Wealth Management Hedge Fund Case

I represent a diverse group of twenty investors  to recover the money they invested through Phillip Trujillo, a Ft. Collins, Colorado investment adviser, and also with a bank, trustee for a number of IRA accounts of our clients, who was involved with his crooked deals. Even though at the outset I believed the case against the bank was a fifty-fifty proposition, I won a settlement.  I prevailed against a dream team of Colorado Super Lawyers by building the case carefully from the beginning, working with the SEC, and organizing the group of investors so the whole case was greater than the individual parts.

Trujillo had a business selling membership interests in LLC’s styled as hedge funds, and worthless promissory notes in the hedge fund manager, his firm. Trujillo sold to the elderly, people he knew from church, and people who were referred by paid shills–including a tax accountant, real estate agent and chiropractor. Whenever he thought it might be effective, Trujillo was unstinting in his use of the name of Jesus as part of the sales pitch for his Biblical investment platforms and strategies.

The bank, through an informal tie-in arrangement, acted as IRA trustee for the folks who wanted to purchase the hedge fund in an IRA. The bank had an important role in the scheme. It executed the subscription paperwork, accepted investors money, paid it to the hedge fund, held the certificate or promissory note, issued account statements to investors and issued dividend checks to the investors. In several cases the bank completed documents that the investors signed in blank to sell out their old retirement investments and purchase Trujillo’s hedge fund without the knowledge or consent of the investor and in violation of the IRA account agreement. The bank’s motto was “[w]here a handshake still has meaning.”

The bank took on the added duties of providing the adviser with an accounting of investor subscriptions and handling the payables for each hedge fund.

The bank records, such as the hedge fund bank and account statements, and its internal reports for the hedge funds gave the bank inside knowledge of the funds' true finances – they were insolvent, and that Trujillo was misapplying funds. He was redeeming or paying off disgruntled investors with funds that were intended to have been invested in the platform.  

By the time I had the case, Trujillo was out of business and investors were upset that their calls went unanswered. Trujillo was already telling disaffected investors that the Lord had a plan to return their money. Our best recourse was against the bank, the only deep pocket. However, at that time Bernie Madoff’s victims were consistently losing against IRA trustees in federal court.

The clients were able to obtain some early return and leverage expense money by settling with the peripheral defendants — an attorney, accountant and others–on secondary liability claims. The effort became somewhat daunting when the mediator, a former district judge, told the investoers there was no case against the bank. I disagreed and redoubled my efforts. There was another unproductive settlement conference right before the scheduled trial.

There were many attempts to derail the case — bankruptcy filings by defendants, motions to dismiss, attempts to force arbitration and more. The defendants sent clear signals that they were “guilty as charged.” Not content with the usual attempts to obstruct our discovery, the adviser’s computer systems, computer storage and records conveniently disappeared, and a sales representative pled the fifth amendment at his deposition. We had to litigate discovery to get the bank's records.

We never lost ground even when we had to wait until the adviser’s was criminally tried and convicted (he was sentenced to sixteen years). I used the time to share our documents with the SEC. The SEC shared important evidence filed in its case, a big help in "following the money." I secured the assistance of former employees and associates of the adviser. I hired a top shelf expert–a former Colorado Securities Commissioner.

An energetic prosecution resulted in a persuasive case. We were ready to show that the bank knew Trujillo was selling a Ponzi scheme and continued helping him by concealing the scheme. We were prepared to demonstrate that the bank sent false account statements that mislead investors into believing they had a profitable investment that was generating a income. A trust officer completed and signed subscription agreements and transferred money to Wealth Management without the knowledge of investors or making any risk disclosure. We were ready to prove that the bank violated banking rules, bank policies, and its IRA account agreements in mishandling investor funds. We were prepared to show that the bank helped the adviser bring in investors despite knowing that at the time he was under investigation and that there was a federal injunction that should have prevented further sales.

We just kept grinding away, at one point causing a borrower from the hedge funds to repay its defaulted loans by threatening to embroil the borrower in our litigation. This provided money the SEC’s receiver paid out to all the investors. Eventually our clients obtained the remaining insurance of the bank. It was the proverbial settlement on the courthouse steps. We have judgments against other defendants that we may collect.

I am proud that we outperformed both the SEC and the Colorado Attorney General as far as recovering money, and prevailed despite all the doubters and opposition. It took an understanding of the securities and banking laws, collaboration, resourcefulness, persistence and courage to obtain this kind of result in a complex case.

At the sentencing hearing, the adviser’s Colorado Super Lawyer, who more than a few times had defended his disreputable client on fraud charges, told the judge what a good man the adviser was, and how his religious faith was absolutely genuine. He went on to say that his client intended to repay the investors (despite having had a few years to make things right), but he could not repay them if he had to go to prison! Many in that courtroom, including several of his victims were outraged by his tone deaf comments.

Even big time lawyers too readily twist reality just to make absurd arguments. Such disingenuousness, never to be confused with zealous representation, is an offense to the judge. Moreover, it has been reinforced too often in the minds of the public, creating a perception that members of the bar lack integrity, sensitivity to others and basic morals. Low public esteem for lawyers is a big problem that undermines our judicial system and ultimately threatens the rule of law.