Opinion ID: 2588679
Heading Depth: 1
Heading Rank: 1

Heading: The Hearing Panel's Findings

Text: 1.... The Respondent was admitted to the practice of law on September 28, 1949. 2. In March, 1994, the Respondent established a new trust account with Bank IV (now called Bank of America). The account was titled: The Kansas Bar Foundation, Fred W. Rausch, Jr. IOLTA Account.... Although the respondent takes exception, arguing that the account was opened in February 1994, he admitted to the March 1994 date in his answer to the Disciplinary Administrator's complaint. At the disciplinary hearing, the respondent testified that the Interest on Lawyer Trust Account (IOLTA) account was opened before Deerfield Holding Company, Inc., (Deerfield) was actually incorporated, but no date was given. IOLTA accounts for clients' funds are established by the Rules of this court. KRPC 1.15(d)(3)(iii). Interest or dividends on the account are remitted by the financial institution to the Kansas Bar Foundation, Inc. KRPC 1.15(d)(3)(iii)(aa). IOLTA trust accounts are designed for funds of clients or third persons (1) that are nominal in amount, (2) that are expected to be held for a short period of time, and (3) on which interest is not paid to the client or third persons. KRPC 1.15(d)(3). The record reflects that the IOLTA account contained the respondent's initial $500 deposit, investment funds from the Methodist Church in South Africa, and funds from Deerfield investors. Sometimes money was transferred to the Deerfield accounts or to Cecil P. Jones. Sometimes the respondent wrote checks to himself as payee out of the IOLTA account. 3. On March 8, 1994, the Respondent filed the necessary papers with the Kansas Secretary of State's office, and incorporated Deerfield Holding Company, Inc. (hereinafter `Deerfield'). Deerfield's office address was the same [as] the Respondent's law office address.....Additionally, the Respondent was listed as the Registered Agent of Deerfield. 4. Thereafter, on March 9, 1994, the Respondent, Cecil P. Jones, and Deborah L. [Gardner-Jones] held the organizational meeting for Deerfield. At that time, 100 shares of stock were issued to the Respondent, and 100 shares of stock were issued to Mr. Jones. The three individuals present voted that they should each be elected to serve as the Board of Directors of Deerfield. Thereafter, Mr. Jones was elected Chairman of the Board of Directors and President of Deerfield; Ms. Gardner-Jones was elected Vice Chairman of the Board of Directors and Vice President of Deerfield, and finally, the Respondent was elected as Secretary of the Board of Directors and Secretary/Treasurer of Deerfield. 5. At a subsequent meeting of the Board of Directors, held on July 1, 1995, the members of the Board of Directors agreed to redesignate the shares of the corporation. At that time, Mr. Jones became owner of 150 shares of stock. The Respondent's ownership in the corporation was reduced to 50 shares of stock. 6. Complaint of Pieter M. Van der Spuy We note that Van der Spuy filed a civil complaint grounded in fraud in the United States District Court for the Eastern District of Virginia, not a Kansas disciplinary complaint. a. During October, 1995, Pieter M. Van der Spuy, a citizen of South Africa who now resides in Virginia Beach, Virginia, from Erich Otto, also a citizen of South Africa, learned of `high-yield foreign investment' programs operated by Deerfield. Mr. Otto indicated that he was scheduled to meet with Anthony H. Adams about investing in Deerfield. Mr. Otto told Mr. Van der Spuy that, if he was also interested, then he would ask Mr. Adams to forward information concerning the program to Mr. Van der Spuy's attention. b. Mr. Van der Spuy contacted Mr. Otto indicating that he would like to have additional information regarding the investment programs. Mr. Otto provided Mr. Van der Spuy with Mr. Adams' address and telephone number. Thereafter, Mr. Van der Spuy contacted Mr. Adams by telephone. Mr. Adams provided information regarding the investment program available through Deerfield. In part, Mr. Adams assured Mr. Van der Spuy that the investment principal was fully secured against loss with letters of guarantee and that the program required the letters of guarantee to be in the possession of the trust before any monies could be released by the trustee. c. Later, Mr. Otto informed Mr. Van der Spuy that the Methodist Church of South Africa had invested hundreds of millions of dollars with Mr. Jones and the Respondent through Deerfield. In order to ensure the accuracy of the information that he was receiving, Mr. Van der Spuy contacted Colin Woolacott. Mr. Woolacott, the Chief Executive Officer for the Methodist Church of South Africa, assured Mr. Van der Spuy that Mr. Jones had been appointed the church's chief investment officer and that Mr. Jones was handling all of the church's investments. d. In deciding whether to invest with Deerfield, Mr. Van der Spuy `investigated' the Respondent. Mr. Van der Spuy contacted bar officials in the state of Kansas. Mr. Van der Spuy was informed that the Respondent had been practicing law for approximately 40 years and had a `clean record.' e. On October 27, 1995, Mr. Van der Spuy telephoned the Respondent. The Respondent informed Mr. Van der Spuy that the funds would be secured by a pledge of securities before the funds were transferred from the trust to Deerfield. The record conflicts here. Apparently Van der Spuy told Steve Hulsopple, of the Kansas Securities Commission, that he spoke to the respondent in October. However, at trial, Van der Spuy testified that the first time he spoke to the respondent was November 13 or 14, when he was preparing to wire the $100,000. The respondent assured him that he had known Jones for some time and that Jones was experienced in this type of thing. Van der Spuy signed the documents received from Deerfield on November 13. At the disciplinary hearing, Van der Spuy agreed that the respondent did not personally make representations to him about a trading program. f. As a result of the various conversations, Mr. Van der Spuy decided to invest $100,000 in Deerfield's investment program. Subsequently, Mr. Jones and the Respondent forwarded documents to Mr. Van der Spuy's attention. The documents included a `Power of Attorney,' a `Trust Agreement,' and an `Authorization to Transfer Funds.' After a careful review of the documents, Mr. Van der Spuy executed the documents and returned the same to Deerfield. The bulk of the documents were originally sent to Van der Spuy from Jones. After signing the documents, Van der Spuy sent them to Deerfield. First, Van der Spuy testified that he sent the documents to the Deerfield address at the respondent's law office, but then he testified that he thought he sent the documents to the Deerfield address in Georgia. He also faxed them to the Deerfield office in Georgia. Copies of the signed agreements were then sent back to Van der Spuy by Jones or the Respondent. g. Thereafter, on November 14, 1995, Mr. Van der Spuy caused $100,000 to be wire transferred to the Respondent's trust account. Pursuant to instructions from Mr. Jones, on November 17, 1995, the Respondent transferred Mr. Van der Spuy's $100,000 to Deerfield .... Then, again, pursuant to instructions from Mr. Jones, on November 22, 1995, the Respondent wire transferred Mr. Van der Spuy's $100,000 from the Deerfield account to the personal account of Linda Flores at the National Westminister Bank in England. The transfer was to E.F.S., Inc. Linda Flores. The findings in paragraph g as modified are supported in the record. h. At no time did the Respondent or Mr. Jones receive a letter of guarantee or a pledge of securities to protect Mr. Van der Spuy's $100,000 investment as required by the documents. Additionally, Mr. Van der Spuy's $100,000 was never placed in a `trading program' as the documents required. The record shows no evidence of a letter of guarantee or pledge of securities, nor is there evidence that Van der Spuy's money was placed in a trading program. Van der Spuy's money was transferred from the IOLTA account to a Deerfield account and then to an account in England (Linda Flores). The money was lost. At trial, the respondent acknowledged that he received no documentation in return for the funds he sent out in November 1995. In addition, the record shows that there apparently had been an agreement between Jones and Adams involving the transfer of Van der Spuy's money to the bank account of Linda Flores, the president of EFS, Inc. i. On February, 12, 1996, Mr. Van der Spuy received a return of $2,000 of his investment funds. j. In March, 1996, Mr. Van der Spuy wrote three letters to Mr. Jones and the Respondent requesting information regarding his investment. In response to Mr. Van der Spuy's letters, the Respondent telephoned Mr. Van der Spuy and indicated that he would contact Mr. Jones. Mr. Jones failed to respond to the requests for information. These facts are supported in the record. k. On July 2, 1996, counsel for Mr. Van der Spuy contacted the Respondent requesting information regarding Mr. Van der Spuy's investment. The Respondent replied, disclaiming knowledge of Mr. Jones' activities and stating that all investors' monies were in the process of being returned. Van der Spuy told this to Steve Hulsopple of the Kansas Securities Commission. The respondent acknowledged that he received inquiries from investors wanting to know where their money was. 1. On December 26, 1996, Mr. Van der Spuy filed a complaint in the United States District Court for the Eastern District of Virginia, alleging that the Respondent, Deerfield, Mr. Jones, and Ms. Gardner-Jones engaged in fraud, breach of contract, and breach of fiduciary duty. m. On July 10, 1997, judgment was entered against Deerfield, Mr. Jones, and Ms. Gardner-Jones. n. On January 6, 1998, after a trial to the court, the Respondent was found civilly liable for committing federal common law fraud, Virginia common law fraud, federal mail fraud, and breach of contact. Additionally, the Respondent was ordered to pay $98,000.00, plus interest to Mr. Van der Spuy. Mr. Van der Spuy requested that the court order the Respondent to pay attorney fees incurred in the action. The following are excerpts from the findings of the United States District Court for the Eastern District of Virginia: ... So we have a scheme to defraud. The scheme is to get people to believe that the Kansas Bar Association, through this wonderful trust agreement with Fred W. Rausch, Jr.and it doesn't say trust with Mr. Rausch. It keeps constantly referring to the Kansas Bar Association, as if it were overseeing this thing. [The wording in Deerfield's documents was clearly designed to place trust in Mr. Rausch and cloak him with the authority of the Kansas Bar Association, clearly designed, and the instruments refer to that. And so I find that that was part of a scheme to defraud participants into believing that this particular money was going to be in trust under specific purposes with an overseer of the Kansas Bar Association. This agreement was drawn by Mr. Rausch, who is an attorney. It was designed to defraud people into believing that the Kansas Bar Association was a participant. And I'm looking at the trust agreement that has Mr. Rausch's initials below it and his signature on it. He knew exactly what he was doing. ... The trust agreement should have been between you as trustee and the individual for whom you were acting. The Kansas Bar Association was no part of any trust agreement. The account may have listed Kansas Bar Association, but this was specifically designed, and I find it was designed by you, to defraud, mislead, and deceive anybody who saw this agreement.... ... Clearly under Virginia law it is common-law fraud. Punitive damages won't serve to do much, although I think that you have some connection with this money somewhere and that you probably could put your hands on a portion of it, Mr. Rausch, because you are the only person that transferred it. I don't know where it is. It may be all gone. I find that you are the person who probably designed all these documents, but have no direct evidence that you designed all the instruments. I have no doubts, and no other conclusion could rationally be drawn in this case other than that these documents represent a gigantic scheme to defraud as they were carried out. They were intended to mislead a person into believing that he was making an ironclad investment overseen by the Kansas Bar Association and that the money would only be transferred under a custodial arrangement whereby it would be for his benefit, when instead, it was anything but. ... I think it was willful and wanton fraud. The Virginia trial transcript was included in the record. The transcript did not explain why respondent defended at a bench trial, as opposed to a jury trial. At the disciplinary hearing, the respondent denied preparing the trust agreement and other documents. Also, at the disciplinary hearing, James Litfin, retired vice-president of Bank IV, testified that to the best of his knowledge, the bank captioned all of the attorney accounts as Kansas Bar Foundation accounts. The respondent acknowledged that in some of his business literature, the word Foundation was incorrectly interchanged with the word Association. o. Before the court ruled on the request for attorney fees, on February 3, 1998, the Respondent filed a notice of appeal. Subsequently, on August 22, 1998, the United States Court of Appeals for the Fourth Circuit affirmed the District Court's judgment in an unpublished decision. The Respondent filed a petition for rehearing and suggestion for rehearing en banc. The Respondent's petition was denied. p. Later, Mr. Van der Spuy renewed his request for attorney fees. On December 4, 1998, the District Court for the Eastern District of Virginia ordered that the Respondent pay Mr. Van der Spuy's reasonable attorney fees. Thereafter, January 15, 1999, the Respondent filed a second notice of appeal to the United States Court of Appeals for the Fourth Circuit. However, the Respondent's second appeal was dismissed on the Respondent's own motion on May 25, 1999. q. At some point, the Respondent and counsel for Mr. Van der Spuy agreed to reduce the judgment owed by the Respondent. As a result, the Respondent paid a total of $65,000 to Mr. Van der Spuy and his attorneys. 7. Complaint of Clive U. Fisher a. Clive U. Fisher also became acquainted with the Respondent, Mr. Jones, and Deerfield through Mr. Adams. Mr. Fisher agreed to invest $100,000 through Deerfield. Thereafter, on October 3, 1995, in order to effectuate the investment, Mr. Fisher provided a power of attorney to Mr. Adams. After obtaining the power of attorney, Mr. Adams signed certain documents, in [sic] behalf of Mr. Fisher, regarding Mr. Fisher's investment with Deerfield. The documents included a `Letter of Intent,' `Authorization to Transfer Funds,' `and `Agreement.' These facts are verified in the record. b. The `Letter of Intent' included the following: `During the Program period (one (1) year and one (1) day), the funds cannot and will not be hypothecated or invaded or put at risk in any manner whatsoever without an approved principal guarantee being substituted for the funds in accordance with approved procedures, and in the approved format(s) to be defined in the Proposed Agreement, in which case the funds can be released upon [Deerfield]'s instructions.' The language is supported in the record. c. In four wire transfers, Mr. Fisher transferred approximately $105,000 to the Respondent's trust account for investment in Deerfield's investment program. The wire transfers occurred on October 11, 1995, October 13, 1995, October 17, 1995, and October 20, 1995. Thereafter, on October 25, 1995, the Respondent, pursuant to directions by Mr. Jones, transferred $100,050 of Mr. Fisher's investment funds to Deerfield. Then, on November 13, 1995, again, pursuant to Mr. Jones' directions, the Respondent transferred Mr. Fisher's investment monies to the personal account of M.P.H. Williams at the Midland Bank PLC in England. [The record reflects the account was `M.P.H. Williams, trustee, West Pacific Holdings, Ltd.'] At the disciplinary hearing, the respondent testified that Adams collected a total of $300,000 from several investors, one of whom was Fisher. $35,609.10 was transferred from Barclays Bank by order of John Fitzpatrick; separate transfers of $30,000, $17,000, and $23,000 were transferred from the Standard Bank of South Africa by Casey Trading PVT Ltd. The connection between Fisher, Fitzgerald, and Casey Trading is unclear, but Fisher claimed that these monies were his personal funds. At the disciplinary hearing, the respondent acknowledged that the $300,000 included Fisher's $100,000. $5609 was for expenses, and $100,000 was for investment. In the Authorization to Transfer Funds, which was signed by Adams, $100,000 was designated for investment. The funds were transferred from the respondent's IOLTA account to a Deerfield account and then to the Midland Bank account of M.P.H. Williams (in England), as trustee of West Pacific Holdings, Ltd. The President of West Pacific, William Frattalone, wrote Jones a letter in which he said they were delayed in placing the investments into a trading program. Apparently Jones later asked for a return of the total $300,000 investment, and Frattalone assured him that the funds would be returned. However, according to letters written by Deborah Gardner-Jones, Frattalone moved the funds to an alternate bank undisclosed to Deerfield. The respondent acknowledges that the money has never been returned. d. At no time did the Respondent or Mr. Jones receive a letter of guarantee or a pledge of securities to protect Mr. Fisher's investment as required by the documents. Additionally, Mr. Fisher's investment was never placed in a `trading program' as the documents required. The money was transferred to the IOLTA account, to a Deerfield account, and then to an account in England. No guarantees were received by the respondent. e. After the contractual period of one year and one day ended, Mr. Fisher sought the return of his initial investment and the profits made during the year. Deerfield, the Respondent, and Mr. Jones failed to return Mr. Fisher's investment and profits. Thereafter, Mr. Fisher complained to the Office of the Disciplinary Administrator, the Office of the Securities Commissioner, and the Client Protection Fund. 8. From on or about October, 1995, through on or about January 24, 1996, approximately $721,435.23 was received by the Respondent and deposited in the `Kansas Bar Foundation, Fred W. Rausch, Jr., IOLTA Trust Account ...' as investment for Deerfield which was intended for investment in `high-yield foreign investment' programs. At the hearing on this matter, the Respondent agreed that he had a fiduciary duty to protect and preserve the investment monies contained in his trust account and the Deerfield accounts. These facts are supported in the record. 9. During that period of time, the Respondent wired the monies to various personal accounts as instructed by Mr. Jones. Having failed to receive a letter of guarantee or pledge of securities following the first and second wire transfers, the Respondent continued to wire transfer investor monies to personal accounts, as instructed by Mr. Jones. Due to several nefarious individuals involved, all of the investor monies were lost in various fraudulent schemes. Van der Spuy's money was wired to the account of E.F.S., Inc.-Linda Flores, a supposed trader with Westminster Bank in London. Flores' corporation, a California corporation, was dissolved during the period that Flores was involved in an unrelated case involving fraudulent investments in 1996. It is unclear whether Flores' corporation was defunct during her dealings with Deerfield. In the pretrial order in the Virginia federal district court case, the parties stipulated that the respondent transferred the $100,000 to the Westminster Bank account for the benefit of Flores. Fisher's money was wired to the account of M.P.H. Williams, trustee for West Pacific Holdings, Inc. 10. For at least two years before the Respondent had taken any investment monies into his possession, he knew that Mr. Jones and Ms. Gardner-Jones were persons of questionable financial means. In fact, at points in time, the couple had been evicted from their apartment and did not have sufficient credit to purchase or lease an automobile. On multiple occasions, the Respondent made loans to the couple to keep them financially afloat. Despite those warning signs, the Respondent continued to act upon the mere assurances of Mr. Jones and completely failed in his duty to protect the investors' monies. The respondent loaned money to Jones for several years. It appears that he began loaning money to Jones in 1993. 11. On August 7, 2000, in the District Court of Shawnee County, Kansas, the Respondent was charged with having committed deceptive commercial practices, a class B misdemeanor, in violation of K.S.A. 21-4403. Thereafter, on September 28, 2000, the Respondent entered a nolo contendere plea to that charge. On November 28, 2000, the District Court sentenced the Respondent to serve six months in the county jail. The District Court did not remand the Respondent to jail. Rather, the District Court placed the Respondent on supervised probation for 24 months. The District Court also ordered that the Respondent pay court costs in the amount of $103.50, a fine of $1,000, and restitution of $65,000 (to Mr. Fisher). Finally, the District Court ordered that the Respondent perform 200 hours of community service work. In his exceptions, the respondent noted that he pled nolo contendere to one count of committing deceptive commercial practices.