The American Lawyer - February 2008

call the scheme one of the largest bank frauds in South Florida history.

Espirito Santo was in a heap of trouble. The money was gone, executives looked foolish, and the feds were empaneling a grand jury. The bank turned to longtime outside counsel H. Rodgin Cohen, Sullivan & Cromwell’s chair, for help. Cohen asked Thomas, a litigator in the firm’s Los Angeles office, to take on the assignment.

A partner since 2001, Thomas had created a contingency fee–based litigation practice specializing in representing companies in crisis, often as plaintiffs. His clients included Los Angeles–based Manufacturers Bank and Dallas-based airline Express One International, Inc. Sporting a tightly trimmed beard, the die-hard Dallas Cowboys fan and former high school quarterback has the gait of a gunslinger from the Old West. One can still hear Carl Junction in his twangy “y’all,” but otherwise, Thomas has to be pressed for some of the grittier details of his upbringing: how his family put newspapers in the walls for insulation or kept baby chicks in the bathroom, the warmest room in the house, in winter. Thomas says “none of that [background] was an issue” when he joined S&C in 1993, after graduating from Duke Law School— where he served as editor in chief of the law journal—and clerking for Judge Ralph Winter, Jr., of the U.S. Court of Appeals for the Second Circuit. “All they wanted to know was, ‘Can you do the work?’ ” Thomas says.

In the Espirito Santo matter, Thomas explains, S&C agreed to a partial contingency fee arrangement with the bank: The firm would bill hours at a reduced rate and then collect a percentage of the final recovery. Thomas quickly went to work, scoring an early victory by keeping Espirito Santo out of the looming federal indictment despite the close ties between the bank and E.S. Bankest. Thomas’s client effectively controlled half of E.S. Bankest, the bank held the joint venture’s accounts, and the two shared office space. But Thomas made the case to the U.S. attorney’s office that the bank was unaware of the fraud; Freeman, now receiver, backed up the bank’s story. No Espirito Santo executives were among the defendants indicted in December 2003. Lead prosecutor Matthew Menchel, the former chief of the criminal division for the Miami U.S. attorney’s office and now a partner at New York’s Kobre & Kim, says that Espirito Santo was “given false financials and lied to at every single [board] meeting.” (After being convicted of bank fraud and money laundering in 2006, the Orlanskys were sentenced to 20 years in prison.)

Recovering the $170 million would be harder. Together with Mitchell Berger, a name partner at Miami’s Berger Singerman, Thomas set his sights on two of E.S. Bank-

est’s advisers: accounting firm BDO, which had signed off on E.S. Bankest’s annual audits, and Florida law firm Gunster, Yoakley & Stewart, which Freeman says represented E.S. Bankest, Bankest Capital, and the Orlanskys without obtaining conflict-of-inter-est waivers. Thomas and Berger saw BDO as negligent for missing millions of dollars in fake receivables and Gunster as conflicted because of its multiple representations. In June 2004 Espirito Santo sued BDO in Miami-Dade County circuit court to recoup $170 million in damages. Three months later, E.S. Bankest filed a malpractice suit against Gunster in bankruptcy court, also seeking $170 million.

Thomas was now working closely with Freeman. As receiver, Freeman ran what was left of the now-bankrupt E.S. Bankest and he recognized that the interests of the company and its largest creditor, Espirito Santo, were closely aligned. Both wanted to recoup the $170 million. To cement the alliance, Freeman successfully petitioned U.S. Bankruptcy Court judge A. Jay Cristol to retain S&C and Berger Singerman as special counsel in E.S. Bankest’s suit against Gunster. Given E.S. Bankest’s bankruptcy and Thomas’s experience with contingency fees, Freeman says, S&C was amenable to a second contingency arrangement.

Yet the cooperation between Thomas and Freeman also presented a potential problem. Freeman was supposed to represent all of E.S. Bankest’s creditors, say BDO counsel Karen Bitar and Adam Cole, two New York–based Greenberg Traurig partners who specialize in accounting liability cases. When Freeman sought to retain S&C and Berger Singerman, Bitar and Cole objected, calling it a conflict of interest for the law firms. Although Bitar says that ethics rules in bankruptcy are “a little more relaxed” than in general litigation, she adds: “We thought it was improper for the same lawyers to be representing [Freeman] . . . and the bank.”

In March 2005, in a two-day trial in bankruptcy court, BDO and Gunster— represented by Washington, D.C.’s Zuckerman Spaeder and Miami’s Bilzin Sumberg Baena Price & Axelrod—tried to have Freeman removed as receiver. But Cristol ruled against Gunster and BDO, saying that it was natural for Freeman as receiver to work with the largest creditor. “They tried to show I was a lackey, a whipping boy who took orders from Espirito Santo,” Freeman says. “But the only people that ever objected to me hiring [S&C] and Berger Singerman as special counsel were Gunster and BDO. And I remember at one point Judge Cristol saying, ‘The potential defendants want to be able to pick the plaintiffs lawyer?’ ”

By December 2005, Gunster agreed to a settlement with Freeman and Espirito Santo; the amount was confidential, but the bank

received at least $10 million, according to sources familiar with the deal. (Gunster managing shareholder Donald Beuttenmuller, Jr., did not respond to a request for comment; Thomas, S&C, and Espirito Santo also declined to comment.) According to the same sources, S&C received a fee slightly north of $4 million. Thomas and Berger then turned their attention to BDO.

6;E5AH7DK I3E 5A@F7@F;AGE and so were pretrial proceedings over the structure of the trial. When Miami circuit court judge Jose Rodriguez bifurcated the issue of liability, Greenberg partner Elliot Scherker—who won a Florida Supreme Court reversal of the mammoth $145 billion tobacco class action award in Engle v. Liggett Group, Inc., partly on bifurcation grounds—argued vehemently against a piecemeal presentation of liability to the jury. Thomas, who had initially taken no position, argued that Rodriguez should stick to his order. Rodriguez did.

In the first phase, the jury would be asked if BDO had a duty to Espirito Santo and whether it was negligent in its audit of E.S. Bankest. If the answer was yes, in the second phase the jury would determine whether BDO’s negligence caused damages to Espirito Santo. If necessary, compensatory damages would also be determined in the second phase, with the third phase reserved for punitive damages.

The trial began in late January 2007, as Miami prepared to host the Super Bowl. (Thomas and several other members of his trial team, settling into Miami hotel rooms for the duration of the trial, were almost evicted when their hotel wanted to make room for Super Bowl guests.) The L.A. contingent of the Espirito Santo trial team included two associates, as well as former S&C associate-turned-solo-practitioner Mark Forrester. Also on the team were local counsel Hector Lombana of Miami’s Gamba & Lombana and solo practitioner Gonzalo Dorta. The first witness that Thomas called was Lew Freeman.

Freeman described in vivid detail how he had unraveled the fraud by discovering hundreds of millions of dollars in fake receivables bought by E.S. Bankest. But for Freeman, the real key to the fraud was computer security company StrataSys Group LLC, one of E.S. Bankest’s factoring clients, whose chairman, Dominick Parlapiano, served as an E.S. Bankest director. StrataSys also had a strategic alliance with BDO, under which the two companies would refer business to each other. Defense counsel argued that there was nothing illicit about the BDO–StrataSys alliance because StrataSys was not a BDO client. But Freeman’s testimony allowed Thomas to argue later that BDO was conflicted because of its relationship with StrataSys.