Skip to comments.Firm takes heat for consí crimes
Posted on 10/14/2005 6:08:38 AM PDT by gpapa
Firm takes heat for cons crimes
Settled suits cost top-tier legal entity $30 million, with more pending
By Janet Elliott
Houston Chronicle Austin Bureau (10-21-01)
Locke Liddell and Sapp is one of Texas premier law firms, having represented some of the states top corporations and individuals, including George W. Bush when he was governor and general partner of the Texas Rangers baseball team.
But it is two other former clients, convicted swindlers Russell Erxleben and Brian Stearns, who have brought unwanted attention to the 426-lawyer firm with offices in Houston and several other cities.
In the past two years, Locke Liddell has paid $30.5 million to settle lawsuits filed by investors who plowed money into enterprises run by Erxleben and Stearns, both of Austin. The deals turned out to be nothing more than elaborate Ponzi schemes.
In a Ponzi or pyramid scheme, investors typically are offered high rates of return. But new investments are used to pay off early investors until the scheme collapses.
The class-action lawsuits alleged the law firm lent its credibility and reputation to enable Erxleben and Stearns to commit securities fraud.
Today, representatives of the firm will participate in mediation of a separate federal lawsuit filed in New York by two foreign corporations that loaned $20 million to Stearns.
Stearns continually told investors that his law firm was the same one that represented Gov. Bush, according to court documents. Harriet Miers, who was co-managing partner of Lock Liddell, represented Bush. She left the law firm in January to become an assistant to President Bush.
Many in the Texas legal community are asking how a reputable firm ended up with two such disreputable clients.
John McElhaney, a Locke Liddell partner from Dallas, said the firm settled the cases to avoid lengthy litigation. He said the firm has not changed its client intake procedures as a resuilt of Erxleben and Stearns.
Austin lawyer Michael Shaunessy, who filed the two class-action lawsuits, said he believes the Locke Liddell lawyers ignored obvious signs that their clients were running scams.
The lesson, if there is one, is that unfortunately we have members of the legal community who dont understand their ethical obligations, said Shaunessy.
Among the more sensational allegations to arise regarding Stearns is a charge that Locke Liddell used a firms special trust account to funnel $12 million in investor money to Stearns, who used the funds to finance a lavish lifestyle that included a private jet. Law firms are required to have the accounts to hold client funds. Interest earned on the accounts is used to help fund civil legal services for the poor.
Linda Eads, an associate professor of law at Southern Methodist University, wrote in an ethics opinion prepared for Shaunessy that the use of the trust account casued investors to feel assured by the involvement of the law firm in the transaction.
McElhaney of Locke Liddell and Sapp said Stearns asked that the transfers be handled through the trust account and that there was nothing illegal about the use of the firms account.
Stearns was sentenced last July to 30 years in federal prison for defrauding investors of $40 million. Among his victims were 342 investors from Brady, the central Texas hometown of the beauty queen Stearns married in 1998. The Brady investors were swindled out of $4.5 million.
In August, Locke Liddell agreed to pay $8.5 million to settle the lawsuit filed by Brady residents and investors from California and Canada. The Brady investors recovered less than 70 cents on the dollar.
Locke Liddell denied any wrongdoing and said it settled the case to avoid lengthy litigation.
The law firm offered the same explanation in April 2000 when it agreed to pay $22 million to settle a lawsuit stemming from its representation of Erxleben. Erxleben, a former star placekicker for the University of Texas and the NFLs New Orleans Saints, is serving a seven-year sentence in federal prison for stealing $36 million through his foreign currency trading company, Austin Forex International.
Lawyers can be disbarred for violating professional ethics rules. One rule requires a lawyer to withdraw from representing a client if the lawyers services will be used by the client in materially furthering a course of criminal or fraudulent conduct.
The first lawsuit against Locke Liddell arose after state securities regulators in September 1998 seized the accounts of Austin Forex and put the company into receivership.
Houston attorney Janet Mortenson was named permanent receiver, charged with finding any assets that might be used to compensate investors. She became privy to notes and memos from the lawyers who had advised Erxleben.
Mortenson found a paper trail that she believed showed Erxlebens lawyers allowed him to sell unregistered securities, signed off on brochures and promotional materials that contained misrepresentations and knew about the companys growing losses for months before state regulators began investigating.
Mortenson and the investors sued Locke Liddell partners Dan Matheson, Jane Matheson and Curtis Ashmos. All three worked in the firms Austin office.
According to the lawsuit, Dan Matheson began representing Austin Forex in April 1997. By March 1998, he knew the company had sustained losses of $7 million but was still taking in about $1 million a week in new investor funds, the lawsuit states.
It was not until June 1998, when losses had mounted to $18 million, that the lawyers advised Exlerben to stop taking in new money and report trading losses, according to the lawsuit.
We denied those allegations consistently before and continue to deny them now, said Dan Matheson, who now works at Munsch Hardt Kopf and Harr.
Two other law firms paid settlements to investors in Erxlebens Austin Forex. Sheinfeld Maley and Kay, which went out of business in July, paid $8.5 million, and Kuperman, Orr, Mouer and Albers paid $800,000. The investors also recovered $775,000 from accounting firm PriceWaterhouseCoopers and $500,000 from Bradford Keene, a part owner of Austin Forex.
The Stearns case followed the same scenario, with Mortenson again being named receiver and gaining access to the legal files. She sued Locke Liddell and Phillip Wylie a partner in the firms Dallas office.
Shaunessy, who investigated Wylies representation of Stearns, said that Stearns exhibited questionable behavior from the time he walked into the law office in 1998. Stearns claimed to be worth $547 million, yet, within a few months, Wylie knew that Stearns had passed bad checks to an Austin drapery store and an interior decorator, and he was slow to pay the law firms bills.
The firms own background check of Stearns found he had no significant property or record of past business success. Another client informed the firm that Stearns had been convicted of a felony in Maryland, but the firm never asked Stearns about his criminal record, Shaunessy said.
According to the ethics report filed by Eads, Wylie learned in late 1998 and early 1999 that investors were angry about promises Stearns made and then broke. He also knew that Stearns was using funds from investors to purchase luxury items, such as a private jet, and that he was telling investors that his law firm was the same firm to represent Gov. Bush.
Despite Wylies knowledge of the foregoing facts, which should have raised many questions about Stearns, Wylie, according to his own statements, did no further investigation, and indeed became deeply involved in legitimizing Stearns schemes, wrote Eads.
Wylie now practices law at Snell Brannian and Trent in Dallas. His lawyer, Tim Duffy, declined comment.
McElhaney said the settlements have been paid from the firms malpractice insurance. He said the firms clients and new lawyer recruits have been understanding.
We are very sorry to have seen this happen, but its not going to have a long-term adverse impact on us.
(Denny Crane: "I like nature. Don't talk to me about the environment".)
Isn't this the second time this old story was posted today?