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Dallas lawyer at center of Houston trial over whether firm owed clients a warning on fraudster Allen Stanford


WASHINGTON — A Dallas lawyer is at the center of a legal malpractice dispute unfolding in a Houston courtroom this week. The jury trial starts Monday in a $51 million suit that pits the former owners of the Houston Galleria and its attached office towers against their former lawyers, Andrews Kurth LLP, a Houston-based firm with offices in Dallas and eight other cities.

A Harris County district court clerk said Friday the trial before Judge Bill Burke is scheduled to last two to three weeks. In it, lawyers for the former owners of the Houston Galleria will argue Andrews Kurth should have warned the real estate company that another of the law firm’s clients was under suspicion by the of SEC of massive fraud.

Andrews Kurth represented both Walton Houston Galleria and R. Allen Stanford’s company, Stanford Financial Group, while the two companies were negotiating the long-term lease and possible purchase of the Galleria office buildings.

Walton alleges that the law firm knew that its other client, Stanford, was under heavy suspicion of fraud by the Securities and Exchange Commission and should have warned the real estate firm that its long-term negotiations were at risk.

To make its claim, the company has argued that the law firm knew of the SEC’s suspicions because its senior partners had spent months recruiting the chief of enforcement in the Fort Worth offices of the SEC, an attorney named Spencer Barasch.

Andrews Kurth hired Barasch in 2005, just weeks before the SEC sent Stanford an official inquiry that would later trigger an all-out investigation. R. Allen Stanford would ultimately be convicted of fraud and be sentenced to 110 years in prison. His firm was responsible for one of the largest Ponzi schemes in U.S. history.

Questions about Stanford Financial Group were raised repeatedly over the years, but the SEC under Barasch had declined to mount a formal investigation. A 2010 Office of Inspector General’s report by the SEC concluded that Barasch had been a key voice in scuttling inquiries into the company’s operations, which included selling certificates of deposit in a bank in Antigua.

A call to Barasch last week was not returned, but a spokeswoman for the law firm later declined to comment on the case. In its legal filings, the law firm has denied wrongdoing. It stated that Stanford, not the lawyers, was responsible for any losses by Walton.

The malpractice suit is just one of many legal tussles playing out in the wake of the more than $7 billion in investments that collapsed when Stanford’s scheme collapsed. The question of why the SEC was so slow in launching its investigation has plagued the SEC, and especially its Fort Worth office for years. Barasch’s role has also been scrutinized repeatedly, including in a multi-part series by Vice.com, The Derailment of the SEC.

In Houston, Walton tried last week to convince a judge to require Barasch to testify at the trial, but failed. A state judge’s subpoena power for a civil case is typically good only for 150 miles, and Burke said Walton hadn’t provided a strong enough case to make an exception this time. Barasch works in the firm’s Dallas office.

But Walton’s lead attorney, Tom Ajamie of New York, said he was pleased with the judge’s ruling nonetheless, since Burke also ruled that the plaintiffs can press their claims that the hiring of Barasch shows that the Andrews Kurth knew about the problems with Stanford. A report last week by Law360.com quoted the judge as saying the plaintiffs could press that case, and used Barasch’s video deposition, but would face his skepticism if they tried to “make this all about Stanford.”

In its complaint, Walton alleges that Andrews Kurth spent months recruiting Barasch to the firm. They assert that Barasch knew about federal enforcement officials’ suspicions about Stanford and that therefore so did his new law firm.

What’s certain is that soon after Barasch arrived at Andrews Kurth, Stanford reached out to the new lawyer to ask for his help with the SEC.

In a sworn April 1 deposition, Barasch states that almost immediately after he arrived at Andrews Kurth in April, 2005, he was contacted by Stanford’s general counsel Mauricio Alvarado to work for the company on its response to an inquiry just received by the SEC. Allen Stanford himself signed off on approaching Barasch. “This guy looks good and probably knows everyone at the Fort Worth office. Good job,” Stanford wrote in an email when told of plans to approach Barasch, according to a 2010 report by the SEC’s inspector general.

With Allen Stanford’s go-ahead, Alvarado called Andrews Kurth and on Friday, June 17 he and Barasch spoke on the telephone about the possibility of Barasch helping the company respond to the preliminary inquiry from the SEC.

Barasch would later fly to Miami to meet with Alvarado, and discuss additional work with the company’s compliance chief, according to the deposition. In his deposition, Barasch said he believed he was free to work “behind the scenes” for Stanford, just not directly represent the company before the SEC. He ultimately billed just 12 hours for work for Stanford. He appears to have stopped all work for the company after a third attempt to convince the ethics officials to allow him to represent the company was unsuccessful.

The U.S. Department of Justice and the SEC would later conclude that Barasch called his former colleagues on behalf of Stanford, despite having been told by ethics officials in Washington that he could not represent the company. Barasch agreed in 2012 to pay a $50,000 fine to the Department of Justice, which concluded he had improperly sought to influence his previous colleagues at the SEC. The SEC itself, citing the DOJ fine, in 2012 banned Barasch from appearing before the SEC.

That suspension was lifted last year, and at that time former colleagues of Barasch spoke in his defense. Longtime Dallas lawyer Edwin Tomko, senior counsel at Dykema law firm in Dallas, was one. He told The News that since the issues never went to trial, nothing was ever proven. “I think he got a pretty raw deal,” Tomko said.

Meanwhile, victims of Stanford’s Ponzi schemes continue to press for compensation which many of them will likely never see. On Tuesday, senators from Louisiana staged a protest over the confirmation of Sharon Bowen, President Obama’s pick to a commissioner of the Commodity Futures Trading Commission because they felt she has stood in the way of compensation for some victims of the Stanford schemes. Both Vitter and Mary Landrieu, a Democrat, voted against Bowen, who was confirmed on a mostly party-line vote, 48-46. Vitter, a Republican, said on the floor that the SEC failed to protect investors and that the Securities Investor Protection Corporation, where Bowen was acting chair, failed them again.

“Frankly, it amazes me that we are here today discussing basically a possible promotion for Ms. Bowen. … I can say quite frankly that she does not deserve any promotion because she has not successfully safeguarded consumers, which is her job, her mission. Instead, she has fought to safeguard Wall Street money from just compensation to the legitimate victims of the Allen Stanford $7.2 billion Ponzi scheme.

“I have been involved in this Stanford issue for quite a while because it affects a lot of folks in Louisiana, but it affects a lot of folks in every State of the country as well. These folks first and foremost were victims of Allen Stanford and his completely fraudulent activity, his Ponzi scheme that literally defrauded hard-working Americans of $7.2 billion. But they were victimized again, quite frankly, by Federal agencies that didn’t do their job–first by the SEC, which knew about this activity for 4 years before saying anything publicly, before warning anyone out there, before taking any action, and then by SIPC … by refusing to take appropriate action for the victims and instead acting as if their job, their duty was to safeguard Wall Street money, not to properly compensate victims under the law.”




Robert Khuzami, director of the division of enforcement at the U.S. Securities and Exchange Commission, left, Carlo di Florio, director of the SEC's office of compliance inspections and examinations, center, and Rose Romero, director of the SEC's Fort Worth regional office, testify at a Senate Banking Committee hearing on the agency's probe of financier R. Allen Stanford's alleged Ponzi scheme, in Washington, D.C., U.S., on Wednesday, Sept. 22, 2010. The SEC told lawmakers that in face of criticism that it bungled fraud claims against Stanford it has strengthened its investigations. Photo by Joshua Roberts/Bloomberg


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