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In the Matter of Douglas Lee Baker

February 15, 2013

IN THE MATTER OF DOUGLAS LEE BAKER, RESPONDENT.


Per curiam.

ORIGINAL PROCEEDING IN DISCIPLINE

Original proceeding in discipline.

Disbarrment.

This is a contested original proceeding in discipline filed by the office of the Disciplinary Administrator against the respondent, Douglas Lee Baker of Lawrence, an attorney admitted to the practice of law in Kansas in 1975.

On December 15, 2011, the office of the Disciplinary Administrator filed a formal complaint against the respondent alleging violations of the Kansas Rules of Professional Conduct (KRPC). The respondent filed an answer on January 9, 2012. On March 28, 2012, a hearing was held on the complaint before a panel of the Kansas Board for Discipline of Attorneys, where the respondent was personally present and was represented by counsel. The hearing panel determined that the respondent violated KRPC 4.1 (2012 Kan. Ct. R. Annot. 605) (truthfulness in statements to others); KRPC 8.4(c) (2012 Kan. Ct. R. Annot. 643) (engage in conduct involving dishonesty, fraud, deceit or misrepresentation); and KRPC 8.4(g) (engaging in any other conduct that adversely reflects on the lawyer's fitness to practice law). The respondent stipulated to the factual allegations as set forth in the complaint and also stipulated to having violated KRPC 4.1, KRPC 8.4(c), and KRPC 8.4(g).

After the hearing's conclusion, the panel made the following findings of fact, conclusions of law, and recommendation to the court:

"FINDINGS OF FACT

"7. . . . The Kansas Supreme Court admitted the Respondent to the practice of law on September 12, 1975. Later, in September, 1997, the Idaho Supreme Court admitted the Respondent to the practice of law. After returning to live in Kansas, the Respondent transferred his Idaho license to inactive status.

"8. In 1992, the Respondent began acquiring gold mining claims for mining operations in Idaho. At a later time, he also acquired mining claims in Arizona.

"9. On February 20, 2001, the Respondent formed and organized Arizona Idaho Mining, LLC ('AZID') as an Idaho limited liability company. The Respondent named himself managing member of AZID. AZID was purportedly formed to engage in the exploration, development, and production of gold and other precious metals, primarily in the states of Arizona and Idaho by acquiring interests in Custer Mining, LLC and Western Metallurgical Company, LLC ('Western').

"10. That same day, February 20, 2001, the Respondent formed and organized Custer Mining, LLC ('Custer') as an Idaho limited liability company. Western Metallurgical did not exist in February, 2001. [Footnote 1: On July 25, 2001, the Respondent formed and organized Western Metallurgical Company, LLC ('Western') as a Nevada limited liability company. Western was formed to conduct a mining operation on 85 acres in Arizona.]

"11. The Respondent prepared a securities offering document by AZID, also dated February 20, 2001. The offering document stated, 'the managing member [of AZID] is accountable to the Members as a fiduciary and must act with integrity and good faith to promote the Members' interests.'

"12. The Respondent also prepared a stock ownership document. The Respondent provided a copy of the offering document and the stock ownership document to prospective investors to explain the terms of an investment in AZID.

"13. The Respondent offered and sold membership interests in AZID to 36 investors, in six states, raising approximately $2.6 million. As the managing member, the Respondent had access to and control of AZID's funds from its inception until it became insolvent.

"14. Investors received no return on their investment in AZID, including no dividends, interest, or return of principal. The Respondent spent all of the AZID's investors' investment monies.

"15. In the offering document and the stock ownership document, as well as during oral conversations, the Respondent made written and oral representations to prospective AZID investors to explain the terms of an investment in AZID. The representations made by the Respondent included material misrepresentations. Additionally, the Respondent failed to provide prospective AZID investors with material information.

"Material Misrepresentations

"16. Safety Net. The Respondent stated that Adair Creek Mine was a safety net and would virtually eliminate the risk of loss to the investors. The Respondent stated that the Adair Creek claims were 'already a proven entity.' However, at the time the Respondent made that statement, the Respondent knew that Adair Creek Mine had never been profitable.

"17. Independent Laboratory Confirmation of Results of Stage One Testing. The Respondent stated that, as a protection for the investors, the results of the stage one testing of the Arizona property would be confirmed by an independent laboratory before additional expenses were incurred. However, the Respondent and AZID failed to have an independent laboratory confirm the results of the stage one testing before proceeding to stage two.

"18. Cash Flow Projection for Mining Year 2001. In the offering document, the cash flow projection for the mining year 2001 on the Adair Creek Claims was based on a representation that AZID would be processing a minimum of 8,950 cubic yards. However, the Respondent knew that the Forest Service had authorized AZID to process a maximum of only 5,400 cubic yards.

"19. Transfer of Stricklans' Interest in Adair Creek Claims. In the offering document, the Respondent stated that William and Marie Stricklan had transferred their production interest in the Adair Creek Claims to AZID. However, the Respondent knew that as of the date of the offering document, the Stricklans had not transferred their interest. The Stricklans did not transfer their interest in the Adair Creek Claims until December 14, 2001. The Respondent failed to inform investors who purchased the membership interest in AZID prior to December 14, 2001, that the Stricklans had not yet entered into a written agreement for the transfer of their production interest in the Adair Creek claims to AZID.

"Material Omissions

"20. Deficiency Letter. On May 10, 2001, the Respondent filed the offering document with the State of Idaho, Department of Finance. On May 18, 2001, Nancy C. Ax, an examiner/investigator for the Department of Finance, sent a letter to the Respondent, noting deficiencies in the offering document. Specifically, Ms. Ax stated, '[i]n order to provide adequate disclosure to investors, additional revision and information will be required.' In offering and selling investments to prospective investors in AZID after May 18, 2001, the Respondent failed to inform the prospective investors that the Department of Finance had issued a deficiency letter.

"21. Mining History of Arizona Property. The Arizona property was previously mined by NewCut, Inc. John Allison served as NewCut's plant manager. In February 1999, NewCut filed for bankruptcy and the mining operation was shut down. Thereafter, in September, 1999, Al/Far Mining, Inc., owned by Dan Carney, purchased the mining operating through NewCut's bankruptcy case. Mr. Allison was instrumental in having Al/Far Mining purchase the Arizona mining operation through NewCut's bankruptcy case. Additionally, Mr. Allison served as the general manager for Al/Far Mining. By March, 2000, Al/Far Mining shut down the mining operation on the Arizona property. On August 1, 2001, the Respondent, as manager of Western Metallurgical Company, LLC, purchased the Arizona property from Al/Far Mining for $300,000. Again, Mr. Allison was the general manager of the mining operation of the Arizona property. Prior to preparing the offering document and the stock ownership document, the Respondent knew that the Arizona mining operation was not profitable and had shut down in March, 2000. The Respondent failed to inform prospective investors that the Arizona mining operation was not profitable and had shut down in March, 2000.

"Idaho

"22. On August 12, 2004, the State of Idaho, Department of Finance, Securities Bureau, filed a complaint against the Respondent and AZID alleging securities fraud and misrepresentation. The State of Idaho sought an injunction and restitution.

"23. On October 13, 2005, the Court entered judgment against AZID in the amount of $1,735,000.00. In the judgment, the Court concluded that AZID violated the Idaho Securities Act and permanently enjoined AZID from engaging in acts, what would constitute violations of the Idaho Securities Act. Additionally, the Court prohibited AZID from selling securities without receiving the prior written consent of the Director of the Idaho Department of Finance. Finally, the Court ordered AZID to pay a money judgment in the amount of $1,730,000 and $5,000 in attorneys fees and costs.

"24. On December 7, 2006, the Court granted summary judgment against the Respondent. In its order, the Court concluded that the Respondent's misrepresentations of fact constituted material misrepresentations in violation of the Idaho Securities Act. Additionally, the Court concluded that the Respondent made material omissions of fact in violation of the Idaho Securities Act. The Court granted summary judgment to the State of Idaho and granted the relief that the State of Idaho sought.

"25. On December 18, 2006, the Court entered judgment and a permanent injunction against the Respondent. Specifically, the Court concluded that the Respondent violated the Idaho Securities Act by misrepresenting and omitting material facts in connection with the offer or sale of a security. Further, the Court permanently enjoined the Respondent from engaging in any acts, practices or courses of business, omissions, and misrepresentations that would constitute violations of the Idaho Securities Act and the Uniform Securities Act. Finally, the Court awarded a money judgment against the Respondent in the total amount of $2,960,000 to include $2,600,000 as restitution to investors injured by the Respondent's violations of the Idaho Securities Act and $360,000 in penalties.

"26. On January 30, 2007, the State of Idaho registered the foreign judgment in the District Court of Douglas County, Kansas. At an aid in execution hearing, the Respondent testified that he has no assets with which to satisfy the judgment. At the time of the disciplinary hearing, the Respondent has paid a total of $500 toward the judgment. The Respondent admitted that he will never be able to satisfy the judgment.

"Washington

"27. On March 21, 2005, the State of Washington, Department of Financial Institutions, Securities Division, filed a statement of charges and notice of intent to enter an order to cease and desist and to impose fines against the Respondent and AZID. In the statement of charges, the ...


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