How did the two principals of payroll company Axium International Inc. carry out the alleged reckless corporate spending that contributed to its collapse?
According to the trustee handling the Chapter 7 bankruptcy, the executives' longtime attorney had something to do with it.
Axium's former outside attorney, Louis Dienes, allegedly helped John Visconti, the company's former chairman and chief executive, and Ronald Garber, former vice chairman and chief operating officer, loot Axium's assets to fund lavish lifestyles that included luxury cars, corporate jets and numerous homes.
In a lawsuit filed against Dienes last week by trustee Howard Ehrenberg, Dienes is accused of doctoring loan agreements to disguise the executives' unrestricted access to Axium's assets, creating and backdating promissory notes, and filing a sham lawsuit to hide assets, including a Rolls-Royce.
The suit also claims that Dienes helped Visconti and Garber violate federal law by falsely claiming minority-owned status for one of Axium's subsidiaries in order to qualify for the opportunities available to such businesses.
Visconti and Garber allegedly promised that Dienes would "become Axium's general counsel and make millions of dollars a year" to make sure that the attorney remained loyal to them.
Axium, headquartered on Wilshire Boulevard's Miracle Mile, provided payroll services to entertainment companies. It stopped operating 18 months ago when it went bankrupt.
"The facts are stated in the complaint," said Ehrenberg, who declined to discuss the suit in further detail. "And at the appropriate time, the court will decide whether Mr. Dienes' actions were inappropriate."
As a result of the alleged fraud, Ehrenberg is seeking more than $100 million in damages from Dienes, in addition to punitive damages.
David Parker, Dienes' attorney, denied the allegations.
"The trustee for Axium filed a meritless lawsuit in a public forum in violation of the agreement of the parties," said Parker, a partner at downtown L.A. firm Parker Mills LLP. "Mr. Dienes denies the allegations and will vigorously defend himself in the proper forum."
Parker said that a confidential agreement among Dienes; his former law firm, Jeffer Mangels Butler & Marmaro LLP; and Axium prevents a suit from being filed against his client. However, Ehrenberg said that as the trustee, he is not barred from taking legal action against Dienes.
Lynn LoPucki, a UCLA law professor and expert in bankruptcy matters who is not involved in the case, said the accusations against Dienes offer a rare insight into corporate mismanagement.
"If the allegations of the complaint are true, then it's pretty egregious action by the lawyer," said LoPucki, who read the suit at the Business Journal's request. "Generally, people who perpetrate this sort of thing remain in control of their company through the bankruptcy case so they are able to conceal it."
However, Visconti and Garber weren't so lucky. When Axium defaulted on loans made by GoldenTree Asset Management, the firm removed the pair and installed its own manager.
Axium then filed for bankruptcy in January 2008, when GoldenTree swept $22.5 million out of its accounts. The bankruptcy left 1,000 employees out of work around the country, and numerous film and production companies scrambling to find money to pay their crews.
Meanwhile, Axium still owes more than $80 million in payroll taxes and creditors have more than $100 million in claims pending.
Lawyers representing Visconti and Garber did not return telephone inquiries.
Visconti and Garber purchased Axium in December 2001 for $4 million, and grew the company and its subsidiaries into the entertainment industry's third largest payroll services firm. At its peak in 2006, Axium handled as much as $1.8 billion in payroll annually.
Dienes began representing Axium in 2002, when he was an associate at then-Christensen Miller Fink Jacobs Glaser Weil & Shapiro LLP. He left for another firm in 2003, and jumped around to different law firms before becoming a partner at Jeffer Mangels in December 2006.
Axium became Dienes' most significant client, according to court documents, and he eventually began doing legal work for all of the company's subsidiaries.
As his relationship with Visconti and Garber grew, Dienes also began representing the executives personally, and as a result "Visconti's and Garber's personal interests began to take precedence over the actual client's interests."
Chuck Kreindler, a white-collar criminal defense attorney at Sheppard Mullin Richter & Hampton LLP, who is not involved in the case but read the suit at the Business Journal's request, said the case reveals the problems that can arise if an attorney allows the personal interests of executives to outweigh those of a company's.
"It's a good lesson for lawyers to understand who exactly their client is and where their obligations run, and to be very careful with conflicts," Kreindler said. "It's a very fine line and it's a difficult line to draw because, for all intents and purposes, the executives are the company."
Dienes' alleged misconduct first came to light during Visconti's divorce from his wife, Maha, in 2006. She claimed during the proceedings that Visconti had unfettered access to Axium's assets.
After she made that claim, according to the suit, Dienes allegedly created promissory notes to hide the fact that Visconti used company money to purchase and remodel five of his properties, and then backdated the notes to make it appear that the loan was made before the divorce began. What's more, the suit claims that Dienes knew Visconti was using Axium funds to pay for his legal representation during the divorce and didn't do anything to stop it.
According to the suit, the fraud allegedly committed by Dienes, Visconti and Garber extends beyond looting Axium's assets.
With the help of Dienes, Visconti and Garber falsely claimed minority-owned status for one of Axium's subsidiaries so the company could compete for government contracts.
According to court documents, Visconti and Garber owned 49 percent of the subsidiary, Diversity MSP Inc., and the other 51 percent was owned by Garber's now ex-wife, Susan Cruz. However, Cruz allegedly never actually owned a majority percentage of Diversity and instead was holding the shares for Axium.
Documents allegedly drafted by Dienes and signed by Cruz state that shares of Diversity were issued to her "only so that Axium could benefit from opportunities available to businesses partially owned by minorities and women."
Sheppard Mullin's Kreindler said that could be a real problem.
"One area that does cause some concern is any kind of false statements made to the federal government about the minority status of a company," he said. "That certainly can result in criminal charges if true."
According to the lawsuit, Dienes said in a deposition that the fraud occurred "in part because Visconti and Garber were restructuring loans to siphon money out of Axium."
Kreindler said it's not unusual for executives who have large majority interests in a company to use it as their personal piggy bank.
"That is generally OK if the company remains adequately capitalized and able to pay its debts," Kreindler said. "But it's a major issue and concern when a company goes bankrupt."
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