In defense of Harriet Miers, the White House has argued that she was not personally involved in the legal work done in various investment scams involving Locke Liddell lawyers while she was co-managing the firm. Taking a close look at the record provides a strong basis that at best Ms. Miers was negligent in her management of the firm.
In September 1996, former football star Russell Erxleben founded Austin Forex International, or AFI, the currency-exchange company he would use to defraud over 600 people, most of whom were unsophisticated investors, out of some $33 million, much of which represented the lifetime savings of senior retirees. In April 1997, AFI hired the law firm of Locke Purnell (later merged into Locke Liddell & Sapp LLP) for legal representation in general corporate, tax and securities/regulatory matters. WND has obtained a copy of the class-action petition filed on behalf of the defrauded investors, which indicates Locke Purnell lawyers were intimately involved in the details of assisting Erxleben perpetrate his fraud.
From the beginning of the relationship through AFI’s demise, Locke Purnell and its attorneys assisted Erxleben and AFI in continuing its fraudulent recruitment and retention of investors. This conduct included, without limitation, assisting AFI in continuing to sell unregistered securities through a firm that was not a registered broker by salespeople who were unregistered agents, aiding AFI in sending false statements to its clients, aiding AFI in concealing loses from its clients, aiding AFI in sending out false brochures to potential new investors, and allowing AFI to tout its relationship with Locke Purnell to continue deceiving current and potential clients.
Prior to landing the AFI account, Locke Purnell attorney Dan Matheson had failed to make partner in the firm. With the fees AFI was able to generate, that changed, and Matheson became both a partner and a senior shareholder in the firm. Only the firm’s management committee would then have been considered more senior to the position to which Matheson was elevated by virtue of the AFI account.
The class-action petition charged that right up until AFI closed its doors on Sept. 14, 1998, Matheson and two other Locke Purnell attorneys, including Matheson’s wife, put their own financial interests ahead of the defrauded investors, making sure all Locke Purnell fees were paid before investors were notified that all their funds had been lost.
There is no record that Harriet Miers or the management committee of the firm ordered any internal investigation until a year later, when the firm learned that lawyers for the defrauded investors planned to file a class-action suit against what was now Locke Liddell. Court records show the suit was filed on Oct. 13, 1999. Matheson, his wife and attorney Curtis Ashmos were at that time still listed as directors, partners and shareholders of Locke Liddell.
When the suit was filed, co-managing partner Harriet Miers acted as spokesperson of the firm.
“Locke Liddell has done nothing improper and in our judgment never should have been named as a defendant,” she stated, as reported by the Class Action Reporter, Nov. 3, 1999, as posted on Bankrupt.com. Six months later, on April 15, 2000, the Austin American-Statesman reported that Locke Liddell agreed to pay $22 million to settle the investor’s suit out-of-court.
Evidently, Harriet Miers and the Locke Liddell management committee did not conduct an internal review even after AFI closed its doors. In August 1998, the firm decided to represent another con man when Locke Liddell attorney Phillip Wylie took on Brian Russell Sterns and his Trans-Global Asset Management, a company that perpetrated a huge bond scandal. On Feb. 22, 2001, the U.S. District Court-Austin Division convicted Sterns of 80 counts of fraud-related conduct, and on July 12, 2001, U.S. District Court Judge James R. Nowlin sentenced Stearns to 30 years in federal prison, ordering him to pay restitution in the amount of $36 million. In October 2001, Locke Liddell paid $8.5 million to settle out-of-court with the investors Stearns had defrauded.
Locke Liddell’s professional malpractice insurance policy covered the bulk of the $30.5 million in settlements required by the two cases. Both suits had charged that Locke Liddell lawyers had been negligent in allowing their activities to contribute to the frauds perpetrated. Lawyers who filed the class-action suits believed they could have won fraud suits pressed against Locke Liddell. They decided to file negligence suits because the standard of proof required was less stringent and the attorneys believe that as a consequence they could collect from Locke Liddell quicker.
Still, there was more. In 1999, Locke Liddell lawyer Brent Clifton wrote an opinion letter supporting an Ernst & Young tax shelter known as “CDS” (or “Contingent Deferred Swap”). The tax scheme was reported on Feb. 8, 2005, by the Permanent Subcommittee on Investigations of the Senate Committee on Homeland Security and Government Affairs as being an abusive tax scheme whose only significant purpose was “the avoidance or evasion of federal, state or local tax in a manner not intended by the law.”
According to the Senate investigative report, from 1999 through 2001, Ernst & Young sold 70 CDS transactions involving 132 high net-worth taxpayers, generating fees of some $27.5 million for Ernst & Young, plus $3.5 million for Locke Liddell in payment for the marketing use of the Locke Liddell opinion letter.
In May 2004, the U.S. attorney for the Southern District of New York reportedly initiated a federal criminal grand jury investigation of Ernst & Young regarding its sale in 1999-2001 of tax shelters to corporations and wealthy individuals to escape or reduce federal taxes.
In a related tax shelter case, one that had also been investigated by the Senate Permanent Investigating Committee, federal prosecutors on Aug. 30, 2005, unsealed criminal conspiracy charges against eight former officials of the public accounting firm KPMG. Also indicted was the legal counsel who provided KPMG with a legal opinion that was utilized in the KPMG tax shelter scheme. KPMG also agreed to pay $456 million in fines as part of the agreement struck with the U.S. Justice Department. When asked by WND if indictments might be forthcoming against Locke Liddell lawyers in the Ernst & Young case currently under criminal investigation by the New York grand jury investigation, the Justice Department declined comment.
How is it possible that Harriet Miers could co-manager Locke Liddell through a period rocked by one investment scam scandal after another without demanding an exhaustive internal review to assure safeguard procedures would be put in place to prevent the firm’s lawyers from participating in fraudulent investment schemes? When we look at Exerleben’s AFI Ponzi scheme, Stearn’s Trans-Global Asset Management bond fraud and Ernst & Young’s tax scam, all three have one element in common. Central to each investment scheme was the Locke Liddell opinions and representation that said the deal was legitimate. Two of the deals have already been proven in federal criminal court to have been professional con jobs. Was Locke Liddell so hungry for large fees that professional standards of ethical legal representation had become unimportant when Harriet Miers was at the helm?
The record strongly supports the contention that Harriet Miers was negligent in managing Locke Liddell. The firm has paid $30.5 million in settlements already to defrauded investors who produced exhibits showing Locke Liddell’s complicity in the investment scams. We don’t know yet how the Ernst & Young investigation will turn out. How negligent does the manager of a law firm have to be before the problem is not negligence, but instead, outright fraud?
Will the Ernst & Young tax shelter scam perpetrated while Harriet Miers was co-managing partner proceed the way the KPMG investigation has gone such that Ernst & Young officials face criminal charges? Will Locke Liddell lawyers face federal criminal charges for writing a fraudulent or criminally negligent opinion letter, as happened in the KPMG case? Only time will tell.