My time as a member of the Justice League

April 15, 2008 at 8:28 am (Random thoughts)

Where have I been? Was I just sitting by watching while my blog stats dropped like the US dollar? Not exactly.

Since February 26th I’ve been employed by the government for a special mission. During this time I’ve been told repeatedly that I may not divulge information about my task. However now that my job has finally come to an end I am free to discuss with you any information you’d be interested in hearing regarding my adventure.

I was on jury duty.

8 hours a day.

4 days a week.

7 weeks.

The very first thought that came to mind when I got that notice in the mail was, “Aww man, I’ve got to waste a day doing jury duty?”

The timing of it wasn’t too bad, my day was on a Tuesday, just about a week after Winter Camp and just a day before I had to give a final. Figuring I didn’t have too much work that day I decided to just head down there, sit, read and get it over with. I had no idea what “getting it over with” would get me into.

Rather than go through the entire narrative of the past 7 weeks I’m going to give you a brief outline as to what the case was about and in a separate post I’m also going to tell list several things I learned from my experience.

The case was called, Mark Augusta vs Henry Rossbacher

Here’s how it breaks down…

Mark Augusta was a securities salesmen (or broker) for a company called Miller and Schroeder from the late 80’s through 2000. He specialized in selling high-yield, tax-free municipal bonds to wealthy clients.

From 1996-1999 M&S began to underwrite and sell “heritage bonds”. Heritage was converting vacant hospitals to Alzheimer’s care facilities and seeking bonds to finance this. M&S sold over 140 million dollars worth of these bonds via salesmen like Mark Augusta.

Heritage turned out to be a bad company that bankrupted and all of the bonds defaulted.

This meant that there was 140 million dollars worth of angry clients out there. And since the only person the clients ever had any interaction with was their salesperson those clients began to sue their brokers. Mark Augusta just so happened to be one of the top sellers of Heritage bonds and he found himself looking down the barrel of hundreds of looming lawsuits.

PAUSE: Now at this point you’ve probably thought to yourself something about how messed up the judicial system is that anyone who wants to can just sue whoever they want to but I want to clarify. The above mentioned “lawsuits” of clients suing their brokers aren’t done within a traditional courtroom with 12 jurors and a judge and everything. Instead they are handled in arbitration’s with the NASD (except the NASD, National Association of Securities Dealers has since changed it’s name to FINRA, Financial Industry Regulatory Authority).

Anyway Mark Augusta went through three arbitration’s in the fall of 2001 regarding his liability in his clients losing hundreds of thousands of dollars. He lost those arbitration’s and was ordered to pay a total of over 4 million dollars.

After going 0 for 3 on arbitrations he did what any reasonable person would do when facing the prospects of going 0 -100, he filed bankruptcy.

OK, so where does Henry Rossbacher and my trial come in?

When Mark Augusta was first sued his company, M&S realized that they were going to have a large number of lawsuits concerning these Heritage matters. They hired one of the biggest and best law firms in Minnesota, Faegre and Benson, to represent Mark and other salespeople in the upcoming arbitrations (The reason they hired a Minnesota firm was because M&S’s main office was in Minn while Mark Augusta and most of the Heritage sellers worked at the Solana Beach office here in CA). The lead attorney on the case was a man named Bob Schnell. Bob Schnell knew he had to have a local license to be able to represent in arbitrations in the state of CA so he retained Henry Rossbacher. Schnell, as lead counsel, would direct Rossbacher, as local counsel, to perform certain tasks whenever they were necessary, but he wouldn’t have him do too much since he had a whole team of lawyers working on the case back in Minn.

About a month before the arbitration dates came around M&S switched law firms and instead of Bob Schnell they got a man named Lindsay Arthur to be the lead counsel. He simply inherited all the work that Faegre and Bensen had done in preparing a defense and then came over to CA and defended Mark Augusta as best he could.

Arthur, also employed Rossbacher, but again in a very limited sense. In fact he really didn’t know anything about Rossbacher except that Schnell told him “you have to have someone with a CA license to be with you at the arbitrations”.

Rossbacher didn’t actually show up at the arbitration dates, instead he sent his associate Jim Cahill. Cahill would introduce himself at the beginning of the arbitration (thus being a present CA license) and then Arthur would present his case.

As mentioned earlier Mark Augusta lost all these cases. You may ask yourself, what was the defense prepared by Schnell and presented by Arthur? If you did you’re astute because that’s a very good question.

In arbitrations, like all lawsuits, the defense will match the claims brought against it. The clients who lost money were claiming that the reason they lost money was because Mark Augusta sold them “unsuitable” bonds.

Suitability- It is a rule that every broker knows. It’s one of the simplest of all concepts. It means, “know your product, know your client”. If you know a product has a “high degree of risk” and you know your client has a “low risk tolerance” then suitability demands that you not sell the risky product to the conservative investor.

Makes sense right?

Also makes it a fairly straightforward defense doesn’t it?

Well since Mark lost those arbitrations we can say it was obviously very clear to the arbitrators that he sold his clients unsuitable bonds…

OK so now we get to our case.

Mark Augusta is suing Rossbacher for fraud, misrepresentations and breach of fiduciary duty. Essentially Augusta claims that had Rossbacher disclosed to Augusta material information that he knew then he could have prepared a more successful defense and not have lost his arbitrations. (The defense he claims he was denied by Rossbacher is a “blame the bosses” defense. He alleges that his bosses told him the bonds were suitable and safe and since he thought they were safe he had the right to sell them to his conservative clients.)

The losses from those arbitrations along with legal fees totaled over 4 million dollars. Augusta also claims loss of earnings due to a negative reputation gained from these losses of about 10 million dollars.

Our job during the past 7 weeks was to listen to the evidence and decide if Mark Agusta’s claims were valid and Rossbacher should be held liable.

If we sided with Augusta then Rossbacher would have to pay him 14 million dollars.

If we sided with Rossbacher then Augusta would get nothing.

That’s a very brief summary of the case and there are lots of time frames, and dollar signs omitted but in general that’s what you’d hear from all the jurors. So taking your general understanding of the case, which way do you think you’d vote?

If you want to know what the verdict was tune in tomorrow for my post on what I learned in jury duty, which will also contain mine (and 10 other jurors) verdict. Yep, we had one who didn’t agree with the rest of us, but in civil trials all you need is 9.

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15 Comments

  1. Tim Sloan said,

    My vote would be judgment for the plaintiff. Augusta prevails; Rossbacher, Schnell, Faegre and Benson appeal, and the next round begins.

  2. Albino Hayford said,

    Gotta go with the plaintiff.

    Wow, Daniel, I thought 2 weeks of life to jury duty in 2006 was a long time.

  3. Bruce S. said,

    How could Augusta get a lawyer for his case since this lawyer would realize that Augusta would (or might) sue him if he loses? Kinda like divorcing your wife in order to marry your mistress who cheats on her husband by committing adultery with yourself.

    I am really surprised this went to trial. How long would the justice system hold up if every criminal that lost a judgment could sue his attorney, unless it was “arbitration” that started this mess and not a court proceeding and that changes the rules of the game.

    I can’t make any determination in this case without the judge’s instructions regarding what the law says. However, my gut feeling is that caveat emptor must apply here and Augusta must accept the fact that he should have hired a better defender.

  4. Bruce S. said,

    Besides, this whole argument is based on Augusta claiming that had the “bad bosses” defense been used he would have been guaranteed victory. That seems speculative and it seems highly unusual that these high powered attorneys e.g. Rossbacher would have been unaware of such a simple air-tight ploy.

  5. danielbalc said,

    With regards to Tim’s comment it should be clarified that in our trial only Rossbacher was being sued, not Schnell or Faegre and Benson.

    unless it was “arbitration” that started this mess

    Actually it was the defaulted bonds that started the mess but again our trial was focused on the arbitrations and whether or not Augusta got a fair trial (did Rossbacher zealously defend his interests?).

  6. danielbalc said,

    That seems speculative and it seems highly unusual that these high powered attorneys e.g. Rossbacher would have been unaware of such a simple air-tight ploy.

    also part of the problem. The accusation is that Rossbacher, in working for the “bad bosses” intentionally set up Mark Augusta to take the fall. Thus Rossbacher was aware of this defense but “intentionally withheld the information” Thus the claim he committed Fraud, Breach of Fiduciary duty and at the very least negligence.

  7. Bruce S. said,

    So wouldn’t Rossbacher be subject to disbarment over this – a conflict of interest etc.?

    I find it interesting that this:

    He alleges that his bosses told him the bonds were suitable and safe and since he thought they were safe he had the right to sell them to his conservative clients

    apparently didn’t come up in the original arbitration hearing.

    It seems to me that Augusta should have smelled a rat from the beginning. He must have seen that his defender was hired by the very group (his employer ) that he felt was culpable all along.

    And how about this: “M&S switched law firms” – so why should Augusta expect to recoup attorney fees if his bosses retained these law firms? Or are they talking about subsequent attorney fees?

    Now, the Nuremberg defense (blame the bosses) is known in other cases to be invalid. How about in civil trials like this one? So, did the judge explain what the law says?

  8. danielbalc said,

    Wow Bruce I’m impressed, you would’ve been a great juror on this case.

    You’ve dug up another portion here. The arbitrations weren’t aimed individually at Augusta but at Augusta AND Miller and Schroeder. Also Miller and Schroeder was paying all the legal fees for Augusta and had offered indemnification (but they bankrupt before the award came out so Augusta got stuck with the judgment).

    He must have seen that his defender was hired by the very group (his employer ) that he felt was culpable all along.

    yes and no. That was part of the difficulty in the case. when did he see that he had a potential defense on the basis of bad bosses? To be honest his testimony on this was very inconsistent.

    apparently didn’t come up in the original arbitration hearing.

    No it never came up that’s the point.

    Our job was to take this new defense and put it into the arbitrations and ask if the results would’ve been different.

    Rossabacher claims he didn’t see a conflict of interest because the interest of Augusta were the same as the interest of M&S (at least as he saw it). The accusation of Augusta is that Ross knew it all along and set him up to go down thinking he wouldn’t have the know how to figure out he had just been screwed.

    and the judge did a very good job of explaining the law to us. He was a great judge and I’m grateful that he’s out there.

    I’m not going to say just yet what he read to us however because it would make it obvious which way we voted.

  9. Echo_ohcE said,

    Well, I don’t feel like I have the whole story.

    Nonetheless, I’ll speculate a little, because it’s kind of fun. Great post Daniel.

    It seems to me, and this is my gut talking, not objective facts, because I’m not sure I have the whole story, but it seems to me on the surface that Augusta is sort of acting like Adam a little bit, when God comes in judgment and confronts him about eating the fruit, and instead of taking responsibility for himself, says to God that it’s his fault, because the woman YOU gave me deceived me and I ate.

    On that grounds, if that analysis is correct, then let Augusta’s lawyer go free, and let Augusta pay what he’s supposed to pay.

    However, I have questions before I’d call that my “final answer”.

    1. Why did Augusta have to pay anything at all in the first place? Augusta didn’t defraud people, but the company who issued the bonds did.

    2. Unless of course Augusta was in on the scam, if in fact it was a scam, and knew full well that he was screwing people when he sold them the bonds. If he was in on it, the judgment against him for 4 million was just, and he should shut up and take his medicine and be glad he’s not in jail. But if he wasn’t in on it, then he’s not culpable for any of it. (Though in good faith, it would be the morally right thing to do to at least restore to people whatever gain he made off of it, even if he wasn’t in on it. It’s just the right thing to do.)

    It sounds to me like Augusta’s claim boils down to this: my bosses knew that this was all a scam, but I didn’t, and they hired this lawyer to “throw the fight” in order to make me a patsy. He’s painting himself like an innocent victim, when in fact he might not be.

    He’s clever, and his lawyers are clever to try to focus the case on the precise issue of whether or not he was provided with the best defense his attorneys were capable of. While that seems to be the main issue you were given to judge, it seems to me of only secondary importance. The most important question here is whether or not Augusta knew people were being defrauded and thus participated in the fraud.

    Because if he is guilty of fraud, then he should be made to pay, and the judgments against him are just.

    Now, let’s assume that he is guilty of fraud, now what about the question put before you? What about Rossbacher? Well, if Augusta is guilty of fraud, and Rossbacher threw the fight to make him the fall guy for Augusta’s bosses, then Augusta should still pay, but charges of fraud should be brought against Augusta’s bosses, with Rossbacher as an accomplice. I don’t see Rossbacher justly having to repay Augusta in this scenario.

    But what if Augusta is pure as the driven snow in all of this, and is truly a victim? Then Augusta should not have to pay, but his bosses should, with Rossbacher as an accomplice, perhaps in an obstruction of justice sense.

    But it seems clear that Augusta and his lawyers have deliberately shifted the focus away from Augusta’s guilt or innocence, by focusing merely on the quality of Rossbacher’s defense. I bet the arguments you heard probably implied that Augusta’s guilt or innocence wasn’t the issue, that it wasn’t the point, but only whether or not this other defense tactic would have worked better.

    This is why I think Augusta is probably guilty, and that he knew he was defrauding people. It seems likely from the nature of the focus of the issues. Notice that he didn’t sue his bosses or people involved in the company that issued the bonds, but he sued his lawyer.

    But it seems to me that if he wanted to accuse his lawyer of truly being negligent in his duties, then such a charge should be brought before the bar association first. Let them decide, and then, if he is disbarred, then Augusta would have a great deal of evidence on his side in this case.

    But my guess is that he was advised not to do that. If the Bar Association acquitted Rossbacher of wrongdoing, then Augusta would have no chance of winning his suit.

    Everything I think about from what you’ve written here seems to point to one conclusion: Augusta is guilty as sin, and is trying to lessen the consequences by shifting blame to others, and trying to get them to pay for his debts that he has incurred in the process. I’m sure he even convinced himself that he was unjustly judged, but it seems clear from the way he approached this whole thing that he’s just trying to keep whatever money he can from this whole thing.

    It sounds to me like he made a lot of money by defrauding people, and got caught, and now he’s trying to spread the blame around, because now he’s going to need to retire, and he needs enough money to do it.

    It seems to me from what you’ve said that Augusta’s got no right to retire with 14 million in the bank. That’s just plain wrong. (If I’m right and he’s guilty of fraud in the first place that is.)

    And by the way, my brother is in a similar line of work as Augusta, and I’m sure he’d say that he knew exactly what he was doing. The amount of money involved tells me that Augusta isn’t exactly a junior member of the firm, but a senior member, probably one of the bosses himself. He’s not the little guy. That means he knew what was going on, because when you’re making millions of dollars in fees, you know what’s going on. You know what you’re doing. You’ve been doing it for 15-20 years, and you’ve got the experience to shoulder that kind of responsibility, and you’ve built up a network of people that trust you over a very long time. Furthermore, far from being the poor guy just trying to eek out a living, he probably comes from money, because guys in that line of work need to bring some previously held network to the table in order to be successful. Guys that don’t already know a lot of rich people that trust them have a very hard time getting off the ground in that line of work.

    So forgive me, but my heart just doesn’t bleed for Augusta. Perhaps he’s guilty, and his argument is that with a better lawyer, the consequences of his actions would have been less severe. That seems to be the substance here. Such a man isn’t interested in justice, but simply preying upon the people that trusted him with their hard earned money.

    Instead, he ought to be glad he didn’t lose his license.

    He is right about one thing though. That line of work is completely dependent upon your personal reputation, which is now ruined. He is unable to continue in that line of work, because starting from scratch for him would be more trouble than it was worth at this point. So like I said, he’s looking for a payoff, so he can retire. But he is seeking to do so at the expense of justice.

    E

  10. Echo_ohcE said,

    I have to say one more thing for those of us who actually are interested in the pursuit of justice.

    Let’s say that Augusta truly is as pure as the driven snow. Let’s say that he has a keen sense of justice, and longs to do the right thing, even when it costs him something. Then what would he have done?

    We know that he collected percentage fees from his sales of these bonds. That’s how he makes his living. Had he found out that he had unwittingly participated in fraud, he should have given back to all of his customers whatever fees he received. It would have been a show of good faith. He could say, “Look, I had no idea this was going to happen, and I was an unwitting accomplice. Here is the money that I made from your purchase of these bonds. I know it is small consolation, but far be it from me to be a part of fraud.”

    If he had done that, he would have immediately regained the trust of most of his network, and they would have seen him as honest and willing to do the right thing. They would be happy to trust him with their money in the future. Why? Because at tremendous cost to himself, he had proved his innocence, and renounced the “blood money” he had received. He would have been able to continue in that line of work, even if he would have a temporary setback, a rough year, so to speak.

    But he didn’t do that. That would have been the right, just, and honest thing to have done. He didn’t do that. No, he has been concerned only about himself, filing for bankruptcy even though he’s probably a multimillionaire. He owes that money to them according to the principles of justice, and he should have paid it back. In so doing, he would have saved his reputation and won over a lot of peoples’ trust, and could have remained successful.

    But he doesn’t care about the people he defrauded. Nope, he cares only about himself.

    The more I think about it, the more I realize the unavoidable truth: he’s just plain guilty.

    Boy, I hope after all of this that you tell me that you judged against him.

  11. danielbalc said,

    Wow Echo, you have made a lot of very accurate assumptions with regards to peripherals.

    here’s some…
    Augusta did come from money. Torrey Pines grad raised in Rancho Santa Fe, Doctor dad etc.

    His official title at the company was “vice president”

    He wasn’t quite making millions but was bringing in about 600k annually at the time of the “incident”.

    Here’s another thing to help you get a better perspective (mind you I’m boiling down 6 weeks of testimony into on post so it’s difficult for me too).

    Augusta couldn’t sue the bosses at Miller and Schroeder or the guys responsible at Heritage once he declared bankruptcy. That right was taken away, although in his chapter 11 that he filed it was part of his plan to pursue damages from them that plan was converted to a 7 and the bankruptcy attorney’s recouped a mere 70k from those parties.

    as for did Augusta know he was “defrauding” his clients, The arbitrators ruled that he sold them unsuitable bonds. Meaning he knew or at the very least should have known that they were too risky for the clients investment objectives.

  12. danielbalc said,

    I wrote 11 before reading 10 so don’t think I’m replying to that if you’re trying to guess the verdict.

  13. Aunt Beth said,

    Daniel – Yikes! You really had a complex case. I’m more of a Perry Mason fan than a MacNeil / Leher enthusiast, so I had to read it several times to come up with a decision.

    I’m going to pick Augusta based my experience with having a professional reputation to defend. In my years of work in charter school teaching and administration I’ve had instances where someone wants my credential to cover their agenda. I’ve nitpicked over having all the information in those situations b/c if the bottom line is that responsibility falls on me when I sign off on the transcript, approve a course, issue a grade, etc… It’s my credential and reputation on the line, so I’m not about to be a “front” for someone else.

    I think Rossbacher should have had a professional obligation to be more than just a front with a California license who then hires someone else to show up and introduce the case, and then turn it over to someone else.

    I did a month of jury duty in ’84 and it was all Perry Mason. I’m afraid I would’ve flunked off of your jury, so I’m thankful it was you and not me.

  14. RubeRad said,

    I was almost on a jury once, in a personal injury lawsuit. I got booted by the ambulance chas– um, I mean prosecuting attorney, for expressing my view that “pain & suffering” compensation (i.e. beyond medical bills, property repair/replacement, lost wages, etc) are not legitimate. Life happens. Pain & suffering happens. So you got a scar on your face? So what? What about people that are born ugly or disfigured? They don’t get compensated for their pain and suffering!

    Aaaanyways, I doubt I’ll be able to contribute much intelligently to this very complicated discussion, but my intuition says that, since this broker was already judged to have been selling “unsuitable” bonds (such that he should have known better), they should throw the book at him. What do I care whether Rossbacher was a patsy or co-consipirator of the plot by the evil overlords to make Augusta take the fall? Let’s spend time taking down the evil overlords that employed Augusta to sell unsuitable bonds. And if for some reason they’re beyond reach, just let it go, and stop wasting public money.

  15. 25 lessons from 7 weeks of Jury Duty « Daniel’s Den said,

    […] Alert: If you haven’t read my post describing the case and would like the opportunity to guess the verdict then do not read this […]

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