IN THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF MISSISSIPPI NORTHERN ... ·...

IN THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF MISSISSIPPI

NORTHERN DIVISION

ALYSSON MILLS, IN HER CAPACITY AS RECEIVER FOR ARTHUR LAMAR ADAMS AND MADISON TIMBER PROPERTIES, LLC,

Plaintiff, v.

BUTLER SNOW LLP; BUTLER SNOW ADVISORY SERVICES, LLC; MATT THORNTON; BAKER, DONELSON, BEARMAN, CALDWELL & BERKOWITZ PC; ALEXANDER SEAWRIGHT, LLC; BRENT ALEXANDER; and JON SEAWRIGHT,

Defendants.

Case No. 3:18-cv-00866-CWR-FKB

Hon. Carlton W. Reeves

ORAL ARGUMENT REQUESTED

REPLY BRIEF IN SUPPORT OF BAKER, DONELSON, BEARMAN,

CALDWELL & BERKOWITZ, PC’S MOTION TO DISMISS THE COMPLAINT

Michael W. Ulmer (MSB #5760) James J. Crongeyer, Jr. (MSB #10536) WATKINS & EAGER PLLC 400 East Capitol Street, Suite 300 (39201) Post Office Box 650 Jackson, MS 39205 Tel.: (601) 965-1900 Fax: (601) 965-1901 Email: [email protected]

Craig D. Singer (pro hac vice) Benjamin W. Graham (pro hac vice) WILLIAMS & CONNOLLY LLP 725 Twelfth Street, N.W. Washington, DC 20005 Tel.: (202) 434-5000 Fax: (202) 434-5029 Email: [email protected]

Counsel for Defendant Baker, Donelson, Bearman, Caldwell & Berkowitz, PC

Case 3:18-cv-00866-CWR-FKB Document 36 Filed 03/14/19 Page 1 of 22

TABLE OF CONTENTS

TABLE OF AUTHORITIES .......................................................................................................... ii

INTRODUCTION ...........................................................................................................................1

ARGUMENT ...................................................................................................................................2

I. Baker Donelson Is Not Responsible for the Actions of Alexander and Seawright. ............2

A. The Complaint Does Not State an “Actual Authority” Claim. ................................2

B. The Complaint Does Not State an “Apparent Authority” Claim. ............................3

1. There is no allegation that Adams was misled about the scope of Alexander’s and Seawright’s authority. .......................................................3

2. Baker Donelson did not give Adams a misleading impression that Alexander and Seawright had authority to manage timber investments in the firm’s name. ...................................................................4

3. The Receiver’s cited authority supports dismissal.......................................7

C. The Complaint Does Not State a Claim for Negligent Supervision and Retention (Count VIII). ............................................................................................8

II. The Complaint’s Causes of Action Do Not State a Claim for Relief. ...............................10

A. The Complaint Does Not State a Claim for Civil Conspiracy (Count I). ..............10

B. The Complaint Does Not State a Claim for Aiding and Abetting (Count II). .......12

C. The Complaint Does Not State a Claim for “Recklessness,” “Gross Negligence,” or “Negligence” (Count III). ............................................................12

III. In Pari Delicto Bars the Receiver’s Claims. ......................................................................13

IV. The Complaint Should Be Dismissed with Prejudice. .......................................................15


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TABLE OF AUTHORITIES

Federal Cases: Page(s)

Amato v. United States, 549 F. Supp. 863 (D.N.J. 1982) ...............................................................................................13

Ashcroft v. Iqbal, 556 U.S. 662 (2009) .................................................................................................................10

Belmont v. MB Inv. Partners, Inc., 708 F.3d 470 (3d Cir. 2013).......................................................................................................9

Chemtex, LLC v. St. Anthony Enterprises, Inc., 490 F. Supp. 2d 536 (S.D.N.Y. 2007)......................................................................................10

CSX Transp., Inc. v. Recovery Express, Inc., 415 F. Supp. 2d 6 (D. Mass. 2006) ............................................................................................6

Cuyler v. United States, 362 F.3d 949 (7th Cir. 2004) ...................................................................................................13

Hays v. Pearlman, 2010 WL 4510956 (D.S.C. Nov. 2, 2010) ...............................................................................15

Honig v. Kornfeld, 339 F. Supp. 3d 1323 (S.D. Fla. 2018) ....................................................................................10

I. Meyer Pincus & Assocs., P.C. v. Oppenheimer & Co., 936 F.2d 759 (2d Cir. 1991).......................................................................................................5

In re Int’l Mgmt. Assocs., LLC, 563 B.R. 393 (Bankr. N.D. Ga. 2017) .....................................................................................10

Jacquez v. Compass Bank, 2016 WL 3017418 (W.D. Tex. May 24, 2016) .....................................................................6, 9

Janvey v. Adams & Reese, LLP, 2013 WL 12320921 (N.D. Tex. Sept. 11, 2013)......................................................................14

Janvey v. Democratic Senatorial Campaign Comm., Inc., 712 F.3d 185 (5th Cir. 2013) ...................................................................................................15

Janvey v. Proskauer Rose LLP, 2015 WL 11121540 (N.D. Tex. June 23, 2015) ..................................................................9, 11

Jones v. Wells Fargo Bank, N.A., 666 F.3d 955 (5th Cir. 2012) .......................................................................................13, 14, 15


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Letizia v. Facebook Inc., 267 F. Supp. 3d 1235 (N.D. Cal. 2017) .....................................................................................4

Litson-Gruenber v. JPMorgan Chase & Co., 2009 WL 4884426 (N.D. Tex. Dec. 16, 2009) ........................................................................10

Neilson v. Union Bank of California, N.A., 2003 WL 27374137 (C.D. Cal. Feb. 20, 2003)........................................................................10

Rosner v. Bank of China, 2008 WL 5416380 (S.D.N.Y. Dec. 18, 2008) .........................................................................10

Tichenor v. Roman Catholic Church of Archdiocese of New Orleans, 32 F.3d 953 (5th Cir. 1994) .......................................................................................................9

State Cases:

Aetna Ins. Co. v. Robertson, 94 So. 7 (Miss. 1922) ...............................................................................................................11

Akin, Gump, Strauss, Hauer and Feld, L.L.P. v. E–Court, Inc., 2003 WL 21025030 (Tex.App.—Austin 2003) .......................................................................13

Akins v. Golden Triangle Planning & Dev. Dist., Inc., 34 So. 3d 575 (Miss. 2010) ........................................................................................................2

Andrew Jackson Life Ins. Co. v. Williams, 566 So. 2d 1172 (Miss. 1990) ....................................................................................................8

Baker Donelson Bearman Caldwell & Berkowitz, P.C. v. Seay, 42 So. 3d 474 (Miss. 2010) ................................................................................................2, 8, 9

Bell v. W. Harrison Cty. Dist., 523 So. 2d 1031 (Miss. 1988) ..................................................................................................12

Bradley v. Kelley Bros. Contractors, 117 So. 3d 331 (Miss. Ct. App. 2013) .....................................................................................10

Cashin v. Murphy, 96 So. 747 (Miss. 1923) ...........................................................................................................14

Christian Methodist Episcopal Church v. S & S Construction Co., Inc., 615 So.2d 568 (Miss. 1993) ...................................................................................................5, 8

Commercial Bank v. Hearn, 923 So.2d 202 (Miss. 2006) ...................................................................................................2, 3


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Eaton v. Porter, 645 So. 2d 1323 (Miss. 1994) ................................................................................................4, 7

Guardian Consumer Fin. Corp. v. Langdeau, 329 S.W.2d 926 (Tex.Civ.App.—Austin 1959, no writ) .........................................................14

Gulledge v. Shaw, 880 So. 2d 288 (Miss. 2004) ......................................................................................................2

Harris v. Town of Woodville, 196 So. 3d 1121 (Miss. Ct. App. 2016) ...................................................................................11

Holliday v. Pizza Inn, Inc., 659 So. 2d 860 (Miss. 1995) ......................................................................................................2

Holmes v. Campbell Properties, Inc., 47 So. 3d 721 (Miss. Ct. App. 2010) .........................................................................................9

Oden v. Pepsi Cola Bottling Co., 621 So.2d 953 (Ala. 1993) .......................................................................................................13

Parmenter v. J & B Enterprises, Inc., 99 So. 3d 207 (Miss. Ct. App. 2012) .........................................................................................9

Patriot Commercial Leasing Co. v. Jerry Enis Motors, Inc., 928 So. 2d 856 (Miss. 2006) ......................................................................................................5

Raclaw v. Fay, Conmy and Co., 668 N.E.2d 114 (Ill. App. 1996) ................................................................................................6

United Residential Properties, L.P. v. Theis, 378 S.W.3d 552 (Tex. App. 2012) .............................................................................................6

Other Authorities:

Miss. Code § 79-10-67 .....................................................................................................................2

Restatement (2d) Torts § 876(b) ....................................................................................................12


INTRODUCTION

The Receiver’s Opposition makes two fundamental errors which, when corrected, doom

all of her claims against Baker Donelson. First, businesses are not automatically responsible for

everything their employees do when they are not working, and law firms are no exception. That

principle disposes of the Receiver’s claims because the Complaint’s allegations show that

Alexander and Seawright ran their personal LLC separately from the law firm. Baker Donelson

did not authorize, endorse, or in any way benefit from the LLC. Incidental use of firm facilities,

as happens in every business, does not transform an individual act into an act of the law firm. It

is telling that the Opposition, like the Complaint, depends on characterizing the Baker Donelson

website as though it advertised Alexander and Seawright as investment managers or brokers,

when anyone reading it can see that it does no such thing.

Second, the Receiver persistently writes as though her claims are brought on behalf of

investors, but that is contrary both to the law and to this Court’s appointment order. The

Receiver cannot bring investors’ claims. She stands in the shoes of Lamar Adams and the

fraudulent entity he controlled, Madison Timber. This means there can be no “apparent

authority” claim unless Adams reasonably relied on a misleading impression that Alexander and

Seawright were acting for Baker Donelson – which is neither alleged nor plausible. The

Receiver’s standing also makes her subject to the defense of in pari delicto – which, contrary to

the arguments in her Opposition, applies to receivers bringing tort claims.

These central issues are sufficient to warrant dismissal, but the Receiver also makes other

claim-specific errors. For example, a claim of conspiracy or aiding and abetting (if it exists in

Mississippi at all) requires an allegation of actual knowledge, not negligence in missing “red

flags.” And a professional firm has no duty in “negligence,” or “recklessness” (however

allegedly “gross” it may be), for failing to detect another’s wrongdoing in the absence of a client


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relationship. Plaintiffs cannot create a duty of care to the entire world of non-clients by labeling

the claim “ordinary” negligence. The Complaint should be dismissed with prejudice.

ARGUMENT

I. Baker Donelson Is Not Responsible for the Actions of Alexander and Seawright.

A. The Complaint Does Not State an “Actual Authority” Claim.

An employer is not responsible for the conduct of an employee who “deviates or departs

from his work to accomplish some purpose of his own not connected with his employment[.]”

Baker Donelson Bearman Caldwell & Berkowitz, P.C. v. Seay, 42 So. 3d 474, 489 (Miss. 2010)

(quotation omitted). The Receiver suggests a crabbed reading of this rule that would cover only

“romantic affairs at their workplace,” Opp’n 10, but that is only an example of the general

principle that vicarious liability does not extend to employees’ acts outside “the scope of their

employment or of their apparent authority to act for the corporation.” Miss. Code § 79-10-67.

Of particular importance here, employees are routinely held to be acting outside the scope

of their employment where the employer received “no benefit” from the employees’ conduct.

E.g., Akins v. Golden Triangle Planning & Dev. Dist., Inc., 34 So. 3d 575, 580 (Miss. 2010)

(citing Commercial Bank v. Hearn, 923 So.2d 202 (Miss. 2006)). That is true even if the

employees were performing the precise type of activities for which they were hired. Gulledge v.

Shaw, 880 So. 2d 288, 296 (Miss. 2004) (no liability where notary public employed by the bank

“notariz[ed] a forged document” because it “was not in the furtherance of the Bank’s business—

rather, it was a personal act”). The rule extends to tortious conduct performed on the employer’s

premises. Holliday v. Pizza Inn, Inc., 659 So. 2d 860, 865 (Miss. 1995) (employee’s party at her

office “in no way furthered or was meant to further the business of [her] employers”). An act is

outside the scope of employment if it is not within the employee’s formal mandate, even where

the employer “encouraged [the employee’s] participation in [those new] activities and benefitted


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therefrom[.]” Hearn, 923 So. 2d at 208–09 (no liability where bank employee was soliciting

charitable donations for an entity other than the bank).

Here, it is undisputed that Baker Donelson received no benefit from Alexander’s and

Seawright’s investment activities. Certainly there is no allegation that the firm sent bills to

anyone, or received anything, for Alexander’s and Seawright’s work on the Timber Fund. Yet

the Receiver persists in arguing that managing the Timber Fund was within the scope of

Alexander’s and Seawright’s law-firm employment. This argument is based solely on a

continued misreading of their firm biographies. The Receiver states that Baker Donelson

“employ[s] Alexander as a ‘Senior Public Policy Advisor’ and a ‘Broker-Dealer/Investment

Advisor.’” Opp’n 7 (quoting Doc. 29-1 at 4). In fact, the website shows that Alexander is a

Senior Public Policy Advisor, Doc. 29-1 at 1, and at the bottom of the profile, it identifies him as

part of the firm’s “Broker-Dealer/Investment Advisor” practice area. Id. at 4. That is because

some of Baker Donelson’s clients are brokers – not because Alexander is one. The Receiver

similarly argues that Seawright is part of the firm’s “Securities” practice. Opp’n 7–8 (quoting

Doc. 29-2 at 5). Again, that means Seawright does legal work for clients in the securities

industry, not that he is employed as a securities dealer. Seawright is also affiliated with the

“Health Systems/Hospitals” practice, but that does not mean that Baker Donelson employs him

as a medical doctor.

B. The Complaint Does Not State an “Apparent Authority” Claim.

1. There is no allegation that Adams was misled about the scope of Alexander’s and Seawright’s authority.

The Receiver concedes that “the key” to a claim of apparent authority “is how particular

third parties perceived the actions of the agents.” Opp’n 6 (quotation and modification omitted).

Those “particular third parties” are Adams and Madison Timber, in whose shoes the Receiver


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stands. No one else’s “perception” of Alexander’s and Seawright’s authority is relevant for

purposes of this claim. See Eaton v. Porter, 645 So. 2d 1323, 1326 (Miss. 1994) (courts look to

“particular group of [plaintiffs] and how those third parties perceived that authority”). Yet the

Receiver continually repeats the investor-facing allegations in the Complaint, e.g., that

Alexander and Seawright conducted their timber business with firm clients, see Opp’n 7 (citing

Compl. ¶¶ 78, 84), which simply do not matter.

What matters is that the Complaint does not allege that Adams or his controlled

company, Madison Timber, perceived that Alexander or Seawright were acting on behalf of

Baker Donelson, much less that they relied to their detriment on any such misperception. That is

fatal to the Receiver’s claim of apparent authority.

It is not enough for the Receiver to suggest that Adams could have formed a mistaken

belief in Alexander’s and Seawright’s agency. See Opp’n 6–9. Even if this hypothesis were in

the Complaint (it is not), such speculation is a long way from alleging that Adams actually did

form such a belief. See Letizia v. Facebook Inc., 267 F. Supp. 3d 1235, 1243 (N.D. Cal. 2017)

(where reliance is an element, plaintiffs must plead they “actually relied”). The Receiver

evidently has no basis to make such an allegation, to say nothing of the even more outlandish

(but requisite) allegation that Adams did something in reliance on that misperception. Adams

ran a Ponzi scheme and stole the money Alexander Seawright Timber Fund I, LLC lent to him.

The Receiver cannot seriously allege that Adams accepted and stole that money because he

thought it came with the blessing of Baker Donelson.

2. Baker Donelson did not give Adams a misleading impression that Alexander and Seawright had authority to manage timber investments in the firm’s name.

Even if the Receiver somehow could allege a mistaken impression on Adams’s part, she

would have to show that Baker Donelson (as opposed to Alexander and Seawright) did


5

something to create that impression. Patriot Commercial Leasing Co. v. Jerry Enis Motors, Inc.,

928 So. 2d 856, 864 (Miss. 2006) (agent’s apparent authority extends only to that “authority that

the principal has by words or conduct held the alleged agent out as having”); Christian Methodist

Episcopal Church v. S & S Construction Co., Inc., 615 So.2d 568, 573 (Miss. 1993) (apparent

authority requires a “showing of . . . acts or conduct of the principal indicating the agent’s

authority”). The Receiver makes four unavailing arguments in support of her claim that Baker

Donelson fostered an impression that Alexander and Seawright were authorized to operate the

Timber Fund on behalf of the law firm.

First, the Receiver argues that the firm advertised that it “employed” Alexander as an

“Investment Advisor” and Seawright as a “Securities” practitioner. Opp’n 7. As discussed

above, that is not a fair reading of the firm website. Besides, there is no allegation that Adams

read it, or that he interpreted it in that unreasonable fashion.

Second, the Receiver argues that Alexander and Seawright used Baker Donelson’s office

space and facilities, for example by holding “closings” and other meetings there, Opp’n 7 (citing

Compl. ¶ 83); id. at 8 (citing Compl. ¶ 102), and sending emails from Seawright’s Baker

Donelson email address, Opp’n at 8 (citing Ex. A, Doc. 35-1).1 But courts routinely reject

1 The Court may consider documents partially quoted in a complaint. See Mem at n.4. That rule protects defendants by preventing the plaintiff (or receiver) from “evad[ing] a properly argued motion to dismiss simply because [she] has chosen not to attach” the full document on which she relies. I. Meyer Pincus & Assocs., P.C. v. Oppenheimer & Co., 936 F.2d 759, 762 (2d Cir. 1991); 5 Wright & Miller, Fed. Prac. & Pro. § 1327, at 489 & n.15 (when “plaintiff fails to introduce a pertinent document as part of his pleading, defendant may introduce the exhibit as part of his motion attacking the pleading”) (emphasis added). But it is something else altogether for the Receiver selectively to exclude certain parts of a document from the Complaint only to introduce them in opposition to a motion to dismiss.

In any event, the email makes clear that Alexander and Seawright were dealing at arm’s length with what they believed was a legitimate timber business, and not a co-conspirator in a Ponzi scheme. See Opp’n Ex. A, Doc. 35-1. Seawright even states he is “no timber expert,” suggesting that he is relying on Adams, not the other way around. Id. at 1.


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claims of apparent authority based on such superficial trappings. See, e.g., Jacquez v. Compass

Bank, 2016 WL 3017418, at *10 (W.D. Tex. May 24, 2016) (“authorizing someone to share

office space to conduct their independent business or authorizing someone to use an email

account” insufficient to create apparent authority); Raclaw v. Fay, Conmy and Co., 668 N.E.2d

114, 117 (Ill. App. 1996) (use of office space, telephones, mailing address, receptionist, and

stationery insufficient to create apparent authority); CSX Transp., Inc. v. Recovery Express, Inc.,

415 F. Supp. 2d 6, 12 (D. Mass. 2006) (“no reasonable person could conclude that apparent

authority was present” on the basis of an email address alone); United Residential Properties,

L.P. v. Theis, 378 S.W.3d 552, 564–65 (Tex. App. 2012) (collecting authority for the same).

Employees in businesses everywhere use their employers’ offices and facilities –

including their work email accounts – from time to time for personal endeavors. As the above

authorities show, that is not sufficient to create apparent authority. A different rule would

encourage employers to forbid these ordinary activities for fear of liability; and life in the

workplace could be profoundly different.

Third, the Receiver contends that Seawright “drafted subscription agreements” for

investments in Madison Timber. Opp’n 7. But this was obviously for the benefit of Alexander’s

and Seawright’s Timber Fund LLC and its investors, not Baker Donelson. In the email chain

attached to the Receiver’s Opposition, Adams refers to “your LLC” – showing that he knew

Seawright was acting for Alexander Seawright Timber Fund I, LLC. Opp’n Ex. A at 2

(emphasis added). Baker Donelson is not mentioned, and Adams cannot reasonably have formed

the impression from this exchange that the law firm was behind the Timber Fund.

Fourth, the Receiver alleges that members of Alexander’s and Seawright’s LLC included

Baker Donelson clients and that “[o]ther Baker Donelson shareholders . . . referred potential

investors to Alexander and Seawright.” Opp’n 7. But this allegation cuts against the Receiver’s


7

claim. The “referrals” were allegedly made to Alexander and Seawright for their Timber Fund,

not to Baker Donelson – and, again, there is no allegation that Baker Donelson performed any

legal work, billed the investors or anyone else for the Timber Fund’s work, or received any

benefit.

At bottom, the Receiver’s claim is that Alexander’s and Seawright’s professional

affiliation with Baker Donelson was beneficial to their investment business because of Baker

Donelson’s good reputation. But affiliation and reputation do not create liability. Any other rule

would effectively punish Baker Donelson for having a good reputation.

3. The Receiver’s cited authority supports dismissal.

The Opposition relies heavily on Eaton v. Porter, 645 So. 2d 1323 (Miss. 1994), which

demonstrates why the Receiver’s apparent authority claim lacks merit. The plaintiffs came to

Eaton Motors seeking repairs for their car. They met with Eaton, Sr. to negotiate the repair

services and saw Eaton Motors’ automotive repair equipment on site. Id. at 1327. Eaton, Sr.

signed the work authorization on behalf of Eaton Motors; the plaintiff addressed her payment to

Eaton Motors; and Eaton, Sr. cashed the check on behalf of Eaton Motors. Id. at 1324. Eaton

Motors later claimed that it was not in the business of repairing vehicles, and that Eaton, Sr. was

acting outside the scope of his authority in accepting the work. Id. at 1326. The court observed

that the plaintiffs were “not residents of the area and could not be expected to be familiar” with

limitations on the scope of “Eaton Motors’ . . . business operations.” Id. at 1327.

In this case, Adams and Madison Timber were not the victims of misleading conduct.

They were running a massive Ponzi scheme and concealing their fraud. They did business with

“Alexander Seawright Timber Fund I, LLC” not “Baker Donelson” (or “Baker, Sr.”). The

Complaint does not allege that Adams and Madison Timber sought to engage Baker Donelson’s

professional services. Adams and Madison Timber were seeking funding, which they received


8

through loans from Alexander’s and Seawright’s independent LLC. They signed no agreement

with Baker Donelson, nor made any payment to the firm.

The Complaint also does not allege that Alexander and Seawright told Adams they were

acting on behalf of Baker Donelson. Cf. Andrew Jackson Life Ins. Co. v. Williams, 566 So. 2d

1172, 1182 (Miss. 1990) (agent for the defendant insurance company “believed he was

authorized to form [the] binding contract” at issue and that he “expected” the purchasers would

“one hundred percent rely” on his represented authority). A plaintiff claiming apparent authority

is presumed to have “knowledge of the nature and usages of the business involved” and must

then have “reasonabl[y] reli[ed]” on a belief that the agent was empowered to act for the

principal. Id. at 1181. Providing funding for timber investments is not among the services that

lawyers or policy advisors ordinarily perform on behalf of law firms, and there is no basis to

infer – much less a well-pleaded allegation – that Adams was misled to think otherwise. Cf.

Christian Methodist Episcopal Church, 615 So. 2d at 573 (defendant’s Secretary of Finance had

apparent authority to make representations about the business’s finances to plaintiff).

C. The Complaint Does Not State a Claim for Negligent Supervision and Retention (Count VIII).

The Receiver’s arguments with respect to negligent supervision fail for many of the same

reasons. A negligent supervision claim does not apply to an employee’s acts outside the scope of

employment. Seay, 42 So.3d at 490. The above discussion disposes of the Receiver’s

contentions that Alexander and Seawright were acting within the scope of their employment, and

that only an employee’s “romantic affairs” can be outside the scope. Opp’n 20. The Receiver

does not address the cases dismissing claims for negligent supervision when employees allegedly

engaged in Ponzi schemes and criminal conduct outside the scope of employment. See Mem. at


9

11 (citing Belmont v. MB Inv. Partners, Inc., 708 F.3d 470 (3d Cir. 2013); Tichenor v. Roman

Catholic Church of Archdiocese of New Orleans, 32 F.3d 953 (5th Cir. 1994)).

The Receiver cites no authority for her suggestion that an employer is generally liable for

an employee’s conduct while on the employer’s premises. Opp’n 21. The law is to the contrary:

“[E]mployers do not have a duty to supervise their employees when the employees are off-duty

or not working,” Seay, 42 So. 3d at 489, and an employee may engage in personal acts while on

the employer’s premises without exposing the employer to liability, see Jacquez, 2016 WL

3017418, at *10; other cases cited supra pp. 2–3.

Nor does the Receiver explain how the Complaint satisfies the requirement that Baker

Donelson “had either actual or constructive knowledge of an employee’s incompetence or

unfitness” to conduct the work for which they were employed. Parmenter v. J & B Enterprises,

Inc., 99 So. 3d 207, 217 (Miss. Ct. App. 2012). The Receiver suggests generally that it is “‘not

unreasonable to infer’ that employers ‘were aware to some degree’” of an employee’s material

assistance to a Ponzi scheme. Opp’n 21 (quoting Janvey v. Proskauer Rose LLP, 2015 WL

11121540, at *1 (N.D. Tex. June 23, 2015)). It is indeed “unreasonable to infer” a law firm’s

knowledge of a Ponzi scheme without some allegation of fact that would support such an

inference. See Holmes v. Campbell Properties, Inc., 47 So. 3d 721, 729 (Miss. Ct. App. 2010)

(misconduct itself is insufficient; plaintiff must show “specific evidence” to support employer’s

knowledge that misconduct was likely). The receiver in Proskauer brought a different claim,

alleging that the defendant law firm failed to supervise its attorneys’ provision of legal services

to the firm’s clients within the scope of their employment.


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II. The Complaint’s Causes of Action Do Not State a Claim for Relief.

A. The Complaint Does Not State a Claim for Civil Conspiracy (Count I).

Civil conspiracy requires that the alleged conspirators were “aware of the fraud or

wrongful conduct at the beginning of the agreement.” Bradley v. Kelley Bros. Contractors, 117

So. 3d 331, 339 (Miss. Ct. App. 2013). The Complaint alleges “red flags,” from which the

Receiver infers that Baker Donelson “knew or should have known” that Madison Timber was a

Ponzi scheme. Compl. ¶ 120 (emphasis added). That the Receiver felt obliged to hedge her

claim (“or should have known”) underscores that she cannot in good faith allege the required

actual knowledge. Litson-Gruenber v. JPMorgan Chase & Co., 2009 WL 4884426, at *2 (N.D.

Tex. Dec. 16, 2009) (dismissing claims in a Ponzi-scheme case because “pleading based on an

allegation the defendant ‘knew or should have known’ is insufficient” for actual knowledge);

Neilson v. Union Bank of California, N.A., 2003 WL 27374137, at *10 (C.D. Cal. Feb. 20, 2003)

(collecting authorities). Even if she had alleged it, a bare assertion of knowledge is a legal

conclusion, which does not suffice to state a claim. Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009).

The Complaint’s allegations of fact are equally insufficient: “Red flags” do not support

an allegation of actual knowledge. See, e.g., Rosner v. Bank of China, 2008 WL 5416380, at *6

(S.D.N.Y. Dec. 18, 2008) (“courts overwhelmingly recognize” that “actual knowledge of a

fraud” is not established “based on allegations of . . . ignorance of obvious ‘red flags’”), aff’d,

349 F. App’x 637 (2d Cir. 2009); Honig v. Kornfeld, 339 F. Supp. 3d 1323, 1344 (S.D. Fla.

2018) (“red flags fail to establish actual knowledge”); Chemtex, LLC v. St. Anthony Enterprises,

Inc., 490 F. Supp. 2d 536, 547 (S.D.N.Y. 2007) (“even alleged ignorance of obvious warning

signs of fraud will not suffice to adequately allege actual knowledge”); In re Int’l Mgmt. Assocs.,

LLC, 563 B.R. 393, 420 (Bankr. N.D. Ga. 2017) (“allegations of ‘red flags’ were insufficient to


11

establish the bank’s actual knowledge of existence of the Ponzi scheme”). And in any event, no

well-pleaded allegation connects any “red flag” to Baker Donelson.

Against the weight of that authority, the Receiver cites only Proskauer for the proposition

that a red flag “supports knowledge for aiding and abetting purposes.” Opp’n 15 (citing

Proskauer, 2015 WL 11121540, at *5). But in Proskauer, an attorney was hired to defend the

Ponzi scheme operator in an SEC enforcement action. Id. at *1. The attorney conducted

“substantial due diligence” while representing the client and gained “knowledge of [the] scheme”

which he used to “obstruct[] the investigation,” including by hiding from the SEC the fact that

the rates of return were too high and that the scheme’s investments in Antigua likely involved

corruption. Id. at *5; see also Compl., Doc. 1, Proskauer, 3:13-cv-477 (N.D. Tex.) at ¶ 112

(alleging that attorney “knew [his client] was actively misleading the SEC”).

Aside from “red flags,” the Receiver cites one other allegation in support of her “actual

knowledge” claim: that “Alexander and Seawright falsely represented that they personally

inspected the timber and mill contracts,” when “there were no timber and no ‘mill contracts’ to

inspect.” Opp’n 17–18. That inference is a non sequitur. Failing to read a document does not

mean one knows the document does not exist or that the transaction is a Ponzi scheme. And that

allegation, too, is only against Alexander and Seawright, not the law firm.

Finally, the Receiver insists that a conspiracy arises from a “‘mere tacit understanding

between the conspirators to work to a common purpose.’” Opp’n 18 (quoting Aetna Ins. Co. v.

Robertson, 94 So. 7, 22 (Miss. 1922)). But the common purpose must be unlawful. See id.;

Harris v. Town of Woodville, 196 So. 3d 1121, 1131 (Miss. Ct. App. 2016). “[P]ool[ing] other

people’s money to invest” in timber tracts, Opp’n 18, is not unlawful; and an agreement to do

that, tacit or otherwise, is not a conspiracy.


12

B. The Complaint Does Not State a Claim for Aiding and Abetting (Count II).

The Receiver concedes that no Mississippi court has ever recognized a cause of action for

civil aiding and abetting. Opp’n 13. And even in jurisdictions that do, a plaintiff must prove the

defendant had “‘know[ledge] that the other’s conduct constitutes a breach of duty[.]’” Id.

(quoting Restatement (2d) Torts § 876(b)). The argument that Baker Donelson “knew that

Adams owed Madison Timber fiduciary duties[,]” Opp’n 13, does not establish actual knowledge

that Adams had breached such duties by operating a Ponzi scheme. That would be so even if the

conclusory argument about Baker Donelson’s knowledge were well-pleaded – which it is not.

C. The Complaint Does Not State a Claim for “Recklessness,” “Gross Negligence,” or “Negligence” (Count III).

It is undisputed that Adams and Madison Timber were not clients of Baker Donelson.

Seeking to skirt the rule that only a client may sue a law firm for professional negligence, the

Receiver contends that she is suing for “ordinary” rather than “professional” negligence. See

Opp’n 19. That argument mischaracterizes the Complaint, and in any event is legally meritless.

First, the Complaint makes clear that Alexander and Seawright, allegedly acting for

Baker Donelson, were negligent in their professional capacities. Even the Opposition touts the

particular “education, experience, and judgment” of Baker Donelson’s professionals, id. at 11,

and argues that the firm engaged in misconduct through “the provision of routine professional

services[.]” Id. at 18 (quotation marks omitted). The Opposition cannot have it both ways,

arguing (1) that Baker Donelson is responsible because it authorized Alexander and Seawright to

act as professionals for the firm and (2) that Alexander and Seawright were acting in some non-

professional capacity so that a non-client can sue them. The Receiver cannot evade the

limitations on a claim for professional negligence, see Mem. 14–15, merely by labeling it

“ordinary negligence.” See, e.g., Bell v. W. Harrison Cty. Dist., 523 So. 2d 1031, 1033 (Miss.


13

1988) (recasting claim involving the exercise of “professional skill” as “‘ordinary negligence’

. . . is without merit”).

Second, any claim of “ordinary” negligence would also fail because Baker Donelson

owed Adams and Madison Timber no duty of “ordinary” care to prevent their Ponzi scheme.

The law does not impose duties on citizens to stop tortious conduct. See, e.g., Cuyler v. United

States, 362 F.3d 949, 954 (7th Cir. 2004) (“no common law duty to warn or rescue”). And as the

perpetrators of the conduct, Adams and Madison Timber certainly cannot claim a duty owed to

them. See, e.g., Oden v. Pepsi Cola Bottling Co., 621 So.2d 953, 954–55 (Ala. 1993) (thief

cannot recover in tort for injury while stealing); Amato v. United States, 549 F. Supp. 863, 867

(D.N.J. 1982) (criminal cannot recover for injury during robbery on theory that “the government

was negligent in not arresting [him] sooner”), aff’d, 729 F.2d 1445 (3d Cir. 1984). In the

absence of an attorney-client duty of care, the Receiver’s claim is untenable.

III. In Pari Delicto Bars the Receiver’s Claims.

Because she stands in the shoes of Madison Timber and Adams, the Receiver may bring

their claims, but she does not have standing to bring investors’ claims. The Receiver does not

dispute that if Adams and Madison Timber were suing in their own right, their claims would be

barred by in pari delicto.

The Receiver argues, however, that it is “well established [in the Fifth Circuit] that when

the receiver acts to protect innocent creditors,” she may do so “even though the corporation

would not be permitted to do so.” Opp’n 22 (quoting Jones v. Wells Fargo Bank, N.A., 666 F.3d

955, 966 (5th Cir. 2012); modification in original). But Jones does not hold that the “innocent

successor” exception applies throughout the Fifth Circuit – that is the Receiver’s addition. The

Fifth Circuit was actually quoting the rule from a series of Texas state court cases. See Jones,

666 F.3d at 966 (quoting Akin, Gump, Strauss, Hauer and Feld, L.L.P. v. E–Court, Inc., 2003


14

WL 21025030, at *5 (Tex.App.—Austin 2003); Guardian Consumer Fin. Corp. v. Langdeau,

329 S.W.2d 926, 934 (Tex.Civ.App.—Austin 1959, no writ)). The Fifth Circuit did so because

“[t]he rights of a receiver are determined by state law.” Jones, 666 F.3d at n.11.

In Texas, a receiver who is appointed “in a dual capacity, as a trustee for both the

stockholder and the creditors,” can act “as trustee for the creditors” without limitation of the

defenses to which the corporation would be subject. Langdeau, 329 S.W.2d at 934 (emphasis

added).2 In Jones, “the district court specifically authorized the Receiver to pursue actions for

the benefit of “‘all investors who may be the victims of the fraudulent conduct[.]’” Id.; see also

Ex. C at 9, Order, Doc. 131, SEC v. W. Financial Group et al., Case No. 3:08-cv-00499-N (N.D.

Tex.) (appointing the receiver in Jones “as the representative of such investors”).

This Receiver was not appointed to stand in the shoes of investors in Madison Timber.

Rather, consistent with Mississippi law, the Court furnished the Receiver with “all powers,

authorities, rights, and privileges now possessed by the officers, managers, and interest holders

of and relating to the Receivership Defendants” and ordered her to “pursue . . . their claims.”

Doc. 33 at 5, SEC v. Adams, 3:18-cv-252 (S.D. Miss.) (emphasis added). When a receiver sues

on an estate’s, she “occup[ies] substantially the same relation which was occupied by the original

parties” and “[a]ny defense . . . which a defendant might have made to an action brought by the

original party is equally available” against the receiver. High on Receivers § 205 (2d Ed.); see

Cashin v. Murphy, 96 So. 747, 749 (Miss. 1923) (citing High). The Receiver is thus similarly

situated to the plaintiffs in the many recent cases that rejected innocent-successor claims brought

by trustees and receivers who claimed that their appointment cleansed the wrongdoer’s estate of

2 Thus, “[t]he Fifth Circuit, when applying Texas law, seems to hold the view that when a receiver is protecting innocent creditors or recovering assets for investors and creditors, the defense of in pari delicto should be rejected generally.” Janvey v. Adams & Reese, LLP, 2013 WL 12320921, at *3 (N.D. Tex. Sept. 11, 2013) (emphases added).


15

in pari delicto. See Mem. at 17–20. The Receiver has identified no Mississippi case that

exempts a receiver from defenses against the corporation in whose shoes she stands.

Jones is also distinguishable because it concerned a different kind of claim. In its usual

articulation, the innocent-successor exception allows the Receiver in-pari-delicto immunity

“against third-party recipients of the entity’s assets that have been fraudulently transferred[.]”

Janvey v. Democratic Senatorial Campaign Comm., Inc., 712 F.3d 185, 191 (5th Cir. 2013). But

the exception typically does not apply to tort claims against those who allegedly conspired with

the entity in receivership to perpetrate a fraud. See, e.g., Hays v. Pearlman, 2010 WL 4510956,

at *5 (D.S.C. Nov. 2, 2010) (“in the absence of a fraudulent conveyance case, the receiver of a

corporation used to perpetuate a fraud may not seek recovery against an alleged third‐party co‐

conspirator in the fraud”). In Jones, the receiver brought a cause of action for conversion against

a bank that had issued and then deposited a fraudulent cashier’s check. 666 F.3d at 961. While

“conversion” is technically a tort, the claim in Jones was analogous to a fraudulent transfer, as it

sought to reclaim misappropriated monies belonging to the estate. The Receiver’s claims against

Baker Donelson do not pursue Madison Timber’s assets – Baker Donelson is not alleged to have

received anything from Adams’ scheme. Even under a permissive, Texas-like standard,

therefore, the torts the Receiver alleges are far afield from the fraudulent transfer or conversion

claims that the Fifth Circuit has addressed.

IV. The Complaint Should Be Dismissed with Prejudice.

The Receiver has not requested leave to amend and does not suggest that she possesses

additional facts that could cure the deficiencies in the Complaint. Wherefore, premises

considered, Baker Donelson respectfully requests that this honorable Court dismiss the

Complaint with prejudice and requests all further relief, both general and special, as mandated by

the premises and as justice requires.


16

Dated this 14th day of March, 2019 Respectfully submitted,

BAKER, DONELSON, BEARMAN, CALDWELL & BERKOWITZ PC

/s/ Craig D. Singer Michael W. Ulmer (MSB #5760) James J. Crongeyer, Jr. (MSB #10536) WATKINS & EAGER PLLC 400 East Capitol Street, Suite 300 (39201) Post Office Box 650 Jackson, MS 39205 Tel.: (601) 965-1900 Fax: (601) 965-1901 Email: [email protected]

Craig D. Singer (pro hac vice) Benjamin W. Graham (pro hac vice) WILLIAMS & CONNOLLY LLP 725 Twelfth Street, N.W. Washington, DC 20005 Tel.: (202) 434-5000 Fax: (202) 434-5029 Email: [email protected]

Counsel for Defendant Baker, Donelson, Bearman, Caldwell & Berkowitz, PC


17

CERTIFICATE OF SERVICE

I hereby certify that on March 14, 2019, I caused the foregoing to be electronically filed

with the Clerk of the Court using CM/ECF, which will send notification of such filing to all

registered participants.

/s/ Benjamin W. Graham Benjamin W. Graham


Exhibit C

Case 3:18-cv-00866-CWR-FKB Document 36-1 Filed 03/14/19 Page 1 of 15

Case 3:08-cv-00499-N Document 131 Filed 11/14/08 Page 1 of 14 PageID 1232

U,S, DISTRttl COURl' NORTHERN DISTRICT OF TEXAS

IN THE UNITED STATES DISTRICT OURT,___F~I ~-=---FOR THE NORTHERN DISTRICT OF TEXAS NOV f , 2008

DALLAS DIVISION '+

SECURITIES AND EXCHANGE COMMISSION,

Plaintiff,

vs.

W FINANCIAL GROUP, LLC, ADLEY H. ABDUL W AHAB a/k/a ADLEY W AHAB, MICHAEL K. W ALLENS, SR., and MICHAEL K. W ALLENS, JR.,

Defendants.

§ § § § § § § § § § § § § §

CIVIL ACTION NO. 3:08-CV-0499-N

ORDER APPOINTING RECEIVER

-~STRICT COURT

Deputy

CAME ON FOR CONSIDERATION (i) the Special Master and Securities and

Exchange Commission's Emergency Motion to Show Cause and for Sanctions and Other

Equitable Relief (docket no. 77) (the "SM/SEC Motion"), and (ii) the Application of Plaintiff

United States Securities and Exchange Commission for Order to Show Cause Why Defendants

Should Not be Held in Civil Contempt for Failure to Comply With Court's Order (docket no. 83)

(the "SEC Motion") (the SM/SEC Motion and SEC Motion are hereinafter collectively referred

to as the "Show Cause Motions"), together with supporting documents filed by the Special

Master and the SEC, as well as opposing documents filed by the Defendants; and the Court,

having conducted an evidentiary hearing on the Show Cause Motions on October 17, 2008 and

October 24, 2008, and, after consideration of all relevant pleadings filed on this matter, all

witness and deposition testimony offered, all exhibits admitted into evidence, and arguments of

513970 000002 DALLAS 2418313.l



counsel, and subject to further orders of the Court with respect to the other forms of relief sought

in the Show Cause Motions which remain under consideration by the Court; and it

APPEARING that an order appointing a receiver is both necessary and appropriate in

order (i) to prevent further waste and dissipation of the assets of W Financial Group 1 to the

detriment of investors; (ii) to liquidate, and preserve the proceeds of, all known and unliquidated

assets of W Financial Group for the benefit of the investors;2 (iii) to recover and preserve all

known and liquidated assets of W Financial Group for the benefit of the investors;3 and (iv) to

identify and recover any additional assets of W Financial Group that may exist, including

without limitation, causes of action and other property of any kind; and it further

APPEARING that the Show Cause Motions have merit and should be GRANTED.

I.

IT IS THEREFORE ORDERED THAT:

1. The Show Cause Motions be, and hereby are, GRANTED.4

2. This Court hereby takes exclusive jurisdiction and possession of the assets,

monies, securities, causes of action, claims, and properties, real and personal, tangible and

intangible, of whatever kind and description, wherever situated, of W Financial Group (the

"Receivership Assets"), together with the books and records, computers, and documents of any

1 W Financial Group, as used herein, shall mean W Financial Group, LLC, together with all d/b/a (s) and subsidiaries, including without limitation W Custom Builders, Texas Auto Pros, Auto Ace Enterprises, Inc., and National Power Company, Inc. 2 The currently known remaining and unliquidated assets of W Financial Group are: (i) seven (7) undeveloped lots in Spring, Texas in the Benders Landing Estates Addition, which is a residential development, with specific addresses of 27406 Shores Ct., 27403 Shores Ct., 27410 Shores Ct., 27407 West Balsam Fir Circle, 5510 White Birch Run, 5706 White Birch Run, and 5702 White Birch Run; (ii) a multi-unit residence located at 2506 Wheeler St. in Houston, Texas; and (iii) a life settlement insurance policy through Hartford Life, policy# VL9236137. 3 The currently known and liquidated assets of W Financial Group are (i) the $4,022,554.67 of cash in the Special Master's Account as of October 24, 2008; (ii) the $57,700.84 of cash on deposit at Wells Fargo Bank as of October 2, 2008 (as reflected on Special Master's Exhibit 3, p. 29); and (iii) the three (3) building deposits with Chaparral Management Company in the range of$5,000.00 to $9,000.00 (as reflected on Special Master's Exhibit 3, p. 29). 4 The Court continues to consider possible additional forms of relief in response to the Show Cause Motions, and the appointment of a receiver herein should not be construed to be the sole remedy.

513970 000002 DALLAS 2418313.1 2



kind, including every writing of any kind, type, and description or other instrument or device by

which, through, or upon which information has been recorded or preserved, including but not

limited to memoranda, notes, letters, bank records, statements, checks, wire instructions, emails,

confirmations, tape recordings, electronic and digital media of all types, audio and video

recordings and photographs of W Financial Group (the "Receivership Records"). The Receiver

is hereby authorized to take and have possession of the Receivership Assets and Receivership

Records.

3. The Receiver is further authorized to inspect and make copies of, without

limitation, any and all documents, wherever located, which relate in any way to (i) W Financial

Group, (ii) the Receivership Assets, (iii) the Receivership Records, (iv) transfers of any assets of

W Financial Group, (v) the value of such assets when transferred, (vi) the source of funds used to

acquire such assets, (vii) the repayment of any notes involved in the acquisition of such assets,

including the source and timing of such repayment, (viii) additional assets of W Financial Group

that have heretofore not been made known to the Receiver, (ix) potential fraudulent transfers of

assets of W Financial Group or the proceeds thereof, (x) potential additional claims and causes of

action owned by W Financial Group, (xi) the disposition of the accounts receivable owed to

National Power Company as of May 1, 2008, and (xii) any documents which would assist the

Receiver in fulfilling his responsibilities under this Order ( collectively, the "Additional

Records"). The Receiver is hereby authorized to take and have possession of copies of all

Additional Records.

4. Max Wayman and Associates ("Wayman") shall provide the Receiver access to,

without limitation, any and all documents previously or hereinafter in the possession of Max

Wayman and Associates (i) relating to W Financial Group in any way, as well as all documents

513970 000002 DALLAS 2418313.l 3



(ii) relating to Adley H. Abdulwahab, Michael K. Wallens, Sr., and Michael K. Wallens, Jr.

( collectively, the "Individual Defendants") which constitute Additional Records, as defined

herein.

5. Until further order of this Court, the Receiver shall have complete and exclusive

control, possession, and custody of all Receivership Assets and Receivership Records, except as

required by Max Wayman and Associates to complete their obligations to the Court; wherein

both the Receiver and Max Wayman and Associates shall have possession of such records. Max

Wayman and Associates shall promptly and fully respond to, and provide information and

documents in response to, any and all requests for information, documents, and explanations

from the Receiver relating to the Max Wayman and Associates engagement, and shall keep the

Receiver fully informed of its findings, the status of its efforts, and any problems it is

experiencing in completing its engagement.

6. Vernon T. Jones, Jr., of Grant Thornton LLP, 333 Clay St., Suite 2700, Houston,

Texas 77002, with the phone number of (832) 476- 3760, and fax number of (832) 476-3756, is

hereby appointed Receiver for the Receivership Assets and the Receivership Records. Within

five days hereof, the Receiver shall file with the Clerk of the Court a bond in the sum of $10,000,

without need for sureties approved by the Court, to assure his conscientious performance of the

duties and responsibilities imposed by this Order.

7. Until further order of this Court, all assets of or under the control of W Financial

Group, or that are attributable to funds provided to W Financial Group by an investor or client of

W Financial Group, are frozen until possessed by the Receiver. W Financial Group, its

respective officers, directors, managers, trustees, members, escrow agents, employees,

accountants, representatives, facilitators, agents, servants, employees, attorneys, and all other

513970 000002 DALLAS 2418313.l 4



persons and entities m active concert or participation with W Financial Group, are hereby

restrained and enjoined from, directly and indirectly, transferring, setting off, rece1vmg,

changing, selling, pledging, assigning, liquidating, or otherwise disposing of, or withdrawing any

assets and property owned by, controlled by, or in the possession of W Financial Group. This

freeze shall include, but not be limited to, those funds located in any bank accounts, brokerage

accounts, or any other accounts or property ofW Financial Group. Except as explicitly set forth,

this Order is not intended to abrogate any provision of the Agreed Interlocutory Order, including,

but not limited to, the freeze on the assets of the individual defendants or the requirement that

defendants provide sworn accountings.

8. All persons and entities, including without limitation W Financial Group and its

officers, directors, managers, trustees, members, escrow agents, employees, accountants,

representatives, facilitators, agents, servants, employees, attorneys, customers, past, present, and

future, and all other persons and entities in active concert or participation with them, past or

present, or with whom W Financial Group has dealt, who receive actual notice of this Order by

personal service or otherwise, and specifically including, without limitation, any customers of W

Financial Group, or any bank or other financial or depository institution holding accounts for or

on behalf of W Financial Group, shall promptly deliver to the Receiver all Receivership Assets,

together with any and all other documents or information in their custody, control, or possession,

which might lead to the discovery and recovery of Receivership Assets or fraudulently

transferred assets of W Financial Group, in the possession or under the control of any one or

more of them, and shall promptly surrender all Receivership Records and Additional Records,

together with copies of those records which may lead to the discovery and recovery of

Receivership Assets or fraudulently transferred assets of W Financial Group. No separate

513970 000002 DALLAS 2418313.1 5



subpoena shall be required. Upon presentment of this Order, all persons and entities, including

without limitation financial institutions, shall provide account balance information, transaction

histories, all account records, and any other Receivership Records to the Receiver or his agents,

in the same manner as they would be provided were the Receiver the signatory on the account.

9. The Receiver is authorized, without breaching the peace and if necessary with the

assistance of local peace officers or U.S. Marshals, to enter and secure any premises, wherever

located or situated, in order to take possession, custody, or control of, or to identify the location

or existence of, Receivership Assets or Receivership Records.

10. All persons and entities, including without limitation W Financial Group and its

officers, directors, managers, trustees, members, escrow agents, employees, accountants,

representatives, facilitators, agents, servants, employees, attorneys, customers, and all other

persons and entities in active concert or participation with them, past or present, or with whom

W Financial Group has dealt, who receives actual notice of this Order by personal service or

otherwise, are enjoined from any way interfering with the operation of the Receivership or in any

way disturbing the Receivership Assets and Receivership Records, as well as Additional

Records, specifically including but not limited to any proceeding initiated pursuant to the United

States Bankruptcy Code, except with the prior permission of this Court. Any actions so

authorized to determine disputes relating to Receivership Assets and Receivership Records shall

be filed in this Court.

11. The Receiver is hereby authorized to make appropriate notification to the United

States Postal Service or any post office box or other mail depository to forward delivery of any

mail addressed to W Financial Group, or any company or entity under the direction or control of

W Financial Group, to himself. Further, the Receiver is hereby authorized to open and inspect

513970 000002 DALLAS 2418313.l 6



all such mail to determine the location or identity of additional assets of W Financial Group, or

the existence and amount of claims against W Financial Group.

12. The Receiver is hereby authorized to make from Receivership Assets such

ordinary and necessary payments, distributions, and disbursements as he deems advisable or

proper for the marshaling, maintenance, or preservation of the Receivership Assets or

Receivership Records. From and after the date of entry of this Order, the Receiver shall have the

authority to conduct the business operations of W Financial Group and the entities it controls,

including without limitation the collection of accounts receivable, the continuation or termination

of any employment arrangement, leases, and/or contracts and the terms thereof, and to sell, rent,

lease, or otherwise hypothecate or dispose of the Receivership Assets. The Receiver shall have

the authority to contact and negotiate with any creditors of W Financial Group for the purpose of

compromising or settling any claim. To this purpose, in those instances in which Receivership

Assets serve as collateral to secured creditors, the Receiver may surrender such assets to secured

creditors, and shall have the authority to make such surrender conditional upon the waiver of any

deficiency of collateral. Furthermore, the Receiver is authorized to renew, cancel, terminate, or

otherwise adjust any pending lease agreement to which the W Financial Group is a party.

13. The Receiver is hereby directed to file with this Court and serve upon the parties,

within 45 days after entry of this Order, a preliminary report setting out the identify, location,

and value of the Receivership Assets, and any liabilities pertaining thereto. Further, at the time

the Receiver makes such report, he shall recommend to the Court whether, in his opinion, based

on his initial investigation, claims against W Financial Group should be adjudged in the

Bankruptcy Court. After providing the parties an opportunity to be heard, this Court will

513970 000002 DALLAS 2418313.1 7



determine whether to accept the Receiver's recommendation and, if appropriate, issue an order

authorizing the Receiver to commence a bankruptcy proceeding.

14. The Receiver is hereby authorized to employ such employees, accountants,

attorneys, consultants, experts, brokers, and appraisers as is necessary and proper for the

identification, demand for, pursuit, collection, recovery, liquidation, preservation, maintenance,

and operation of the Receivership Assets and Receivership Records, and to open bank accounts

or other depository accounts in the name of the Receiver on behalf of the receivership estate.

The retention of Grant Thornton LLP, as litigation consultants to the Receiver, and the firm of

Thompson & Knight LLP, as counsel to the Receiver, is hereby approved without further order

from the Court.

15. The Receiver is hereby authorized to demand, pursue, receive, and collect any and

all sums of money due or owing to W Financial Group, whether the same are now due or shall

hereafter become due and payable, and is authorized to incur such fees and expenses and make

such disbursements as are necessary and proper for the identification, demand for, pursuit,

collection, recovery, liquidation, preservation, maintenance, and operation of the Receivership

Assets. The Receiver is further authorized, in his discretion, to abandon or sell assets which are

less than $1,500.00 in value without obtaining further order of the Court, provided that such

action is set forth in the Receiver's Final Report.

16. The Receiver is hereby authorized to institute, defend, compromise, or adjust such

actions or proceedings in state or federal court now pending and hereinafter instituted, as may in

his discretion be advisable or proper for the identification, collection, recovery, preservation,

liquidation, protection, and maintenance of the Receivership Assets or proceeds therefrom, and

to issue subpoenas, and institute, prosecute, compromise, or adjust such actions or proceedings in

513970 000002 DALLAS 2418313.1 8



state or federal court as may in his judgment be necessary or proper for the identification,

collection, recovery, preservation, liquidation, protection, and maintenance of the Receivership

Assets.

1 7. The Receiver is hereby authorized to institute such actions or proceedings, as

necessary, (i) to identify, impose a constructive trust upon, collect, recover, liquidate, protect,

maintain, and obtain possession of the Receivership Assets and Receivership Records; (ii) to

pursue fraudulent transfers of Receivership Assets, past, present, and future, including without

limitation any fraudulent transfers relating to (x) the National Power Company transaction on

May 1, 2008, whether such transfers occurred prior to, during, or after the May 1, 2008

transaction, and to recover any and all fraudulently transferred assets; (iii) to seek declaratory

relief that purported transfers of Receivership Assets never occurred and to seek the return of

such Receivership Assets and restoration to the status quo ante, and (y) any other transaction

involving the Receivership Assets; (iv) to recover judgment with respect to persons or entities

who received or may receive Receivership Assets or funds or proceeds traceable to investor

funds (whether past, present, or future); and (v) to seek the turnover of Receivership Assets and

Receivership Records. All such actions shall be filed in this Court. The Receiver is specifically

authorized to pursue such actions on behalf of, and for the benefit of, the constructive trust

beneficiaries, including without limitation any and all investors who may be the victims of the

fraudulent conduct alleged herein by the Commission. The Receiver is hereby appointed as the

representative of such investors for the purpose of making requests to any authority, foreign or

domestic, for the return of the funds that such investors contributed to W Financial Group,

wherever such funds may have been transferred, and for the purpose of filing actions to recover

such funds wherever the Receiver may deem necessary.

513970 000002 DALLAS 2418313.1 9



18. The Receiver is hereby authorized to take any actions which could be taken by the

officers, directors, managers, members, partners, trustees, or other principals of W Financial

Group. The Receiver is entitled to transact any business or take any action that W Financial

Group would be authorized to take. W Financial Group, and all persons and entities affiliated

with W Financial Group, are hereby directed to execute any consent, authorization, resolution, or

other document as may be required by any person to confirm the authority of the Receiver as

granted in this paragraph. W Financial Group, together with any other person or entity who

receives a copy of this Order, is further directed to cooperate fully, honestly, and promptly with

the Receiver, including without limitation (i) delivering to the Receiver all Receivership Assets

and Receivership Records, together with any Additional Records and related documents, records,

names, and contact information for persons or entities who may be custodians or otherwise

involved with or knowledgeable of the Receivership Assets or Receivership Records; (ii)

obtaining or providing all bank records involving transfers of invested funds provided to or

disbursed by W Financial Group or any subsequent transferee under the direct or indirect control

hereof; (iii) providing full accountings of the disposition of all funds invested with W Financial

Group; (iv) providing all related financial records, computers, computer files, e-mails,

passwords, keys, security cards, access codes for premises, vehicles, vessels, aircraft; and (v)

granting access to safes, safe deposit boxes, computers, warehouses, storage units, garages,

homes, buildings, or any other facility containing, or in the judgment of the Receiver possibly

containing, Receivership Assets or Receivership Records, or information relevant thereto. The

Court expects that W Financial Group and the other defendants in this action will promptly,

honestly, fully, and affirmatively assist the Receiver, and not merely allow control to be taken of

Receivership Assets and Receivership Records.

513970 000002 DALLAS 2418313.1 10



19. Upon the request of the Receiver, the United States Marshal's Office is hereby

ordered to assist the Receiver in carrying out his duties to identify, take possession, custody, or

control of, identify the location of, recover, collect, preserve, protect, liquidate, or maintain any

Receivership Assets or Receivership Records. The Receiver is authorized to remove any person

from any premises or real estate constituting a Receivership Asset that attempts to interfere with

the Receiver, his attorneys, or other agents in the performance of their duties. The Receiver is

further authorized to change any locks or other security mechanisms with respect to any premises

or other assets that constitute or contain Receivership Assets or Receivership Records.

20. The Receiver shall keep the Commission apprised at reasonable intervals of

developments concerning the operation of the receivership, and shall tum over copies of

Receivership Records upon request of the Commission.

21. The Receiver shall have the right from time to time to obtain updated contact and

medical information regarding the viator/insured under the life settlement policy #VL9236137

through Hartford Life (the "Policy"), including (A) pursuant to 45 C.F.R. § 164.512(e)(l)(i), all

health care providers who are served with a copy of this Order and a written request by the

Receiver shall be authorized and compelled to immediately release a copy to the Receiver of all

records relative to the care, treatment, and health of the insured/viator under the Policy so

requested by the Receiver for the purpose of evaluating and predicting health and life

expectancy, and (B) the insured/viator under the Policy being required to provide the Receiver

with (I) current contact information for the insured/viator, (II) Health Insurance Portability and

Accountability Act of 1996 compliant medical authorizations, (111) contact information for all

physicians and other medical providers who have treated the insured/viator during the previous

five-year period, and (IV) any and all medical information generated during the previous five-

513970 000002 DALLAS 2418313.1 11



year period pertaining to the insured's/viators's health and/or medical condition, and the

Receiver shall be entitled to seek enforcement of this paragraph as to any person, including by

way of example, and not limitation, an application for a finding of contempt.

22. The Receiver shall file on at least a quarterly basis an application for approval of

the disbursements for professional fees and expenses to himself and other professionals retained

by the Receiver, including without limitation, the firm of Grant Thornton LLP ( as litigation

consultants to the Receiver) and the firm of Thompson & Knight LLP ( as counsel to the

Receiver). The Receiver may pay, without further Court order, up to 90% of the professional

fees and 100% of the expenses on a monthly basis, provided that statements are made on a

monthly basis to the Commission, no objections thereto have been presented by the Commission

within five (5) calendar days from receipt of the statements, and quarterly applications (to the

extent they become due prior to the presentation of such statements), have been made as

required. The Receiver shall file quarterly applications with the Court commencing for the

period ending December 31, 2008, and each subsequent quarter thereafter, with copies of such

applications served on the Commission and the defendants. Any and all costs incurred by the

Receiver shall be paid from the Receivership Assets. For purposes of this provision, the

effective date for the inception of services and expenses of the Receiver and professionals

retained by the Receiver, shall be October 25, 2008.

23. The Court takes notice that the Receiver previously served as Special Master in

this case, and together with his professionals, provided services for the period March 28, 2008

through October 24, 2008, and has filed four (4) fee applications relating to services rendered

and expenses incurred through August 31, 2008 (docket nos. 28, 65, 76, and 80), which fee

513970 000002 DALLAS 2418313.1 12



applications remain pending. The Special Master will be filing a final fee application to cover

the period September 1, 2008 through October 24, 2008.

24. Except for an act of gross negligence or intentional misconduct, as determined by

a Final Order, the Receiver and all persons and entities engaged or employed by him (including,

without limitation, any of their partners, principals, employees, or agents) shall not be liable for

any loss or damage incurred by any person or entity by reason of any act performed or omitted to

be performed by the Receiver or those engaged or employed by him in connection with the

discharge of their duties and responsibilities in connection with the receivership. This provision

shall apply to claims based on conduct of the Receiver and all other persons who may be

engaged or employed by the Receiver hereunder during the term of the ap}lOintment by this

Court, even if such claims are filed after the termination of any such appointment.

25. The Receiver currently is aware of no conflict which would prohibit his

fulfillment of his obligations under this Order. However, in the event of an unexpected conflict,

the Receiver shall have the right to recuse himself from that specific portion of his engagement.

Upon such event, the Receiver shall have the right to seek a special conflicts receiver to handle

the conflicted matter. Randy W. Williams, an attorney for the law firm of Thompson & Knight

LLP, 333 Clay St., Suite 3300, Houston, Texas 77002, is hereby designated as Special Conflicts

Receiver in this case.

II.

IT IS FURTHER ORDERED that this Court shall retain jurisdiction of this action for

all purposes. The Receiver is hereby authorized, empowered, and directed to apply to this Court,

with notice to the Commission and W Financial Group, for issuance of such other orders as may

be necessary and appropriate in order to carry out the mandate of this Court.

513970 000002 DALLAS 2418313.l 13



III.

IT IS FURTHER ORDERED that the remaining forms of relief sought in the Show

Cause Motions remain under consideration by the Court. This Order will remain in effect until

modified by further order of this Co~

SIGNED this b day of Q,/(llvt t/2008.

-~D STA: ES DISTRIC JUD

513970 000002 DALLAS 2418313.l 14


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