May 26, 2009 11:30 PM

Weil Partner Takes the Stand in Refco Case

Posted by Brian Baxter

The buzz in the federal courthouse in downtown Manhattan on Tuesday was about President Barack Obama's nomination of Sonia Sotomayor to the U.S. Supreme Court. But in courtroom 15A, 15 jurors got a crash course in leveraged buyouts and law firm economics.

The case: USA v. Joseph P. Collins. The defendant: a Mayer Brown corporate partner charged by federal prosecutors with concealing a $2.4 billion corporate fraud that led to the collapse of commodities dealer Refco in 2005.

The trial started almost two weeks ago before U.S. district court judge Leonard Sand. Prosecutors claim the 59-year-old Collins helped orchestrate hundreds of millions of dollars in sham loans that eventually bankrupted Refco and forced the company to liquidate. Collins allegedly was motivated to maintain the deception because Refco was his largest client, bringing Mayer Brown more than $40 million in fees between 1997 and 2005. (Click here for a November 2008 feature story from The American Lawyer about Mayer Brown's role in the Refco fallout.)

On Tuesday Weil, Gotshal & Manges corporate partner Jay Tabor, a key government witness, took the stand again to testify about his work advising a Boston-based private equity firm, Thomas H. Lee Partners (THL), that acquired a 57 percent interest in Refco in 2004. Tabor, who first testified on direct last Thursday, pointed an accusing finger directly at Collins and Mayer Brown for the Refco fiasco.

As Collins's chief defense lawyer William Schwartz, chair of the white-collar and regulatory group at Cooley Godward Kronish, claimed on cross-examination, Tabor and Weil had an incentive to deflect attention toward Mayer Brown and Collins.

After the THL buyout of Refco was completed, Weil replaced Mayer Brown as the company's lead outside counsel. Refco imploded only a few weeks after going public in a $500 million IPO in 2005, leaving the company's newly minted shareholders in the lurch. (In mid-March, Mayer Brown and Collins escaped liability from a class action brought by those shareholders.)

Tabor testified on direct that THL remains a Weil client and that the firm is representing THL in a RICO suit against Mayer Brown and Collins. Under questioning by Schwartz, Tabor admitted that under a "standstill agreement" between Weil and THL freezing the statute of limitations on certain causes of action against the firm, THL could still file suit against Weil if new details emerge during the Collins trial.

Throughout the afternoon's proceedings, Schwartz, who has the countenance and slightly disheveled look of a man who's just missed his connecting flight, hammered away at the remarkably even-keeled Tabor as he answered each question in his nearly imperceptible Texan twang.

In arguing that Collins knew as little about Refco's illicit finances as THL and Tabor did, Schwartz drew down on the types of due diligence law firms routinely provide for corporate clients. Tabor testified on cross that it is the job of accountants, not lawyers, to verify where monies are moving within a company while corporate lawyers typically concern themselves with a company's liabilities. (Grant Thornton served as Refco's auditor, while THL tapped KPMG for its Refco acquisition.)

On the issue of liability, Tabor testified on direct about an SEC investigation of several lower-level brokers that involved former Refco executive vice president Santo Maggio. Refco hired former SEC director of enforcement William McLucas from Wilmer Cutler Pickering Hale and Dorr to handle the inquiry, but Tabor testified that a dispute arose between Refco and the firm over fees and strategy.

As a result, Refco switched counsel to Mayer Brown and Collins. Tabor testified on cross that as part of the firm's due diligence for THL, Weil hired Davis Polk & Wardwell to inquire with McLucas as to why Wilmer dropped out of the matter. McLucas corroborated what Collins had told Tabor: that differences over fees and strategy alone were the reason behind the switch in counsel.

Like most white-collar cases, what Collins knew and when he knew it has been a running theme throughout the trial. On cross, Schwartz noted the sheer number of lawyers working on THL's acquisition of Refco--such as legions of associates tending to their "data rooms" of due diligence--and how certain agreements Tabor said had not been disclosed by Collins could be found in Weil deal team memoranda. (In addition to Weil and Mayer Brown, George Stephanakis from Cravath, Swaine & Moore advised the investment banker--Credit Suisse First Boston--backing THL's Refco bid.)

Schwartz also methodically attacked Weil's billing records to THL in an attempt to show that despite Tabor's meticulous notation of even the most minute matter handled for the private equity firm, a conversation the lawyer claimed to have had with Collins in March 2004 was nowhere to be found in billing statements.

Schwartz will continue his cross-examination of Tabor on Wednesday morning, likely starting with a $4 million payment to buy out former Refco owner and president Tone Grant, now serving a ten-year prison sentence, which Tabor testified he wasn't aware of when THL closed its deal for the company. Tabor stated he was alarmed by the size of Grant's buyout when he found out about it, considering THL had just invested $453 million to purchase a controlling stake in Refco.

Weil corporate partner James Westra, managing partner of the firm's Boston office, is expected to testify for the government later this week. (In testimony, Tabor said Weil partners Greg Danilow and Vernon Broderick and counsel Seth Goodchild represented him in interviews with prosecutors.)

Three former Refco executives--ex-CEO Phillip Bennett, ex-CFO Robert Trosten, and Maggio--have pled guilty to criminal charges. Trosten and Maggio are cooperating with the government and are expected to testify against Collins, who is on leave from Mayer Brown and could face 30 years in prison if convicted.

For the most part, the ten women and five men comprising the jury (three are alternates) remained attentive, even if some heads started to sag as 4 p.m. approached. But lead prosecutor Christopher Garcia, Schwartz, and fellow Cooley partner Jonathan Bach will have to balance the urge to introduce more documents to prove their respective cases with the possibility that the endless paper trail could adversely affect jurors' attention spans.

Lawyers in the case expect the trial to conclude in another four to six weeks.

Additional reporting by Susan Beck.

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