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Note: Hammatt (Attorney) approached an officer of Morris Cerullo World Evangelism (Lender/Victim) with a “confidential offering” that he said was on behalf of his clients, Larry Sorenson, owner of Arrowmark, LLC and Laramark Investments, LLC (Client). Attorney sought a USD 3.5 million loan to buy gold mining property in Utah which allegedly contained a “rich stream of gold”. Attorney stressed the confidentiality of the discovery and the need for haste. Attorney indicated that Clients would repay USD 4.55 million after 145 days due to “the need and timing of the investment”. Furthermore, the investment would be structured so it “not represent an actual ‘loan’ to [Client] from [Investor] which could cause serious issues to [Investor] and its current tax status [as a non-profit organization]”. Attorney offered various types of collateral including a 2% stake in the mine to be valued at USD 122.90 million, a jade statue said to be worth USD 34 million, and a standby LC.

Attorney stated that Client’s mining company purportedly netted 52% “from its current operations of USD 8.33 million”.

[Attorney] also provided an appraisal for a jade statue from the “Jade Gallery,” which was for a nine-piece puzzle plaque of Emperor Qin Shi Huangdi from the Chi Dynasty (475-221 B.C.). The appraisal included a “certificate of authenticity/chain of title—ownership/identity of royalty that can verify origin” which stated the statue had been transferred in March 2003 from the Baroness Monika Elizabeth Freifrau von Quernheim to British citizen Paul Haworth Cater, and from Paul Haworth Cater to Larry Sorenson in 2005. The appraisal “updated” an insurance appraisal performed in 2002 in Colorado. The appraisal also included the “photograph of the Prince who can verify [the statue] was in the Museum of Malaysia.” It did not include any contact information for “the Prince”.

After its seizure by the Secret Service some time after the transaction had occurred, the jade statute was reappraised for a mere “thousands, not millions, of dollars” and “had little historical significance”.

Attorney first provided a standby said to be from Century Bancorp, a New Zealand Bank for € 10 million to act as “additional collateral”. Since the standby was unsigned and from a foreign bank, Lender/Victim rejected it. Lender/Victim also expressed lack of confidence in the appraisal of the jade statue.

Attorney restructured the terms by increasing the payment from USD 4.55 million in the original offer to USD 5.121 million since Lender/Victim did not want a 2% interest in the mining operation. Attorney also provided a USD 5.2 million standby that appeared to have been issued by BBVA Compass Bank (Bank) from its office in Temecula, CA., and signed by Wilkinson (Employee) who was the “branch retail manager and vice president”. The standby provided that “beneficiary must present the letter of credit to the [Bank] office in Kirby Drive in Houston, Texas ‘accompanied by a signed and dated statement worded as follows with the instructions in brackets therein complied with.’”

The opinion stated that “[n]o instructions in brackets followed and the Kirby Drive address in Houston proved to be an old address no longer used by [Bank].”

Lender/Victim took the LC to Bank and met with Employee where Lender/Victim was assured that the LC “was valid, that it was issued by [Bank], and was signed by [Employee]”. Lender/Victim agreed to the loan and did “no further investigation into [Attorney or Clients]”.

Soon after wiring the loan to Attorney’s trust account, Lender/Victim spoke with Attorney’s paralegal who stated that “[t]he jade appraisal was a fake [because Attorney] had forged it and that Attorney had filed for bankruptcy so “it was highly unlikely his [trust account] contained [USD 5,200,000], as represented in the letter of credit”. Lender/Victim considered the paralegal’s warnings to be “rants of an ‘hysterical’ female”.

Furthermore, Secret Service Agent Gee (Agent) had been investigating Attorney for fraud. Agent contacted Lender/Victim regarding the loan but found Lender/Victim uncooperative and, “in denial” that Attorney had fraudulently represented loan. Agent took note of the LC identification number and called Bank. Bank proceeded to speak with Employee who “denied any knowledge of the letter [of credit] and denied signing it”.

When Attorney defaulted on the loan payment, Lender/Victim called on Employee to draw on the LC. When Employee did not respond, Lender/Victim met Employee at the Bank’s Temecula branch where Employee “appeared harried and nervous, claiming to be in a rush to get to another meeting”. However, Employee stated that “he would immediately begin ‘processing’ [the LC]”. Lender/Victim proceeded to contact Bank who informed Lender/Victim that LC would not be honored because the identification number was fraudulent. Bank then contacted Employee and informed him that he did not have authority to issue the LC. Employee would later admit to Agent that Attorney paid Employee USD 42,000 for Employee to issue fraudulent LC.

Bank sued Lender/Victim for declaration that the LC was unenforceable. The U.S. District Court for the Southern District of California, William V. Gallo, J., granted Bank’s motion for declaratory relief.

The LC was found to be unenforceable because the LC only created an agreement “between an applicant and a bank”. Had the LC been properly issued, Lender/Victim could “have a cause of action for breach of contract as a third-party beneficiary”. However, the LC was forged by Attorney and Employee “in [Attorney’s] office” and the Bank was not in agreement with either Lender/Victim or Attorney.

Lender/Victim raised an unclean hands defense by stating that Bank’s own misconduct relieved Lender/Victim of Lender/Victim’s misconduct. However, Lender/Victim was unaware of Employee’s actions in drafting a fraudulent LC. Upon conducting an investigation, Bank fired Employee. While relieving Bank of misconduct, the Judge emphasizes Lender/Victim’s own unclean hands by echoing prior points listed above.

Prior to judgment on the case, Lender/Victim moved for evidentiary and monetary sanctions against Bank on the grounds that the Bank “engaged in spoliation of evidence by failing to preserve a recorded telephone call” regarding requested documents concerning the Employee and fraudulent issuance of the LC. Lender/Victim specified a particular telephone conversation between Bank and Employee prior to Employee’s termination but Bank was unable to find the recording. Bank responded by asserting that “there is insufficient evidence to prove that the subject call even existed, let alone that it was subsequently destroyed by [Bank]”. The Judge granted Lender/Victim’s motion for sanctions because it was “entirely reasonable that…[Bank] would also want to speak with the individual who allegedly issued the letter of credit”.

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The views expressed in this Case Summary are those of the Institute of International Banking Law and Practice and not necessarily those of the ICC or Coastline Solutions.