Wednesday, October 11, 2006

When Your Attorney Turns You In

Salvatore Favata will enter a guilty plea to a mail fraud charge and settled an SEC civil enforcement action for selling "private money note investments" purportedly to raise money for his mortgage firm, National Consumer Mortgage, LLC, that was essentially a Ponzi scheme.  According to the SEC Litigation Release (here), Favata "raised more than $30 million from over 200 investors by offering rates of return from 30-60 percent on the investment. In fact, investor funds were used to pay Favata's gambling debts in excess of $10 million, personal debts and monthly living expenses, including leased luxury vehicles, lavish house parties and community music festivals."  Note once again that the promise of outsized returns is too good to be true because it isn't.  Favata is scheduled to appear on the criminal charge on October 16, and a press release issued by the U.S. Attorney's Office for the Central District of California (here) states that he is expected to receive the maximum five year prison sentence authorized under the mail fraud statute.

The interesting part of the case is a line near the end of the USAO release stating, "The investigation of Favata's fraud started in April when Favata's attorney reported the criminal conduct to the United States Attorney's Office."  It's not clear what basis the attorney had for disclosing the information to prosecutors, especially if it was confidential information gained in the course of the attorney-client relationship.  If the attorney provided legal services that were used by Favata to commit the fraud, then the attorney could be compelled to testify under the crime-fraud exception, but that does not appear to be the case from the wording of the release.  Assuming the attorney is licensed in California, then under Rule 3-100(B), "A member may, but is not required to, reveal confidential information relating to the representation of a client to the extent that the member reasonably believes the disclosure is necessary to prevent a criminal act that the member reasonably believes is likely to result in death of, or substantial bodily harm to, an individual."  While many states, and now the ABA, permit disclosure of client fraud,  California appears to apply the older approach limiting disclosure only if there is a risk of death or serious harm by the client.  It may be that the attorney represented the mortgage company rather than Favata personally, so it might have waived the privilege when the misconduct came to light.  The release, however, states that it was "Favata's attorney" and not the company's counsel.  However it came to light, a Ponzi scheme has been stopped, although like weeds in a garden another one will pop to the surface again soon. (ph)

Fraud, Legal Ethics, Prosecutions | Permalink

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» $30 Million Ponzi Scheme Halted from Psychology of Compliance & Due Diligence Law
Salvatore Favata's $30 million ponzi scheme admitted to according to SEC. Now this was a very clever mix of a legitimate business, mortgage brokerage, with... [Read More]

Tracked on Oct 12, 2006 7:14:07 AM

» When an Attorney Turns in a Client? from Legal Profession Blog
Posted by Alan Childress That's the question puzzling -- rightly I'd say, under California law -- Peter Henning over at the White Collar Crime Prof Blog (presumably a site not about law profs accused of white collar crime). In a [Read More]

Tracked on Oct 12, 2006 1:06:50 PM


Peter, here's the speculation I left over at Legal Profession Blog. I'm not necessarily endorsing these views and it's all speculative.

1. The lawyer concluded that the SEC ethics rules governed and were "supreme law of the land."

2. The lawyer concluded that some other state's rules governed.

3. The lawyer concluded he/she was under criminal investigation and/or threat from client and felt that California case law gave leeway to disclose.

4. The lawyer weighed up the risks of being held financially responsible for the Ponzi scheme and decided they out-weighed the risks of state bar discipline. Imagine, for example, the lawyer is near retirement, has a modest nest egg, and knows that the lawsuits will come fast and furious. While I don't applaud the thinking, a lawyer might vote his/her own pocketbook.

5. The Ponzi scheme entity had at least one "good" officer/director who authorized the disclosure.

Posted by: John Steele | Oct 12, 2006 4:52:04 PM

My mother lost over 100k in this scheme, she is 76 yrs old, when can she get her money back? Him going to jail for 5 years hardly seems like justice as he, his wife, and mother still have not returned what they stole in many cases from the elderly.

Posted by: lauren trosclair | Jan 29, 2010 9:18:41 AM

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