February 4, 1999

Portland, Maine

The government's key witness in the alleged $6.8 million Catherine Duffy Petit fraud case endured a blistering attack from defense attorneys Thursday in an attempt to underscore their assertion that he is the real ringleader of Maine's largest investment fraud.

In testimony that lasted the entire day, Thomas Blackburn admitted to Petit attorney David Beneman that he:

• Devised a scheme to defraud a pension fund.
• Falsified a memorandum of understanding that said he was Petit's legal counsel.
• Submitted false legal bills that he claimed were owed by Petit.
• Failed to pay federal taxes for four years on proceeds he said he earned raising money for Petit.
• Pocketed thousands of dollars he told prosecutors were sent on to Petit.
• Spent the Maine employee payroll tax which he was supposed to pay the state.
• Sold two guns and gave an old address to a gun dealer while he was a felon, federal violations that could have landed him jail.
• Breached Maine bar ethics by using his attorney trust fund to pay personal expenses and co-mingle money destined for three different companies in which he had an interest.

Blackburn has pleaded guilty to bankruptcy fraud charges and signed a plea agreement with the government. Facing a mandatory five-year sentence, he acknowledged that he is hopeful prosecutors will file a motion with Judge D. Brock Hornby that will suggest he is sentenced to probation.

He is one of six men who have pleaded guilty to felony charges in connection with the case and are expected to testify. The others are Donald Shields, James Erskine, Greg O'Halloran, Robert Paradis and Armand Pelletier.

Petit, Paul Richards, Roland Morin and David Hall are facing 87-counts of mail fraud, conspiracy, money laundering, bankruptcy fraud and securities fraud.

A fifth defendant, Steven Hall, was severed from the case and could face a later trial alone after his attorney fell ill earlier this week and was hospitalized.

Beneman, who labelled Blackburn as the true ringleader of the fraud in his opening statement last week, pressed his attack by sketching a portrait of a man with deep financial and emotional troubles.

Saying it was the worst period of his life, Blackburn acknowledged that he contemplated suicide and left a package with a goodbye letter and a number of documents to his wife in 1995. That was the year, he testified earlier, that he severed his relationship with Petit and stopped his fundraising activities on her behalf.

It was also the year, a number of government witnesses who were solicited by Blackburn as investors have testified, that he told them he was ''washing his hands of them.''

Inside that package was what Blackburn termed ''a sort of life insurance policy'' for his wife and kids. It consisted of a number of documents with references to accounts receivable. One consisted of several unpaid bills for his former law firm which amounted to $40,000. They were in Petit's name. Blackburn acknowledged to Beneman that they were false.

So to, Blackburn testified, was a memo of understanding he drafted in which he stated that he was Petit's legal counsel.

''I thought it was appropriate at the time,'' he told Beneman. Blackburn has repeatedly testified that he was acting as a businessman in a commercial transaction with Petit in his six-year span of raising money to fund her Key Bank lawsuit.

He also left a $500,000 promissory note to fellow prosecution witness O'Halloran in the package. O'Halloran was a former colleague of Blackburn's at the investment firm of Roberts Hackett and the two opened a venture capital firm named Prime Capital.

O'Halloran lent Blackburn $4,000 to start the company - which Blackburn acknowledged was largely unsuccessful. Blackburn testified that he used money that he said was given by investors to finance Petit's Key Bank case to finance Prime Capital business transactions.

Questioned by Beneman if O'Halloran was unhappy over Blackburn's failure to pay money he owed Prime Capital, Blackburn said he ''felt it equitable that O'Halloran receive a share. The money was a combination of payment and gift.'' Later in 1995 the two had an unpleasant split, Blackburn said.

Prime Capital also borrowed money from Capital Placement Services, a company owned by government witness Erskine, Blackburn testified. Blackburn pledged a note of $25,000 and paid Capital Placement Services with money that he said was raised from investors for Petit's lawsuit.

Erskine's company was also the beneficiary of a number of other deals that were set up through Prime Capital. Erskine, like O'Halloran, was a former colleague at Roberts Hackett.

One investor solicited by Erskine was listed on Blackburn's accounting ledger to the government as having invested $73,000, but ultimately fees to Erskine and Blackburn reduced that figure to $55,000, his records show.

However, Beneman pointed out, the investor actually wrote a check for $133,000.

''You did business with Mr. Erskine. Did you think he was an embezzler,'' Beneman asked.

''I did not know he did this until this moment,'' Blackburn replied.

Beneman outlined the extent of Blackburn's financial woes over the years. He was unable to pay his law office rent and was eventually sued for and ordered to pay $5,000 in back rent.

He was sued by at least two other investors and transferred his house to his wife's name in 1989 because he was in part concerned about creditors, Blackburn told Beneman. Ultimately, the house was foreclosed on. He also owed thousands in back taxes, he testified.

In addition to using his attorney trust fund for expediting transactions for Capital Placement and Prime Capital, Blackburn also said he used it to facilitate almost $500,000 for Roberts Hackett's leveraged buyout of Oxford Homes, a modular home builder which filed for bankruptcy as a result. Blackburn was house counsel for Roberts Hackett at the time.

Unlike Tuesday and Wednesday, when he faced the jury and looked at them frequently during direct questioning from Assistant U.S. Attorney Clark, Blackburn turned towards the lawyer's podium and often clenched his hands and crossed and recrossed his legs.

When pressed by Richard attorney Evan Slavitt about whether he ever thought he was committing a fraud during the six-year period he claims he was raising money for Petit, Blackburn said he was after 1993, when Petit was placed into involuntary bankruptcy.

''In relation to the investors, I don't think I was consciously, but unconsciously[subconsciously] I knew I was,'' he said. ''I should have paid more attention.''

Blackburn's involvement with Donald Shields, another government witness who has pleaded guilty to felony charges, escalated after the pair went to visit potential investors in the Rockport/Camden area.

Shields introduced Blackburn to Dr. Gordon Paine, who Shields had done other business with and whose signature he is charged with forging in deals unrelated to Petit. He is facing five felony counts in Lincoln County Superior Court for the alleged forgeries, where he pleaded not guilty last October.

Blackburn convinced Paine to initially invest $150,000 he said, in part based on a letter claiming a $2.5 million escrow account that had the forged signature of a Boston attorney overseeing Petit's $3.9 million settlement with a Portland law firm. Blackburn claims Petit provided him with the letter.

Under questioning from Beneman, he said he never contacted the firm to see if the letter was authentic and never saw the original.

''You travelled to Las Vegas and Buffalo and testified that you called Florida and a number of other places out of state to solicit investors, but you never called Looney & Grossman to ask whether there was an escrow account''? Beneman asked.

He then asked Blackburn if he had a computer, copier and copies of documents related to her lawsuit in his law office during the time the forged letter was being circulated to investors who wanted reassurance that their money would be backed by an escrow account. Blackburn replied that he did. Richard Grahn, the attorney whose name was allegedly forged, did work on Petit's civil suit against Key Bank.

Blackburn had previously testified that the agreements that he issued to investors promising in most cases to souble their money and an additional 18% interest were pre-signed by Petit and then given to him in stacks. He had the only copies, he testifed, and never gave then to his associates.

Ultimately, investors in the Camden area contributed hundreds of thousands of dollars. The checks were made payable to either Blackburn or Shields.

In earlier testimony, the former lawyer, who testified that he has resigned his license to practice law in Maine, said he raised some $4.3 million for Petit. Over $3.7 million went to Petit or her associates, he said. He claims to have kept approximately $200,000 for himself over the six-year period.

Defense lawyers pointed out a number of inconsistencies with the accounting procedures he provided to the government in which he claimed money was sent to Petit. Some $600,000 appears unaccounted for based on those exhibits.

In his cross-examination, Slavitt questioned Blackburn about a letter he wrote to Richard about forwarding $225,000 to him which does not appear in the accounting summary he provided to the government. Blackburn acknowledged the ommission.

He also asked him about his testimony to FBI agent James Osterreider, in which Osterreider asked him about a $98,000 payment form his attorney trust account to the Maine Bar Association. Blackburn said he could not recall the reason for the payment, but did remember writing a tuition check in 1994 for his son's education at Roger Williams University out of the trust account.

Slavitt also pressed Blackburn about discrepancies that have appeared in his testimony about a $100,000 investment received from Larry LaCoste.

Wednesday, Blackburn acknowledged that only $40,000 of that was paid to Petit's employees. He provided Clark with information she received the entire sum, but testified that he, Erskine and O'Halloran received a total of $25,000 in commissions.

In his testimony to the FBI, he said she received $82,500 and yesterday he told Beneman Petit received $87,500.

''That leaves only $75,000 Mr. Blackburn. We have three different stories. One you told Mr. Beneman, one you told Mr. Clark and one you told the FBI,'' Slavitt barked at Blackburn. ''Pick a sum, which one is it''?

David van Dyke and Bruce Hochman, attorneys for Roland Morin and David Hall respectively, also cross-examined Blackburn.

Van Dyke established that Morin was involved with introducing investors to Blackburn for a 13-month period between 1992 and 1993 and that Morin did not receive commissions but assignments, or promissory notes. He was never paid on those notes.

Blackburn testified that he never told Morin there was no escrow account and that some investors money allegedly went to paying Petit's personal expenses.

Hochman established that Blackburn never met David Hall, a former Sun Life Agent who allegedly had his customers cash in their annuities and invest in Petit's lawsuit. Blackburn also testified that there was no indication of money paid to Hall on his accounting ledger he gave to the government.

The defense attorneys finished with Blackburn at the end of a long, grueling session. Prosecutors will be calling additional witnesses when the trial resumes on Monday.

February 4, 1999

7:25 p.m.