© 2015 The Texas Lawbook.
By Natalie Posgate
(Nov. 20) – A group of North Texas business leaders plan to ask a judge next week to issue an $8 million judgment against Dallas-based Southwest Securities – now HilltopSecurities – and one of its former brokers for allegedly duping them out of millions of dollars in a Brooklyn waterfront real estate development.
A Dallas jury ruled last week that Southwest Securities and broker Leighton Stallones conspired with New York real estate developer Stephen Jemal to defraud two investment portfolios owned by eight investors – six of them from the DFW area – out of $5.5 million in a four-year long scheme.
The jury found that Southwest Securities helped Jemal misrepresent the value of his Southwest accounts and provided fake brokerage statements to lenders and investors. They ordered the defendants to pay $5.45 million to the investors, which includes a former Major League Baseball pitcher and a financial adviser to Dallas Stars owner Tom Gaglardi .
Lawyers for the plaintiffs, Gerritsen Beach Investments and SSST Riviera Investments, say they plan to ask Texas District Judge Bonnie Lee Goldstein next week to approve the jury’s award and add another $3 million in legal fees.
“It was a long, hard fight and we’re extremely pleased with the jury’s verdict,” said Joel Reese, a partner at Dallas-based Reese Gordon Marketos, who represented the plaintiffs. “We’re not under any fantasy or belief that this case will resolve itself now or any time in the future. The other side will fight us to the very end, but we anticipated that and feel that we’ll prevail on appeal.”
William Montgomery, a partner at Jackson Walker who represented Southwest during the trial, declined to comment on the case. Southwest was acquired last year by Hilltop Holdings, the Dallas parent of PlainsCapital Bank.
Ben Brooks, a spokesman at HilltopSecurities, said in an e-mailed statement that the brokerage firm strongly disagrees with the verdict and that it plans to “vigorously pursue all legal remedies available” to it.
“We do not believe that Southwest Securities committed or authorized any misconduct or wrongdoing,” he said.
Brooks pointed out that juries in two previous trials conducted in Pennsylvania in 2012 on basically the same charges and evidence “resulted in a finding of no liability or wrongdoing on the part of Southwest Securities or the advisor.” Republic First Bank and Jemal’s own lawyers sued him alleging fraud, conspiracy and racketeering. Jurors, however, ruled in favor of Southwest Securities.
“In addition, as in the previous two cases, the plaintiffs in this case were not clients of Southwest Securities and there are no allegations that any SWS clients were harmed,” Brooks said.
Reese said he and law partner Adam Sanderson sat through parts of one of the Pennsylvania trials, which made them better prepared for Southwest Securities’ defense tactics.
The Dallas investors, led by businesspeople Ralph Searfoss, Doug Tatum and Blair Dance, met Jemal in late 2005 through a personal friend at Republic First Bank, which was named a defendant in the lawsuit but settled for an undisclosed amount prior to trial, Reese said.
In 2005, Republic loaned Jemal approximately $16 million and agreed to help him find investors for his real estate projects in return for a broker’s commission, according to testimony during the three-week trial.
Republic assured the Gerritsen Beach and SSST Riviera investors that Jemal, a co-founder of the now-bankrupt northeastern electronic store chain Nobody Beats the Wiz, was a man of considerable wealth. Southwest account statements showed Jemal had at least $26 million of readily marketable securities in blue-chip stocks, including Google and Halliburton.
In reality, Reese said, Jemal’s multi-million dollar account statements from Southwest were fake. One account showed a balance of $2.5 million but was actually only worth $205. The only stock Jemal owned in his Southwest accounts was the penny stock, Applied Nanotech Holdings.
Reese said his clients agreed to sell their 28 percent ownership interest in the three Brooklyn-area waterfront developments back to Jemal in 2007. The Dallas investors accepted a $6.2 million promissory note from Jemal instead of cash, based on his brokerage account statements from Southwest Securities showing a balance of $31 million in marketable securities.
When Jemal defaulted on the note, the investors discovered his true financial situation after they took garnishment action against him. He has since filed for Chapter 7 bankruptcy.
Key witnesses at the trial were officials from Republic and lawyers at Philadelphia law firm Spector Gadon & Rosen, who represented Jemal in various matters. They testified that Southwest broker Stallones lied to them about the value in Jemal’s accounts, Reese said.
Southwest contended throughout the trial that they did not conspire with Jemal because the bank never worked directly with the plaintiffs and had no knowledge of their existence.
“When stripped of its empty rhetoric and unsupported factual assertions, plaintiffs’ lawsuit becomes a series of claims asserted against complete strangers, based on conjecture and fantastical conspiracy theories,” Southwest Securities states in court documents.
After three hours of deliberations last Wednesday, the Dallas jury found in favor of the investors, which included former MLB pitcher Ted Lilly, and awarded them $5.5 million. The jury also determined that Southwest committed statutory fraud against the plaintiffs and violated the Texas Securities Act.
When asked why he believed his clients won but the plaintiffs in the two other cases didn’t, Reese pointed out that the two Philadelphia cases included Racketeering Influence and Corrupt Organizations Act claims. Reese and Sanderson originally brought a RICO claim, but decided against arguing it at trial or including it in the jury charge due to the additional dimension of complexities the statute brings.
“RICO is a statute that everybody thinks of as criminal, because it does have a criminal component,” Reese said. “It was originally intended for mobsters. [Republic and Spector Gadon] almost argued it as a quasi-criminal action instead of a civil action. When you’re arguing that someone basically violated a criminal racketeering statute, it’s much more difficult of an argument to make.”
© 2014 The Texas Lawbook. Content of The Texas Lawbook is controlled and protected by specific licensing agreements with our subscribers and under federal copyright laws. Any distribution of this content without the consent of The Texas Lawbook is prohibited.
If you see any inaccuracy in any article in The Texas Lawbook, please contact us. Our goal is content that is 100% true and accurate. Thank you.