Baker Donelson and the timber mogul’s Ponzi scheme: a cautionary tale

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(Reuters) - When big-firm lawyers stop acting as lawyers, bad things can happen.

That’s the message of a ruling on Thursday from U.S. District Judge Carlton Reeves of Jackson, Mississippi, denying Baker, Donelson, Bearman, Caldwell & Berkowitz’s motion to dismiss claims that the law firm helped a fraudster named Lamar Adams attract investors in what turned out to be a $164.5 million Ponzi scheme.

Baker Donelson did not spend much time on traditional legal services for Adams, who is serving a 19.5-year prison sentence for orchestrating the scheme, which falsely promised investors outsized returns on timber sales to lumber mills. That work was limited, according to Reeve’s opinion, to drafting subscription agreements and some other investment documents.

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The firm’s main job for Adams was allegedly to bring in investors, according to the opinion. A Baker Donelson partner and a non-lawyer lobbyist from the firm’s Jackson, Mississippi, office allegedly leveraged the firm’s prestige - and escrow account – to persuade Baker Donelson clients, lawyers and other “friends and family” to pony up for Adams’ scheme.

Procuring investments was allegedly so alluring for the lawyer and the lobbyist that they created a limited liability investment company to pool the millions of dollars they intended to raise for Adams. As they contemplated potential returns of $18 million for every $1 million their fund invested, the lobbyist emailed the lawyer: “We pull this off, we get rich.”

Instead, they got their firm – a regional powerhouse with more than 650 lawyers and nearly $375 million in revenues in 2020, according to the Am Law 100 – a heap of trouble. Baker Donelson, under Thursday’s ruling from Reeves, must face claims by the court-appointed receiver for Adams’ company, Madison Timber Properties, that the firm was negligent, engaged in a civil conspiracy and aided Adams’ breach of duty to the company.

To be clear, as the judge emphasized, Madison Timber receiver Alysson Mills and her counsel from Fishman Haygood have not yet proved the receiver’s claims. Baker Donelson and its counsel at Williams & Connolly contend that partner Jon Seawright and lobbyist Brent Alexander were operating on their own, abusing the firm’s good name for their own purposes. Baker Donelson, in this argument, cannot be liable for enabling a Ponzi scheme the firm had no knowledge of.

Neither Baker Donelson partner Seawright, firm chairman Timothy Lupinacci nor lead counsel Craig Singer of Williams & Connolly responded to my email query, but Reeves’ ruling on the firm’s dismissal motion said that the firm could be entitled to summary judgment if discovery in the case ends up supporting its contention that Seawright and Alexander were, in effect, rogue employees. Alexander’s email at Baker Donelson is no longer operative and his lawyers from the Brunini law firm did not respond to my email.

The judge also, however, seemed skeptical about that eventuality. Reeves wrote in Thursday’s opinion that the trustee’s allegations - particularly her claims that Seawright and Alexander used the firm’s escrow account to process investor money – suggested Baker Donelson’s involvement in the timber Ponzi scheme was “far from being an unaffiliated frolic.” (The trustees’ claims against Seawright are stayed because he filed for bankruptcy protection.)

When Seawright and Alexander used the escrow fund and held investor presentations and meetings at Baker Donelson, Reeves said, they lent “an air of authenticity and safety to the scheme.” Their recruiting of investors, the judge wrote, “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.”

Under the deal Seawright and Alexander allegedly struck with Adams, they received at least $1.6 million for luring investors - partly a share of fraudulent returns investors received before the Ponzi scheme crashed and partly a 3% commission that was not disclosed to the investors they recruited.

According to allegations detailed in the Reeves opinion, no one at Baker Donelson checked out Adams’ representations about the timber play even as Seawright and Alexander enticed Baker clients to invest. No one contacted the mills that were supposedly buying lumber from Adams. Seawright and Alexander went out once or twice at the beginning of their relationship with Adams to inspect timber tracts, but, according to an allegation recounted in Reeves’ opinion, that inspection meant “[grab] a cooler of beer and make a loop.”

A modicum of lawyerly due diligence, the judge said, might have brought down the Ponzi scheme. But Baker Donelson didn’t do it. “As the money flowed in,” he wrote, “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 [of] the guaranteed return.”

No one at the law firm Baker Donelson, in other words, seems to have acted like a lawyer.

I should note that Baker Donelson is not the only firm that faced accusations from the Madison Timber receiver of enabling Adams’ fraud. The receiver also sued Butler Snow, which denied the allegations but reached a $9.5 million settlement after Reeves denied its bid to send the case to arbitration. The firm had appealed that ruling to the 5th U.S. Circuit Court of Appeals but on Wednesday dismissed the appeal.

Unlike Baker Donelson, Butler Snow allegedly recruited investors through a non-legal subsidiary, Butler Snow Advisory Services. Butler Snow lawyers performed work for Adams – twice drafting private placement memos for unsuccessful offerings – and were apprised of the advisory business’ investor recruiting efforts. But it was employees from the business advisory subsidiary, according to the receiver’s complaint, that marketed the investment.

Law firms contemplating the creation of non-legal subsidiaries would do well to keep the Madison Timber case in mind as a cautionary tale. Big law firms attained their success because they’re good at legal services – and they shouldn’t ever forget it.

The case is Mills v. Butler Snow, docket no. 3:18-CV-00866 in the Southern District of Mississippi.

(By Alison Frankel)

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