Vaughan Investors Sue Trust Company
Attorneys Terrence Revo and Roger Smith will represent four clients who, they say, went to Zia to handle the investments of their IRAs and were guided to Vaughan. There may only be a few clients in on the suit initially, but the list will likely grow.
In late February, state securities agents were approaching Vaughan about possible securities violations and fraud when he drove away from the investigators. Because his license had been revoked from a previous drunk driving charge, Vaughan was arrested. The exchange with the investigators became public, tipping off the media that Vaughan could have a hand in what's been called a Ponzi scheme.
The suit is not against Vaughan. Instead, it's being brought against Zia, a conduit for investments with Vaughan. The lawsuit is based on three accusations:
First, Revo says, Zia recommended that its clients invest their money with Vaughan. Here's the rub: "In their contract with their customers, they make it very clear that they are not going to give them investment advice," he says.
“... they had to know that he wasn't telling the truth to his customers about how much money he was borrowing.”
Lawyer Roger Smith
Second, since close to 100 Zia clients bought promissory notes with Vaughan, the company had to know “he was lending out 10 or 20 times as much money as the promissory notes provided,” Smith says. “So they had to know that he wasn't telling the truth to his customers about how much money he was borrowing.”
And finally, Smith says, a deed of trust was supposed to back the investments. If Vaughan defaulted on the promissory notes, property could be sold off to pay people back. But Zia should have been aware that there wasn’t enough property in the deed to cover it, he finishes.
The suit was filed on Tuesday, June 29, in District Court, according to Revo and Smith. The Zia Trust Company did not return calls for comment as of press time.
Vaughan and the real estate company he founded filed for Chapter 11 bankruptcy protection in late February, at which time he stepped down from his position as CEO. The Vaughan Co. Realtors was the third-largest residential real estate firm in New Mexico. Chapter 11 is a reorganization of debt. When businesses come out of Chapter 11, they can be functional again. At the end of May, a bankruptcy judge ruled that Vaughan—not the company—must file for Chapter 7 bankruptcy, which is a straight liquidation. That means, as Revo puts it: "You're going to end it. There's no way to save this."
"Keep in mind that the title is Zia Trust Company. It's got the word 'trust' in its title."
Lawyer Terrence Revo
In mid-June, Vaughan sent a letter to friends, family and business associates asking for donations to the Douglas F. Vaughan Legal Fund. He said he’d been mistreated by the media and was determined to prove his innocence.
Vaughan's holdings will be sold to pay back his creditors, but many of his assets are mortgaged. "All those that invested in promissory notes are unlikely to get much of anything back," Smith says. "The people we're looking at are all people who are in danger of losing their retirement accounts as a result of the Doug Vaughan scheme."
The law firm has talked to 40 or so people who invested with Vaughan through various routes. "But the original client was referred to us by her financial planner, who took a look at her circumstances and basically said, You need some help," Revo says. The attorneys put an ad in the Albuquerque Journal asking to speak with anyone who invested with Vaughan through Zia.
It’s not a class action lawsuit because there are variations in the stories of how people ended up buying in. Some callers had already decided to invest with Vaughan when they got to Zia and simply needed a custodian for their IRA. At some point, the Revo Law Firm might consider bringing a suit on their behalf as well. With the knowledge Zia had and the duty to inform its clients that a Vaughan investment was sketchy, those people may have claims, too, Revo says. "Keep in mind that the title is Zia Trust Company," Revo says. "It's got the word 'trust' in its title."
Other trust companies may have also directed customers to the bad investment, Revo says, but the attorneys haven't heard from anyone yet. "Certainly, if somebody was steered to Vaughan by any of the other trust companies or any of the financial planners—independent, even—we’re interested in talking to them," he says. Neither Smith nor Revo say they've heard of other suits being filed.
So what kind of damages will they seek? "A lot," says Revo. It will depend on how many plaintiffs end up involved in the suit, Smith adds. "Each one has their own amount of money that they invested, so at a minimum, whatever they invested, we think they're entitled to get back."
The case will follow the usual path, Revo says. The complaint has been filed, the defendant served and Zia has 30 days to respond. Then the discovery process begins with written questions and requests for documents from both sides. After depositions, sometimes there's an opportunity to sit down and talk settlement. "Cases develop their own personality," he says. Some go smoothly, he adds, and some, no matter what happens, are on a rocky road. "We don't know which this will be yet," Smith says.
The firm isn't taking any special considerations into account for the high-profile nature of the lawsuit, the attorneys say. "We know that more people will be looking over our shoulders to make sure we do a good job, partially because we are going to have more clients. And that's OK," Revo says.
They don't take on cases they don't think they will win, Revo says. He summed up the reason for their confidence: "That trust company, through their employee or employees, did actually give them financial advice, and that financial advice was to steer them to an investment that was a Ponzi scheme. There's something real wrong about that."
What is a Ponzi scheme?
In simplest terms, a company pays investors with money from new investors rather than generating any actual profits. Ponzi schemes are usually characterized by unusually high returns. People will often reinvest their returns because they are so high. The only money keeping the Ponzi raft afloat is the cash pumped in by investors.
Bernie Madoff orchestrated the largest Ponzi scheme in history. He cost investors at least $18 billion.
What is a promissory note?
Basically, it’s an IOU, a promise to pay in the future.
What is a trust company?
It’s a business that acts as a custodian or guardian of IRAs, estates and trust funds, for example.