It's lawyer vs. lawyer in FBI embezzlement sting

Employee wears wire to gather evidence

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When federal agents raided the home and office of bankruptcy attorney Daniel J. Gates on Feb. 20, 2002, the first person he called was his employee and confidante, attorney Patricia L. Blais.

"The FBI are here, Pat," he said as agents combed through his Zelienople house.

"The FBI?" she said. "Oh my God, Dan. ... How did this happen?"

That was some fine acting, because Blais knew exactly how it had happened. She was the reason the FBI was there, along with the Internal Revenue Service and U.S. postal inspectors.

Two weeks before, she had contacted the U.S. attorney's office and described how Gates had been embezzling millions of dollars from his clients, including $118,000 from ex-Pittsburgh Steelers star Rod Woodson.

Agents decided to use one lawyer to catch another. They recorded her calls to Gates and sent her into the law firm wearing a body wire as she continued to play her role as his "best friend."

Gates is heard on those tapes discussing how to shuffle money from new accounts to pay off older ones and cover pilfered losses, while at the same time securing fraudulent loans and placating angry clients with excuses.

"You know, just play him a little," he instructs Blais in one tape when she asks how to handle a client who wants his money.

But now those incriminating tapes are the subject of an unusual legal debate.

Gates' public defender, Marketa Sims, argues that Blais, 43, of Bellevue, was Gates' lawyer, in part because she had represented him in some past business deals. Because of that relationship, Sims has accused federal agents of "outrageous conduct" in violating the attorney-client privilege that is supposed to be sacrosanct.

"The government not only induced attorney Blais to make disclosures of attorney-client privileged information, but further induced her to continue the attorney-client relationship under false pretenses while wearing a body wire," Sims said in court papers.

But Assistant U.S. Attorney James Wilson, who has overseen the investigation from the start, said Blais merely worked for Gates and was not his personal attorney.

She may have represented him in several of his side businesses, but Wilson said Blais was never his lawyer in regard to anything happening at Gates & Associates.

"There was no attorney-client relationship between Gates and Blais regarding the subject matter of the fraud schemes," he said.

Even if Blais was Gates' lawyer, however, the government has another legal weapon. Under the law, the attorney-client privilege is not protected if a crime is ongoing, and Wilson said Gates was defrauding clients and banks right up until the day of the search.

Theft and confessions

This argument is one of several intriguing developments in the case against Gates, 43, that have emerged in recent weeks in U.S. District Court, where he has been under indictment for more than a year.

His law practice is defunct, but he was once a fairly prominent lawyer in the region, running Gates & Associates out of a $600,000 building he owned on Northgate Drive in Marshall. The firm was small, with only Blais and two other lawyers practicing with Gates, while his wife, Linda "Buzzy" Gates, handled the bills and his ex-wife, Karen, worked as a secretary.

Outside of legal circles, Gates was known largely because of his cable TV commercials. In one, he extended a hand to a man contemplating jumping from a ledge and said he could help clients get the IRS "off their backs."

He never realized the IRS, and specifically the agency's Criminal Investigation Division, would one day be on his back.

In July 2003, a federal grand jury charged him with stealing more than $3 million from his clients between 1997 and 2002 to support a fancy lifestyle for himself and Linda that included a stable of 20 show horses in Butler County, a $700,000 vacation home in Key West, Fla., collections of guns, stamps and coins, and such baubles as a $60,000 wristwatch.

Gates is accused of operating what Blais described as a Ponzi scheme in which he collected money from clients -- and from fraudulent bank loans -- to cover his obligations to other clients after stealing their money for himself.

He burned through his money, though, traveling the country to horse shows and snapping up every expensive item he could find, from artwork and sports memorabilia to furniture for his Key West home.

He was deeply in debt and always needed more money, according to investigators, so he stole it from his firm's escrow account.

Although the indictment hit the newspapers in 2003, the details of the investigation didn't become public until hearings to suppress evidence started last month.

Those hearings, in which Sims has been trying to get the case thrown out, have featured some spectacles that make sense only in the legal world.

For example, why did Gates take the stand Nov. 22 and confess while at the same time insisting an earlier confession be tossed out?

Sims wants U.S. District Judge Joy Flowers Conti to throw out Gates' Feb. 28, 2002, confession on the grounds that Gates didn't realize his statement would be used against him, even though all three agents involved testified that he was told it would be.

But last month's confession came about because of Sims' attempt to dismiss the indictment based on her claim that agents violated the attorney-client privilege.

To support her contention that Blais and Gates had a professional relationship, Sims had Gates testify that he had sought her legal advice when he called her during the 2002 raid. And to do that, he had to admit he was defrauding clients, which he did.

So the November confession -- made in open court and recorded by a stenographer -- doesn't count except in the narrow confines of Sims' motion. It can't be used against Gates at trial unless he testifies, and Conti won't consider it in deciding whether Gates' earlier confession should be dismissed.

It is possible, then, that a jury could hear the Gates case without realizing that he twice admitted doing what he is accused of doing.

Undercover attorney

The confessions are a sideshow, however, compared to the star witness, Blais.

She couldn't be reached last week, but according to court records she went to work for Gates in 1998 and earned $55,000 a year as a personal injury and bankruptcy lawyer.

Sometime in 2001, she suspected he was stealing client money. When she confronted him, she said he admitted it and took her into his confidence.

She eventually contacted lawyer J. Alan Johnson, a former U.S. attorney, who recommended she go to the U.S. attorney's office. They met with Wilson and the agents on Feb. 6, 2002.

Blais described the whole scheme, complete with dollar figures, and "laid out a list of clients that Mr. Gates had embezzled from," said Internal Revenue Service agent Ed Wirth.

She also described how Gates had arranged for loans from three banks that she said he secured with false information.

Although Sims has tried to portray Blais as a co-conspirator in the scheme because Gates considered her his "equal partner," Wirth said she acted only at Gates' direction and did not benefit from the fraud.

To corroborate her claims and gather enough evidence for a search warrant, Wilson and the agents decided to have her act as an undercover operative. The first call was placed on Feb. 7, from the U.S. attorney's office, followed by others leading up to the Feb. 20 searches.

That's when Blais took the call from Gates at his home and expressed faux shock at what was happening.

"I can't help but believe that somebody from the office is involved in this," Gates said.

Blais didn't let on, and later drove to the law office and pretended to be interviewed there by agents while she continued to talk to him by cell phone.

"Are you all right?" he asked her.

"No," she said, "are you?"

"No!" he said.

The calls during the search are critical because of what else was said. At one point Blais told him to "do the right thing" and suggested some defense lawyers Gates might call.

Sims used that to bolster her argument that she was his lawyer. Wilson said the opposite.

"The proof is in the pudding," Wilson said. "Gates never asks Blais to act as his attorney even though he calls her in the midst of an ongoing search."

Even without Blais, however, the government has another avenue of attack: All of the alleged victims, including Woodson, are prepared to testify against Gates.

In the Woodson case, Gates received more than $300,000 in connection with the bankruptcy of Woodson's former restaurant at Station Square, the All-Star Grille.

But, according to the indictment, "Gates embezzled and converted to his own use funds given to him on behalf of the All-Star Grille Inc. by Roderick K. Woodson, causing a loss in excess of $118,000."

In another case, Gates represented a Pittsburgh couple who wanted to set up a trust for their children. In June 2000, the parents gave Gates checks totaling more than $430,000.

Gates assured them he had invested the money in certificates of deposit and told them at a meeting at his office that he would provide documentation about the CDs.

In truth, there were no CDs and Gates had simply used their $430,000 for himself.

In addition to embezzling money from his clients, the indictment also charges that Gates defrauded Sky Bank and two other banks by overstating income and under-reporting liabilities while securing loans for $500,000, $475,000 and more than $1.3 million.

The government has seized all of Gates' real estate, cars and other assets and will auction them to the highest bidder if he is convicted.


Correction/clarification (published Dec. 14, 2004) -- The first name of Internal Revenue Service agent Ed Wirth was omitted from this Dec. 13, 2004 story about a bankruptcy attorney accused of stealing from clients. Torsten Ove can be reached at tove@post-gazette.com or 412-263-2620.


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