Further examination of the Scruggs indictment and the Jones v. Scruggs lawsuit

Normally Saturday is a non-blogging day for me, but because of the extremely high public interest in the events of this last week and the importance of this story, I am posting today.  

If you are new to this story, you should refer to my posts of earlier this week for background and my previous analysis of the events surrounding the indictment of Dickie Scruggs and four others.    As I have done for the past few days, I will use subheads within this post to make it easier both for me to write and for you to read. 

We would do well also to keep in mind that the indictments are merely allegations.  Nothing has been proven, and the law holds all innocent until proven guilty.  Nothing I say in this post or have said in any other post should be taken as an accusation of guilt — here we are discussing allegations only and trying to make the best sense of them that we can.  

What PACER shows.

Public Access to Court Electronic Records (PACER) is an electronic public access service that allows users to obtain case and docket information from Federal Appellate, District and Bankruptcy courts, and from the U.S. Party/Case Index.  For those who have PACER accounts, such as lawyers like me, PACER is an absolutely vital record of what is going on in federal cases.  The PACER records of USA v. Scruggs et al.  in the Northern District of Mississippi — not to be confused with USA v. Scruggs in the Northern District of Alabama, a case where Dickie Scruggs is being prosecuted on a charge of criminal contempt of court —  show the following:

All the alleged bribery conspirators except Timothy Balducci have been arraigned and released — Dickie Scruggs on a bond of $100,000, and Zach Scruggs and Patterson on bonds of $50,000, all unsecured bonds. (See this AP story by Mike Kunzelman). Sidney Backstrom, however, was released on his own recognizance.  Here are copies of documents of interest.

What conclusions can we draw from the indictment and the PACER record?

As discussed yesterday, it would seem a logical conclusion that federal investigators obtained the cooperation of at least one of the alleged conspirators during the investigation.  As noted, at least two entries in the list of overt acts in support of the alleged conspiracy are difficult to explain unless Timothy Balducci was either wired or otherwise cooperating with investigators as of late October-early November, if not before.

From yesterday’s Wall Street Journal interview with Judge Lackey, whom prosecutors say the alleged conspirators tried to bribe, we know that the feds had wired his office with audio and video recording devices.  From the verbatim quotes by Balducci given  in the indictment, one logically can surmise that investigators had substantial recorded evidence that would have given them tremendous leverage over Balducci in obtaining his cooperation against the others.

At least one more curious aspect of the indictment’s charges stands out and supports a theory of Balducci cooperating with investigators. You may remember I have remarked on the discrepancy between the amount of money allegedly given by Dickie Scruggs to Balducci for the supposed purpose of bribing Judge Lackey, and the amount Balducci actually allegedly took to Lackey — a total of $50,000 was allegedly paid by Scruggs, but only $40,000 allegedly delivered.

The logical inference from these allegations is not that Balducci pocketed the money, but rather that at some point in mid-October Balducci was working with the government, and at the behest of investigators went back to Scruggs with a concocted tale that the judge was demanding $10,000 more than the $40,000 already delivered.  It is difficult to otherwise explain that paragraph 17 of the indictment alleged that Scruggs paid Balducci $40,000 as a reimbursement for bribe money previously advanced, but that paragraphs 22-24 alleged Balducci came back on November 1 apparently with the curious request for $10,000 more.

If you read the indictment closely, you may detect a subtle difference in the style of the wording when discussing the events of around November 1 and later. Once again, here is a copy of the indictment.  You will note that paragraph 9 says that on September 21, Balducci agreed to pay Lackey, who had gone to authorities after being approached about the alleged bribery scheme in March, $40,000.  This sum allegedly was delivered in several payments, according to paragraphs 12, 15 and 20, between September 27 and November 1.  

However, on November 1, Balducci allegedly went to the Scruggs Law Firm and made a statement that, if he was indeed cooperating with investigators, looks like a statement someone would make to get others recorded as agreeing with, or at least failing to object to, the statement.  On that date, the indictment said Balducci discussed the amended order obtained from Judge Lackey in the Jones v. Scruggs attorney fee dispute case, and stated, "we paid for this ruling; let’s be sure it says what we want it to say." Including that statement in the indictment is not necessary to implicate Balducci — the indictment earlier lists alleged verbatim statements he made to Judge Lackey about the alleged bribes — but rather can be seen as evidence potentially implicating Zach Scruggs and Sidney Backstrom.  At the very least, if someone makes a statement like this to you and you fail to say "what the hell are you talking about," it implies you agree.  Of course, we do not now know what if anything Zach Scruggs and Backstrom said during the conversation.  They might have disagreed, they might have agreed, we do not know, but the inference from the available evidence is there.

Also on November 1, Balducci allegedly had a conversation with Dickie Scruggs about an extra $10,000 to pay to Judge Lackey.  This, in paragraph 22, is the first mention of a sum in addition to the previous $40,000, and we must therefore conclude that this addition and the way it is mentioned in the indicment is significant. Paragraph 22 does not list verbatim discussions between Scruggs and Balducci, so we do not know what precisely was allegedly said, but the paragraph does say Scruggs "agreed to take care of an extra $10,000 payment to the judge and said he would ‘hire’ Balducci to prepare jury instructions in an unrelated case to cover the $10,000 extra to be paid to the judge."  One might infer from the timing that investigators told Balducci to go back to the law firm and make this request for a fake additional payment to Lackey to get further evidence against Dickie Scruggs — and Zach Scruggs and Backstrom to boot.  

Paragraphs 23 and 24 allege that Dickie Scruggs, on November 5, caused an e-mail to be sent to Balducci with phony documentation of the employment agreement for the purported jury instructions.  (As someone remarked to me, with $50,000 being allegedly paid for "jury instructions," those better be some damn good jury instructions — that is an astronomical sum to be paid for such legal tasks under normal conditions). The paragraphs also alleged that on November 5, Balducci "took hand delivery" of the cover letter and fake documentation regarding the supposed jury instruction employment agreement. Again, this additional payment logically can be seen as set up by investigators to overwhelmingly implicate Dickie Scruggs. 

In reading the allegations of the indictment, one does not detect any overwhelming reason to infer that any other of the alleged conspirators was cooperating with federal investigators before the indictment. To the contrary, the steps by Balducci in the later part of the investigation give the appearance of being part of a possible plan by investigators to gather even more evidence against the others. Also, attempts to involve other conspirators would have produced additional risk of unmasking the investigation itself.

That Balducci, as of the time of this post on Saturday morning, has not been arraigned and released, according to PACER, gives further substance to these inferences.  This does not rule out the possibility that other alleged conspirators have since decided to cooperate with prosecutors — one might note the difference in the time between the arraignments of Dickie Scruggs, Zach Scruggs and Patterson on the one hand, and Sid Backstrom on the other, and infer that this time lag may have significance. 

UPDATE: Lattman and Jones of the Wall Street Journal continue their outstanding coverage of these events with a story that discusses possible cooperation by Balducci with investigators. (Subscription required).

Allegations of the Jones v. Scruggs lawsuit. 

It is important that we tackle this, although rooting through the lengthy allegations of a civil suit can be tedious. This lawsuit, however, provides context for the indictment and the bribery conspiracy that it alleges.  For your reference, once again here is a copy of the Jones lawsuit.  First, some background about the Scruggs Katrina Group will be helpful.  The Scruggs Katrina Group, as I have mentioned, was a joint venture of six  law firms: the Scruggs Law Firm of Oxford, Miss.; the Barrett Law Office of Lexington, Miss.; Nutt & McAlister, of Ridgeland, Miss.; Jones, Funderburg, Sessums and Peterson, of Jackson, Miss.;  Paul Benton, of Biloxi, Miss.; and the Lovelace Law Firm, of Destin, Florida.  All of this, by the way, is listed in the SKG joint venture agreement attached to the lawsuit as exhibit one, and you can view it by clicking on the link above and turning to the later pages.

The lawsuit alleges that the other SKG firms "froze out" the Jones law firm from the division of some $26.5 million in fees collected from settlement of 640 Hurricane Katrina claims against insurers.  Allegedly, Dickie Scruggs said his own firm would not OK any payment to the Jones firm, but that Barrett and Nutt & McAlister would agree to pay Jones $1 million from their own share of the proceeds.  The Jones firm refused and demanded arbitration of the dispute, which was repeatedly rejected, and Jones then filed the lawsuit for 20 percent of the $26.5 million and 20 percent of future legal fees of the SKG.   At this point, or some point earlier, it appears the Jones firm was ejected from the SKG pursuant to the joint venture agreement, which requires a vote of four members to remove a firm. 

I also note that the website of the SKG currently lists only the Scruggs firm, the Barrett firm, the Lovelace firm and Nutt & McAlister — I do not know what happened to Benton [UPDATE: I am informed by those who know that Benton really never was part of the SKG and was only local counsel for the group in Biloxi], nor do I know if the remaining members came up with a new joint venture agreement subsequent to the one used as an exhibit to the Jones lawsuit.  If they did not, the current family feud between the other members and Scruggs, wherein they are trying to kick Scruggs out of the group, faces the difficulty that the joint venture agreement explicitly states that four votes are needed to eject a member.  If only four members remain — as listed on the website — Scruggs will not vote against himself and could not be removed.  This would produce an impasse that would require negotiations between Scruggs and the other members, with Scruggs holding the advantage.  

Given that the lawsuit alleges that Jones requested arbitration 20 times and was rejected 20 times before filing suit, the question is what motive Scruggs would have to allegedly participate in a bribery scheme that had as its object obtaining an order from Judge Lackey to force arbitration, when arbitration could have been had pursuant to Jones’ demand. This is all the more curious in that the indictment alleges Balducci told Lackey that the Scruggs firm had changed its strategy from seeking a dismissal of the case on summary judgment in favor of seeking arbitration.  Why not use the bribes to obtain a dismissal, rather than merely send it to another type of legal proceeding?

We do not know the answers, but we can make some observations.  Although interpretation of a contract such as the joint venture agreement is normally a question of law that is to be decided by a judge on summary judgment, the Jones lawsuit appears to present issues of fact regarding the intent of the parties in forming the agreement, factual questions regarding who said what and the like, which are not appropriate for determination as legal questions but instead must go to the trier-of-fact, which in this case was likely to be a jury.  A summary judgment order obtained under these circumstances would be subject to review and reversal by the appellate courts, the briefing might be embarrassing, and there would be publicity.  Bribery under these circumstances would not only likely not produce the desired results, but instead a summary judgment that flies in the face of reason might produce further scrutiny of what in the world was going on.  When matters are sent to binding private arbitration, however, no judicial review of the panel’s decision is typically available, and the proceedings are much less exposed to the public eye.  One might also observe that the opportunities to influence an arbitrator through various means would be much less exposed to prying eyes than attempts to influence appellate judges.

In other words, under such circumstances, one could surmise that the motive was simply a change in strategy under evolving conditions, or perhaps a realization that the earlier rejection of arbitration was a bad idea.  Perhaps the rejection of arbitration was primarily the doing of others in the SKG, and not the Scruggs firm itself.  [UPDATE: I am informed by an authoritative source that the SKG did have a motion to compel arbitration and Judge Lackey had a hearing on the matter in which he developed an extensive record (keep in mind Lackey was already cooperating with the FBI at that point) — and that none of the lawyers defendant firms showed up personally, but were instead represented at the proceedings only by their counsel. So this rules out the Scruggs firm going rogue on the question of the SKG’s stance on arbitration.] This line of reasoning could explain why the Scruggs firm allegedly apparently acted alone to obtain Judge Lackey’s arbitration order — perhaps the other members of the group would have strongly disagreed with a strategy of seeking arbitration (not to mention the alleged bribery).  Under the facts as alleged, the bribery would make it look like Judge Lackey decided this on his own — there does not appear to have been any motion or briefing seeking an order to compel arbitration.      

The dueling letters sent by Don Barrett and Dickie Scruggs both contain an interesting error.

The Scruggs Katrina Group has come apart at the seams, as I provided advance warning of in an earlier post and discussed above in this post, over the Scruggs indictments.  First, Don Barrett sent a letter to courts where the group’s Katrina cases were filed saying the Scruggs firm was withdrawing.  Then Scruggs wrote a letter to the courts saying he was not withdrawing. See this post for copies of the letter.  Strangely, both letters list Judge L.T. Senter Jr., the primary judge in the Katrina litigation in Mississippi and someone obviously well-known to both firms, as a magistrate judge.  He is, of course, an Article III full judge appointed by the president and approved by the U.S. Senate, and is not a U.S. Magistrate.  Magistrate judges are appointed by the district courts, not the president, and do not have the same powers as federal judges, unless parties consent to give them such powers.  Folks in Mississippi tell me Senter, besides being a very good judge, is not the kind of person that this mistake would bother.  However, all lawyers know some federal judges with big egos that would flip out over such an error. 

UPDATE: Be sure to read this excellent analysis by Alan Lange of Y’all Politics.

 

9 Comments

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9 Responses to Further examination of the Scruggs indictment and the Jones v. Scruggs lawsuit

  1. Ironic

    Oh, the irony. Scruggs and Co. are going to pull out all the stops to discover what insider evidence was collected by the FBI. Their mission will be to attack these informant(s) in every way possible. Attack may be too soft a word.
    Oh, the irony, of a lawyer who has made a living based on confidential informants. Now, the time has come to to use every weapon in their legal bag of tricks to discredit confidential informants.
    Oh, the irony. The tabacco case ends with Scruggs as the hero who protects the insider. Now, he goes for the sequel with the Rigsby sisters as the insiders. Yet, the tables turn, and the movie doesn’t end as Scruggs planned. Worse, the criminal may be Scruggs himself. The shady dealings, backroom deals, fake documents, and money grabbing may ironically have happened in Scruggs own office.
    The human sound bite suddenly is quiet. His AG friend suddenly is quiet. Oh, the irony. These guys are NEVER at a loss for words. Yet, they’re silent.
    Oh, yes, there will be plenty of spin to come. For the moment, I’ll just sit back and consider the irony of the situation.

  2. notdickie

    Amazing blog- keep up the great work on this situation. In addition to the timing disparity between the arraignment of Backstrom and that of the others, how (other than the fact that he flipped) else to explain the disparity in terms of release- personal recognizance for Backstrom, bonds for the others.

  3. Scruggs indictment, days 3-4

    Speculation continues to mount that central bribery-scandal figure Timothy Balducci may be cooperating with prosecutors, and perhaps has been doing so for some time; Balducci had not yet been arraigned as of this weekend, and…

  4. Justus

    Okay, you’re doing a good job of analyzing the top layer, but you need to get to the other layers quickly so you’ll be able to see the possibility of additional indictments. Key – follow the money!
    One thing that you failed to pick it up on in your review of the SKG joint venture agreement – the identity of the
    “money man” for the venture, and who approves the SKG expenses? It’s none other than David H. Nutt of the Nutt-McAlister firm. The joint venture agreement states that Nutt’s firm gets 35% of the legal fees in exchange for funding the venture. That leaves 65% to be split between Scruggs, Barrett and Lovelace, since they kicked Jones out, resulting in about 21.66% for each of them. Thus, the joint venture agreement makes Nutt’s 35% the “lion’s share” of the legal fees by far, according to my math.
    A little background here. Nutt made the tobacco settlement happen. Nutt became wealthy when he made his first really big money in asbestos with the help of another lawyer named Danny Cupit, and he was not originally in the tobacco litigation. However, Scruggs and his tobacco litigation buddies were almost out of money, so they approached Nutt, who was flush with cash from asbestos. Nutt agreed to fund the tobacco litigation from that point “in exchange for the lion’s share of the legal fees” that might be recovered. The rest, as they say, is history.
    Fast forward to Jim Hood’s “first” election for Attorney General about four years ago. While you and others have correctly picked up on the fact that Joey Langston was the top contributor to Hood’s first campaign, no one has yet discovered that Nutt was the second highest contributor to Hood’s first campaign. The facts can be found in the records of the MS Secretary of State. And, while Hood awarded Joey Langston the MCI case, Hood awarded David Nutt and Danny Cupit a case against pharmacy benefit managers for them to pursue on behalf of the State of MS, which could prove even more lucrative.
    The point is, everyone is thinking one-dimensionally, and trying to link up Scruggs and Hood. In reality, the tighter link is really between Nutt and Hood, and since Nutt is the money man in the SKG joint venture, the link is also there between SKG/Nutt and Hood.
    Also, if you will check, you will find that a very close and longstanding relationship has existed between Steve Patterson and Bill Jones (not related to John Jones, the plaintiff in the underlying lawsuit). Steve Patterson is a former State Auditor of MS who is a business partner of Tim Balducci. Both Patterson and Balducci were indicted along with Dickie Scruggs, Zach Scruggs and Sid Backstrom.
    Bill Jones is a CPA who works as an in-house accountant for David Nutt, and has worked for Nutt for many years. Bill Jones is also the accountant for the entire SKG joint venture and reviews and approves the SKG expenses. Bill Jones is originally from Meridian, MS, and he and Steve Patterson once worked together at — you guessed it — the State Auditor’s office.
    So, you can see, Nutt (35%) stood to gain more from a favorable ruling by Judge Lackey than did Scruggs (21.66%) or any other SKG joint venturer, and there is a connection between Nutt’s CPA, Bill Jones, and Steve Patterson.
    You can draw your own conclusions as to whether Judge Lackey was being bribed to solely benefit Scruggs. But, if the objective of the reported bribe had been successful, it would have resulted in a benefit not only to Dickie Scruggs’ 21.66% of the attorney fees, but also to Nutt’s 35% of the attorney fees in a greater proportion.
    All of the above also raises the question of whether the $50,000 bribe was an SKG expense that Nutt was funding, and whether SKG/Nutt were attempting to pass along the bribe as an “expense”, and make their Katrina clients pay it as a litigation expense?
    Keep it up.
    Justus Kneads

  5. David Rossmiller

    Justus, that is some brilliant analysis, if I had some asbestos or tobacco money to finance a staff at Insurance Coverage Law Blog I would hire you.

  6. Question for Justus

    Agreed, re: Justus’ analysis. One question however. Wasn’t the Nutt fee of 35% coming off of the top, and then the other 65% was what the rest of the attorneys would split? Thought that is what the Joint Venture Agreement said. If that is the case, I don’t see why Nutt would bother with bribing the judge.

  7. Wall-to-wall Scruggsblogging

    …continues at David R.’s blog, and at mine….

  8. Justus Kneads

    I don’t know if Nutt was involved with the bribery or not, and that’s not what I’m saying because that is something for the feds to put before a jury to determine. You can draw your own conclusions. What I do know is that when I smell smoke, I look for fire, and there is a very strong odor of smoke here.
    As for the 35% question, if Nutt was satisfied with his 35%, then why did he join Scruggs and Barrett to oust Jones and keep Jones’ part of the fees. Reading the allegations of the Complaint, you have to believe that Nutt agreed to kick out Jones in order to share with Scruggs and Barrett, what was to be Jones’ part of the legal fees, thereby increasing Nutt’s guaranteed 35%. That was the name of the game for all of them – to try and increase their share/money. Why else would he do it? It was “GREED”, just like the very first heading in Jones’ Complaint called it, the “GREED OF THE DEFENDANTS”! If millions upon millions was enough for these guys, then they never would have tried to get more by ousting Jones in the first place – it’s greed, greed, greed, and greed.
    And, don’t forget that the Complaint in Jones et al. v. Scruggs et al. names “Nutt’s firm” as a co-defendant right along with Scruggs. Pay particular attention to the allegations in paragraphs 37, 38, 43, 57, 60, 73, 77, 79, 80, 89-93, 107-111, 113 and 121. Nutt had just as much incentive as Scruggs to avoid liability in that lawsuit, probably more since was the kingpin with 35%.
    Justus

  9. Question for Justus

    My only point was that if Nutt was taking 35% off of the top, and the only thing being split among SKG attorneys was 65%, then kicking out Jones and bribing the judge would not have increased the amount the 35% draw. Nutt got that whether Jones was in or not. Now, maybe his portion of the 65% was worth kicking Jones out (if he was even entitled to a split of the 65% after taking the 35% off of the top). Who knows. There could have been a number of reasons to do that. But the incentive becomes even smaller when you talk about bribing the judge. I agree with you re: smoke leading to fire, but I’m just pointing out that by kicking Jones out (and hypothetically bribing the judge) he wasn’t increasing his portion on the 35% draw, he was increasing his portion of the 65%. I can’t remember if he was even entitled to a split of the 65% under the Joint Venture Agreement.