William A. Miller, Esq.

Following on the heels of the federal class-action lawsuit filed against two nation­al law firms and national accounting firms last week in Phoenix, Greenberg Traurig and Mayer Hoffman McCann and its affiliates find themselves on the wrong end of another inves­tor lawsuit to recover some $52.3 million that the investors claim the lawyers and audi­tors helped Mortgages Ltd (MLtd) and its wholly-owned subsidiary Mortgages Ltd. Secur­i­ties (MLS) defraud investors to the tune of $900-plus million between 2004 and 2008.

The latest lawsuit was filed on June 1st in Maricopa County Superior Court in Phoenix by Scotts­dale attorney William A. Miller on behalf of the Plaintiff, Victims Recovery, LLC (VR), a group that represents 18 high net-worth investors who, according to the complaint, as the result of the defendants’ misrepresentations, bought into Mortgages Ltd.’s promise of high-interest income and relatively quick payback of principal from its “secured” investments.

In addition to Greenberg Traurig and Mayer Hoffman, the complaint names as defendants May­er Hoffman affil­i­ates, CBIZ, Inc., and CBIZ-MHM, LLC, as well as two Greenberg attor­neys, Robert Kant and Jeffrey Verbin, two Mayer Hoff­man accountants and auditors, Charles McLane and Joel Kramer, and three former MLtd executives, former president Michael Den­ning, former CFO Chris­to­pher Olson and former vice president Jeffrey Newman, who was also the for­mer president of MLS, which was used to sell MLtd’s invest­ments to investors.

Kant, Verbin and Greenberg Traurig were MLtd’s and MLS’s attorneys from 2006, while McLane, Kramer and Mayer Hoffman reviewed and audited the company’s 2004-08 financial statements, which Olson prepared. According to the complaint, these defendants participated in or facilitated MLtd’s fraud by preparing false offering memoranda, other legal documents and indepen­dent auditors’ reports, which mis­led investors by misstating the real risks of MLtd’s loan programs, and the fact that MLS was selling securities illegally and that MLtd was actually insolvent but for creative accounting and undisclosed bor­row­ing from related and third parties.

In the complaint VR says, “the Company’s lawyers, accountants and auditors made sure that “MLtd would fall [like Humpty Dumpty], leaving investors ‘holding the bag’ of worth­less paper.” After detailing how all of that happened, VR alleges claims of fraud, negligence, aiding and abetting breaches of con­tract, bad faith and fiduciary duty, and civil conspiracy against Greenberg Traurig, Mayer Hoffman and the other defendants.

By way of background, MLtd was founded in 1963 and licensed as an Arizona mortgage bank­er. It opera­ted as a private real estate mort­gage len­der in Arizona until 2008 when Scott Coles took over the compa­ny as CEO from his father who founded the company. Coles moved the compa­ny’s business from making traditional residential mortgage loans to making short-term multi-million dollar bridge loans to commercial real estate developers and buil­ders for pro­jects in Arizo­na such as mul­ti­family residential complex­es, office buildings and unde­vel­op­ed mixed-use prop­erties.

MLtd packa­ged these loans into “pro­grams” and sold invest­ments in the pro­grams as unreg­i­s­tered securities through its MLS subsi­di­ary to investors, such as those represented by VR, to raise the money it used to make the loans. Accor­ding to VR’s complaint, MLtd made its money by col­lec­ting “a virtual airline-like laundry list” of fees from both its borrowers and its inves­tors in addition to receiving the “interest spread,” the dif­fer­ence between the interest received from bor­rowers and the inter­est it paid to inves­tors, on the loans.

One of MLtd’s loan investment programs, its “Revolving Opportunity” (RevOp) program, was differ­ent from its other programs in that it was geared towards high net-worth investors, like the VR investors, and required higher minimum investment amounts (initially $500,000.00 and later increased to $1 million). According to VR’s complaint, RevOp, the program that the VR investors lost their money in, was touted as offering investors preferred posi­tions, higher rates of return, better security, and more liquidity than the company’s other loan programs.

VR’s complaint goes on to say that MLtd increasingly originated significantly larger but few­er loans, many of which had delayed-funding terms that obligated the company to fund sub­stan­tial portions of the loans in stages rather than the entire amounts upfront. This magnified the adverse effects of the deteriorating real estate market conditions in Arizona in late 2006 and through­out 2007, all of which began to severely impact MLtd’s cash flow.

For example, as VR’s complaint states, in late 2006 through late 2007, MLtd made com­mit­ments to developers to loan them more than $670 million for a multitude of projects with­out the resources to fund those loans. Moreover, many of MLtd’s borrowers began defaul­ting on their large multi-million dollar loans and by January 2008, developers had defaulted on more than $100 million in loans.

According to the complaint, that coupled with the impact of having to meet delayed-funding obligations resulted in the company’s not having the money or ability to raise more money to pay the VR Investors their monthly interest or to honor their investment-redemption requests as required under RevOp. The complaint continues that with the assistance of the defendants, “[a]s a result of being so grossly overextended, MLtd and MLS pursued vari­ous Ponzi schemes of sell­ing even more loan programs to existing and new investors, including the VR Investors, to raise the money … needed to pay the interest due investors on earlier investments and to keep the com­pany afloat.”

As a result, the complaint alleges, “MLtd’s house of cards came crashing down” when Coles, who also ran MLS, committed suicide on June 2, 2008, and just three weeks later, MLtd was forced into bankruptcy by its creditors. Short­ly after that the SEC and the Arizona Depart­ment of Financial Institutions (ADFI) began investi­ga­ting the com­pa­ny’s business, and the SEC shut MLS down for violating federal securities laws and the ADFI yanked MLtd’s license based on its improper finan­cial practices and accounting, which violated Arizona law.

The complaint explains that the VR RevOp investors first became aware of the fact that Greenberg Traurig and Mayer Hoffman may have been involved in MLtd’s fraud during MLtd’s bankruptcy proceedings. That then led these 18 investors to join together to set up VR to investigate the situation and that resulted in the lawsuit that VR filed on June 1st. A copy of VR’s complaint is available under the “Mortgages Ltd. Case” tab at the top of this website.

A San Francisco landlord for defunct white shirt law firm Heller Ehrman won a key court ruling earlier this month that means bankruptcy is now possible. What this means is the landlord accelerated all future rent due and has tied the Heller Ehrman partner hands from a midnight move or fire sale of its assets.

A Superior Court granted the landlord, 333 Bush Associates, a writ of attachment for $48 million on Dec. 19. The move makes the landlord a secured creditor, freezes a portion of Heller’s assets for the landlord, and leaves other unsecured creditors at a disadvantage, essentially waiting in line behind the landlord for dibs on leftover assets. This is ultimate hardball and is a tactic available in Maricopa County Superior Court under certain circumstances.

“The fact that they have reached the point where the landlord has gotten a writ, has obtained legal process to take their money on this scale, means that it is very likely they will file bankruptcy or be forced into bankruptcy,” said William McGrane, of McGrane Greenfield, who represented the three landlords that forced Brobeck, Phleger & Harrison into bankruptcy in 2003. Who would ever hire a law firm who cannot even pay its rent? This is a shame. At the law firm of William A. Miller in Scottsdale, Arizona, we applaud the landlord for playing hard ball against a powerful law firm. We handle all landlord tenant matters and can be reached at 602-319-6899.

My dad always used to tell me that ‘luck only happens once.’ What he meant was if someone is truly successful, it is not because of luck, it is because of hard work, street smarts and good planning. Not simply luck! Well, by Madoff standards I ain’t done much, but for a boy who grew up on 40th street in Phoenix, I have been lucky blessed indeed.

Anyway, I think this advice is the only time my dad was wrong. I got lucky twice. First, I married Andra.

The next stroke of luck was working for Tom Stoops, Esq. He is and has always been a top real estate lawyer in Phoenix. He is a true gentleman lawyer and faithful Arizonan committed to our cowboy roots. He taught me to prepare cases beyond what was expected. He told me to trust my instincts, not the books that would tell me how to think. He told me to be honest and faithful to the concept of justice. He told me to stay faithful to my Christian faith and defend the poor.

He taught me how to cowboy up when the white shirt law firms and their big money attack the little guy. We put real estate con or two out of business back in those days. One crook sold bogus lots in Northern Arizona at The “Grand Canyon Estates” to European visitors. A thousand bucks down & hundred bucks a month. The problem was, the lots had no water, roads, sewer or nor could they even be found. One German who looked like Otto in Malcom in the Middle bought the same lot about 15 times. Tom taught me how to stand up to these type of cons.

I just went to Tom’s Christmas party. It was full of his long time friends and business associates. There was a ton of good cheer. I was kind of surprised that I knew some of his folks after so many years of not seeing Tom. His staff still worked with him. 

So, I now will tell my kids that luck can happen twice.

I also tell them that every successful guy I know sticks with his friends and business partners. Jerry C. who owned the Phoenix Suns still has his secretary Ruth. Bob Russell has the same accountant for 40 years. Mike Dorn still works with his accountant and lawyer after 30 plus years. The Van Arsdale brothers do not quit on their partners or contractors, nor does Bob Fraley, Skip Hancock, Howie Basuk, The Tangs, The Gongs, Andrew Cohn, Bob Alpert, Chris Peacock, Tim Louis, Mark Stein, Jim Harrison, Ezri Namvar or a whole host of multi-bill/mill-ionaires I know and work with.

Mom told me you know a person by who their friends are. I’ll amend that too mom, you know a business guy based on who still hangs around him after 25 plus years. To Lou P., Erv S., John H., Steve S., etc. thanks for sticking in there with the Law Firm of William A. Miller and God Bless you Tom.

In a recent Arizona case that involved real estate, an entrepreneur named Caneva owned several businesses, mobile home parks and even an airplane. This guy was a classic Arizona developer. At the law firm of William A. Miller, PLLC, we have seen scores of cases like this. Anyway, in too much debt, he chose to file for Chapter 7 dissolution and discharge. He had every right to do so. While in Court, he amended his bankruptcy schedules. As noted on the record, each schedule was less and less clear as to what he owned. 

Finally, his last amendment said his interest in the businesses was unclear or unknown. In a courtroom cross-examination of the status of his finances, the guy admitted that he failed to keep records for his businesses. I think the presumption was he was hiding something. Arizona judges do not like this at all.

In Arizona and virtually every other State, you must keep business financial records and electronic evidence in order to obtain a discharge in bankruptcy. One of Caneva’s creditors objected to the Court’s ability to discharge his debts due to his lack of financial records. The Court denied Caneva’s request for a discharge based on his lack of records, ruling that the court couldn’t tell what to discharge, and he appealed. He lost. Arizona lawyers and those who litigate often say, “the cover up is worse than the crime.”

Federal law allows discharges, but not if the debtor fails to preserve records ”from which the debtor’s financial condition or business transactions might be ascertained.”  Sufficient written evidence, as opposed to absolute completeness, must be presented.

Caneva argued he produced a substantial quantity of documents, but he admitted he did not keep records crucial to determine the extent of Caneva’s interest in his businesses. Since his creditors were not able to accurately understand Caneva’s financial condition, the court did not have to discharge his debts. In Maricopa County you must also keep or have retention policies regarding electronic records such as emails and computer programs.

I have heard of Maricopa County Judges tossing out suits for failure to keep and then produce good business records. The same goes for offering a defense. Keep good records or you may lose your chance at a case-winning argument.