Analysis : Trial on J. David Role Draws Big Crowd

EL CAJON â€”  These days, when attorney Michael A. Clark talks, people listen. A lot of people.

For eight days, the one-time J. David & Co. lawyer has testified in a civil trial brought by former investors in the failed La Jolla investment firm.

For eight days, listeners have been paying close attention to what has been said.

There are, of course, the typical trial participants: Clark’s defense attorney, a Superior Court judge and a battery of plaintiffs’ lawyers eager to pounce on inconsistencies--real or perceived--in Clark’s testimony.

But in the back of the courtroom, taking copious notes and watching without expression, are federal agents who may play a big role in Clark’s future: Three IRS criminal investigators and Assistant U.S. Atty. Gay Hugo, who’s leading a federal grand jury probe into J. David and several former executives and associates of the firm.

It is, at best, a strained situation for Clark, who, using his legal skills, measures his answers carefully and slowly and with remarkable poise, well aware that what he says could both hurt him financially and incriminate him.

Clark, J. David investors allege, took part in J. David (Jerry) Dominelli’s Ponzi scheme, which attracted $200 million from 1,500 investors. Losses totaled about $82 million.

Clark claims that his willingness to testify and not to invoke the Fifth Amendment is evidence of his innocence.

But there are some questions that Jack Samet--Clark’s lawyer, well aware of the seeming double jeopardy--will not allow his client to answer.

For example, plaintiffs’ attorney Pat Frega last week asked Clark whether he had paid income taxes on the reputed profits from his J. David account, which had the fictitious name “Blackstone.�

Samet objected, claiming the question was irrelevant, and cited the presence of federal investigators in the gallery. Superior Court Judge James A. Malkus agreed.

The plaintiffs are trying to prove that Clark--a divorce lawyer and a former partner in Wiles, Circuit & Tremblay, which once represented J. David & Co.--laundered money through J. David foreign currency trading accounts with strange-sounding names such as Blackstone and J.B. Scotch. They have shown that $100,000 in Blackstone funds was originally on deposit in a Mexican bank, suggesting, they assert, a money-laundering scheme.

The plaintiffs also contend that Clark directed several associates to establish their own fictitious J. David accounts, and the attorneys have suggested that they will uncover other fictitious accounts during the trial.

Clark has countered the allegations, claiming that the money in the Mexican bank merely represented funds in an investment account. He said he obtained the funds through a profitable real estate deal in partnership with Ray Twigg, president of San Diego-based Sym-Tek Systems, a publicly held maker of automatic environmental test-handling equipment for the semiconductor industry.

(Clark is a director of Sym-Tek; Twigg lost $100,000 in J. David, about $30,000 of it through an account he called Cambridge, set up for his parents and named for a street in London where Twigg once lived.)

Clark also testified that he used accounts with phony names to prevent some J. David salesmen from pestering him to invest in the company and to retain his privacy.

The fictitious J. David account system was a secretive one. On the Blackstone account application, for example, Clark’s “ID� number was listed as “A44Z�--a totally fabricated identification. He and former J. David executive Mark Yarry conceived the number, Clark testified, because 4 is Clark’s favorite digit and two 4’s were arbitrarily sandwiched between the first and last letters of the alphabet.

Besides, Clark has argued, accounts with phony names were the way J. David did business. It had less to do with avoiding income taxes than with ensuring privacy, he maintained.

Bewildering and confusing? Certainly. In that sense, the trial mirrors the J. David fiasco itself.

And, much like the federal criminal investigation into J. David, the civil trial, now into its fourth month, will take a long time to complete. By all indications, it will consume the rest of the year, and it could stretch into March.

“People don’t understand how long it takes to prove white-collar crime,� a business fraud expert said.

The plaintiffs’ attorneys have said they intend to prove money laundering, under-the-table payments and tax evasion.

But so far, Clark has had an explanation for every accusation.

Attorney Joe Cotchett last week said he would prove that Clark received illegal payments from Dominelli in 1982, citing the opening of a J. David interbank account one year after Clark had been served with a notice of default of payments on his home.

Clark’s explanation is that he had a dispute with a second trust deed holder and, in protest, withheld payment on the note. That protest, and not any financial problem, led to the notice of default.

Clark, who once worked in the controller’s office of Frontier Hotel in Las Vegas, steered clients and non-clients into J. David investments, plaintiffs’ attorneys claim, and they contend that Clark is culpable in Dominelli’s fraud. The plaintiffs also claim they will unveil “bombshells� concerning fictitious accounts at J. David.

As in the J. David imbroglio itself, the relationships between the accusers and the accused in the trial often appear murky.

For example, some of the plaintiffs were themselves selling J. David foreign currency, or interbank, accounts. They claim they were duped--by Dominelli and others, including Clark.

Plaintiffs include members of J. David salesman Ted Pulaski’s family; financial syndicator Edith Reid, who pooled funds of small investors to invest in J. David; Transatlantic Bancorp, which raised money from clients and then invested in J. David, and members of Dominelli’s family.

Clark, in turn, says he was duped by Dominelli, and he points to the funds he lost when the firm collapsed. He also hints that some of the plaintiffs may have had their accounts under fictitious names.

The trial is complicated and painstakingly slow. Judge Malkus types voluminous notes into a desk-top computer.

However, it isn’t the spectacle it could have been had most of the defendants not settled out of court.

The law firms of Rogers & Wells and Abramson & Fox, and the accounting firm of Laventhol & Horwath settled out of court, without admitting any wrongdoing.

The cost, paid by insurance companies for the firms, was about $55 million.

By contrast, the trial now under way is aimed at the $2-million insurance policy of Wiles, Circuit & Tremblay, Clark’s former law firm. Because the plaintiffs are asking for $4 million in damages, they could go after Clark’s personal assets if they win.

Moreover, the plaintiffs probably will go after Wiles, Circuit’s insurance company for payment of damages in excess of coverage.

Adding all the damages together, the defendants could receive about $60 million. Added to this would be the more than $12 million collected by the bankruptcy trustee liquidating the J. David estate. It is also possible that the trustee could receive an additional $25 million or so.

That could bring the total recovery through litigation and liquidation to about $97 million.

That is an amazing figure, considering that the actual losses at J. David were $82 million.

Of course, administrative and legal fees--about one-third of awarded damages on the civil side--must be subtracted from that total.

But one wonders what bankruptcy trustee Louis Metzger and U.S. District Judge J. Lawrence Irving, who’s overseeing Metzger’s work, may be thinking about that money--and how it could be distributed to investors who haven’t sued for damages.