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When Wethersfield, Conn., lawyer William J. O’Sullivan filed a malpractice suit against a Cheshire, Conn., real estate appraiser, he had no way of knowing he was about to unmask a multinational insurance fraud. The ensuing litigation exposed a web of fake charities and bogus “insurance” schemes created by Mark S. Haukedahl, a Toledo, Ohio, businessman who has since retreated to the Dominican Republic. What O’Sullivan and his New York co-counsel uncovered was bad news both for the defendant in the suit, Cheshire appraiser Timothy Kennelly, and later for the other members of the American Real Estate Association (AREA). In addition to a cheery association newsletter and calendars, the 1,600 real estate agents, appraisers and inspectors belonging to the group unwittingly relied on a promise of $10 million in errors and omissions insurance coverage. Last month, when news broke that AREA was actually an elaborate Ponzi scheme, with no actual insurance for its members, it caused shock. “They’re scrambling now to find real insurance,” said O’Sullivan. An attorney at the firm of Baker, O’Sullivan & Bliss, O’Sullivan initially represented two partnerships that invested in property in Cheshire that Kennelly appraised at $2 million in 1993. A foreclosure judge valued it at $750,000 a year later. When the dust settled in 1997, the mortgage lenders had a $1.3 million deficiency judgment against the partnerships, which went into receivership under the U.S. Small Business Association. Kennelly had few assets, and got no assurances that AREA would make good on its promised coverage. Instead, Kennelly allowed a $1.5 million judgment to enter against him in 2000, and assigned his legal claims against AREA to the SBA. In that manner, the Small Business Association stepped into the shoes of Kennelly and became O’Sullivan’s client as he pursued the Ohio “insurer.” DAMNING TESTIMONY The case was removed to U.S. District Court in the Southern District of New York, and local counsel Steven Weinberg joined O’Sullivan to press the case for the SBA. Weinberg practices in the Manhattan firm of Gottesman, Wolgel, Secunda, Malamy & Flynn. The SBA lawyers deposed Haukedahl, his son Troy, and a lawyer-claims administrator at the association. From limited discovery disclosures, they followed a paper trail of bank accounts and cancelled checks. In a recent interview, O’Sullivan said they discovered that members’ fees were not deposited in the AREA account, but instead went to another Haukedahl entity account. “So AREA was kept judgment-proof,” said O’Sullivan. “The checking accounts we looked at showed over $400,000 [in] travel expenses, but at his deposition, Mr. Haukedahl couldn’t remember any of the business trips.” The lawyers also uncovered hundreds of thousands of “loans” between various Haukedahl entities. “When we asked for evidence of a business purpose for these loans, Mr. Haukedahl was unable to provide it,” said O’Sullivan. In addition, there were checks to the Internal Revenue Service that Haukedahl acknowledged were for his and his family’s personal obligations. “But probably the most damning thing,” O’Sullivan said, “was his testimony about the so-called insurance premium loss fund. We basically determined that that was the so-called insurance company. He set up a checking account. They had some premium dollars from members, and that’s what they used to cut small checks for small claims. Enough money,” O’Sullivan noted, “was being paid out to people to maintain the fa�ade of legitimacy, but once you had a big claim like this, all of a sudden there was no money there.” The SBA sued the corporate entities first. On Sept. 3, 2003, it obtained a default judgment of over $2 million against three similarly named real estate associations Haukedahl had created. Next, the SBA went after Haukedahl. In a three-day trial in January before U.S. District Judge Jed S. Rakoff, the SBA proceeded to “pierce the corporate veil” and expose Haukedahl’s personal assets. Testimony showed that the closest thing to real insurance was AREA’s affiliation with a company Rakoff derisively called “the great Mid-West Insurance Company.” Despite its name, which conjures up an image of heartland solidity, it was actually incorporated in Barbados, and consisted of, as O’Sullivan put it, “a pile of papers in a file drawer in the Bahamas.” Sporadic regulatory action from far-flung states had never stopped Haukedahl. But in March, Rakoff did, when he ruled against Haukedahl personally, finding him liable for breach of contract as the legal alter-ego of AREA in its various forms. Rakoff also ruled on counts of fraud, Connecticut Unfair Trade Practices Act violations, and violation of the Connecticut Unauthorized Insurers Act. The judge forbade Haukedahl from engaging in future real estate associations, concluding “this was a flagrant, intentional, willful and despicable fraud… . ” He imposed attorney fees as CUTPA damages in an award to the SBA of $2.3 million. Haukedahl was represented by Mark Krassner of New York’s Cohen & Krassner, who said, “I think the decision pretty much speaks for itself. The case is over, and I don’t think I can add anything to the story.” For the SBA lawyers, recovering for their client is a challenge. One source of potential recovery is the Haukedahl Foundation, which has owned and operated a bingo hall in the Toledo area. The foundation reported $1.5 million in revenue to the IRS in 2002, almost all of which went to direct expenses, employee wages and benefits, and management fees, leaving roughly $72,000 to distribute. The attorney general’s office in Ohio reported the foundation only distributed $500 in 2002 and nothing in 2003. It has revoked the bingo license, and is conducting its own investigation. O’Sullivan said his firm was notified on May 26 that it won a temporary injunction and order of attachment against the Haukedahl Foundation.

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