Law Firm Was Aware of Suspect J. David Actions
The law firm that represented the fraud-ridden J. David & Co. investment firm recommended in early 1983--before most of the $200 million invested with the firm poured in--that J. David “cease trading” and offer to refund clients’ money because the company was selling unregistered, and therefore illegal, securities.
But the suggestion from top officials of Rogers & Wells in New York and London apparently was never followed by the firm’s San Diego branch. In fact, members of Rogers & Wells’ San Diego office continued to represent J. David and later convinced state regulators that J. David’s foreign currency trading in a so-called interbank fund did not have to be registered as a security.
In an internal Rogers & Wells memo filed in San Diego Superior Court on Tuesday, Joni Lynett Nelson, partner-in-charge of the law firm’s London office, wrote that, if J. David’s illegal trading were not halted, Rogers & Wells “cannot continue to represent” the La Jolla investment firm.
She suggested that J. David send out “rescission-offer letters now, while the investors are still happy because they’ve made money.”
Trading could be resumed, Nelson said, after reaching settlements with the “necessary California and U.S. regulatory departments.”
Nelson also wrote that no one in Rogers & Wells’ San Diego office had the “experience required to deal with a client of this nature.” She added that Norman Nouskajian, Rogers & Wells’ lead attorney for J. David, had “no background in corporate, securities or financial services law.”
Her memo includes an observation that J. David had “no financial controls on the operation or safeguard against commingling.” In addition, Nelson wrote that British authorities rejected J. David’s attempt to be listed on the London International Financial Futures Exchange because officials there “suspected a Mafia front.”
Nelson’s memo was filed by attorneys representing Prudential-Bache Securities, the stock brokerage company that is being sued by former J. David investors.
The lawsuits allege that Prudential-Bache, which once employed J. David (Jerry) Dominelli, “assisted” the J. David fraud by failing to publicly dispute Dominelli’s purported profitable trading record with them. Dominelli founded and ran J. David & Co.
A settlement involving 334 plaintiffs has been proposed with Prudential-Bache and two other so-called “third-party” professional firms once connected to J. David.
A hearing on the proposed settlement is scheduled for 9:30 this morning.
Terms of the settlement include the eventual payment of $3.9 million. But the agreement stipulates that the payment will be decreased by judgments that may later be won against other third parties, most notably Rogers & Wells.
Rogers & Wells opposes the settlement because the terms do not qualify as a “good-faith settlement,” according to Dennis Kinnaird, the attorney representing Rogers & Wells.
Prudential-Bache attorneys argued in their filing that Rogers & Wells’ opposition is a “desperate attempt by a desperate defendant to try to . . . keep as many deep-pocket defendants in the cases as possible.” The “deep pockets” in Rogers & Wells’ case is represented by the law firm’s $60 million to $70 million in insurance coverage, according to sources close to the case.
Based on various documents--some filed in court, others obtained by The Times--it seems clear that if government authorities had known as much about J. David’s financial irregularities in early 1983 as Rogers & Wells did, they could have prevented the Ponzi-type scheme from mushrooming. Most of the $200 million that was invested with J. David came in during 1983.
For example, Nelson’s memo, dated Jan. 21, 1983, followed a meeting of Rogers & Wells officials in London, at which they concluded that J. David’s interbank activity should be registered as a security.
Dominelli was told of that determination on Feb. 2, 1983, in a four-page memo from Rogers & Wells attorney Don Augustine.
But the next day, Augustine met with the corporate counsel for the state Department of Corporations to discuss the state’s investigation of J. David, and argued that Dominelli’s interbank activity did not constitute a security. His position was that each of J. David’s clients had “individual discretionary accounts,” with each investor instructing Dominelli how to invest the funds. In truth, the investors’ funds were pooled.
The state relied on Augustine’s representation when it decided to drop its investigation of J. David. As they solicited investors for J. David, employees of the La Jolla investment firm would later refer to the “clean bill of health” issued by state regulators.
Rogers & Wells didn’t officially resign from J. David’s interbank until June 2, 1983, although it continued to represent the firm in other areas and Nouskajian continued to work extensively on interbank activity, according to former J. David executives.
The Securities & Exchange Commission’s enforcement division has shown a “keen interest” in Rogers & Wells’ work for J. David, according to a source familiar with the case.
Included in a potential examination, said the source, would be a “2E” proceeding, a controversial examination that could bar or suspend professionals from practicing before the SEC if they are found, among other things, to have violated federal securities laws.