U.S. attorneys prosecuting Leawood payday loan businessman Scott Tucker want to access communications between Tucker and a prominent Kansas City law firm, records that would be off-limits but for the government’s claim that the firm helped Tucker commit fraud.
Federal prosecutors in New York, where Tucker awaits trial on criminal charges related to running an illegal payday loan business and racketeering, asked a judge to order the McDowell, Rice, Smith & Buchanan firm to disclose its records related to a 2010 case it handled on Tucker’s behalf.
Records and communications between lawyers and clients are in nearly all aspects sacrosanct and strictly off-limits to outside parties. One exception to attorney-client privilege is if it’s established that a lawyer helped a client with criminal or fraudulent behavior.
Prosecutors in Manhattan submitted a motion in March against the law firm. The motion says that R. Pete Smith, chairman of McDowell, Rice, Smith & Buchanan, filed a lawsuit in 2010 on Tucker’s behalf that forced the Kansas secretary of state to recognize a 2008 merger between two companies in the payday lending business.
Prosecutors say it was a “sham merger” designed to obstruct investigations into Tucker’s payday lending businesses.
Attorneys representing Tucker and his co-defendant, Tim Muir, said in a response filed in court Thursday that the government fell “woefully short” in its attempt to overcome attorney-client privilege.
Thomas Buchanan, a member of McDowell, Rice, Smith & Buchanan’s executive committee, told The Star in an email that the firm handled the 2010 matter in accordance with Kansas law.
“Our law firm is not a party or joined to the criminal proceedings in New York and we have not been served with any subpoena or papers,” Buchanan wrote. “The Kansas statutory and judicial procedure was followed in matter (sic) we handled.”
Buchanan declined to further address the claims made by federal prosecutors. He cited ethical rules that prohibit lawyers from publicly discussing client matters without permission.
Tucker, whose involvement in payday lending began with a storefront operation in the late 1990s, became one of the most prominent figures in the online consumer loan industry. Federal and state investigators have said he obtained his fortune by extending deceptive short-term loans on interest rates as high as 700 percent.
Last year, Tucker and his related enterprises were hit with a $1.3 billion civil judgment in a case brought by the Federal Trade Commission. It was the largest judgment obtained by the FTC in a litigated case.
A New York grand jury in February 2016 indicted Tucker, along with Muir, an Overland Park attorney not affiliated with McDowell, Rice, Smith & Buchanan but who handled Tucker’s business affairs. They are charged with extending deceptive loans, unlawful debt collection and racketeering.
The indictment says Tucker amassed a $2 billion enterprise that exploited 4.5 million consumers. Profits from Tucker’s businesses allowed him to fund a professional race car team; Tucker competed in races in North America, Europe and the Middle East.
Tucker and Muir have pleaded not guilty and have denied wrongdoing. Their trial is scheduled to start in September.
Smith, the McDowell Rice chairman, is one of Kansas City’s best-known and successful lawyers whose practice includes corporate matters, litigation and divorce and bankruptcy.
A key Tucker business practice, which comes into play with the McDowell Rice matter, was his use of companies based on American Indian land. Indian tribes generally enjoy immunity from state regulations and investigations.
The lawsuit at the center of the government’s attempts to pierce Tucker’s attorney-client privilege with McDowell Rice was filed by Smith in 2010 in Wyandotte County District Court. It was filed against a company called AMG Services Inc.
The lawsuit sought to compel the Kansas secretary of state to recognize a merger of Tucker’s payday loan servicing company, called CLK Management, into AMG Services.
AMG is a lending company, and Tucker described it as being owned by the Miami Tribe of Oklahoma.
Tucker’s lawsuit said the merger occurred in 2008 but that AMG Services had failed to file documents with the Kansas secretary of state’s office to make it official. When Tucker sued AMG two years later, he wanted the documentation to reflect that the merger had occurred in 2008.
The 2008 date is important. By merging with AMG Services, CLK would become a tribal company and could resist investigations into its business practices, according to prosecutors.
And in 2008, prosecutors said, the Colorado attorney general was attempting to investigate CLK Management. The prosecutors charge that the AMG-CLK merger was meant to frustrate that attempt.
Attorneys for Tucker and Muir argue that the merger was a straightforward and legitimate business transaction. They add Colorado’s attempt to put pressure on CLK was “a way to shut down the tribe’s payday lending business.”
But prosecutors also say AMG was established nominally with a tribe but was effectively owned and operated by Tucker in an office building in Overland Park where 600 employees worked. Tucker’s criminal attorney described Tucker as an employee of AMG.
The government refers to Tucker’s case against AMG as a “sham lawsuit” designed to address the failure to record the merger of two of Tucker’s companies.
AMG never responded to the lawsuit. Exactly 21 days after Smith filed the lawsuit on Tucker’s behalf, which is the length of time in which civil defendants in Kansas have to respond to a lawsuit, Wyandotte County Judge David Boal issued an order finding that AMG was in default and directed state authorities to record the CLK merger into AMG, effective in 2008.
To support its case, the government released a letter from an attorney advising the Miami Tribe of Oklahoma chief executive. It was written in 2008 and describes the Colorado attorney general’s subpoena as a way to put pressure on a business that does not have tribal protection from a state investigation.
The letter, written by Omaha, Neb., attorney Lance Morgan on June 3, 2008, came as the Colorado attorney general issued a subpoena to CLK.
“Colorado is attempting to accomplish their goal of impeding the Miami Tribe’s business model indirectly by attempting to apply pressure on CLK, an entity that doesn’t have sovereign immunity,” reads the letter from Morgan to Don Brady, chief executive of the tribe.
It went on to say that a merger would create an entity that “may be able to invoke tribal sovereign immunity.”
Another contention by prosecutors is that the tribe paid $120,000 for CLK, “a paltry sum given the value of the business,” and that bank records indicate the acquisition wasn’t paid for until 2010. Tucker’s defense attorney counters that there could be all kinds of business reasons for deferring a payment.
The government also says the lawsuit includes false statements, including a claim by Tucker that he had no control over AMG following the 2008 merger. Prosecutors have copies of AMG checks bearing Tucker’s signature in 2009 and 2010 that were written to McDowell Rice to pay for legal services — all after the merger occurred.
AMG Services never responded to Tucker’s lawsuit against the company in 2010. Defendants that fail to respond to litigation are considered in default, which means a judge accepts a plaintiff’s claims as true and generally awards the plaintiff what is requested in the lawsuit.
Attorneys for Tucker and Muir say that AMG acted on legal advice by not responding. They say as far as the Miami Tribe was concerned, AMG’s acquisition of CLK was legal and the tribe did not want to submit to Kansas law by responding to Tucker’s lawsuit in Wyandotte County.
A letter from a tribal attorney in 2010 said that recording the CLK-AMG merger in Kansas was important to Tucker so that other states would recognize the transaction.
Records that the government has recovered through grand jury proceedings hint at a coordinated effort by Tucker and other attorneys to frustrate investigations into their businesses.
Prosecutors cited them in the motion seeking additional records from McDowell Rice.
Prosecutors say emails between Tucker and Muir, where they congratulate one another following the Wyandotte County judge’s ruling, demonstrate Muir’s role.
In a July 31, 2010, email to Tucker, Muir wrote, “They’re only about 10 attys in the country who can really appreciate just how (expletive) good this is. And ALL of us want to be flies on the wall when the opposing attys get this.”
Muir’s email went on: “Lastly, when Pete talked to an atty at the KS Sec of State’s office, she said ‘I don’t know how you did this….you shouldn’t have been able to get this done.’ ”
Federal prosecutors say the Pete referenced is R. Pete Smith.
Another email written to Tucker by Conly Schulte, an Omaha attorney who works for a firm that represents tribes, also gives Muir credit for carrying out the merger lawsuit.
“I think this was one of the more brilliant pieces of legal work I’ve seen in a while — Tim deserves a huge pat on the back for pulling this one off!” Schulte’s Aug. 5, 2010, email to Tucker reads.
“Getting a court order directing the Secretary of State to file the articles of merger — with an effective date of June 2008 — within such a short period of time — was just short of miraculous! It will prove to be invaluable in the pending litigation in California (and elsewhere) — and should go a long way to protecting the business model.”
Attorneys for Tucker and Muir say the emails reflect “appreciation for the fine lawyering involved” in recording the merger while preserving AMG’s tribal immunity.