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Mills v. Butler Snow LLP

United States District Court, S.D. Mississippi.

September 12, 2019

Alysson Mills, Plaintiff,
v.
Butler Snow LLP, et al., Defendants.

          Before Carlton W. Reeves, District Judge .

          ORDER

          Carlton W. Reeves, United States District Judge

         Defendants Butler Snow LLP, Butler Snow Advisory Services LLC, and Matt Thornton have moved to send this case to ar- bitration. For the reasons that follow, the motion is denied.

         I. Factual and Procedural History

         From at least 2010 until April 2018, Lamar Adams operated timber investment companies called Madison Timber Com- pany LLC and Madison Timber Properties LLC. He told in- vestors they were purchasing shares of timber tracts that would be harvested and sold to lumber mills at a significant profit. The demand for lumber was so great, he said, he could guarantee investors a fixed rate of return in excess of 10%. In- vestors believed him. They collectively gave him hundreds of millions of dollars.

         Adams was lying. He had, with the help of others, faked eve- rything about the scheme. There were no timber deeds, tracts of land, or lumber mills. He was actually using new investors' money to pay old investors-a classic Ponzi scheme. It worked as long as Adams and his associates could continue to bring in new money.

         The scheme collapsed in April 2018. Adams turned himself in to the United States Attorney's Office in Jackson, Mississippi and quickly pleaded guilty to wire fraud. He is now serving a 19.5-year sentence in federal prison. The sentence reflects the significance of the fraud; the criminal proceeding estab- lished that Adams' victims lost approximately $85 million.

         When the Ponzi scheme collapsed, the U.S. Securities and Ex- change Commission asked this Court to appoint a receiver to take charge of Adams' companies and provide some measure of financial relief to his victims. The Court appointed Alysson Mills to be that receiver. To date, she has sold Adams' assets, negotiated settlements with Adams' enablers, and filed law- suits against persons and entities that contributed to the fraud.

         This is one of those lawsuits.

         In this action, the receiver alleges that the Butler Snow and Baker Donelson law firms aided and abetted Adams in carrying out the Ponzi scheme.[1] These firms “lent their influ- ence, their professional expertise, and even their clients to Ad- ams, ” the complaint alleges. “They made a fraudulent enter- prise a fraternity. Defendants contributed to the success of the Madison Timber Ponzi scheme, and therefore to the debts of the Receivership Estate to investors. By this complaint the Re- ceiver seeks to hold Defendants accountable.” What follows will focus on the receiver's allegations against Butler Snow and its affiliates. These allegations are disputed, but must be taken as true at this stage of the case.

         In 2009, Adams hired Butler Snow to draft a private place- ment memorandum (PPM) for Madison Timber Fund LLC. The PPM explained to potential investors that Adams used his “network of contacts cultivated over 20 years” to broker deals between landowners and “various timber mills.” It claimed that Adams had a “competitive advantage” and “highly competitive pricing strategy.” The PPM also warned investors that timber prices “experience significant variation and have been historically volatile, ” and cautioned that suc- cess would be “substantially dependent” on Adams.

         It is not clear whether Butler Snow knew in 2009 that Adams was running a Ponzi scheme. The firm did know, however, that people who helped Adams might need to register as a broker. That year, according to a note in the firm's Madison Timber file, senior partner Don Cannada researched Missis- sippi law to learn the various penalties one could face for profiting as an unlicensed real estate broker. See Miss. Code Ann. § 73-35-31. He observed that the law set forth a “very broad definition of what a broker is.” He somehow concluded that Mississippi law “[s]ays you can't pay an unlicensed bro- ker, but doesn't provide any penalty if you do so.” The PPM did not attract any formal investors. It succeeded in a different way. In lieu of buying into the fund, receptive in- vestors simply entered into “joint ventures” with Madison Timber. The scheme otherwise worked the same-$100, 000 and $200, 000 investments came in, while “consistent, uniform returns of 12% to 14%” went out. The fraudulent enterprise continued to grow.

         The next phase of Butler Snow's work with Adams kicked off in 2012. That year, Adams hired Butler Snow's new subsidi- ary, Butler Snow Advisory Services, to expand his “business” and raise $30-50 million. The complaint says that Matt Thornton, the CEO of Butler Snow Advisory Services, “alerted Don Cannada and Barry Cannada, a senior partner and the Vice Chair of Butler Snow, respectively, to the pro- spects of this new business.” Meetings were held; contracts were negotiated.

         The parties ultimately agreed that Butler Snow Advisory Ser- vices would pitch Adams' timber investments to wealthy peo- ple and institutions. In exchange, Adams would pay Butler Snow Advisory Services a $3, 500 monthly retainer, commis- sions for each completed transaction, a fund success fee (com- prised of half of the fund's management fees and a quarter of the fund's carried interest), expenses, and an administrative fee.

         The legal side of Butler Snow began to update the PPM while the “strategic advisors” at Butler Snow Advisory Services went to work. The advisors made a list of more than 30 poten- tial investors and refined their pitch. Their emails reveal a simple strategy: they knew that Adams had “a seemingly in- satiable appetite for cash, ” and they would find investors to give him that cash-profiting from the ensuing commissions and fees-until Adams “says ‘uncle.'”

         The receiver has some of Butler Snow Advisory Services' sales pitches. They are illuminating.

         Thornton told one potential mark that he could not share spe- cific information about the timber mills because Adams “has an extremely stringent NDA with his mill partners.” But that was a lie. There were no NDAs with mill partners; there were no mill partners at all. Thornton also engaged in obfuscation. He told another mark that Adams had “been vetted by several $1.5 billion family office(s) in Texas, encompassing a 75 day due diligence period [and] as you would imagine, Lamar passed with flying colors!” That conveniently omitted that the billion-dollar family offices had declined to invest with Ad- ams.

         Thornton kept the legal side of Butler Snow apprised of his progress. The complaint says he “often” copied Barry Can- nada on emails. Thornton also sent emails pressuring Butler Snow lawyers to work faster on Adams' legal needs. The law- yers did so and finished the updated PPM in 2013. As de- scribed earlier, investors continued to sign up through joint ventures instead of the fund. Butler Snow Advisory Services still received its commissions. Neither Thornton nor Butler Snow ever registered with the S.E.C.

         According to the complaint, Butler Snow's lawyers and sales- men “recklessly ignored numerous red flags.” They didn't call a landowner or check a title. They didn't call a mill. They told potential marks that in the event of a default, the investor could “simply file the [timber] deed, ” but never questioned why investors were told not to record the deed at the outset of the investment. The professionals at Butler Snow also ig- nored the red flag of the return: Adams promised “a con- sistent, uniform return of 12% to 14%, ” a rate of return una- vailable in the broader market and at odds with the PPM's express warning that timber prices were volatile.

         No one acted on these glaring red flags. Adams got new in- vestors to pay off the old investors, the salesmen at Butler Snow Advisory Services got their commissions, and the law- yers at Butler Snow were paid for their legal work.

         Adams and Butler Snow Advisory Services parted ways in December 2013. By then, Adams had realized that he could make more money if he hired one of Butler Snow Advisory Services' key salesmen, Mike Billings, without the framework and fees of the Advisory Services itself. So Adams directly hired Billings to help him defraud investors.[2] Adams also turned to the lawyers at Butler Snow for “regulatory” and “compliance” help with a real estate development company he was setting up.[3]

         The complaint says that by spring 2018, Butler Snow found itself in an unusual position. The firm was still sending in- voices to Adams-even after he turned himself in to the United States Attorney's Office. The firm simultaneously “purported to represent investors in their demands of Madi- son Timber, ” the receiver alleges. And the firm “purported to represent Billings-whose interests clearly were adverse to investors, ” according to the complaint.

         The receiver filed this action in December 2018. She claims that Butler Snow, Butler Snow Advisory Services, and Thornton are liable to the receivership estate for civil conspir- acy, aiding and abetting, negligence, gross negligence, and recklessness. She alleges that Butler Snow Advisory Services and Thornton violated Mississippi's fraudulent transfer act and Mississippi's prohibition on organized fraud enterprises (civil RICO). She adds that the Butler Snow law firm is liable to the ...


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