February 17, 1999

Portland, Maine

Catherine Duffy Petit's former attorney for her civil suit against Key Bank and a bankruptcy trustee who administered her estate for 18 months testified Wednesday in the 87-count federal trial against Petit and three other defendants.

Richard Grahn, a partner in the Boston law firm of Looney & Grossman testified under direct examination by Assistant U.S Attorney Paula Silsby that he was one of Petit's lawyers in her now 14-year effort to bring her civil suit against the bank to a jury.

He was instrumental in helping Petit reach a $3.9 million settlement with the Portland law firm of Bernstein, Shur, Sawyer & Nelson, which was a co-defendant in the suit.

Grahn - who is still technically one of Petit's attorneys of record in the civil suit - then oversaw the disbursement of the funds from the settlement to various creditors, including the payment of $1.5 million in attorney's fees.

The settlement, which came with a gag order issued by York County Superior Court Judge Arthur Brennan, called for the repayment of some of Petit's creditors and included a payment of $1.19 million to the former owner of the Old Orchard Beach Pier.

Grahn told jurors that Petit and all those bound by the gag order could have been sued for damages - conceivably as much or more than the $3.9 million settlement - for violating the order.

He also told the court that two escrow accounts totalling over $760,000 were established to pay off debts that Petit had incurred prior to the settlement.

By 1993, the accounts had been drained down to $31,000, and eventually Grahn was ordered to turn that sum over to the trustee of Petit's 1993 involuntary bankruptcy estate.

The issue of an escrow account has been pivotal in the government's assertion that investors in Petit's Key Bank suit were knowingly defrauded by the defendants.

Grahn told the court that three letters that were submitted by Silsby into evidence which were purportedly signed by him were in fact forgeries.

Those letters attest to the existence of an escrow account. Later, under cross-examination by David van Dyke, co-defendant Roland Morin's attorney, Grahn said he was not aware that a forged letter bearing his signature was shown to future investors by government witness Thomas Blackburn.

Blackburn testified earlier in the trial that he told investors at Petit's direction that there was a substantial escrow account to protect the investor's principal. He claims she supplied him with a copy of the forged Grahn letter attesting to the escrow account.

Blackburn has been labelled by the defense as the true orchestrator of the alleged $6.8 million fraud. He acknowledged solicting $4.3 million over a six-year period.

The sums of the escrow account investors were told about vary widely, according to witness testimony. Some were told $1 million, some $3.5 million and at least one remembered being told it was $13 million.

Petit, Paul Richard, Morin and David Hall stand accused of 87-counts of bankruptcy fraud, money laundering, securities fraud, mail fraud and conspiracy. Steven Hall was granted a mistrial and could be tried at a later date.

In addition to Blackburn, five men have pleaded guilty to felony charges in connection with the case and have agreed to testify in exchange for sentencing leniency. James Eskine, who testified last week, acknowledged raising $1.8 million over an 18-month period. Donald Shields, Greg O'Halloran, Armand Pelletier and Robert Paradis have yet to testify.

Grahn also told jurors that portions of the settlement were used to pay back assignments that had been issued to two investors who testified earlier in the trial. He said the agreements, which were reviewed by three attorneys, were perfectly legal and binding.

The Boston attorney also walked jurors through a summary of Petit's suit against the bank. Filed in 1986, the case had a number of counts reduced in January, 1993 and, in 1995, Brennan dismissed the sole count in summary judgement.

However, the Maine Supreme Judicial Court reinstated the case on an ammended complaint - the fourth filed in the evolution of the suit - in December, 1996.

Under cross-examination by Petit co-counsel David Beneman, Grahn told the court that the case is still pending in York County Superior Court and that the one remaining count in an encompassing one that could deliver full damages if a jury decides it has merit.

"It is possible in a civil complaint to have some counts reduced and still get a full recovery,'' the distinguished-looking, gray-haired attorney told Beneman.

Prosecutors have repeatedly asked witnesses whether they were told Petit's lawsuit was dismissed in 1995, inferring that any raising of money for a non-existent lawsuit is fraudulent in and of itself.

However, the case was on appeal and still considered active, as Grahn told the court when he provided an explanation of the fees agreed to to cover appeals.

Grahn also told Beneman that the original suit listed Petit as a plaintiff and also listed her corporations, CDP Inc., Old Orchard Ocean Pier Co. and Whiteway Amusements as plaintiffs.

That point is crucial, as prosecutors have repeatedly asked investors whether they were told that Petit was placed into involuntary bankruptcy. Her corporations, plaintiffs in the law suit, were never placed into bankruptcy.

The bankruptcy issue was key later in the day when Peter Fessenden, the bankruptcy trustee for Petit's estate from June, 1994 to December, 1995, was called to testify by Assistant U.S. Attorney Donald Clark.

Upon reviewing a summary of the $3.9 million BSSN settlement and the Key Bank case and possible malpractice claims against her former attorney, Richard Poulos, that Petit listed as assets, Fessenden filed an objection to Petit's request for an exemption of the Key Bank case from the Chapter 11 estate. That objection was affirmed by a bankruptcy judge.

Petit was placed into involuntary bankruptcy in 1993. The petitioning creditor was New England Mortgage Services Co.

In a summary she provided to the bankruptcy court in 1997, Petit claims that the attorney for that company, John Connor, conferred with Ralph Lancaster, a partner in the Portland law firn of Pierce Atwood and Key Bank's attorneys, and reviewed paperwork related to Petit at the firm's office. Key Bank did not have any outstanding claims against Petit or her corporations.

Fessenden testified that he held depositions for Richard and Petit in October, 1994 to ascertain the disposition of the settlement proceeds and the amount of money that Petit was receiving and spending.

Clark, Silsby and Fessenden then read portions of those transcripts to the jury before deliberations ended for the day.

In response to questions posed by Fessenden, Richard said he lent Petit somewhere in the order of $200,000 between 1990 and 1994. The loans were a verbal agreement between he and Petit, he told Fessenden and he lent the money because he wanted to assist her in her suit against the bank.

"I want to stop what Key Bank is doing to people,'' Richard said. ''Part of my motive is what they did to me and what they are doing to other people.''

Fessenden pressed Petit repeatedly in an October, 1994 deposition about who was supplying her money, who was being paid and which of her employees was keeping a financial accounting.

She told Fessenden that she listed Richard as having lent her $200,000 on her bankruptcy schedules and Boston resident Ed Simpson, a longtime friend, as having lent her around $600,000 between 1990 and 1994.

Much of that money, as well as that she received from the BSSN settlement, went towards trial expenses, she told Fessenden.

Fessenden later told Clark that he wasn't aware that money was being raised in the name of her corporations for the Key Bank lawsuit and he was not informed by either Richard or Petit about assignments that had been issued to investors. Knowledge of that, he said, would have altered his administration of the estate.

Petit's Chapter 11, which allows for reorganization, was eventually converted to a Chapter 7 in October, 1995. Chapter 7 calls for liquidation and also puts the Key Bank lawsuit in the hands of the trustee. Fessenden quit as trustee in December and was replaced by Joseph O'Donnell. O'Donnell died shortly after the current trial started.

Testimony will resume Thursday with Fessenden on the witness stand and prosecutors playing exerpts of a audio tape of a 1995 bankruptcy hearing.

Portland, Maine

7:10 p.m.