges a single dollar related to Alexander’s and Seawright’s timber fund ever touched any Baker Donelson account.  The Receiver never alleges any client retained Baker Donelson to provide any investment services through Alexander Seawright Timber Fund I, LLC.  And the Receiver never alleges the firm profited by a single penny or otherwise benefited from the timber fund.  The Receiver does not allege these things because they did not happen.

Strong words. The firm is basically accusing the Court of making up its own set of facts as it dismissed the motion to dismiss.    

Ever the Spitfire, the Receiver fired back at Baker Donelson with her own barrage of words. She said the firm misread Judge Reeves' order.   The key bone of contention is the Court's statement that timber funds were run through the firm's escrow account.  Baker Donelson completely denies it happened.  Ms. Mills states: 

Actually,  the  Receiver  does  not  know  which  accounts  Alexander  Seawright  investors’  funds passed through before they made it to Madison Timber.  The Receiver has obtained records from numerous parties, but not yet from Baker Donelson.

If the Receiver has not seen the Baker Donelson records, how does she know the firm allowed the Baker Boyz to use its escrow accounts? She explains it all:  

Jon Seawright told a Baker Donelson client, in writing, that “running funds through us or BD escrow is not a problem.”   His email leaves no doubt that he believed using the firm’s escrow account was “not a problem.” Only discovery will show whether the firm’s escrow account in fact transacted with the Alexander Seawright Timber Fund.

Either way, if a shareholder believes using the firm’s escrow account is “not a problem,” it follows that the shareholder believes he has the firm’s blessing.  That is, the firm knows what the shareholder is doing and does not object.  Baker Donelson cannot credibly contend it did not know what Seawright (a member of the firm’s Board of Directors!) was doing.   Nor can it credibly contend  that  Seawright  misled  the  firm.   If  Seawright  had  misled  the  firm,  it  would  not  have permitted him to remain a shareholder, which it did until he was indicted last month.

Ms. Mills recited other facts in defense of her claim:

* Baker Donelson employed Seawright and Alexander

* The two men used their firm connections and assets to identify potential investors. 

* Alexander and Seawright allegedly ran the scheme out of their Baker Donelson offices.  

* Other Baker Donelson lawyers referred "new victims" to Alexander and Seawright.  

She also cited one client-investor in support of her defense:

Seawright and another Baker lawyer had helped him and a doctor sell a healthcare business. Seawright later presented him with an investment opportunity for proceeds of the deal.

“After we closed the transaction, Seawright was pitching us to be involved in an exclusive investment at Baker Donelson,” he said.

Rather than hire accountants and others to vet the deal, [he] said, ‘the fact that this was Baker Donelson and two partners, we made two phone calls. We just didn’t do any other [due diligence] work.”

Baker Donelson was having none of it and said Ms. Mills  took "liberties with her allegations" in an effort to "paper over those shortcomings in her theory."  

Stay tuned. 

 Kingfish note: Um, did the Receiver and Court engage in a bit of inference?   This one will probably make its way down South to New Orleeens.  

Synopsis of Case

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 Justice Department recently indicted Alexander and Seawright for securities fraud.  Earlier post & copy of indictment. 

Ms. Mills settled a similar clawback lawsuit against Butler Snow for $9.5 million this year.  



Anonymous said...

As with numerous other cases before the learned Carlton Reeves, the 5th Circuit is there to correct his reversible errors.

Anonymous said...

Why should she care how long or how expensive it is to prolong this case? She is getting paid from the already collected funds.

Anonymous said...

Baker Donaldson won't cave like Butler Snow did.

Anonymous said...

Bakers insurer will cave I promise

Anonymous said...

I love it when the sharks fight amongst themselves.

BS is an appropriate name for the firm said...

10:24, maybe that's because BD wasn't involved -- as a firm --- like BS was. No emails from the top that while "a license may be involved, but there's no penalty if you get caught" type comments.

Anonymous said...

facts are pesky little things

Anonymous said...

she hung his honor out on assumptions. this won't end well for her.

Anonymous said...

Bakers insurers WILL not pay if they did intentional illegal acts as all insurance doesn't cover an intentional act. Now what was intentional and what was stupid laziness remains to be seen. Anyone with basic business sense should have realized that these timber returns were fishy. Of course we are talking about attorney's so business sense really doesn't apply. By the way I wish my timber generated even a 5% return.

Anonymous said...

BD believes that old saying . . .the best defense is . . .a good offense.

When a wild animal is backed into a corner, it has no choice but to fight like hell. BD is the wild animal.

Anonymous said...

Sell your timber by the load or you will get screwed.

Anonymous said...

I’m not a lawyer, but why hasn’t she already investigated the BD escrow account(s)? It appears the court would have granted the access given the court bought the assumed connection hook, line, and sinker. Am I wrong that she could have gained access to the records?

And, why would a firm be penalized based on perception? The investors who jumped on this bandwagon did so out of greed to become wealthier. The investors may have invested based on perceived connection to BD, but why is that BD’s fault? The schemers are the only ones to blame here. Why would the schemers statements be accepted as truth without proper investigation? Who drops that kind of money without (admitted) proper due diligence??

Anonymous said...

2:38 you must not know how all this works. When an attorney sues you he sues everyone because they gave their poor clients the impression that you worked for the guy who owns the property. By using Bakers office, letterhead, staff you gave the timber clients the impression that Baker was involved and ok with what was being done in their office. It is rather funny that now Baker says that they had no knowledge of any of this, shoes on the other foot now. Now you know how us businesses feel when you come calling because a client has been wronged.

Anonymous said...

Sell your timber by the load and you are assuming the logger will merchandise the timber correctly. Sawmill not taking chip-n-saw? No problem, throw it on that load of pulpwood going to the paper mill! Quota at the hardwood sawmill that takes grade logs? No problem, throw it on that load going to the crosstie mill! If you're hands on and know what you're doing or have a good consultant watching it like a hawk and you get good per unit prices, selling by the load can work out very well. Lump sum can too since you just put the burden of prices, logging conditions and merchandising on the buyer. Plus, they can make a mistake and overestimate the volume, quality and value of the standing timber. Both have their good and bad points.

Anonymous said...

@3:27p- First, those clients weren't "poor." I'm pretty sure I read above that they didn't do further due diligence on the investment because of their (inaccurate) assumptions. Second, unless the schemers presented the clients an investment package with the BD seal on it, they schemers were no more than employees running a side scheme.

FYI... there's no shoes or feet applicable in my questions. I said I wasn't an attorney, so I don't know what clients I have that negatively impacted, as you put it, "us businesses." I don't believe in burning down the castle because of a bad apple. If it can be proven that the connection was "assumed" by the investors and there's no evidence of knowledge (beyond the schemers) of flowing funds through their escrow accounts, then in my opinion, BD as a firm did nothing wrong.

Your usage of "letterhead" made me giggle. Unless BD is handing out sheets of letterhead per page printed, they cannot constantly have knowledge of what is released on their letterhead. It seems to me that whether or not the firm TRULY had knowledge of the scheme is the big question. You are assuming based on use of letterhead that the firm knew. I prefer facts over assumptions.

We live in a world of digital footprints and firms must properly account for their escrow holdings/transfers. If the funds did flow through an escrow account belonging to the firm, there would have a been a question by at least the accountant or CPA about how to assign the transactions. My initial question centered around why the escrow accounts haven't been accessed and reviewed.

Anonymous said...

Baker’s self insured retention has been spent on legal fees defending this case.

The insurer is now footing all the bills for the defense.

The reinsurer is pressuring the insurer to get this resolved under its limits. The reinsurer is scared to death of the potential damage feature here.

Baker is out of the scene as far as decisions go on paying this claim. Baker does continue to employ seawrong and Alexander…..I can envision the comp committee having to meet to discuss how to pay these guys to stick around…..if baker fired them then seawrong and Alexander would surely set that brick house on fire……

Mediation on this jewel will be a real bear…..good luck with that!

Anonymous said...

Judge Reeves usually knows the outcome before he knows the facts. He is predictable.

Anonymous said...

@5:05, you don’t know what you are talking about.

Anonymous said...

I'm not about to spend all afternoon reading the pleadings, so somebody enlighten me:

Is this about whether the receiver pled enough facts to raise an inference that BD's escrow accounts were used, and thus make it to discovery against BD?

Because if that is the question, let me save you some time:

The answer is yes.

Even if the district court's opinion misstated facts, that doesn't change what was in the pleadings. The answer is still yes.

Anonymous said...

You know what I like about coming to this blog, well do you? I'll tell you why I like coming to this blog, because every poster on the comment board is an expert, and they're never wrong. Never.

Anonymous said...

6:55 wins the day. Reinsurance litigation expert posting from Bermuda at 5:05 for instance hasn't kept up for sure as he didn't even know the two were terminated the day they were served with the indictment (not when they were actually indicted, in February.....):):)

Anonymous said...

I'm speculating here, but I suspect BD doesn't want the Receiver to see it's trust account statements. Misuse of a law firm's trust account is one sure way to get the MS Bar involved. Attorneys get disbarred over that.

Anonymous said...

I think this round about whether the Receiver stated a claim for vicarious liability against the law firm, based on BD's argument that the (alleged) criminals acted outside the course and scope of their employment. If she survives the motion to dismiss, she can compel discovery from BD, and presumably get the banking docs.

Though the order didn't specifically state that it was doing so, the court has to take all of the plaintiff's alleged facts as true, as well as all reasonable inferences therefrom, when deciding a motion to dismiss. I don't think this order actually adjudicates any facts.

Anonymous said...

9:30, so my made up lawsuit suing google because they caused my abduction by aliens survives a motion to dismiss? The legal profession is in the shitter

Anonymous said...

Good to see that everyone is now an expert on federal pleading standards and civil procedure. Also the law of agency and apparent authority.

Anonymous said...

9:30: Your lawsuit would not survive summary judgment because, even all of your alleged facts are taken as true, you would still not be entitled to relief. You have alleged no facts that support Google's vicarious liability for the actions of extraterrestrial aliens.

If you were to allege such facts, and your suit was found to have no basis in law or fact, then you would be subject to sanctions by the court, which may include having to pay Google's attorney fees.


11:55: No, not everyone. But, some of us are experienced litigators. If you are so knowledgeable as to dismiss all comments in one fell (snarky) swoop, please at least contribute to the conversation. Maybe we can learn something from you.

Anonymous said...

The first part of my comment above was intended for 10:40, and I meant “motion to dismiss,” not summary judgement. Sorry for any confusion.


Anonymous said...

If I needed to sit on a commode for an hour and a half, this would be good company. But I don't.

Anonymous said...

Nice public relations move by Baker Donelson- to your clients.. everything is ok!

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