BLACK TIE SOCIETY CIVIL WAR

by Mark Smiley | Apr 1, 2019 | Main Articles

The Fight Leads Back To Brownstein Farber Law Firm
by Julie Hayden

It is the fight and the lawsuit that all the rich and powerful in Denver are obsessively talking about, but is being kept out of the news by the efforts of the all powerful Brownstein Hyatt Farber and Schreck LLP law firm (Brownstein Farber) its principals and/or persons on their behalf. It has been dubbed the “Black Tie Society Civil War” as many of the litigants are featured on webpages of “Blacktie Colorado” attending high society and major charitable soirées. The lawsuit accuses Cherry Creek multi-millionaire James Lustig of “masterminding” the scheme, using friends and family, tied by blood and marriage as “straw purchasers” to reap millions of dollars in stock manipulations. If you think the stock market is rigged for the benefit of the rich, the lawsuit appears to be proof positive of that fact.

Berlin Claims

David Berlin, a Denver securities mogul, through two investment companies he controls (Detroit Street Partners, Inc. and Birchwood Resources, Inc.) filed two lawsuits in late 2017 and early 2018 which were later consolidated into a single suit (the Lawsuit) in Federal District Court in Colorado. His companies are suing 20-odd individuals and companies who are a veritable “Who’s Who” of Denver society, alleging securities fraud and racketeering.

In the lawsuits Berlin alleged that the parties masterminded by James A. Lustig, another major Denver securities mogul, participated in a market manipulation scheme to fraudulently obtain allocation of initial public offering (IPO) shares from J.P. Morgan Securities LLC and eight other banks which include such other financial titans as Goldman Sachs & Co., Deutsche Bank Securities Inc., and Citigroup Markets Inc. (the Banks). He alleges they engaged in “countless instances of market manipulation, wire fraud, securities fraud and other racketeering activities” that cost Berlin entities “to the tune of tens of millions of dollars.” Lustig’s wife, Debbie, is the sister of Cindy Farber, who is the wife of Steve Farber, a co-founder of the all-powerful Brownstein Farber law firm. Steve Farber is in turn accused of heading one of the key defendants CLFS Equities, LLLP (CLFS).

Brownstein Farber Drafts Key Documents

Berlin claims Brownstein Farber drafted contractual provisions among the defendants that “would purport to keep [the scheme] confidential and “and were used in, “racketeering activity” as defined by Colorado statutes “and that Brownstein Farber’s actions could be construed as “having participated in racketeering enterprise” under Colorado law.

It goes on to specifically allege that “upon information and belief, Brownstein Farber co-founder Steven W. Farber is the ‘F” in CLFS.”

IPOs

The consolidated Lawsuit revolves around the fact that major banks act as underwriters for the initial offering to the public of shares in a company (IPO shares). The banks cannot simply reserve the IPO shares for themselves but must offer them to independent entities or individuals. The initial price of the IPO is set by the banks in consultation with company going public with the banks having the major say. If the initial offering price is set low enough it is almost guaranteed that the IPO shares can immediately be resold for a profit with little or no risk in the secondary market.

The holders of the IPO shares, unlike average investors, will make millions off the initial offering even if the shares later tank. Over the years the banks have indirectly tried to figure out various schemes to take as much of the profits on the immediate resale of IPO shares as possible for themselves which may have dubious legality, but they have gotten away with it for many a decade. The consolidated Lawsuit goes to extreme lengths not to allege any wrongful actions by the Banks and even refers to them as the “Innocent Banks” as Berlin clearly does not wish to offend some of the the most powerful financial institutions in the world.

The Allocation Scam

Berlin’s companies were for many years allocated IPO shares due to the fact they were deemed preferred customers with ten million dollars or more deposited with the bank. In order to rake in more of the profits the Banks began in 2011 to demand that the customer provide a minimum of $600,000 per year in commissions from trading through the bank rather than simply $10 million on deposit. In order to spread the wealth around the Banks adopted a rule that a group of clients with $600,000 or more would be given a greater number of IPOs than a single customer with the same amount of total commissions. Thus five customers with $600,000 in commissions each would collectively garner more IPO shares than a single customer who generated $3 million in commissions.

Berlin alleges that Lustig, with the help and connivance of Brownstein Farber, devised a racketeering scheme to take advantage of the new allocation rules to the detriment of the Berlin companies. Lustig set up a scheme whereby Lustig and other entities including CLFS would advance to straw companies he set up for relatives and friends $600,000 plus. The straw companies were then directed to buy shares of identified companies that would be quickly sold that afternoon. The sole purpose of the trades was to generate commissions for the banks so that the straw company would be allocated IPO shares. Berlin claimed the quick purchases and sale of stock with no purpose to profit on the sale were illegal “churning” and “wash sales.” The $600,000 plus would be repaid with interest by the straw companies. Forty percent of the profits from the immediate sale of IPO shares would then be paid to Lustig or Lustig entities under the guise of accounting and administrative services.

What is amazing is that even after paying the Banks huge sums of money in worthless commissions there was so much money in the reselling of the IPO shares that Lustig and the other Defendants still netted millions in profits.

Defendants’ Defenses

A principal defense by many of the Defendants to the purported illegal activity appears to the participation of Brownstein Farber in drawing up the documents regarding the purported scheme including non-disclosure agreements alleged to hide the illegal scheme from federal and state regulators. As stated in the Motion to Dismiss by Jeremy and Mia Abelson (son-in-law and daughter of James A. Lustig):

In fact, there would be no reason for anyone, especially the Abelson Defendants, to think there was anything untoward in actively and deliberately maximizing their eligibility for IPO allocation because the lawyers involved in the effort had raised no concerns or warnings. Specifically, according to Plaintiffs, the “highly sophisticated” Brownstein Hyatt Farber Schreck, LLP (“Brownstein”) was retained to draft non-disclosure agreements (“NDAs”) to be signed by the entities with which the Lustig Defendants are alleged to have engaged. Brownstein participation reassured the Abelson Defendants that engaging with the Lustig Defendants — and even entering into confidentiality agreements in connection with such engagement — was not unlawful or even problematic in any way . . . It is also evidence of good faith on the part of the Abelson Defendants (and negation of intent to defraud . . .) that they understood that highly reputable lawyers were involved and raised no red flags.

It is not clear how much of the defense that Brownstein Farber was involved doing legal work for the project (and therefore nothing could possibly be illegal) will stand up in court. Berlin alleges that the straw companies necessarily engaged in fraud on the Banks in order to get the IPO shares including that the funds used were from personal or family wealth, and (2) that Lustig did not have a beneficial interest in the profits from the IPO shares. Various of the Defendants seem to indicate they signed whatever Lustig and/or Brownstein Farber told them to sign without obtaining their own separate legal counsel.

Bo Brownstein To Jail And Close Connections

The Defendants were, however, undoubtedly aware that Drew “Bo” Brownstein (the son of the co-founder of Brownstein Farber, Norm Brownstein), was sentenced in 2012 to federal prison for a year and a day and fined $2.44 million for illegal insider securities trades. But in that case no one alleged that Brownstein Farber firm had set up the illegal insider trades.

The willingness to rely simply on Brownstein Farber was perhaps due to the close connections of all of the Defendants to each other. In addition, some of the Defendants may have employed Brownstein Farber in other unrelated legal matters. The Defendants are a dizzying montage of relatives and friends, including James Lustig’s close acquaintance William Sander and Sander’s step-son Jonathan Marsico, the nephew of mutual fund giant Tom Marsico; brothers Brandon and Brett Perry, in addition to their mother, Ricki Rest; Buzz Alterman and his ex-brother-in-law, Andrew Harrison; real estate titan Skip Miller, and Miller’s son-in-law and work colleague Steve Shoflick, who is married to Lustig’s niece; Lustig’s brother-in-law, and work colleague. Local investors Samuel Zaitz and William Hall are also Defendants along with Jake Cohen, Todd Eberstein and Jan Falber.

One of the other defendants, Jeremy Abelson typifies the close connections between the alleged “straw purchasers”: he is married to Lustig’s niece Mia Abelson who is Skip Miller’s daughter, is Schoflick’s brother-in-law and brother-in-law to Mia’s sister Melissa Mackiernan, another Defendant.

Other Defendants listed in the lawsuit include Denny Pepper, Ronald Vlosich, Kenneth Ricek, Aaron Wolk, John Goldenberg and Jonathon Vinnik.

David Berlin himself was very much part of that close-knit group of high society friends and relatives that he is now suing. As stated in Lustig’s Motion to Dismiss:

Demonstrating that David Berlin, the owner of both Plaintiffs, previously worked alongside many of the defendants and engaged in the conduct he now labels racketeering. Plaintiffs all allege they ‘previously had access to a database’ controlled by the Lustig defendants which contains information about IPO share distribution practices.

The Defendants, along with the defense that the documents were drawn up by Brownstein Farber and therefore must be legal, also state that the fraudulent misstatements were made to the Banks and not to Berlin and Berlin did not rely on them to his detriment. Moreover, they claim that the sale and immediate reselling of the stocks were not illegal “churning” or “wash sales” as those terms are defined. They also state that if Berlin has any cause of action it is against the Banks who drew up any and all new IPO allocation criteria that he is now complaining about.

Out Of The Public Eye

Why Brownstein Farber or people on their behalf have tried, heretofore highly successfully, to keep the lawsuits out of public purview is that in the lawsuits appear possible alleged criminal activities by Brownstein Farber and as well as each of the Defendants. Insiders indicate that at least in Colorado Brownstein Farber is almost bulletproof. The U.S. Attorney for the District of Colorado at the time of the filings was Bob Troyer, who was a former Brownstein Farber partner. The new U.S. Attorney for Colorado is Jason Dunn who was, at the time of his appointment, a Brownstein Farber partner.

Any claim of violation of Colorado securities or racketeering law would be brought by Colorado Attorney General Phil Weiser, who was elected in no small part because of money contributed or raised by Brownstein Farber. Insiders also note that most federal and state judges in Colorado have gotten their positions due in large part to the influence of Brownstein Farber, making any criminal legal action difficult.

The only real concern to the law firm is if authorities outside of Colorado take notice. Insiders note that the charges against Bo Brownstein were brought by the U.S. Attorney for Southern District of New York in a federal court in New York City.

The Denver federal court docket indicates that next action to be taken in the lawsuit is scheduled for May for a Status Conference with all the parties. More people may start to pay attention to the Black Tie Society Civil War as public awareness of its existence and implications grows and grows.


The above article cites Jeremy & Mia Abelson and Jonathan Marsico & Sam Zaitz as defendants in the Berlin litigation matter. They were all dismissed from the matter and are no longer defendants in this action.