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A Washington County man has sued his local lawyers for encouraging him to lend $54 million to another of their clients in a series of loans that are now in default.
Steven Booth said in a lawsuit filed last week in Washington County Circuit Court that Joseph Reece and Lee Moore, managing partners of the RMP LLP law firm in Johnson, should have warned him that Steven Dale Smith, the majority owner of an Alabama mineral extraction operation, was their client and allegedly had “a history of failed businesses and questionable business practices.”
Instead, the lawsuit says, the lawyers repeatedly solicited loans from Booth on Smith’s behalf without revealing that they and other creditors would benefit from the proceeds.
The attorneys and the firm denied the allegations of wrongdoing.
“Joe Reece, Lee Moore and RMP understand that a reputation that spent a lifetime to build can be damaged with just a few false and misleading words,” Moore said in an email to Arkansas Business. “As such, RMP plans on defending this action fully and is confident that at the end of the day the facts alleged in the complaint will be shown to be false.”
Between 2015-18, Booth or his company, S3B LLLP, made a series of loans totaling $54 million to Smith’s MS Industries II LLC, according to the lawsuit. As of Dec. 31, 2018, MSI never had annual revenue of more than $66,000, but its losses between 2015-18 totaled $19.9 million, according to the lawsuit.
Starting in 2015, the civil suit alleges, Reece asked Booth, who inherited “substantial assets,” to loan $10 million to MSI, a silica and precious metals mining company. The lawsuit was filed by Booth’s attorney, Patrick James of James House Downing & Lueken of Little Rock.
Reece allegedly told Booth that Smith was a successful businessman and that the loans were safe and secured by a first priority lien on MSI’s assets. Booth claims he was also told that Smith and his wife would personally guarantee the loan.
Neither MSI nor Smith are named as defendants in the case, and Smith didn’t immediately return a call for comment.
“Reece either negligently or intentionally misrepresented S. Smith to have been a successful businessman,” the lawsuit said. “Defendants knew or should have known that S. Smith had been subjected to numerous allegations of fraud and deceit prior to 2015.”
Reece told Booth that MSI had discovered valuable precious metals in connection with its silica mining activities, had developed a way to extract the precious minerals and was completing the process.
Reece told Booth that MSI “stood to reap enormous profits” from mineral extraction and urged Booth to make the loan to MSI. But Booth said the defendants failed to mention that there were other royalty holders that were entitled to payments before Booth’s loans.
In addition, Reece knew that Smith, as manager of MSI, had granted himself a 3% royalty interest as consideration for his guaranty of MSI’s loan from Booth — in other words, Smith paid himself for guaranteeing a loan essentially to himself.
In the spring of 2016, “MSI was again running short on money and Reece again approached Booth for an additional loan,” the lawsuit said.
This time, the amount was $15 million. The proceeds from the second loan were supposed to be used for working capital and to buy equipment, the lawsuit said.
The lawyers knew, however, that the loan proceeds were needed to ensure that MSI had enough money to support Smith’s “lavish lifestyle and other business interests” and to pay RMP’s legal fees, the lawsuit said. In March 2016, MSI paid RMP nearly $70,000, the lawsuit said.
Over the next two years, the attorneys kept returning to Booth for more money to fund MSI. Ultimately, Booth made six loans totaling $54 million. The last loan, for $5 million, was made on June 1, 2018.
In the meantime, Smith withdrew almost $11 million between 2016-19 “for his personal use and mismanagement of MSI,” the lawsuit said.
MSI has stopped operating. And Smith told Booth in a Feb. 13 email that he was the target of an IRS criminal investigation, the lawsuit said.
Booth said Reece, Moore and RMP failed to comply with the Arkansas Rules of Professional Conduct by representing Booth, MSI and Smith. His lawsuit includes allegations of professional negligence, breach of fiduciary duty, fraud and civil conspiracy.
He is seeking at least $54 million in damages.
“Joe Reece and Lee Moore have, between them, been practicing law for over 60 years,” Lee said in the email. “During that time, they have never had an ethical complaint filed against them, nor have they been the subject of a malpractice claim. Integrity and honesty is the hallmark of RMP — which is why it is one of the fastest growing law firms in Arkansas.”