Petition for Writ of Certiorari — Tew v. Arky

Supreme Court brief1988

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88-1 86 Supreme Court, U.S.

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JR,

. CLERK

In The

Supreme Court of the United States

October Term, 1988

ft).

THOMAS TEV, as Trustee for ESM Government Secur-

ities, Inc., and as Receiver for ESM Group, Ine. and

ESM Financial Group, Inc.,

Petitioner,

Vv.

ARKY, FREED, STEARNS, WATSON, GREER,

WEAVER & HARRIS, P.A., & EUGENE E. STEARNS,

Respondents.

PETITION FOR A WRIT OF CERTIORARI TO

THE UNITED STATES COURT OF APPEALS

FOR THE ELEVENTH CIRCUIT

co)

LAWRENCE A. KELLOGG

Counsel of Record

Jose’ R. Garcta-PEpRosA

Tew JORDEN SCHULTE & BEASLEY

701 Brickell Avenue

Miami, Florida 33131

(305) 371-2600

COCKLE LAW BRIEF PRINTING CO., (800) 225-6964

or call collect (402) 342-2831

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QUESTIONS PRESENTED

1. Is an attorney who has knowledge of a client’s on-

going fraud obliged to ensure that the fraud is

stopped, or at least to take precautions not to assist

the client in continuing the fraud?

2. When requested by a client to respond to an auditor’s

request for information, is an attorney obligated to

respond truthfully, or if a truthful response would

reveal a client confidence, not to respond at all?

TABLE OF CONTENTS

Page

OPINIONS BERRI] | uu: cncdvconteaasneneanenal 2

FU BES IOM . Sissiisciccissiticccnssistiedehieiie iene cepa iaadeenmaiate 2

STATEMENT OF TH Clie scecocieeeeeee 2

A. COURSE OF PROCEEDINGS AND DIS-

POSITION IN THE COURTS BELOW ... 2

B. STATEMENT OF THE FACTS 0 5

REASONS FOR GRANTING THE WRIT ................. 13

POINT I

THE ISSUES PRESENTED INVOLVE IM-

PORTANT PUBLIC Faso 13

POINT II

THE ABA “STATEMENT OF POLICY’? DOES

NOT GOVERN AN ATTORNEY’S DUTY TO A

CLIENT: AN ATTORNEY OWES A DUTY TO

ACT WITH REASONABLE CARE |... cm A 14

A. The ABA ‘‘Statement of Policy’? Does Not

Govern the Lawyer's Dat... 14

B. The ABA Statement is not a Mantle Protect-

ing a Lawyer’s Complicity in a Fraud _....... 18

POINT III

THE LOWER COURTS’ JUDGMENT ORDERS

CONFLICT IN PRINCIPLE WITH NIX V.

WHITBQGEE oon pea taaietshecslsiitieelas 21

POINT IV

SUMMARY JUDGMENT HAS DEPRIVED

PETITIONER OF THE OPPORTUNITY TO

PROVE ARKY, FREED’S KNOWLEDGE OF

ESM’S ONGOING FRAUD ..... Ns Nin toot 26

ill

TABLE OF CONTENTS—Continued

Page

EES TOTO LTT Oe A abi la

APPENDIX B ....... Gt tices saaiadhiisaadsaaamiaatasotiamaamentoe lla

ERE SE ee ET Te 13a

I a inch naldicecineipeitatliaohoonleaie 22a

SEE RL NS 24a

LI ee 27a

SES STE Sa aoe ee ee TE 31a

TABLE OF AUTHORITIES

Page

Albright v. Burns, 206 N.J. Super. ~ 503 A.2d

ee CA WG TINIE sabndccscnsenabaiiia eel enedianentieas 17

Fishman v. Brooks, 396 Mass. 643, 487 N.E.2d

Ie eee 16

Gerlach v. Donnelly, 98 So.2d 493 (Fla. 1957) WW... 26

Gleason v. Title Guarantee Co., 317 F.2d 56 (5th

Cir. 1963) ee a ee a 15

Gomez v. Hawkins Concrete Construction Co.,

623 F Sapp. 194 (N.D. Fla. 1995) —___. 16

In re Carter, Exchange Act Release No. 17597

Ee: Rat eee osc 23

McKissick v. United States, 379 F.2d 754 (5th Cir.

BEIT. cincceh tiscieaittetihiepaianinataiuiaientiamauuiadgna 22, 24

Nia v. Whiteside, 475 U.S. 157 (1986) ............. 2, 13, 23, 24, 26

Oberon Investments, N.V. v. Angel, Cohen and

Rogovin, 492 So.2d 1113 (8d DCA 1986), quash-

ef 8 B.S, Sy cere Dee 16

Ortiz v. Barrett, 222 Va. 118, 278 S.E.2d 833 (1981) ... 15

STATUTES

Te OE RSS ce rer 2

l‘lorida Code of Professional Responsibility DR7-

a caisiaitsostci nce ee seeeinnieiaehceenotiimanitl basen 26

Florida Code of Professional Responsibility DR7-

102(B)(1) (1985) 22. paeeinmecsiinabaisaas 17, 22, 25

TABLE OF AUTHORITIES—Continued

Page

OPINIONS

Florida Bar Comm. on Ethics, Advisory Opinion

TOD COREE D . sccnssnrsisinssenbsiebeieechinmadnanniadaaeniitadmeinnee 25

Florida Bar Comm. on Ethies, Advisory Opinion

82-3 (1982) siniieinips satiiaiipagclalsa elicit anata etd akan 25

New Jersey Supreme Court Advisory Committee

on Professional Ethics, Op. 591 (1986) 23

Books

Auditor’s Letter Handbook (1976) 15, 19, 20

No.

In The

Supreme Court of the United States

October Term, 1988

THOMAS TEW., as Trustee for ESM Government Seceur-

ities, Inc., and as Receiver for ESM Group, Ine. and

ESM Financial Group, ine.,

Petitione f

ARKY, FREED, STEARNS, WATSON, GREER,

WEAVER & HARRIS, P.A., & EUGENE E. STEARNS,

Re sponde nts.

PETITION FOR A WRIT OF CERTIORARI TO

THE UNITED STATES COURT OF APPEALS

FOR THE ELEVENTH CIRCUIT

Thomas Tew, as Trustee for the bankruptcy estate of

ESM Government Securities, Inc., and as equity receiver

for ESM Group, Inc. and ESM Financial Group, Inc., re

spectfully petitions for a writ of certiorari to review the

judgment in this case of the United States Court of Ap

peals for the Eleventh Circuit.

OPINION BELOW

The court of appeals’ per curiam affirmance of the

district court’s Judgment Orders is attached as Appendix

‘“*G’’, The Judgment Orders of the United States District

Court for the Southern District of Florida (Gonzalez,

D.J.) (App. ‘*C’’ and ‘‘D’’) are reported at 655 F.Supp.

1571 (SM. Fla. 1987) and 655 F.Supp. 1573 (S.D. Fla.

1987).

JURISDICTION

The jurisdiction of this Court is invoked under 28

U2, §1254(1). Certiorari is necessary to consider is-

sues of great public importance and to correct a conflict in

prineiple between the court of appeals’ affirmance of the

district court’s decision in this case and Nic v. White-

side, 475 U.S. 157 (1986).

STATEMENT OF THE CASE

A. Course of Proceedings and Disposition in the

Courts Below

From 1977 until 1985, the officers and directors of the

ESM Companies’ engaged in the most massive securities

fraud in United States history up to that time. The ESM

. Unless otherwise indicated, the terms “ESM” and “the ESM

Companies” refer to ESM Government Securities, Inc., ESM

Group, Inc., and ESM Financial Group, Inc.

eT |

Companies, located in Ft. Lauderdale, Florida, were se-

curities brokers which primarily sold government securities

to customers. In the aftermath of the ESM fraud, cred-

itors consisting primarily of financial institutions and

public bodies (such as municipalities, school boards and

taxing authorities) suffered losses exceeding $300 million.

One ESM customer located in Ohio, Home State Savings

Bank, collapsed due to ESM’s fraud. As a result, tlie

Ohio fund insuring deposits of Ohio-chartered savings and

loan associations also collapsed, thereby forcing the gov-

ernor of Ohio to declare the first bank holiday in the Unit-

ed States since the depression.

An essential element of the ESM fraud was the issu-

ance of false financial statements certified by Alexander

Grant & Company, a big-eight accounting firm. Such cer-

tified financial statements showed ESM to be financially

sound, while in reality the ESM Companies were hopeless-

ly insolvent. By keeping the ESM Companies in business

long after they should have been in bankruptcy, the of-

ficers and directors looted the ESM Companies of more

han $60 million through ‘‘loans’’, bonuses and excessive

salaries.

On March 5, 1985, the ESM fraud came to abrupt end

when the ESM Companies closed their doors and petition-

er, Thomas Tew, was appointed receiver for ESM Group,

Inc. and ESM Financial Group, Inc., and, later, trustee for

the Estate of ESM Government Securities, Inc. (** Re-

ceiver/Trustee’’). In this, one of the adversary proceed

ings instituted by the Receiver/Trustee for ESM, the Re-

ceiver/Trustee sued Arky, Freed, Stearns, Watson, Greer,

Weaver & Harris, P.A. and Eugene E. Stearns for making

it possible for the ESM fraud to continue by responding

to ESM’s auditors in a way that concealed what Arky,

Freed? knew about the true financial condition of the ESM

Companies. This petition for certiorari stems from the

eleventh circuit’s affirmance of a summary judgment en-

tered in favor of Arky, Freed on the following claims al-

leged in the Amended Complaint (App. ‘‘A’’):

Count Il: negligence, 2.e., legal malpractice, against

Arky, Freed;

Count II1:: breach of contract against Arky, Freed;

and

Count IV: negligence, 2z.e., legal malpractice, against

Stearns.

In the trial court, petitioner filed his own motion for

partial summary judgment against Arky, Freed based on

the undisputed fact that—at least as of January 21, 1985—

Arky, Freed knew (through its first-named partner, Ste-

phen W. Arky) of the true financial condition of ESM,

and failed to take any action in response to that knowl-

edge. To the contrary, Arky, Freed responded to ESM’s

auditors in a way that: (a) was false and misleading; and

(b) caused or contributed to the continuation of the ESM

fraud, to the detriment of the ESM Companies and their

creditors. The district court denied petitioner’s motion.

In the same order, the district court invited respondents

to file motions for summary judgment on their own behalf

on the basis of a lack of any duty of Arky, Freed to ESM

(App. ‘‘B’’), because of what the lower court perceived

2 Throughout this Petition, Respondents Arky, Freed, Stearns,

Watson, Greer, Weaver & Harris, P.A. and Eugene E.

Stearns shall be referred to collectively as ‘‘Arky, Freed.”

«+

to be the need to protect the confidentiality of attorney-

client communications.

Although motions based on lack of a duty would logic-

ally have disposed of the entire case against both defen-

dants, respondents filed motions for summary judgment

only as to the post-January 21, 1985 events. Those mo-

tions were granted by Judgment Orders dated I|*ebruary

26, 1987. (App. ‘‘C’’).

The case was then placed in the awkward position of

having been decided but not fully disposed of—as Arky,

Freed had not moved for summary judgment on the re-

mainder of the case. Subsequently, Arky, Freed filed a

motion for summary judgment on the remaining issues,

and the district court entered summary judgment on the

balance of petitioner’s claim. (App. ‘‘D’’). Petitioner

appealed the Judgment Orders to the eleventh circuit,

which on April 29, 1988, affirmed the order per curiam,

without opinion. (App. “G’’).

B. Statement of Facts

Prior to 1978, Arky, Freed was retained by the ESM

Companies as corporate counsel. The law firm acted as

general counsel to ESM until just before its collapse in

early 1985. During that period, Arky, Freed received a

monthly retainer as well as additional compensation on a

case-by-case basis.

As counsel to ESM Government Securities, Ine.

(‘“‘ESM Government’’), Arky, Freed agreed, among other

things, to disclose annually to Alexander Grant & Com-

pany—ESM’s auditors—certain information relevant to

the financial condition of ESM Government. Typically,

ESM Government’s management sent request letters to

Arky, Freed requesting that the law firm furnish to Alex-

ander Grant details of any pending or threatened litiga-

tion or claims. The letters also discussed ‘‘Unasserted

Claims and Assessments,’’ invariably stating manage-

ment’s belief that there were no unasserted claims against

ESM Government probable of assertion or which, if as-

serted, would have a reasonable possibility of an unfavor-

able outcome. Recognizing that Arky, Freed could dis-

agree with management’s assessment and reach a differ-

ent conclusion regarding such possible unasserted claims,

the letters further requested Arky, Freed to confirm to

Alexander Grant that ESM Government correctly under-

stood that Arky, Freed would advise and consult with

ESM Government ‘‘as a matter of professional responsi-

bility’’ to ESM in the event of any disagreement with

management’s belief that no claims existed. The letters

then reiterated:

We also inform you that we have represented to our

auditors that there are no unasserted possible claims

other than those listed above that you have advised

are probable of assertion and must be disclosed in ac-

cordance with Statement of Financial Accounting

3 For convenience, a copy of ESM’s January 31, 1985 audit

request letter to Arky, Freed is attached as App. “E”, and a

copy of Arky, Freed’s 1985 audit response letter to Alex-

ander Grant is included as App. “F’”’.

Standards No. 5 in our financial statements at Decem-

ber 31, 1984 and for the year then ended.‘

When Arky, Freed’s 1985 audit response letter was

prepared, Stephen Arky knew that management’s represen-

tation made to the auditors regarding unasserted possible

claims was untrue. On January 21, 1985, as the ESM

fraud was beginning to unravel, Arky met with the bank-

ruptey counsei for Ronnie R. Ewton (the ‘‘E’”’ in ESM),

ESM’s chairman of the board and controlling shareholder.

At the meeting, Ewton’s bankruptcy lawyer told Arky that

ESM had suffered massive losses and owed an estimated

$180 million to creditors, which it could not repay.

Arky also knew that a substantial portion of that debt

was owed to other Arky, Freed clients presently or form-

erly controlled by his father-in-law, Marvin L. Warner, in-

cluding Home State Savings Bank of Ohio. After learn-

ing of the astounding amount of debt on January 21, 1985,

Arky called Marvin Warner to tell him that things were

amiss at ESM. Warner immediately called Ewton, with

Arky secretly on the line as an undisclosed listener. In

that posture, Arky heard Warner and Ewton discuss the

massive losses at ESM. In that conversation, Warner de-

manded of Ewton an explanation for ESM’s financial con-

dition, and implored him not to tell anyone else about

ESM’s losses. Ewton testified:

4 The excerpt quoted is from the last request letter, relating

to the year ending December 31, 1984, but the same langu-

age (with a different year) appears in each request letter

from 1979 through 1983. Also, note the implication in

the quoted language that, if Arky, Freed advised that an

unasserted claim was probable of assertion, that claim

would be “listed above” and hence disclosed.

He [Warner] said to me, Ron, I’ve just got off

the phone with Steve. I can’t believe these numbers.

How did this happen? I said Marvin, the aceumn-

lated losses just got larger than life.

He says, Ron, ... do you realize this could be

the end of Home State? Do you realize this could put

the whole fund in jeopardy? I said, yes, I do realize

that.

He said, well, what are you going to do? I said,

I don’t know what I’m going to do.

He said, well, who have you talked to? I said, I

haven’t talked to anyone.

* * *

He said, well, one, don’t talk to anyone about this,

nobody.

Ten days later, on January 31, 1985, Arky, Freed re-

ceived from ESM Government’s management a request

for Arky, Freed to disclose to Alexander Grant informa-

tion regarding the financial condition of ESM Govern-

ment. In the request letter, ESM management falsely

represented that it had no knowledge of unasserted claims

against ESM Government. Despite its undeniable know]l-

edge that ESM Government had suffered $180 million in

losses, and could not repay that sum to its creditors, Arky,

Freed did not diseuss with ESM the fact that ESM Gov-

ernment faced the probable assertion of claims by such

creditors, including claims of Arky, Freed clients Marvin

L. Warner and institutions that he controlled. Nor did

Arky, Freed advise ESM Government that those possible

unasserted claims should be disclosed in ESM Govern-

ment’s audited financial statements. Nor did Arky, Freed

request the ESM Companies’ permission to disclose those

possible unasserted claims to Alexander Grant. Nor did

Arky, Freed eall upon the ESM Companies or their offi-

cers and directors to rectify the fraud being perpetrated.

Nor did Arky, Freed advise ESM management to discon-

tinue their fraudulent business operations. Nor did Arky,

Freed resign or even threaten to resign from the engage-

ment. Nor, of course, did Arky, Freed say anything to

Alexander Grant concerning the massive losses or possible

unasserted claims resulting from ESM Government’s fi-

nancial condition, even though Arky, Freed knew that ESM

Government had ‘‘[r]Jepresented to [its] auditors that

there [were] no unasserted possible claims .. .’’ (App.

ep?)

What Arky, Freed did do, on February 16, 1985, was

to sign and deliver a letter to Alexander Grant,’ falsely

stating that it knew of no unasserted claims probable of

being asserted, and confirming that if such claims existed

it would so advise and consult with ESM Government.

The response letter was a prerequisite to the issuance of

the ESM financial statement, and thus provided to the

auditors a missing item that they needed before the false

financial statements could be issued which, in turn, would

enable the fraud to continue. Arky knew of the importance

of the Arky, Freed response letter, not only becanse of his

5 The Arky, Freed response letter to Alexander Grant was

sent on February 16, 1985, well after all of the above knowl-

edge was imparted to Arky, Freed. Within two weeks,

Alexander Grant certified the ESM financial statement for

the year ending December 31, 1984—the last ESM financial

statement issued. Creditors relying on that statement con-

tinued to invest or made new investments with ESM, there-

by suffering damages, and increasing the claims against

the ESM corporate entities.

Pa biahty = et.

experience in corporate matters, but also because the man-

aging partner of Alexander Grant told him that the re-

sponse letter was a ‘‘pending item,’’ necessary for the

issuance of the ESM financial statement.

Based upon those facts, petitioner moved for summary

judgment as to damages suffered after January 21, 1985

events. However, January 21, 1985 was not the first date

upon which petitioner contends that Arky, Freed learned

of ESM’s insolvency and losses or of material unasserted

claims against ESM. The record is replete with evidence

of Arky, Freed’s knowledge of ESM’s financial condition,

and certain of its fraudulent practices, as early as 1977.

There are repeated instances of knowledge of specific

facts, which have individual as well as cumulative sig-

nificance. A summary of such evidence in the record is

as follows:

*** In 1977, Ewton told Arky that he and Robert

Seneca (the ‘‘S’’ in ESM) would have to use

customer margin money in order to fund the aequi-

sition of certain shares of stock by each of them

individually, and Arky assured Ewton that he

could make use of such customer margin money.

*** In 1977, the Securities and Exchange Commission

began investigating ESM for alleged excessive

markups, and Ewton expressed to Arky and to

Bruce Greer, another Arky, Freed partner, the

fear that the SEC investigation might uncover

the aforesaid use of customer margin money,

which if made known to the broker-dealer com-

munity would endanger ESM’s lines of credit.

*** Tn 1977, at a luncheon meeting between Ewton and

Greer, who was handling the SEC investigation,

Ewton explained to Greer the concept of ‘‘cus-

tomer margin money”’ using the silverware on the

at ane

***

table, and he told Greer why the revelation of the

officers’ use of such money would be devastating

to ESM. The spoon on the table wound up being

the ‘‘customer margin money’’ and was thereafter

referred to as ‘‘the spoon money.”’ In 1984, upon

being asked by Arky to use ESM customer margin

money to purchase stock in another financial in-

stitution controlled by Marvin L. Warner, Ewton

consulted with Greer, who asked Mwton ‘‘is this

the spoon money again?’’ When Ewton respond-

ed affirmatively, Greer advised Ewton in the

presence of Arky not to use it.

In Mid-1977, Seneea purchased certain bonds with-

out authorization from an ESM customer, who

later refused to accept them. In June of 1978, the

bonds were sold by ESM at a loss of some

$3,500,000 (more than ESM’s net worth). On

March 23, 1979, a meeting was held at Arky,

Freed’s offices at which time Ewton and Seneca

told Arky, Freed (represented at the meeting by

Arky, Greer, Stearns, and Gerald Cope) of the

losses incurred by the Seneca unauthorized trad-

ing.

In July of 1980, the divorce case of Seneca v.

Seneca was tried, with Stearns representing Mr.

Seneca, who had previously been forced out of

ESM for his unauthorized trading. Mrs. Seneca’s

expert witness, accountant Victor Karcinell, test-

ified that Mr. Seneca’s interest in the ESM com-

panies was of substantial value, although he had

received no money for it at the time of his disas-

sociation from ESM. Mrs. Seneca’s position was

that Ewton was secretly holding money for Seneca

until after the divorce case. Stearns cross-exam-

ined Karcinell, showed him certain financial docu-

ments of the ESM Companies, and got him to ad-

mit that the ESM Companies were broke! Stearns

won the case for Mr. Seneca on that basis.

*** In 1981, ESM was foreed to unwind its trans-

actions with Unity Savings & Loan Association of

Chicago, and Ewton told Arky that ESM had

difficulty in the unwinding and that Burton Bon-

gard, President of Warner-controlled Home State

Savings Bank, would be ‘‘helping’’ ESM out of

the ensuing crisis.

*** In 1983, Ewton complained to Arky that Arky’s

father-in-law, Marvin L. Warner, was demanding

that ESM return certain margin money belonging

to ESM customers and that ESM could not return

it.

*** In the fall of 1984, Ewton told Arky that ESM

could not unwind its transactions with American

Savings and Loan Association of Miami Beach, be-

cause ESM ‘‘didn’t have the money to unwind it.’’

Notwithstanding such knowledge, Arky, Freed an-

nually rendered to Alexander Grant false or misleading

response letters that failed to disclose what Arky, Freed

knew: that the ESM Companies were insolvent and/or

had suffered extensive losses and were therefore exposed

to substantial claims from customers. As a result, false

Statements of Financial Condition and Auditors’ Reports

for ESM Government—-which lay at the very heart of the

ESM fraud—were issued for the years ending December

31, 1978, 1979, 1980, 1981, 1982, 1983, and 1984.

REASONS FOR GRANTING THE WRIT

POINT I

THE ISSUES PRESENTED INVOLVE

IMPORTANT PUBLIC POLICIES.

The facts of this case illustrate the tension between a

lawyer’s duties of loyalty to and aggressive representation

of a client, and a lawyer’s responsibilities to the public

dealing with that client. While a lawyer must have loyalty

to a client, the extent of that loyalty must be commensur-

ate with the bounds of the law; a lawyer must not assist

a client in committing a crime. See, e.g., Nix v. Whiteside,

475 U.S. 157 (1986). This case presents fundamental is-

sues regarding how an attorney must act when confronted

with the ongoing fraud of his client, or the shareholders,

officers or directors of that client.

This case also casts doubts upon the reliability of at-

torneys’ responses to auditors’ inquiries of them, which is

essential to the accurate functioning of the auditing pro-

cess. If an attorney’s response cannot be relied upon by

auditors, in the ultimate analysis an accountant’s certifi-

cation of financial statements also cannot be relied upon.

Such audited statements are necessary to enable cor

porations—especially publicly reporting corporations—to

operate and flourish; they are essential to borrowing

money and, more importantly, to create trust and honesty

in business. In truth, they are a foundation upon which

American business rests. Thus, the negative implications

of this case are indeed far-reaching.

The result of the decisions of the district court and

the eleventh circuit is that a lawyer bears no responsibility

for professing to an auditor ignorance of any unasserted

claims against a client, while, in fact, having actual knowl-

edge of potential claims arising from an ongoing fraud of

the client’s officers and directors. A further implication

of the decisions is that a lawyer may not bear responsibil-

ity for assisting in perpetuating an ongoing fraud. Cer-

tiorari should be granted to examine and analyze these

unique facts and address the important, complex and fun-

damental issues that they raise.

POINT II

THE ABA “STATEMENT OF POLICY’’ DOES

NOT GOVERN AN ATTORNEY'S DUTY TO

A CLIENT: AN ATTORNEY OWES A DUTY

TO ACT WITH REASONABLE CARE.

A. The ABA ‘Statement of Policy’’ does not

Govern the Lawyer’s Duty

The district court decided that this case was gov-

erned by a ‘‘Statement of Policy Regarding Lawyer’s Re-

sponses to Auditor’s Requests for Information’’ promul-

gated by the American Bar Association. The statement

was issued after lengthy debate among lawyers and ac-

countants, and was a joint product of the ABA and the

American Institute of Certified Public Accountants. A\l-

though the statement was promulgated in 1975, remark-

ably this case is the first and only reported decision to

construe, analyze and apply it.

The district court, and the eleventh circuit, improperly

held that the statement ‘‘governs’’ the case. It does not.

Nothing in the law or in the ABA Statement warrants

such a ruling. Membership in the ABA is not, of course,

even mandatory for lawyers. Moreover, the ABA State-

ment itself recognizes in its paragraph 7 that the pro-

nouncements are ‘‘for the general guidance of the legal

profession’’ and that a lawyer may, in a particular case,

“elect to supplement or modify the approach hereby set

forth.” In fact, the ABA Statement does not even pur-

port to define an attorney's duty:

[N]o lawyer is obliged to enter into an understanding

with his client conforming to the ABA Statement of

Policy, nor is he obliged to confirm to the auditors

that such understanding exists.

ABA Statement of Policy; Second Report of the Commit-

tee on Audit Inquiry Responses Regarding Initial Imple-

mentation; reprinted in Audttor’s Letter Handbook, at 44

(1976). In addition, the note to the preamble of the

Statement recognizes that the standards contained therein

are merely ‘‘recommended by the American Bar Associa-

tion,’’ not mandatory.

The district court’s Judgment Orders inexplicably

and erroneously elevate the ABA Statement to the level

of ‘‘governing’’ attorney conduct. Rather, the ABA

Statement should be viewed as mere evidence of the

requisite standard of care.

An attorney's duty to a client is to exercise a reason-

able degree of care, skill and dispatch in carrying out the

services for which he is employed. See, e.g., Gleason v.

Title Guarantee Co., 317 F.2d 56 (5th Cir. 1963) (attor-

ney’s duty is measured by community standards of skill

and professional conduct); Ortie v. Barrett, 222 Va. 118,

278 S.E.2d 833 (1981). ‘‘Reasonableness’’ is judged by

the standard of professional conduct prevailing in the

community in which the attorney practices. See Gleason,

317 F.2d at 60. Thus, the ‘‘legal duty’’ owed by Arky,

Freed was the duty to use reasonable care, and the State-

ment of Policy is merely one factor to consider in deter-

mining whether that standard of care was met.

More persuasive evidence of the standard of care is

contained in the Code of Professional Responsibility. The

courts below erred in ignoring the ethical dictates of the

Code of Professional Responsibility in finding Arky,

treed’s actions to be immune from attack.

In contrast to the ‘‘recommended’’ standards of the

ABA Statement, compliance with the Florida Code of

Professional Responsibility is mandatory for Florida law-

vers like Arky, Freed. The preamble to the 1985 Code of

Professional Responsibility provides:

The disciplinary rules, unlike ethical considerations,

are mandatory in character. The disciplinary rules

state the minimum level of conduct below which no

lawyer can fall without being subject to disciplinary

action. (KMmphasis added).

Noncompliance can result not only in disciplinary action,

but also in liability for malpractice. For example, in

Gomez v. Hawkins Concrete Construction Co., 623 F.Supp.

194 (N.D. Fla. 1985), the court stated:

While the Code of Professional Responsibility does

not undertake to define liability of lawyers for pro

fessional conduct, it constitutes some evidence of stan-

dards required of them. Woodruff v. Tomlim, 616

F.2d at 924, 936 (6th Cir. 1980).

323 F.Supp. at 199. See also Oberon Investments, N.V. v.

Angel, Cohen and Rogovin, 492 So.2d 1113, 1114 n.2 (Fla

3d DCA 1986) (violation of the Code of Professional Re-

sponsibility is evidence of negligence), quashed on other

grounds, 512 So.2d 1113 (Fla. 1987); Fishman v. Brooks,

396 Mass. 643, 487 N.E.2d 1377, 1381 (1986) (violation of

Cannon of Ethics is evidence of attorney’s negligence) ;

Albright v. Burns, 206 N.J. Super. 625, 503 A.2d 386, 390

(App. Div. 1985) (violations of ethical standards set forth

minimum levels of competency, and failure to meet those

standards is evidence of malpractice).

Although the district court correctly stated that the

Code does not create a private cause of action, the court

erred in refusing to consider Arky, Freed’s violation of

the Code as evidence of negligence. Arky, Freed’s viola

tion of DR7-102(B) is undeniable. DR7-102(B), which

was applicable to Florida attorneys during the relevant

time frame, requires an attorney to call upon his client

to rectify a fraud or, if the client is unwilling or unable

to do so, to disclose it. DR7-102(B) provides, in pertinent

part:

\ lawyer who receives information clearly es

tablishing that:

(1) His client has, in the course of the representation,

perpetrated a fraud upon a person or tribunal

shall promptly call upon his client to rectify the

same, and if his client refuses or is unable to do

so, he shall reveal the fraud to the affected per

son or tribunal.

Arky received information clearly showing that ESM

was engaging in a fraud when Ewton’s bankruptcy lawyer

told him of ESM’s losses and when Arky listened in on

Ewton’s telephone conversation with Warner. By not

calling upon ESM or its principals to stop the fraud and

by not disclosing it if ESM or its principals refused to

do so, Arky, Freed violated DR7-102(B). Arky, Freed

went further than failing to attempt to end the fraud,

serena RO tae Ea

however. It assisted in enabling perpetuation of the fraud

by giving false and misleading information to the auditors.

By affirming the district court’s summary judgment, the

eleventh circuit allowed attorneys to avoid liability for

arguably rendering substantial assistance in a massive

securities fraud.

B. The ABA Statement is Not a Mantle Pro-

tecting a Lawyer’s Complicity in a Fraud

Although the ABA Statement may be considered as

evidence of the applicable standard of care, contrary to

the lower court’s rulings, it is not a mantle that protects

a lawyer’s complicity in a fraud. Rather, the ABA State-

ment recognizes that a lawyer’s professional responsibil-

ities may require disclosure or advising disclosure of a

wide range of matters. Paragraph 6 of the ABA State-

ment states:

Independent of the scope of his response to the audi-

tor’s request for information, the lawyer, depending

upon the nature of the matters as to which he is en-

gaged, may have as part of his professional responsi-

bility to his client an obligation to advise the client

concerning the need for or advisability of public dis-

closure of a wide range of events and circumstances.

The lawyer has an obligation not knowingly to par-

ticipate in any violation by the client of the disclosure

requirements of the securities laws. The lawyer also

may be required under the Code of Professional Re-

sponsibility to resign his engagement if his advice

concerning disclosures 1s disregarded by the client.

(Emphasis added). As the ABA Statement illustrates,

the lawyer’s function in undertaking to advise a client

about the need to disclose unasserted claims is to enable

the auditors to rely upon management’s representations

as to the existence or non-existence of unasserted claims.

The ABA Statement further states:

[N]o lawyer is obliged to enter into an understanding

with his client conforming to the ABA Statement of

Policy, nor is he obliged to confirm to auditors that

such an understanding exists; indeed, if no such un-

dertaking by the lawyer is seriously intended, tt would

be entirely wrong for the lawyer to do either. In such

event, however, the auditor will normally seek some

other means of obtaining from the lawyer or others,

including other lawyers engaged or employed by the

client, corroboration of the information furnished by

management concerning unasserted possible claims,

in order to satisfy himself concerning compliance by

the client with FAS 5.

ABA Statement of Policy; Second Report of the Commit-

tee on Audit Inquiry Responses Regarding Initial Imple-

mentation; reprinted in Auditor’s Letter Handbook at 44.

(Emphasis added).

Similarly, the First Report on the ABA Statement,

which explains the Statement, specifies that the auditor

will rely on the client’s assurance that it has disclosed all

unasserted possible claims that the lawyer has advised

are probable of being asserted. If the client has not dis-

closed all possible unasserted claims, the auditor may

rely on the attorney’s taking an appropriate “course of

action” to rectify the client’s failure to do so. Auditor’s

Letter Handbook, supra, at 36. Likewise, if the client

makes representations about advice that it has received

from its lawyers that is different from the advice actual-

ly given, the ABA Statement says that the lawyer should

tell the auditor that such matters “are not in conformity

with agreed procedures.” See Auditor’s Letter Handbook,

supra, at 36.

Thus, when an attorney confirms that he will consult

with the «iient about the need to disclose unasserted

claims, the auditor will depend upon that promise in re-

lying upon management’s representations that no un-

asserted claims exist. If an attorney does not promise

to consult with the client about disclosure, the auditor will

have te devise substitute methods to confirm the client’s

representations that no unasserted claims exist, or issue

a qualified opinion on the financial statement. If, as

here, an attorney falsely confirms that he will consult

with the client, the system breaks down; no alternative

methods of verifying management’s representations are

devised, and a qualified opinion is not issued.

In interpreting the ABA Statement, the district court

simply disregarded the above provisions. Here, the courts

interpreted the ABA Statement so as to protect client

confidentiality even where none existed. Yet, in so doing,

the district court failed to consider that Arky, Freed

could have maintained client confidentiality by refusing

to respond, or by qualifying its response, or by resigning.

If Arky, Freed had refused to respond to the audit in-

quiry or had contradicted the false representations made

by ESM’s management to the auditors, or had resigned,

the result would have been the issuance of a qualified

opinion on ESM’s financial condition, which might have

been unacceptable to ESM’s customers, Auditor’s Letter

Handbook, supra, at 45 n.2; ABA Statement 4; Auditor’s

Letter Handbook, at page 15, and might ultimately have

revealed the fraud as early as 1978—instead of 1985.

as anata

The lower courts’ rulings thus undermine the re-

liability of attorney responses to audit inquiries, and thus

render attorneys’ participation in the auditing process

a worthless exercise. The courts’ decisions allow an at-

torney to make untrue representations and promises to

an auditor under the guise of protecting client confiden-

tiality—without fear of suffering the consequences of his

actions.

POINT III

THE LOWER COURT’S JUDGMENT ORDERS

CONFLICT IN PRINCIPLE WITH

NIX V. WHITESIDE.

The crux of the district court’s ruling is the first

sentence contained in the preamble to the ABA State-

ment. Quoting the first sentence of the preamble, the

district court held:

‘*The public interest in protecting the confidentiality

of lawyer-client communications is fundamental’’. As

concerns this case, ‘‘[t]hat is the whole law; the rest

is mere commentary.’’ (citation omitted).

The court’s focus on attorney-client communications, how-

ever, was erroneous. There simply was no lawyer-client

communication to protect. When Ewton and Warner

spoke on the telephone on January 21, 1985, Arky was

a secret listener to that conversation. No ‘‘attorney-

client communication” oceurred. Nor was there any at-

torney-client communication involved when Stearns cross-

examined an opposing expert witness in open court during

a divoree trial in 1980, and persuaded the witness to admit

to ESM’s insolvency. Accordingly, there was no confi-

dentiality to protect—a point totally ignored by the lower

court.

Even had Arky, Freed learned of ESM’s insolvency

through attorney-client communications, public policy re-

quires disclosure, despite attorney-client confidentiality, in

the event of an ongoing fraud. This general policy also

prohibits lawyers from hiding ongoing frauds with mis-

leading audit response letters. Thus, even had Arky,

Freed’s knowledge about the ongoing fraud resulted from

a confidential communication, it should have acted differ-

ently when asked by ESM to respond to its auditors’ in-

quiries.®

As has been noted above, the ABA Statement explic-

itly recognizes:

The lawyer has an obligation not knowingly to partic-

ipate in any violation by the client of the disclosure

requirements of the securities laws. The lawyer also

may be required under the Code of Professional Re-

sponsibility to resign his engagement if his advice

concerning disclosure is disregarded by the client.

ABA Statement, paragraph 6. Once an attorney learns his

client is involved in a continuing fraud, the attorney has a

duty to take steps to rectify the fraud or to disclose it.

See, e.g., Florida Code of Professional Responsibility

DR7-102(B) (1985). McKissick v. United States, 379 F.2d

754, 761 n.2 (5th Cir. 1967) (lawyer had a duty to report

client’s perjury to the prosecuting authorities or to the

court). The public interest in requiring disclosures is

two-fold: first, the failure to act would result in the

6 It should be noted that in the letter requesting Arky, Freed

to provide information to Alexander Grant, ESM’s manage-

ment waived any attorney-client privilege to the extent nec-

essary to confirm the representations relating to unasserted

claims made by ESM’s management to Alexander Grant.

lawyer’s complicity in an ongoing fraud or a continuing

conspiracy by which the frand remains uncovered ;’ second,

disclosure would tend to prevent the continuation of a

wrong. See generally New Jersey Supreme Court Advis-

ory Committee on Professional Ethics, Op. 591 (1986) (a

lawyer has an inserent obligation to prevent a wrong, and

may not become involved in an ongoing fraud).

The eleventh circuit’s affirmance of the district

court’s decision in this case conflicts with the principles

espoused by this Court in Nia v. Whiteside, 475 U.S. 157

(1986). In Nia, this Court commented on the tension be-

tween attorney-client confidentiality and the duty to dis-

close under DR 7-102 of the Code of Professional Respons-

ibility :

Indeed, both the Model Code and the Model Rules

do not merely authorize disclosure by counsel of

client perjury; they require such disclosure. (cita-

tion omitted).

7 In this regard, the SEC has opined that a lawyer’s profes-

sional responsibilities may require him to persuade his

client to avoid or discontinue illegal conduct, and/or to

make disclosures sufficient to curtail such conduct. In In

re Carter, SEC Admin. Proc. File No.: 3-5464, Release No.

17597 (February 28, 1981), the SEC considered the ethical

conduct of attorneys for a collapsed public company who

had learned that the company had made misleading repre-

sentations of its financial condition. There the Commission

stated that if a lawyer becomes aware of his client’s contin-

uing failure to comply with federal securities law disclos-

ure requirements, “his continued participation violates pro-

fessional standards unless he takes prompt steps to end

the client’s noncompliance.” /d. at 45. The Commission

further stated: ‘[A] lawyer is not privileged to unthinking-

ly permit himself to be co-opted into an ongoing fraud and

cast as a dupe or shield for a wrongdoing client.” /d.

These standards confirm that the legal profession has

accepted that an attorney’s ethical duty to advance the

interests of his client is limited by an equally solemn

duty to comply with the law and standards of profes-

sional conduct.

475 U.S. at 168. Although the issne there was different

from that presented in the instant ease,’ the public policy

considerations are the same. As it was explained by this

Court, Arky, Freed’s ethical duty to its client is ‘‘limited

by an equally solemn duty to comply with the law and

standards of professional conduet.’’ 475 U.S. at 168.

The same tension between maintaining client confi-

dentiality and disclosing the continuance of a wrong was

commented on by the fifth cireuit in McKissick, 379 F.2d

754. In ruling that disclosure was required, the court

stated that a lawyer’s claim that he owed his client a para-

mount duty of non-disclosure [2.e., confidentiality] will not

exonerate him from failure to disclose his client’s perjury.

379 F.2d at 761, n.2 (quoting Jv re King, 7 Utah 2d 258, 322

P.2d 1095 (1958)). Thus, client confidentiality is not to be

protected at all costs. The duty to disclose and prevent a

continuing wrong is paramount to client confidentiality.

The eleventh cireuit’s affirmance of the district court’s

ruling erroneously makes client confidentiality superior to

all other interests, which clearly is incorrect in light of the

principles espoused in Naz.

8 The issue in Nix was whether an accused’s Sixth Amend-

ment right to counsel was violated when an attorney ad-

vised his client that if the client committed perjury, the

attorney would withdraw and would reveal the perjury to

the court. 475 U.S. at 157.

Florida Disciplinary Rule 7-102(B), which governed

Arky, Freed’s conduct in this ease, required disclosure

even of confidences of a client.? See, e.g., Florida Bar

Committee on Ethies, Advisory Opinion 82-3 (May 20,

1982), in which the committee stated:

{[U]nder the circumstances described in DR7-102(B)

of the Florida Code, an attorney is required to dis-

close even confidences or secrets of his client. The

Supreme Court of Florida, in adopting the Florida

Code in its present form, has recognized and mandated

this limited exception to the ordinary attorney-client

relationsbip in order to preserve the integrity of the

system of administration of justice.

See also Florida Bar Committee on Ethies, Advisory

Opinion 75-19 (March 15, 1977) (disclosure of a client

fraud upon the court is mandatory under DR7-102(B)).

In Opinion 75-19 the committee stated that ‘‘the attorney-

client privilege is not to be preserved at all costs, or at the

cost of the principles represented by DR7-102(B).’’ Id.

Furthermore, in no event does the ABA Statement

permit—nor should professional ethics permit—an attor-

ney to give false or misleading information to auditors.

The impact of the district court’s decision, and the

eleventh circuit’s affirmance, is to improperly shield an

attorney from liability for making untrue and misleading

statements regarding his knowledge of the insolvency of

9 Florida’s DR7-102(B)(1) differs from the ABA Modei Code

version of DR 7-102(B)(1) in that the ABA version specific-

ally excludes privileged communications from disclosure.

The absence of such exclusion from the Florida Disciplin-

ary Rule implies that disclosure of a fraud is mandatory,

even when confidential communications are involved.

his client, knowing that such statements will be relied

on by others. See Code of Professional Responsibility

DR7-102(A)(5) (a lawyer is prohibited from making

statements of fact known by him to be false) ; C/. Gerlach

v. Donnelly, 98 So.2d 493, 498 (Fla. 1957) (an ‘‘attorney

is under a duty at all times to represent his client and

handle the client’s affairs with the utmost degree of hon-

es *

Thus, the lower court’s protection of perceived con-

fidential communications between lawyer and client, in the

context of the facts of this case, conflicts with the ethical

principles set forth in Niz—as well as in the Code of

Professional Responsibility and the ABA statement.

POINT IV

SUMMARY JUDGMENT HAS DEPRIVED PE-

TITIONER OF THE OPPORTUNITY TO

PROVE ARKY, FREED’S KNOWLEDGE OF

ESM’S ONGOING FRAUD.

The district court granted summary judgment, and

the eleventh circuit affirmed, despite the clear existence

of genuine issues of material fact as to Arky, Freed’s

pre-January, 1985 knowledge of ESM’s insolvency and

ongoing fraud.’® Thus, the lower court’s rulings not only

misstated the law but also deprived petitioner of the op-

portunity to have the trier of fact pass judgment on the

reasonableness of Arky, Freed’s conduct. Consider in

that respect the evidence already in the record concerning

the conduct of three of Arky, Freed’s main partners:

10 Petitioner contends that there is no genuine issue of ma-

terial fact as to Arky, Freed’s post-jJanuary 21, 1985 knowl-

edge of ESM’s insolvency and ongoing fraud.

ee a eee,

Se ee ae

*** Arky’s knowledge began in 1977 and culminated

on January 21, 1985, when he secretly listened

to Ewton and Warner discuss ESM’s massive

losses.

*** Stearns won a case in 1980 by getting the oppos-

ing expert witness to admit that the ESM Com-

panies were insolvent.

*** Greer knew in 1977 that management of the ESM

Companies were using customer funds, which he

called “spoon money”; seven years later, he coun-

seled Ewton not to do it any more, even though his

partner (Arky) had asked Ewton to do it once

again.

By almost any standard, such conduct is at the very

least questionable. A trier of fact could well conclude

that it is unreasonable, even outrageous. Yet the lower

court’s ruling precludes any such conclusion. It does so

based on a misplaced emphasis on the need to protect

‘‘the confidentiality of lawyer-client communications,’’

without even the necessity of proving that such communi-

cations took place. The truth is that what Arky heard

secretly on January 21, 1985, and what Stearns argued

in open court in 1980 do not constitute ‘‘attorney-client

communications’’ to which any confidentiality could pos-

sibly attach. On this point, the lower court’s ruling is

not only erroneous, it is incomprehensible. At best, there

exists an issue of material fact as to whether Arky, Freed

acted reasonably in falsely responding to the auditors’

requests.

CONCLUSION

For the foregoing reasons, this petition for a writ

of certiorari should be granted.

July 28, 1988.

Lawrence A. Ketitoca

Counsel of Record

Jose’ R. Garcta-Peprosa

Tew Jorpen Scuvutre & Beasiey

Attorneys for Petitioner

701 Brickell Avenue

Miami, Florida 33131

(305) 371-2600

APPENDIX ‘‘A”

UNITED STATES DISTRICT COURT

SOUTHERN DISTRICT OF FLORIDA

FORT LAUDERDALE DIVISION

(CHAPTER 7)

CASE NO. 85-6254-CIV-GONZALEZ

ADVERSARY PROC. NO.

85-6898-Civ-GONZALEZ

IN RE

E.S.M. GOVERNMENT SECURITIES,

INC.,

Debtor.

THOMAS TEW, as Receiver for

E.S.M. GROUP, INC. and E.S.M.

FINANCIAL GROUP, INC.; and as

Trustee for the Estate of E.S.M.

GOVERNMENT SECURITIES, INC.,

Plaintiff,

vs. AMENDED COMPLAINT

ARKY, FREED, STEARNS, WATSON,

GREER, WEAVER & HARRIS, P.A.,

EUGENE E. STEARNS, AND BRUCE

W. GREER,

Defendants.

Plaintiff, THOMAS TEW, as Receiver for E.S.M.

GROUP INC. and E.S.M. FINANCIAL GROUP, INC.,

and as Trustee for the Estate of E.S.M. GOVERNMENT

SECURITIES, INC., sues Defendant, ARKY, FREED,

STEARNS, WATSON, GREER, WEAVER & HARRIS,

P.A., EUGENE E. STEARNS, and BRUCE W. GREER,

and alleges:

1. Plaintiff brings this action as equity Receiver of

E.S.M. GROUP, INC. (‘‘Group’’) and E.S.M. FINAN-

CIAL GROUP, INC. (“Financial”) and as bankruptey

Trustee for E.S.M. GOVERNMENT SECURITIES,

INC. (“GOVERNMENT”’) (hereinafter collectively re-

ferred to as ‘‘the E.S.M. Companies’’), pursuant to his

appointment as Receiver by Order of this Court dated

March 4, 1985, in an action entitled SECURITIES AND

EXCHANGE COMMISSION PLAINTIFF vs. E.S.M.

GROUP, INC... ESM. GOVERNMENT SECURITIES,

INC., ESM. SECURITIES, INC., E.S.M. FINANCIAL

GROUP INC., DEFENDANTS, Case No. 85-6190-Civ-

GONZALEZ, and as Trustee by Order of this Court dated

April 17, 1985, in the action entitled Jn Re ESM Govern-

ment Securities, Inc., Debtor, Case No. 85-6254-Civ-GON-

ZALEZ.

2. Jurisdiction is founded upon 28 U.S.C. § 1334(b),

28 U.S.C. § 157, and upon the doctrine of ancillary and

pendent jurisdiction. 28 U.S.C. § 754 vests authority in

the Receiver to sue in this District.

3. ARKY, FREED, STEARNS, WATSON, GREER,

WEAVER and HARRIS, P.A. (hereinafter “ARKY

FREED”) was at all relevant times a Professional As-

sociation incorporated under the laws of the State of

Florida and composed of attorneys practicing law in the

State of Florida. EUGENE E. STEARNS (“STEARNS”)

and BRUCE W. GREER (“GREER”) were at all rele-

vant times shareholders of ARKY FREED.

4. Government was a wholly owned subsidiary of

Group, and Financial was an affiliate of Group, in that

Financial was 100% owned by Ronnie Ewton, who in turn

: owned 62% of the stock of and controlled Group. The in-

terrelated corporate entities comprising the E.S.M. Com-

panies included the following:

(a) Grvup, a Florida corporation, a parent and

holding company for several subsidiaries which paid

certain operating expenses of its subsidiaries.

(b) Government, a Florida corporation, a se-

eurities broker-dealer trading in government secur-

ities and registered with the Florida Division of Se-

curities and other state securities commissions. It

is a totally-owned subsidiary of Group.

Florida corporation, a securities broker-dealer regis-

tered with the Securities and Exchange Commission

and a member of the National Associatior of Secur-

ities Dealers. It is a wholly-owned subsidiary of

(Froup.

(d) E.S.M. Aviation, Ine. (“Aviation”), a Flori-

da corporation, operated and/or owned executive air-

craft used by officers and directors of one or more

of the E.S.M. Companies. Aviation is a wholly-owned

subsidiary of Group.

(e) Finaneial, a Florida corporation, acted as

an operator and lessor of real estate as well as an

investment company. Its capital stock was owned

by Ronnie R. Ewton.

COUNT I

FIRST CLAIM FOR RELIEF

(11 U.S.C. §§ 547(b), 550)

5. The Trustee realleges paragraphs 1 through 4,

above.

6. On March 26, 1985, an involuntary petition for

relief under Chapter 7 of the Bankruptcy Code was filed

by certain creditors of Government, and on March 27,

1985, an Order for Relief was entered against Government.

7. On January 23 and 24, 1985, Government was in-

debted to ARKY FREED as a result of services rendered

to it by ARKY FREED during the months of April

through October, 1984.

8. On January 23, 1985, Government transferred

funds to Group to cover Government’s antecedent indebt-

edness to ARKY FREED. Group in turn transferred to

ARKY FREED on January 24, 1985, property totalling

$38,500.00.

9. The foregoing transfer to ARKY FREED through

Group constituted a transfer of Government’s property

within ninety days prior to the filing of the involuntary

petition.

10. The transfer to ARKY FREED was made at a

time when Government was insolvent.

11. The transfer to ARKY FREED enabled it to

receive more than if (i) the transfer had not been made

and (ii) ARKY FREED received payment on Govern-

ment’s indebtedness to it to the extent provided by U.S.C.

Title 11.

12. The transfer to ARKY FREED constitutes a

preferential transfer that may be avoided by the Trustee

pursuant to 11 U.S.C. §547(b) and recovered for the

benefit of Government’s estate pursuant to 11 U.S.C. § 550.

WHEREFORE, the Trustee demands judgment avoid-

ing the transfer to ARKY FREED pursuant to 11 U.S.C.

§ 547(b), awarding to Government’s estate the value of

the transfer pursuant to 11 U.S.C. § 550, and granting such

other and further relief as is just, including interest and

the costs of this action.

COUNT II

NEGLIGENCE: ARKY FREED

13. Plaintiff realleges paragraphs 1 through 4, above.

14. Prior to 1978, at a date not specifically known to

Plaintiff at this time, ARKY FREED was retained by the

E.S.M. Companies as corporate counsel. Such engage-

ment lasted until early 1985. As corporate counsel, ARK Y

I‘REED agreed, among other things, to disclose annually

to the accounting and auditing firm of Alexander Grant &

Company information material to the financial condition

of the E.S.M. Companies, and assumed the professional

re. ponsibility to the E.S.M. Companies to follow all re-

quirements and standards required by the American Bar

Association Statement: Lawyer’s Responses to Auditors’

Requests for Information (December 1975) (‘‘ABA State-

ment’’), the applicable requirements of the statement of

Financial Accounting Standards No. 5 (“FAS No. 5”),

and the Florida Code of Professional Responsibility, Dis-

ciplinary Rule 7-102 (‘‘D.R. 7-102’’).

15. As early as 1978, officers, directors, and/or em-

ployees of ARKY FREED knew that the E.S.M. Com-

panies were insolvent and/or were suffering extensive

losses. Notwithstanding such knowledge, ARKY FREED

annually rendered to said auditors false or misleading re-

sponse letters that failed to disclose that the E.S.M. Com-

panies were insolvent and/or had suffered extensive

losses, thereby enabling said auditors to render false and

misleading Statements of Financial Condition and Audi-

tors’ Reports for Government for the years ending De-

cember 31, 1978, 1979, 1980, 1981, 1982, 1983, and 1984.

16. In connection with its representation of the

E.S.M. Companies, ARKY FREED owed a duty to com-

ply with the E.8S.M. Companies’ requests and the afore-

mentioned standards and requirements in disclosing infor-

mation material to the financial condition of the E.S.M.

Companies.

17. ARKY FREED failed to exercise reasonable

care by virtue of the following acts and omission, among

others:

(a) Failing to adhere to its professional respons-

ibilities as set forth in the aforementioned requirements

and standards by failing to disclose information material

to the financial condition of the E.S.M. Companies and

known to ARKY FREED;

(b) Failing to use reasonable care in preparing

attorney response letters to auditors, to ensure that such

response letters accurately reflected matters known by

ARKY FREED materially to affect the financial condi-

tion of the E.S.M. Companies; and

be inaccurate, false, and/or misleading with respect to the

financial condition of the E.S.M. Companies.

18. ARKY FREED’s conduct in representing the

E.S.M. Companies fell below the legal community’s stan-

dards of professional conduct in South Florida for the

subject representation.

a i a

NES PED GED be

—=_™-».?x»krk,_

19. The acts and omissions complained of were com-

mitted by officers, agents, or employees of ARKY FREED

while engaged on behalf of ARKY FREED in rendering

professional service to the E.S.M. Companies.

20. As a proximate result of ARKY FREED’s afore-

mentioned conduct, the E.S.M. Companies suffered exten-

sive damage, the total amount of which has not been quant-

ified or segregated among the E.S.M. Companies, as fol-

lows:

(a) The business life of the E.S.M. Companies

was artifically prolonged beyond the point of insolvency,

which enabled the E.S.M. Companies to continue to sus-

tain additional trading losses, incur greater debt than

they otherwise would have, make unprofitable investments,

and suffered increased exposure to creditor liability, fur-

ther aggravating their insolvency and the dissipation and

diminution of their assets; and

(b) The prolonged existence of the E.S.M. Com-

panies caused additional funds to be pumped into said

companies and thereby enabled the officers and directors

to continue to withdraw money and loot the assets of the

E.S.M. Companies in the form of salaries, commissions,

bonuses, and loans for their own benefit and to the detri-

ment of the E.S.M. Companies.

21. But for the foregoing acts or omissions by ARKY

FREED, the E.S.M. Companies would not have been able

to prolong their business life and would not have suffered

the additional losses set forth above.

22. The damages suffered by the E.S.M. Companies

were a reasonably foreseeable consequence of the defen-

dants’ conduct. ARKY FREED knew or should have

known that the conduct complained of would cause or con-

tribute to the damages incurred as a result of the contin-

ued existence of the E.S.M. Companies despite their in-

solvency.

WHEREFORE, Plaintiff demands judgment against

ARKY FREED for the aforesaid damages suffered by the

K.S.M. Companies, as such damages may ultimately be

quantified and segregated, together with costs.

COUNT III

BREACH OF CONTRACT

23. Plaintiff realleges paragraphs 1 through 4 and

14 through 22, above.

24. Prior to 1978, at a date not specifically known to

Plaintiff at this time, ARKY FREED and the E.S.M.

Companies entered into an oral and/or implied contract

pursuant to which ARKY FREED agreed to act as cor-

porate counsel to the E.S.M. Companies, and the E.S.M.

Companies agreed to pay ARKY FRIED for its legal

services.

25. The aforesaid contract required ARKY FREED,

among other things, annually to disclose to the accounting

and auditing firm of Alexander Grant & Co. information

material to the financial condition of the E.S.M. Com-

panies.

26. ARKY FREED breached said contract by the

acts and omissions alleged in Paragraphs 17(a), 17(b),

and 17(c), above. The acts and omissions complained of

were committed by officers, agents, or employees of ARKY

FREED, while engaged on behalf of ARKY FREED in

rendering professional services to the E.S.M. Companies.

27. The aforesaid breach of contract has caused

damage to the E.S.M. Companies, as alleged in Paragraphs

20(a) and 20(b), above.

28. All conditions precedent required of the E.S.M.

Companies have been met.

WHEREFORE, Plaintiff demands judgment against

ARKY FREED for the aforesaid damages suffered by the

H.S.M. Companies, as such damages may ultimately be

quantified and segregated, together with interests and

costs.

COUNT IV

NEGLIGENCE: STEARNS

29. Plaintiff realleges paragraphs 1 through 4 and

14 through 22, above.

30. The'acts or omissions complained of by Plaintiff

and alleged in paragraphs 15 through 18, above, were com-

mitted, among others, by STEARNS or by persons under

his direct supervision or control, while rendering profes-

sional services on behalf of ARKY FREED to the E.S.M.

Companies.

31. Accordingly, Defendant STEARNS is personally

liable and accountable for such conduct, pursuant to the

provisions of Fla. Stat. ¢ 621.07.

WHEREFORE, Plaintiff demands judgment against

Defendant STEARNS for the aforesaid damages suffered

by the E.S.M. Companies, as such damages may ultimately

be quantified and segregated, together with costs.

10a

COUNT V

NEGLIGENCE: GREER

32. Plaintiff realleges paragraphs 1 through 4 and

14 through 22, above.

33. The acts or omissions complained of by Plaintiff

and alleged in paragraphs 15 through 18, above, were com-

mitted, among others, by GREER or by persons under his

direct supervision or control, while rendering professional

services on behalf of ARKY FREED to the E.S.M. Com-

panies.

34. Accordingly, Defendant Greer is personally liable

and accountable of such conduct, pursuant to the provi-

sions of Fla. Stat. § 621.07.

WHEREFORE, Plaintiff demands judgment against

Defendant GREER for the aforesaid damages suffered by

the E.S.M. Companies, as such damages may ultimately

be quantified and segregated, together with costs.

FRIEDMAN & LEHMAN, P.A.

Penthouse South

4500 Biscayne Boulevard

Miami, Florida 33137

General Counsel to Trustee

FINLEY, KUMBLE,

WAGNER, HEINE, UNDER-

BERG, MANLEY, MYERSON

& CASEY

777 Brickell Avenue

Suite 1000

Miami, Florida 33131

Attorneys for Receiver

/s/ By: Jose Garcia-Pedrosa

lla

APPENDIX ‘‘B’”’

UNITED STATES DISTRICT COURT

SOUTHERN DISTRICT OF FLORIDA

CASE NO. 85-6254-CIV-GONZALEZ

IN RE:

E.S.M. GOVERNMENT

SECURITIES, INC.,

Debtor.

THOMAS TEW, as Receiver for

E.S.M. GROUP, INC. and E.S.M. Adv. Pro. No.

FINANCIAL GROUP, INC. and as 85-6898-CTV-

Trustee for the Estate of E.S.M. GONZALEZ

| GOVERNMENT SECURITIES,

INC.,

Plaintiff,

vs.

ARKY, FREED, STEARNS

WATSON, GREER, WEAVER &

| HARRIS, P.A., and EUGENE

STEARNS,

Defendants.

ORDER

THIS CAUSE has come before the court upon the

parties’ Motions for Partial Summary Judgment. The

; court having considered the motions, the supporting mem-

: oranda of law and accompanying exhibits, and the argu-

ment of counsel, and being duly advised therein, it is

hereby

12a

ORDERED AND ADJUDGED:

1. As to Plaintiff’s Amended Motion for Partial

Summary Judgment, the court reserves ruling on Count

I, as this count was not argued before the court. Count

II and Count III of the Amended Motion for Partial Sum-

mary Judgment are DENIED as the court does not find

that the plaintiff is entitled to summary judgment as a

matter of law.

2. The motion for Partial Summary Judgment filed

by defendant Arky, Freed, Stearns, Greer, Weaver &

Harris, P.A. be and the same is DENIED. Defendants

are invited to file their Motion for Summary Judgment

within twenty (20) days of this Order. See 10A C.

Wright, A. Miller, & M. Kane, Federal Practice and Pro-

cedure: Civil 2d § 2720 (1983).

DONE AND ORDERED at Chambers, Fort Lauder-

dale, Florida, this 3rd day of November, 1986.

/s/ Jose A. Gonzales, Jr.

JOSE A. GONZALES, JR.

UNITED STATES DISTRICT

JUDGE

copies furnished counsel

l3a

APPENDIX ‘‘C”’

UNITED STATES DISTRICT COURT

SOUTHERN DISTRICT OF FLORIDA

CASE NO. 85-6898-CIV-GONZALEZ

THOMAS TEW, as receiver for

E.S.M. GROUP, INC. and E.S.M.

FINANCIAL GROUP, INC. and as

Trustee for the Estate of E.S.M.

GOVERNMENT SECURITIES,

INC.,

JUDGMENT

Plaintiff, ORDER

Vs. (Filed February

26, 1987)

ARKY, FREED, STEARNS,

WATSON GREER, WEAVER &

HARRIS, P.A. and EUGENE

E. STEARNS,

Defendants.

Defendant Arky, Freed, Stearns, Watson, Greer,

Weaver & Harris, P.A. (“Arky Freed”) has moved pur-

suant to Fed. R. Cov. P. 56 for partial summary judg-

ment on Counts II and III of the Amended Complaint

as to any liability resulting from the events of January

21, 1985, a date upon which plaintiff claims that Stephen

Arky, a former member of Arky Freed, learned of the

insolvency of ESM*.

* Unless otherwise indicated herein, the term “ESM” refers

to E.S.M. Government Securities, Inc., E.S.M. Group, Inc. and

E.S.M. Financial Group, Inc.

l4a

The court has considered the briefs, affidavits, depo-

sition testimony, and exhibits submitted by the parties,

as well as the arguments of counsel. The court finds

that there is no genuine issue of material fact and that

Arky Freed’s motion for partial summary judgment must

be granted as a matter of law.

Arky Freed owed no legal duty to disclose to ESM’s

auditors, Alexander Grant & Co. (“Grant”), Stephen

Arky’s alleged knowledge of ESM’s financial condition

purportedly obtained in a meeting attended by Mr. Arky

on January 21, 1985, approximately six weeks prior to

ESM’s collapse.

An attorney’s responsibility with respect to responses

to auditor’s inquiries is governed by the American Bar

Association “Statement of Policy Regarding Lawyer's

Responses to Auditor’s Request For Information” (“ABA

Statement”). The preamble of the ABA Statement reads:

“The public interest in protecting the confidentiality of

lawyer-client communications is fundamental.” As con-

cerns this case, “[t]hat is the whole law; the rest is mere

commentary.” Hillel, Pirke Avot (Ethics of the Fathers),

quoted in 14 Encyclopedia Americana 197 (1984).

The ABA Statement provides that an attorney is

authorized to disclose information to his client’s auditors

only where the client has both “specifically identified”

“in the [audit] inquiry letter or supplement thereto” a

particular unasserted claim or assessment, and has “spe-

cifically requested” comment by the attorney on that un-

asserted claim or assessment. ABA Statement, Paragraph

2. The requirement that the client both specifically iden-

tify and specifically request comment on the unasserted

lida

claim or assessment in the audit inquiry letter is predi-

cated on the ABA Statement’s fundamental concern with

preserving the confidentiality of attorney-client communi-

cations. Under the ABA Statement, an attorney has no

duty “to investigate . . . legal problems of the client, even

when on notice of some facts which might conceivably

constitute a legal problem ... .” nor should he “. . . . in-

clude information concerning the client which the lawyer

receives in another role.” ABA Statement, Commentary

to Paragraph 2.

There is no genuine issue of material fact that ESM

ever identified its financial problems in its auditor’s in-

quiry letters to Arky Freed, or requested Arky Freed

to comment thereon. In fact, the ABA Statements limi-

tations on an attorney’s duties were expressly contained

in both ESM’s audit inquiry letters to Arky Freed, and

Arky Freed’s audit responses. Furthermore, Mr. Arky

was not consulted or retained by ESM at the January 21,

1985 meeting, but rather was consulted concerning Mr.

Ron Ewton’s personal affairs. Failure to disclose under

these circumstances does not constitute either negligence

or breach of contract.

The plaintiff also relies upon the Disciplinary Rule

7-102(B) of the Florida Code of Professional Responsi-

bility to support his negligence theory against Arky

Freed. As the Florida Supreme Court has plainly stated:

“Violation of a [disciplinary] rule should not give rise to

a cause of action nor should it create any presumption that

a legal duty has been breached. .. . [The rules] are not

designed to be a basis for liability. . .. Accordingly, noth-

ing in the rules should be deemed to augment any sub-

l6a

stantive duty of lawyers or the extra-disciplinary conse-

quences or violating such duty.”

The plaintiff has failed to cite any case holding that

the Disciplinary Rules create a private cause of action,

and this Court is aware of none. Numerous cases hold that

the Disciplinary Rules do not create a private cause of

action. See, e.g., Bickel v. Mackie, 447 F.Supp. 1376 (N.D.

Ia. 1979), aff'd mem., 590 F.2d 341 (Sth Cir. i978); Mer-

rit-Chapman & Scott Corp. v. Elgin, Coal, Inc., 358 F.

Supp. 17, 22 (E.D. Tenn. 1972), aff'd, 477 F.2d 598 (6th

Cir. 1973); Nobel v. Sears, Roebuck & Co., 33 Cal. App.

3d 654, 109 Cal. Rptr. 269, 271-72 (1973). Thus, DR

7-102(B) imposed no legal duty upon Arky Freed.

Accordingly, the court hereby enters judgment in fa-

vor of Arky Freed dismissing with prejudice plaintiff's

claims in Counts II and III of the Amended Complaint

which arise out of the events of January 21, 1985.

DONE AND ORDERED in Chambers, at Fort Lau-

derdale, Florida, this 26th day of February, 1987.

s/ Jose A. Gonzalez, Jr.

Jose A. Gonzalez, Jr.

UNITED STATES

DISTRICT JUDGE

Copies furnished counsel

Oe eee

UNITED STATES DISTRICT COURT

SOUTHERN DISTRICT OF FLORIDA

CASE NO. &85-6898-CIV-GONZALEZ

THOMAS TEW, as Receiver for

E.S.M. GROUP, INC. and E.S.M.

FINANCIAL GROUP, INC. and as

Trustee for the Estate of E.S.M.

GOVERNMENT SECURITIES,

INC.,

JUDGMENT

Plaintiff, ORDER

Vs. (Filed February

26, 1987)

ARKY, FREED, STEARNS,

WATSON, GREER, WEAVER &

HARRIS, P.A,, and

EUGENE E. STEARNS,

Defendants.

Defendant Eugene E. Stearns has moved pursuant to

Fed. R. Civ. P. 56 for summary judgment in his favor on

Count IV of the Amended Complaint, the only count

brought against Mr. Stearns personally. The court has

considered the briefs, affidavits, deposition testimony, and

exhibits submitted by the parties, as well as the arguments

of counsel. The court finds that there is no genuine

issue Gf material fact and that Mr. Stearns’ motion for

complete summary judgment must be granted as a matter

of law. Mr. Stearns owed no legal duty to advise ESM’s

18a

auditors, Alexander Grant & Co. (‘‘Grant’’), of his alleged

knowledge of ESM’s* financial! problems.

An attorney’s responsibility with respect to responses

to auditor’s inquiries is governed by the American Bar

Association ‘‘Statement of Policy Regarding Lawyer’s Re-

sponses to Auditor’s Request For Information’? (ABA

Statement’’). The preamble of the ABA Statement reads:

‘‘The public interest in protecting the confidentiality of

lawyer-client communications is fundamental.’’ The re-

mainder o fthe ABA Statement is designed with this fund-

amental interest in mind. In this ease, ‘‘(t)hat [confi-

dentiality] is the whole law; the rest is mere commentary. ’’

Hillel, Parke Avot (Ethics of the Fathers) quoted in 14

Eneyeclopedia Americana 197 (1984).

The ABA Statement provides that a lawyer’s response

to an auditor’s inquiry ‘‘is properly limited to matters

which had been given substantive attention by the lawyer

in the form of legal consultation, and, where appropriate

legal representation ...’’ ABA Statement, Paragraph 2.

Indeed, the Commentary to Paragraph 2, which is an inte-

gral part of the ABA Statement, states that a lawyer’s

response ‘‘should not include information concerning the

client which the lawyer receives in another role.’’ The

ABA Statement also provides that an attorney is auth-

orized to disclose information to his client’s auditors only

where the client has both ‘‘specifically identified’’ ‘‘in the

faudit] inquiry letter or supplement thereto”’ a particular

unasserted claim or assessment, and has ‘‘specifically re-

* Unless otherwise indicated herein, the term “ESM” refers

to E.S.M. Government Securities, Inc., E.S.M. Group, Inc. and

E.S.M. Financial Group, Inc

19a

quested’’ comment by the attorney on that unasserted

claim or assessment. ABA Statement, Paragraph 2.

The requirement that the client both specifically ident-

ify and specifically request comment on the unasserted

claim or assessment in the audit inquiry letter is predi-

cated on the ABA Statement’s fundamental concern with

preserving the confidentiality of attorney-client commun-

ications. Under the ABA Statement, an attorney has no

duty ‘‘to investigate. . . legal problems of the client, even

when on notice of some facts which might conceivably con-

stitute a legal problem. ...’’ ABA Statement, Com-

mentary to Paragraph 2.

Here, there is no evidence that ESM ever retained Mr.

Stearns to devote substantive attention to its financial

problems. In fact, the record in this case establishes with-

out question that Mr. Stearns did virtually no work at all

for ESM. Accordingly, even under the ABA Statement,

it is patently clear as a matter of law that Mr. Stearns

owed no legal duty to disclose. Having rendered almost

no services to ESM—and never having been retained by

ESM regarding its financial problems—Mr. Stearns simply

cannot be sued for legal malpractice for not disclosing his

alleged knowledge of ESM’s financial problems. In addi-

tion, there is no evidence that ESM ever identified its

financial problems in its auditor’s inquiry letters or re-

quested comment thereon.

The plaintiff also relies upon the Disciplinary Rule

7-102(B) of the Florida Code of Professional Responsi-

bility to support his negligence theory against Mr. Stearns.

Plaintiff’s reliance on DR 7-102(B) is misplaced. The

Florida Supreme Court has plainly stated: ‘‘ Violation of

20a

a [disciplinary] rule should not give rise to a cause of

action nor should it create any presumption that a legal

duty has been breached. . . . [The rules] are not design-

ed to be a basis for liability. . . . Accordingly, nothing in

the rules should be deemed to augment any substantive

duty of lawyers or the extra-disciplinary consequences for

violating such duty.’’ Preamble to Chapter 4: Rules of

Professional Conduct.

The plaintiff has failed to cite any case holding that

the Disciplinary Rules create a private cause of action,

and this Court is aware of none. Numerous cases hold

that the Disciplinary Rules do not create a private cause

of action. See e.q., Bickel v. Mackie, 447 F. Supp. 1376,

1383 (N.D. Ia. 1978), aff’d mem., 590 F.2d 341 (8th Cir.

1978) ; Merrit-Chapman & Scott Corp. v. Elgin Coal, Inc.,

358 F. Supp. 17, 22 (E.D. Tenn. 1972), aff’d, 477 F.2d 598

(6th Cir. 1973) ; Nobel v. Sears, Roebuck & Co., 33 Cal App.

3d 654, 109 Cal. Rptr. 269, 271-72 (1973). Thus, it is clear

as a matter of law that DR 7-102(B) imposed no legal

duty upon Mr. Stearns for the breach of which he may be

held liable.

The court has considered the plaintiff’s remaining

factual and legal arguments and finds them insufficient

to defeat Mr. Stearns’ motion for summary judgment.

The court hereby enters final judgment dismissing with

prejudice Count IV of the Amended Complaint and this

action against Eugene E. Stearns, and awards Mr. Stearns

his costs of suit herein. The court expressly finds pur-

suant to Fed. R. Div. (sic) P. 54(b) that there is no just

reason for delay and expressly directs entry of this final

judgment of dismissal with prejudice of the entire claim

against Mr. Stearns.

2la

DONE AND ORDERED in Chambers, at Fort Lau-

derdale, Florida, this 26th day of February, 1987.

/s/ Jose A. Gonzalez, Jr.

Jose A. Gonzalez, Jr.

UNITED STATES DISTRICT

JUDGE

Copies furnished counsel

22a

APPENDIX ‘‘D”’

JNITED STATES DISTRICT COURT

SOUTHERN DISTRICT OF FLORIDA

FORT LAUDERDALE DIVISION

CASE NO.: 85-6898-CIV-GONZALEZ

THOMAS TEW, as Receiver for

E.8.M. GROUP, INC., and E.S.M.

FINANCIAL GROUP, INC.; and as

Trustee for the Estate of E.S.M.

GOVERNMENT SECURITIES, INC.,

Plaintiffs,

VS.

ARKY, FREED, STEARNS, WATSON,

GREER, WEAVER & HARRIS, P.A.,

Defendant.

JUDGMENT ORDERED

(Filed April 27, 1987)

Defendant Arky, Freed, Stearns, Watson, Greer,

Weaver & Harris, P.A., (‘‘Arky Freed’’) has moved pur-

suant to Fed. R. Civ. P. 56 for complete summary judg-

ment on Counts II and III of the Amended Complaint.

This Court on February 26, 1987, entered partial summary

judgment on those counts in favor of Arky Freed, and

complete summary judgment in favor of an Arky Freed

attorney who was sued personally. Arky Freed asserts

tuat the Court’s prior decisions control the instant mo-

tion. Plaintiff agrees, but argues that the Court’s prior

decisions were flawed. This Court has considered the

parties’ arguments, and remains convinced that its prior

decisions are correct and govern the instant motion. Ac-

23a

cordingly, the Court finds that there is no genuine issue

of material fact and, for the reasons stated in this Court’s

prior orders of February 26, 1987, the Court hereby enters

complete summary judgment in favor of Arky Freed dis-

missing with prejudice Counts IT and III of the Amended

Complaint, and awards Arky Freed its costs of suit here-

in. The Court expressly finds pursuant to Fed. R. Civ. P.

54(b) that there is no reason for delay and expressly di-

rects both the entry of this final judgment of dismissal

with prejudice of Counts II and III against Arky Freed,

and the entry of a final judgment of dismissal with preju-

dice under this Court’s February 26, 1987 order granting

Arky Freed partial summary judgment.

DONE AND ORDERED in Chambers, at Fort Lau-

derdale, Florida, this 28th day of April, 1987.

/s/ Jose A. Gonzalez, Jr.

Jose A. Gonzalez, Jr.

UNITED STATES DISTRICT

JUDGE

Copies furnished counsel

24a

APPENDIX ‘‘E”’

E.S.M. GOVERNMENT SECURITIES, INC.

January 31, 1985

Arky, Freed, Stearns, Watson, Greer,

Weaver & Harris, P. A.

One Biscayne Tower

Two South Biscayne Blvd.

Miami, Florida 33131

Gentlemen:

For purposes of verification in connection with an audit,

will you please furnish our auditors, Alexander Grant &

Company, with information relative to the matters set

forth below, which the companies regard as material, with

respect to which you have been engaged and to which you

have devoted substantive attention on behalf of the com-

panies in the form of legal consultation or representation,

including in your response such matters that existed at

December 31, 1984 and during the period from that date to

the date of your response.

Pending or Threatened Litigation

Please furnish details of any litigation or law suits in

which the companies are involved directly or indirectly,

and of any claims asserted against these companies even

though legal proceedings have not started, including (1)

the nature of the pending or threatened litigation, (2) the

progress of the matter to date, (3) the response which is

being made or which will be made to the matter, and (4) an

evaluation of the likelihood of an unfavorable outcome and

an estimate, if one can be made, of the amount or range

of potential loss.

25a

Unasserted Claims and Assessments

Management of these companies believe that there are no

unasserted claims which are probable of assertion or which,

if asserted, would have at least a reasonable possibility of

_an unfavorable outcome.

It is our understanding that in the course of providing

legal services for us regarding a matter recognized to in-

volve an unasserted claim, you may form a professional

conclusion as to the need to disclose such a possible claim

or assessment. It is also our understanding that whenever

you have formed such a conclusion, you will, as a matter of

professional responsibility to us, advise us and consult

with us concerning the question of such disclosure and the

applicable requirements of Statement of Financial Ac-

counting Standards No. 5. Please specifically confirm to

our auditors that our understanding is correct.

We also inform you that we have represented to our audi-

tors that there are no unasserted possible claims other

than those listed above that you have advised are probable

of assertion and must be disclosed in accordance with

Statement of Financial Accounting Standards No. 5 in our

financial statements at December 31, 1984 and for the year

then ended.

Please specifically identify the nature of and reasons for

any limitation on your response.

Other Matters

Please furnish our auditors:

1. Information about any financing statements filed

under the Uniform Commercial Code or any other as-

signment of the company’s assets.

26a

2. Amounts due you, if any, for services, whether billed

or unbilled.

A business reply envelope is enclosed for your convenience

in replying directly to Alexander Grant & Company, Cert-

ified Public Accountants, 1900 One Financial Plaza, Fort

Lauderdale, Florida 33394.

Very truly yours,

E.S.M. GOVERNMENT

SECURITIES, INC.

/s/ George G. Mead

Vice President

/kme

27a .

APPENDIX ‘‘F”’

January 31, 1985

Alexander Grant & Company

Certified Public Accountants

1900 One Financial Plaza

Fort Lauderdale, Florida 33394

RE: E.S.M. Securities, Inc., E.S.M. Government

Securities, Inc. and E.S.M. Group, Inc., (the

‘*Companies’’)

To Whom It May Concern:

We have been requested by George G. Mead, Vice Presi-

dent of E.S.M. Government Securities, Inc., to furnish you

with certain information in connection with your audit of

the Companies.

This letter and the information contained herein is being

submitted to you in connection with the preparation of

financial statements as of December 31, 1984. You are

not authorized to use this letter for any other purpose or

to provide copies of this letter to any other person or gov-

ernmental agency without the express written consent of

this firm.

While this firm represents the Companies on a regular

basis, our engagement has been limited to specific matters

as to which we were consulted by the Companies. Subject

to the foregoing and to the last paragraph of this letter,

we advise you that for the period ended December 31,

1984, and as of the date hereof, we have not been engaged

to give substantive attention to or represent the Com-

panies in connection with any material loss contingencies

coming within the scope of Paragraph 5 of the Statement

of Policy referred to in the last paragraph of this letter,

except as follows:

28a

United States of America v. One 1981 Rockwell Interna-

tional Commander 690C /840, Serial Number 11627, Civil

Number 82-A2—Tnited States District Conrt—North Da-

kota.

E.S.M. Aviation, Ine. (**E.S.M. Aviation’’) is a wholly-

owned subsidiary of E.S.M. Group. E.S.M. Aviation is the

owner of a 1981 Rockwell International Commander 690C /

840, Serial Number 11627. On December 20, 1981, the Rock-

well aircraft was seized by agents of the federal govern-

ment pursuant to 21 U.S.C. 881 for facilitating the trans-

portation of controlled substances. On the flight in ques-

tion, E.S.M. Aviation had leased the aircraft to Cav Air,

TIne., a licensed air carrier. Cav Air, in turn, had char-

tered the plane and provided a pilot to three individuals

who were arrested in Fargo, North Dakota, indicted and

convicted for federal narcotics violations. No employee of

E.S.M. Aviation or Cav Air has been implicated in any

wrongdoing.

On May 10, 1982, the United States of America com-

menced judicial forfeiture proceedings against the subject

aircraft, seeking to extinguish E.S.M. Aviation’s owner-

ship interest in the aircraft. On June 9, 1982, E.S.M.

Aviation answered the complaint for forfeiture and coun-

terclaimed for damages against the United States. On

August 3, 1983, E.S.M. Aviation moved for summary judg-

ment, arguing that the airplane is not subject to forfeiture

because it was being used as a common carrier and neither

the captain nor the crew was acting in concert or privity

with the persons transporting controlled substances. In

the alternative, E.S.M. Aviation argued that the airplane

is not subject to forfeiture because the owners did every-

29a

thing reasonably possible to avoid the airplane being used

in an unlawful fashion. On September 6, 1983, the Court

agreed in part with E.S.M. Aviation’s position. The

Court ruled that the flicht in question was conducted as a

common carrier and the burden therefore shifted to the

government to demonstrate that the owner or operator

was privy to or consented to the illegal transportation of

contraband. A trial on this sole issne cemmenced Febru-

ary 21, 1984. On February 24, a jury returned a verdict

in favor of E.S.M. Aviation and on February 27 judgment

was entered directing that the aircraft be immediately re-

turned to E.S.M. Aviation.

On March 8, 1984, the government moved for reconsidera-

tion of the trial court’s September 6, 1983 ruling that the

flicht in question was conducted as a common carrier.

Over E.S.M.’s objection, on Jnne 29, 1984, the trial court

reversed its earlier ruling, entered a directed verdict and

final judgment in favor of the government and ordered

forfeiture of the aircraft. On July 9, 1984, E.S.M. ap-

pealed the trial court’s ruling. On December 12, 1984, the

appellate court heard argument and, on February 8, 1985,

the appellate court reversed the trial court’s forfeiture of

the aircraft. The appellate court reinstated the jury ver-

dict and directed that the aircraft be returned to E.S.M.

Aviation.

As of December 31, 1984, the Companies had no outstand-

ing balance for services rendered by this firm.

This response is limited by and in accordance with the

ABA Statement of Policy Regarding Lawyers’ Responses

to Auditors’ Request for Information (December, 1975).

Without limiting the generality of the foregoing, the limi-

30a

tations set forth in such Statement on the scope and use

of this response (Paragraphs 2 and 7) and specifically in-

corporated herein by reference and any description herein

of any ‘‘loss contingencies’’ is qualified in its entirety by

Paragraph 5 of the Statement and the accompanying

Commentary (which is an integral part of the Statement).

Consistent with the last sentence of Paragraph 6 of the

ABA Statement of Policy and pursuant to the Companies’

request, this will confirm as correct that whenever in

the course of performing legal services for the Companies

with respect to a matter recognized to involve an unas-

serted possible claim or assessment that may call for fi-

nancial statement disclosure, we have formed a profes-

sional conclusion that the Companies must disclose or con-

sider disclosure concerning such possible claim or assess-

ment, we, as a matter of professional responsibility to the

Companies, will so advise the Companies and will consult

with the Companies conceraing the question of such dis-

closure and the applicable requirements of Statement of

Financial Accounting Standards No. 5.

Very truly yours,

ARKY, FREED, STEARNS, WAT-

SON, GREER, WEAVER & HAR-

RIS, P.A.

/s/ Arky Freed Stearns Watson

Greer Weaver & Harris, P.A.

ce: E.S.M. Securities, Inc.

E.S.M. Government Securities, Inc.

E.S.M. Group, Inc.

c/o E.S.M. Government Securities, Ine.

3la

APPENDIX ‘‘G”’

FOR THE ELEVENTH CIRCUIT

No. 87-5248

D.C. Docket No. 85-6898

IN RE: ESM GOVERNMENT SECURITI ES, INC.,

Debtor.

THOMAS TEW, As received for ESM GROUP, INC.,

and ESM FINANCIAL GROUP, INC., and Trustee

for the Estate of ESM GOVERNMENT SECURI-

TIES, INC.,

Plaintiff-Appellant,

versus

ARKY, FREED, STEARNES (sic), WATSON, GREER,

WEAVER & HARRIS,

Defendant-Appellee.

No. 87-5405

D.C. Docket No. 85-6898

In Re: E.S.M. GOVERNMENT SECURITIES, INC.,

Debtor.

THOMAS TEW, as Receiver for E.S.M. Group, INC.

and E.S.M. FINANCIAL GROUP, INC., and TRUS-

TEE for the Estate of E.S.M. GOVERNMENT SE.

CURITIES, INC.,

Plaintiff-Appellant,

versus

32a

ARKY, FREED, STEARNS, WATSON, GREER,

WEAVER & HARRIS, P.A.,

Defendants-Appellees.

Appeals from the United States District Court for the

Southern District of Florida

(April 29, 1988)

Before TJOFLAT and HILL, Cireuit Judges, and HALL",

District Judge.

PER CURIAM: AFFIRMED. See 11th Cir. R. 36-1.

* Honorable Robert H. Hall, U.S. District Judge for the Northern

District of Georgia, sitting by designation.

This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.