Mississippi Litigation Review & Commentary : Mississippi Personal Injury Lawyer & Attorney : Phillip W. Thomas Law Firm : MS Litigation Review & Commentary

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It's being reported that the A&O bankruptcy trustee settled with Provident Capital for $11 million:

The bankrupt A&O life settlement funds will receive $11 million under a legal settlement with Costa Rican bond insurer Provident Capital Indemnity.

About 720 investors and creditors are owed about $92 million from seven A&O life settlement funds that filed for Chapter 11 bankruptcy. Federal authorities and Texas securities regulators are investigating allegations of fraud on the part of A&O's principals, Marwil said. He said 23 life insurance policies held by A&O funds remain active.

Many of the policies were supposed to be insured by Provident Capital. Provident is not authorized to write insurance in the U.S., the Securities and Exchange Commission said in an unrelated case. Texas insurance and securities regulators have issued cease-and-desist orders against Provident.

The Provident bonds were to pay the face value of a policy in exchange for transfer of the policy itself if the insured didn't die by a certain date.

That's $11 million more than I thought they would get out of Provident.

Here are my prior posts on A&O.

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U.S. Bankruptcy Trustee Patrick Collins did not pull any punches at the A&O creditor's meeting last week. You can listen to the entire meeting here. The meeting was over three hours long and Mr. Collins' comments were a small part of it. Among Mr. Collins' comments to the investors:

• you've been screwed;
• you've been lied to;
• some of the A&O policies have already lapsed;
• the lapse of other policies is imminent; and
• there is no money or other assets available to pay premiums on the policies.

Participants by phone included government regulators, including attorneys from the Texas attorney general's office. Discussions were heated at times and sad at others. One woman said she put her kids college fund into these investments and asked if she was going to be able to send her kids to college.

Russell Mackert testified under oath. Among Mackert's testimony:

• he lives in the same subdivision as Abdulwahab ("Wahab") and Mackert's finance is Wahab's wife's aunt;
• Shepard Capital was created for the purpose of acting as custodian of the A&O entities;
• the sale price of A&O to Blue Dymond was close to $3 million;
• Blue Dymond is a Nevis LLC;
• he dealt with RJ Stephenson from Blue Dymond;
• Mackert drafted the sale documents;
• he drafted trustee documents for 10-12 insureds and he was referred by life insurance agents;
• he was trustee for some of the policies;
• he controls A&O Life Funds LP's bank accounts;
• there are a few hundred dollars in the bank accounts;
• in March 2009 they started hearing about Prestige Title's problems;
• the Prestige-A&O relationship pre-dates Mackert's involvement with Shepard;
• the $4.6 million that A&O gave to Prestige to pay premiums was supposed to last for the life of all the policies;
• Mackert filed a police report with the Biloxi police department;
• Shepard hired an attorney in Biloxi [Don Dornan] to represent A&O; 
• Prestige bounced checks for premiums in February;
• Oncale and Almindinger loaned money ($40,000 each) to the company so premiums could be paid;
• Wahab had other legal problems and couldn't contribute;
• under the bond agreements the bond holders were supposed to pay if the insured did not die by a certain date;
• PCI did not pay under any of the bonds;
• 1 bond should have paid out as of today; 
• he described getting the run-around from the bond company; 
• the folks in Mississippi [Stephen Colson] looted the company's funds; and
• the bulk of the investors' money was used to acquire policies. 

Someone said that substantial commissions were paid to insurance agents who brought these policies to the companies. It was also said:

• the paper work is a mess;
• there is a secondary market for these policies where they could be sold;
• Mackert and his lawyer don't know what happened to any money before Mackert got involved; and
• they don't know if there were inappropriate distributions to insiders or brokers.

 Patrick Collins said there was wide-spread fraud here and law enforcement in multiple jurisdictions are looking at this. He can't really say when it started and stopped or who did it.

Mackert said there is an on-going federal investigation involving Prestige's principal [Colson].

It does not take a rocket scientist to see what happened here or where it is headed. The details have not emerged yet, but the big picture is clear. See this prior post regarding where the A&O money went. I'm not buying that all A&O's problems were caused by Prestige and Colson.   

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Just when I thought the A&O situation could not get more bizarre, it has. There has been an unbelievable development in the A&O Life Bankruptcy proceeding. In the comments section to this earlier post on A&O, there was talk regarding a potential conflict of interest by a law firm that solicited A&O investors as clients. On October 6, 2009 the bankruptcy trustee (Patrick Collins) filed a motion for Rule 2004 examination of John and Laura Spalding regarding representation of investors by the Johnson Spalding Law Firm, which is where John Spalding practices law.  Here is a copy of the Motion. 

According to the motion:

In 2006-2007 Bayou City Escrow was an escrow agent for A&O. In that capacity Bayou City received millions of dollars in investments from investors and passed the funds to A&O entities and others.  John and Laura Spalding owned Bayou City.

John and Laura Spalding have run into trouble in Illinois for not registering life settlement investments as securities. Here is a link to that document. 

John Spalding is a lawyer with the law firm of Johnson and Spalding in Houston. In September 2009 a lawyer with Spalding's firm appeared in the bankruptcy proceeding on behalf of A&O investors, including the Spaldings. The firm now claims to represent 75 investors and entities.

Bayou City is already a defendant in at least one lawsuit against A&O.

Johnson and Spalding is claiming to represent investors who refused to sign contracts with the firm. So we have a law firm whose name partner owns a company being sued by A&O investors representing A&O investors. Sound like a conflict?

Now proceed to Ex. 8 to the motion, which starts on page 46 (of the pdf) and is an affidavit from Texas attorney Janet Chafin. According to Ms. Chafin:

Johnson and Spalding had a call-in conference for A&O investors on September 12, 2009. Johnson and Spalding lawyers Deborah Fritsche and Lori Hood led the call. During the call they did not disclose the firm's relationship with Bayou City. The firm offered to represent the investors for $325 per hour pro rated with an initial retainer of $1,000 or $2,000, depending on the amount invested.

Now proceed to p. 62 (pdf) of the motion, which is a Johnson and Spalding letter "to confirm you waive any conflict of interest arising from Johnson, Spalding, Doyle, West and Trent's representation of you...." The letter then lists other firm clients, including John and Laura Spalding. "You agree, understand and waive any conflicts of interest by and between you and any of the referenced parties which exist now or which may arise in the future."

Oh. My. God. That is un-freaking-believable. Potential targets in the A&O litigation sign up to represent investors and then attempt to have them waive the conflict of interest. I say attempt here because I do not believe that any court would enforce the waiver.

A&O is broke. Lawsuits on behalf of investors seeking to recover their losses will focus on brokers and other associates of A&O who participated in any fraud. Without question, Bayou City, which is owned by the Spaldings, is a potential target and has already been sued in at least one case. This creates a huge conflict of interest for Johnson and Spalding that exists regardless of the attempts to have the conflicts waived. Also, to waive a conflict the client must give knowing and informed consent. That appears not to have happened here.

You would guess that the Spaldings do not want to be deposed. Too bad! On October 14, 2009 the Court granted the motion and ordered the depositions. As Mickey Haller would say, don't be surprised if the Spaldings take the nickel.

I would be shocked if someone has not already filed a bar complaint in Texas against Johnson and Spalding and its lawyers. I am not familiar with disciplinary proceedings in Texas. But in Mississippi, the Bar would not look kindly upon this situation and a serious career altering sanction would be imposed.  

One other point: if I were an A&O investor I would insist that my lawyer take the case on contingency. You need a lawyer who is going to sink or swim with you, not someone who is going to get paid by the hour while taking no risk in the event that no money is recovered. It doesn't have to be a full contingency. It could be part hourly rate at a reduced rate and part contingency. Here is a quote from the web site of David Berg's firm in Houston:

Whether on the defense or plaintiffs side, we have always been willing to share the financial burden of litigation with our clients, entering into creative fee agreements that tie our fees to our results.

If I were an A&O investor I would be looking for a law firm with a similar attitude. This will not be an easy case to collect on and investors need counsel highly motivated to collect, not just get a judgment.