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Dallas-based Locke Liddell & Sapp has agreed to pay $8.5 million to settle a class action suit alleging it aided a client in defrauding investors through a Ponzi scheme. The firm and former lawyer Phillip Wylie are settling with a plaintiffs class that invested with former Locke Liddell client Brian Russell Stearns, an Austin, Texas, businessman serving 30 years in prison after he was found guilty in February on 80 charges, including money laundering and securities fraud. The settlement agreement came out of a two-day mediation in June. “We thought it was in the best interest of both the plaintiffs and the firm to get this complicated and protracted and expensive litigation behind us,” says Locke Liddell partner John McElhaney of Dallas. “The firm will not suffer any losses beyond deductible payments under the insurance policy.” Judge John K. Dietz of the 250th District in Austin gave preliminary approval to the settlement on July 31 and certified a class for settlement purposes. He set a final fairness hearing for Sept. 5, giving the class members a month to decide if they want to opt out of the agreement. While investors will not recoup everything with the settlement, they can expect a recovery of up to 68 percent, according to terms of the agreement. “It’s a good settlement,” says Michael Shaunessy, a lawyer for receiver Janet Mortenson. “Ultimately for the investors it’s a trade-off of time and certainly over the risk and benefit. It you go to trial, they might have gotten more, they might have gotten less.” Shaunessy, a partner in Bickerstaff, Heath, Smiley, Pollan, Kever & McDaniel in Austin, says that without a settlement, the defendants would likely have appealed the suit to the Texas Supreme Court, delaying any payment to the plaintiffs. The settlement is on behalf of the firm and Wylie. The settlement’s term sheet provides $6,130,200 for a group of at least 342 investors who live in and around the town of Brady, Texas, giving them a recovery of about 68 percent of their money. Another $1,382,100 will go to a group of investors, chiefly from California, who will get back about 50 cents on the dollar. A third group of investors, including some from Canada and Australia, will share in $987,700, giving them 8 cents to 10 cents on the dollar. As alleged in the petition, the Brady investors got involved after Stearns married Reagan Martin, a former beauty queen from Brady, and word got around town that some of her relatives who invested with Stearns received huge returns on their money. According to pleadings, lawyers from Bickerstaff Heath who represent receiver Mortenson will ask Dietz at the fairness hearing to approve fees totaling $1,487,500. At the same time, lawyers for the plaintiff class representatives, George & Donaldson of Austin, will request the same amount. D�JA VU Locke Liddell has been down this road before. In 2000, the firm agreed to pay $22 million to settle litigation stemming from the firm’s representation of Russell Erxleben, a former University of Texas star football kicker whose foreign currency trading company was allegedly a Ponzi scheme. He pleaded guilty to federal conspiracy and securities fraud charges. McElhaney says the firm admits no wrongdoing by settling the Stearns litigation, and he alleges the firm did not represent Stearns in connection with any of the transactions the plaintiffs complain about in the suit. “The firm certainly does not admit any liability in this case that has just settled,” McElhaney says. The class action suit, Janet Mortenson, et al. v. Locke Liddell & Sapp, et al., which was filed in September 2000, pulled Locke Liddell and Wylie into the legal morass involving Stearns, who was arrested in September 1999 and indicted. The criminal case against Stearns has been big news in Central Texas because hundreds of people from the area around Brady, the hometown of the beauty queen Stearns married in 1998, are among individuals who lost money through Stearns’ alleged pyramid operations. After Stearns’ conviction in February, federal Judge James Nowlin of the U.S. District Court for the Western District of Texas sentenced him to 30 years in prison. Stearns’ criminal defense attorney, Austin solo Stephen Orr, did not return a telephone message by press time on Aug. 2. The class action suit filed by R. James George Jr. and Shaunessy alleges Locke Liddell and former special counsel Wylie helped Stearns defraud investors and allowed the firm’s Interest on Lawyers Trust 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.” The plaintiffs allege that more than $26 million went through the Locke Liddell IOLTA account between Jan. 1, 1999, and Sept. 21, 1999 — money the plaintiffs allege wasn’t used for legitimate investments. They also allege 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. Wylie, who left Locke Liddell in 2000, declined comment and referred questions to his lawyer, Timothy Duffy, a member of Dallas’ Burleson, Pate & Gibson. Duffy did not return a telephone message by press time on Aug. 2. The firm and Wylie are defendants in a related suit — Ivor Wolfson Corp., et al. v. Locke Liddell & Sapp, et al. — filed in federal court in New York in November 1999 by two corporations seeking to recover $26 million, plus interest and costs, 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. John Harris, an attorney for Ivor Wolfson and Tremmer, says discovery is close to wrapping up in the litigation, but federal Judge Alvin Hellerstein of the U.S. District Court for the Southern District of New York has not set a trial date. Harris, a shareholder in Stillman & Friedman of New York, says there have been no settlement negotiations with the firm and Wylie. McElhaney confirms the suit is pending and no trial date has been set. FIRM PROCEDURES Wylie’s representation of Stearns dates back to September 1998, when he was a partner in Dallas’ Locke Purnell Rain Harrell, which merged in January 1999 with Liddell, Sapp, Zivley, Hill & LaBoon of Houston to become Locke Liddell. The Texas suit alleges 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. But the suit also alleges Wylie and the firm helped Stearns make his pyramid scheme work and that lawyers at the firm should have known investor funds deposited in the IOLTA account for Stearns were sent out for improper and illegal uses. The suit alleges those improper uses include paying $4.2 million to an early investor who wanted his promised return and using money to buy a Lear Jet. McElhaney says the firm has not changed any of its procedures in the wake of the litigation or the settlement adding, “The firm’s policies are proper ones.”

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