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First Union’s systems advisers might well be urging the bank to invest in some new “e-mail shredding” technology, now that telltale electronic documents have helped lead a Philadelphia jury to a $352 million verdict against the bank in a commercial tort case. Attorneys Christopher Day and Maurice Mitts of Philadelphia’s Frey Petrakis Deeb & Blum brought home the verdict — $1.779 million in direct damages, $13.4 million in consequential damages and a whopping $337.5 million in punitives — for Pioneer Financial Mortgage Corp., a mortgage warehouse lender that has been struggling on the verge of bankruptcy since a crucial deal soured in 1997. Day said yesterday that many of the documents that supported Pioneer’s case were concealed from its lawyers until after Day and Mitts had rested the plaintiff’s liability case. When the defense called Louis Nelson, a First Union branch manager, to the stand, the Pioneer team learned of a highly relevant document that had never been surrendered during discovery. Common Pleas Judge Gene Cohen stopped the proceedings, excused the jury, and sternly told defense lawyers to turn over all the documents relating to the case, Day said, and “the following day at trial, they walked in with a big stack of documents,” Day said. According to Day, Cohen instructed the jury that the documents had just been brought to light and had not been turned over during discovery. Although Pioneer’s lawyers had already rested their case, Cohen allowed them to introduce the documents into discovery and to refer to them in closing arguments, Day said. As a further sanction, Cohen excluded any defense testimony by Walter Weir of Philadelphia-based Weir & Partners, who was replaced as First Union’s counsel in the case in May by Michael Baylson and Nolan Atkinson of Duane Morris & Hecksher. Weir presided over the case during most of the discovery period, during which Pioneer’s lawyers filed and were granted seven motions to compel production of evidence, Day said. Pioneer lost the $1.779 million that was originally disputed in the case through a complicated transaction involving First Union (then CoreStates Bank), co-defendant American Financial Mortgage Co., which was held jointly and severally liable for the $1.779 million in direct damages, and another mortgage company called Norwest Funding. Pioneer sold two “bundles” of mortgages to Norwest using American Financial as a conduit. The plan for the transaction was that Pioneer would send the mortgages to American Financial with a bailee letter certifying that Pioneer was their owner, that they should be conveyed to Norwest, and that Norwest should wire the money for them directly to Pioneer. The first transaction went more or less as planned, Day said, except that Norwest wired the money to American Financial’s CoreStates account instead of Pioneer. But American Financial rectified the problem by sending the money to Pioneer. The problem arose with the second transaction, when Norwest received a bundle of 13 mortgages and once again sent the money to American Financial’s CoreStates account. These wire transactions occurred between Nov. 11 and Nov. 19, 1997, Day said. But unbeknownst to Pioneer and Norwest, Day reported, CoreStates on Nov. 7 had frozen all American Financial’s accounts because it suspected the company and its principal, Thomas Flatley, of a check-kiting scheme. Day said Flatley and two of his accountants have since been investigated by the U.S. Attorney in Philadelphia. But Pioneer’s lawyer, a California practitioner named Robert Izmirian, was never told of this situation, Day said. Instead, his questions to CoreStates counsel Weir about his client’s money were brushed off with “We’re looking into it,” Day said. “We got no explanation from anybody,” Day said. On Dec. 19, CoreStates was owed about $4 million by Flatley and American Financial, Day said, and they swept his accounts, taking Pioneer’s $1.779 million in partial satisfaction of that debt. Day said that all parties involved in the funds transfer from Norwest to American Financial — Pioneer, Norwest, even American Financial — requested that the transfer simply be reversed. “We forwarded them all the documents they needed to determine that it was our money,” Day said, “but they wouldn’t give it back. According to Day, the loss was devastating for Pioneer. The company, whose stock was traded on NASDAQ, had just finished a very successful year in 1997, increasing its line of credit from $25 million to $60 million, Day said. At the time Pioneer’s money was swept out of American Financial’s CoreStates account, Pioneer was just about to close a deal — for another $200 million line of credit with Rod Ennico of Nikko Financial Services. Ennico testified that Pioneer’s disclosure of the mysterious loss of nearly $1.8 million killed the deal, Day said. Some of the inculpatory documents that didn’t appear until after the plaintiffs rested, according to Day, included an internal e-mail from November 1997, indicating that CoreStates was aware that Flatley was shuffling funds from one business account to another to cover checks through all of 1997 — and asked how much the bank had made in fees from the practice. Another, said Day, was from a member of senior management who quoted then-CoreStates Senior Vice President C.B. Cook saying about the Pioneer/American Financial situation, “Shoot first and ask questions later.” Another damaging e-mail was from lawyer Weir, Day said. It indicated that Weir had talked to a representative of the U.S. Attorney’s Office to ask the federal prosecutors to suspend their investigation of Flatley while he worked out a deal whereby Flatley would repay the $4 million he owed the bank, be responsible for the cost of defending Pioneer’s suit, and indemnify the bank against losses. Weir was using the threat of a RICO suit to encourage Flatley’s cooperation, Day said. According to Day, the e-mail said, “I have asked them to stand still until we can get a deal in place and they seem willing to cooperate for the time being.” Weir, who was called as a hostile witness during the plaintiff’s case, had testified that he had done nothing to interfere with the U.S. Attorney’s investigation, Day said. Day said the jury deliberated for only 10 minutes before reaching its verdict finding First Union and American Financial liable for conversion and American Financial liable for breach of contract. The jury decided at the same time it would impose punitive damages. Norwest had settled with Pioneer before the trial. The Legal was unable to reach Baylson for comment yesterday evening. Calls seeking comment from First Union’s corporate headquarters were not returned by press time. After the damages verdict was rendered, Day said, he talked to some of the jurors. The defense’s withholding of documents might have had some bearing on the size of the punitive damages verdict Day said, but he thought that primarily, “They were just shocked that the bank had stolen our money and would not give it back.”

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