You Can't Cheat an Honest Man - James Walsh [135]
On February 13, 1984, involuntary bankruptcy petitions were filed against Dominelli, J. David and several related entities. Louis Metzger, a retired Marine Corps general, was named trustee to oversee the liquidation. A few weeks later, Dominelli was jailed for refusing to give up J. David assets. He was released, after agreeing to cooperate with authorities investigating the collapse of the scheme.
Beginning about May of 1984—and lasting almost ten years—several groups of burned J. David investors started bickering over which of their groups was most legitimate, who should represent them, and how the liquidation should be handled. After sorting through the disagreements, the trustee recognized investor claims of about $112 million in the bankruptcy action. However, none of the investors could be paid until money was recovered and creditors were repaid.
In March 1985, Dominelli pleaded guilty to stripping investors of $80 million through his Ponzi scheme. Although he’d made sophisticated promises, his actions were simple. He did little, if any, shelter-building or currency trading for his 1,500 investors. He simply paid early investors with money from later ones. A federal court sentenced Dominelli to 20 years in prison.
Dominelli suffered a stroke early in his sentence, while talking with Hoover by phone from jail. Not long after, Hoover married a wealthy man from central California who invested $2 million in her defense. She was eventually sentenced to 10 years in prison but served only 30 months because she cooperated with government investigators.
By early 1988, about $30.6 million had been recovered. The main source of this money had been the sale of company assets, including artwork, horses, several airplanes and cars. (One of the cars was a 1956 Gullwing Mercedes-Benz that brought $117,000.)
Of this money, about $8.4 million was used to repay secured debts. About $5.4 million was paid to lawyers, accountants and other professionals involved in the case. Another $1.5 million went to administrative costs and related fees. That left a little less than $15 million which would eventually go to investors and unsecured creditors. The trustee planned to keep that money until he’d explored settlements of various claims he had made against lawyers and accountants who’d advised J. David during its criminal heyday.
Allan Frostrom (who started out as Metzger’s assistant) completed the J. David bankruptcy proceeding in late 1993. Despite their complaints, the investors did pretty well—most got back about 82 cents on the dollar. Of this amount, about 20 cents came from liquidating company assets and 62 cents came from lawsuits against law firms and accountants. Most of the professional liability money came from the law firm of Rogers & Wells, which paid $40 million to make a flurry of J. David-related lawsuits go away.
One lawyer who represented some burned J. David investors said that the Rogers & Wells settlement was more than should be expected in the wake of a fallen Ponzi scheme:
That firm was looking at some major liability. There were boxes full of smoking guns showing that [its] lawyers had signed off on contracts and other documents they knew—or should have known—were bogus. Maybe they were just stupid. But there were so many documents that the stupid defense was going to be hard to make....
Rogers & Wells restructured its partnership after the J. David settlements. But one person who was with the firm at the time said it—like most J. David investors—was fooled by Dominelli and Hoover’s local prominence. For lawyers, that’s an expensive mistake.
CHAPTER 21
Chapter 21: Go After Banks and