Lawyer Cauley in Hot Water Over Missing $9 Million

Little Rock lawyer and real estate investor Gene Cauley is being investigated by federal prosecutors in New York after failing to produce some $9.3 million he was holding for victims in a class-action securities case.

In a hearing in federal court in New York City on April 20, a transcript of which was leaked to ArkansasBusiness.com, Cauley's attorney, John Wesley Hall Jr. of Little Rock, told U.S. District Judge Jed S. Rakoff that his client couldn't give details of the missing money without the risk of self-incrimination.

"I think that is not unlikely," replied Rakoff, who went on to say, "It appears not unlikely from the little information available to me that Mr. Cauley may have committed a crime or several crimes, that he may have committed disbarrable conduct in one or many ways."

(Click here to download a PDF of the transcript.)

Rakoff had asked a representative of the local U.S. Attorney's Office to attend the hearing, which was also attended by other attorneys involved in a 2004 class-action case in which investors sued The Bisys Group for issuing misleading financials. It is the sort of case on which Cauley built his career.

Hall told ArkansasBusiness.com on Friday that he and his client would not be making any statements. He said that Cauley has also retained former U.S. Attorney Chuck Banks.

Here's what's known from the hearing transcript and other court filings:

When the case was settled in October 2006, Cauley's former law firm - then known as Cauley Bowman Carney & Williams - was a co-lead counsel and given the job of custodian for the $65.875 million settlement fund. Cauley designated himself as the sole signatory on the account.

On Dec. 3, Rakoff ordered the distribution of the settlement to the victims through a class administrator called AB Data. Cauley made distributions to AB Data on Dec. 19, 24 and 30 and on Feb. 19. "The last conveyance, totaling approximately $9.3 million, was supposed to have occurred, according to the parties, on April 2," Judge Rakoff said at the hearing.

Cauley told AB Data that the final installment was tied up in a 90-day Treasury bill and would be available no later than April 8, but that distribution still has not been made. Hall told Rakoff that the money "cannot be liquidated," but did not explain further.

On April 13, Cauley told his former law partner, Curtis Bowman, that the $9.3 million was "unavailable" but would be within 90 days. On April 15, Bowman and other former partners, J. Allen Carney and Darrin Williams, faxed a letter to Rakoff on the situation. The exact contents of the letter are not known.

Although Cauley, in effect, invoked his Fifth Amendment right against self-incrimination, Rakoff said the law allowed him to "draw an adverse inference" from that in the Bisys civil case.

"And the inference I'm drawing is that Mr. Cauley has either misappropriated or otherwise misallocated these funds," he said.

Rakoff ordered all the parties to turn over any documents concerning the settlement funds to the U.S. Attorney's Office. He also appointed Carney as "co-escrow agent," and ordered AB Data to begin distributing the money that had been received to the victim group.

"When I hear people cracking lawyer jokes, I always take umbrage and point out that the profession of Lincoln, the profession of Madison and Jefferson often represents the highest ideals in our society," Rakoff said. "But recent events give me pause about how true that is."