The University of St. Thomas

November, 2010

A Review: “Unweaving a Tangled Web: Inside the Petters Ponzi Scheme”

By: Acts of Kindness

Published on: Friday, November 12th, 2010

By Aaron Knoll
On November 10, 2010 in the University of St. Thomas School of Law atrium, the Federal Bar Association, Business and Corporate Law Society, Criminal Law Association, and Holloran Center sponsored a panel discussion on the Tom Petters ponzi scheme.

Prior to the conviction of Bernie Madoff in 2009, Tom Petters orchestrated the largest ponzi scheme in history, valued at $3.65 billion. In general, a ponzi scheme is a fraudulent financial investment operation, whereby investors are paid returns which far surpass the market average. The concern is able to continually operate in this way by paying returns to investors not from earned profit but with the money of subsequent investors. Therefore, the scheme needs to consistently attract new investment, or the operation will collapse leaving investors victimized without payment of either the principal or promised interest.

Similarly, Petters sought investors to fund the near sixty companies he owned and managed, which included Polaroid and Sun Country Airlines. He sought such investment from lenders on the basis of fabricated documents which detailed false purchases of electronic consumer goods. The lenders were told that retailers had ordered such merchandise even though no such purchases occurred. The FBI and U.S. Attorney’s Office became aware of the scheme on September 8, 2008 when Deanna Coleman, an executive with the company, informed federal officials of the false purchase orders and bank statements, empty warehouses, and fraudulent promises to investors upon which the entire business was premised. On September 24, 2008, investigators executed search warrants around the Minneapolis-St. Paul metro and obtained documents and admissions confirming the vast scale and scope of the ponzi scheme. On December 2, 2009, Petters was found guilty on twenty counts of wire and mail fraud and, in April 2010, sentenced to fifty years in federal prison.

The panel focused on the ethical, legal, and policy considerations surrounding this case of white-collar crime. Joe Dixon, Assistant United States Attorney and Chief of the Economic Crime Section of the U.S. Attorney’s Office, moderated a candid discussion with the attorneys representing key interests involved in the ponzi scheme.

John Marti, First Assistant U.S. Attorney for the District of Minnesota, spoke about his role as prosecutor in the case. He detailed much of the government’s involvement in the factual context and also discussed the role of whistleblowers and how the government weighs their criminal culpability with the valuable information they have to offer.

Joe Friedberg, defense attorney who represented Robert White, spoke about his client’s situation as the primary document falsifier within the scheme. He also talked about his experience with another client who came to him in 2002 for advice about an investment he had made with Petters. The client said that he was concerned about the high return he had received, and Friedberg told his client that he was in a ponzi scheme. He also touched on how decent persons can get involved in such fraudulent activity, theorizing that the high economic advantages act as a disincentive to act ethically.

Allan Caplan, a defense attorney who represented Deanna Coleman, discussed his unique role in advising an informant in such a massive fraudulent scheme. He spoke about Coleman’s willingness and courage in coming forward and speaking with the federal authorities, making them aware of the scheme and confessing her own involvement.

Doug Kelley, the court-appointed receiver and trustee for the bankruptcy, discussed how his legal obligations in gathering assets for the Petters estate to pay back the investors in the scheme are balanced with competing obligations of fairness and reasonableness.

In overview, the event shed light on the inconceivable proportions and impacts of the scheme. This clearer perspective brought attention to the 3,200 employees affected, the investors left without payment, and the charities and other organizations who had received donations from Petters. The stories told weave lessons to be learned from this massive breach in the ethical duties imposed on all members of the business, financial, and legal professions. More importantly, it shows that each of us have a personal and professional responsibility to guard against and disclose such breaches, for the long-term consequences of not doing so damage the integrity of the economic and social framework upon which our society depends.

Aaron Knoll is a second year law student at the University of St. Thomas School of Law and a research assistant for Professor Hamilton.

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Online Social Media and Legal Ethics

By: Acts of Kindness

Published on: Tuesday, November 2nd, 2010

by Neil Hamilton and Sarah Gillaspey

In April 2009, Facebook announced it had more than 200 million active users worldwide. LinkedIn, a professional networking site, had more than 48 million members and Twitter, one of the newest forms of online social media, had 14 millions active users.

The American Bar Association’s legal technology survey found in 2010 that 5 percent of lawyers and 14 percent of law firms have some type of legal blog. Additionally, 56 percent of all lawyers and 17 percent of all law firms are involved in some form of online social networking.

With so many lawyers and firms online, interacting and posting content, the potential for rule violations increases dramatically. Some lawyers and firms are having a hard time understanding the ethical boundaries and limitations of their behavior online.

In an article, “The Legal Implications of Social Networking,” published in Regent University Law Review, Sensei Enterprises president Sharon Nelson, vice president John Simek and paralegal Jason Foltin comment, “It’s a brave new world, and most corporations and law firms are having a heck of a time dealing with it. [Missteps] can involve huge costs, business disruptions, public embarrassment, and [even] legal liability.”

This article seeks to outline some of the potential ethical issues that could arise due to a lawyer’s online social interactions. Possible violations of the Minnesota Rules of Professional Conduct due to a lawyer’s or firm’s behavior online include issues relating to confidentiality, the attorney-client relationship, conflicts of interests and the dissemination of information relating to a lawyer’s or firm’s legal services.

We conclude with some advice and guidance for lawyers and firms about online social networking.

Confidentiality

Maintaining confidentiality with clients is a vital part of a lawyer’s professional service. Rule 1.6 states that “a lawyer shall not reveal information relating to the representation of a client unless the client gives informed consent.” However, a lawyer’s or a firm’s online presence may be revealing confidential information.

Rutgers University Adjunct Professor Steven Bennett notes in “Ethics of Lawyer Social Networking,” that “lapses in confidentiality can occur on a firm’s Web site and client intake forms, in emails and attachments, on lawyer blogs, bulletin boards, chat rooms, and listservs, and in many other communication forms.”

For example, if an attorney has a profile on LinkedIn and lets the public see his contacts, this may disclose a confidential relationship. An attorney with a blog that is cross-linked with other various websites related to their clients could be unintentionally revealing confidential information.

Attorney-client relationship

An attorney-client relationship is formed when a person manifests to a lawyer his or her intent for the lawyer to provide legal services, the lawyer fails to manifest lack of consent to do so, and the lawyer knows or reasonably should know that the person is reasonably relying on the lawyer to provide the services.

An attorney may inadvertently create an attorney-client relationship by commenting on a legal blog, offering advice on Facebook or posting legal advice on someone’s Tweet. If a firm’s website or a lawyer’s blog allows individuals to e-mail or contact lawyers, this interaction may also lead to the formation of an attorney-client relationship.

Whether an attorney client relationship has been formed is a matter of degree. The more conversation or interaction there is between the attorney and potential client, the more likely legal advice is given, and reasonably relied upon, the more likely an attorney client relationship has been formed.

It is important that the lawyer very clearly distinguishes between the interactions that are meant to form attorney client relationships and those that are not intended to do so.

Conflicts rules

An attorney owes a duty of loyalty to prospective clients, current clients and former clients. A lawyer’s online behavior may violate this duty of loyalty and the Minnesota rules relating to attorney client conflicts.

Rule 1.18 states “a lawyer shall not represent a client with interests materially adverse to those of a prospective client in the same or a substantially related matter.” A prospective client is anyone who has a reasonable expectation that the attorney is willing to discuss the possibility of forming an attorney-client relationship. Therefore, if an attorney, due to a post on a person’s blog or an informal conversation in a chat room, leaves someone with the reasonable expectation that the attorney is willing to discuss the possibility of an attorney-client relationship, the attorney may obtain confidential information from the prospective client and would be barred from representing any person who has materially adverse interests to the prospective client.

Furthermore, if an attorney-client relationship is formed, and the new client’s interests are materially adverse to any former client, the attorney may be violating Rule 1.9 protecting former clients.

Attorneys should also give careful attention to potential conflicts arising from differences between an attorney’s online commentary about legal issues and a client’s position on the same issues.

Theoretically, Bennett observes, “if a lawyer were to take a definitive legal position, in a blog or other posting, such position could ‘materially limit’ the lawyer’s ability to represent clients for whom the opposite legal position is dominant.”

Information about legal services

Rule 7.1 states that “a lawyer shall not make a false or misleading communication about the lawyer or the lawyer’s services. A communication is false or misleading if it contains a material misrepresentation of fact or law, or omits a fact necessary to make the statement considered as a whole not materially misleading.”

Bennett notes that “a lawyer’s Web site, blog, or social networking profile necessarily concerns the lawyer and his or her services, therefore these informational platforms must be true and not misleading.” For example, many firms and lawyers have a reviews section on their Facebook pages and blogs. These client “endorsements” could be considered misleading. Rule 7.1 states that an endorsement is misleading if “presented so as to lead a reasonable person to form an unjustified expectation that the same results could be obtained for other clients in similar matters.”

Additionally, Bennett emphasizes, ” a law firm cannot imply, by using the word ‘bar’ in its domain name, that it is associated with a bar organization; nor may it use ‘org’ as a top level suffix, which might imply that it is a not-for-profit organization.”

Other potential violations

Many other rules are also implicated when an attorney or a firm uses online social media and networking sites.

Online solicitations could lead to ethical violations. Rule 7.3 states that “an attorney shall not by in-person, live telephone or real-time electronic contact solicit professional employment from a prospective client when a significant motive for the lawyer’s doing so is the lawyer’s pecuniary gain.” In theory, if an attorney talks with potential clients in a chat room, on Facebook or in a comments section of a blog, the attorney could be cited for solicitation.

Bennett notes, “The closer an electronic medium gets to ‘live, in-person’ communication, the more likely it is that the attorney will be found to have solicited the client if other facts suggest solicitation.”

Rule 5.5 states that “a lawyer shall not practice law in a jurisdiction in violation of the regulation of the legal profession in that jurisdiction.” A lawyer must be licensed within the jurisdiction in which she practices. If an attorney answers a legal question online for an individual who lives in Oregon, but the attorney is licensed to practice only in Minnesota, the attorney may have violated Rule 5.5.

Rule 3.5 prohibits an attorney from communicating ex-parte with any juror, potential juror, judge or other official related to an ongoing case. If an attorney is linked to one of these people via LinkedIn or Twitter, or is friends with the person on Facebook, any form of communication between the two parties may constitute ex parte communication.

Avoiding rule violations

Nelson, Simek and Foltin offer the following tips for lawyers and firms interacting online:

-Attorneys need to be careful not to establish attorney-client relationships while online. A good rule of thumb is to not give legal advice online. Attorneys should speak only generally about the law and not apply the law to the other person’s specific facts.

-Confidential information must remain confidential. Firms should forbid and attorneys should avoid the posting, tweeting or blogging of confidential information. When in doubt, attorneys should get permission from their firm or clients before posting any information that may be confidential.

-Attorneys should always use disclaimers whenever they post online. An attorney within a firm should state that his or her opinions do not represent the opinions of the law firm where he or she is employed. Additionally, a disclaimer should also state that any information he or she is posting online is not intended to be legal advice as to avoid forming attorney-client relationships.

-Attorneys must exercise good judgment and be cognizant of the fact that their behavior online has real world implications. Maintaining good manners, honesty and acting like a professional online will only bolster a lawyer’s good reputation offline.

Bennett observes, “Common sense simply requires a user to think through his or her actions and realize that there is no special shield protecting a person’s online actions.”

Bennett concludes that “the best approach for the responsible lawyer is to become educated on new technologies and new methods of practice, to remain alert to potential ethical issues involved in the use of these technologies and methods of practice, and to encourage candid discussion among lawyers, clients, IT specialists, and law firm managers about the best means both to serve client interests and to uphold the high standards of the profession.”

Neil Hamilton is a professor of law and director of the Holloran Center for Ethical Leadership in the Professions at the University of St. Thomas School of Law.  Sarah Gillaspey is Hamilton’s research assistant and a third year law student at UST Law.

This article originally appeared in the October 22nd Minnesota Lawyer.

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