Court Won't Dismiss Timber Ponzi Scheme Receiver's Suit Against Law Firm

A federal court has ruled that a national law firm must face a lawsuit brought by a court-appointed receiver over a collapsed timber Ponzi scheme that took in over $100 million from investors. Baker Donelson, which touts itself as the 74th largest law firm in the United States with nearly 700 attorneys, was one of the law firms that was linked to Henry Lamar Adams before he was arrested in 2018 on charges that his timber investment operation was nothing more than a massive Ponzi scheme that took in over $160 million from hundreds of investors. Alysson Mills, the Receiver for Adams’ company Madison Timber Properties (“Madison Timber”), has been tasked with recovering assets for the benefit of defrauded investors and to date has recovered approximately $20 million.

The Scheme

Adams touted Madison Timber to investors as a timber harvesting company that could provide annual returns ranging from 12% to 15% through the harvest of timber from plots of lands owned by third parties.  In many cases, investors were told that they had sole rights to timber harvested from specific plots of lands.  Investments were typically memorialized by a one-year promissory note that could be rolled over, a timber deed and cutting agreement, a security agreement, a tract summary with the purported timber value, and a title search certificate.  Adams ultimately raised over $160 million from 150 investors throughout the southeastern United States that would purportedly be used to purchase additional timber tracts.  

Many of these promises, however, were false. Adams never obtained the requisite harvesting rights to the land as he had claimed, and he also forged many of the investment documents provided to investors including the timber deed and cutting agreements as well as the tract summary showing the purported timber value.  In many cases, the same plots of land (to which he had no rights) were pledged to multiple parties.  Adams also misappropriated investor funds for unauthorized purposes, including for his own personal benefit and the development of unrelated construction projects in Oxford and Starkville, Mississippi.  New investor funds were also used to pay returns to existing investors - a classic hallmark of a Ponzi scheme. Adams was charged by civil and criminal authorities in May 2018, pleaded guilty, and was sentenced to a 20-year term in October 2018.

The Receiver’s Recovery Efforts

Following her appointment, Mills filed a number of actions against individuals and entities linked to Madison Timber. One of those lawsuits targeted law firms Baker Donelson and Butler Snow Mills as well as associated individuals and lawyers, alleging that the firms “lent their influence, their professional expertise, and even their clients to Adams…They made a fraudulent enterprise a fraternity.” After Butler Snow lost a motion to compel arbitration of the lawsuit in late 2019, the firm agreed to settle the Receiver’s claims for $9.5 million in early 2021.

The Receiver’s complaint described a seven-year relationship between Adams and two employees of Baker Donelson, Brent Alexander and Jon Seawright. Alexander served as a “Senior Public Policy Advisor” at the firm while Seawright was a shareholder and a member of the firm’s Board of Directors. According to the Receiver, Alexander and Seawright formed an investment fund in 2011 in which they pooled investor funds to invest with Adams. In turn, Adams agreed to share the returns with Alexander and Seawright. The fund was pitched to potential investors, including Baker Donelson clients, as an exclusive “friends and family” fund in which Alexander and Seawright were personally invested and had conducted extensive due diligence. The two men allegedly heavily leaned on Baker Donelson’s prestige and reputation in attracting investors, directing potential investors to view their biographies on the firm’s website and also using the firm’s offices and employees to carry out the fund’s operations. This included using the firm’s office to hold closings and make presentations as well as using the firm’s runners to pick up investor checks. Above all, investor funds were routed through the firm’s escrow accounts.

In reality, the Receiver alleged that neither Alexander nor Seawright had undertaken any significant investigation of the investments they were soliciting - even though the term sheets provided to investors specifically provided that the men’s fund would inspect the property and agreement with the specific timber mill. As the Receiver alleged:

Investors might fairly question what Alexander and Seawright did to investigate the investment. The reality is not much. In October 2017, Alexander bragged to a potential investor that “to our surprise, we have now financed the purchase of about $60 million in timber . . . It has worked so well that we simply send out an email on the 15th of each month and some hours later have collected the investment we need for the next round.”

In short, the Receiver alleged that Baker Donelson and the two men recklessly ignored numerous red flags.

Following Butler Snow’s settlement, the remaining defendants sought to dismiss the Receiver’s claims for civil conspiracy, aiding and abetting, recklessness and gross negligence, negligent retention, and vicarious liability.

In an order entered last week, U.S. District Judge Carlton W. Reeves denied Baker Donelson’s motion in its entirety while largely denying the motion filed by Seawright and Alexander. In the Order, the Judge found that the Receiver had adequately alleged the predicate to support her claims - including that the claim for civil conspiracy could stand given plausible allegations that Baker Donelson had “actual knowledge that Adams was running a Ponzi scheme.” The Order also denied the invocation of the in pari delicto defense, noting that the Receiver and the Receivership Estate were legally distinct from Adams and Madison Timber and thus entitled to assert claims that Adams and Madison Timber would be precluded from pursuing.

The case will now proceed to the discovery phase. A link to the Receiver’s website is here, and a copy of the Court’s Order is below: