SEATTLE (CN) – Fourteen lawsuits claim the Seattle law firm Graham & Dunn knew about a client’s “massive fraud,” including spending real estate investors’ money on lavish vacations, luxury cars and a yacht, but did not warn the investors and helped the client conceal the scheme.
Click here to read Courthouse News’ Securities Law Review.Angela Aggen heads the list of dozens of plaintiffs in one of the 14 complaints against Graham & Dunn, P.C. All the complaints were filed in King County Court.
Aggen claims that NDG Investment Group, headed by Jose Nino De Guzman, both non-parties, solicited more than $12 million to develop real estate projects in Peru that never materialized. The company repeatedly violated securities laws and De Guzman used investor money to fund his “lavish lifestyle,” according to the complaint.
“Not surprisingly, the company that repeatedly violated the securities laws and concealed its violations from investors had other secrets as well,” the complaint states. “Investors’ funds were not being used for the purposes they were intended. Instead, investor funds were diverted to friends and associates of NDG’s Chief Executive Officer, Jose Nino De Guzman, and were used to fund Mr. De Guzman’s lavish lifestyle – which included a Bentley, a yacht, an expensive art collection, and hundreds of thousands of dollars spent in clubs in Las Vegas, Miami, and Hollywood. That massive fraud was made possible by De Guzman’s lawyers, who aided, abetted, and conspired with NDG and De Guzman to carry out the scheme.”
The plaintiff investors claim attorneys at Graham & Dunn knew about NDG’s securities violations, helped the company mislead securities officials, and helped conceal De Guzman’s misuse of funds.
Graham & Dunn did not respond to an e-mail requesting comment on the allegations.
De Guzman waived privilege and authorized Graham & Dunn to turn over documents to NDG whistleblowers’ attorneys, according to the complaint. But it says Graham & Dunn omitted an incriminating email, later discovered in NDG’s files, in which “Graham & Dunn cautioned its client” about terminating its vice president for business development, Nathan Hoerschelmann.
According to the complaint, the email states: “‘As you know, we continue to be in violation of various state and federal securities laws with respect to most of our deals … Although my instincts tell me that Nathan will not take it upon himself to disclose NDG’s failures to the authorities or to NDG’s investors, this causes a great deal of concern. We will, of course, incorporate a confidentiality agreement within the separation agreement that is being drafted. Unfortunately, the confidentiality agreement will only be worth anything so long as it is honored – because, as soon as the ‘cat’s out of the bag,’ our ability to enforce this agreement really doesn’t help us much. Because this would be a HUGE issue for you if these violations were publicly known, you may want to consider whether it makes sense to maintain Nathan’s employment until the violations can be remedied.’
“Just weeks later, NDG and Graham & Dunn raised another $1 million from investors-including plaintiffs in this case-in another non-compliant securities offering. None of those investors was told that NDG and Graham & Dunn were concealing a ‘HUGE’ secret,” according to the complaint.
The plaintiffs claim that NDG and De Guzman solicited money through various limited liability companies formed by Graham & Dunn.
“With respect to each of the LLCs, NDG provided plaintiffs with a Private Placement Memorandum (‘PPM’) describing the investment opportunity, which represented that investor funds would be used to develop real estate projects in Lima, Peru. The PPMs described the Peruvian real estate market and the proposed building projects; they also included a limited liability company agreement prepared by Graham & Dunn (which expressly provided that Graham & Dunn would serve as counsel to each LLC) and a certification signed by a Graham & Dunn attorney as the ‘organizer’ of each LLC. The PPMs also represented that NDG intended to rely upon an exemption from the registration requirements of the federal securities laws by complying with the provisions of Section 4(2) and Rule 506 of Regulation D adopted by the SEC thereunder. Indeed, on Graham & Dunn’s advice, NDG specifically represented to investors that ‘NDG Investment Group offers and sells investments under exemptions from registration applicable to non-public offerings. No offer or solicitation will be made to any person except in full compliance with such exemptive provisions,'” the complaint states. (Parentheses in complaint.)
The investors claim that none of the LLCs were legitimate and few development properties were actually purchased.
“In truth, none of the LLC projects were ever legitimate ventures,” the complaint states. “Indeed, the very first LLC project at issue in this case – Arequipa, LLC – was undersubscribed by 70 percent, and could never have accomplished its stated purpose. Few, if any, of the properties that were supposed to have been developed actually were purchased, and none were developed as promised.”
The plaintiffs say that when certain investors became “suspicious that De Guzman had misdirected funds” they confronted him in a meeting at Graham & Dunn’s offices, where he confessed to fraud.
“A meeting was held at the offices of Graham & Dunn on January 23, 2009 at which De Guzman was confronted by a representative of the P.R.E. investors and by De Guzman’s own employees. With a Graham & Dunn attorney and paralegal in attendance, De Guzman admitted to fraud – specifically, paying funds belonging to Grau Residential, LLC to P.R.E. (purportedly to purchase the Grau property from P.R.E.), but then using those funds for unauthorized purposes. There was no confusion about what De Guzman was confessing. Graham & Dunn’s timesheets for January 23, 2009 expressly acknowledge a ‘Meeting with Nino De Guzman … regarding misuse of funds and related issues,'” according to the complaint.
Graham & Dunn former P.R.E. Acquisitions LLC in July 2008 on behalf of De Guzman and his associates, according to the complaint.
The plaintiffs claim Graham & Dunn worked with De Guzman to “secretly negotiate a resolution” with the P.R.E. investors but never told other investors.
“Over the next few months, those investors attempted to obtain information from De Guzman regarding the true use of investment funds and the status of various property development projects in Peru. Graham & Dunn worked closely with De Guzman in responding to the inquiries of those concerned investors – even editing De Guzman’s emails to the investors before De Guzman sent them. Graham & Dunn likewise advised and assisted De Guzman in attempting personally to negotiate a compromise – despite the fact that Graham & Dunn represented (and owed duties to) NDG and the various LLC’s. None of the investors was told that their funds had been misused, or that NDG, De Guzman, and Graham & Dunn were negotiating to pay off the P.R.E. investors,” the complaint states.
Three NDG employees who were at the meeting where De Guzman admitted fraud then confidentially investigated the company’s finances and learned the scope of the scheme, according to the complaint. The employees became whistleblowers and contacted state and federal authorities.
“Among other things, the whistleblowers discovered that De Guzman and Graham & Dunn had caused Los Alamos Residential, LLC to pay more than $655,000.00 to P.R.E. for the purchase of a property that P.R.E. never owned and never conveyed to Los Alamos Residential, LLC. Indeed, it was a Graham & Dunn attorney – acting well outside the role of an attorney performing routine professional services – who directed NDG’s Director of Operations to wire those funds to P.R.E., despite the fact that the Los Alamos project had not yet been fully subscribed and there was no documentation to support the supposed purchase of the property. Those funds were never returned, and the investor/members of Los Alamos Residential, LLC were not told that the funds had been lost,” according to the complaint.
“Despite all of these revelations and serious conflicts of interest, Graham & Dunn during this period remained loyal to De Guzman, and the firm actively assisted De Guzman in secretly fending off accusations of wrongdoing by investors and employees and attempting to conceal NDG’s various misrepresentations to investors.”
The plaintiffs say that Graham & Dunn realized NDG “was coming under serious scrutiny, and the firm scrambled to correct the securities violations that had remained uncured for more than a year.”
They claim that in gathering the documentation for securities filings, Graham & Dunn discovered NDG had fabricated various transactions.
“Rather than acknowledge the fraud, Graham & Dunn tried to help De Guzman cover it up,” by making false representations to the SEC, the complaint states.
The law firm then helped De Guzman prepare convertible notes for a new L.L.C. project so he could “pay off disgruntled investors,” according to the complaint. The plaintiffs say investors who purchased the new notes were also defrauded and lost all of their money.
The plaintiffs say they learned about De Guzman’s embezzlement in April 2009, after the NDG whistleblowers disclosed the fraud.
“On June 16, 2009, Graham & Dunn finally withdrew as counsel for NDG – not because NDG had committed fraud, but because NDG had stopped paying the firm: ‘Graham & Dunn is not in a position to provide legal services to NDG without payment of our outstanding fees.’ Graham & Dunn wrote in that withdrawal letter: ‘We certainly regret that we need to terminate our relationship and hope that we will be in a position to re-engage at some point in the future after the economy makes a turn around,'” according to the complaint.
De Guzman fled Seattle after authorities learned about the scheme.
“Soon after NDG’s fraud was revealed, De Guzman left his wife and newborn child in Seattle, abandoned his $1.8 million home (which subsequently went into foreclosure), and secretly relocated to Los Angeles, where he began promoting a new investment scheme using an entity called Catalyst Investment Group LLC. On information and belief, De Guzman used funds invested by plaintiffs to fund his new venture,” according to the complaint.
De Guzman was arrested in Los Angeles on July 7, 2011 and is in jail awaiting trial on wire fraud charges, the complaint states.
The investors say Graham & Dunn violated the Washington Securities Act, aided and abetted fraud and breach of fiduciary duty and engaged in conspiracy to commit fraud and breach fiduciary duties. They seek statutory and punitive damages.
They are represented by Matthew Carvalho, with Yarmuth Wilsdon Calfo.
(Editor’s Note: On July 31, 5 days after Courthouse News posted the story above, the Graham & Dunn law firm issued this statement by email. Here is the law firm’s unedited statement.)
SEATTLE – The president of Graham & Dunn says allegations made against the law firm in complaints recently filed in King County are meritless. The complaints were filed by investors in failed real estate development offerings promoted by NDG Investment Group and its principal, Jose Nino de Guzman. “Our firm did not violate the Washington State Securities Act and we did not conspire in any way in the fraudulent schemes NDG is accused of,” Michael Fandel said today. “We provided legal services to NDG and were defrauded by Mr. De Guzman in much the same way these plaintiffs were. The investors gave him money, Graham & Dunn did work for him – both of us were deceived.” De Guzman, founder of NDG, is now in jail awaiting trial on charges of money laundering and fraud.
“The complaints take snippets of unconnected events and distort them in an attempt to link de Guzman’s fraud to our firm. The charges are just not true,” Fandel said, adding that Graham and Dunn handled routine legal work for the corporations that de Guzman created to invest in property in Peru, but was not involved in the sale of securities. Unbeknownst to Graham & Dunn, the investments turned out to be a sham, and the complaints allege that investors lost a collective $12 million in the various funds.
“While we are sympathetic to their losses, the investors are not justified in asserting a claim that Graham and Dunn would knowingly participate in this fraud. We have practiced law in accordance with the highest ethical standards since our firm was founded more than 120 years ago.”
Mr. Fandel said his firm will vigorously defend against the claims. The firms being represented in the lawsuit by Lou Peterson and Michael Scott of the Seattle law firm Hillis Clark Martin & Peterson.