Dreade Locke

What happens when a top law firm gets two crooks for clients? At Locke, Liddell, and Sapp, the result was a $30 million settlement for angry investors.

Locke Purnell Attorney Jane Matheson’s note on the back of a trade agreement her firm was editing for client Russell Erxleben in February 1998 got right to the point: “Tell the truth.” Erxleben, an All-American punter and place kicker for the University of Texas Longhorns in the seventies, had enlisted the 110-year-old, blue-chip Dallas law firm to keep his company, Austin Forex Investments ( AFI), from running afoul of state and federal securities regulations. AFI made its money through short-term investments in the volatile foreign-currency market, and it had a fiduciary duty to be open and honest with its investors. If, for example, AFI was telling clients that the company was doubling their money when it was really millions in the hole, then it was committing securities fraud.

This hypothetical example turned out to be the case. Seven months after Matheson scribbled her note, AFI closed its doors. A year later another client of the firm, Brian Russell Stearns, was arrested and charged with securities fraud after bilking investors out of more than $30 million, including $4.5 million from clients in his wife’s hometown of Brady. Both Erxleben and Stearns turned out to have been running Ponzi schemes, using money from new investors to pay old ones. Before the two businesses collapsed, Locke Purnell’s lawyers wrote letters on behalf of their clients, edited solicitations of investors, and negotiated deals, lending the firm’s expertise and, by extension, its good name. By all accounts, their clients were no less willing to lie to the firm than to anyone else. But when the businesses failed, desperate investors with no chance to recoup their money from Erxleben or Stearns looked through the maze of transactions for a party with deep enough pockets to make them close to whole. They found Locke Purnell, which by that time had merged with Houston’s Liddell Sapp to form Locke, Liddell, and Sapp, the state’s sixth-largest legal shop. In April 2000 the firm agreed to pay defrauded AFI customers $22 million. Not even a year and a half later, a Travis County district judge okayed an $8.5 million settlement by Locke Liddell for Brian Stearns’ investors. Although most of the $30 million tab will be picked up by the firm’s malpractice insurance, the size of the claims, that nasty word “fraud,” and Locke Liddell’s surrender without going to trial—as well as a $26 million suit brought by other Stearns’ investors that the firm is still fighting in New York City—sent shock waves through the Texas legal community. The firm brought in $175 million in gross revenue last year and employs some 435 attorneys spread out in offices in Dallas, Houston, Austin, and New Orleans. One of its co-managing partners at the time, Harriet Miers, a former president of the State Bar of Texas and onetime lawyer for George W. Bush, is on the White House staff. So how is it that the sins of the clients came to be visited upon the firm?

The clients were indeed world-class con artists, with an abundance of charm and an absence of conscience that enabled them to talk folks into turning over their entire life’s savings. Both men hid previous legal trouble from investors, lied about the growth of their funds, failed to disclose losses, and pooled their clients’ money (something only registered securities dealers can do) instead of segregating it in individual accounts—all significant violations of securities regulations. Locke Liddell attorneys worked on many of those transactions, representing Erxleben from April 1997 until AFI closed its doors and Stearns from August 1998 until he was arrested. According to John McElhaney, a senior shareholder and a member of the firm’s risk-management team, Locke Liddell was duped much like the investors: “One of these cases involved a client [Erxleben] who was not following our advice, and the other involved a client who was misrepresenting the facts entirely, so we weren’t able to give adequate advice because we were being fooled as to what he was doing.”

The problem with that explanation is that judging from Locke Liddell’s own documents—attorneys’ notes and memos, billing sheets, and correspondence, all of which were inherited by the court-appointed receiver who took over the two enterprises—the firm would be hard-pressed to convince a jury that it had been duped. The paper trail, pieced together by plaintiffs lawyers Mike Shaunessy and Jim George (George represents this magazine), could be evidence that Locke Liddell either knew or should have known that someone was being had. The attorney who worked the Stearns file for Locke Liddell was Phillip Wylie, a corporate lawyer who, despite 26 years of practice, the last 6 of them with Locke Liddell, was “of counsel” to the firm, not a shareholder. He took over Stearns’s file when another attorney had concerns about inconsistencies in Stearns’ stories. For instance, Stearns initially told the firm he was worth $547 million, but a rare client-background check turned up just a small house in Austin and a couple of secondhand cars, barely $150,000 in assets. Undeterred, Wylie took over the file. He responded to a State Securities Board inquiry by writing that Stearns was not selling securities in Texas, even though Stearns’s earliest statements to the firm indicated that he was. In a letter to a man who was mulling over an $8 million loan to Stearns, Wylie wrote under the firm’s letterhead that Stearns “honors all the commitments that he makes and he pays his bills when they are due.” Yet Wylie had previously written two letters to Stearns demanding that he pay the firm’s bill that was overdue. He had also helped Stearns clear up $60,000 in hot checks and had failed to check out a report from another client of the firm that Stearns had been convicted of felony fraud in Maryland. When Wylie was deposed, he contended that Stearns had good explanations for those irregularities and plenty of others, and maybe Stearns did have him convinced: The firm sent Stearns a bill two months after he was arrested.

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