February 3, 1999

Portland, Maine

After enduring two days of prosecution testimony by Thomas Blackburn, Catherine Duffy Petit's defense team opened its case against the key government witness in the alleged $6.8 million fraud case by questioning his accounting of proceeds that he said went to finance Petit's case against Key Bank.

Petit's co-counsel, Davis Beneman, tore gaping holes in Blackburn's testimony almost immediately by asking the former Auburn lawyer why he supplied US Attorney Donald Clark with an account that had a $100,000 investment going to Petit when his own information revealed that he accounted for $40,000 being sent to Petit, with the some of the rest paid in commissions to himself and two other government witnesses.

Blackburn admitted to Beneman that his testimony differed from the information that he supplied to the government. That revelation cast into doubt the government's extensive use of accountings that Blackburn supplied as part of his plea agreement.

Those accountings outline the government's case that Blackburn helped obtain $4.2 million over a six-year period and forwarded the money to Petit through some of her employees and alleged associates.

He pleaded guilty to bankruptcy fraud charges and told the court that he is hoping to avoid going to jail.

Beneman led Blackburn through a capsule overview of his career and professional affiliations, including his stint as a bank director, registered lobbyist for the banking industry, his private decade-long law practice and as general counsel for an investment firm.

It was his tenure at the investment firm, Roberts Hackett, that Beneman concentrated on. That company made headlines back in 1994 when it was involved in the leveraged buyout of Oxford Homes, a modular homes manufacturer that went into bankruptcy as a result. Blackburn was Roberts Hackett house attorney at the time.

After he left there in 1994, he testified Wednesday, he formed a company called Prime Capital with another Roberts Hackett employee, Greg O'Halloran. O'Halloran is also a government witness who has pleaded guilty to felony charges in connection with the Petit case.

Along with James Erskine - another former Roberts Hackett employee who has pleaded guilty to felony charges in connection with the Petit case - they took over the $150,000 promissory note owed by a company named Seacoast. Roberts Hackett had raised the money for the company from private investors, but Seacoast could not pay the note when it came due.

They borrowed $100,000 from an investor to cement the deal and the three gave personal guarantees.

What they didn't tell the investor, Blackburn testified under questioning from Beneman, was that the money allegedly went to Petit. In 1997, he said, he told Clark that it was his idea to give the money to Petit.

Dressed in a gray suit, Blackburn was cross-examined for only 45 minutes Wednesday afternoon. Most of the day was devoted to a hearing of taped conversations between Blackburn and Petit on three separate ocassions in the spring of 1997, a few months before Petit and four other co-defendants were arrested on a 344-count criminal indictment. Those charges were eventually reduced to 87 counts.

The four plus hours of tapes range across a multitude of issues related to Petit's 14-year battle to have her lawsuit against Key Bank come before a jury.

The former owner of the Old Orchard Beach Pier, Petit sued the bank and the law firm of Bernstein, Shur, Sawyer & Nelson for withholding approved financing and trying to force her to take on partners, including members of the law firm and a bank director. Those actions, she claims, led her to be forced into bankruptcy.

Against the backdrop that saw an embattled Petit fighting a state civil suit, an involuntary bankruptcy, her lawsuit against Key Bank and an imminent federal grand jury, Blackburn wore a wire and spoke to Petit about a fraud scheme that was clearly unravelling.

''This is like a soap opera Cathy. It's worse than a soap opera,'' Blackburn told Petit at one of their meetings.

He was summarizing Petit's descriptions of the internecine-like feud that she said broke out amongst government witness.

Donald Shields - another witness who pleaded guilty to felony charges and was scheduled to testify for the government - had been forging the signature of a Camden doctor, Gordon Paine in several business dealings and claimed he had been sending all the money he raised for Petit back to Blackburn, Petit said.

''He's convinced Paine that you are the biggest thief in America,'' she said. Paine has been characterized as a significant investor, although Petit said he testified to state Assistant Attorney General Peter Brann that he had simply loaned Petit money.

''That man is pathological,'' Blackburn said of Shields.

Petit also told Blackburn that both O'Halloran and Erskine had claimed that Blackburn was responsible for fleecing investors, a charge that Blackburn refuted.

Petit said co-defendant Paul Richard opted to go to jail for 10 months and plead the Fifth Ammendment rather than turn over evidence that both were convinced would be scripted to create a crime against them and would lead to the dissolution of Petit's Key Bank case.

''They [Key Bank] are doing this to try to stop the flow of money. They think she can't deal with the US Attorney and us,'' Petit told Blackburn. ''Humiliate me and embarrass me. It's character assassination.''

Later, she told Blackburn that she was concerned about imminent federal charges because Key Bank's lead attorney would look for a quick settlement of her case against the bank with the trustee's legal counsel.

''I'm convinced that's what Lancaster wants,'' she told Blackburn . ''If Morrell settles, Lancaster would be an idiot to pay over $5 million for the case.''

The state's civil suit, she told Blackburn, was prompted by contact from another former attorney, Richard Poulos, to the Attorney General's Office. Poulos, Petit has said in the past, lashed out at her becasue she made a court filing that suggested the possibility that she might sue him for malpractice for some perceived legal errors.

At one point, Petit told Blackburn that the issue of whether any investments were securities was in doubt, but she also recommended admitting that they were and facing any fines that might be levied.

Petit, Paul Richard, Roland Morin and David Hall are facing 87 counts of mail fraud, conspiracy, money laundering, bankruptcy fraud and securities fraud. The attorney for Steven Hall, another co-defendant, fell ill Monday and Judge D. Brock Hornby agreed to sever him from the case. He could go to trial at a later date.

The courtroom was crowded Wednesday, as Beneman's cross-examination had been anticipated since opening day, when he told jurors in his opening statement that Blackburn was the true mastermind of the fraud.

In the gallery, friends, family and supporters of the defendants listened to Petit's frequently ribald language and Blackburn's occasional prodding. A legal representative for Pierce Atwood, Key Bank's lawyers, also sat in the gallery.

Key Bank and Pepperell Trust reached a settlement either Tuesday or Wednesday in the bank's decade-long suit that charged Peperrell Trust with failing to obtain it a release against possible legal action by Petit. That lawsuit was scheduled for trial Monday in York County Superior Court.