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Five months after Dallas-based Locke Liddell & Sapp agreed to pay $22 million to settle a suit alleging that it helped a client in defrauding investors, the firm was hit with another suit alleging it aided a client in defrauding investors through a Ponzi scheme. The class-action suit, filed on Sept. 8 in state court in Austin, pulls the firm and former lawyer Phillip Wylie into a legal morass involving Brian Russell Stearns, an Austin businessman who was indicted in July on 85 counts of defrauding investors, making false statements and illegally possessing firearms. The criminal charges have been big news in central Texas because hundreds of people from the area around Brady, Tex., the hometown of the beauty queen whom Stearns married in 1998, are among individuals who lost money through Stearns’ alleged pyramid operation. The suit filed by Austin lawyers R. James George Jr. and Michael Shaunessy alleges that Locke Liddell and former special counsel Wylie helped Stearns defraud investors and allowed the firm’s IOLTA account to be used as a “conduit.” It alleges that money from investors that went into the firm’s trust account was deposited into Stearns’ bank accounts and was used to pay for his “expensive toys.” As alleged in the pleadings, more than $26 million went through the Locke Liddell Interest on Lawyers Trust Account between Jan. 1, 1999, and Sept. 21, 1999 — money the plaintiffs allege wasn’t used for legitimate investments. “It doesn’t smell good,” Austin attorney Nanneska Hazel says of what she claims was Locke Liddell’s role in Stearns’ alleged pyramid scheme. Bruce LaBoon, a co-managing partner in Locke Liddell, says the suit is unwarranted because the firm did not represent Stearns in connection with the transactions cited in the suit. “We have carefully reviewed it and carefully reviewed the facts, and we think it’s totally without merit,” he says. “He was a client, but not with respect to the transactions in which these plaintiffs were involved.” But Hazel, an associate at Austin-based George & Donaldson, alleges that even if Wylie did not represent Stearns in connection with every single investment, he and the firm are conspirators with Stearns. “They allowed him [Stearns] to do these things. They approved these transfers. The Locke Liddell name was held out as safeguarding these funds, and they approved these [IOLTA account] transfers,” she alleges. Wylie, who is no longer at Locke Liddell, did not return a message left on an answering machine at his office in Dallas. His lawyer, Michael Gibson, a partner in Burleson, Pate & Gibson of Dallas, says Wylie did not represent Stearns in connection with investments from Brady-area individuals. “The attorneys for [receiver] Janet Mortenson and those people know that, so I was disappointed that they have made such an effort to try to create such a lawsuit alleging misconduct and malpractice,” Gibson says. LaBoon won’t characterize the circumstances under which Wylie left the firm earlier this year. “I’ll just say he thought it was in his best interest to not be associated with us any more. So he left,” LaBoon says. SECOND SUIT The suit filed in Austin is the second suit that the firm is facing because of Wylie’s representation of Stearns, who is in jail awaiting trial in October on the criminal charges. The firm and Wylie are defendants in a suit filed in federal court in New York in November 1999, lodged by two corporations seeking to recover $48.4 million, plus punitive damages, that they allege Stearns owes them. The plaintiffs in that suit, Ivor Wolfson Corp. and Tremmer Limited, allege claims of fraud, conspiracy to defraud, aiding and abetting fraud, fraudulent concealment, negligent misrepresentation, breach of fiduciary duty and breach of warranty against Locke Liddell and Wylie. Locke Liddell’s defense attorney in that litigation, Michael Silberberg, a partner in Morvillo, Abramowitz, Grand, Iason & Silberberg of New York, says, “We don’t think that the firm has done anything wrong.” Wylie’s lawyer in New York, Lee Richards, a partner in Richards, Spears, Kibbe & Orbe, did not return a telephone message by press time. The class action filed in Austin, meanwhile, is on behalf of others who invested money with Stearns, including at least 342 residents of the Brady area, people who invested through a California attorney and the court-appointed receiver for several companies that Stearns allegedly used in his investment schemes. The plaintiffs allege in the Austin suit that they wouldn’t have put their money into the investment contracts marketed by Stearns and his companies if the firm and Wylie weren’t involved in “assisting and vouching for the legality, legitimacy and financial soundness of Stearns, his assets and the Stearns entities.” The plaintiffs seek unspecified actual and punitive damages, although Hazel says class members invested at least $10 million with Stearns. As alleged in their pleadings, the plaintiffs from the Brady area gave money to Stearns for investment after he and Reagan Martin married, and word got around town that some of her relatives who invested with Stearns received huge returns on their money. The suit alleges that the firm and Wylie assisted Stearns in selling unregistered securities, aided him in breaching fiduciary duties to investors, and conspired with Stearns to breach fiduciary duties to commit securities fraud and fraud. The suit also alleges that Wylie and the firm were negligent in how they represented Trans-Global Asset Management Group Inc., one of Stearns’ companies, and alleges that Wylie, and through him Locke Liddell, breached a duty to nonclients. “We felt that Phillip Wylie and Locke Liddell conspired with Brian Stearns to induce people to invest with Brian Stearns, and because they conspired with Stearns, they are liable for the acts of all co-conspirators,” alleges Hazel. Stearns, who was arrested in September 1999 and indicted the next month and again in July 2000, also faces other civil suits filed in Texas and New York by investors who allege he failed to deliver the returns he promised. (George, a partner in George & Donaldson, and Shaunessy, a partner in Austin-based Bickerstaff, Heath, Smiley, Pollan, Kever & McDaniel, filed a civil suit against Stearns in June in state court in Austin on behalf of the receiver, Mortenson, and 10 individual investors.) A trial on the criminal charges against Stearns is set for Oct. 16 before U.S. District Judge James R. Nowlin of Austin. Stearns’ defense attorney, Austin sole practitioner Stephen Orr, did not return a telephone message by press time. TRACING THE STEPS Wylie’s representation of Stearns dates back to September 1998, when he was a partner in Locke Purnell Rain Harrell of Houston, as alleged in Janet Mortenson, et al. v. Locke Liddell, et al. (The firm became Locke Liddell & Sapp when it merged with Liddell, Sapp, Zivley, Hill & LaBoon of Dallas in January 1999.) As alleged in the suit, Wylie assisted Stearns with securities, business litigation and corporate matters, and drafted documents that Stearns used in soliciting investments. He paid the firm at least $243,332 in fees, the suit alleges. But the suit also alleges that Wylie helped Stearns “defend, delay and deflect” threats from investors who weren’t receiving the returns they were promised and also misled securities regulators. “Most importantly, perhaps, Wylie and Locke Liddell helped make the pyramid scheme work by transferring money from investors to Stearns’ pockets through the Locke Liddell IOLTA account,” the suit alleges. The suit alleges that lawyers at the firm should have known that investor funds deposited in the IOLTA account for Stearns were sent out for improper and illegal uses — such as paying $4.2 million to an early investor who wanted his promised return. As alleged in the indictments against Stearns, $12.5 million from Locke Liddell’s IOLTA account was wired into Stearns personal account on March 15, 1999, and $3 million was wired out of the IOLTA account to buy a Lear Jet on March 19, 1999. LaBoon says the firm acted properly by putting the money into its IOLTA account. “We believe our handling of monies in the IOLTA account was exactly how they should be handled and there was no improper use in any way,” he says. “Whenever a client gives us money that doesn’t belong to us and belongs to a client, it goes into the IOLTA account.” Gibson says Wylie followed Locke Liddell procedures for the IOLTA account. The allegations go beyond the use of the IOLTA account. The plaintiffs allege that Wylie knew that Stearns was selling unregistered securities, knew that he was facing investigations by state regulatory agencies and knew that he was defaulting on promises to repay investors. They also allege that Wylie didn’t warn prospective investors of those facts as required under the Texas Rules of Professional Conduct. The plaintiffs also allege that Wylie continued to help Stearns solicit funds even after he learned his client was breaching his fiduciary duty to investors and was engaging in fraud. “There is nothing to indicate that Wylie or Locke Liddell ever even considered withdrawing from representation of Stearns and his business entities until after his arrest on Sept. 20, 1999,” the plaintiffs allege. Gibson disagrees with the allegation that Wylie knew Stearns was involved in criminal conduct, yet allowed it to continue and aided and abetted it. “The issue is going to be one of where did and when did he know something,” Gibson says. LaBoon says the firm’s representation of Stearns is totally unrelated to the litigation the firm settled in April, which stemmed from its representation of Russell Erxleben, a former University of Texas star football kicker whose foreign currency trading company was allegedly a Ponzi scheme. Erxleben pleaded guilty last November to federal conspiracy and securities fraud charges. He is represented by Orr.

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