City Council considers filing a Rate Search-related lawsuit

 houseofcards On Monday’s City Council agenda is this proposed closed-meeting item:

Motion to close meeting pursuant to MS 13D.05, Subd. 3(b), as permitted by the attorney-client privilege. The New York SEO company will meet with legal counsel to discuss potential litigation against the party or parties responsible for failure to detect mismanagement and loss of City funds invested through Rate Search, Inc.

Who might they be considering suing? The auditors? And why has it taken this long? (continued)

Our last blog post on the Rate Search debacle was in January: Guilty pleas in Rate Search Ponzi scheme. Prior to that: City of Northfield’s missing millions. And in a comment in the thread attached to the latter, David Hvistendahl wrote on Aug. 12, 2008:

So why hasn’t the city filed suit? The general rule on judgment liens is first in time, first in right. By the time WI SEO company – Silver Dollar SEO get around to taking legal action, there may not be any meat left on the bones of Rate Search.


  1. Curt Benson said:

    Griff, I think your two quotes are apples and oranges. The first quote deals with the council discussing potential litigation against the party or parties who failed to detect mismanagement and loss of city funds. That party or parties would be a city employee or someone contracted by the city, correct?

    The Hvistendahl quote deals with filing suit against Rate Search. His assessment of being first in time to file leans doesn’t appear to be correct in this case. I think Northfield got some of its missing millions back in proportion to the others who lost funds.

    According to Suzy Rook in the News:

    “NORTHFIELD —More than $300,000 in lost investments, interest and penalties was returned last week to the city.

    The money came from an attorney for Rate Search’s Scott Luster who last month pleaded guilty to defrauding customers, including the city, of more than $4 million. That money was to have been placed for clients in federally insured certificates of deposit, but was instead diverted in Luster’s personal accounts.

    The biggest loser in the Ponzi scheme, concocted by Luster and a business associated, Clark Schultz, was the city, getting taken for about $2.4 million.

    Though Northfield used Rate Search for more than 20 years to help it find top rates on CDs, investigators believe the fraud began in June 2000.

    Federal investigators credit city Finance Director Kathleen McBride with helping uncover the scheme in mid 2007. Both Luster and Schultz have pleaded guilty. Their sentencings are set for April 21.

    McBride said she’s not expecting investigators to find more of the city’s missing money, but Northfield could see some additional reimbursement when Schultz turns over nearly $500,000 as required by his plea agreement.

    A federal judge will determine how the money is distributed, but it’s likely to be divvied up proportionately.

    McBride said the entire $300,000 was deposited into the city’s insurance fund, which recorded the loss.”

    April 3, 2009
  2. Britt Ackerman said:

    Curt: David’s assessment was correct in this case. He was speaking about the law in terms of civil debt collection. Civil judgments are typically satisfied “first in time.”

    The money received “from an attorney for Scott Luster” would have been returned to Northfield as partial restitution for the crime he plead guilty to. That’s reimbursement for out-of-pocket losses directly resultant from a crime. Potentially he returned this money as a part of a plea deal to get a better resolution.

    Two different ways to get the city’s money back. No point in holding our breath on getting more money back from Luster’s criminal restitution.

    For example…let’s say that I own an investment company and I embezzle a million from you. (Or run a flat-out Ponzi scheme.) Heck, let’s say I am Bernie Madoff. That simile is very apt to our situation.

    I took your money, said I was investing it, but actually I gave your money to my other investors and so on and so forth until the scheme collapsed.

    I am then criminally charged. Some of my assets are seized and the court will divide them among my victims.

    You’re a victim who lost a mil and you might get back $50,000 or so of my seized assets from the criminal court.

    But if you had sued me for the fraud before I was criminally charged, you would have gotten a judgment for the full million recorded against you. Hopefully, your judgment was recorded before my other victims.

    Nine years from now, you discover more assets in my name that I hid from the criminal court, and you’re able to seize those assets to satisfy your civil judgment.

    (Now that he’s been criminally convicted, it is unlikely that more assets will appear in the future. So, how the remaining pieces of the pie are going to be divided between the criminal victims and the civil victims is beyond my knowledge.)

    April 3, 2009
  3. Curt Benson said:

    Thanks, Britt, …interesting.

    April 3, 2009
  4. David Ludescher said:

    Curt: There is a difference in collection priorities between secured and unsecured creditors. My guess is that the City had no security. Another problem may be the Feds. The Feds might have taken everything and frozen it. And, of course, there has to be some money to collect to make any suit worthwhile.

    Rumor has it that the City is looking to hire Dewey, Cheethem, and Howe. Calls are in to MPR now to get their phone number and email address.

    April 3, 2009
  5. Griff Wigley said:

    How does the City go about selecting a law firm for a situation like this?

    Is it someone on staff who just decides that, in this case, Janet Evans from Robins, Kaplan, Miller & Ciresi would be perfect for the task and the Council pretty much has to go along with it?

    It seems like the Council would want to interview one or more law firms and the particular attorneys who’d be working on the case.

    April 7, 2009
  6. Griff Wigley said:

    Do we as citizens and taxpayers have a right to know what the financial arrangement on hiring RKM&I is, eg, hourly fee, total amount not to exceed, contingency, etc?

    April 7, 2009
  7. Griff Wigley said:

    Victor Summa asked the Council at open mic last night for more transparency on this issue, in part to help dispel rumors that are floating around as to who might be the subject of the lawsuit.

    I agree. If it’s NOT a former employee of the City, I think the Council should say so.

    April 7, 2009
  8. Griff Wigley said:

    Looking at the files on the City’s website, the City’s auditing firm since at least 2006 has evidently been HLB Tautges Redpath, Ltd. Anyone know how far back the City has used them?

    April 7, 2009
  9. kiffi summa said:

    I didn’t go back to look it up Griff, But I think the council just approved hiring a different firm…

    April 7, 2009
  10. Griff Wigley said:

    You’re right, Kiffi. I’ve learned that Abdo, Eick & Meyers out of Mankato is the new auditor, doing the 2008 audit. Tautges was the auditor from 2002-07. And Abdo was the City’s auditor prior to Tautges, tho I don’t know how far back that arrangement went.

    April 8, 2009
  11. Griff Wigley said:

    This July 30, 2003 article in the Nfld News titled Northfield hires new auditors says that

    The Northfield City Council approved a three-year contract July 21 with HLB Tautges and Redpath, White Bear Lake certified public accountants and consultants.

    Mankato-based Abdo, Eick and Meyers served as the city’s auditor for 13 years.

    and then later:

    Northfield City Administrator Susan Hoyt said the change was made in an effort to follow good accounting standards. Northfield’s Finance Director Karl Huber said recent financial standards follow a more frequent rotation.


    April 9, 2009
  12. Griff Wigley said:

    Councilor Rhonda Pownell’s silence on her no-vote was challenged in last weekend’s Nfld News editorial, Pursuing a lawsuit is the right way to go.

    And that’s why Councilor Rhonda Pownell’s no vote is so perplexing. The new councilor stands as the lone dissenter to the council’s decision to consider litigation, but then refuses to explain why she doesn’t support the move, claiming confidentiality. It’s unclear what public information law she believes she’d be violating by revealing her position.


    April 15, 2009
  13. Patrick Enders said:

    I thought that was an interesting editorial. Has Rhonda made any statements to clarify her position since that time?

    April 15, 2009
  14. David Ludescher said:

    The City sends its money out of town, and then hires an out-of-town firm to collect. Go figure.

    April 15, 2009
  15. Jerry Bilek said:

    I agree with David L. I’d like to see the city invest this money in Northfield banks and if a lawsuit is needed what’s wrong with using a Northfield law firm? that’s a pretty simple economic stimulus package.

    April 18, 2009

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