In the Matter of John B. Kern , 423 S.C. 567 ( 2018 )

THE STATE OF SOUTH CAROLINA
In The Supreme Court
In the Matter of John B. Kern, Respondent.
Appellate Case No. 2017-002083
Opinion No. 27820
Heard April 19, 2018 – Filed June 27, 2018
DEFINITE SUSPENSION
John S. Nichols, Disciplinary Counsel, and Joseph P.
Turner, Senior Assistant Disciplinary Counsel, both of
Columbia, for Office of Disciplinary Counsel.
John B. Kern, of Charleston, pro se.
PER CURIAM: In this attorney disciplinary matter, a hearing panel of the
Commission on Lawyer Conduct (the Panel) issued a report recommending
Respondent John B. Kern be definitely suspended from the practice of law for three
years, that he be ordered to pay the costs of disciplinary proceedings, and that he be
required to complete the Legal Ethics and Practice Program Ethics School
(LEAPPS) as a condition of reinstatement to the practice of law. Neither the Office
of Disciplinary Counsel (ODC) nor Kern took exception to the Panel's report. For
the reasons stated below, we find the appropriate sanction is an eighteen-month
definite suspension and the payment of costs of the disciplinary proceedings.1
FACTS AND PROCEDURAL HISTORY
1
This Court placed Kern on Interim Suspension in an unrelated matter on May 24,
2018. See In re John B. Kern, S.C. Sup. Ct. Order dated May 24, 2018 (Shearouse
Adv. Sh. No. 22 at 66).
The charges against Kern arise from Securities and Exchange Commission
(SEC) proceedings initiated against Kern and others following an SEC investigation
of a fraudulent investment scheme perpetrated by Craig Berkman. Berkman
fraudulently raised around $13.2 million from approximately 120 investors by
selling membership interests in limited liability companies (LLCs) that he
controlled. Unfortunately for these investors, Berkman was subject to a $28 million
judgment in Oregon—in connection with another fraudulent investment scheme—
and was also facing bankruptcy in Florida. Berkman began to use some of the funds
from his new ventures to pay his bankruptcy obligations in Florida. Kern helped
form and served as general counsel for Ventures Trust II LLC (Ventures II) and
Face-Off Acquisitions, LLC, two of the LLCs Berkman used to carry out his crimes.
Berkman pled guilty to criminal conduct in a criminal action parallel to the SEC's
administrative proceeding.
On February 4, 2014, Kern signed an offer of settlement in connection with
SEC administrative proceedings pursuant to Rule 240(a) of the Rules of Practice of
the SEC.2 On March 7, 2014, Kern consented to the entry by the SEC of an order
imposing sanctions against him pursuant to section 4C of the Securities and
Exchange Act of 1934,3 and Rule 102(e) of the Rules of Practice of the SEC.4 The
pertinent findings and conclusions in the order were: (1) Kern willfully aided and
abetted the fraudulent conduct of Berkman in violation of federal securities law; (2)
with Kern's consent, the SEC ordered Kern to disgorge his fees totaling $234,577
and imposed a fine of $100,000; (3) Kern is barred from associating with brokers,
investment advisors, and others and from being employed in connection with
investment companies or underwriters or others; and (4) Kern consented to being
denied the privilege of practicing law before the SEC.
ODC filed formal charges against Kern on February 16, 2016. Kern was
largely dilatory during the pre-hearing stage of these proceedings. The Panel
allowed Kern until May 1, 2016, to answer the charges. He answered the formal
charges on May 9, 2016, but failed to timely comply with the initial disclosure
requirements imposed by Rule 25(a) (Discovery—Initial Disclosure), RLDE, Rule
413, SCACR. On September 23, 2016, the Panel ordered Kern to comply with Rule
2
17 C.F.R. § 201.240(a) (2018).
3
15 U.S.C. § 78d-3 (2012).
4
17 C.F.R. § 201.102(e) (2018).
25(a) within 10 days of the order. On December 9, 2016, the Panel issued a second
order directing Kern to comply with Rule 25(a). Kern finally provided ODC with
the Rule 25(a) materials in December 2016, after the Panel's second order to comply
with Rule 25(a) and approximately six months after the materials were due.
A hearing was held before the Panel on July 6 and 7, 2017, and the Panel filed
its Panel Report on October 4, 2017. The Panel concluded the SEC is "another
jurisdiction" under Rule 29(e) (Conclusiveness of Adjudication in Other
Jurisdictions), RLDE, Rule 413, SCACR. As a result, the Panel adopted the findings
of fact and the findings of misconduct set forth in the above-referenced order issued
by the SEC. ODC and Kern were served with a copy of the Panel Report and were
advised to refer to Rule 27(a) (Briefs of Disciplinary Counsel and Respondent),
RLDE, Rule 413, SCACR, for procedures concerning briefing and taking exception
to the Panel Report. Neither ODC nor Kern filed briefs with this Court.
DISCUSSION
We "may accept, reject, or modify in whole or in part the findings, conclusions
and recommendations of the Commission [on Lawyer Conduct]." Rule 27(e)(2),
RLDE, Rule 413, SCACR. "This Court is not bound by [the Panel's]
recommendation; rather, after a thorough review of the record, this Court may
impose the sanction it deems appropriate." In re McFarland, 360 S.C. 101, 105, 600
S.E.2d 537, 539 (2004). Additionally, "[T]his Court may make its own findings of
fact and conclusions of law." In re Marshall, 331 S.C. 514, 519, 498 S.E.2d 869,
871 (1998).
As mentioned above, pursuant to Rule 29(e), RLDE, Rule 413, SCACR, the
Panel adopted the findings of fact and findings of misconduct set forth in the SEC's
order. Rule 29(e) provides in pertinent part, "[A] final adjudication in another
jurisdiction that a lawyer has been guilty of misconduct . . . shall establish
conclusively the misconduct . . . for purposes of a disciplinary . . . proceeding in this
state." Rule 29(e), RLDE, Rule 413, SCACR. We have never addressed whether
the SEC is "another jurisdiction" under Rule 29(e) for purposes of imposing
reciprocal discipline. 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. See Florida Bar v. Tepps, 601 So. 2d 1174, 1175 (Fla. 1992); see also
Disciplinary Counsel v. Lapine, 942 N.E.2d 328, 332 (Ohio 2010). At oral
argument, ODC conceded it no longer believed the SEC to be "another jurisdiction"
under Rule 29(e), but ODC argued the record contained evidence of Kern's culpable
conduct warranting discipline.
We find the SEC is not a jurisdiction for purposes of reciprocal discipline.
We also find that because Kern failed to take exception to the Panel Report, the
Panel's findings that Kern committed misconduct are deemed admitted pursuant to
Rule 27(a), RLDE, Rule 413, SCACR. Rule 27(a) provides in pertinent part, "The
failure of a party to file a brief taking exceptions to the [Panel Report] constitutes
acceptance of the findings of fact, conclusions of law, and recommendations." Rule
27(a), RLDE, Rule 413, SCACR. As noted above, Kern did not file a brief taking
exceptions to the Panel Report. Kern's failure to adhere to Rule 27 is consistent with
his conduct throughout these disciplinary proceedings.
Even absent Kern's admission of misconduct pursuant to Rule 27(a), the
record contains ample evidence that Kern committed professional misconduct by
providing false information in statements to others. First, Kern made
misrepresentations to the attorney representing Berkman in Berkman's Florida
bankruptcy proceedings. In May 2011, Kern was contacted by Berkman's
bankruptcy attorney. Berkman's bankruptcy attorney voiced concerns to Kern about
the origin of the funds Berkman was planning to use to settle his bankruptcy
proceedings. Kern assured Berkman's bankruptcy attorney that none of the funds
used to settle any of the fees resulting from Berkman's bankruptcy litigation were
derived from investors in Ventures II. This information was false. By May 2011,
approximately $525,000 had been transferred from a bank account held by Ventures
II to pay claims owed by Berkman in his bankruptcy litigation.
Second, on August 1, 2012, Kern issued a memorandum to the investors in
Ventures II. In this memorandum, Kern assured the investors that their funds were
secure and that their investments were not part of a Ponzi scheme orchestrated by
Berkman. This information was false. Of the approximate $13.2 million in investor
funds, only $600,000 was invested in the ventures in which the investors intended
to invest. Berkman personally transferred approximately $5.1 million from the
Ventures II account to his personal account to pay his judgment creditors in the
Florida bankruptcy proceedings. Berkman also used approximately $1 million,
drawn directly from the Ventures II accounts, in the form of large cash withdrawals,
to pay legal fees and other personal expenses.
Kern's primary defense before the Panel and at oral argument was that he was
totally unaware of Berkman's malfeasance and that as soon as he became aware, he
resigned as general counsel for the investment entities and encouraged a principal in
the companies to act as a whistleblower to the SEC. Kern's professed ignorance of
Berkman's malfeasance does not save him. At the Panel hearing, Professor John
Freeman was qualified as an expert in the field of securities regulation and testified
as to a lawyer's duties and obligations when acting as general counsel for a private
securities company. 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. We conclude Kern acted recklessly in making the foregoing
assurances to Berkman's bankruptcy attorney and to the Ventures II investors and
that Kern failed to exercise the required diligence to ensure investors' money was
invested for the purposes represented to them. See In re Dobson, 310 S.C. 422, 427,
427 S.E.2d 166, 168 (1993) ("This Court will not countenance the conscious
avoidance of one's ethical duties as an attorney."); In re Solomon, 307 S.C. 1, 5, 413
S.E.2d 808, 810 (1992) ("This Court will not tolerate an attorney's deliberate
avoidance of his ethical responsibilities.").
Because we find Kern has committed misconduct, we must determine the
appropriate sanction to impose upon Kern. Kern has a history of misconduct in
South Carolina. This Court suspended Kern for ninety days on February 1, 2012,
for the commingling of trust account funds with personal funds and for failing to
cooperate with ODC. In re Kern, 396 S.C. 496, 499-500, 722 S.E.2d 520, 521
(2012).
Also, Kern has made no effort to repay any of the funds he was ordered to
repay by the SEC. Kern was ordered by the SEC to disgorge $234,577 in fees, plus
prejudgment interest, and to pay a civil penalty of $100,000. Kern consented to this
sanction, and while Kern represented at oral argument that he could not afford to pay
these obligations, he has paid nothing since the SEC order was issued more than
three years ago.
Kern did not cooperate in discovery as mandated by Rule 25, RLDE, Rule
413, SCACR. Rule 25 provides the parties are required to exchange certain
information within twenty days of filing an answer to the Formal Charges. As noted
above, Kern filed his answer on May 9, 2016; however, Kern did not provide
discovery to ODC until December 2016, approximately seven months after filing his
answer, and only after the Panel Chair issued two orders directing him to comply
with the rule. Also, after the Panel hearing, the Commission thrice requested Kern
to redact personal information from his exhibits pursuant to this Court's order dated
April 15, 2014. See Re: Revised Order Concerning Personal Identifying
Information and Other Sensitive Information in Appellate Court Filings, S.C. Sup.
Ct. Order dated Apr. 15, 2014 (Shearouse Adv. Sh. No. 15 at 34) (providing "parties
shall not include, or will partially redact where inclusion is necessary, personal
identifying information from documents filed with the appellate court"). After Kern
did not respond to letters dated May 12, 2017, July 27, 2017, and August 31, 2017,
a Commission staff member spent 3.25 hours redacting Kern's 46 exhibits.
Kern argued to this Court that he had no dishonest or selfish motive, did not
profit from his misconduct, and showed remorse for the harm caused to the investors.
See In re Atwater, 397 S.C. 518, 530, 725 S.E.2d 686, 693 (2012) (stating a
respondent's lack of personal gain and dishonest motive is a relevant mitigation
factor); In re Glover, 333 S.C. 423, 426, 510 S.E.2d 419, 421 (1998) (stating a
respondent's remorse is a relevant mitigating factor to be considered in determining
the appropriate sanction). We take these representations into account in determining
the appropriate sanction to impose.
We find Kern has committed misconduct in violation of the following Rules
of Professional Conduct, Rule 407, SCACR: 4.1 (truthfulness in statements to
others); 8.4(d) (conduct involving dishonesty, fraud, deceit or misrepresentation);
and 8.4(e) (conduct prejudicial to the administration of justice). We therefore
conclude Kern is subject to discipline pursuant to Rule 7(a)(1) (violating the Rules
of Professional Conduct), RLDE, Rule 413, SCACR.
CONCLUSION
We find the SEC is not "another jurisdiction" for the purposes of imposing
reciprocal discipline pursuant Rule 29 (Reciprocal Discipline), RLDE, Rule 413,
SCACR. We find Kern committed professional misconduct by recklessly providing
false information to the investors and to Berkman's bankruptcy attorney. We find
the appropriate sanction for Kern's misconduct is an eighteen-month definite
suspension, and we order Kern to pay the costs of the disciplinary proceedings within
thirty days of the date of this opinion.5 Within fifteen days of the date of this opinion,
5
The Panel also recommends that Kern be required to complete the Legal Ethics and
Practice Program Ethics School as a condition of reinstatement. Since the
completion of this program is required for reinstatement by Rule 33(f), RLDE, Rule
413, SCACR, it is unnecessary for any action to be taken on this recommendation.
Kern shall file an affidavit with the Clerk of Court showing that he has complied
with Rule 30, RLDE, Rule 413, SCACR.
DEFINITE SUSPENSION.
BEATTY, C.J., KITTREDGE, HEARN, FEW and JAMES, JJ., concur.