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Litigant in messy legal battle alleges corruption in Milwaukee County court

By   /   January 5, 2017  /   News  /   No Comments

MILWAUKEE – A messy intellectual property battle between a Texas-based high-frequency trading firm and a dissolved Milwaukee company accused of stealing trade secrets has gotten a whole lot messier.

Now the tale of the defunct SXP Analytics LLC is mired in allegations of bribery, attorney misconduct and judicial abuse.

Milwaukee County District Attorney John Chisholm — the Democrat who launched Wisconsin’s infamous John Doe investigation against conservatives — and Milwaukee County’s political machine stand in the shadows of this story of alleged legal and government corruption.

‘Maliciously injuring’

Emmanuel Mamalakis, a Milwaukee entrepreneur and former securities litigator, has had a very bad time in recent years with receivers, adversarial companies, lawsuits and the FBI. Mamalakis is at the center of a nasty and expensive legal dispute between SXP and Quantlab Technologies Ltd. of Houston.

Mamalakis also is at the center of an arguably messier court battle in Milwaukee, where he is accusing O’Neil, Cannon, Hollman DeJong & Laing SC, the court-appointed receiver for SXP’s assets, of conspiring with Quantlab in an egregious breach of fiduciary duty.

And Mamalakis alleges that Milwaukee County Circuit Judge Paul Van Grunsven turned a blind eye to the law firm’s alleged double-dealing because of his ties to a cadre of politically connected local attorneys.

Photo contributed

‘CLEAR-CUT MISCONDUCT’: Milwaukee entrepreneur Emmanuel Mamalakis, at the center of messy corporate litigation, alleges a Milwaukee law firm broke the law as a Milwaukee judge looked away.

According to court documents, Mamalakis alleges that the law firm and Seth Dizzard, the firm’s attorney who served as receiver, combined with an SXP minority partner “for the purpose of willfully and maliciously injuring Mamalakis and his reputation, trade, business profession in exchange for receipt of financial benefit.”

Mamalakis alleges the receiver did legal work for Quantlab, SXP’s main adversary, while it was legally bound to serve the interests of the receivership. The reason? Mamalakis asserts the receiver and his firm were leveraging for a big pay day if Quantlab won its lawsuits against SXP.

“This is clear-cut misconduct in public office and bribery,” he said in an interview this week with Wisconsin Watchdog. “They took money they were not allowed to take and lied in their filings about it.”

O’Neil, Cannon, Hollman DeJong & Laing SC has vehemently denied the allegations in multiple court proceedings and in an interview with Wisconsin Watchdog. An attorney for the firm tells Wisconsin Watchdog that multiple courts have found the firm’s conduct appropriate and legal.

Milwaukee County Judge Glenn Yamahiro is scheduled to take up the thorny legal matter next week.

Trade secrets

SXP, like Quantlab, was a high-frequency trading firm, which used powerful computers to make large numbers of stock market orders at exceptionally fast rates. SXP made a lot of money off the practice in its short run, between 2008 and 2012.

Quantlab claims those profits were the direct result of high-frequency trading secrets that SXP minority partners, Andriy Kuharsky and Vitaliy Godlevsky, stole after being fired from Quantlab in 2007. Kuharsky, a mathematician, and Godlevsky, a physicist, according to press accounts, were instrumental in building Quantlab’s fortunes in the industry.

“Quantlab was highly successful in the years after the two Ukrainian men joined the firm. Starting with trading capital of $1.5 million, it generated hundreds of millions of dollars of revenue between 2001 and 2007,” the Wall Street Journal reported in 2015.

“Quantlab’s founders, Wilbur ‘Ed’ Bosarge Jr. and Bruce Eames, became wealthy, records show. Mr. Bosarge bought a 72-acre Bahamian island and commissioned construction of a 180-foot yacht in 2008. In 2014, Mr. Bosarge put his 27,000-square-foot home on sale for $43 million.”

Mamalakis and his Ukrainian business partners met at a Greek Orthodox Church function in Phoenix in 2008 and soon after put together a business plan. Mamalakis repeatedly has claimed the processes SXP used were not derivative of Quantlab’s algorithms.

Quantlab, like other HFT companies, is very protective of its trade secrets. It sued SXP and the owners in a lengthy intellectual property lawsuit before SXP went out of business. Mamalakis said the company dissolved because of disagreements among the principals and because the owners wanted to pursue other opportunities.

Raids and suspicions

Amid Texas lawsuits, Dizzard, of O’Neil, Cannon, Hollman DeJong & Laing SC, was named receiver of SXP in 2013. Dizzard, at the request of SXP minority owner Godlevsky, began an investigation of Mamalakis’ handling of the company’s proceeds. The receiver claimed that Mamalakis had siphoned millions of dollars from the company, pocketing the money for his personal use. In February 2014, Dizzard filed a lawsuit against Mamalakis on behalf of SXP.

Mamalakis has long denied the fraud allegations, telling the Wall Street Journal in 2014 that he had donated millions of dollars to “churches, battered women’s shelters and drug rehab clinics,” among other nonprofits.

AP file photo

HIGH FREQUENCY LAWSUIT: The lawsuits involving Quantlab and SXP lifted the veil on the often-secret world of high-frequency trading.

No criminal charges ever came out of the receiver’s investigation, just as no charges came from earlier FBI raids following Quantlab complaints.

“FBI agents tapped Mr. Kuharsky’s and Mr. Godlevsky’s phones and Quantlab hired private investigators to sort through their trash, according to FBI files,” the Wall Street Journal reported.

“The case started ruining our lives,” Kuharsky told the newspaper. “Everywhere we went, we were paranoid and wondering if we were being followed.”

Still, the “money-laundering” allegation headlines hurt, Mamalakis said.

“They made my life a living hell.”

Mamalakis’ said he grew suspicious because of what he described as the receiver’s constant attacks. Something “didn’t smell right,” the attorney and former securities litigator said.

In 2014, Mamalakis sued Dizzard and the law firm. He demanded the firm’s billing statements, among other things.

In court, attorneys for O’Neil, Cannon, Hollman DeJong & Laing SC, told  Van Grunsven, the judge, that they could not release the requested information because it might violate attorney-client privilege. Instead, they sought a private, off-the-record meeting with Van Grunsven.

At first, the judge pressed for answers in court.

“I will ask this question, and I was told previously not to ask it, but is Quantlab in any way funding the receiver’s work?” Van Grunsven asked firm attorney Joseph Newbold at a November 2014 hearing.

“Your honor, we would like to answer that question in camera, and we believe that once you hear that, that answer to our question in camera, you’ll understand the reason why we want to answer that question in camera,” Newbold told the judge.

While Newbold declined to tell Wisconsin Watchdog whether his firm billed Quantlab for legal services, he did reiterate that the scope of the receiver’s job includes creditors of the receivership.

The judge raised the point that Mamalakis and his attorneys pushed, that the receiver has an exclusive fiduciary – or financial trust – duty to SXP.

“And that means doing everything in your power to avoid a judgment by Quantlab against SXP,” the judge said.

As Mamalakis’ attorney noted, Quantlab, at the time, was “adverse to every party” in the Milwaukee case. For the receiver to say anything but an “unequivocal no” to the question of Quantlab was funding the law firm “is very problematic to us, and it should be very problematic to your Honor.”

Photo by Wisconsin Law Journal

JUDGES: (From left) Milwaukee County judges Glenn Yamahiro, Paul Van Grunsven, and Jeff Conen.

It seemed to be. At first.

Van Grunsven said he was reluctant to take Newbold up on his offer to go into a private session “because I can’t memorialize or have a record should that become an issue later.”

In December 2014, the judge came back and proclaimed that he had done some research regarding receivership law and the roles of the fiduciary. From the bench he read:

”The United States Supreme Court has opined that a Receiver may not place itself in a position where its personal interests may be antagonistic to those of the estate it is administering. It may not deal with Receivership property to benefit itself at the expense of the estate, and it may not profit from its Receivership except through compensation approved by the court. If a Receiver breaches its fiduciary duty by profiting from the Receivership at the expense of the Receivership estate, the court must compel it to disgorge its profits and apply them to the Receivership estate.”

The high court ruling, Mamalakis said, underscores the legal obligation the receiver and the law firm had to SXP, and the conflict it would have in working with Quantlab.

Asked Thursday whether O’Neil, Cannon, Hollman DeJong & Laing SC took money from Quantlab while serving as receiver for SXP, Newbold again invoked attorney-client privilege.

“Again, we are not going to state whether elements of the receivership were or were not funded by Quantlab. However, the receiver and his counsel have done hundreds of thousands of dollars of work in this matter that remains unpaid to this day,” the attorney said.

Van Grunsven agreed to meet with the receiver’s attorneys privately in his chambers and placed under seal the explanation the law firm provided on the Quantlab question.

Dismissed

In January 2015, Van Grunsven dismissed Mamalakis’ complaints against the receiver and his law firm, ruling that the receiver has court-granted immunity. Receivers generally have “quasi-judicial immunity for any actions brought against them in their individual capacity, unless their activities exceeded the scope of their order of appointment,” according to law firm Ervin, Cohen and Jessup LLP.  In the Milwaukee case, Van Grunsven granted the receiver such immunity.

Van Grunsven declared that Mamalakis failed to state his claim on the breach of fiduciary duty charge.

“He said, ‘You didn’t write that law (fiduciary duty) into your lawsuit, so I’m ignoring it. He’s saying that he is throwing out my lawsuit on technicalities … but that’s no excuse to tell (the receiver and the law firm) they can take the money from Quantlab,” Mamalakis said.

The judge agreed with the receiver’s attorneys that Quantlab could eventually become a creditor of SXP and therefore, according to an “unpublished court of appeals decision,” the receiver may accept funding from “the corporation’s creditor in order to recoup money for the corporation from its principles.”

“Mamalakis’ claims that the Receiver accepted funding from Quantlab is not the silver bullet he believes it to be. It does not support the existence of a conspiracy between the Defendants and Quantlab,” the judge said.

Van Grunsven continued to keep the “answers” the law firm provided under seal.

Reached for comment Wednesday, Van Grunsven said he did not think it appropriate under the “code of ethics” to comment on a pending case.

Mamalakis was beside himself.

His lawsuit would harvest billing statements that Mamalakis says show O’Neil, Cannon, Hollman DeJong & Laing SC had billed Quantlab for some $73,000 in legal services in 2013 and 2014, long before Quantlab ended up being an SXP creditor – when it arguably was prohibited by law from working with an adversary of the receivership.

Legal experts not affiliated with the case told Wisconsin Watchdog that the relationship appeared to be a conflict of interest and presented a legal and ethical problem for the receiver, their attorneys and the judge.

“When (Van Grunsven) said they did nothing wrong, he lied and he did it under the color of law,” Mamalakis said. “The judge said, ‘If you think this is a criminal act, take it up with the DA.’”

Mamalakis did just that.

Milwaukee politics?

He said he first spoke with a Milwaukee County assistant district attorney in November 2015.

Mamalakis said he was told by the assistant DA that the judge’s handling of the case “looked odd” but that the DA’s office had “some political problems with Van Grunsven,” so the prosecutor advised Mamalakis to take the matter to the Wisconsin Office of Lawyer Regulation.

Not satisfied with that course of action, Mamalakis said he finally got an interview with Chisholm and the district attorney who supposedly was looking into the case.

“They said, ‘Golly, this is terrible. How could this happen? ” Mamalakis said, paraphrasing the prosecutors’ comments. “Three months later they told me this was dead on arrival.”

AP file photo

BACK AGAIN: Milwaukee County District Attorney John Chisholm, the prosecutor who brought Wisconsin an unconstitutional John Doe investigation, is accused again of putting politics in front of justice.

He said he learned along the way why that was.

Mamalakis said he was asked by one of Chisholm’s “political people” to keep the SXP case quiet until after Chisholm’s re-election bid.

“He said, ‘John is facing a tough election and this could flare up and be trouble for him.’ I was told to be a good soldier.”

As a generous and prominent member of Milwaukee County’s Democratic Party establishment, Mamalakis said he has on many occasions proved to be a good soldier for the party (he and his wife, Kim, gave $20,000 to Democratic legislative and statewide campaign committees in 2010). He said he did so again, hoping that the DA would do something with his case.

But when Mamalakis was told once more to be a good soldier and stay quiet until Van Grunsven got through his re-election bid this spring, he said he had had enough.

Chisholm, who has been criticized for targeting conservatives and protecting political allies, is a defendant in a civil rights lawsuit in the 7th Circuit Court of Appeals. Oral arguments are scheduled for Friday morning in Chicago.

‘Color of law’

Mamalakis’ misconduct charges are now before another Milwaukee County judge, Glenn Yamahiro.

In court transcripts from September, the receiver’s attorney decries the fact that the allegations are coming back up again. The defendants say they had the approval of multiple courts to work with “creditors.”

“Mr. Mamalakis has attempted to force the amount and the identity of the source of this independent funding. However, three judges have each found that the amount and source of this funding is protected by the attorney-client and common interest privilege,” the court document states.

“If Mr. Mamalakis wants to put accusations at us, that’s fine. But — and when we need to respond to those and we need to respond to them by going into the details of this case, and we’re glad to,” Newbold told Yamahiro during the September court session. “But I believe this is the third time now that we’ve had to do this, and he’s an attorney. I mean there’s — something at some point needs to be put to rest on this issue, and every single judge that has raised this concept we got funded by Quantlab has said there’s no big deal. I’m paraphrasing. But that’s our position, and we’re glad to brief it again before Your Honor.”

Mamalakis said the lawyers are misleading when they say three different judges have said taking money from Quantlab was “no big deal.” He said the subsequent judges, one in Milwaukee County and U.S. District Judge Keith Ellison in Texas, simply accepted Van Grunsven’s dismissal without seeking the billing statements.

Newbold said that’s not true.

“We agree with the decision by Judge Ellison, in which he stated under Wisconsin law a receiver may accept funding from a creditor of a corporation in receivership to seek, to obtain, recovery from principles of the corporation,” Newbold said. “And that statement made by Judge Ellison prior to the entry of judgement, simply when Quantlab was a prejudgment creditor.”

“Mr. Mamalakis can continue to make allegations against us, but we believe the decision by three different judges, including a federal district court in Texas and two circuit court judges in Milwaukee County correctly ruled that the receiver did nothing improper in this case,” Newbold said.

Asked about his legal troubles with SXP, Mamalakis said whatever happened in those cases has no relevance to the conduct of the receiver and his law firm.

“This was all done under the color of law,” he said. “Whatever my fight with SXP and Quantlab is, and that’s my problem, the minute the system breaks down and justice is abused, that’s society’s problem.”

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M.D. Kittle is bureau chief of Wisconsin Watchdog and First Amendment Reporter for Watchdog.org. Kittle is a 25-year veteran of print, broadcast and online media. He is the recipient of several awards for journalism excellence from The Associated Press, Inland Press, the Wisconsin Broadcasters Association, and others. He is also a member of the Investigative Reporters & Editors Network. Kittle's extensive series on Wisconsin's unconstitutional John Doe investigations was the basis of a 2014 documentary on Glenn Beck's TheBlaze. His work has been featured in Town Hall, Fox News, NewsMax, and other national publications, and his reporting has been cited by news outlets nationwide. Kittle is a fill-in talk show host on the Jay Weber Show and the Vicki McKenna Show in Milwaukee and Madison.