Lawyer disciplined for involvement in investment scheme

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The SEC is not “another jurisdiction” for the purpose of reciprocal discipline

On June 27, the South Carolina Supreme Court suspended a lawyer for eighteen months based on Securities and Exchange Commission (SEC) charges*. While this case has nothing to do with dirt law, I bring it to the attention of South Carolina lawyers because they often find themselves in the position of forming and representing limited liability companies (LLCs).

SECThe South Carolina lawyer, John Kern, helped form and served as general counsel for Ventures Trust II LLC and Face-Off Acquisitions, LLC, two of the LLCs used in a fraudulent investment scheme perpetrated by Craig Berkman. Berkman fraudulently raised around $13.2 million from approximately 120 investors by selling memberships in the LLCs he controlled. Unfortunately for these investors, Berkman was subject to a $23 million judgment in Oregon, in connection with another fraudulent investment scheme, and was also facing bankruptcy in Florida. Berkman began to use some of the funds from his new ventures to pay his bankruptcy obligations in Florida, and the SEC got involved.

In 2014, Kern signed an offer of settlement and consented to an entry by the SEC of an order imposing sanctions against him. SEC findings included that (1) Kern willfully aided and abetted the fraudulent conduct of Berkman; (2) Kern was ordered to disgorge fees of around $235,000 and to pay a fine of $100,000; (3) Kern was barred from associating with brokers and investment advisors; and (4) Kern consented to being denied the privilege of practicing law before the SEC.

South Carolina’s Office of Disciplinary Counsel (ODC) filed formal charges in 2016 and argued that the SEC is “another jurisdiction” under the Rule 29(e), which deals with conclusiveness of misconduct adjudications against lawyers in other jurisdictions. The Supreme Court found that the SEC is not a jurisdiction for the purposes of reciprocal discipline, but found that Kern was guilty of providing false information in statements to others.

Kern falsely assured Berkman’s bankruptcy attorney that none of the funds used to settle Berkman’s bankruptcy obligations were derived from Ventures II. Kern also issued a false memorandum to investors in Ventures II to the effect that their funds were secure and were not part of a Ponzi scheme orchestrated by Berkman.

Kern’s primary defense in his South Carolina disciplinary proceedings was that he was totally unaware of Berkman’s malfeasance, and that as soon as he became aware, he resigned as general counsel for the LLCs and encouraged a principal in the companies to act as a whistleblower to the SEC. Kern argued that he had no dishonest or selfish motive, did not profit from his misconduct and showed remorse for the harm caused to investors. The Court said that it took these mitigating factors into consideration in imposing sanctions.

Professor John Freeman, who taught ethics to many of us, was qualified as an expert in the case and testified that when a lawyer acts as general counsel for a private securities company, he or she must exercise due diligence to ensure money is invested for the represented purposes.

Despite the fact that the SEC is not considered by the South Carolina Supreme Court to be a jurisdiction for the purposes of reciprocal jurisdiction against attorneys, this attorney was suspended for eighteen months because of his conduct that led to charges before the SEC.

The lesson to us is clear. Be careful in forming and representing LLCs and use proper due diligence in statements made to the investors in those entities. Lacking a dishonest motive is not enough to protect lawyers from discipline.

*In the Matter of Kern, South Carolina Supreme Court Opinion 27820 (June 27, 2018)

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Criminal defense lawyer’s advertising debacle may be instructive for us

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Title insurance companies in South Carolina persistently encourage attorney agents to market their firms. We offer seminars on social media marketing. We invite experts to the table to explain the latest and greatest marketing tactics. I trust all the title companies also explain the professional responsibility rules that relate to marketing and bring in professionals to assist with compliance. The rules are detailed and specific, and any South Carolina lawyer who dips a toe into that arena should get the education needed to stay out of trouble. The South Carolina Supreme Court and the Office of Disciplinary Counsel (ODC) are serious about the rules.

The criminal defense lawyer who received a public reprimand in last month’s disciplinary case, In the Matter of Lord,* apparently did not take the safe approach.

fingers crossed realtor

To market his legal services, Lord sent direct mail solicitation letters to potential clients who received traffic tickets. One of those clients filed a complaint with the ODC. Lord made several mistakes in those letters. He used the tagline “attorneys at law” in his letterhead although he was a solo practitioner.

He touted “28 years’ experience both as a lawyer and former law enforcement officer” although he had been a lawyer and former law enforcement officer for only 16 years. His telephone number was (844) FIXTICKET, which may have created unjustified expectations or an implication that he can receive results by unethical means. Further, the Court held that the phoneword is also an improper moniker that implies an ability to obtain a certain result.

The letter also referred to the lawyer’s website which claimed he has “unique insight into the South Carolina traffic laws that many other lawyers simply do not have.” Lord admitted that this claim cannot be factually substantiated. Finally, the letter indicated Lord learned of the traffic tickets from “court records”. The court held that this source identification as not sufficiently specific.

The letter also referred to the lawyer’s profile on www.avvo.com (“AVVO”), a legal marketing website. AVVO, according to the Court, creates profiles for attorneys without their consent, knowledge or participation, then invites them to “claim” their profiles and participate in a variety of AVVO marketing activities, including “ratings”, peer endorsements, client testimonials and online contact with prospective clients.  Lord claimed his AVVO profile and used the website to market his legal services, making him responsible for the content.

A prior disciplinary investigation revealed a negative review on AVVO to which respondent replied. In the response, Lord revealed information relating to the representation of the complaining client and said: “Do me a favor. The next time you are arrested, call a public defender and see what happens after you sit in jail for 3 months they might get around to sending you a form letter. Good luck.” He was issued a confidential admonition in 2013 as a result of this exchange. Lord failed to remove the offending post after receiving the admonition.

He was also required to add a “clear and conspicuous” disclosure regarding endorsements, testimonials and reports of past results. He added this disclosure, but the terms “clear and conspicuous” were not defined in the rules until 2014, and Lord failed to revise the disclosure when that rule changed.

The lawyer advertising rules are not always intuitive. But they are always taken seriously by the ODC and the Supreme Court. If dirt lawyers choose to market their services, as the title companies believe they should, they should make every effort to follow the rules. Your title insurance company will help. Ask!

* South Carolina Supreme Court Opinion 27741 (November 15, 2017)

When Do I Have to Turn My Fellow Lawyer In?

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We have a hot-off-the-presses South Carolina Ethics Advisory Opinion (16-04, July 18, 2016) in which a lawyer asks when opposing counsel must be reported to the Office of Disciplinary Counsel (ODC). The opinion only relates to dirt in that it revolves around a foreclosure matter, but all of us as attorneys may need guidance in these extremely difficult situations from time to time.

The facts are as clear as mud, but my colleague and former foreclosure lawyer, Jennifer Rubin, has attempted to decipher them for us. It appears that Lawyer A (the lawyer who is raising the question) represents a lender in the context of an ongoing mortgage foreclosure sales action. We’re guessing here, but it sounds as if the lender needs to unwind the foreclosure sale, probably because of some agreement or dispute with the borrower. Lawyer B represents the purchaser at the sale. Lawyer B’s client does not want the sale to be unwound, and Lawyer B argues that his or her client enjoys a bona fide purchaser status. Lawyer A argues that Lawyer B purportedly knew of a potential defect prior to paying the balance of the purchase price and acquiring title but failed to reveal that information to the court. In other words, Lawyer B knew his client was not a bona fide purchaser.

whistle blowerLawyer A believes Lawyer B’s conduct has damaged the lender financially and also rises to the level of misconduct that must be reported to the ODC. The question becomes whether Lawyer A must report Lawyer B’s conduct to the ODC immediately or whether the report can be made at the conclusion of the litigation or appeal.

The Ethics Advisory Committee first reviews Rule of Professional Conduct 8.3 which requires a Lawyer to report a fellow lawyer of a violation of the Rules which raises a substantial question of the lawyer’s honestly, trustworthiness or fitness to practice law. Rule 8.3 requires actual knowledge, which implies more than a suspicion of misconduct. But judgment is required of the reporting lawyer. Comment 3 gives guidance by limiting the reporting obligation to “those offenses that a self-regulating profession must vigorously endeavor to prevent.”

Why do we have to report each other? The Committee points to the preamble of Rule 8.3 which states that the legal profession is largely self-governing and that “the legal profession’s relative autonomy carries with it a responsibility to assure that its regulations are conceived in the public interest and not in furtherance of  parochial or self-interested concerns of the bar.”

So, assuming this lawyer’s conduct rises to the level that must be reported, when must the report be made? A partial answer is that the rule is silent as to timing, but the Committee points to prevailing opinions around the country that reporting should be made “promptly”. The Louisiana Supreme Court has said *, “The need for prompt reporting flows from the need to safeguard the public and the profession against future wrongdoing by the offending lawyer.”

The Committee said it believes it is appropriate for the lawyer to consider any potential adverse impact to the client in determining the timing of the report against another lawyer. And because the Rule is silent as to timing, the Committee opined that Lawyer A may wait until the conclusion of the matter if Lawyer A determines that immediate reporting may hurt the client, but the misconduct should be reported promptly at the conclusion of the litigation or appeal.

*In re Rielmann, 802 So.2d. 1239 (Louisiana, 2005)