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TABLE OF CONTENTS
INTRODUCTION ...........................................................................................................................1
ARGUMENT ...................................................................................................................................2
I. Baker Donelson Is Not Responsible for the Actions of Alexander and Seawright. ............2
C. The Complaint Does Not State a Claim for Negligent Supervision and
Retention (Count VIII). ............................................................................................8
II. The Complaint’s Causes of Action Do Not State a Claim for Relief. ...............................10
A. The Complaint Does Not State a Claim for Civil Conspiracy (Count I). ..............10
B. The Complaint Does Not State a Claim for Aiding and Abetting (Count II). .......12
TABLE OF AUTHORITIES
Ashcroft v. Iqbal,
556 U.S. 662 (2009) .................................................................................................................10
Hays v. Pearlman,
2010 WL 4510956 (D.S.C. Nov. 2, 2010) ...............................................................................15
Honig v. Kornfeld,
339 F. Supp. 3d 1323 (S.D. Fla. 2018) ....................................................................................10
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State Cases:
Cashin v. Murphy,
96 So. 747 (Miss. 1923) ...........................................................................................................14
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Eaton v. Porter,
645 So. 2d 1323 (Miss. 1994) ................................................................................................4, 7
Gulledge v. Shaw,
880 So. 2d 288 (Miss. 2004) ......................................................................................................2
Other Authorities:
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INTRODUCTION
The Receiver’s Opposition makes two fundamental errors which, when corrected, doom
all of her claims against Baker Donelson. First, businesses are not automatically responsible for
everything their employees do when they are not working, and law firms are no exception. That
principle disposes of the Receiver’s claims because the Complaint’s allegations show that
Alexander and Seawright ran their personal LLC separately from the law firm. Baker Donelson
did not authorize, endorse, or in any way benefit from the LLC. Incidental use of firm facilities,
as happens in every business, does not transform an individual act into an act of the law firm. It
is telling that the Opposition, like the Complaint, depends on characterizing the Baker Donelson
Second, the Receiver persistently writes as though her claims are brought on behalf of
investors, but that is contrary both to the law and to this Court’s appointment order. The
Receiver cannot bring investors’ claims. She stands in the shoes of Lamar Adams and the
fraudulent entity he controlled, Madison Timber. This means there can be no “apparent
authority” claim unless Adams reasonably relied on a misleading impression that Alexander and
Seawright were acting for Baker Donelson – which is neither alleged nor plausible. The
Receiver’s standing also makes her subject to the defense of in pari delicto – which, contrary to
These central issues are sufficient to warrant dismissal, but the Receiver also makes other
claim-specific errors. For example, a claim of conspiracy or aiding and abetting (if it exists in
Mississippi at all) requires an allegation of actual knowledge, not negligence in missing “red
allegedly “gross” it may be), for failing to detect another’s wrongdoing in the absence of a client
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relationship. Plaintiffs cannot create a duty of care to the entire world of non-clients by labeling
the claim “ordinary” negligence. The Complaint should be dismissed with prejudice.
ARGUMENT
I. Baker Donelson Is Not Responsible for the Actions of Alexander and Seawright.
An employer is not responsible for the conduct of an employee who “deviates or departs
from his work to accomplish some purpose of his own not connected with his employment[.]”
Baker Donelson Bearman Caldwell & Berkowitz, P.C. v. Seay, 42 So. 3d 474, 489 (Miss. 2010)
(quotation omitted). The Receiver suggests a crabbed reading of this rule that would cover only
“romantic affairs at their workplace,” Opp’n 10, but that is only an example of the general
principle that vicarious liability does not extend to employees’ acts outside “the scope of their
employment or of their apparent authority to act for the corporation.” Miss. Code § 79-10-67.
Of particular importance here, employees are routinely held to be acting outside the scope
of their employment where the employer received “no benefit” from the employees’ conduct.
E.g., Akins v. Golden Triangle Planning & Dev. Dist., Inc., 34 So. 3d 575, 580 (Miss. 2010)
(citing Commercial Bank v. Hearn, 923 So.2d 202 (Miss. 2006)). That is true even if the
employees were performing the precise type of activities for which they were hired. Gulledge v.
Shaw, 880 So. 2d 288, 296 (Miss. 2004) (no liability where notary public employed by the bank
“notariz[ed] a forged document” because it “was not in the furtherance of the Bank’s business—
rather, it was a personal act”). The rule extends to tortious conduct performed on the employer’s
premises. Holliday v. Pizza Inn, Inc., 659 So. 2d 860, 865 (Miss. 1995) (employee’s party at her
office “in no way furthered or was meant to further the business of [her] employers”). An act is
outside the scope of employment if it is not within the employee’s formal mandate, even where
the employer “encouraged [the employee’s] participation in [those new] activities and benefitted
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therefrom[.]” Hearn, 923 So. 2d at 208–09 (no liability where bank employee was soliciting
Here, it is undisputed that Baker Donelson received no benefit from Alexander’s and
Seawright’s investment activities. Certainly there is no allegation that the firm sent bills to
anyone, or received anything, for Alexander’s and Seawright’s work on the Timber Fund. Yet
the Receiver persists in arguing that managing the Timber Fund was within the scope of
continued misreading of their firm biographies. The Receiver states that Baker Donelson
Advisor.’” Opp’n 7 (quoting Doc. 29-1 at 4). In fact, the website shows that Alexander is a
Senior Public Policy Advisor, Doc. 29-1 at 1, and at the bottom of the profile, it identifies him as
part of the firm’s “Broker-Dealer/Investment Advisor” practice area. Id. at 4. That is because
some of Baker Donelson’s clients are brokers – not because Alexander is one. The Receiver
similarly argues that Seawright is part of the firm’s “Securities” practice. Opp’n 7–8 (quoting
Doc. 29-2 at 5). Again, that means Seawright does legal work for clients in the securities
industry, not that he is employed as a securities dealer. Seawright is also affiliated with the
“Health Systems/Hospitals” practice, but that does not mean that Baker Donelson employs him
as a medical doctor.
The Receiver concedes that “the key” to a claim of apparent authority “is how particular
third parties perceived the actions of the agents.” Opp’n 6 (quotation and modification omitted).
Those “particular third parties” are Adams and Madison Timber, in whose shoes the Receiver
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stands. No one else’s “perception” of Alexander’s and Seawright’s authority is relevant for
purposes of this claim. See Eaton v. Porter, 645 So. 2d 1323, 1326 (Miss. 1994) (courts look to
“particular group of [plaintiffs] and how those third parties perceived that authority”). Yet the
Receiver continually repeats the investor-facing allegations in the Complaint, e.g., that
Alexander and Seawright conducted their timber business with firm clients, see Opp’n 7 (citing
What matters is that the Complaint does not allege that Adams or his controlled
company, Madison Timber, perceived that Alexander or Seawright were acting on behalf of
Baker Donelson, much less that they relied to their detriment on any such misperception. That is
It is not enough for the Receiver to suggest that Adams could have formed a mistaken
belief in Alexander’s and Seawright’s agency. See Opp’n 6–9. Even if this hypothesis were in
the Complaint (it is not), such speculation is a long way from alleging that Adams actually did
form such a belief. See Letizia v. Facebook Inc., 267 F. Supp. 3d 1235, 1243 (N.D. Cal. 2017)
(where reliance is an element, plaintiffs must plead they “actually relied”). The Receiver
evidently has no basis to make such an allegation, to say nothing of the even more outlandish
(but requisite) allegation that Adams did something in reliance on that misperception. Adams
ran a Ponzi scheme and stole the money Alexander Seawright Timber Fund I, LLC lent to him.
The Receiver cannot seriously allege that Adams accepted and stole that money because he
Even if the Receiver somehow could allege a mistaken impression on Adams’s part, she
would have to show that Baker Donelson (as opposed to Alexander and Seawright) did
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something to create that impression. Patriot Commercial Leasing Co. v. Jerry Enis Motors, Inc.,
928 So. 2d 856, 864 (Miss. 2006) (agent’s apparent authority extends only to that “authority that
the principal has by words or conduct held the alleged agent out as having”); Christian Methodist
Episcopal Church v. S & S Construction Co., Inc., 615 So.2d 568, 573 (Miss. 1993) (apparent
authority requires a “showing of . . . acts or conduct of the principal indicating the agent’s
authority”). The Receiver makes four unavailing arguments in support of her claim that Baker
Donelson fostered an impression that Alexander and Seawright were authorized to operate the
First, the Receiver argues that the firm advertised that it “employed” Alexander as an
above, that is not a fair reading of the firm website. Besides, there is no allegation that Adams
Second, the Receiver argues that Alexander and Seawright used Baker Donelson’s office
space and facilities, for example by holding “closings” and other meetings there, Opp’n 7 (citing
Compl. ¶ 83); id. at 8 (citing Compl. ¶ 102), and sending emails from Seawright’s Baker
Donelson email address, Opp’n at 8 (citing Ex. A, Doc. 35-1). 1 But courts routinely reject
1
The Court may consider documents partially quoted in a complaint. See Mem at n.4. That rule
protects defendants by preventing the plaintiff (or receiver) from “evad[ing] a properly argued
motion to dismiss simply because [she] has chosen not to attach” the full document on which she
relies. I. Meyer Pincus & Assocs., P.C. v. Oppenheimer & Co., 936 F.2d 759, 762 (2d Cir.
1991); 5 Wright & Miller, Fed. Prac. & Pro. § 1327, at 489 & n.15 (when “plaintiff fails to
introduce a pertinent document as part of his pleading, defendant may introduce the exhibit as
part of his motion attacking the pleading”) (emphasis added). But it is something else altogether
for the Receiver selectively to exclude certain parts of a document from the Complaint only to
introduce them in opposition to a motion to dismiss.
In any event, the email makes clear that Alexander and Seawright were dealing at arm’s length
with what they believed was a legitimate timber business, and not a co-conspirator in a Ponzi
scheme. See Opp’n Ex. A, Doc. 35-1. Seawright even states he is “no timber expert,”
suggesting that he is relying on Adams, not the other way around. Id. at 1.
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claims of apparent authority based on such superficial trappings. See, e.g., Jacquez v. Compass
Bank, 2016 WL 3017418, at *10 (W.D. Tex. May 24, 2016) (“authorizing someone to share
office space to conduct their independent business or authorizing someone to use an email
account” insufficient to create apparent authority); Raclaw v. Fay, Conmy and Co., 668 N.E.2d
114, 117 (Ill. App. 1996) (use of office space, telephones, mailing address, receptionist, and
stationery insufficient to create apparent authority); CSX Transp., Inc. v. Recovery Express, Inc.,
415 F. Supp. 2d 6, 12 (D. Mass. 2006) (“no reasonable person could conclude that apparent
authority was present” on the basis of an email address alone); United Residential Properties,
L.P. v. Theis, 378 S.W.3d 552, 564–65 (Tex. App. 2012) (collecting authority for the same).
including their work email accounts – from time to time for personal endeavors. As the above
authorities show, that is not sufficient to create apparent authority. A different rule would
encourage employers to forbid these ordinary activities for fear of liability; and life in the
Third, the Receiver contends that Seawright “drafted subscription agreements” for
investments in Madison Timber. Opp’n 7. But this was obviously for the benefit of Alexander’s
and Seawright’s Timber Fund LLC and its investors, not Baker Donelson. In the email chain
attached to the Receiver’s Opposition, Adams refers to “your LLC” – showing that he knew
Seawright was acting for Alexander Seawright Timber Fund I, LLC. Opp’n Ex. A at 2
(emphasis added). Baker Donelson is not mentioned, and Adams cannot reasonably have formed
the impression from this exchange that the law firm was behind the Timber Fund.
Fourth, the Receiver alleges that members of Alexander’s and Seawright’s LLC included
Baker Donelson clients and that “[o]ther Baker Donelson shareholders . . . referred potential
investors to Alexander and Seawright.” Opp’n 7. But this allegation cuts against the Receiver’s
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claim. The “referrals” were allegedly made to Alexander and Seawright for their Timber Fund,
not to Baker Donelson – and, again, there is no allegation that Baker Donelson performed any
legal work, billed the investors or anyone else for the Timber Fund’s work, or received any
benefit.
affiliation with Baker Donelson was beneficial to their investment business because of Baker
Donelson’s good reputation. But affiliation and reputation do not create liability. Any other rule
The Opposition relies heavily on Eaton v. Porter, 645 So. 2d 1323 (Miss. 1994), which
demonstrates why the Receiver’s apparent authority claim lacks merit. The plaintiffs came to
Eaton Motors seeking repairs for their car. They met with Eaton, Sr. to negotiate the repair
services and saw Eaton Motors’ automotive repair equipment on site. Id. at 1327. Eaton, Sr.
signed the work authorization on behalf of Eaton Motors; the plaintiff addressed her payment to
Eaton Motors; and Eaton, Sr. cashed the check on behalf of Eaton Motors. Id. at 1324. Eaton
Motors later claimed that it was not in the business of repairing vehicles, and that Eaton, Sr. was
acting outside the scope of his authority in accepting the work. Id. at 1326. The court observed
that the plaintiffs were “not residents of the area and could not be expected to be familiar” with
In this case, Adams and Madison Timber were not the victims of misleading conduct.
They were running a massive Ponzi scheme and concealing their fraud. They did business with
“Alexander Seawright Timber Fund I, LLC” not “Baker Donelson” (or “Baker, Sr.”). The
Complaint does not allege that Adams and Madison Timber sought to engage Baker Donelson’s
professional services. Adams and Madison Timber were seeking funding, which they received
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through loans from Alexander’s and Seawright’s independent LLC. They signed no agreement
The Complaint also does not allege that Alexander and Seawright told Adams they were
acting on behalf of Baker Donelson. Cf. Andrew Jackson Life Ins. Co. v. Williams, 566 So. 2d
1172, 1182 (Miss. 1990) (agent for the defendant insurance company “believed he was
authorized to form [the] binding contract” at issue and that he “expected” the purchasers would
“one hundred percent rely” on his represented authority). A plaintiff claiming apparent authority
is presumed to have “knowledge of the nature and usages of the business involved” and must
then have “reasonabl[y] reli[ed]” on a belief that the agent was empowered to act for the
principal. Id. at 1181. Providing funding for timber investments is not among the services that
lawyers or policy advisors ordinarily perform on behalf of law firms, and there is no basis to
infer – much less a well-pleaded allegation – that Adams was misled to think otherwise. Cf.
Christian Methodist Episcopal Church, 615 So. 2d at 573 (defendant’s Secretary of Finance had
C. The Complaint Does Not State a Claim for Negligent Supervision and
Retention (Count VIII).
The Receiver’s arguments with respect to negligent supervision fail for many of the same
reasons. A negligent supervision claim does not apply to an employee’s acts outside the scope of
employment. Seay, 42 So.3d at 490. The above discussion disposes of the Receiver’s
contentions that Alexander and Seawright were acting within the scope of their employment, and
that only an employee’s “romantic affairs” can be outside the scope. Opp’n 20. The Receiver
does not address the cases dismissing claims for negligent supervision when employees allegedly
engaged in Ponzi schemes and criminal conduct outside the scope of employment. See Mem. at
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11 (citing Belmont v. MB Inv. Partners, Inc., 708 F.3d 470 (3d Cir. 2013); Tichenor v. Roman
Catholic Church of Archdiocese of New Orleans, 32 F.3d 953 (5th Cir. 1994)).
The Receiver cites no authority for her suggestion that an employer is generally liable for
an employee’s conduct while on the employer’s premises. Opp’n 21. The law is to the contrary:
“[E]mployers do not have a duty to supervise their employees when the employees are off-duty
or not working,” Seay, 42 So. 3d at 489, and an employee may engage in personal acts while on
the employer’s premises without exposing the employer to liability, see Jacquez, 2016 WL
Nor does the Receiver explain how the Complaint satisfies the requirement that Baker
unfitness” to conduct the work for which they were employed. Parmenter v. J & B Enterprises,
Inc., 99 So. 3d 207, 217 (Miss. Ct. App. 2012). The Receiver suggests generally that it is “‘not
unreasonable to infer’ that employers ‘were aware to some degree’” of an employee’s material
assistance to a Ponzi scheme. Opp’n 21 (quoting Janvey v. Proskauer Rose LLP, 2015 WL
11121540, at *1 (N.D. Tex. June 23, 2015)). It is indeed “unreasonable to infer” a law firm’s
knowledge of a Ponzi scheme without some allegation of fact that would support such an
inference. See Holmes v. Campbell Properties, Inc., 47 So. 3d 721, 729 (Miss. Ct. App. 2010)
(misconduct itself is insufficient; plaintiff must show “specific evidence” to support employer’s
knowledge that misconduct was likely). The receiver in Proskauer brought a different claim,
alleging that the defendant law firm failed to supervise its attorneys’ provision of legal services
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II. The Complaint’s Causes of Action Do Not State a Claim for Relief.
A. The Complaint Does Not State a Claim for Civil Conspiracy (Count I).
Civil conspiracy requires that the alleged conspirators were “aware of the fraud or
wrongful conduct at the beginning of the agreement.” Bradley v. Kelley Bros. Contractors, 117
So. 3d 331, 339 (Miss. Ct. App. 2013). The Complaint alleges “red flags,” from which the
Receiver infers that Baker Donelson “knew or should have known” that Madison Timber was a
Ponzi scheme. Compl. ¶ 120 (emphasis added). That the Receiver felt obliged to hedge her
claim (“or should have known”) underscores that she cannot in good faith allege the required
actual knowledge. Litson-Gruenber v. JPMorgan Chase & Co., 2009 WL 4884426, at *2 (N.D.
Tex. Dec. 16, 2009) (dismissing claims in a Ponzi-scheme case because “pleading based on an
allegation the defendant ‘knew or should have known’ is insufficient” for actual knowledge);
Neilson v. Union Bank of California, N.A., 2003 WL 27374137, at *10 (C.D. Cal. Feb. 20, 2003)
(collecting authorities). Even if she had alleged it, a bare assertion of knowledge is a legal
conclusion, which does not suffice to state a claim. Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009).
The Complaint’s allegations of fact are equally insufficient: “Red flags” do not support
an allegation of actual knowledge. See, e.g., Rosner v. Bank of China, 2008 WL 5416380, at *6
(S.D.N.Y. Dec. 18, 2008) (“courts overwhelmingly recognize” that “actual knowledge of a
fraud” is not established “based on allegations of . . . ignorance of obvious ‘red flags’”), aff’d,
349 F. App’x 637 (2d Cir. 2009); Honig v. Kornfeld, 339 F. Supp. 3d 1323, 1344 (S.D. Fla.
2018) (“red flags fail to establish actual knowledge”); Chemtex, LLC v. St. Anthony Enterprises,
Inc., 490 F. Supp. 2d 536, 547 (S.D.N.Y. 2007) (“even alleged ignorance of obvious warning
signs of fraud will not suffice to adequately allege actual knowledge”); In re Int’l Mgmt. Assocs.,
LLC, 563 B.R. 393, 420 (Bankr. N.D. Ga. 2017) (“allegations of ‘red flags’ were insufficient to
10
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establish the bank’s actual knowledge of existence of the Ponzi scheme”). And in any event, no
Against the weight of that authority, the Receiver cites only Proskauer for the proposition
that a red flag “supports knowledge for aiding and abetting purposes.” Opp’n 15 (citing
Proskauer, 2015 WL 11121540, at *5). But in Proskauer, an attorney was hired to defend the
Ponzi scheme operator in an SEC enforcement action. Id. at *1. The attorney conducted
“substantial due diligence” while representing the client and gained “knowledge of [the] scheme”
which he used to “obstruct[] the investigation,” including by hiding from the SEC the fact that
the rates of return were too high and that the scheme’s investments in Antigua likely involved
corruption. Id. at *5; see also Compl., Doc. 1, Proskauer, 3:13-cv-477 (N.D. Tex.) at ¶ 112
(alleging that attorney “knew [his client] was actively misleading the SEC”).
Aside from “red flags,” the Receiver cites one other allegation in support of her “actual
knowledge” claim: that “Alexander and Seawright falsely represented that they personally
inspected the timber and mill contracts,” when “there were no timber and no ‘mill contracts’ to
inspect.” Opp’n 17–18. That inference is a non sequitur. Failing to read a document does not
mean one knows the document does not exist or that the transaction is a Ponzi scheme. And that
allegation, too, is only against Alexander and Seawright, not the law firm.
Finally, the Receiver insists that a conspiracy arises from a “‘mere tacit understanding
between the conspirators to work to a common purpose.’” Opp’n 18 (quoting Aetna Ins. Co. v.
Robertson, 94 So. 7, 22 (Miss. 1922)). But the common purpose must be unlawful. See id.;
Harris v. Town of Woodville, 196 So. 3d 1121, 1131 (Miss. Ct. App. 2016). “[P]ool[ing] other
people’s money to invest” in timber tracts, Opp’n 18, is not unlawful; and an agreement to do
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B. The Complaint Does Not State a Claim for Aiding and Abetting (Count II).
The Receiver concedes that no Mississippi court has ever recognized a cause of action for
civil aiding and abetting. Opp’n 13. And even in jurisdictions that do, a plaintiff must prove the
defendant had “‘know[ledge] that the other’s conduct constitutes a breach of duty[.]’” Id.
(quoting Restatement (2d) Torts § 876(b)). The argument that Baker Donelson “knew that
Adams owed Madison Timber fiduciary duties[,]” Opp’n 13, does not establish actual knowledge
that Adams had breached such duties by operating a Ponzi scheme. That would be so even if the
conclusory argument about Baker Donelson’s knowledge were well-pleaded – which it is not.
It is undisputed that Adams and Madison Timber were not clients of Baker Donelson.
Seeking to skirt the rule that only a client may sue a law firm for professional negligence, the
Receiver contends that she is suing for “ordinary” rather than “professional” negligence. See
Opp’n 19. That argument mischaracterizes the Complaint, and in any event is legally meritless.
First, the Complaint makes clear that Alexander and Seawright, allegedly acting for
Baker Donelson, were negligent in their professional capacities. Even the Opposition touts the
particular “education, experience, and judgment” of Baker Donelson’s professionals, id. at 11,
and argues that the firm engaged in misconduct through “the provision of routine professional
services[.]” Id. at 18 (quotation marks omitted). The Opposition cannot have it both ways,
arguing (1) that Baker Donelson is responsible because it authorized Alexander and Seawright to
act as professionals for the firm and (2) that Alexander and Seawright were acting in some non-
professional capacity so that a non-client can sue them. The Receiver cannot evade the
limitations on a claim for professional negligence, see Mem. 14–15, merely by labeling it
“ordinary negligence.” See, e.g., Bell v. W. Harrison Cty. Dist., 523 So. 2d 1031, 1033 (Miss.
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1988) (recasting claim involving the exercise of “professional skill” as “‘ordinary negligence’
. . . is without merit”).
Second, any claim of “ordinary” negligence would also fail because Baker Donelson
owed Adams and Madison Timber no duty of “ordinary” care to prevent their Ponzi scheme.
The law does not impose duties on citizens to stop tortious conduct. See, e.g., Cuyler v. United
States, 362 F.3d 949, 954 (7th Cir. 2004) (“no common law duty to warn or rescue”). And as the
perpetrators of the conduct, Adams and Madison Timber certainly cannot claim a duty owed to
them. See, e.g., Oden v. Pepsi Cola Bottling Co., 621 So.2d 953, 954–55 (Ala. 1993) (thief
cannot recover in tort for injury while stealing); Amato v. United States, 549 F. Supp. 863, 867
(D.N.J. 1982) (criminal cannot recover for injury during robbery on theory that “the government
was negligent in not arresting [him] sooner”), aff’d, 729 F.2d 1445 (3d Cir. 1984). In the
Because she stands in the shoes of Madison Timber and Adams, the Receiver may bring
their claims, but she does not have standing to bring investors’ claims. The Receiver does not
dispute that if Adams and Madison Timber were suing in their own right, their claims would be
The Receiver argues, however, that it is “well established [in the Fifth Circuit] that when
the receiver acts to protect innocent creditors,” she may do so “even though the corporation
would not be permitted to do so.” Opp’n 22 (quoting Jones v. Wells Fargo Bank, N.A., 666 F.3d
955, 966 (5th Cir. 2012); modification in original). But Jones does not hold that the “innocent
successor” exception applies throughout the Fifth Circuit – that is the Receiver’s addition. The
Fifth Circuit was actually quoting the rule from a series of Texas state court cases. See Jones,
666 F.3d at 966 (quoting Akin, Gump, Strauss, Hauer and Feld, L.L.P. v. E–Court, Inc., 2003
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329 S.W.2d 926, 934 (Tex.Civ.App.—Austin 1959, no writ)). The Fifth Circuit did so because
“[t]he rights of a receiver are determined by state law.” Jones, 666 F.3d at n.11.
In Texas, a receiver who is appointed “in a dual capacity, as a trustee for both the
stockholder and the creditors,” can act “as trustee for the creditors” without limitation of the
defenses to which the corporation would be subject. Langdeau, 329 S.W.2d at 934 (emphasis
added). 2 In Jones, “the district court specifically authorized the Receiver to pursue actions for
the benefit of “‘all investors who may be the victims of the fraudulent conduct[.]’” Id.; see also
Ex. C at 9, Order, Doc. 131, SEC v. W. Financial Group et al., Case No. 3:08-cv-00499-N (N.D.
Tex.) (appointing the receiver in Jones “as the representative of such investors”).
This Receiver was not appointed to stand in the shoes of investors in Madison Timber.
Rather, consistent with Mississippi law, the Court furnished the Receiver with “all powers,
authorities, rights, and privileges now possessed by the officers, managers, and interest holders
of and relating to the Receivership Defendants” and ordered her to “pursue . . . their claims.”
Doc. 33 at 5, SEC v. Adams, 3:18-cv-252 (S.D. Miss.) (emphasis added). When a receiver sues
on an estate’s, she “occup[ies] substantially the same relation which was occupied by the original
parties” and “[a]ny defense . . . which a defendant might have made to an action brought by the
original party is equally available” against the receiver. High on Receivers § 205 (2d Ed.); see
Cashin v. Murphy, 96 So. 747, 749 (Miss. 1923) (citing High). The Receiver is thus similarly
situated to the plaintiffs in the many recent cases that rejected innocent-successor claims brought
by trustees and receivers who claimed that their appointment cleansed the wrongdoer’s estate of
2
Thus, “[t]he Fifth Circuit, when applying Texas law, seems to hold the view that when a
receiver is protecting innocent creditors or recovering assets for investors and creditors, the
defense of in pari delicto should be rejected generally.” Janvey v. Adams & Reese, LLP, 2013
WL 12320921, at *3 (N.D. Tex. Sept. 11, 2013) (emphases added).
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in pari delicto. See Mem. at 17–20. The Receiver has identified no Mississippi case that
exempts a receiver from defenses against the corporation in whose shoes she stands.
Jones is also distinguishable because it concerned a different kind of claim. In its usual
“against third-party recipients of the entity’s assets that have been fraudulently transferred[.]”
Janvey v. Democratic Senatorial Campaign Comm., Inc., 712 F.3d 185, 191 (5th Cir. 2013). But
the exception typically does not apply to tort claims against those who allegedly conspired with
the entity in receivership to perpetrate a fraud. See, e.g., Hays v. Pearlman, 2010 WL 4510956,
at *5 (D.S.C. Nov. 2, 2010) (“in the absence of a fraudulent conveyance case, the receiver of a
corporation used to perpetuate a fraud may not seek recovery against an alleged third‐party co‐
conspirator in the fraud”). In Jones, the receiver brought a cause of action for conversion against
a bank that had issued and then deposited a fraudulent cashier’s check. 666 F.3d at 961. While
“conversion” is technically a tort, the claim in Jones was analogous to a fraudulent transfer, as it
sought to reclaim misappropriated monies belonging to the estate. The Receiver’s claims against
Baker Donelson do not pursue Madison Timber’s assets – Baker Donelson is not alleged to have
received anything from Adams’ scheme. Even under a permissive, Texas-like standard,
therefore, the torts the Receiver alleges are far afield from the fraudulent transfer or conversion
The Receiver has not requested leave to amend and does not suggest that she possesses
additional facts that could cure the deficiencies in the Complaint. Wherefore, premises
considered, Baker Donelson respectfully requests that this honorable Court dismiss the
Complaint with prejudice and requests all further relief, both general and special, as mandated by
15
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16
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CERTIFICATE OF SERVICE
I hereby certify that on March 14, 2019, I caused the foregoing to be electronically filed
with the Clerk of the Court using CM/ECF, which will send notification of such filing to all
registered participants.
17
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Defendants.
Alysson Mills, in her capacity as the court-appointed receiver for Arthur Lamar Adams and
Madison Timber Properties, LLC (the “Receiver”), through undersigned counsel, opposes the
motion to dismiss filed by Defendant Baker, Donelson, Bearman, Caldwell & Berkowitz, P.C.
(“Baker Donelson”).
INTRODUCTION
If this lawsuit is unprecedented, it is because there is no precedent for this set of facts. It is
not every day that a law firm such as Baker Donelson allows its agents, including a member of its
board of directors, to use their positions of trust and their firm’s name and resources to sell
Case 3:18-cv-00866-CWR-FKB Document 35 Filed 03/07/19 Page 2 of 26
Baker Donelson distances itself from its codefendant Butler Snow on the premises that,
unlike Butler Snow, Baker Donelson did not have an attorney-client relationship with Madison
Timber and did not form a separate LLC to provide Madison Timber “non-legal business advice.”
Unlike Butler Snow, Baker Donelson contends its agents’ work for Madison Timber was
The complaint, however, tells another story. The complaint alleges that it was their
affiliation with Baker Donelson that enabled Brent Alexander and Jon Seawright, a Baker
Donelson lobbyist and lawyer, to recruit new investors to the Madison Timber Ponzi scheme.1
Alexander and Seawright relied heavily on their affiliation with Baker Donelson to recruit
investors. 2 Yes, they formed a separate LLC for their investment fund and named it after
themselves—but they pitched their fund as a “friends and family” fund for preferred Baker
Donelson partners and clients.3 They referred potential investors to Baker Donelson’s website,
which shows that Jon Seawright is not merely a shareholder in Baker Donelson’s Jackson office
but an elected member of the firm’s national governing board of directors. 4 They made a
1
Doc. 1 at ¶¶ 79–84, 193–94.
2
Doc. 1 at ¶ 80.
3
Doc. 1 at ¶¶ 75, 80.
4
Doc. 1 at ¶ 81.
2
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Lawyers as a Rising Star, as well as one of the nation’s top attorneys, and represents
a range of national and regional clients, specializing in complex business
transactions, mergers and acquisitions and taxation. . . . 5
Alexander and Seawright’s affiliations with Baker Donelson “to the good.”6
Baker Donelson knew that Alexander and Seawright used their affiliation with Baker
Donelson to recruit new investors to Madison Timber, and allowed it.7 Alexander and Seawright’s
investment business was not “separate” from or “unaffiliated” with the firm’s business—it was
inextricably intertwined. Alexander and Seawright used Baker Donelson’s Jackson address for
their investment business.8 They met with Lamar Adams, investors, and potential investors at
Baker Donelson’s offices for “closings” and used Baker Donelson’s runners to pick up investors’
checks. 9 They used Baker Donelson’s conference rooms to make presentations to potential
investors, accountants, and advisors.10 They enlisted their colleagues at Baker Donelson, including
from offices in other states, to introduce them to potential investors.11 They specifically targeted
clients of Baker Donelson for whom Baker Donelson had recently closed transactions, because
they knew those individuals had money available to invest.12 They told one such client, “[r]unning
funds through us or BD [Baker Donelson] escrow is not a problem” and all “legal and other admin
5
Doc. 1 at ¶ 103.
6
Doc. 1 at ¶ 105.
7
Doc. 1 at ¶ 82.
8
Doc. 1 at ¶ 83.
9
Doc. 1 at ¶ 83.
10
Doc. 1 at ¶ 102.
11
Doc. 1 at ¶ 84.
12
Doc. 1 at ¶ 78.
3
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expenses” would “come out of our share.” 13 Third parties, including Adams, investors, and
potential investors, reasonably believed that the investments were backed by Baker Donelson.14
That Alexander and Seawright did not share their Madison Timber commissions with
Baker Donelson does not absolve Baker Donelson of liability for the Madison Timber Ponzi
scheme fallout. This lawsuit does not “compound the harm of the Ponzi scheme” by seeking to
hold Baker Donelson liable for its allowance of unprecedented acts by its lawyer and lobbyist.
Baker Donelson is not “blameless.” But for Baker Donelson’s recklessness and willful blindness,
the Madison Timber Ponzi scheme would not have continuously grown.15
The complaint alleges claims against Baker Donelson for aiding and abetting; civil
conspiracy; recklessness, gross negligence, and at a minimum negligence; and for negligent
retention and supervision. The complaint also alleges Baker Donelson is vicariously liable for the
acts of its agents Alexander and Seawright. The Receiver need not prove Baker Donelson’s or
Alexander and Seawright’s actual knowledge that Madison Timber was a Ponzi scheme to survive
Baker Donelson’s motion to dismiss. It is sufficient that the complaint expressly alleges they knew
or should have known, and there are ample facts that if true establish that they did.
The Receiver does not lack standing to pursue her claims. The Receiver filed this lawsuit in
her capacity as Receiver and pursuant to the powers vested in her by the Court’s orders and
applicable law. The Receiver has standing to pursue, inter alia, claims against third parties whose
actions contributed to the success of the Madison Timber Ponzi scheme, and therefore to the debts
of the Receivership Estate. As the Fifth Circuit has held in comparable cases, the doctrine of in
13
Doc. 1 at ¶ 71.
14
Doc. 1 at ¶ 79.
15
Doc. 1 at ¶ 183.
4
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ARGUMENT
A complaint should state “factual content that allows the court to draw the reasonable
inference that the defendant is liable for the misconduct alleged.” Ashcroft v. Iqbal, 556 U.S. 662,
678 (2009). “When considering a motion to dismiss under Rule 12(b)(6), the Court accepts the
plaintiff’s factual allegations as true and makes reasonable inferences in the plaintiff’s favor.”
Handy v. U.S. Foods, Inc., No. 3:14-CV-854-CWR-LRA, 2015 WL 1637336, at *1 (S.D. Miss.
1. Baker Donelson is responsible for the acts of Alexander and Seawright, its agents.
services within the scope of their employment or of their apparent authority to act for the
corporation is liable to the same extent as its employees.” MISS. CODE ANN. § 79-10-67(2)
(emphasis added).
Baker Donelson argues that it is not responsible for Alexander and Seawright’s acts, but it
concedes that it would be if Alexander and Seawright acted “either ‘within the scope [1] of their
employment or [2] of their apparent authority to act for [Baker Donelson].’”16 The complaint
alleges facts that would establish Baker Donelson’s liability under either scenario. The Receiver
“Whether an agent has the apparent authority to bind the principal is a question of fact”
that looks to “(1) acts or conduct of the principal indicating the agent’s authority, (2) reasonable
reliance upon those acts by a third person, and (3) a detrimental change in position by the third
16
Doc. 29 at p. 5 (quoting MISS. CODE ANN. § 79-10-67(2)) (emphasis added).
5
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person as a result of that reliance.” Eaton v. Porter, 645 So. 2d 1323, 1325 (Miss. 1994). The
The first prong is “fulfilled merely by acts of the principal which clothed the agent with
indicia of authority.” Id. at 1326. How the principal, here Baker Donelson, “held itself out to the
general public” is irrelevant; the Mississippi Supreme Court “care[s] not whether anyone from
[Baker Donelson] but its agent[s] . . . made any representations to [third parties].” Id. The “key is
how . . . particular third parties . . . perceived the actions of the agent[s].” Id.
Eaton v. Porter is instructive. In that case, J.W. Eaton, Sr., an employee of Eaton Motors,
represented to the Porters that their car would be repaired at the Eaton Motors shop. Id. at 1324.
Instead he arranged for a different auto body shop to perform the repairs, and that shop’s repairs
were defective. Id. After the Porters sued J.W. Eaton, Jr. d/b/a Eaton Motors for the defective
repairs, Eaton, Jr. argued Eaton, Sr. had no apparent authority to bind Eaton Motors because Eaton
Motors did not “h[o]ld itself out to the public as a repair business” and because Eaton, Jr. never
met the Porters nor made any representations to them. Id. at 1326. The Mississippi Supreme Court
explained that Eaton Motors’ argument “misconstrue[d] our case law.” Id.
Eaton Motors had “provided Eaton, Sr. with a desk on its premises” and Eaton, Sr. was
listed on Eaton Motors’ business cards. Id. Eaton, Sr. endorsed checks on behalf of Eaton Motors
and signed the repair estimate in question with his name and “Eaton Motors.” Id. These facts were
“sufficient evidence to show that Eaton, Jr. d/b/a/ as Eaton Motors, had clothed Eaton, Sr. with the
necessary indicia of authority.” Id. In another case, the Mississippi Supreme Court held it was
sufficient, for apparent authority purposes, that a business named its agent “Secretary of the
Department of Finance, charg[ed] him with the duty to write checks for the [business], and
6
Case 3:18-cv-00866-CWR-FKB Document 35 Filed 03/07/19 Page 7 of 26
provid[ed] him with [the business’s] Department of Finance letterhead.” Christian Methodist
Episcopal Church v. S & S Constr. Co., 615 So. 2d 568, 573 (Miss. 1993).
Applying this precedent, the Receiver’s complaint alleges more than sufficient facts to
establish Baker Donelson “clothed [Alexander and Seawright] with the necessary indicia of
authority.” Eaton, 645 So. 2d at 1326. Among other things, Baker Donelson allowed Alexander
and Seawright to use Baker Donelson’s Jackson address for their investment business.17 Baker
Donelson allowed Lamar Adams, Alexander, and Seawright to hold “closings” in Baker
Donelson’s office and to use Baker Donelson’s runners to pick up investors’ checks.18 Other Baker
Donelson shareholders, including from offices in other states, referred potential investors to
Alexander and Seawright.19 Baker Donelson allowed Alexander and Seawright to target clients of
Baker Donelson for whom Baker Donelson had recently closed transactions.20 Echoing Eaton,
Seawright even “drafted subscription agreements and accompanying documents” for investments
in Madison Timber that he sent to Adams from his Baker Donelson e-mail address.21
While Mississippi law cares not how Baker Donelson “held itself out to the general
public,” id., it nevertheless bears mention that Baker Donelson employed, and continues to
Adviser.” 22 Seawright was, and is, a Baker Donelson shareholder and “a member of Baker
17
Doc. 1 at ¶ 83.
18
Doc. 1 at ¶ 83.
19
Doc. 1 at ¶ 84.
20
Doc. 1 at ¶ 78.
21
Doc. 1 at ¶ 74. See Exhibit A. As Baker Donelson acknowledges, “[w]hen a plaintiff quotes from a document used
as a foundation for allegations in the complaint, the Court may examine the entire document to review a motion to
dismiss.” Thornton v. Micrografix, Inc., 878 F. Supp. 931, 933 (N.D. Tex. 1995). Paragraph 72 of the complaint
quotes the email that is Exhibit A.
22
Doc. 29-1 at 4.
7
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Companies.” 23 Baker Donelson argues that additional language on its website qualifies the
practices of Alexander and Seawright to exclude the activities Alexander and Seawright
performed relating to Madison Timber investments,24 but that argument only raises a factual issue
In short, the complaint alleges more than sufficient “acts or conduct of [Baker Donelson]
The second prong asks whether it was reasonable for a third party to rely on the indicia of
It is relevant, however, that in Eaton the Porters’ reliance was reasonable in part because
Eaton, Sr. met with them at Eaton Motors. Eaton, 645 So. 2d at 1327. Here, too, Alexander and
Seawright met with Lamar Adams, investors, and potential investors at Baker Donelson’s offices
a third party’s reliance was reasonable because it had received a letter “written on [the principal’s]
Department of Finance letterhead.” 615 So. 2d at 573. Here, too, Alexander and Seawright
communicated with Adams, investors, and potential investors using their Baker Donelson email
accounts; indeed, Seawright sent Adams legal documents from his Baker Donelson e-mail
address.27
23
Doc. 29-1 at 2, 5.
24
Doc. 29 at 6-7.
25
Doc. 1 at ¶ 83.
26
Doc. 1 at ¶¶ 83, 102.
27
See e.g., Exhibit A.
8
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These facts, coupled with the facts, among others, that Alexander and Seawright
emphasized their affiliation with Baker Donelson in their pitchbook,28 and that Alexander and
Seawright represented that an investor’s funds could be “run” through “BD [Baker Donelson]
escrow,” 29 are sufficient to establish that any third party—Adams, investors, and potential
Baker Donelson argues that even if investors reasonably relied on Alexander and
Seawright’s indicia of authority, the same reliance by Adams and Madison Timber could not be
reasonable and therefore the Receiver, who stands in the shoes of Adams and Madison Timber,
cannot invoke apparent authority. This argument ignores the complaint’s allegations that
Alexander and Seawright held themselves out as agents of Baker Donelson to Adams as well—by
sending legal documents to Adams from their Baker Donelson email accounts, inviting Adams to
“closings” at Baker Donelson’s offices, and pitching the Madison Timber investment to Baker
Donelson clients. Far from offering any proof that Adams had “actual knowledge of the limits of
the agents’ authority,” Baker Donelson suggests only that Adams “presumably did not care
whether Baker Donelson supported the investments.” 30 That suggestion does not undermine
“(3) a detrimental change in position by the third person as a result of that reliance”
Finally, it goes without saying that Baker Donelson’s apparent backing was to everyone’s
detriment. But for Baker Donelson’s backing, the Madison Timber Ponzi scheme would not have
continuously grown—it would have failed before ensnaring hundreds of new unwitting
28
Doc. 1 at ¶ 103.
29
Doc. 1 at ¶ 71; see also Exhibit B (an e-mail quoted in paragraph 71 of the complaint).
30
Doc. 29 at 8-9.
9
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investors.31 Each new investor that Alexander and Seawright, with Baker Donelson’s apparent
backing, recruited to the Madison Timber Ponzi scheme increased Madison Timber’s liabilities
and, today, the Receivership Estate’s debts. E.g., Official Stanford Inv’rs Comm. v. Greenberg
Traurig, LLP, No. 3:12-CV-4641-N, 2014 WL 12572881, at *6 (N.D. Tex. Dec. 17, 2014)
(finding defendants had caused damages to the Stanford receivership estate because “they
contributed to the size and scope of the underlying scheme, which ultimately resulted in Stanford’s
financial ruin”).
Because Alexander and Seawright acted with Baker Donelson’s apparent authority, Baker
Donelson is vicariously liable for their acts. See MISS. CODE ANN. § 79-10-67(2).
Alternatively, Baker Donelson is liable for Alexander and Seawright’s acts because
Alexander and Seawright acted within the scope of their employment. Baker Donelson’s own
website represents that the scope of professional services Alexander and Seawright offer are
The two cases on which Baker Donelson relies to argue Alexander and Seawright did not
act within the scope of their employment are inapplicable here. Both involved employees who
conducted romantic affairs at their workplace. Baker Donelson Bearman Caldwell & Berkowitz,
P.C. v. Seay, 42 So. 3d 474, 487 (Miss. 2010) (concluding that an attorney’s affair with a client’s
wife was not related to representation of the client); Children’s Med. Grp., P.A. v. Phillips, 940 So.
2d 931, 936 (Miss. 2006) (following “[o]ther jurisdictions [that] have specifically found that an
31
Doc. 1 at ¶ 183.
32
Doc. 29-1 at 4.
33
Doc. 29-1 at 2, 5.
10
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employee’s affair with a coworker is beyond the course and scope of employment”). A romantic
affair is “the quintessential example of an activity that is for purely personal benefit and outside the
scope of employment.” Seay, 42 So. 3d at 488. This lawsuit does not allege a romantic affair.
Seay also involved a Baker Donelson shareholder. In holding that the shareholder’s affair
with a client’s wife was not within the scope of his employment, the Mississippi Supreme Court
observed that his conduct was “different in kind from that authorized” by Baker Donelson. Id.
(emphasis removed). Here, by contrast, Alexander and Seawright’s acts were “of the kind [they
“smart advice” to potential investors to “put [their] money to work” by “invest[ing] in [] timber
drafted “subscription agreements and accompanying documents for the sales of units” in the
Baker Donelson argues that the court in Seay emphasized that its shareholder’s affair was
“not in any way related to [a legal] representation.”38 But the sales of investments by professionals
who hold themselves out as having the education, experience, and judgment to provide
professional advice on such matters is something else. The complaint alleges Alexander and
Seawright specifically targeted clients of Baker Donelson for whom Baker Donelson had recently
closed transactions39 and even told one such client, “[r]unning funds through us or BD [Baker
34
Doc. 29-1 at 4.
35
Doc. 1 at ¶ 77.
36
Doc. 29-1 at 2, 5.
37
Doc. 1 at ¶ 74.
38
Doc. 29 at 7 (quoting Seay, 42 So. 3d at 489).
39
Doc. 1 at ¶ 78.
11
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Donelson] escrow is not a problem” and all “legal and other admin expenses” would “come out of
our share.”40
These facts are sufficient to establish that Alexander and Seawright acted within the scope
of their employment, such that Baker Donelson is vicariously liable for their acts. See MISS. CODE
ANN. § 79-10-67(2).
Baker Donelson represents that “Mississippi law does not recognize a cause of action for
civil aiding and abetting.”41 Although no Mississippi state court has had the occasion to address
the issue, every Mississippi federal court to address the issue has agreed that Mississippi law
would recognize a claim for civil aiding and abetting as set forth in the Restatement (Second) of
Torts section 876(b). This includes the United States Bankruptcy Court for the Southern District
of Mississippi in In re Evans, 467 B.R. 399 (Bankr. S.D. Miss. 2011), which Baker Donelson
As the court In re Evans court explained, this Court in Dale v. Ala Acquisitions, Inc., 203 F.
Supp. 2d 694 (S.D. Miss. 2002), made an Erie guess that Mississippi would recognize a cause of
action under section 876(b) of the Restatement “(1) because a majority of other jurisdictions have
done so and (2) because Mississippi recognizes the analogous tort of civil conspiracy.” In re
Evans, 467 B.R. at 409. Since Dale, this Court has consistently recognized a cause of action for
aiding and abetting under Mississippi state law.42 The In re Evans court recognized the viability of
40
Doc. 1 at ¶ 71; see also Exhibit B.
41
Doc. 29 at 19.
42
See Natchez Reg’l Med. Ctr. v. Quorum Health Res., LLC, 879 F. Supp. 2d 556, 574 (S.D. Miss. 2012) (declining to
grant summary judgment to defendants on an aiding and abetting fraud claim); Dickens v. A-1 Auto Parts & Repair,
Inc., No. 1:18CV162-LG-RHW, 2019 WL 508074, at *2 (S.D. Miss. Feb. 8, 2019) (“Federal courts in this district
have concluded that Mississippi courts would recognize a claim of aiding and abetting fraud or civil conspiracy under
12
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a cause of action based on section 876(b) but declined to hold that Mississippi law would
recognize a cause of action cased on section 876(c). 457 B.R. at 409. As Baker Donelson
acknowledges, the Receiver’s cause of action arises under section 876(b), not section 876(c).43
B. The complaint alleges sufficient facts to state a claim for aiding and abetting.
“For harm resulting to a third person from the tortious conduct of another, one is subject to
liability if he knows that the other’s conduct constitutes a breach of duty and gives substantial
TORTS § 876(b).
Baker Donelson, Alexander, and Seawright knew that Lamar Adams was the manager of
his company, Madison Timber. They therefore knew that Adams owed Madison Timber fiduciary
duties of care. Mississippi law requires a manager to discharge his duties in good faith and fair
dealing, with ordinary care, and in a manner that he reasonably believed was in the best interests of
the company. See MISS. CODE ANN. § 79-29-123(6)(a). Adams breached those duties by misusing
Madison Timber’s corporate form to sustain a Ponzi scheme. E.g., Greenberg Traurig, LLP, 2014
WL 12572881, at *8 (“the underlying fiduciary duties on which Plaintiffs’ claims are based are
those owed by directors and officers of the Stanford Financial Group to their respective Stanford
entities”).
The complaint alleges that Baker Donelson, Alexander, and Seawright, by recruiting new
investors to the Madison Timber Ponzi scheme, aided and abetted Adams in “committing breaches
of duties owed by Adams to Madison Timber and in other tortious conduct.”44 E.g., Official
the Restatement (Second) of Torts § 876(b).”); U-Save Auto Rental of Am., Inc. v. Moses, No. 1:02CV689GURO,
2006 WL 211955, at *1 (S.D. Miss. Jan. 27, 2006) (denying a motion to dismiss a claim for aiding and abetting breach
of contract); see also Wright v. Life Investors Ins. Co. of Am., No. CIV.A. 2:08CV3-P-A, 2008 WL 4450260, at *1
(N.D. Miss. Sept. 26, 2008) (denying a motion to dismiss a claim for aiding and abetting fraud).
43
Doc. 1 at ¶ 127.
44
Doc. 1 at ¶ 128.
13
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Stanford Inv’rs Comm. v. Breazeale Sachse & Wilson LLP, No. 3:11-CV-0329-N, 2015 WL
13740747, at *9, n.11 and accompanying text (N.D. Tex. Mar. 24, 2015) (allegations that law firm
Baker Donelson argues it cannot be liable for aiding and abetting “because neither
Alexander, Seawright, nor anyone at Baker Donelson is alleged to have known that Madison
Timber was a Ponzi scheme.”45 But the complaint expressly alleges that they “knew or should
have known that Madison Timber was a Ponzi scheme” in view of the numerous red flags
described in the complaint.46 These red flags, summarized in paragraphs 94–100 of the complaint,
95. The timber deeds and cutting agreements between landowners and
Madison Timber were fake. The landowners’ signatures, forged by Adams, often
looked the same. A call to any one of the hundreds of purported landowners, or a
simple check of the title for any one of the hundreds of purported tracts of land,
would have confirmed the truth. Neither Alexander nor Seawright, nor anyone at
Baker Donelson, ever called a landowner or checked a tract’s title.
96. Madison Timber also had no real contracts with any mills. A call to any
one of the mills for which Madison Timber purported to have contracts would have
confirmed the truth. Neither Alexander nor Seawright, nor anyone at Baker
Donelson, ever called a mill.
97. Adams required that an investor agree that he or she would not record
the deed by which Madison Timber purported to grant its own rights to the investor
unless and until Madison Timber failed to make a payment due under the
promissory note. Seawright quipped that “I have been clear that I am no timber
expert”—but he is unquestionably a lawyer to whom his clients and investors
looked to evaluate the investment’s risks. Incredibly, notwithstanding the
suspicious “agreement not to record,” neither Alexander nor Seawright, nor anyone
at Baker Donelson, questioned this requirement.
98. The “profit” that Adams promised was 300% to 400% better than that
payable by any other fully collateralized investment and was uniform and
consistent. This fact should have been a glaring warning sign but Alexander, who
Baker Donelson presents as a qualified and experienced advisor, turned this
warning sign into a selling point. Alexander bragged about his “six year perfect
45
Doc. 29 at 14.
46
Doc. 1 at ¶ 129.
14
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track record” of consistent uniform returns under his “beautiful, albeit simple,
financial model.”
99. Adams purported to have identified mills with an insatiable demand for
timber at uniform prices. The market price for timber is readily available from
multiple sources, and any one of those sources would have confirmed that the
market price for timber actually rises and falls, sometimes dramatically, over short
periods of time. Neither Alexander nor Seawright, nor anyone at Baker Donelson,
ever evaluated the investment in light of such information. To the contrary,
Seawright gloated that “[Adams] has stated that volume is not problem and
indicates there are enough opportunities for him to soak up as much capital as we
can raise.”
100. In 2014 Adams decided that he did not want to have to manage
Madison Timber during the month of December. He told his “bird dogs,” including
Alexander and Seawright, that Madison Timber would not issue checks in
December going forward; what had been a 12-month payoff would become a
13-month payoff, skipping the last month of the year. Seawright blindly passed on
to investors the dubious explanation that mills shut down in December for OSHA
inspections . . . .
Baker Donelson creates out of thin air a “universal rule in this country” that “banks,
lawyers, brokerage houses, [or] accountants” are not liable for aiding and abetting a fraudulent
scheme based on “red flags, smoke, and other irregularities.”47 Baker Donelson cites El Camino
Res., LTD v. Huntington Nat’l Bank, 722 F. Supp. 2d 875, 907–08 (W.D. Mich. 2010). The only
“universal rule” to which the El Camino court referred is the purported principle that “a bank’s
relationship is with its customer and that the bank owes third parties no duty of care to monitor a
customer’s activities.” 722 F. Supp. 2d at 907. That principle is inapplicable here, and in any
event, El Camino is not binding on this Court. Indeed, in Ponzi scheme cases decided in the Fifth
Circuit, awareness that an investment offered “unrealistic rates of return” supports knowledge for
aiding and abetting purposes. Janvey v. Proskauer Rose LLP, No. 3:13-CV-0477-N, 2015 WL
Moreover, the complaint does not depend on red flags alone. The complaint expressly
alleges at paragraphs 86–88 that Alexander and Seawright falsely represented that they personally
47
Doc. 29 at 14.
15
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inspected the timber and “mill contracts” underlying each investment. These representations were
knowingly false, because there were no timber and no “mill contracts” to inspect:
86. Investors were led to believe that Alexander and Seawright personally
inspected the timber underlying each investment. Of course they did not. Alexander
and Seawright gave investors “Equity Term Sheets” that described each upcoming
investment opportunity. An “Equity Term Sheet” dated March 5, 2017, for
instance, explained that for the “minimum investment” of $25,000, an investor
would share in the “cutting rights on tracts of land in various counties (the ‘Timber
Rights’).” Like all of Alexander and Seawright’s “Equity Term Sheets,” the
“Equity Term Sheet” dated March 5, 2017, expressly represented that Alexander
and Seawright would personally inspect the property in question:
Company [Alexander and Seawright] will inspect the property
related to the Timber Rights, must receive the original, executed
Note and timber deed and will inspect the executed agreement(s)
with the timber mill(s).
Alexander and Seawright could not and did not inspect the property in
question—nor “the executed agreement(s) with the timber mill(s)”—because such
did not exist. These representations were patently false.
87. Alexander and Seawright even devised a “Timber Rights Investment
Closing Checklist” that included among its list of things to do “Review Mill
Contract” and “Review Land re Timber.” Alexander and Seawright could not and
did not review any “Mill Contract” or “Land re Timber” because there was no “Mill
Contract” or “Land re Timber” to review.
88. On information and belief, Alexander and Seawright “inspected” a
purported timber tract only once or twice, at the very inception of their partnership
with Adams. The “inspection” was hardly professional. Email traffic indicates
“inspection” meant “[grab] a cooler of beer and make a loop.”
Because Alexander and Seawright were Baker Donelson’s agents, their knowledge is imputed to
Baker Donelson. See Lane v. Oustalet, 873 So. 2d 92, 95–96 (Miss. 2004) (“The law of agency
generally imputes knowledge and information received by an agent in conducting the business of a
principal to the principal, even where that knowledge or information is not communicated by the
agent to the principal.”); see also Proskauer, 2015 WL 11121540, at *5 (citing Texas agency law
to impute a lawyer’s knowledge of a Ponzi scheme to law firms where he was employed).
Reading the complaint’s allegations in a light most favorable to the Receiver, and
indulging reasonable inferences in her favor, the complaint states a claim for aiding and abetting.
16
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purpose or a lawful purpose unlawfully.” Shaw v. Burchfield, 481 So. 2d 247, 255 (Miss. 1985).
conduct.” Bradley v. Kelley Bros. Contractors, 117 So. 3d 331, 339 (Miss. Ct. App. 2013)
(emphasis added). The three elements of civil conspiracy claim are: “(1) the existence of a
conspiracy, (2) an overt act in furtherance of that conspiracy, and (3) damages arising therefrom.”
Wells v. Shelter Gen. Ins. Co., 217 F. Supp. 2d 744, 753 (S.D. Miss. 2002) (citing Delta Chem. &
Petroleum, Inc. v. Citizens Bank of Byhalia, 790 So. 2d 862, 877 (Miss. App. 2001)). Facts
supporting the “substantial assistance” prong of an aiding and abetting claim also support a
showing of “an overt act in furtherance of a [Ponzi scheme] conspiracy.” Rotstain v. Trustmark
Nat’l Bank, No. 3:09-CV-2384-N, 2015 WL 13034513, at *11 (N.D. Tex. Apr. 21, 2015).
Baker Donelson argues that under “settled Mississippi law,” the complaint does not state a
civil conspiracy claim because it “does not allege that anyone at Baker Donelson, including
Alexander and Seawright, knew that Madison Timber was a Ponzi scheme.”48 This argument fails
on two grounds. First, and again, the complaint expressly alleges that Baker Donelson, Alexander,
and Seawright “knew or should have known that Madison Timber was a Ponzi scheme”49 in view
of the red flags summarized in paragraphs 94–100 and reproduced above. Moreover, and again, the
complaint does not depend on red flags alone. The complaint expressly alleges at paragraphs
86–88 that Alexander and Seawright falsely represented that they personally inspected the timber
48
Doc. 29 at 18. Baker Donelson also argues that the Receiver cannot base her civil conspiracy claim on Alexander
and Seawright’s unlawful sale of unregistered securities. The Receiver does not purport to assert a private right of
action for Alexander and Seawright’s sale of unregistered securities. The Receiver would be remiss, however, to fail to
point to that unlawfulness, which is further “evidence of [Alexander and Seawright’s] course of conduct.” Bradley,
117 So. 3d at 339.
49
Doc. 1 at ¶ 120.
17
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and “mill contracts” underlying each investment. These representations were knowingly false,
Second, “settled Mississippi law” holds that a conspiracy can be formed by a “mere tacit
understanding between the conspirators to work to a common purpose.” Aetna Ins. Co. v.
Robertson, 94 So. 7, 22 (1922), modified on suggestion of error for other reasons, 95 So. 137
(1923). Alexander and Seawright formed a common purpose with Lamar Adams to “pool other
people’s money to invest in Madison Timber,”50 and Baker Donelson furthered that purpose.
Baker Donelson knew that Alexander and Seawright used their affiliation with Baker Donelson to
recruit new investors to Madison Timber and allowed it.51 See, e.g., Rotstain, 2015 WL 13034513,
at *11 (even the provision of “routine [professional] services” is “sufficient to allege substantial
assistance and an overt act in furtherance of a conspiracy” if those services “inherently facilitated
the financial transactions and operations that formed the lifeblood of the [Ponzi] scheme”).
Baker Donelson cites Midwest Feeders, Inc. v. Bank of Franklin, 886 F.3d 507, 520 (5th
Cir. 2018), for the general proposition that civil conspiracy requires proof that the coconspirator
“knew of [the] fraudulent scheme.” In fact, in affirming summary judgment in that case, the Fifth
Circuit nevertheless observed that “civil conspiracy can be—and often is—established through
circumstantial evidence.” Id. at 520. Indeed, the district court in Midwest Feeders denied a motion
to dismiss because alleged “circumstantial evidence” created “a factual inquiry regarding a civil
conspiracy.” Midwest Feeders, Inc. v. Bank of Franklin, 114 F. Supp. 3d 419, 431 (S.D. Miss.
2015). Where one conspirator had “confessed to fraudulent activity,” it was sufficient, at the
motion to dismiss stage, that his coconspirators were alleged to have failed to investigate. Id.
50
Doc. 1 at ¶ 70.
51
Doc. 1 at ¶ 82.
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Applying this precedent, and reading the complaint’s allegations in a light most favorable
to the Receiver and indulging reasonable inferences in her favor, the complaint unquestionably
states facts supporting a civil conspiracy claim sufficient to survive a motion to dismiss.
4. The complaint states a claim for recklessness, gross negligence, and at a minimum
negligence; and for negligent retention and supervision.
“Negligence is a failure to do what the reasonable person would do under the same or
similar circumstances.” Estate of St. Martin v. Hixson, 145 So. 3d 1124, 1128 (Miss. 2014).
Recklessness “is a failure or refusal to exercise any care.” Maldonado v. Kelly, 768 So. 2d 906, 910
(Miss. 2000).52
Receivership Estate, because its duties of care are to its clients only. But Baker Donelson
misconstrues the Receiver’s claim as a claim for “professional negligence.”53 The complaint
currently alleges a claim for professional negligence, or attorney malpractice, only against Butler
Snow—not against Baker Donelson. Against Baker Donelson, the complaint currently alleges
ordinary negligence only. The complaint alleges Baker Donelson, Alexander, and Seawright
“were in advantageous positions to discover Adams’s fraud” and “[i]n view of the numerous red
flags described in this complaint, a reasonable person”—not a reasonable lawyer—“in the same or
similar circumstances would have discovered Adams’s fraud.”54 The complaint further alleges
they “not only failed to exercise due care, they failed or refused to exercise any care at all in their
52
See also Dame v. Estes, 101 So. 2d 644, 645 (Miss. 1958) (“Gross negligence is that course of conduct which, under
the particular circumstances, discloses a reckless indifference to consequences without the exertion of any substantial
effort to avoid them.”).
53
Doc. 29 at ¶ 21 (emphasis added).
54
Doc. 1 at ¶ 138.
55
Doc. 1 at ¶ 139.
19
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The case law on which Baker Donelson relies holds only that lawyers generally are not
liable to non-clients for their negligent provision of legal services. See Great Am. E & S Ins. Co. v.
Quintairos, Prieto, Wood & Boyer, P.A., 100 So. 3d 420, 425 (Miss. 2012) (“But here, Great
American has alleged nothing more than professional negligence.”). Because the complaint does
not allege, and the Receiver’s claim does not depend, on Baker Donelson’s negligent provision of
legal services, that case law is inapplicable here. 56 Baker Donelson has stated no basis for
dismissing the Receiver’s claim for recklessness, gross negligence, and at a minimum negligence.
The complaint separately alleges a claim against Baker Donelson for negligent retention
and supervision. A claim for negligent retention and supervision is also “simply a negligence
claim.” Roman Catholic Diocese of Jackson v. Morrison, 905 So. 2d 1213, 1229 (Miss. 2005).
“[A]n employer will be liable for negligent hiring or retention of his employee when an employee
injures a third party if the employer knew or should have known of the employee’s incompetence
or unfitness.” Backstrom v. Briar Hill Baptist Church, Inc., 184 So. 3d 323, 327 (Miss. Ct. App.
2016) (quoting Parmenter v. J&B Enters. Inc., 99 So. 3d 207, 217 (Miss. Ct. App. 2007)).
Baker Donelson argues it cannot be liable for negligent retention and supervision because
“employers do not have a duty to supervise their employees when the employees are off-duty or
not working.”57 But the case on which Baker Donelson relies, Seay, is the same case on which it
relies to argue Alexander and Seawright did not act within the scope of their employment. That
case held only that a Baker Donelson shareholder’s romantic affair with a client’s wife was
56
Contrast the complaint, Doc. 1 at ¶¶ 135–41, with the facts in Great Am. E & S Ins. Co. v. Quintairos, Prieto, Wood
& Boyer, P.A., 100 So. 3d 420, 425 (Miss. 2012): “Great American’s claims for ordinary negligence, gross negligence,
and negligent supervision all allege that Quintairos breached its duty in providing legal services to Shady Lawn. As we
have said, ‘a legal malpractice action is a negligence action dressed in its Sunday best.’ A plaintiff, therefore, must
allege something other than professional negligence to establish an ordinary negligence claim. For instance, lawyers
who fail to maintain their offices in a reasonably safe manner are subject to their clients’ ordinary negligence claims.
But here, Great American has alleged nothing more than professional negligence.”
57
Doc. 29 at ¶ 17 (quoting Baker Donelson Bearman Caldwell & Berkowitz, P.C. v. Seay, 42 So. 3d 474, 489 (Miss.
2010)).
20
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“different in kind from that authorized” by Baker Donelson. Seay, 42 So. 3d at 487. As shown
above, Alexander and Seawright’s acts were “of the kind [they were] employed to perform.” Id.
“Investment Adviser” services,58 purported to provide “smart advice” to potential investors to “put
accompanying documents for the sales of units” in the Alexander Seawright Timber Fund, which
invested solely in Madison Timber.61 These facts are sufficient to establish that Alexander and
Seawright acted within the scope of their employment, see MISS. CODE ANN. § 79-10-67(2).
At a minimum, Baker Donelson had a duty to supervise acts that Alexander and Seawright
undertook within Baker Donelson’s offices and in reliance on Baker Donelson’s name and
resources. The complaint alleges sufficient facts, described above, which would establish that
Baker Donelson failed to do so. When a receiver adequately pleads that an employee “provided
claim should be denied because it is “not unreasonable to infer” that employers “were aware to
58
Doc. 29-1 at 4.
59
Doc. 1 at ¶ 77.
60
Doc. 29-1 at 2, 5.
61
Doc. 1 at ¶ 74.
62
The court in Proskauer applied Texas law to explain that negligent supervision “requires a plaintiff to demonstrate
that the employee’s tortious conduct was foreseeable to the employer.” Texas’s standard for negligent supervision is
the same as Mississippi’s. CoTemp, Inc. v. Houston W. Corp., 222 S.W.3d 487, 492 (Tex. App. 2007) (“The basis of
responsibility under the doctrine of negligent retention is the master’s negligence in retaining in his employ an
incompetent servant whom the master knows, or by the exercise of reasonable care should have known, was
incompetent or unfit, thereby creating an unreasonable risk of harm to others.”).
21
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5. The doctrine of in pari delicto does not bar the Receiver’s claims.
The doctrine of in pari delicto is an equitable, affirmative defense, which provides that “a
wrongdoer is not entitled to compel contribution from a joint tortfeasor.” Sneed v. Ford Motor Co.,
735 So. 2d 306, 308 (Miss. 1999). Baker Donelson argues the Receiver’s claims are barred by the
doctrine of in pari delicto because the Receiver, having “stepped into the shoes” of Adams and
Madison Timber, can have no right of action against Baker Donelson. Baker Donelson is wrong.
In federal equity receiverships, the Fifth Circuit has adopted what Baker Donelson calls the
“innocent successor” exception to the doctrine of in pari delicto. This exception allows a receiver
to assert tort claims against professionals even though she has stepped into the wrongdoer’s shoes.
The rationale for applying the “innocent successor” exception in a federal equity receivership such
as this is straightforward: A receiver has a duty to maximize the value of a receivership estate for
the benefit of victims, and “[a]pplication of in pari delicto would undermine one of the primary
purposes of the receivership.” Jones v. Wells Fargo Bank, N.A., 666 F.3d 955, 966 (5th Cir. 2012).
Application of in pari delicto in a federal equity receivership would also “be inconsistent with the
purposes of the [in pari delicto] doctrine,” which is “not for the benefit of either party and not to
punish either of them, but for the benefit of the public.” Id. (quoting Lewis v. Davis, 145 Tex. 468,
199 S.W.2d 146, 151 (1947)). See also Janvey v. Adams & Reese, LLP, No. 3:12-CV-0495-N,
2013 WL 12320921, at *3 (N.D. Tex. Sept. 11, 2013) (“In other words, whether to apply in pari
“It is [therefore] well established [in the Fifth Circuit] that when the receiver acts to protect
innocent creditors . . . [s]he can maintain and defend actions done in fraud of creditors even though
the corporation would not be permitted to do so.” Jones, 666 F.3d at 966 (internal quotation marks
and citation omitted). Indeed, the Stanford court has refused to apply the doctrine of in pari delicto
to that receiver’s claims against professionals. See, e.g., Greenberg Traurig, LLP, 2014 WL
22
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12572881, at *4 (“This Court has already held that the in pari delicto defense has little application
when a receiver seeks to reclaim assets for innocent investors.”); Janvey v. Willis of Colorado,
Inc., No. 3:13-CV-3980-N, 2014 WL 12670763, at *4 (N.D. Tex. Dec. 5, 2014) (same); Adams &
Reese, LLP, 2013 WL 12320921, at *3 (“The Fifth Circuit, when applying Texas law, seems to
hold the view that when a receiver is protecting innocent creditors or recovering assets for
investors and creditors, the defense of in pari delicto should be rejected generally.”).
Baker Donelson contends that “Mississippi courts have not yet spoken on the question”
and speculates that, if asked, they would find that the “innocent successor” exception does not
apply here.63 Baker Donelson premises its argument on case law from the Seventh Circuit and
from New York, which it characterizes as a “clear trend.”64 Baker Donelson does not explain why
it believes Mississippi courts would look to courts in the Seventh Circuit or New York for
guidance, when courts in the Fifth Circuit have addressed the issue repeatedly and convincingly.
Baker Donelson does not explain why it believes Mississippi courts would reject the Fifth
Indeed, Mississippi courts have long recognized “important limitations” to the in pari
delicto doctrine. Morrissey v. Bologna, 123 So. 2d 537, 543 (Miss. 1960). “Even where the
contracting parties are in pari delicto, the courts may interfere from motives of public policy.
Whenever public policy is considered as advanced by allowing either party to sue for relief against
the transaction, then relief is given to him.” Id.; see also Rideout v. Mars, 54 So. 801, 802 (Miss.
1911) (“However, there is a well-defined exception to that rule, which is that, where the paramount
public interest demands it, the court will intervene in favor of one as against the other.”).
63
Doc. 29 at 17.
64
Doc. 29 at 19.
23
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Tellingly, Baker Donelson fails to address the important public policy reasons for not
applying in pari delicto in this case. Adams & Reese, 2013 WL 12320921, at * 3 (“The parties have
not briefed any public policy rationales, and thus the Court declines to dismiss the Receiver’s
claims on in pari delicto grounds.”). Plainly, there is a “paramount public interest” in the
Receiver’s recovery. There is no public interest in, and the purpose of the in pari delicto doctrine is
not served by, barring the Receiver from pursuing claims against defendants who are alleged to
have knowingly falsely represented that they personally inspected the timber and “mill contracts”
underlying each Madison Timber investment.65 Excepting the Receiver from the in pari delicto
doctrine is prudent and consistent with Fifth Circuit and Mississippi law.
Baker Donelson argues that, even if the “innocent successor” exception to the doctrine of
in pari delicto applies, it should except the Receiver’s fraudulent transfer claims only, not the tort
claims the Receiver alleges against Baker Donelson. Courts in the Fifth Circuit have flatly rejected
this argument. A federal equity receiver may pursue any claims against any third parties whose
actions contributed to the success of a Ponzi scheme, and therefore to the debts of a receivership
estate. See, e.g., Rotstain, 2015 WL 13034513, at *9 (“The Court has rejected [the argument that
the Receiver has no standing to bring tort claims] in the past and held that the Receiver has
standing to assert tort claims based on the harm to the Receivership Estate’s ability to repay its
creditors.”); Greenberg Traurig, LLP, 2014 WL 12572881, at *4 (“This Court has held that the
Receiver may assert tort claims against third parties based on allegations that the third parties’ torts
contributed to the liabilities of the Receivership Estate.”); Willis of Colorado, Inc., 2014 WL
12670763, at *3 (allowing the receiver to pursue “common law tort claims because they allege that
Defendants’ participation in a fraudulent marketing scheme increased the sale of Stanford’s CDs,
65
Doc. 1 at ¶¶ 86-88.
24
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ultimately resulting in greater liability for the Receivership Estate”); Adams & Reese, LLP, 2013
WL 12320921, at *1 (allowing the receiver to pursue civil conspiracy claim is for conspiracy to
commit fraud, breaches of fiduciary duty, fraudulent transfers, and conversion because the lawyer
defendants “were in advantageous positions to discover Stanford’s fraud and . . . they either failed
to discover it or discovered it and chose not to act because they benefitted from the enterprise
through their director fees or legal fees”). Like the courts before it, this Court too should find “in
pari delicto no impediment to the Receiver’s standing to assert [her] tort claims.” Greenberg
CONCLUSION
Baker Donelson has not stated a basis for dismissing any of the Receiver’s claims against
Baker Donelson. The Receiver asks to be permitted to proceed with discovery, in anticipation of
25
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March 7, 2019
Respectfully submitted,
CERTIFICATE OF SERVICE
I certify that I electronically filed the foregoing with the Clerk of Court using the ECF
26
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TABLE OF CONTENTS
INTRODUCTION ...........................................................................................................................1
ARGUMENT ...................................................................................................................................5
I. Baker Donelson Is Not Responsible for the Actions of Alexander and Seawright. ............5
C. The Complaint Does Not State a Claim for Negligent Supervision and
Retention (Count VIII). ..........................................................................................10
II. The Complaint’s Causes of Action Do Not State a Claim for Relief Against Baker
Donelson. ...........................................................................................................................12
A. The Complaint Does Not State a Claim for Civil Conspiracy (Count I). ..............12
B. The Complaint Does Not State a Claim for Aiding and Abetting (Count II). .......13
A. The Receiver Stands in the Shoes of the Most Culpable Parties, Madison
Timber and Adams. ................................................................................................16
CONCLUSION ..............................................................................................................................20
Case 3:18-cv-00866-CWR-FKB Document 29 Filed 02/21/19 Page 3 of 28
TABLE OF AUTHORITIES
Hays v. Pearlman,
2010 WL 4510956 (D.S.C. Nov. 2, 2010) ...............................................................................18
Hymel v. FDIC,
925 F.2d 881 (5th Cir. 1991) ...................................................................................................16
In re Evans,
467 B.R. 399 (Bankr. S.D. Miss. 2011) ...................................................................................14
Jones v. Greninger,
188 F.3d 322 (5th Cir. 1999) ...................................................................................................20
iii
Case 3:18-cv-00866-CWR-FKB Document 29 Filed 02/21/19 Page 4 of 28
Pinter v. Dahl,
486 U.S. 622 (1988) .................................................................................................................13
Scholes v. Lehmann,
56 F.3d 750 (7th Cir. 1995) ...............................................................................................17, 19
State Cases:
iv
Case 3:18-cv-00866-CWR-FKB Document 29 Filed 02/21/19 Page 5 of 28
Glidewell v. Hite,
6 Miss. 110 (Miss. Err. & App. 1840) .....................................................................................18
Great Am. E & S Ins. Co. v. Quintairos, Prieto, Wood & Boyer, P.A.,
100 So. 3d 420 (Miss. 2012) ..............................................................................................14, 15
Latham v. Johnson,
--- So. 3d ---, 2018 WL 3121362 (Miss. Ct. App. June 26, 2018) ...........................................16
Other Authorities:
v
Case 3:18-cv-00866-CWR-FKB Document 29 Filed 02/21/19 Page 6 of 28
vi
Case 3:18-cv-00866-CWR-FKB Document 29 Filed 02/21/19 Page 7 of 28
INTRODUCTION
In this unprecedented lawsuit, the Receiver seeks to hold the law firm of Baker,
Donelson, Bearman, Caldwell & Berkowitz P.C. (“Baker Donelson”) liable for the Ponzi scheme
perpetrated by Madison Timber Properties, LLC (“Madison Timber”) and Arthur Lamar Adams
(“Adams”). The law firm never represented Madison Timber or Adams, and it owed them no
attorney-client duties. The Receiver certainly does not allege that Baker Donelson perpetrated
the Ponzi scheme, or that anyone at the firm knew Adams was engaged in fraud. In contrast to
others whom the Receiver has sued, Baker Donelson never profited or stood to profit from the
The Receiver’s sole basis for suing Baker Donelson is that two individuals who work at
the law firm, Brent Alexander and Jon Seawright, also operated an unaffiliated personal LLC,
Alexander Seawright Timber Fund I, LLC, which lent its members’ funds to Madison Timber.
But the Receiver does not allege, because she cannot allege, that Baker Donelson owned or
controlled this LLC or profited from it in any way. Baker Donelson is not in the investment
business, much less the timber business. Alexander and Seawright operated their LLC separately
from the business of the law firm, and the Complaint alleges nothing to the contrary. Nor does it
allege a single fact about any other person at Baker Donelson. Whatever Alexander’s or
Seawright’s responsibility allegedly may be – and the Receiver does not allege that they knew
Madison Timber was fraudulent – there is no basis to hold Baker Donelson liable.
Baker Donelson fully supports the Receiver’s proper objective to compensate innocent
investors who lost money in Adams’s scheme. But such compensation must come from those
who profited from the scheme and are legally responsible for it. Mississippi law does not permit
imposing liability on a law firm that did not represent Adams or participate in his fraud. Such an
unprecedented action would only compound the harm of the Ponzi scheme by punishing other
Case 3:18-cv-00866-CWR-FKB Document 29 Filed 02/21/19 Page 8 of 28
innocent parties: the blameless employees and shareholders of Baker Donelson, who had nothing
The Court therefore should dismiss the Complaint against Baker Donelson because,
under settled Mississippi law, the firm is not responsible for its employees’ actions outside the
scope of their employment. The Complaint also should be dismissed for failure to state a claim
on the elements of the causes of action it asserts: First, it alleges no facts that could support a
finding that Baker Donelson had actual knowledge of Adams’s fraud, an essential element of the
Receiver’s claim for civil conspiracy. Second, the same defect would defeat the Receiver’s
claim for aiding and abetting – if such a cause of action existed in Mississippi, which it does not.
Third, the Receiver’s claim of “recklessness,” “gross negligence,” or “negligence” fails because
the Receiver stands in the shoes of Madison Timber and Adams, who were not clients of Baker
Donelson. Under settled Mississippi law, a law firm owes no duty of professional care to non-
clients absent rare circumstances not arguably present here. That rule ensures that lawyers can
exercise their duties to those who are their clients with uncompromised loyalty.
That the Receiver stands in the shoes of Madison Timber and Adams, and not the
investors, gives rise to another reason why the Complaint should be dismissed: The doctrine of
in pari delicto bars tort claims brought on behalf of a primary wrongdoer against other alleged
wrongdoers. Receivers and trustees have no greater powers than the entities in receivership,
which means this Receiver is subject to the same defenses that would have been available to
Baker Donelson if Madison Timber and Adams were the plaintiffs. To be sure, receivers may be
shielded from in pari delicto when they assert non-tort causes of action, like fraudulent transfer
claims (no such claims are alleged against Baker Donelson); but many courts hold otherwise
when, as here, a receiver asserts tort claims. The Mississippi courts have not spoken on this
2
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issue, but they would likely apply the traditional rule that a receiver inherits tort claims as she
finds them, subject to all existing defenses. The Court need not consider in pari delicto,
however, if it finds the Complaint deficient because Baker Donelson is not liable for the acts of
Alexander and Seawright, or because the allegations do not establish the elements of a cause of
action. In all events, the Complaint does not state a claim and should be dismissed.
FACTUAL ALLEGATIONS1
Baker Donelson is a law firm based in Memphis, Tennessee, which employs more than
700 attorneys and public policy advisors around the country, including in its Jackson, Mississippi
office. Through its professionals, the firm provides legal and consulting services to a diverse set
of clients. The Complaint does not allege, however, that Madison Timber and Arthur Lamar
Adams were clients of Baker Donelson – because they were not clients. Cf. Compl. ¶¶ 165–176.
The Complaint also does not allege that anyone at Baker Donelson had any contact with
Adams or the Madison Timber investments, with the exception of two individuals, Brent
Alexander and Jon Seawright, who did business with Adams through an LLC that bears their
names, Alexander Seawright Timber Fund I, LLC. Compl. ¶ 74. Jon Seawright is an attorney
and shareholder in the firm, who works primarily on corporate law matters for healthcare clients.
Brent Alexander is a non-lawyer political consultant who works primarily in healthcare policy.
According to the Complaint, in 2011 Alexander and Seawright became acquainted with
Adams, who offered an opportunity to invest in Madison Timber. Id. ¶ 70. They asked Adams
about the potential risks to the timber stock and received assurances of an umbrella insurance
policy on all tracts. Id. ¶ 85. They viewed the investment as posing little risk because it was
secured by the land and timber deed. Id. ¶ 70. From time to time, Adams would present them
1
The Complaint’s allegations must be taken as true for purposes of this motion to dismiss.
Baker Donelson does not concede that any factual allegation in the Complaint is true.
3
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with tranches of timber investments, for which they would locate investors. In exchange, they
received certain commissions. Id. ¶¶ 72–74. The Complaint does not allege that Baker
Donelson received any commissions. Nor does it allege that anyone at Baker Donelson other
than Alexander and Seawright did anything wrong. As to Alexander and Seawright, the
Complaint does not allege they knew Madison Timber was a Ponzi scheme. It alleges instead
that they missed “red flags” about Madison Timber – e.g., that the returns were too stable and too
high, and that the signatures on the timber deeds had been forged. See id. ¶¶ 94–100.2
On May 11, 2018, “Adams pleaded guilty to the federal crime of wire fraud and
‘admit[ted] to all of the conduct of the entire scheme and artifice to defraud.’” Compl. ¶ 21. In a
separate action, the SEC charged Adams with federal securities violations, and this Court
appointed Alysson Mills (the “Receiver”) as a federal equity receiver for Madison Timber and
the Adams estate. The Receiver has filed several lawsuits to claw back for the benefit of
investors funds that were fraudulently transferred from Madison Timber. This lawsuit is
different: The Receiver seeks to impose tort liability on parties who she alleges permitted the
scheme to grow, even if – as in Baker Donelson’s case – there is no allegation that they received
Seawright, and Alexander Seawright, LLC3 (the “Alexander Seawright Defendants”); and Matt
Thornton, Butler Advisory Services LLC, and Butler Snow LLP (the “Butler Snow
2
The Complaint also alleges that Alexander and Seawright planned to expand their business with
Madison Timber through a second LLC, Alexander Seawright Timber Fund II, LLC, but this
fund never launched. See Compl. ¶¶ 101–112. The Complaint does not allege that this LLC had
any connection to the law firm either.
3
Alexander Seawright, LLC, a separate entity from Alexander Seawright Timber Fund I, LLC,
allegedly also participated in the Madison Timber investments. See Compl. ¶ 162. Again, there
is no allegation that this LLC had any connection to Baker Donelson.
4
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Defendants”). The Receiver brings four counts against Baker Donelson: civil conspiracy (Count
I); aiding and abetting (Count II); “recklessness, gross negligence, and at a minimum
negligence” (Count III); and negligent supervision and retention (Count VIII), and alleges that
Baker Donelson is vicariously liable for the acts of Alexander and Seawright. The Complaint
brings other counts but not against Baker Donelson, including legal malpractice (Baker Donelson
did not represent Adams or Madison Timber), fraudulent transfer (Baker Donelson received no
payments as a result of the Ponzi scheme); and Mississippi’s civil RICO statute.
STANDARD OF REVIEW
To survive a motion to dismiss under Rule 12(b)(6), the Complaint must plead “enough
facts to state a claim to relief that is plausible on its face.” Bell Atl. Corp. v. Twombly, 550 U.S.
544, 570 (2007). The plausibility requirement extends to every essential element of each claim.
In re S. Scrap Material Co., LLC, 541 F.3d 584, 587 (5th Cir. 2008).
ARGUMENT
I. Baker Donelson Is Not Responsible for the Actions of Alexander and Seawright.
The Receiver’s entire case depends on holding Baker Donelson responsible for the acts of
Alexander and Seawright. This theory fails as a matter of law. Baker Donelson is a professional
corporation is limited to the acts of its employees that are performed either “within the scope [1]
of their employment or [2] of their apparent authority to act for the corporation[.]” Miss. Code
§ 79-10-67(2). The allegations concerning Alexander and Seawright satisfy neither condition.
“If an employee deviates or departs from his work to accomplish some purpose of his
own not connected with his employment – goes on a ‘frolic of his own’ – the relation of master
5
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and servant is temporarily suspended.” Baker Donelson Bearman Caldwell & Berkowitz, P.C. v.
Seay, 42 So. 3d 474, 489 (Miss. 2010) (internal quotation marks omitted). “Some actions are so
clearly beyond an employee’s course and scope of employment that they cannot form the basis
for a claim of vicarious liability, as a matter of law.” Children’s Med. Grp., P.A. v. Phillips, 940
So. 2d 931, 935 (Miss. 2006). The Mississippi Supreme Court in Seay applied these principles to
the law firm where the shareholder’s actions – an alleged adulterous affair with an alleged
client’s spouse – were not in furtherance of the firm’s practice of law and were not approved by
Baker Donelson. 42 So. 3d at 489. While the plaintiff claimed that he relied on the lawyer’s
legal advice, the Court emphasized that Baker Donelson had obtained no benefit from the
shareholder’s wrongdoing, and that the affair did not relate to the attorney-client relationship. Id.
Seay’s reasoning compels dismissal here, because the Complaint’s allegations do not
plausibly demonstrate that Alexander and Seawright were acting within the scope of their
employment at Baker Donelson. Alexander and Seawright worked as, respectively, a lobbyist
and a lawyer at the Baker Donelson law firm. Compl. ¶ 69. The Complaint does not allege,
however, that Madison Timber or Adams sought or received legal advice from Seawright or
public-policy advice from Alexander, or that any of the wrongdoing attributed to Alexander or
Seawright occurred in the course of providing such client services to anyone. Rather, Alexander
and Seawright are alleged to have missed “red flags” in the course of managing investments
dismiss,4 demonstrates that investment management is not part of Alexander’s or Seawright’s job
4
“When a plaintiff quotes from a document used as a foundation for allegations in the
complaint,” see Compl. ¶ 81, “the Court may examine the entire document to review a motion to
dismiss.” Thornton v. Micrografix, Inc., 878 F. Supp. 931, 933 (N.D. Tex. 1995).
6
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working primarily “in health care, on behalf of health care providers and related service
industries.” Ex. A (Website) at 2. Jon Seawright is a lawyer who advises and represents firm
clients “with a particular focus on issues unique to community and non-profit hospitals” and an
emphasis on “new market tax credits . . . and historic tax credits[.]” Ex. B (Website) at 2.
The Complaint’s suggestions to the contrary are based entirely on misleading partial
quotations from the website. See Compl. ¶ 81. Alexander supposedly has “a ‘rapidly growing’
practice in ‘advising venture capital and related investors.’” Id. The quoted sentence does not
end with a period after “investors.” It actually says that Alexander advises “venture capital and
related investors on public policy issues” – not on their investments. Ex. A at 2. Seawright
supposedly has “‘extensive experience’ in business development and capital formation.” Compl.
¶ 81. That quotation omits the immediately preceding words, which explain that Seawright
provides legal advice on “structuring of tax incentives for business development and capital
formation[.]” Ex. B at 2. Interpreting the tax code and structuring tax incentives are legal
The Mississippi Supreme Court in Seay cited the Restatement (Second) of Agency,
emphasizing that “[c]onduct of a servant is not within the scope of employment if it is different
in kind from that authorized, far beyond the authorized time or space limits, or too little actuated
by a purpose to serve the master.” 42 So. 3d at 488 (emphases in original). The lawyer’s
conduct was outside the scope of his employment because it “was not in any way related to [a
legal] representation” and “not motivated by a desire to benefit” the firm. Id. at 489 (internal
quotation marks omitted). That equally describes the allegations in this case. Madison Timber
and Adams were not clients of Baker Donelson. Baker Donelson did not profit from Madison
Timber or Adams; the firm had no business relationship with them whatsoever. Alexander and
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Seawright conducted their investment business through a separate legal entity, Alexander
Seawright Timber Fund I, LLC. Baker Donelson has no ownership interest in the LLC and
The separateness of the Alexander Seawright Defendants’ conduct from Baker Donelson
stands in contrast to the Complaint’s allegations about the Butler Snow Defendants. Unlike
Baker Donelson, Butler Snow allegedly had “attorney-client relationships with Adams and
Madison Timber[.]” Compl. ¶ 66. Where Alexander and Seawright acted through personal
LLCs, “Butler Snow launched Butler Snow Advisory Services, [as] ‘a wholly owned subsidiary
In an effort to avoid the Seay case, the Receiver claims that even if Alexander and
Seawright did not have authority to act for Baker Donelson in their investment activities, they
had apparent authority. This theory does not rescue the Complaint from dismissal, both because
(1) if anyone could have been misled by an appearance of authority, it was not Adams or
Madison Timber, in whose shoes the Receiver stands; and (2) Alexander and Seawright had no
more “apparent” than “actual” authority to bind the firm in investment-management matters –
Baker Donelson is a law firm, not an investment management organization. See Compl. ¶ 81.
Apparent authority is “authority that the principal has by words or conduct held the
alleged agent out as having.” Patriot Commercial Leasing Co. v. Jerry Enis Motors, Inc., 928
So. 2d 856, 864 (Miss. 2006). It requires a “showing of (1) acts or conduct of the principal
indicating the agent’s authority, (2) reasonable reliance upon those acts by a third person, and
(3) a detrimental change in position by the third person as a result of that reliance.” Christian
Methodist Episcopal Church v. S & S Construction Co., Inc., 615 So.2d 568, 573 (Miss. 1993).
Apparent authority must be assessed “from the point of view of the third person” who is suing
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the principal. Restatement (Second) of Agency § 261, cmt. a. For example, “a third party cannot
rely on the apparent authority of an agent to bind a principal where he has actual knowledge of
the limits of the agent’s authority[.]” Patriot Commercial Leasing Co., 928 So. 2d at 864.
The Complaint alleges that “Investors reasonably believed that their investment in
Madison Timber, through Alexander Seawright Timber Fund I, LLC, was backed and promoted
by, and had been vetted by, Baker Donelson.” Compl. ¶ 79 (emphasis added).5 But the Receiver
does not stand in the shoes of investors; she asserts the claims of Madison Timber and Adams,
and apparent authority must be assessed from their perspective. The Complaint does not allege
that Madison Timber or Adams believed Alexander and Seawright were acting on behalf of
Baker Donelson, far less that they relied on any such mistaken belief or that such reliance would
be reasonable. See Morgan v. MML Inv’rs Servs., Inc., 226 So. 3d 590, 598 (Miss. Ct. App.
2017) (reliance was unreasonable where plaintiff “did not pay the funds to [the principal;] . . .
never received any receipt, contract, statement, or other documentation from them[; and]
acknowledges that [the agent] never even said that the investments would be with or through [the
principal]”). To the contrary, Madison Timber and Adams were engaged in fraud and
presumably did not care whether Baker Donelson supported the investments as long as they got
The Complaint also does not state a claim for vicarious liability because it does not allege
any act or conduct by Baker Donelson that indicated Alexander and Seawright’s authority to act
for the firm in recommending timber investments. “Apparent authority of an agent only binds
the principal when the plaintiff can show ‘acts or conduct of principal indicating agent’s
5
See also id. ¶ 71 (alleging Seawright told an investor his funds could be run through Baker
Donelson’s escrow account); ¶ 75 (alleging Alexander told investors that Baker Donelson
attorneys invested); ¶ 81 (alleging they “referred potential investors” to firm website); ¶ 85
(“Investors were led to believe . . . [investment] was backed by Baker Donelson’s reputation.”).
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authority[.]’” Forest Hill Nursing Ctr., Inc. v. McFarlan, 995 So. 2d 775, 781 (Miss. Ct. App.
2008) (emphasis in original) (quoting McFarland v. Entergy Mississippi, Inc., 919 So. 2d 894,
902 (Miss. 2005)). Absent some indication by Baker Donelson that Alexander and Seawright
were agents of Baker Donelson for the specific purpose on which Madison Timber allegedly
relied – i.e., for investment services – apparent authority is lacking. Adams Cmty. Care Ctr.,
LLC v. Reed, 37 So. 3d 1155, 1160 (Miss. 2010) (no apparent authority where “[t]he record is
devoid of any action on the part of [the principal] indicating that [the putative agent] was her
agent for the purpose of making health-care decisions”). An employer’s indication that an agent
is affiliated with the business – here, hosting Alexander’s and Seawright’s biographies on the
firm website – therefore does not confer authority outside the scope of the agent’s employment.
See McFarland, 919 So. 2d at 902 (“not reasonable . . . to assume” that use of a company utility
vehicle conferred apparent authority to repair power lines); Mississippi Bar v. Thompson, 5 So.
3d 330, 337 (Miss. 2008) (paralegal lacked apparent authority to create client relationship).
Because conduct by the principal is required, it is not enough for the Complaint to allege
that the putative agents, Alexander and Seawright, referred to their affiliation with Baker
Donelson. McFarlan, 995 So. 2d at 782 (insufficient that agent “held herself out” as authorized
because “the acts or conduct indicating the authority of the agent must be made by the
principal”). In any event, none of Alexander’s or Seawright’s alleged statements about Baker
Donelson are to the effect that the firm stood behind the investments. See supra n.5.
C. The Complaint Does Not State a Claim for Negligent Supervision and
Retention (Count VIII).
The Complaint also attempts to hold Baker Donelson liable for Alexander’s and
Seawright’s conduct through a claim that Baker Donelson negligently retained and supervised
them in their employment. Compl. ¶¶ 177–186. This claim fails for the same reasons as the
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vicarious liability theory: Under Mississippi law, “employers do not have a duty to supervise
their employees when the employees are off-duty or not working,” especially where the
employer gains no “corporate benefit therefrom.” Seay, 42 So. 3d at 489 (internal quotation
marks omitted). Because Alexander’s and Seawright’s investment activities were outside the
scope of their employment, the firm was under no duty to supervise them. See also Belmont v.
MB Inv. Partners, Inc., 708 F.3d 470, 491 (3d Cir. 2013) (dismissing negligent supervision claim
where employee operated a Ponzi scheme; employer has no duty “to discover, at its peril, the
fraudulent machinations in which [employee] was involved outside the scope of his
953, 960 (5th Cir. 1994) (applying Mississippi law, “[e]mployers also are not liable for failure to
But even assuming Baker Donelson were under such an obligation, the Complaint does
not state a claim for breach. “A plaintiff must prove the defendant had either actual or
become liable for the negligent hiring or retention of an employee who injures a third party.”
Parmenter v. J & B Enterprises, Inc., 99 So. 3d 207, 217 (Miss. Ct. App. 2012) (internal
quotation marks omitted). The Receiver alleges that “[i]n view of the numerous red flags
described in this complaint, . . . Baker Donelson knew or should have known of [its] agents’
incompetence or unfitness.” Compl. ¶ 180. But the only “red flags” alleged in the Complaint are
about Madison Timber – e.g., uniform high-yield profits, forged documents, etc.; see Compl.
¶¶ 94–100 – and Baker Donelson is not alleged even to have known about them. There are no
alleged “red flags” that speak to Alexander’s or Seawright’s competence or fitness to practice
law or consulting. Baker Donelson does not supervise its employees’ personal business, and the
Alexander-Seawright LLCs were just that: Alexander’s and Seawright’s personal business.
11
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II. The Complaint’s Causes of Action Do Not State a Claim for Relief.
The Receiver brings three additional causes of action against Baker Donelson: civil
conspiracy (Count I); aiding and abetting (Count II); and recklessness, gross negligence, and
negligence (Count III). The Court should dismiss each of these counts because the Complaint
does not state a claim. First, each count apparently presumes that Alexander and Seawright were
acting for the firm in their investment matters, which is incorrect for the reasons discussed in
Part I above. Second, as discussed below, these counts should be dismissed against the law firm
A. The Complaint Does Not State a Claim for Civil Conspiracy (Count I).
The essential elements of civil conspiracy are “(1) an agreement between two or more
persons, (2) to accomplish an unlawful purpose or a lawful purpose unlawfully, (3) an overt act
in furtherance of the conspiracy, and (4) damages to the plaintiff as a proximate result.” Harris
v. Town of Woodville, 196 So. 3d 1121, 1131 (Miss. Ct. App. 2016) (internal brackets omitted).
The Complaint does not state a conspiracy claim because it does not allege that anyone at
Baker Donelson, including Alexander or Seawright, knew that Madison Timber was a Ponzi
scheme. The Receiver contends only that Alexander and Seawright missed red flags. Compl.
¶¶ 94, 120. “For a civil conspiracy to arise, the alleged confederates must be aware of the fraud
or wrongful conduct at the beginning of the agreement.” Bradley v. Kelley Bros. Contractors,
117 So. 3d 331, 339 (Miss. Ct. App. 2013). Under settled law, therefore, the Receiver is wrong
to argue that “Defendants need not have known that Madison Timber was a Ponzi scheme to
unlawfully conspire with Adams,” Compl. ¶ 120. See also Midwest Feeders, Inc. v. Bank of
Franklin, 886 F.3d 507, 520 (5th Cir. 2018) (civil conspiracy requires proof that conspirator
“knew of [the] fraudulent scheme”). Absent such knowledge, it is also implausible to allege the
other central conspiracy element: that Baker Donelson intentionally agreed to the illegal scheme.
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The Receiver also has no viable conspiracy claim based on her allegations that Alexander
and Seawright (i) operated without a broker’s license and (ii) sold unregistered securities.
Compl. ¶ 118. Civil conspiracy requires that the plaintiff allege a viable underlying tort. Wells
v. Shelter Gen. Ins. Co., 217 F. Supp. 2d 744, 755 (S.D. Miss. 2002). The cause of action
“cannot rest solely upon the violation of a federal statute for which there is no corresponding
private right of action.” In re Orthopedic Bone Screw Prod. Liab. Litig., 193 F.3d 781, 790 (3d
Cir. 1999). Where the Receiver “could not sue an individual defendant for an alleged violation
of the [statute], it follows that [she] cannot invoke the mantle of conspiracy to pursue the same
cause of action against a group of defendants.” Id. at 789. With respect to licensure, the
Receiver alleges that a license is required under Section 3(4) of the Securities Exchange Act, see
Compl. ¶ 91, but cites no statutory provision that would confer a private right of action for such a
violation. With respect to registration, “only a purchaser of the unregistered security may sue”
for a registration violation under Section 12(a)(1) of the Securities Act. Trustcash Holdings, Inc.
v. Moss, 668 F. Supp. 2d 650, 654 (D.N.J. 2009) (citing Pinter v. Dahl, 486 U.S. 622, 644
(1988)). Madison Timber and Adams were not the purchasers of the alleged securities.
All of the above applies to Alexander and Seawright, but if their conduct is not imputed
to Baker Donelson, the conspiracy claim should be dismissed for the additional reason that the
Complaint alleges no facts showing that anyone at the firm entered into any agreement
concerning Madison Timber, or committed any overt acts in furtherance of Adams’ scheme.
B. The Complaint Does Not State a Claim for Aiding and Abetting (Count II).
The Court should dismiss Count II because Mississippi law does not recognize a cause of
action for civil aiding and abetting. The Receiver cites Section 876(b) of the Restatement
(Second) of Torts for the proposition that “a defendant is liable if he ‘knows that the other’s
conduct constitutes a breach of duty and gives substantial assistance or encouragement to the
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other so to conduct himself.’” Compl. ¶ 127. The Receiver cites no Mississippi statute or case
because “[n]o Mississippi court has ever recognized any of the subsections of the Restatement
(Second) of Torts § 876 as viable causes of action,” and “no Mississippi court has recognized a
claim for civil aiding and abetting.” In re Evans, 467 B.R. 399, 409 (Bankr. S.D. Miss. 2011).
Assuming arguendo that an aiding and abetting cause of action exists, the Complaint
does not state a claim because, again, neither Alexander, Seawright, nor anyone at Baker
Donelson is alleged to have known that Madison Timber was a Ponzi scheme. The Restatement
provides that a defendant is liable only if he “knows that the other’s conduct constitutes a
breach[.]” Restatement (Second) of Torts § 876(b); Compl. ¶ 127. Allegations that a defendant
“should have known about the dangers” of an alleged confederate’s conduct falls short of
establishing that the defendant “knew about conduct constituting a conspiracy[.]” Dickens v. A-1
Auto Parts & Repair, Inc., No. 1:18-cv-162-LG-RHW, 2018 WL 5726206, at *3 (S.D. Miss.
Nov. 1, 2018). Courts in those jurisdictions that recognize civil liability for aiding and abetting
routinely dismiss claims based on “red flags” like the Receiver alleges here. Consistent with the
“universal rule in this country,” “banks, lawyers, brokerage houses, [or] accountants” are not
liable for aiding and abetting based on “red flags, smoke, and other irregularities[.]” El Camino
Res., LTD. v. Huntington Nat. Bank, 722 F. Supp. 2d 875, 907–08 (W.D. Mich. 2010) (collecting
authority), aff’d, 712 F.3d 917 (6th Cir. 2013); Lerner v. Fleet Bank, N.A., 459 F.3d 273, 294 (2d
Cir. 2006) (“red flags” were “insufficient to establish a claim for aiding and abetting fraud”).
“It is quite elementary that there cannot be a tort without a breach of a legal duty.”
Savage v. Prudential Life Ins. Co. of Am., 154 Miss. 89, 121 So. 487, 489 (1929). Lawyers owe
“absolute and uncompromised” duties to their clients. Great Am. E & S Ins. Co. v. Quintairos,
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Prieto, Wood & Boyer, P.A., 100 So. 3d 420, 425–26 (Miss. 2012). But the Mississippi Supreme
Court has strictly limited the scope of an attorney’s obligations to non-clients. Id. (declining to
adopt a regime that would hold attorneys “liable for all foreseeable harm . . . to nonclients”).
This ensures that a lawyer’s absolute obligations to her client is not compromised by duties to
non-clients. Id. Mississippi recognizes only narrow exceptions to this rule, in certain
circumstances where a non-client foreseeably relies on the attorney’s work. Century 21 Deep S.
Properties, Ltd. v. Corson, 612 So. 2d 359, 373–74 (Miss. 1992); see also, e.g., Great Am. E & S
Ins. Co., 100 So. 3d at 425 (permitting suit by non-client because title lawyers “are fully aware
Madison Timber “to discover Adams’ fraud” by virtue of the “advantageous position” it
occupied as the law-firm employer of Alexander and Seawright. Compl. ¶ 138. Under the well-
established law cited above, there was no such duty. The Complaint does not allege that Adams
or Madison Timber were clients of the firm – they were not. Baker Donelson is not alleged to
have performed any professional work for Madison Timber, nor any work for another client on
which Madison Timber relied. There is no authority under Mississippi law, or any other law,
that would impose a duty on a law firm to monitor the conduct of non-client third parties, much
less a duty to discover a criminal fraud that the wrongdoer went to great lengths to disguise.
Under Mississippi law,6 a plaintiff who is in pari delicto with the defendant may not
recover. Sneed v. Ford Motor Co., 735 S.2d 306, 308 (Miss. 1999) (“a wrongdoer is not entitled
to compel contribution from a joint tortfeasor . . . if [they] are in pari delicto”). The in pari
6
The Receiver’s claims are all brought under Mississippi law, which therefore also governs the
in pari delicto defense. Knauer v. Jonathon Roberts Fin. Grp., Inc., 348 F.3d 230, 235 (7th Cir.
2003) (court “must look to [the relevant state] law to determine the rights of the receiver”).
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delicto doctrine enforces the longstanding equitable “principle that a plaintiff who has
participated in wrongdoing may not recover damages resulting from the wrongdoing.” In Pari
Delicto Doctrine, Black’s Law Dictionary (10th ed. 2014). The doctrine “applies where [i] the
plaintiff is equally or more culpable than the defendant or [ii] acts with the same or greater
knowledge as to the illegality or wrongfulness of the transaction.” Latham v. Johnson, --- So. 3d
---, 2018 WL 3121362, at *10 (Miss. Ct. App. June 26, 2018) (citing 27A Am. Jur. 2d, Equity
§ 103, p. 641 (2008)), reh’g denied (Oct. 9, 2018). At the motion todismiss stage, an affirmative
defense like in pari delicto bars recovery where the defense is established “on the face of the
complaint.” Alexander v. Verizon Wireless Servs., L.L.C., 875 F.3d 243, 249 (5th Cir. 2017).
A. The Receiver Stands in the Shoes of the Most Culpable Parties, Madison
Timber and Adams.
The Receiver stands in the shoes of Madison Timber and the Adams estate. See Hymel v.
FDIC, 925 F.2d 881, 883 (5th Cir. 1991); Order Appointing Receiver, D.I. 33, SEC v. Adams,
No. 3:18-cv-00252 (S.D. Miss.). It is black-letter law that she “has standing to assert only the
claims of the entities in receivership and not the claims of the entities’ investor‐creditors.”
Janvey v. Democratic Senatorial Campaign Comm., Inc., 712 F.3d 185, 190 (5th Cir. 2013); see
also Troelstrup v. Index Futures Grp., Inc., 130 F.3d 1274, 1276 (7th Cir. 1997) (receiver
appointed for wrongdoer’s estate “has no possible claim against [a third‐party brokerage], or on
behalf of the investors, the victims of the fraud, because he was not their receiver”).
Madison Timber and Adams have no viable tort claims against defendants, like Baker
Donelson, who allegedly failed to discover their fraud. On the face of the Complaint, the
defense of in pari delicto bars such claims as a matter of law. “Madison Timber was a Ponzi
scheme[.]” Compl. ¶ 117. Adams operated Madison Timber for more than ten years, during
which time he purported to purchase timber from Mississippi landowners and resell it to lumber
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mills for a profit. Id. ¶ 13. But “[t]here was no timber and no proceeds from sales of timber.”
Id. at 1. Madison Timber conducted no legitimate business – it was created solely as a vehicle
for fraud. See id. ¶¶ 17, 117. Outside of the Ponzi scheme, “Madison Timber had no revenues
whatsoever[.]” Id. ¶ 17. Adams “pleaded guilty to the federal crime of wire fraud” and
“‘admit[ted] to all of the conduct of the entire scheme and artifice to defraud.’” Id. ¶ 21 (quoting
Plea Agreement, D.I. 11, United States v. Adams, No. 3:18-cr-00088 (S.D. Miss)).
Beyond question, Adams’s and Madison Timber’s wrongdoing (“delicto”) was at least
equal (“in pari”) to anything alleged against Baker Donelson. In contrast to Adams’ active and
criminal fraud, the Complaint alleges that Baker Donelson is responsible for the conduct of the
Alexander Seawright Defendants, who allegedly missed “red flags” in the course of introducing
potential investors to Adams. Where two parties allegedly are responsible for a tort, the “active
wrongdoer” is more at fault than the “passive wrongdoer.” Long Term Care, Inc. v. Jesco, Inc.,
560 So. 2d 717, 721 (Miss. 1990). In any event, there can be no dispute that Adams’s fault was
While Mississippi courts have not yet spoken on this question, some states recognize a
limited exception to the in pari delicto doctrine for so-called “innocent successors.” See, e.g.,
Scholes v. Lehmann, 56 F.3d 750 (7th Cir. 1995) (applying Indiana law); Janvey, 712 F.3d at 191
(discussing Scholes and applying Texas law). Where the exception is available, it permits a
receiver “to assert the claims of a receivership entity against third‐party recipients of the entity’s
assets that have been fraudulently transferred by the principal of the Ponzi scheme[.]” Id.
7
There also can be no dispute that Adams’s fraud was within the scope of his relationship with
Madison Timber, as Adams allegedly operated Madison Timber as a pure Ponzi scheme with no
legitimate business activities. Compl. at 1.
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An innocent-successor exception does not apply to the Receiver’s tort claims for two
reasons: First, Mississippi has never recognized the exception and would not do so in these
circumstances. The Mississippi Supreme Court has recognized the doctrine of in pari delicto
since at least 1840, see Glidewell v. Hite, 6 Miss. 110, 134 (Miss. Err. & App. 1840), without
once excusing a corporation from its own fraud. Since the Seventh Circuit first recognized the
innocent successor rule (under Illinois law) in 1995, that court has criticized and progressively
narrowed it. See Peterson v. McGladrey & Pullen, LLP, 676 F.3d 594, 599 (7th Cir. 2012).
Other courts in recent years have flatly refused to adopt the exception, including the highest
court of New York in Kirschner v. KPMG LLP, 938 N.E.2d 941 (N.Y. 2010). Kirschner rejected
a litigation trustee’s attempt to sue professional firms and evade the in pari delicto defense,
reasoning that even after a fraudster has been removed, a corporation cannot foist liability for his
conduct onto third parties that allegedly failed to prevent his fraud. The court refused to permit
“the interests of innocent stakeholders of corporate fraudsters [to] trump those of innocent
stakeholders of the outside professionals who are the defendants in these cases.” Id. at 475.
Second, even where the exception is recognized, it typically applies to fraudulent transfer
claims, or similar claims designed to recoup monies expended from the estate – not tort claims
like the ones asserted against Baker Donelson in this case. Janvey, 712 F.3d at 191 (claims
against “recipients of the entity’s assets that have been fraudulently transferred”). Thus, in Hays
v. Pearlman, 2010 WL 4510956, at *5 (D.S.C. Nov. 2, 2010), the court dismissed an action like
this one, holding that “in the absence of a fraudulent conveyance case, the receiver of a
corporation used to perpetuate a fraud may not seek recovery against an alleged third‐party co‐
conspirator in the fraud.” The Receiver has not alleged a fraudulent transfer claim against Baker
Donelson, nor could she, as Baker Donelson received no payments as a result of the Ponzi
scheme. Cf. Compl. ¶¶ 145–149 (count for fraudulent transfer against other defendants).
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To be sure, the Fifth Circuit has applied an innocent successor rule under Texas law,
when considering a claim for conversion of a cashier’s check, Jones v. Wells Fargo Bank, N.A.,
666 F.3d 955 (5th Cir. 2012); and the district court in Janvey applied the exception to certain tort
claims, again under Texas law, while at the same time recognizing that “Scholes is not
universally accepted, especially outside the fraudulent transfer context.” Janvey v. Adams &
Reese, LLP, 2013 WL 12320921, at *3 (N.D. Tex. Sept. 11, 2013). The Seventh Circuit’s post-
Scholes opinion in Knauer v. Jonathon Roberts Fin. Grp., Inc. explains why the exception
should apply only to fraudulent-transfer claims and the like, not to tort claims:
348 F.3d 230, 236 (7th Cir. 2003). The Seventh Circuit has continued to limit Scholes,
describing some of its most-quoted language as “dictum” and explaining that “Scholes should
not be generalized beyond the law of fraudulent conveyances and preferential transfers.”
Peterson, 676 F.3d at 599 (applying in pari delicto to claims by bankruptcy trustee for Ponzi
If presented with this question, the Mississippi Supreme Court likely would follow this
clear trend in the caselaw and would hold that appointing a receiver does not automatically
nullify the well-established defense of in pari delicto in tort cases. At a minimum, Mississippi
would not apply an “innocent successor” rule in a case like this one, where Baker Donelson is
not alleged to have been directly involved in Adams’s fraud, nor to have derived any benefit
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from the scheme. Notably, the Jones court found the question of benefit important: it
distinguished Knauer based on the equities because in Knauer (as here) “the defendants were
neither directly involved in the embezzlements at issue nor benefitted from them.” 666 F.3d at
968 n.12.
Amendment cannot cure any of the core defects in the Complaint: that Alexander and
Seawright acted for their own personal business without authority from Baker Donelson, that
Baker Donelson did not know that Madison Timber was a Ponzi scheme, and that in pari delicto
bars the claims. The Receiver has reviewed communications among Madison Timber, Adams,
Alexander, Seawright, and their members. See Compl. ¶¶ 70, 71, 75, 77. If there were facts to
remedy these flaws, she would have alleged them. Jones v. Greninger, 188 F.3d 322, 327 (5th
Cir. 1999) (dismissal with prejudice proper where “a complaint alleges the plaintiff’s best case”).
CONCLUSION
For the foregoing reasons, the Complaint should be dismissed with prejudice.
20
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CERTIFICATE OF SERVICE
I hereby certify that on February 21, 2019, I caused the foregoing to be electronically
filed with the Clerk of the Court using CM/ECF, which will send notification of such filing to all
registered participants.
22
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Defendants
MEMORANDUM IN SUPPORT OF
JOINT MOTION OF BUTLER SNOW PARTIES
TO DISMISS OR STAY PROCEEDINGS PENDING ARBITRATION
Defendants Butler Snow LLP (“Butler Snow”), Butler Snow Advisory Services, LLC
(“BSAS”), and Matt Thornton (“Thornton”) (collectively, the “Butler Snow Parties”) jointly
move the Court to dismiss or stay litigation of the claims asserted against them pending
The Complaint asserts that the Butler Snow Parties caused a multi-million dollar financial
fraud that continued until 2018. Each of the Butler Snow Parties denies liability with respect to
those matters. Many of the allegations in the Complaint relating to the Butler Snow Parties are
1
The Fifth Circuit has declined to decide whether arbitration motions fall under Rule 12(b)(1) or 12(b)(3).
Noble Drilling Servs., Inc. v. Certex USA, Inc., 620 F.3d 469, 472 (5th Cir. 2010). In either event, this motion is one
made within the scope of Rule 12.
1
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written arbitration agreement, this is not the time to debate those allegations.
However, it is helpful to explain how the arbitration agreement was executed and the
roles of the Butler Snow Parties. Thus, the limited involvement and duration of any connections
of any Butler Snow Party with Adams are briefly summarized below.
The law firm of Butler Snow was engaged with respect to three matters that related to
Adams.
First, in 2009 Butler Snow was initially engaged in connection with Madison Timber
Fund, LLC on a referral from a longtime contact of Butler Snow. Butler Snow drafted a limited
liability company agreement and a private placement memorandum for this proposed timber fund
and made securities filings with the Securities and Exchange Commission (“SEC”) and the
Securities Division of the Mississippi Secretary of State. That fund was far different from what
became Adams’ Ponzi scheme referenced in this litigation. However, Adams elected not to
Second, in 2012 Butler Snow was engaged to prepare a revised version of the private
placement memorandum. Once again, Adams decided not to use the fund for his activities. By
the end of February 2013, the law firm had ceased any activity on the memorandum, and the law
firm formally concluded that engagement in July 2013. The fund, like other legitimate timber
funds common in this country, would have offered an investment interest in a fund intended to
invest in timber assets, not loans secured by timber deeds as in the plan described in the
Receiver’s Complaint. Moreover, as the Complaint concedes, the two private placement
2
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memoranda (in 2009 and in 2012) did not result in any investing activity. Complaint at ¶¶ 34,
54. Butler Snow received a total of $28,428.92 in fees for both engagements.
Third, and finally, Butler Snow represented Oxford Springs, LLC, a real estate
development entity in which Adams owned a minority interest. Butler Snow provided counsel
related to environmental permitting and other regulatory matters for Oxford Springs beginning in
September 2015. According to the Receiver’s December Report, Oxford Springs still owns
approximately 2300 acres of land purchased in 2015 and 2016 for more than $6,000,000. See
Doc. 70 in SEC v. Adams [Cause No. 3:18-cv-252]. Other than enhancing the value of a project
in which the Receiver now claims an interest, the work Butler Snow performed with respect to
Oxford Springs is totally unconnected with any alleged wrongdoing in this case.
BSAS is a separate legal entity organized as an LLC with its own governance structure.
It is a subsidiary of the Butler Snow law firm. Neither BSAS nor its employees or contractors
engage in the practice of law but instead advise small and mid-sized entities with respect to
various business matters. Defendant Matt Thornton, a non-lawyer, has acted as its President
since 2011.
On a referral from a third party, not the law firm, on August 8, 2012, Madison Timber
Company and Adams engaged BSAS pursuant to a written agreement to provide business
advisory services. Ex. 1. That written agreement contained the arbitration agreement that is the
subject of this motion. The engagement of BSAS was terminated in December 2013. Thus,
BSAS was involved with Madison Timber Company and Adams for some 17 months, and that
association ended many years before Adams’ Ponzi scheme was discovered in 2018. BSAS did
introduce Adams to potential business partners for his various projects—all of which it believed
3
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were legitimate. In total, BSAS received $99,250 in fees for this engagement, of which $59,500
represented a monthly retainer fee of $3,500 (which was unrelated to any specific transactions)
consists of a signed engagement letter and attached “Standard Terms and Conditions.” The
Standard Terms and Conditions are repeatedly incorporated by reference into the letter. Ex. 1.
The parties expressly defined the “Engagement Contract” to include both documents:
This Engagement Letter and the Standard Terms and Conditions attached
hereto constitute the engagement contract (the “Engagement Contract”)
pursuant to which . . . Services . . . will be provided . . . . (Id. at BSAS 124.)
The last portion of the engagement letter—just above Adams’ signature—notes in bold
type that BSAS was retained upon the terms in the engagement letter itself and the attached
The Standard Terms and Conditions included a detailed arbitration provision. While the
entire provision is relevant to show the parties intention to arbitrate disputes, we focus on the
In the event there is an unresolved legal dispute between the parties and/or
any of their respective officers, directors, partners, employees, agents,
affiliates or other representatives that involves legal rights or remedies
arising from this engagement or any other agreement between you [Adams
and Madison Timber Company] and [BSAS] and any of its affiliates, the
parties agree to submit their dispute to binding arbitration under the
authority of the Federal Arbitration Act. (Id. at BSAS 129, ¶ 6.3.)
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The Butler Snow Parties invoke this arbitration provision as a defense under Rule 12 and
move this Court to dismiss or stay the litigation against them pending arbitration.
ARGUMENT
I. The Federal Arbitration Act requires the Court to dismiss this matter so that it can
be arbitrated, or at least stay the litigation pending arbitration.
The FAA provides that a “written provision in any . . . contract evidencing a transaction
involving commerce to settle by arbitration a controversy thereafter arising out of such contract
or transaction . . . shall be valid, irrevocable, and enforceable.” 9 U.S.C. § 2. Under the FAA’s
plain language any arbitration agreement that is (1) written and (2) involves commerce should be
enforced. The August 8, 2012 Engagement Contract satisfies these criteria. The Engagement
Contract is comprised of two parts, both of which are written: an engagement letter and a
Standard Terms and Conditions document, attached to the letter and incorporated by reference in
the letter’s text and in the statement above the signature line. The Engagement Contract clearly
commerce. See Allied-Bruce Terminix Companies, Inc. v. Dobson, 513 U.S. 265, 273-77 (1995).
The Complaint, on its face, alleges instances of interstate commercial activity, at Paragraphs 46-
47. Thus, the FAA requires enforcement of the arbitration provision in the Engagement
Contract. To enforce the arbitration provision the Court should dismiss or stay this case. 2
2
Enforcement can involve referring the matter to arbitration and staying this litigation against the Butler
Snow Parties: when a suit is filed that should be referred to arbitration, a federal court “shall on application of one of
the parties stay the trial of the action until such arbitration has been had in accordance with the terms of the
agreement.” 9 U.S.C. § 3 (emphasis added). This “shall” stay provision in the FAA is mandatory. Waste Mgmt.,
Inc. v. Residuos Industriales Multiquim, S.A. de C.V., 372 F.3d 339, 345 (5th Cir. 2004).
5
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II. The arbitration provision in the Engagement Contract applies to all of the Butler
Snow Parties.
All of the Butler Snow Parties are entitled to enforce the arbitration provision in the
Engagement Contract. BSAS is a party to the agreement, and Thornton is an officer and agent
for BSAS who is alleged to have acted in that capacity in committing the acts of which the
Receiver complains. See Mississippi Fleet Card, L.L.C. v. Bilstat, Inc., 175 F. Supp. 2d 894, 900
(S.D. Miss. 2001) (“Courts in this circuit recognize that a non-signatory may enforce an
arbitration agreement [where] the non-signatory is alleged to be the agent of a signatory.”). The
arbitration agreement specifically applies to disputes “between the parties and/or any of their
Butler Snow—the law firm—can enforce the arbitration agreement for numerous reasons.
First, the Receiver alleges that the law firm is the alter ego and part of a “single business
enterprise” with BSAS. Second, Butler Snow is the corporate parent of BSAS. See Sam
Reisfeld & Son Imp. Co. v. S. A. Eteco, 530 F.2d 679, 681 (5th Cir. 1976) (“If the parent
corporation was forced to try the case, the arbitration proceedings would be rendered
meaningless and the federal policy in favor of arbitration effectively thwarted.”). Notably, the
arbitration provision in this case specifically applies to disputes “between the parties and/or any
of their respective . . . affiliates.” Ex.1, at BSAS 129, ¶ 6.3. Third, both Thornton and Butler
Snow can enforce the arbitration agreement because the claims asserted against BSAS are
intertwined with the claims asserted against them. The “intertwined claims” doctrine requires
relationship with one of the signatories and the claims are intimately founded in and intertwined
with the underlying contract obligations.” Hays v. HCA Holdings, Inc., 838 F.3d 605, 610 (5th
Cir. 2016); Mississippi Fleet Card, 175 F. Supp. 2d at 900; First Family Fin. Servs., Inc. v.
6
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Fairley, 173 F. Supp. 2d 565, 573 (S.D. Miss. 2001). Here, the Complaint itself (at Paragraphs
113-94) is replete with allegations that the parties acted in concert. Moreover, the Receiver
seeks to impute any liability of BSAS and Thornton to Butler Snow. Complaint at ¶¶ 187-94.
In sum, the starting point for arbitration is the Engagement Contract between BSAS, on
one hand, and Madison Timber and Adams, on the other hand. The agreement to arbitrate
extends to all of the Butler Snow Parties because of principles of agency, a parent/subsidiary
A receiver is “bound to the arbitration agreements to the same extent that the receivership
entities would have been absent the appointment of the receiver.” Javitch v. First Union Sec.,
Inc., 315 F.3d 619, 627 (6th Cir. 2003); see also Wiand v. Schneiderman, 778 F.3d 917, 923
(11th Cir. 2015); Moran v. Svete, 366 F. App’x 624, 629-32 (6th Cir. 2010). Put simply, the
receiver “stands in the shoes” of the persons or entities subject to the receivership; their
agreements to arbitrate become the receiver’s agreements. 1 Thomas H. Oehmke & Joan
The Receiver stands in the shoes of Arthur Lamar Adams, who signed the Engagement
Contract with BSAS. The Receiver is bound by that agreement because Adams is bound by it.
Adams was BSAS’s client under the Engagement Contract. The “Standard Terms and
Conditions” made clear in its first paragraph that “you” and “your” as used throughout the
3
At one time the Fifth Circuit reasoned that because receivers act “on behalf of creditors,” receivers are not
subject to arbitration agreements that creditors did not sign. Janvey v. Alguire (“Alguire I”), 628 F.3d 164, 182 (5th
Cir. 2010), opinion withdrawn and superseded, 647 F.3d 585 (5th Cir. 2011). However, the Fifth Circuit later held
“a federal equity receiver has standing to assert only the claims of the entities in receivership, and not the claims of
the entities’ investor-creditors.” Janvey v. Democratic Senatorial Campaign Comm., Inc., 712 F.3d 185, 190 (5th
Cir. 2013). Therefore, it is clear that the Fifth Circuit is now in accord with the general rule that receivers are bound
by the arbitration agreements of the persons or entities for whom they act. Cf. Janvey v. Alguire (“Alguire IV”), 847
F.3d 231, 238-39 (holding that entity within receivership umbrella that had no arbitration agreement was not
compelled to arbitrate).
7
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agreement referred to “Madison Timber Company, Inc. and/or A. Lamar Adams.” Ex. 1, at
BSAS 127 (emphasis added). The Receiver’s Complaint correctly alleges that “Adams formally
engaged Butler Snow Advisory.” Complaint at ¶ 44. The Complaint repeatedly alleges that
Adams individually benefited from the engagement with BSAS. See, e.g., id. at ¶ 58. Thus,
Adams—and therefore the Receiver—is bound for (a) having received the benefits of the
Engagement Contract and (b) asserting claims that must be determined in reference to that
contract. Noble Drilling, 620 F.3d at 473-74. All rights and obligations in the Engagement
Contract belonged to Adams, and now belong to the Receiver who stands in Adams’ shoes.
Moreover, the Receiver is required to arbitrate on behalf of all entities for which she is
Receiver. Throughout the Complaint, the Receiver expressly conflates Madison Timber
Company and Madison Timber Properties, treating them as a single entity. Complaint at p. 2.
Every allegation made regarding “Madison Timber” applies to both. Madison Timber Company
is a party to the Engagement Contract that contained the arbitration provision. Ex. 1 at BSAS
127. Hence, the Receiver has chosen to join Madison Timber Properties entirely with a party
bound to arbitrate. In addition, Madison Timber Properties was the fund manager for Madison
Timber Fund—another party to the Engagement Contract for the arbitration provision. Id. at
BSAS 124. As manager for the fund, Madison Timber Properties is bound by the principal/agent
doctrine, just as described above. Finally, Madison Timber Properties is bound to arbitrate
because it has received the benefits of the Engagement Contract and asserted claims that must be
determined in reference to that contract. Thus, the Receiver, standing in the shoes of Adams or
IV. Argument in anticipation of Receiver’s position: Both the arbitration provision and
the forum selection clause must be given effect.
8
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Footnote 10 of the Complaint, at Paragraph 44, signals that the Receiver will argue that
the agreement to arbitrate is not valid. The Footnote suggests that the Receiver will argue that
some conflict between the arbitration provision and the forum selection clause somehow
Footnote to the Complaint, it is helpful to consider the most pertinent portions of these two
Although Footnote 10 does not elaborate on the particular inconsistency that the Receiver
will argue causes an invalidation of the arbitration provision, the process of elimination leads us
to conclude that she will argue that the “exclusive jurisdiction” language of the second sentence
should be read as if it said “all disputes will be determined by courts in Mississippi.” 4 Any such
argument will have no merit, as discussed in more detail below. There is no inconsistency in the
two provisions. The two provisions in the same contract should be harmonized.
4
Though Footnote 10 quotes the second and third sentences of the forum selection provision, the third
sentence does not impact application of the arbitration provision. For example, in this case, there is no objection to
filing this action in this court, there is no claim that this is an inconvenient forum, and no claim that this court does
not have jurisdiction. Still the case must be arbitrated, and the third sentence does not affect that arbitration.
9
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As discussed below, there is no substantial basis for asserting any inconsistency between
the arbitration provision and the forum selection clause. However, if there were any question,
Mississippi law5 requires that the arbitration provision and the forum selection clause be
harmonized to give effect to both. The Court must “read the contract as a whole, so as to give
effect to all of its clauses.’” Gaiennie v. McMillin, 138 So. 3d 131, 135 (Miss. 2014) (quoting
Facilities, Inc. v. Rogers–Usry Chevrolet, Inc., 908 So.2d 107, 111 (Miss.2005). If the “contract
is unclear or ambiguous, the court should attempt to ‘harmonize the provisions in accord with the
parties’ apparent intent.” Id.; West v. West, 891 So. 2d 203, 212 (Miss. 2004); Royer Homes of
Mississippi, Inc. v. Chandeleur Homes, Inc., 857 So. 2d 748, 753 (Miss. 2003). Moreover,
Mississippi law provides that any ambiguity or uncertainty regarding whether the parties formed
Commercial Lot, LLC v. H. Gordon Myrick, Inc., 107 So. 3d 943, 950 (Miss. 2013).
Those principles clearly apply here. “[I]nstruments executed at the same time, by the
same contracting parties, for the same purpose, and in the course of the same transaction will be
considered and construed together, since they are, in the eyes of the law, one contract.” Gilchrist
Tractor Co. v. Stribling, 192 So. 2d 409, 417 (Miss. 1966) (quoting 17 Am.Jur.2d Contracts §
264 (1964)). There is no merit to the implication of Footnote 10 of the Complaint that the
arbitration provision contained in the Standard Terms and Conditions is not of equal stature to
the forum selection clause contained in the August 8 engagement letter. Both provisions are part
of the same Engagement Contract executed at the same time. The parties’ intent to be equally
bound by both is made clear by the signature line on the August 8 engagement letter, placed just
5
Whether there is a valid agreement to arbitrate is an issue that must be decided under Mississippi law. “In
answering the first question of contract validity” federal courts apply “‘ordinary state-law principles that govern the
formation of contracts.’” Graves v. BP Am., Inc., 568 F.3d 221, 222 (5th Cir. 2009) (quoting First Options of
Chicago, Inc. v. Kaplan, 514 U.S. 938, 944 (1995)).
10
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below a statement in bold print, which makes it clear that both the letter and the Standard Terms
and Conditions constitute the “Terms of Engagement.” Thus, there is no basis for any claim that
If, in fact, the Receiver’s contention is that the “exclusive jurisdiction” language of the
second sentence should be read as if it said “all disputes will be determined by courts in
Mississippi,” that contention has no merit. The word “jurisdiction” has a very precise and well-
“court’s power to decide a case or issue a decree.” Black’s Law Dictionary (10th ed. 2014)
(emphasis added). In recognition that the word “jurisdiction” is sometimes misused, the
Supreme Court of the United States has explicitly cautioned federal courts to only apply the
Thus, the statement that Mississippi courts have “exclusive jurisdiction” is accurately
read to mean that it is only in the Mississippi courts that a party can invoke a “court’s power” to
decide a case or issue a decree.” The second sentence provides that the exclusive right to
exercise the “adjudicatory capacity of a court” with respect to any dispute, claim or difference
This provision by its own terms does not provide that all disputes, claims, or differences
will be resolved by courts. Instead, the plain meaning of the words is that if there is any exercise
of the adjudicatory power of courts—using “jurisdiction” in its clear and precise legal sense as
defined by Black’s—that judicial power can only be exercised by courts in Mississippi. Had the
11
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provision been intended to provide that “all disputes will be resolved by courts” it could have
been written that way if that was the intent of the parties.
Accordingly, reading the word “jurisdiction” in light of its actual and technically accurate
meaning leads to the inescapable result that the forum selection clause is fully consistent with the
arbitration provision. Importantly, this reading—based on the meaning of the literal words—is
supported by common sense experience as to the intent of parties who purposefully include both
an arbitration provision and a forum selection clause in the same agreement. Their intent is that
(a) both provisions will be enforced and (b) the forum selection clause will establish which
courts would be involved if a judicial decision becomes necessary. The reason why parties
included both provisions in the same agreement—with the intention that both will be enforced—
is illustrated by what is happening in this very case. Here, the arbitration provision’s validity
must be decided by some court. The forum selection clause means, in this case, that the
exclusive decision to exercise judicial power as to that issue must be exercised by a court in
Mississippi—and not by a court in some far-off state. Moreover, if issues arise from the
arbitration of this dispute, such as enforcement or validity of the arbitration award, then
Mississippi courts will have exclusive jurisdiction over those disputes. Indeed, the arbitration
provision here specifically provides that certain disputes as to the award of the arbitrators would
be resolved by “a court of law.” The forum selection clause vests exclusive judicial power to
Here, the intent of the parties that both provisions be enforced is clear from the fact that
both are contained in the same agreement. 6 The two provisions can be readily harmonized.
6
An intent that both provisions be enforced is clear here. The lengthy arbitration provision in the Standard
Terms and Conditions document (which is part of the Engagement Contract) manifests a clear intent to arbitrate, and
the engagement letter repeatedly incorporates that document by reference and conditions the parties’ agreement on
it. Had the parties intended the forum selection clause to void the agreement to arbitrate, surely they would have
12
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There is a clear and logical reading of the forum selection clause based on the plain meaning of
the words that is not inconsistent with the arbitration provision. That meaning is consistent with
the apparent intent of parties that include arbitration provisions and forum selection clauses in
the same agreement that both should be enforced. Thus, under Mississippi law, both provisions
The parties to the Engagement Contract reached some agreement to arbitrate. Any issues
as to the scope of arbitration must be decided by the arbitrators. Parties to an arbitration may
refer such questions to the arbitrator either by including express referral language in the
arbitration agreement itself or by incorporating the AAA Rules of arbitration into their
agreement. 7 Here, as in Henry Schein, Inc. v. Archer & White Sales, Inc., No. 17-1272, 2019
WL 122164, at *3 (U.S. Jan. 8, 2019), the arbitration provision referenced the rules of the
American Arbitration Association (AAA). Those rules plainly delegate to the arbitrators the
CONCLUSION
The Court should dismiss the case so that it can be arbitrated, or at least stay litigation of
the claims asserted against the Butler Snow Parties pending arbitration.
done so expressly by omitting the arbitration clause or included some language that negated the arbitration provision
by name. See, e.g., Reading Health Sys. v. Bear Stearns & Co., 900 F.3d 87, 103 (3d Cir. 2018).
7
Houston Ref., L.P. v. United Steel, Paper & Forestry, Rubber, Mfg., 765 F.3d 396, 408 (5th Cir. 2014);
Petrofac, Inc. v. DynMcDermott Petroleum Operations Co., 687 F.3d 671, 675 (5th Cir. 2012).
8
The AAA rules are publicly available at https://www.adr.org/sites/default/files/Employment%20Rules.pdf.
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Attorneys for Butler Snow Advisory LLC Attorneys for Butler Snow LLP
and Matt Thornton
CERTIFICATE OF SERVICE
I, Alan W. Perry, certify that on January 24, 2019, I electronically filed the foregoing
with the Clerk of the Court using the CM/ECF system, which will send notification of such filing
to all counsel of record.
14
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Defendants
Defendants Butler Snow LLP (“Butler Snow”), Butler Snow Advisory Services, LLC
(“BSAS”), and Matt Thornton (“Thornton”) (collectively, the “Butler Snow Parties”) jointly
move the Court under Federal Rule of Civil Procedure 12 to dismiss or stay litigation of the
claims asserted against them pending arbitration as required by the Federal Arbitration Act. The
bases for this Motion are more fully set forth in the Memorandum in Support being filed
contemporaneously with the Motion, which is hereby incorporated by reference. The Butler
Snow Parties also rely on Exhibit 1—the August 8, 2012 Engagement Contract—attached to this
Motion. In light of this Exhibit and the arguments in the Memorandum in Support, the Butler
Snow Parties are entitled to either a dismissal of this action, or to a stay while the matter is
arbitrated.
1
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Attorneys for Butler Snow Advisory LLC Attorneys for Butler Snow LLP
and Matt Thornton
CERTIFICATE OF SERVICE
I, Alan W. Perry, certify that on January 24, 2019, I electronically filed the foregoing with
the Clerk of the Court using the CM/ECF system, which will send notification of such filing to all
counsel of record.
2
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Defendants.
COMPLAINT
Alysson Mills, in her capacity as the court-appointed receiver for Arthur Lamar Adams and
Madison Timber Properties, LLC (the “Receiver”), through undersigned counsel, files this
Complaint against Butler Snow LLP; Butler Snow Advisory Services, LLC; Matt Thornton;
Baker, Donelson, Bearman, Caldwell & Berkowitz, PC; Alexander Seawright, LLC; Brent
INTRODUCTION
For more than ten years, Arthur Lamar Adams (“Adams”), through his companies Madison
Timber Company, LLC and Madison Timber Properties, LLC (“Madison Timber”), operated a
Ponzi scheme that defrauded hundreds of investors. Investors believed that Madison Timber used
investors’ money to purchase timber from Mississippi landowners; that Madison Timber sold the
timber to Mississippi lumber mills at a higher price; and that Madison Timber repaid investors
their principal plus interest with the proceeds of those sales. Investors received timber deeds that
purported to secure their investments—but the deeds were fake. There was no timber and no
proceeds from sales of timber. The money used to repay existing investors came solely from new
investors.
Madison Timber had to continuously grow to repay existing and new investors, and
continuously grow it did. In 2011, Madison Timber took in approximately $10 million from
investors. By 2018 that number had grown by a factor of 16. In the one-year period prior to April
19, 2018, the date Adams surrendered to federal authorities and confessed to the Ponzi scheme,
Madison Timber took in approximately $164.5 million. As of April 19, 2018, Madison Timber
had 501 outstanding promissory notes, reflecting debts to investors of more than $85 million.1
Madison Timber would not have grown without Defendants’ encouragement and
assistance. Defendants lent their influence, their professional expertise, and even their clients to
Adams. They made a fraudulent enterprise a fraternity. Defendants contributed to the success of
the Madison Timber Ponzi scheme, and therefore to the debts of the Receivership Estate to
1
The evidence at Adams’s sentencing established that of the $164.5 million that Madison Timber received in its last
year of operation, it paid back approximately $79.5 million, leaving an $85 million difference. The outstanding
principal and interest owed to investors is necessarily higher.
2
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1. The Court has jurisdiction over this action and its parties, and venue is proper in
this Court, pursuant to the Securities Act of 1933, 15 U.S.C. § 77v(a); the Securities & Exchange
2. This action arises in connection with and is ancillary to the civil action already
pending in this Court styled Securities & Exchange Commission v. Arthur Lamar Adams and
Madison Timber Properties, LLC, No. 3:18-cv-252-CWR-FKB. In that civil action, the Securities
& Exchange Commission (“S.E.C.”) alleges that “[b]eginning in approximately 2004,” Adams,
through Madison Timber, “committed securities fraud by operating a Ponzi scheme” in violation
of the Securities Act of 1933 and the Securities & Exchange Act of 1934.2
3. The S.E.C. requested that the Court appoint a receiver for the estates of Adams and
Madison Timber.3 As the Court that appointed the Receiver, this Court has jurisdiction over any
claim brought by the Receiver in the execution of her duties. “[I]t is well-settled that when an
initial suit results in the appointment of the receiver, any suit that the receiver thereafter brings in
the appointment court in order to execute h[er] duties is ancillary to the main suit.” U.S. Small Bus.
Admin. v. Integrated Envtl. Sols., Inc., No. 05-cv-3041, 2006 WL 2336446, at *2 (S.D. Tex. Aug.
10, 2006) (citing Haile v. Henderson Nat’l Bank, 657 F.2d 816, 822 (6th Cir. 1981)). See also 28
U.S.C. § 1692 (“In proceedings in a district court where a receiver is appointed for property, real,
personal, or mixed, situated in different districts, process may issue and be executed in any such
4. Consistent with that precedent, Chief U.S. District Judge Daniel P. Jordan III has
ordered that all “cases filed by the duly appointed Receiver . . . which . . . arise out of or relate to
2
Doc. 3, Securities & Exchange Commission vs. Adams, et al., No. 3:18-cv-00252 (S.D. Miss).
3
Docs. 11, 21, Securities & Exchange Commission vs. Adams, et al., No. 3:18-cv-00252 (S.D. Miss).
3
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[Securities & Exchange Commission v. Arthur Lamar Adams and Madison Timber Properties,
LLC, No. 3:18-cv-252-CWR-FKB] shall be directly assigned by the Clerk of Court to U.S. District
Judge Carlton W. Reeves and U.S. Magistrate Judge F. Keith Ball.”4 In compliance with Chief
Judge Jordan’s order, the Receiver shall separately file, contemporaneously with this complaint, a
notice of relatedness.
PARTIES
5. Plaintiff Alysson Mills is the Court-appointed Receiver for the estates of Adams and
Madison Timber. The Court’s order of appointment vests in her the power to, among other things:
The Receiver brings this civil action in her capacity as Receiver and pursuant to the powers vested
in her by the Court’s orders and applicable law. The Receiver has standing to pursue, inter alia,
claims against third parties whose actions contributed to the success of the Madison Timber Ponzi
6. Defendant Butler Snow LLP (with Butler Snow Advisory Services, LLC, “Butler
7. Defendant Butler Snow Advisory Services, LLC (with Butler Snow LLP, “Butler
4
Doc. 45, Securities & Exchange Commission vs. Adams, et al., No. 3:18-cv-00252 (S.D. Miss).
5
Doc. 33, Securities & Exchange Commission vs. Adams, et al., No. 3:18-cv-00252 (S.D. Miss). By order dated
August 22, 2018, the Court eliminated the requirement that the Receiver obtain “prior approval of this Court upon ex
parte request” before bringing any legal action. Doc. 38, Securities & Exchange Commission vs. Adams, et al., No.
3:18-cv-00252 (S.D. Miss).
4
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“Senior Public Policy Advisor” for Baker Donelson. With Jon Seawright, he owns Alexander
Seawright, LLC.
shareholder of Baker Donelson and a member of its national governing Board of Directors. With
13. For more than ten years, Adams, through Madison Timber, operated a Ponzi
scheme that purported to purchase timber from Mississippi landowners and resell it to Mississippi
14. Investors in Madison Timber delivered to Madison Timber large sums of money,
typically in excess of $100,000 dollars, in reliance on the promise that Madison Timber would
repay them their principal plus interest of not less than 12% per annum, and sometimes as much as
20% per annum. The promised interest invariably far exceeded the interest any investor might
15. Investors believed that Madison Timber would use their money to acquire timber
deeds and cutting agreements from Mississippi landowners; that Madison Timber would then sell
the timber to Mississippi lumber mills at a higher price; and that with the proceeds of those sales
Madison Timber would repay investors their principal and promised interest.
5
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16. In exchange for their investments, investors in the Madison Timber Ponzi scheme
received a promissory note in the amount of their investment, payable in twelve monthly
installments together with the promised interest; twelve pre-dated checks, each in the amount of
the installment due under the promissory note; a timber deed and cutting agreement by which a
named landowner purported to grant to Madison Timber the rights to harvest timber on the land
described in the deed; and a timber deed and cutting agreement by which Madison Timber
17. In fact, the timber deeds and cutting agreements were fake. Madison Timber had
no rights to harvest timber and no timber to cut and sell. Because Madison Timber had no
revenues whatsoever, investors were being repaid with new investors’ money.
18. Each month, Madison Timber required more and more new investors to repay
existing investors. Like any Ponzi scheme, Madison Timber had to continuously grow. To grow
Madison Timber, Adams relied on recruiters, including Defendants, to attract new investors.
19. In 2011, Madison Timber took in approximately $10 million from investors. By
20. In April 19, 2018, on the heels of investigations of him by the F.B.I. and the U.S.
Attorney’s Office for the Southern District of Mississippi, Adams turned himself in. In the
one-year period prior to April 19, 2018, Madison Timber took in approximately $164.5 million.
As of April 19, 2018, Madison Timber had 501 outstanding promissory notes, reflecting debts to
6
The evidence at Adams’s sentencing established that of the $164.5 million that Madison Timber received in its last
year of operation, it paid back approximately $79.5 million, leaving an $85 million difference. The outstanding
principal and interest owed to investors is necessarily higher.
6
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21. Adams pleaded guilty to the federal crime of wire fraud and “admit[ted] to all of the
conduct of the entire scheme and artifice to defraud.”7 On October 30, 2018, he was sentenced to
22. The S.E.C. separately charged Adams with violations of the Securities Act of 1933
and Securities & Exchange Act of 1934, alleging in its complaint that “[b]eginning in
approximately 2004,” Adams, through Madison Timber, “committed securities fraud by operating
a Ponzi scheme.”9
23. The promissory notes sold by Madison Timber to investors were “securities,” as
that term is defined under 15 U.S.C.A. §78(c)(A)(10) and Miss. Code Ann. § 75-71-102(28).
24. As alleged in the complaint in the underlying action SEC v. Arthur Lamar Adams et
al., No. 3:18-cv-252 (S.D. Miss.), and in the bill of information filed against Adams in U.S. v.
Arthur Lamar Adams, No. 3:18-c-188 (S.D. Miss.), Adams, Madison Timber, and their affiliates,
misstatements and omissions; employed a device, scheme, or artifice to defraud; and engaged in
acts, practices, or courses of business that operated or would operate as a fraud or deceit, all in
violation of Section 17(a) of the Securities Act of 1933, 15 U.S.C. § 77q(A); Section 10(b) of the
Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and Rule 10b-5, 17 C.F.R. § 240.10b-5,
thereunder; as well as the Mississippi Securities Act, Miss. Code Ann. § 75-71-501.
25. The sales furthermore violated the Securities Act of 1933 and the Mississippi
Securities Act because there were no registration statements for the promissory notes, see Section
5 of the Securities Act of 1933, 15 U.S.C § 77e, and Miss. Code Ann. § 75-71-301; and the
7
Doc. 11, United States v. Adams, No. 3:18-cr-00088 (S.D. Miss).
8
Doc. 21, United States v. Adams, No. 3:18-cr-00088 (S.D. Miss).
9
Doc. 3, Securities & Exchange Commission vs. Adams, et al., No. 3:18-cv-00252 (S.D. Miss).
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promissory notes were not exempt from registration, see Section 5 of the Securities Act of 1933,
BUTLER SNOW
26. Adams and Madison Timber’s relationship with Butler Snow began in 2009 and
27. Adams had made a name for himself as someone who understood the timber
industry and made money brokering timber sales. For many years Adams brokered legitimate
timber sales—but by 2009 he had figured out that he could fake things, and he saw an opportunity
to go big.
28. Adams previously had done business with Pinnacle Trust, a financial services
company in Madison, Mississippi. He and Pinnacle Trust discussed ways to maximize Adams’s
business. They decided to form an investment fund and engaged Butler Snow law firm to draft the
29. The investment fund was named Madison Timber Fund, LLC. Its aim would be to
raise $10,000,000 by selling 100 units at $100,000 each. Lawyers at Butler Snow spent months
30. The resulting PPM, drafted by Butler Snow, described the fund as follows:
8
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31. The PPM identified Adams and Madison Timber Company, Inc. as the fund’s
“Manager” and advised that the fund’s “Business Strategy” depended on the Manager’s “network
of contacts”:
[T]he Fund purchases the standing timber directly from the landowner and
then sells or arranges for the sale of the tree harvest. The purchase is made by the
execution of a “Timber Deed,” which is consequently filed in the real estate records
of the county where the land is located. The Timber Deed commonly allows for a
24 to 36 month period to actually harvest the timber. . . .
***
Using its network of contacts cultivated over 20 years, the Manager
regularly receives opportunities to purchase land tracts with timber. Typically, the
Manager has the opportunity to purchase before these tracts go on the “market.”
This gives the Manager a first-look pricing advantage. . . .
***
The Manager also has a number of established relationships with various
lumber mills, which includes knowledge of the mills’ preferred specialty type of
lumber needs from hardwoods to pine. These mills also offer the Manager referrals
for timber purchases. The Manager’s Timber Deeds are designed to protect the
Fund from liability for cleanup, property damage, road repair and other harvesting
challenges.
***
[T]he Manager has developed a timber purchase format that allows the
Manager to control the cyclical aspects of the business. By securing various
term-length contracts, the Manager is able to even out its supplies of timber for its
mill purchasers. The Manager intentionally purchases short-term contracts (3 to 6
month harvest), mixed with mid-term (6 to 12 months) and longer-term tracts (24 to
36 months) to enable the Manager to have a steady three-year supply of harvestable
inventory.
In addition, the Manager tracks the needs of its regular mill customers to
better supply the type of product they need.
***
The Manager believes that its competitive advantage is its flexibility in
choosing both wood sources and wood processing mills. By not having an in-house
mill, the Manager is able to obtain raw timber from various locations and match it
to buyers and mills that are geographically compatible with the mill location. . . .
The Manager’s pricing philosophy is to offer its mills a highly competitive
product. The Manager can offer lower pricing in exchange for a contributing
stream of referrals from its mill customers. The Manager is able to maintain a
highly competitive pricing strategy because it operates with low overhead costs,
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outsources its harvesting operations with a network of loggers and owns very little
equipment.
32. The PPM identified several “Timber Investment Risks,” including “Timber Price
The Fund’s revenues will be affected by the cyclical nature of the forest
products industry. Prices for timber can experience significant variation and have
been historically volatile. The Fund will have little control over the timing and
extent of price changes for timber products. The demand for timber and wood
products is affected primarily by the level of new/residential construction activity,
the supply of manufactured timber products, including imported timber products,
and other uses of timber products. These activities are subject to variation because
of changes in economic conditions, interest and currency rates, population growth
and changing demographics and seasonal weather cycles and storm activity.
33. The PPM also identified several “General Investment Risks,” one of which was
“Reliance on the Manager.” The PPM explained that the fund’s success is “substantially
dependent on the Manager”—therefore the fund might fail if Adams quits or dies. The PPM
disclosed the fund “does not currently own key-person insurance on the life of Lamar Adams” but
34. Ultimately the fund itself did not attract any investors, and the PPM was shelved for
35. Adams, however, continued to broker purported timber sales and make money
entering “joint ventures” with individual investors to purchase purported stand-alone timber tracts
that he called “standing tracts.” In 2011, Madison Timber took in approximately $10 million from
investors.
36. By this time the Madison Timber Ponzi scheme had been perfected. The consistent,
uniform returns of 12% to 14% attracted dozens of investors with between $100,000 and $200,000
to invest—but like any Ponzi scheme, each month Madison Timber required more and more new
10
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investors to repay the old ones. Adams would have to continuously grow Madison Timber to keep
up.
37. To continuously grow Madison Timber, Adams turned again to Butler Snow.
38. Butler Snow markets itself to clients as “the only resource you need.” To provide
business services to its law firm’s clients, in 2011 Butler Snow launched Butler Snow Advisory
Services, “a wholly owned subsidiary that provides non-legal business advice.” Butler Snow’s
website boasts that Butler Snow Advisory provides “executive-level strategic guidance” to closely
held businesses:
Closely held businesses face many of the same challenges as large, public
companies without the advantage of strategic advisors. This can make it more
difficult to those business owners to make informed decisions regarding their
business strategy.
Butler Snow Advisory specializes in providing executive-level strategic guidance
to private, family owned and closely held companies. We’ve built a diverse,
experienced team of professionals that are uniquely positioned to leverage industry
knowledge and real-world experience to work for our clients from day one.
Members of the BSA team are dedicated to understanding the goals of your
company and crafting actionable strategies for success, all while identifying
opportunities and mitigating risks.
39. Butler Snow’s website boasts that Butler Snow Advisory “utilize[s] resources from
In addition to our team’s expertise, as a part of the larger Butler Snow family, BSA
has the advantage of access to resources and networks that put our company ahead
of the competition. Our team approach allows us to utilize resources from across
the Butler Snow network to match your business needs with the expertise required.
As a result, our clients benefit from strategic counsel, innovative solutions and
efficient execution – all from an extensive, reputable network of professionals.
A few of the Butler Snow advantages include access to a legal network that boasts:
x 325+ attorneys
x 24 offices across the United States and in Asia and the United Kingdom
11
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40. Under the leadership of Matt Thornton, its President and CEO, Butler Snow
Advisory sought to “fast-track” its own business by acquiring “top-level talent.” In April 2012,
Thornton announced that Mike Billings would join the team as a “strategic advisor”:
41. Butler Snow Advisory was young, and Billings was brand new, when in May 2012
the opportunity to “strategically advise” Madison Timber arose. Adams wanted assistance with a
“$30-50 million capital raise.” Thornton alerted Don Cannada and Barry Cannada, a senior
partner and the Vice Chair of Butler Snow, respectively, to the prospects of this new business.
42. A series of meetings followed at Butler Snow’s Ridgeland office. After, Thornton
told Adams “I have thoroughly enjoyed getting to know you and believe we could be a piece of the
puzzle in terms of strategic business growth and the associated financing/capital strategies to
accompany growth.” Thornton proposed that Adams engage Butler Snow Advisory to provide
advisory services” and, separately, engage Butler Snow law firm to update the preexisting PPM.
43. Internally Thornton and Billings discussed how Butler Snow Advisory would be
compensated. They proposed a monthly fee of $3,500 “to assist in strategic business
development” plus a “success fee” for “individual projects.” If Thornton and Billings succeeded
12
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in establishing a fund, they proposed to receive half of Madison Timber’s management fee plus
33% (later reduced to 25%) of Madison Timber’s carried interest. At the time, Billings wrote
As Lamar [Adams] has a seemingly insatiable appetite for cash, all the way up to a
couple hundred $ Million, in theory we would be engage[d] and be paid the $3,500
retainer until he says “uncle” and does not have the capacity to do any more
volume.
Thornton agreed that they should “lock that down for at least a year.”
44. In August 2012, at Thornton’s urging, Adams formally engaged Butler Snow
Advisory to “focus on strategic business development” and, separately, formally engaged Butler
The pitch
45. While lawyers at Butler Snow updated the preexisting PPM, Thornton and Billings
began pitching Madison Timber to high net-worth clients. During this time they often copied
46. They had early success with a high net-worth client in New Orleans. The investor
was not interested in investing in a fund, but he was willing to entertain a “joint venture” in a
“standing tract.” Billings and Adams made a presentation to the investor that falsely represented
that Madison Timber had “timber sales” of $9,576,252 in 2009; $8,087,072 in 2010; and
$10,034,024 in 2011. The impressed investor wired Madison Timber $450,000, and Madison
Timber delivered to Butler Snow an $8,000 “commission check.” One month later, after the same
10
The “BSA – Standard Terms and Conditions” that accompanied the August 8, 2012 engagement letter for the
“Engagement of Butler Snow Advisory” includes an arbitration clause, but the letter itself, signed by Lamar Adams
for Madison Timber and Martin Willoughby for Butler Snow Advisory, expressly states that “The state and federal
courts in Mississippi shall have exclusive jurisdiction in relation to any claim, dispute or difference concerning this
Engagement Contract and any matter arising from it. The parties hereto irrevocably waive any right they may have to
object to any action being brought in that Court, to claim that the action has been brought to an inconvenient forum or
to claim that that Court does not have jurisdiction.”
13
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investor wired Madison Timber another $1,050,000, Madison Timber delivered to Butler Snow a
47. Buoyed by this early success, Billings introduced Adams to two “billion-dollar”
“family offices” in Texas. Thornton gushed at this “tremendous ‘start.’” On the same day, eager
to please Adams, and worried his counterparts at Butler Snow law firm were not meeting Adams’s
needs, Thornton complained to Barry Cannada that an associate in Butler Snow’s Memphis office
had failed to return Adams’s call and caused Adams to submit a bid for a tract of land “without
legal review.” Thornton lamented that “we continue to have the same scenario occur
over-and-over again with respect to Advisory asking the law firm to assist in a timely, efficient &
48. While lawyers at Butler Snow continued to work on the updated PPM, Thornton
and Billings looked for other investors who, like the high net-worth client in New Orleans, might
prefer to invest in a “standing tract” only. They were aware that Madison Timber offered a
consistent, uniform return of 12% to 14%. They made a list of thirty-plus mostly local individuals
and families to target as “Small Investor Madison Timber Prospects.” Many of the individuals on
49. In February 2013 lawyers at Butler Snow finalized the updated PPM. The fund
would now aim to raise up to $100,000,000 by selling 1,000 units at $100,000 each. Notably, the
fund’s “Business Strategy” and “Timber Investment Risks”—reproduced above, both of which
“reread from a non-legal language standpoint and all business, market and organizational aspects
remain in-tact.”
14
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50. With the PPM in hand, Thornton made pitches to bigger, institutional clients. He
told them that “Madison Timber (Lamar Adams, President) is a very good client of ours” that “has
been vetted by several $1.5 billion family office(s) in Texas, encompassing a 75+ day due
diligence period [and] as you would imagine, Lamar passed with flying colors!” In fact, the two
51. One institutional client to whom Thornton pitched Madison Timber candidly
remarked that “First blush says there has been some inventory build over the last four years.” But
instead of addressing the question raised by the remark, Thornton continued his pitch: “‘Inventory
Build-Up’ . . . great question and one major topic we would like to discuss ‘face-to-face’ . . . we
Timber’s inability to provide requested information. He told one potential investor “we have had
entities sign NDA(s) prior to providing financial information . . . we certainly did this with the two
multi-billion $ family office entities in Dallas.” He told another potential investor, “As we
mills, financing structure and the like, we certainly appreciate very much your team’s treating
today’s discussion and information provided in the STRICTLY CONFIDENTIAL category under
the NDA umbrella.” These comments had the effect of impressing upon the potential investor that
53. Thornton told yet another potential investor who asked about mill contracts:
“Lamar [Adams] has an extremely stringent NDA with his mill partners [and] due to this
15
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extremely stringent NDA, we have not shared any mill names/profiles with any potential investors
to date.” Of course, this representation was false because Adams did not have any “mill partners”
therefore there was no “extremely stringent NDA” and no “mill names/profiles” to share. But
Additionally, as the investor has a contract with Madison Timber (and NOT with
the mill directly) via promissory note issued from Madison Timber that has
assigned timber deed worth twice as much as their invested dollars. So, investors
would be looking to Madison Timber for payment (not the mill), and in the event of
a default by Lamar, the investors simply file the deed / resell the timber.
Thornton thus assured the potential investor that he should not worry about the mills, because his
contract would be with Madison Timber—a company backed by Butler Snow’s reputation.
54. Ultimately, no investor chose to invest in the fund for which the PPM had been
updated and through which Butler Snow and Adams had hoped to raise $100,000,000. But many
individuals and institutional clients to whom Thornton and Billings made a pitch did invest in
purported “standing tracts” only, and for each of these investments, Madison Timber delivered to
55. For all of these transactions, Thornton, Billings, and Butler Snow acted as
unlicensed brokers, in violation of federal and state law. A broker is “any person engaged in the
business of effecting transactions in securities for the account of others.” See Section 3(4) of the
Securities Exchange Act of 1934, 15 U.S.C. § 78c. The S.E.C.’s public website states that the
recent search using the Financial Industry Regulatory Authority’s public online BrokerCheck
confirms that neither Thornton, Billings, nor Butler Snow have ever registered with the S.E.C.
11
Guide to Broker-Dealer Registration, U.S. SECURITIES & EXCHANGE COMMISSION, https://www.sec.gov/reports
pubs/investor-publications/divisionsmarketregbdguidehtm.html.
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56. Butler Snow knew or should have known what it was doing was unlawful. Among
the notes in Butler Snow’s Madison Timber files is this comment from Don Cannada in 2009:
“Very broad definition of what a broker is . . . Includes one who for a commission procures a
purchaser or prospect etc. See 73-35-31 for penalties. Says you can’t pay an unlicensed broker,
57. Investors might fairly question what Butler Snow did for them to earn their
commissions. The answer is not much. While they extolled Madison Timber’s “strategic
partnerships and forward-thinking supply/demand philosophy,” neither Thornton nor Billings, nor
anyone at Butler Snow, conducted an even cursory inspection of Madison Timber’s operations. If
they had, they would have been forced to face the reality that Madison Timber was nothing more
58. Instead, Butler Snow aided and abetted Madison Timber’s growth, lending Adams
and Madison Timber their influence, professional expertise, and clients. Butler Snow’s
imprimatur was powerful, and they knew it. They even agreed to serve as a “referral” for other
firms’ clients. In July 2013 “Baker Donelson” sought “a few referrals” to validate Madison
Timber. Thornton responded within minutes: “No problem by me – thanks!” Billings exclaimed:
“You are more than welcome to include me as a reference for anything at any time . . . highest
marks possible!!”
Red flags
59. Not only did Thornton, Billings, and Butler Snow broker Madison Timber
investments without a license and fail to independently confirm that the timber and rights in
question were real, they also recklessly ignored numerous red flags.
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60. Indeed, the timber deeds and cutting agreements between landowners and Madison
Timber were fake. The landowners’ signatures, forged by Adams, often looked the same. A call to
any one of the purported landowners, or a simple check of the title for any one of the purported
tracts of land, would have confirmed the truth. Neither Thornton nor Billings, nor anyone at Butler
61. Madison Timber also had no real contracts with any mills. A call to any one of the
mills for which Madison Timber purported to have contracts would have confirmed the truth.
Neither Thornton nor Billings, nor anyone at Butler Snow, ever called a mill. Worse, having
conducted no due diligence themselves, they falsely represented to potential investors that they
could not disclose Madison Timber’s “mill partners” due to an “extremely stringent NDA.”
62. Adams required that an investor agree that he or she would not record the deed by
which Madison Timber purported to grant its own rights to the investor unless and until Madison
Timber failed to make a payment due under the promissory note. Incredibly, notwithstanding the
suspicious “agreement not to record,” neither Thornton nor Billings, nor anyone at Butler Snow,
63. The “profit” that Adams promised was 300% to 400% better than that payable by
any other fully collateralized investment and was uniform and consistent. This fact should have
been a glaring warning sign standing alone, particularly for individuals such as Thornton and
Billings who touted decades of business experience. It is all the more incredible that neither
Thornton nor Billings, nor anyone at Butler Snow, ever questioned it, given that the PPM drafted
by Butler Snow, which Thornton professed to have read, expressly disclosed the risk of “Timber
Price Volatility.”
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Another engagement
64. By December 2013 Adams had grown tired of paying Butler Snow Advisory the
monthly fee of $3,500 plus travel expenses. Separately Billings saw potential to make more money
recruiting new investors to Madison Timber fulltime. Adams and Billings informed Thornton that
they would “proceed on a direct basis,” meaning Billings would leave Butler Snow Advisory to
work for Adams fulltime, effective January 1, 2014. Thornton told Adams he had “thoroughly
enjoyed” Madison Timber” and to “please let me know if I or BSAS can ever be of service again.”
65. Butler Snow, however, did not cease servicing Adams. In 2015 Adams engaged
Butler Snow to assist Oxford Springs, LLC, of which he effectively was the managing member,
with “regulatory permitting and compliance matters.” Butler Snow thus continued to lend its
influence to Adams, this time with government bodies. Indeed, Butler Snow was still sending
66. Notwithstanding its attorney-client relationships with Adams and Madison Timber,
not to mention its own role in perpetuating the Ponzi scheme, after Adams turned himself in Butler
Snow purported to represent investors in their demands of Madison Timber. These investors were
led to believe that Butler Snow could and would represent their best interests. At the same time,
however, Butler Snow also purported to represent Billings—whose interests clearly were adverse
to investors.
67. On May 11, 2018, Butler Snow sent Adams a letter titled “Disengagement”
advising that “recent events” made it “appropriate for us to withdraw from the representation.”
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BAKER DONELSON
68. Adams and Madison Timber’s relationship with Baker Donelson began in 2011 and
A joint venture
69. In 2011, Brent Alexander and Jon Seawright, a lawyer and lobbyist at the Baker
Donelson law firm in Jackson, were looking to start a new investment fund.
70. Alexander and Seawright made acquaintances with Adams and a partnership
quickly formed. Alexander and Seawright would create an LLC that would pool other people’s
money to invest in Madison Timber, and Adams would share the returns with Alexander and
I feel pretty good about this . . . Please explain to me why this is not a virtually risk
free deal. There is no pricing risk – everything is tied down on the front end. The
only risk I see is (i) mill defaults, but you still own the land, (ii) Lamar is a fraud,
but no evidence of that, or (iii) such a fundamental collapse of the timber industry
that mill defaults and uncut timber is less than purchase price, but investor is
oversecured almost 2:1, so there would have to be catastrophic collapse. Jds
71. Alexander and Seawright saw a big opportunity in Madison Timber, but to raise
“significant capital” for Adams, they needed to do some “smaller investments to prove out the
income earning potential.” They pitched the first investment to a client of Baker Donelson.
Seawright told the client that Alexander and Seawright would be responsible for everything:
Seawright told the client that “[r]unning funds through us or BD [Baker Donelson] escrow is not a
problem,” and all “legal and other admin expenses” would “come out of our share.”
20
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72. Alexander and Seawright’s “share” would include a portion of each investment’s
return, what Adams called a “birddog fee.” Adams told Alexander and Seawright that he could
ensure a 14% “profit” with a 2% “birddog fee” built-in, but Alexander and Seawright could decide
73. Seawright proposed instead that each investment’s promissory note bear 13%
interest, of which investors would receive 10% and Alexander and Seawright would keep 3%.
a result, Alexander and Seawright’s “share” of each investment’s return included the 3% they
disclosed to investors, plus an extra undisclosed 3% that Adams paid them directly.
74. Seawright drafted subscription agreements and accompanying documents for the
sales of units in what was then called Alewright Investments, LLC, later renamed Alexander
Seawright Timber Fund I, LLC. From 2011 until April 2018, Alexander and Seawright used their
fund to invest other people’s money in Madison Timber and split the “profits” with Adams.
The pitch
75. Throughout this time period Alexander and Seawright pitched their fund to
potential investors, including Baker Donelson clients, as an exclusive “friends and family” fund.
Alexander often used the phrase “simple, elegant and profitable” to describe the fund. He told
investors that “we are in it”— a lie; neither Alexander nor Seawright invested their own money in
the fund—“our neighbors, lots of physicians, many of the attorneys at Baker Donelson and other
76. Alexander was a persistent salesman. His pitch varied slightly depending on his
audience—for some investors the minimum was $25,000; for others, $50,000—but he always
promised a “rock stable” and “oversecured” 10% return, in a fund “safe enough for friends and
21
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family.” If an investor said he could invest “either 25k or 30,” Alexander responded “$50k would
be better for you . . . The more you get in circulation, the more you can compound each quarter.”
investors the fund “sells out quick” and “is moving fast.” To one such person he texted: “[You]
need to invest in the timber fund. We have figured the math and can get you 14 percent fully
secured if you reinvest your principle [sic] and interest every quarter. It compounds like you
would not believe,” followed by, “Are you going to invest in this timber round? You need to put
your money to work. No pressure at all, just smart advice in this climate.”
78. Alexander and Seawright specifically targeted individuals who had recently sold
assets because they knew those individuals had money to invest. Such individuals included clients
79. Investors reasonably believed that their investment in Madison Timber, through
Alexander Seawright Timber Fund I, LLC, was backed and promoted by, and had been vetted by,
Baker Donelson.
80. Alexander and Seawright relied heavily on their affiliation with Baker Donelson in
securing investments. Alexander and Seawright described the fund to potential investors who were
clients of Baker Donelson as a fund for preferred Baker Donelson clients and partners.
81. Alexander and Seawright referred potential investors to Baker Donelson’s website,
which shows that Jon Seawright is not merely a shareholder in Baker Donelson’s Jackson office
but an elected member of the firm’s national governing Board of Directors. Baker Donelson is a
law firm, not an investment advisory firm, but its website touts Jon Seawright’s advanced degree
in taxation and “extensive experience” in business development and capital formation. Its website
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presents Brent Alexander as a “Senior Public Policy Advisor” who is qualified by regulators to
serve as a principal in, or advisor to, hedge funds and who has a “rapidly growing” practice in
82. Baker Donelson knew Alexander and Seawright relied on their affiliation with
83. Alexander and Seawright used Baker Donelson’s Jackson office’s address for
official business. They and Adams held “closings” at Baker Donelson’s Jackson office. They used
84. Alexander and Seawright enlisted their colleagues at Baker Donelson, including in
offices in other states, to introduce them to potential investors. They asked their colleagues to
“[h]elp us get a meeting if you’re able,” adding “[i]f you can get us in the door, it would mean a
Easy money
85. Investors were led to believe that they could rely on Alexander and Seawright to
evaluate each investment using their professional expertise and judgment, which was backed by
evaluation of the investments they pushed on unwitting persons, including Baker Donelson’s
clients. At the beginning of their partnership with Adams, Seawright asked questions such as
“Who bears the loss with respect to the destruction of timber? For example, if there is fire, beetles,
hurricane, whatever, who is on the hook? Is it an insured risk?” But he accepted Adams’s answers
to his questions without follow-up. Adams told Seawright that Madison Timber had “umbrella
[insurance] on all tracts” (he added, “Expensive, don’t need it but have it”). Seawright never asked
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86. Investors were led to believe that Alexander and Seawright personally inspected
the timber underlying each investment. Of course they did not. Alexander and Seawright gave
investors “Equity Term Sheets” that described each upcoming investment opportunity. An
“Equity Term Sheet” dated March 5, 2017, for instance, explained that for the “minimum
investment” of $25,000, an investor would share in the “cutting rights on tracts of land in various
counties (the ‘Timber Rights’).” Like all of Alexander and Seawright’s “Equity Term Sheets,” the
“Equity Term Sheet” dated March 5, 2017, expressly represented that Alexander and Seawright
Company [Alexander and Seawright] will inspect the property related to the
Timber Rights, must receive the original, executed Note and timber deed and will
inspect the executed agreement(s) with the timber mill(s).
Alexander and Seawright could not and did not inspect the property in question—nor “the
executed agreement(s) with the timber mill(s)”—because such did not exist. These representations
87. Alexander and Seawright even devised a “Timber Rights Investment Closing
Checklist” that included among its list of things to do “Review Mill Contract” and “Review Land
re Timber.” Alexander and Seawright could not and did not review any “Mill Contract” or “Land
timber tract only once or twice, at the very inception of their partnership with Adams. The
“inspection” was hardly professional. Email traffic indicates “inspection” meant “[grab] a cooler
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89. Between 2011 and April 2018, Alexander and Seawright withdrew over $980,000
from the Alexander Seawright Timber Fund I, representing their “shares” of investors’ returns. In
addition Adams separately paid them over $600,000 representing undisclosed “birddog fees.”
90. On information and belief, Adams also sometimes paid Alexander and Seawright
bonuses, including Christmas bonuses in cash that he had delivered to Alexander and Seawright at
91. For all this time, Alexander and Seawright acted as unlicensed brokers, in violation
of federal and state law. A broker is “any person engaged in the business of effecting transactions
in securities for the account of others.” See Section 3(4) of the Securities Exchange Act of 1934, 15
U.S.C. § 78c. The S.E.C.’s public website states that the receipt of transaction-related
commissions is a key indicator that a broker must be registered.12 A recent search using the
Financial Industry Regulatory Authority’s public online BrokerCheck confirms that neither
92. Investors might fairly question what Alexander and Seawright did to investigate the
investment. The reality is not much. In October 2017, Alexander bragged to a potential investor
that “to our surprise, we have now financed the purchase of about $60 million in timber . . . It has
worked so well that we simply send out an email on the 15th of each month and some hours later
93. Neither Alexander nor Seawright, nor anyone at Baker Donelson, conducted an
even cursory inspection of Madison Timber’s operations. If they had, they would have realized
what should have been obvious—that the money was too good to be true because Madison Timber
12
Guide to Broker-Dealer Registration, U.S. SECURITIES & EXCHANGE COMMISSION https://www.sec.gov/reports
pubs/investor-publications/divisionsmarketregbdguidehtm.html
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was nothing more than a Ponzi scheme. Instead, they aided and abetted Madison Timber’s growth,
providing Adams and Madison Timber their influence and their clients.
Red flags
94. Not only did Alexander and Seawright and Baker Donelson fail to independently
confirm that the timber and rights in question were real, they recklessly ignored numerous red
flags.
95. The timber deeds and cutting agreements between landowners and Madison
Timber were fake. The landowners’ signatures, forged by Adams, often looked the same. A call to
any one of the hundreds of purported landowners, or a simple check of the title for any one of the
hundreds of purported tracts of land, would have confirmed the truth. Neither Alexander nor
Seawright, nor anyone at Baker Donelson, ever called a landowner or checked a tract’s title.
96. Madison Timber also had no real contracts with any mills. A call to any one of the
mills for which Madison Timber purported to have contracts would have confirmed the truth.
Neither Alexander nor Seawright, nor anyone at Baker Donelson, ever called a mill.
97. Adams required that an investor agree that he or she would not record the deed by
which Madison Timber purported to grant its own rights to the investor unless and until Madison
Timber failed to make a payment due under the promissory note. Seawright quipped that “I have
been clear that I am no timber expert”—but he is unquestionably a lawyer to whom his clients and
investors looked to evaluate the investment’s risks. Incredibly, notwithstanding the suspicious
“agreement not to record,” neither Alexander nor Seawright, nor anyone at Baker Donelson,
98. The “profit” that Adams promised was 300% to 400% better than that payable by
any other fully collateralized investment and was uniform and consistent. This fact should have
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been a glaring warning sign but Alexander, who Baker Donelson presents as a qualified and
experienced advisor, turned this warning sign into a selling point. Alexander bragged about his
“six year perfect track record” of consistent uniform returns under his “beautiful, albeit simple,
financial model.”
99. Adams purported to have identified mills with an insatiable demand for timber at
uniform prices. The market price for timber is readily available from multiple sources, and any one
of those sources would have confirmed that the market price for timber actually rises and falls,
sometimes dramatically, over short periods of time. Neither Alexander nor Seawright, nor anyone
at Baker Donelson, ever evaluated the investment in light of such information. To the contrary,
Seawright gloated that “[Adams] has stated that volume is not problem and indicates there are
100. In 2014 Adams decided that he did not want to have to manage Madison Timber
during the month of December. He told his “bird dogs,” including Alexander and Seawright, that
Madison Timber would not issue checks in December going forward; what had been a 12-month
payoff would become a 13-month payoff, skipping the last month of the year. Seawright blindly
passed on to investors the dubious explanation that mills shut down in December for OSHA
inspections:
In December 2014, we were notified that the mills intended to shut down
operations in December to allow a break for the holidays and complete OSHA
required inspections. With their operations down, they requested that no payment
be made in December. The broker we worked with agreed to this, but on the
condition that the interest rate is increased by 1%, which they agreed to. This
increase is passed on to investors, so now all rounds pay out in 12 payments over 13
months, with a total interest of 13%. The result is the annual effective interest rate
increased to 10.15%, so while the payments are stretched out by a month, the
interest rate is better.
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Neither Alexander nor Seawright, nor anyone at Baker Donelson, did anything to verify this false
information.
101. In 2015 Alexander and Seawright had an idea. They had been making monthly
investments with Adams of between $100,000 and $500,000 using other people’s money.
Alexander proposed that “[we] systemize this a little and take it to the next level.” Over the next
two years Alexander and Seawright would brainstorm a new model that could make Alexander
and Seawright rich. Alexander estimated that if a fund put $1 million in Madison Timber and then
reinvested the principal and interest each month for ten years it would make $17 to $18 million.
102. The idea consumed Alexander. He texted Seawright, “Woke at [sic] at 2 thinking
about the structure of the timber pool. We pull this off, we get rich.” Using Baker Donelson’s
conference rooms and resources, he hosted meetings with and made presentations to accountants,
investors, and advisors to push his idea and debate the merits of a five-year versus ten-year model.
He reported the models gave people “much more level headed” than he “an orgasm as to its
potential.” Fearing that “now that they have seen up our skirts” people will “try to cut us out,” he
103. Alexander and Seawright gave their new model a new company and named it
Alexander Seawright Timber Fund II, LLC. They made a pitchbook for prospective investors. As
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104. The 15-page pitchbook extolled the “elegant, simple and highly profitable” model
by which Alexander and Seawright had already “invest[ed] more than $20 million to facilitate the
purchase of over $50 million in timber.” The pitchbook falsely represented that an investment
would be “over-secured” and the timber would be “insured.” The pitchbook called the opportunity
to compound both principal and interest in the new fund “a nice trick indeed”:
105. The feedback was not all good. One prospective investor observed that Alexander
and Seawright could count “the respect we have for Baker” “to the good”—but the investment
presented at least ten concrete concerns, the first of which he called the “John Grisham novel
problem”:
To the concerning . . .
1. The structure seems very difficult – bordering on uninvestable in its current form
– for institutional managers, which is to say those managing money for others. Were
this to go bad in any way, there’s a beginning to a John Grisham novel problem here:
two lawyers drove up from Jackson, MS, to Memphis, TN, to pitch yield hungry
investors on a double digit, nearly riskless opportunity. The opportunity was
unaudited, and the lawyers did the tax work. . . .
But Alexander brushed off the criticism. (“I’m not sure he is a particularly artful or cogent writer,”
he told Seawright.)
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106. The same prospective investor questioned why Alexander and Seawright
themselves were not invested in their own fund. “Your interest in the incentive is noteworthy, but,
it is derived from sweat, not money you stand to lose,” he wrote. Alexander replied, “We do have
We do have skin in the game, at least in the way we characterize it, in that we have
fronted the expenses for the design, implementation, operation and management of
Alexander Timber Fund I, with little direct compensation because we knew that if
we were successful in building a track record, the opportunity to create a larger fund
would follow. . . . [O]ur incentives under this model are perfectly aligned with our
investors. If they don’t make money, we really don’t make money. That’s about the
best we can do.
What Alexander’s reply did not acknowledge was the obvious: Investors stood to lose their own
107. The same prospective investor pressed Alexander and Seawright on the question of
“margin”—that is, how did their broker (Adams) guarantee such uniform and consistent profits?
He asked “what are we missing to understand here that a broker exists which [sic] such large
spreads/ margins?”:
Gents – in doing some research on this strategy, I spoke to a friend who is more
familiar with timber. I described the model this opportunity works under, which
was foreign to him. What he is used to seeing is the forester working as an agent of
the landowner, where the forester is incented by receiving (if they are really good)
5-10% of the sales price. In this model, the forester markets the timber directly to
the mills and, in some cases, literally opens the bids up in front of everyone. Both
the concept of a broker and the 30ish % margins discussed seemed unfamiliar (and
this is a very experienced guy).
Notwithstanding this meaningful input, neither Alexander nor Seawright, nor anyone at Baker
Donelson, did anything to slow things down, nor even made a cursory analysis of their and
Adams’s business.
108. Instead Alexander and Seawright speeded things up with more forceful
presentations. They now argued Alexander Seawright Timber Fund II, LLC was for investors
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“with brains and balls.” Meanwhile they continued to invest other people’s money in Alexander
109. In late 2017, Alexander and Seawright finally secured a “key investor” to “seed”
Alexander Seawright Timber Fund II, LLC with $6 million. Alexander wanted $12 million to start
but figured he would raise the remaining $6 million by “bootstrapping.” Eventually he hoped “to
raise an additional $36 [million] over the life of the fund and let it roll for ten years.”
110. The “key investor” was a Baker Donelson client who would fund his investment
with the proceeds from the sale of a major asset. Seawright represented him in the sale. Alexander
told him, “I think you know us well enough to trust us, and if anything were ever go wrong, the
As you know, we are extremely confident in the model which is why we are
investing and reinvesting our earnings along with you under the same conditions.
Every deal has risk, but the only way that the numbers would be affected would be
if we for some reason could not close the rounds on a monthly basis (and I am very
confident we will). . . .
The purchase from the timber owner and the sale to the mill are executed
simultaneously Remember on the sale, we are over-secured by 50 percent. We put
up half the money, but have rights to the entire tract of timber. So, that gives us a
lot of margin to sell to someone else should there be a default. We have never
experienced a default, but we have a lot of wiggle room should one occur.
111. Anticipating their launch, Alexander and Seawright opened a new bank account for
Alexander Seawright Timber Fund II, LLC. Alexander wrote Adams to advise that starting May 1,
2018, they would “start deploying at $1 million a month beginning May 1”:
[W]e have a signed commitment for $6 million that we plan to start deploying at $1
million a month beginning May 1. . . . [I]t is safe to assume that we will invest $1
million an month increasing to $1.5 million a month. . . . Also, this investment,
which will be made under Alexander Seawright Timber Fund II, will be in addition
to the on-going investment in Alexander Seawright Timber Fund I, so plan on an
average of about $350,000 -$500,000 per month in Alexander Seawright Timber
Fund I. We are excited about the opportunity to provide a regular, consistent and
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112. Just days before Alexander and Seawright would have deployed their “key
investor” and client’s money, Adams turned himself in. As news spread, the investor sought
information from Alexander. Alexander told the investor that Alexander and Seawright were
victims:
CAUSES OF ACTION
COUNT I
FOR CIVIL CONSPIRACY
AGAINST ALL DEFENDANTS
113. The Receiver re-alleges each of the foregoing paragraphs as though stated fully
herein.
114. Mississippi law defines a civil conspiracy as a “combination of persons for the
115. Defendants conspired with Adams to commit the tortious acts alleged in this
complaint.
116. Defendants agreed to assist Adams by recruiting new investors to Madison Timber.
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117. Madison Timber was a Ponzi scheme; therefore Defendants and Adams’s purpose
was unlawful.
securities, in violation of federal and state law. The securities that Defendants sold were not
exempt from registration but were unregistered, in violation of federal and state law.
119. In furtherance of their unlawful purpose, among other overt acts, Defendants
pitched Madison Timber to potential investors, including their clients; consummated sales of
Madison Timber to investors; and received commissions from Adams for their assistance in
120. Defendants need not have known that Madison Timber was a Ponzi scheme to
unlawfully conspire with Adams. Nevertheless, in view of the numerous red flags described in this
complaint, Defendants knew or should have known that Madison Timber was a Ponzi scheme.
121. Numerous red flags notwithstanding, Defendants lent their influence, their
professional expertise, and even their clients to Adams. They made a fraudulent enterprise a
fraternity. Madison Timber grew from an approximately $10 million-a-year Ponzi scheme in 2011
122. Defendants were essential to the growth of the Madison Timber Ponzi scheme. But
for Defendants’ encouragement and assistance, Madison Timber would not have continuously
grown—it would have failed before ensnaring hundreds of new unwitting investors.
123. Defendants contributed to Madison Timber’s success over time, and therefore to
the Receivership Estate’s liabilities today. Defendants and Adams’s civil conspiracy is a
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124. Defendants are jointly and severally liable for the debts of the Receivership Estate,
125. Because Defendants acted with reckless disregard of the wellbeing of others, and in
specific instances described in this complaint committed actual fraud, punitive damages are
appropriate.
COUNT II
FOR AIDING AND ABETTING
AGAINST ALL DEFENDANTS
126. The Receiver re-alleges each of the foregoing paragraphs as though stated fully
herein.
127. The Restatement (Second) of Torts § 876(b) (1979) provides that a defendant is
liable if he “knows that the other’s conduct constitutes a breach of duty and gives substantial
128. Defendants aided and abetted Adams in committing breaches of duties owed by
Adams to Madison Timber and in other tortious conduct alleged in this complaint.
129. In view of the numerous red flags described in this complaint, Defendants knew or
130. Numerous red flags notwithstanding, Defendants gave substantial assistance and
encouragement to Adams. Defendants lent their influence, their professional expertise, and even
their clients to Adams. They made a fraudulent enterprise a fraternity. Madison Timber grew from
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131. Defendants were essential to the growth of the Madison Timber Ponzi scheme. But
for Defendants’ substantial assistance and encouragement, Madison Timber would not have
continuously grown—it would have failed before ensnaring hundreds of new unwitting investors.
132. Defendants contributed to Madison Timber’s success over time, and therefore to
the Receivership Estate’s liabilities today. Defendants’ substantial assistance and encouragement
133. Defendants are jointly and severally liable for the debts of the Receivership Estate,
134. Because Defendants acted with reckless disregard of the wellbeing of others, and in
specific instances described in this complaint committed actual fraud, punitive damages are
appropriate.
COUNT III
FOR RECKLESSNESS, GROSS NEGLIGENCE, AND AT A MINIMUM NEGLIGENCE
AGAINST ALL DEFENDANTS
135. The Receiver re-alleges each of the foregoing paragraphs as though stated fully
herein.
136. “Negligence is a failure to do what the reasonable person would do under the same
or similar circumstances.” Estate of St. Martin v. Hixson, 145 So. 3d 1124, 1128 (Miss. 2014).
137. While negligence is the failure to exercise due care, recklessness “is a failure or
refusal to exercise any care.” Maldonado v. Kelly, 768 So. 2d 906, 910 (Miss. 2000).
the numerous red flags described in this complaint, a reasonable person in the same or similar
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139. Defendants not only failed to exercise due care, they failed or refused to exercise
continuously grow. Madison Timber grew from an approximately $10 million-a-year Ponzi
scheme in 2011 to an approximately $164.5 million-a-year Ponzi scheme as of April 19, 2018.
would not have continuously grown—it would have failed before ensnaring hundreds of new
unwitting investors.
Madison Timber’s success over time, and therefore to the Receivership Estate’s liabilities today.
Receivership Estate.
143. Defendants are liable for the debts of the Receivership Estate, which their
144. Because Defendants acted with gross negligence evincing a reckless disregard of
COUNT IV
FOR VIOLATIONS OF MISSISSIPPI’S FRAUDULENT TRANSFER ACT
AGAINST BUTLER SNOW ADVISORY, THORNTON,
ALEXANDER SEAWRIGHT, ALEXANDER, AND SEAWRIGHT
145. The Receiver re-alleges each of the foregoing paragraphs as though stated fully
herein.
146. The Receiver may avoid any transfer made in violation of the Mississippi Uniform
Fraudulent Transfer Act (the “Act”), MISS. CODE ANN. §15-3-101, et seq.
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147. Pursuant to § 107 of the Act, the Receiver may recover from any party any funds
that Madison Timber transferred with the actual intent to hinder, delay, or defraud any of its
creditors. Because Madison Timber was a Ponzi scheme, by definition all transfers by Madison
Timber were made with the actual intent to hinder, delay, or defraud its creditors.
148. The Receiver is entitled to avoid all “commissions,” fees, and other such payments
paid by Adams or Madison Timber to Defendants Butler Snow Advisory, Thornton, Alexander
Seawright, Alexander, and Seawright, and to the entry of a judgment against Defendants Butler
Snow Advisory, Thornton, Alexander Seawright, Alexander, and Seawright for the amount of all
149. Alternatively, the Receiver is entitled to recover all monies paid to Defendants
Butler Snow Advisory, Thornton, Alexander Seawright, Alexander, and Seawright because
(i) Madison Timber was insolvent when it paid those commissions because its net liabilities far
exceeded the value of its (nonexistent) assets and (ii) Madison Timber received no value for the
COUNT V
FOR VIOLATIONS OF MISSISSIPPI’S RACKETEER INFLUENCED
AND CORRUPT ORGANIZATION ACT
AGAINST BUTLER SNOW ADVISORY, THORNTON,
ALEXANDER SEAWRIGHT, ALEXANDER, AND SEAWRIGHT
150. The Receiver re-alleges each of the foregoing paragraphs as though stated fully
herein.
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151. Mississippi’s RICO statute provides: “It shall be unlawful for any person to
152. Madison Timber was a “fraud enterprise” within the meaning of Mississippi’s
RICO statute because “fraud enterprise” includes one conducted by “mail or other means of
communication,” MISS. CODE ANN. § 97-43-3.1, and Adams was convicted of wire fraud.
153. Mississippi’s RICO statute further provides: “It is unlawful for any person
employed by, or associated with, any enterprise to conduct or participate, directly or indirectly, in
such enterprise through a pattern of racketeering activity. . . .” MISS. CODE ANN. § 97-43-5
commit . . . any crime which is chargeable under [Mississippi’s RICO statute],” MISS. CODE ANN.
and Seawright participated, directly or indirectly, in the Madison Timber “fraud enterprise.”
155. Their participation allowed the Madison Timber “fraud enterprise” to continuously
grow. Madison Timber grew from an approximately $10 million-a-year Ponzi scheme in 2011 to
156. But for their participation, the Madison Timber “fraud enterprise” would not have
continuously grown—it would have failed before ensnaring hundreds of new unwitting investors.
157. By their participation, they contributed to Madison Timber’s success over time, and
therefore to the Receivership Estate’s liabilities today. Their participation is a proximate cause of
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and Seawright therefore are liable for “threefold the actual damages sustained” by the
COUNT VI
FOR JOINT VENTURE LIABILITY
AGAINST ALEXANDER SEAWRIGHT, ALEXANDER, AND SEAWRIGHT
159. The Receiver re-alleges each of the foregoing paragraphs as though stated fully
herein.
160. “[A] joint venture can be defined as a single purpose partnership.” Duggins v.
Guardianship of Washington ex rel. Huntley, 632 So. 2d 420, 427 (Miss. 1993). “Profit sharing is
the most important factor in determining whether a joint venture exists.” Walker v. Williamson,
131 F. Supp. 3d 580, 591 (S.D. Miss. 2015). “Where a joint venture exists, its members are bound
by the acts of the other members acting in the course and scope of the joint venture.” Braddock
Law Firm, PLLC v. Becnel, 949 So. 2d 38, 50 (Miss. Ct. App. 2006).
161. Defendants Alexander Seawright, Alexander, and Seawright formed a joint venture
with Adams and Madison Timber, as evidenced by their stated intent to form a fund to invest other
people’s money in Madison Timber and to split the “profits” with Adams.
162. Defendants Alexander Seawright, Alexander, and Seawright did invest other
people’s money in Madison Timber and did split the “profits” with Adams.
Seawright, Alexander, and Seawright are liable for debts incurred within the scope of their joint
venture, which was still ongoing on April 19, 2018, the date Adams turned himself in.
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164. Defendants Alexander Seawright, Alexander, and Seawright therefore are jointly
COUNT VII
FOR ATTORNEY MALPRACTICE
AGAINST BUTLER SNOW
165. The Receiver re-alleges each of the foregoing paragraphs as though stated fully
herein.
166. “Lawyers owe their clients a duty to protect them from liability in every possible
way.” Official Stanford Inv’rs Comm. v. Greenberg Traurig, LLP, No. 3:12-cv-4641, 2014 WL
167. Adams and Madison Timber had a lawyer-client relationship with Defendant
Butler Snow. Adams twice engaged Defendant Butler Snow to draft a private placement
168. The PPMs drafted by Defendant Butler Snow contained numerous false and
misleading statements, including but not limited to those described in this complaint, regarding
169. In view of the numerous red flags described in this complaint, a reasonable lawyer
170. Defendant Butler Snow not only failed to exercise due care, it failed or refused to
exercise any care at all in its dealings with Adams. Defendant Butler Snow was not merely
negligent, but reckless, in its handling of legal affairs to which it was entrusted.
171. Although no investor chose to invest in the funds for which the PPMs were drafted,
many relied on the PPMs in choosing to invest in purported “standing tracts” only.
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Madison Timber to continuously grow. Madison Timber grew from an approximately $10
Madison Timber would not have continuously grown—it would have failed before ensnaring
contributed to Madison Timber’s success over time, and therefore to the Receivership Estate’s
175. Defendant Butler Snow is liable for the debts of the Receivership Estate, which its
176. Because Defendant Butler Snow acted with gross negligence evincing a reckless
COUNT VIII
FOR NEGLIGENT RETENTION AND SUPERVISION
AGAINST BUTLER SNOW AND BAKER DONELSON
177. The Receiver re-alleges each of the foregoing paragraphs as though stated fully
herein.
178. “[A]n employer will be liable for negligent hiring or retention of his employee
when an employee injures a third party if the employer knew or should have known of the
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employee’s incompetence or unfitness.” Backstrom v. Briar Hill Baptist Church, Inc., 184 So. 3d
179. Agents of Defendants Butler Snow and Baker Donelson agreed to assist Adams by
recruiting new investors to Madison Timber, thereby acting as unlicensed brokers of securities, in
180. In view of the numerous red flags described in this complaint, Defendants Butler
Snow and Baker Donelson knew or should have known of their agents’ incompetence or unfitness.
181. Defendants Butler Snow and Baker Donelson were reckless, or at a minimum
negligent, in retaining their agents and failing to supervise their agents’ dealings.
negligence, allowed Madison Timber to continuously grow. Madison Timber grew from an
approximately $10 million Ponzi scheme in 2011 to an approximately $164.5 million Ponzi
183. But for Defendants Butler Snow and Baker Donelson’s recklessness, or at a
minimum negligence, Madison Timber would not have continuously grown—it would have failed
minimum negligence, contributed to Madison Timber’s success over time, and therefore to the
Receivership Estate’s liabilities today. Defendants Butler Snow and Baker Donelson’s
Estate.
185. Defendants Butler Snow and Baker Donelson are liable for the debts of the
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186. Because Defendants Butler Snow and Baker Donelson acted with gross negligence
evincing a reckless disregard of the wellbeing of others, punitive damages are appropriate.
187. Defendant Butler Snow is liable for the acts of Butler Snow Advisory, and
therefore the acts of Thornton and Billings, because Defendant Butler Snow authorized or directed
those acts; had knowledge of, or gave consent to, those acts; or acquiesced in those acts when it
knew or should have known that it should have taken steps to prevent them.
188. Defendant Butler Snow is liable for the acts of Butler Snow Advisory because the
two effectively operate as a single business enterprise, and Butler Snow and Butler Snow Advisory
189. The Receiver is entitled to a declaratory judgment holding, inter alia, that
Defendant Butler Snow is liable for payment of all damages or other relief awarded in favor of the
190. Defendants Alexander and Seawright are liable for the acts of Alexander Seawright
191. Defendants Alexander and Seawright are liable for the acts of Alexander Seawright
192. The Receiver is entitled to a declaratory judgment holding, inter alia, that
Defendants Alexander and Seawright are personally liable for payment of all damages or other
relief awarded in favor of the Receiver and against Defendant Alexander Seawright.
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193. The apparent backing of Defendants Butler Snow and Baker Donelson enabled
Thornton and Billings, and separately Alexander and Seawright, respectively, to recruit new
investors to Madison Timber. Defendants Butler Snow and Baker Donelson are liable for the
negligent and reckless acts of their agents, including but not limited to Thornton and Billings, and
194. The Receiver is entitled to a declaratory judgment holding, inter alia, that
Defendant Butler Snow is liable for payment of all damages or other relief awarded in favor of the
Receiver and against Defendants Butler Snow Advisory and Thornton, and that Defendant Baker
Donelson is liable for payment of all damages or other relief awarded in favor of the Receiver and
___________________
WHEREFORE, the Receiver respectfully requests that, after due proceedings, the Court
enter judgments:
3. awarding any and all other relief as may be just and equitable.
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