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

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Here is the bankruptcy trustee's initial report in the A&O debacle. It details irregularities and problems that observers of A&O have come to expect. Some of the noted problems include:

• many of the A&O policies have lapsed.
• there are ownership disputes with many of the policies that haven't lapsed. This means that A&O may not really own the policies.
• Provident Capital probably is not going to pay on the bonds that were supposed to back up the policies.
• there was a bait and switch pulled on investors: they were told that they were getting one type of investment, but actually got something else.

The trustee's website is a great A&O resource and there is not much that I can add from an information standpoint.

From an opinion and commentary standpoint, I am impressed with the efforts of the trustee. If I was an investor I would support the current trustee based on the information that I have seen.

As far as blame, do not buy into Russell Mackert and A&O's attempt to blame this debacle on Prestige Title and Stephen Colson. They are using Prestige and Colson as scapegoats. All indications are that the interpleader case that froze Prestige's funds accelerated A&O's demise rather than caused it. All you really need to know about A&O is that the founder (Adley Abdulwahab) lied about his education in touting A&O as a legitimate enterprise. If this is not evidence of a con man, then I do not know what is.

If I were an investor who has not yet hired an attorney, I would be looking for an attorney who is willing to file suit against the agent who sold me the investment. I continue to believe that agents' errors and omissions policies are the best hope for recovery. In addition, if the government prosecutes and recovers funds in the case, then there could be an avenue for the victims to recover losses from the government. Finally, Russell Mackert and any insurance coverage that he carries could also be a potential target if, as expected, it turns out that the A&O sale to Blue Dymond turns out to be a sham.

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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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On July 31, 2009 Russell Mackert of Shepherd Capital Management sent a letter to some investors in A&O Life Funds. Here is a copy of the letter. The news is bad. According to Mackert, the company (Provident Capital Indemnity) which issued the payment bonds backing the maturity date of the investment is not paying the investors. This is what happens when a company buys its payment bond from a little known company in Costa Rica. Incidentally, I have heard from investors who have not been paid. The letter does not mention Adley Wahab, but does refer to Prestige Title misappropriating A&O funds.

Mackert goes on to state that the policy backing the investment is in full force and effect, but that premiums are being paid from cash values built up in the policies. In other words, A&O is not paying the premiums. Although Mackert does not explain this, paying the premiums from cash values can be really bad for the policy and can lead to huge premium payments down the road because all cash values have been exhausted. This is particularly true in policies insuring the lives of elderly people, because the premiums on a life insurance policy get more expensive as we age due to shorter life expectancies. It can be sort of like when an adjustable rate mortgage resets at a higher interest rate. I believe that most or all of the A&O policies insure lives of elderly individuals.

Mackert gives the investors 3 options:

1. investors pay a pro rata share of the premiums on the polices (on the policy in this letter the premium is $29,015 every 3 months)
2. sell the policy on the secondary market
3. do nothing and lose the entire investment.

None of the options involve A&O or the related companies paying the premiums: "the company does not have the funds to pay for such premium needs."   

Many, if not all, A&O investors bought the investment from a securities broker or agent. If I were an A&O investor I would be talking to the SEC and other federal authorities, questioning the person who sold me the policy on what was his commission and what due diligence did he do, and trying to hire an attorney. 

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There were two new cases filed in the last week in federal court against Biloxi lawyer Stephen Colson. On August 20, 2009 Wachovia Bank filed this Complaint against Colson and Prestige Title. The suit is based on loans and credit lines that are in default. The amount sued for on each is as follows:

1. Note 1: $292,355.36
2. Loan 2: $720,088.09
3. Loan 3: $494,321.01

Total: $1,506,764.40.

Eric Hatten with Burr Forman's Jackson office represents Wachovia. The fact that Colson defaulted on loans is not surprising, since his businesses were apparently shut down last fall.

The second case was a declaratory judgment action filed on August 24, 2009 by Aspen Insurance UK Limited against Prestige, Colson, Wachovia Bank and Lawyer's Title Insurance. Here is the Complaint, which Aspen filed in the Jackson Division instead of Gulfport for reasons that I can't identify. Aspen alleges that it issued a professional services liability policy to Prestige/ Colson in 2008 and there were misrepresentations in the application. As a result, Aspen claims that it has no duty to defend and indemnify Prestige/ Colson in their several legal actions. I don't know how this will turn out, but having the insurance company pay the freight for defending the lawsuits is usually a very big deal for a defendant.  Carroll Warren and Parker of Jackson filed the complaint and are local counsel for Chicago lawyers.

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In the Colson litigation, Judge Ozerden was not satisfied with A&O's affidavit identifying its partners, and issued the following text order in both cases:

TEXT ONLY ORDER directing movants A&O Bonded Life Assets Management, LLC; A&O Bonded Life Assets, LLC; A&O Bonded Life Settlements Management, LLC; A&O Bonded Life Settlements, LLC; A&O Capital Management, LLC; A&O Life Fund Management, LLC; A&O Life Fund, LLC; A&O Life Funds Management; LLC, A&O Life Funds, LLC; A&O Resource Management, Ltd.; Houston Tanglewood Partners, LLC; Life Fund 5.1 Management, LLC; Life Fund 5.1, LLC; Life Fund 5.2 Management, LLC; and Life Fund 5.2, LLC, to file into the record in this case on or before Friday, May 29, 2009, an Affidavit or Declaration identifying the members of Blue Dymond Capital Group, LLC, and their respective citizenships, and identifying any general or limited partners of A&O Resource Management, Ltd., other than the previously identified general partner A&O Capital Management, LLC, and their respective citizenships. NO FURTHER WRITTEN ORDER SHALL ISSUE FROM THE COURT REGARDING THIS DIRECTIVE. Signed by District Judge Halil S. Ozerden on 5/19/2009. (EMN) (Entered: 05/19/2009)

With $1.5 million interpleaded by Wachovia, the filed claims to date are:

1. Lawyers Title:                $10 million
2. Adams Homes:            $624,000
3. Seashore:                      $428,000
4. Coldwell Banker:          unspecified
5. Denada Invest.:            $530,000
6. A&O Life Funds:           $3 million

             Total:                              $14,520,000 (plus Coldwell Banker's claim)       

This means that there is at least $13 million in claims in excess of the amount available to satisfy those claims.

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Over the last several weeks Judge Ozerden issued several orders requiring the parties to provide information on the identity and residency of parties to the case, including members of limited partnerships. Reviewing the parties' filings, it appeared that the court may lose diversity jurisdiction over the case. That appears to have now happened, with Judge Ozerden entering this Order requiring the parties to show cause as to why the Court should not remand the case to state court on the basis that there is no diversity jurisdiction.

The reason for the Court's conclusion that the case should be remanded is the fact that Wachovia and Sandion Coldwell Banker are both citizens of North Carolina. As a result, there is not complete diversity of citizenship. Although no party raised this issue, federal courts monitor jurisdiction and sometimes remand cases on their own.

For practical purposes, once the case is remanded to state court it will proceed much like it would if it stayed in federal court. But the case will be much harder to monitor, since unlike in federal courts, state court records are not available to the public on-line. Although the court file will still be public record and available for inspection at the clerk's office, I will not be in a position to monitor filings like if the case stayed in federal court. This is an unfortunate development for people following the litigation on this blog, since the Sun Herald stopped covering the litigation after an initial article several months ago. I will continue to monitor the Lawyer's Title action and post updates about it as warranted. In addition, I will continue to monitor the federal court filings for new actions related to the Colson litigation, which I expect.

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In this memorable quote from the movie Wall Street the character played by Michael Douglas tells Bud to call a number and tell the man that Blue Horseshoe Loves Anacott Steel. A&O Life's filing in federal court listing its member partners reminded me of this quote. The only new name identified in the affidavit was Blue Dymond Capital Group, LLC, a citizen of the West Indies. The person signing the affidavit was A&O front man Russell Mackert.

Mr. Mackert claims to have personal knowledge of the facts in the affidavit, but does not explain who he is, how he obtained that knowledge or his relationship with A&O. The affidavit does not mention Adley Wahab, who is presumably the man behind the curtain. Mackert and A&O seem shady--real shady. Their presence in this litigation is bad for Steve Colson, because he was doing business with these shady characters.  

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The Colson litigation now involves a $3 million claim involving viatical settlements by A&O Bonded Assets and related entites. Looks like I picked the wrong week to stop sniffing  glue.

In viatical settlements an owner of a life insurance policy sells his future death benfit to an "investor" for a lump sum payment. The "investor" then pays the premiums until the insured dies, and collects the death benefit at death. Unlike the life insurance company, which would just as soon the insured live forever, the "investor" is cheering for death, since it allows him to earn the return on his investment. Needless to say, viatical settments are controversial and are rife for abuse by the "investors", since many life insurance owners are not financially sophisticated enough to know whether the payout is fair. In addition, viatical settlements arguably defeat the purpose of life insurance, but that is a topic for another day.

Here is A&O's Motion to Intervene in the Lawyer's Title case, supporting memorandum and supporting affidavit of Russell Mackert. The affidavit does not describe Mackert's relationship to A&O, but the results of a Google search indicate that Mackert is a Houston, TX area lawyer. It appears that Mackert is a front man for the real investors: the hedge fund A&O Life Funds.  A&O Life either does not want anyone to know much about it, or it has the worst web site designer in the world.

The memo provides a more detailed explanation of the claim than the motion. In 2008 A&O Bonded Life Assets Management LLC and related entities entered into a Escrow Management Services Agreement with Prestige Title. A&O deposited $4.6 million with Prestige Title that Prestige was to use to pay the premiums on the policies. In return for Prestige's services, A&O paid Prestige $150,000 annually. A&O claims that its $4.6 million was comingled with other Colson entity firms and then sequested as a part of the Lawyers Title case and Wachovia intepleader action. It looks like Prestige paid the premiums for a while and that A&O's real loss is approximately $3 million.

A&O also claims that Prestige has not been paying the premiums on the policies and that some of the policies will lapse soon unless the premiums are paid. A&O places the value on the policies where a lapse is imminent at $29 million. The total value of the policies at issue is $179 million. Here is a partial list of the policies, which have huge face amounts. Obviously, A&O is not going to let these policies lapse and will cover the premiums if Prestige does not pay. A&O is trying to cut its losses by recovering money in the ongoing litigation. It's hard to imagine a less sympathetic party in this litigation. A&O's attorney is former Mississippi Bar President Don Dornan, so at least it has a respected attorney.

In another Colson development I have learned that Colson is suing Tedd Martin, who is his partner in Prestige, in state court. State court pleadings are public record, but are not accessible on-line. I do not know what Colson alleges in the action.  

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Stephen Colson filed a response opposing Denada Investment's Motion to Intevenve in the Wachovia-Colson interpleader case. Colson's position is that the Denada promissory note is a separate transaction that is unrelated to the subject of the interpleader action. In addition, the response points out that only about $150.00 of the interpleaded funds were in Colson's personal accounts or his law firm's accounts. Most of the funds were in various Prestige Title accounts, including trust accounts.

Colson's response appears valid and I expect Judge Ozerden to deny Denada's motion to intervene. Look for Denada to file a separate action against Colson in the near future.

Overall, things have been fairly quite in the two Colson cases currently pending in federal court. In the Lawyer's Title case the parties are conducting written discovery and Judge Ozerden scheduled a hearing on a motion for preliminary injunction for July. There is a motion pending to consolidate the two cases, which if granted will make following the litigation easier.

The two big shoes that have yet to drop are a criminal indictment and a bankruptcy filing. I think we'll see both before this is over. I'm hearing from Coast contacts that Colson is telling people that he is innocent and will be vindicated. I hope so. Colson has a reputation as being a nice guy and many people would like to see this work out for him.

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Denada Investments, LLC moved to intervene in the Colson-Wachovia interpleader action on Monday. Here is Denada's proposed answer and cross-claim. Denada's claim of $530,000 is based on a 2007 one page promissory note that Colson personally guaranteed. It appears that the entire principal may still be due, but it's unclear. Denada alleges that Colson defaulted in November 2008. Denada is represented by Clarence Webster and Will 'Deuce' Manuel of Bradley Arant out of Jackson.

With $1.5 million interpleaded by Wachovia the filed claims to date are:

1. Lawyers Title:                $10 million
2. Adams Homes:            $624,000
3. Seashore:                      $428,000
4. Coldwell Banker:          unspecified
5. Denada Invest.:            $530,000

There are now over $11.5 million in claims to date with only $1.5 million to satisfy those claims.

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There were two more intervenors on Wednesday in the Colson-Wachovia interpleader action. Seashore Development Group, LLC filed a motion and attached a proposed cross-claim that seeks $428,429.25 of the funds that Wachovia froze and interpleaded into the court. Seashore has a condominium development in Biloxi. Colson's companies held escrow deposits and closing settlement funds for the development that were held in Wachovia bank accounts. 

Sandion LTD, d/b/a Coldwell Banker also filed a motion and proposed cross-claim .Coldwell Banker claims that the frozen Wachovia accounts hold a substantial amount of earnest monies belonging to its clients and that it has been unable to close many sales. For some unexplained reason, Coldwell Banker did not identify the amount of its claim or even the number of affected transactions.  

With $1.5 million interpleaded by Wachovia the filed claims to date are:

1. Lawyers Title:   $10 million
2. Adams Homes:     $624,000
3. Seashore:        $428,000
4. Coldwell:          $??????

There are over $11 million in claims to date with only $1.5 million to satisfy those claims. There could also be additional claims filed in the future. The two prominent questions at this point are:

1. How much money is missing; and
2. Where did it all go?

There will be a lot of attorneys and forensic accountants trying to get answers to those questions on behalf of many clients. It will also be interesting to see when the claimants start turning on each other and Wachovia in this case or separate actions.

 For additional information on this developing case click here.

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Kingfish at the Jackson Jambalaya blog has an update on the Steve Colson fraud scandal.

One question is how many victims will there be? I received a not so nice email from one of the victims that stated that there are 250 people "going through this." 

Kingfish found this Mobile Press article from early March. I'm surprised by the limited amount of press attention that this story has received thus far. This appears to be a major scandal involving a lawyer, the mortgage industry and LSU football players who may have been investors in some of Colson's companies. 

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United States Magistrate Judge John Roper entered an Order yesterday allowing Adams Homes to intervene into the Stephen Colson / Wachovia Bank interpleader action. The motion was unopposed and the order was a standard order prepared by Adams' counsel. Adams will now be able to make its claim for over $600,000 of the $1.5 million deposited into the Court by Wachovia.

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On Monday Adams Homes filed a motion to intervene into the Wachovia v. Colson interpleader action. Here is Adams' proposed answer and counterclaim that it will file if the court grants the motion to intervene. Adams claims Colson's companies owe Adams $623,898.21 in unpaid proceeds, earnest money deposits, withheld closing items, and unpaid interest. Adams is represented by Les Smith of Page, Mannino in Biloxi. Smith is a product of the famed University of Mississippi School of Law class of 1993, which included standouts such as former MSU safety Bo 'Recap' Russell, and Michael Morton.

Lawyers Title Insurance Corp. previously sued Colson and his companies for $10 million. The Adams claim brings the total known filed claims against Colson to $10.6 million, with Wachovia putting up only $1.5 million to satisfy those claims. It sure sounds like there is some money that is missing.

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There is more litigation involving Coast lawyer and businessman Stephen Colson. I previously wrote about the financial scandal involving Colson. On Friday there was a federal court removal of an interpleader action involving Colson that was originally filed in Harrison County Circuit Court. The interpleader Complaint alleges that in February, Wachovia Bank froze over fifty bank accounts belonging to Colson or related entities and deposited the funds--over $1.5 million--into the Court. 

The Defendants in the case include Colson, Colson's businesses, Fidelity National Financial, Fidelity National Title Group, Lawyers Title Insurance Corporation and John Does 1-50. The Doe Defendants will allow Wachovia to add other parties who claim an interest in the funds. It would not be surprising to see parties with claims against Colson or his businesses intervene into the lawsuit.

The interpleader Complaint identifies all the bank accounts and their balances. The action states that in late 2008, many of the accounts were suffering overdrafts that Colson promised to rectify, but didn't. The Complaint states that Wachovia investigated and discovered "unusual" transfers between the accounts in order to cover overdrafts. An interpleader action requires Colson and others with a claim to the funds to fight over the money in Court. The case has been assigned to federal district court judge Sul Ozerden.

The interpleader action is an ominous development for Colson. First, his companies' bank accounts were emptied and frozen, presumably shutting down operations. Second, Wachovia is required by law to report certain suspicious activities to the government. There is background information on suspicious activity reports (SAR) here, here, and here. Banks get in big trouble for not reporting suspicious activities. There is little doubt that Wachovia alerted the government about this unusual activity and that an investigation is underway. The investigation could lead to criminal charges against Colson. Finally, getting out of line with a client's money is a cardinal sin for lawyers. If Colson was improperly moving client funds from trust accounts to personal or business accounts, then the Mississippi Bar will impose severe penalties even if Colson escapes criminal prosecution.

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The Sun-Herald is reporting a financial scandal and lawsuit involving prominent Biloxi attorney Stephen Colson.  Basically, there is a whole lot of money missing and the allegations are that Colson and his title company stole it. The Sun-Herald story focuses on a couple whose check from Colson's title company to pay off their house bounced. According to their attorney Andy Alfonso of Ocean Springs:

This is going to rock the Coast, as far as being a huge public catastrophe.”

The only lawsuit on file is not on behalf of the couple that is the subject of the newspaper article. If you want to read the Complaint of the only lawsuit on file so far, here is the PDF. Gulfport attorney Joe Sam Owen is defending Colson. Sheryl Bey with Baker Donelson in Jackson filed the lawsuit. 

Colson is a Gulfport native who attended high school at St. Stanislaus in By St. Louis and college and law school at LSU. He has been active in the LSU alumni association and is well known on the Coast. For Colson's sake, I hope that the allegations are not true. A lawyer stealing client funds usually means automatic disbarment. It would aslo be another black eye for the legal profession in Mississippi.