A South Carolina lawyer was suspended from practice June 27 for helping a prominent venture capitalist execute a Ponzi scheme that fooled investors into thinking they would acquire highly-coveted, pre-IPO shares in Facebook and other social media companies.
Voting unanimously, the South Carolina Supreme Court said John B. Kern should lose his law license for at least 18 months for his role in a scheme that landed his client—former financier and one-time Oregon gubernatorial candidate Craig Berkman—in prison for six years.
The case required the justices to answer a question that only two courts had previously addressed: whether bar authorities can initiate reciprocal discipline proceedings against a lawyer based on a sanction imposed by the Securities and Exchange Commission.
The court said “no,” which meant that the SEC’s findings were not conclusive. But there was “ample evidence that Kern committed professional misconduct,” the justices said in a per curiam order.
The SEC brought charges against Berkman and Kern in 2013, alleging that the financier “capitalized on the market fervor preceding highly anticipated IPOs of Facebook and other social media companies to fleece investors” out of $13.2 million, and that the lawyer helped prevent those investors from discovering the fraud.
Berkman told the investors that he “special access to scarce sources of pre-IPO stock in Facebook, LinkedIn, Groupon, and Zynga,” but he ended up using the money “to make Ponzi-like payments to earlier investors, fund personal expenses, and pay off claims against him in a bankruptcy case,” the SEC said.
When Facebook went public and the investors began asking about their shares, Kern assured them that the stock had been purchased and was being held for them by unnamed counterparties.
One year earlier, an attorney who was handling Berkman’s bankruptcy case contacted Kern to express concern about the origin of funds Berkman wanted to use to settle some of his debts. Kern assured the bankruptcy attorney that those funds didn’t come from Berkman’s investors.
In 2014, the SEC banned Kern from the securities industry, imposed a $100,000 fine against him, and ordered him to disgorge $234,577 in legal fees earned from Berkman.
Bar authorities initiated a reciprocal discipline proceeding against Kern. All U.S. jurisdictions have reciprocal discipline procedures, which expedite misconduct cases against lawyers who have been disciplined in other forums.
Most states use language similar to that used in South Carolina’s rule, which provides that a final adjudication of misconduct in “another jurisdiction” is conclusive proof of misconduct in a South Carolina disciplinary action.
The court said it had never considered whether the SEC qualifies as “another jurisdiction” for reciprocal discipline purposes.
“However, at least two of our sister states have addressed the issue and concluded that the SEC is not a ‘jurisdiction’ for purposes of reciprocal discipline,” the court said, citing decisions from Ohio and Florida. The justices said they agreed with those courts.
(See 31 Law. Man. Prof. Conduct 374 for a discussion of how courts have ruled on similar questions—analyzing whether reciprocal discipline can be based on sanctions imposed by other agency tribunals, federal courts, and other regulatory bodies).
Ignorance and Diligence
Kern raised an ignorance defense during oral argument, saying he was unaware of Berkman’s malfeasance, and that when he learned about it he resigned as general counsel for the entities Berkman used to perpetrate the fraud.
But the court said “Kern’s professed ignorance of Berkman’s malfeasance does not save him.”
The justices pointed to testimony from John P. Freeman, an expert in securities regulation who teaches business and legal ethics at the University of South Carolina School of Law.
“Professor Freeman explained that when a company makes representations to investors as to how their money is to be invested, general counsel is obligated to exercise due diligence to ensure the money is invested for the represented purposes,” the court said. “We conclude Kern acted recklessly in making the foregoing assurances to Berkman’s bankruptcy attorney and to [the] investors and that Kern failed to exercise the required diligence to ensure investors’ money was invested for the purposes represented to them.”
Making Things Worse
The court said Kern violated South Carolina Rules of Professional Conduct 4.1 (truthfulness in statements to others), 8.4(d) (conduct involving dishonesty), and 8.4(e) (conduct prejudicial to the administration of justice).
Kern’s misconduct was aggravated because of his failure to pay the SEC penalties, the court said. Kern said he couldn’t afford to pay those penalties, but “he has paid nothing since the SEC order was issued more than three years ago,” the court said.
The court also rapped Kern for failing to cooperate in discovery. The disciplinary panel ordered Kern to redact personal information in some of his exhibits, but Kern ignored those requests and a staffer for the panel had to spend three hours making the redactions.
The justices imposed an 18-month suspension, along with an order to pay the costs of the disciplinary proceeding.
Disciplinary Counsel John S. Nichols and Senior Assistant Disciplinary Counsel Joseph P. Turner, both of Columbia, S.C., represented the Office of Disciplinary Counsel. Kern, of Charleston, S.C., appeared pro se.
The case is In re Kern, 2018 BL 227531, S.C., No. 27820, 6/27/18.