Letters Indicate Law Firm Knew of Client’s Violations
The local office of the nationally prominent Rogers & Wells law firm apparently knew of ongoing violations of state and federal securities laws at American Principals Holdings in mid-1983--at least nine months before the Del Mar-based real estate investment firm collapsed, according to documents obtained Thursday by The Times.
In a July 12, 1983, letter to American Principals general counsel Tom Scheuneman, Rogers & Wells attorney Don Augustine explained that his firm withdrew as the investment firm’s law firm believing that there had been “previous and ongoing violations of federal and state securities laws. . . . “
Nine months after that letter was written, on April 12, 1984, Scheuneman held an unusual press conference in which he disclosed “financial and operating irregularities” at American Principals.
Neither Augustine nor Scheuneman could be reached for comment Thursday.
American Principals collapsed amid charges of fraud, mismanagement and commingling of investor funds. The company raised about $90 million from approximately 3,000 investors between 1977 and March, 1984. Its highly leveraged managed assets have been valued at about $250 million.
In a June 3, 1983, letter from Augustine to Scheuneman, Augustine asked that American Principals settle its legal fee to Rogers & Wells by paying $139,739 of the more than $228,000 in delinquent and disputed fees.
Augustine advised Scheuneman that American Principals could settle the fee dispute through arbitration but warned that “in such case, I would suggest you review what might happen to the attorney-client privilege which you now have.”
Scheuneman, apparently taking Augustine’s warning as a threat, wrote back on June 8, “I’d be fascinated to know . . . precisely what you’re driving at with that implication.”
Rogers & Wells worked in various capacities for American Principals from July, 1982, until it resigned the account in February, 1983, according to San Diego partner-in-charge Mitchell Lathrop.
Lathrop on Thursday said that the law firm tried to investigate American Principals’ activities “but never received answers. We were never able to complete a single transaction for them.”
Described as Warning
He said that Augustine’s claim about American Principals’ losing its attorney-client privilege was a legitimate warning, not a threat.
Rogers & Wells would have had to sue American Principals for the back fees, said Lathrop. That, he added, would have sparked a lawsuit by American Principals, and “if a client sues an attorney, the attorney-client privilege is waived,” he said.
American Principals is now selling off its remaining assets--about 35 limited partnerships--under the direction of federal court-appointed receiver Ashley Orr.
The Rogers & Wells letters obtained Thursday follow by two months the law firm’s agreement to pay up to $40 million to settle more than 300 lawsuits brought by former investors in J. David & Co., the fraudulent La Jolla investment firm.
Rogers & Wells represented J. David in several matters; the settlement was the largest ever by a U.S. law firm.
Interestingly, it was Augustine who advised company founder J. David (Jerry) Dominelli that he was violating securities regulations by not registering with the government J. David’s foreign currency trading activity, according to documents previously obtained by The Times.
Assurances Accepted
However, it was also Augustine who successfully argued to state authorities that J. David’s accounts were not securities and, therefore, were exempt from registration. The state relied on those assurances when it dropped its investigation of J. David.
At the time of American Principals’ collapse--two months after J. David was forced into bankruptcy--Scheuneman said the irregularities surfaced after an outside attorney was hired in January, 1984, to conduct an internal investigation. That investigation revealed that investors funds were commingled and used for purposes other than those stated in American Principals’ offering circulars.
The 10-page self-disclosure letter written by Scheuneman on April 12, 1984, and sent to American Principals investors, was also distributed to the IRS, the SEC, the U.S. attorney’s office in San Diego, the San Diego district attorney, the California Department of Corporations and the state Franchise Tax Board.
The SEC later sued American Principals, as did scores of investors, whose action has since been consolidated into a single class action lawsuit. Rogers & Wells is a named defendant in that lawsuit.
An amended class-action complaint was filed in federal court Thursday.
The U.S. attorney’s office is still investigating the company.
American Principals’ largest assets, Private Ledger, was taken over by Crown Life Insurance Co. of Toronto, Canada, in return for money American Principals had borrowed from Crown in 1983.
