Tennessee’s Ties to The Madoff Scheme

TENNESSEE’S NEW RULES FOR FRAUD:

Law Firm Admits Hiding Assets & Accountings—Tennessee Courts say “OK!”

EDITOR’S NOTE: THIS IS THE THIRD IN A SERIES ABOUT PROTECTING THE ASSETS OF YOUR FAMILY

OR BUSINESS IN THE WAKE OF NEW RULINGS FROM TENNESSEE’S COURTS.

Special to www.stopprobatefraud.com

Williamson County Tennessee Judge James Martin III

This is Part 3 in a series that details the big changes in Tennessee’s legal and accounting laws rising from the ruling of Judge James Martin III (shown left) in “The Little Case From Leiper’s Fork.”

If you missed parts 1 and 2 you may read them here:

http://www.stopprobatefraud.com/blog/2018/10/26/big-changes-to-tennessee-probate/

and here:

http://www.stopprobatefraud.com/blog/2018/11/16/tennessees-new-rules-for-fraud/

RECAP:  When Leiper’s Fork resident Woody Darken died, the court installed his wife, Cherry Lane, as the estate administrator. Mr. Darken’s children were the trustees of both his estate and the family’s trusts.

The trustees met with their lawyer, Randle S. Davis, the senior managing partner of Lassiter, Tidwell, Davis, Keller and Hogan. The firm is now called Farmer, Purcell, Lassiter and White, the home of Nashville’s former mayor Bill Purcell.

Court records detailed that Davis told the trustees that their father’s affairs were “cut and dried” and directed them to get their family’s legal and financial records from their father’s office.

But when they went to their father’s farm, the executrix refused to release the family’s files.

PART THREE: BERNIE MADOFF’S LINKS TO LIEPER’S FORK

Court testimony details that after being denied their family’s records, the trustees called the firm and told Davis that the executor was refusing to deliver their family’s files.

The firm admitted had key pieces of the  family’s legal and financial records in their office, but did not give those files to the trustees when they asked for them. Instead, they defended the executrix and directed the trustees to try meeting with her again. This was the trustees’ first estate accounting experience and so they took the firm’s advice and agreed to a second meeting.

ACCOUNTINGS DENIED AGAIN: THE START OF SUBSTITUTION FRAUD:

Trial testimony details that at the second meeting, the executrix again denied the trustees access to the family’s records: She concealed Woody Darken’s financial and legal library, including a computer, royalty statements, trading records, deeds, loan schedules, trust records and pre-nuptial accountings.

In place of the actual files, she gave the trustees a two page “flow chart” that she directed the firm to construct.

In the world of fraud, this is called “substitution” and it was a key tool used in the frauds designed by convicted Wall Street con-man, Bernie Madoff.

Substitution is a fraud where something bogus is substituted for the real thing. It is used in “cons” ranging from auto repair shops that substitute a used part for new one, to an art broker substituting a forged work for an original.

THE HEART OF FRAUD:

Substitution fraud has two halves: The first half is that the fraudster presents a fake item to his or her target.  The other half is that the fraudster prevents victims from inspecting or auditing the item. This forces to the victims to“take it on faith” that what is being presented is, in fact, authentic.

In 1999, nearly ten years before Madoff was caught, Harry Markopolos was one of the first to “red flag” Madoff’s investments. Markopolos is a certified fraud examiner and certified financial analyst.

In an interview with Fraud magazine, Markopolos noted that one of Madoff’s key skills was avoiding an audit:

“Investors who asked too many questions were told not to invest. If you asked detailed due-diligence questions and wanted full transparency…Madoff would tell you, ‘It’s a take-it or leave-it black-box strategy.’”

The key to Madoff’s scam was preventing “investors” from inspecting or auditing their actual accounts or trades. Victim’s were charmed by Madoff’s style and success, and simply took him at his word.

Diana Henriques echoes the insights of Markopolos. Henriques is the author of the Madoff book, The Wizard of Lies. In an interview with Adam Courtenay for the accounting publication, Intheblack, she says that Madoff’s victims “…all thought he was God’s money manager.” The trouble, she says, “…all came down to a lack of basic compliance – and scrutiny – by accountants and auditors….”

Madoff damaged thousands of people all because nobody audited his accounts.

SAME TOOLS; DIFFERENT RESULTS

Unlike Madoff’s clients, the trustees in Tennessee never stopped asking for access to their family’s records.

But as executrix, Cherry Lane had the power to control every legal and financial file in the estate. Like Madoff, she was able to use her power to control access to the accounts, and stop the trustees from doing an audit.

It took the trustees more than two years in court before Cherry Lane and the firm were finally forced to give the family’s files to the Trustees. It was a legal fight that cost the trustees a quarter of a million dollars in legal fees.

TENNESSEE’S COURTS MAKE NEW RULES

But the links between Leiper’s Fork and Wall Street end there.

In 2008 Madoff’s ponzi scheme collapsed. There were billions of dollars in losses. Madoff pled guilty, and a federal judge in New York sentenced him to 150 years in prison.

Tennessee’s courts saw it differently:

In a break from long-established law, Williamson County Court Judge James Martin III ruled that it was not a breach of fiduciary duty in Tennessee for an officer of the court to pay a law firm to help hide legal and accounting records from  trustees.

The trustees appealed Martin’s decision, but the Tennessee court of appeals confirmed Martin’s logic.

The court’s ruling means that fiduciaries and officers of the court in Tennessee no longer need to deliver full disclosure and transparency to their clients, beneficiaries or principals. Tennessee is now the only state in the nation with these rules.

In turn, it also means that beneficiaries and trustees must now accept whatever access to accountings that fiduciaries choose to offer. In Tennessee, they have been stripped of the long-held right of transparency and disclosure from fiduciaries and officers of the court.

NO LONGER “CUT AND DRIED”

“The Little Case from Leiper’s Fork” that started off “cut and dried” is delivering big changes to Tennessee’s laws and especially business on Nashville’s Music Row.

“This is a big deal” said trustee Eric Darken. “Every music manager, talent agent, banker and promoter in Tennessee is a fiduciary.  Tennessee’s ruling makes it legal for these people to hide records from their artists and clients and substitute whichever accountings they want to show.“

PURCELL’S FIRM SILENT:

The editors asked for comment from attorneys Bill Purcell, William Lassiter and Elizabeth Ryder Sykes, who are partners at Farmer, Purcell, Lassiter and White. We received no response.

Suggestion for Tennesseans:

If you or someone you love has had similar experiences in Tennessee, please contact the editors at stopprobatefraud@gmail.com.

 

 

 

 

 

 

 

 

 

 

 

About Edmund Burke 80 Articles
Volunteers working to help people spot, stop and recover from fraud and corruption in probate, trusts, estates & guardianships.