On order for review of application for admission to the bar.
For reversal -- Chief Justice Wilentz and Justices Schreiber, Handler, Pollock, O'Hern and Garibaldi. For affirmance -- None. The opinion of the Court was delivered by Handler, J.
The issues raised by these proceedings concern the standards for evaluating the fitness of a bar applicant to practice law and the procedures that must be followed in determining the candidate's fitness.
The individual whose application for admission to practice law has occasioned these proceedings is Donald Matthews. While in law school, Matthews was involved in a fraudulent investment scheme that eventually resulted in civil litigation by defrauded investors against Matthews and his partner. This unlawful venture also led to criminal proceedings against his partner, resulting in the partner's conviction and imprisonment. Matthews has maintained that he was deceived by his partner and that throughout his involvement he believed in good faith in the legitimacy of the investment scheme for which he solicited funds.
Initially, a designated part of the Committee on Character concluded that Matthews had knowingly participated in the investment fraud, demonstrated a serious lack of understanding
of the enormity of his misdeeds and displayed little, if any, remorse. Accordingly, it recommended that Matthews be denied admission to the bar for lack of the required good moral character. Matthews appealed this determination to a Hearing Panel of the Committee on Character, which, following a formal hearing, found that although Matthews should have known of the fraud, the evidence was insufficient to prove Matthews had actual knowledge. The Committee concluded that while Matthews' misconduct had been serious, his character had changed over the six intervening years, and that the six-year delay in admission had been sufficient discipline. Accordingly, on November 1, 1982 the Committee certified to the Board of Bar Examiners that Matthews was fit to practice law. Upon initial review of the certification, we issued an order to show cause in order to review the Committee's certification of Matthews' fitness to practice and to determine whether he should be admitted to practice law.
The heart of this matter concerns Matthews' relationship and business dealings with Ralph Cucciniello. In the late summer of 1973, as Matthews prepared to enter law school, Cucciniello offered Matthews the opportunity to enter into an extraordinarily profitable investment scheme. Cucciniello who was a social acquaintance of Matthews told Matthews that he had an opportunity to invest in some land deals that promised to yield a return greater than 40 percent on a term of merely four to six weeks. Matthews' understanding of the structure of these deals was that the money was being used to purchase property in Ocean County that the purchasers already had contracted to sell to another party at a tremendous markup, so that the profit was virtually guaranteed. Although Cucciniello was actually younger than Matthews and was similarly a law student without significant business experience, Matthews felt that the investment scheme was credible and, in September 1973, decided to invest.
Matthews made two investments in September, totalling approximately $1250. Subsequently, Cucciniello told Matthews that the deal had gone through and that his money had accrued the indicated profit. Cucciniello also indicated to Matthews that another similar transaction was planned and that Matthews could let Cucciniello retain his initial investment and profit and roll it over into this second deal. Matthews agreed and also gave Cucciniello another $600 to invest. The second deal being planned by Cucciniello was indeed similar to the first. However, neither deal involved any land transactions. Instead, Cucciniello was operating a classic, pyramid-style investment fraud known as a "Ponzi" scheme. In this type of scheme, no investment is ever made. Instead, the promised returns for the first set of investors are paid from the proceeds garnered from a second set of investors. The second set of investors is then paid off with the funds deposited by a third set of investors, and so on. At each step of the process, the promoter takes a sizeable cut as pure profit. The scheme creates irresistible pressure to bring in additional investors with ever greater amounts of money, and eventually collapses of its own weight when the supply of fresh investors dries up.
By October 1973, when Matthews rolled over his money into the second deal, he had become an active partner of Cucciniello in the solicitation of new investors. Cucciniello at that time asked Matthews if he knew anyone else who would be interested in investing in the deal, and Matthews proceeded to solicit funds from his personal friends for both the second deal and a series of subsequent similar transactions. These deals were structured in the same way as the first one in which Matthews had participated, with extremely high yields promised in a matter of four to six weeks. For his role in solicitation, Matthews received part of the profit. On a deal that Cucciniello said would yield a 40 percent return, Matthews kept 20 percent and the investors received a 20 percent profit.
The first of the deals for which Matthews solicited ended in November 1973. As with the succeeding deals, the investors were told that they could roll over their initial funds, along with accrued profit, into the next deal, and some evidently did so. In all, four deals occurred between the fall of 1973 and the fall of 1974 for which Matthews helped solicit investors. Over $500,000 was collected, with Matthews responsible for solicitations totalling over $100,000. Matthews has admitted to profits of at least $33,000 from his activity. These figures may be conservative, because many of the investments and repayments were in cash. No records were kept on cash transactions, and neither Matthews nor Cucciniello maintained a book of accounts.
Throughout all of these deals, Matthews claims to have relied totally on Cucciniello's representations. Matthews did have real estate experience, having received a real estate salesman's license and having worked in his father's real estate office. Nevertheless, he later stated that he did not think it was unusual to receive a guaranteed 40 percent return for short-term participation in a realty investment, although he had never before seen such a transaction. Matthews never looked at any of the sales contracts supposedly involved, never talked to any of the people supposedly purchasing the property, and never went to look at the property. He claims that his reliance on Cucciniello was total.
By December 1973, Matthews and Cucciniello began discussing the formation of a corporation through which investments would be funneled. Together they set up the corporation in early 1974 under the name "Rado," which stood for Ralph and Don, their first names. Matthews and Cucciniello were the sole directors and shareholders of Rado, each owning half of the corporation. A bank account was established for Rado and, by the summer of 1974, some of Matthews' and Cucciniello's investment activities were carried on through Rado, although some funds continued to be collected and disbursed through their personal checking accounts.
The level of Matthews' involvement can be seen in a transaction that he and Cucciniello conducted with Dr. John Rodgers and his wife, who were relatives of Cucciniello. Matthews accompanied Cucciniello to the Rodgers home, where the proposed deal was explained to Dr. Rodgers. Matthews and Cucciniello cosigned on a $70,000 note given to Rodgers as a further guarantee for the money Rodgers was investing. Although Matthews ostensibly thought Rodgers was investing in a land deal, two checks were made out directly to Matthews, who used these to pay off prior investors. Similarly, in a later transaction, Matthews had another investor write a $16,000 check payable to Dr. Rodgers. Matthews' later explanation of these events was that Cucciniello told him the money was "backed," and that this was simply a quicker way of paying off earlier investors, rather than waiting for proceeds from the deals that had just concluded to clear the banks. To Matthews, the arrangement simply appeared "expeditious."
The last investment scheme for which Matthews solicited outsiders began in August 1974 and continued on through the end of the year. This deal purportedly involved a $3 million certificate of deposit, issued through the Chase Manhattan Bank and the Bank of Luxembourg, that Matthews thought would yield over 40 percent on a six-month term. Matthews and Cucciniello were to raise $500,000 of the required amount, while the remainder was to be raised by a wealthy individual whom Cucciniello knew and who supposedly had arranged for the certificate. As with the land deals, Matthews' understanding of the mechanics of the C.D. deal was weak. He later testified that all he knew was that it was "some kind of a deal with oil through the Bank of Luxembourg." Matthews said that he and Cucciniello asked a friend who was a lawyer to look into it, and that this friend reported he could find no evidence of the existence of such a deal. Nevertheless, whatever skepticism Matthews felt was abated by Cucciniello's reassurances, and
Matthews went about his solicitations.*fn1
By the end of 1974, the availability of new money came to an end and pressure from investors for repayments mounted. The last profit taken by Matthews was $5,000 he received from Cucciniello on January 20, 1975. At this time Cucciniello and Matthews were negotiating to purchase a trailer court in Butler with Rado profits. The closing was scheduled for January 14, 1975, but did not occur because Cucciniello had failed to bring the necessary funds. Despite assurances that he would raise the money, Cucciniello failed to do so within the next two weeks.
Matthews at this point apparently lost confidence in Cucciniello. On January 30, 1975 he filed a complaint in the Chancery Division in Bergen County alleging that he and Cucciniello "were associated in the business of securing funds for third parties for the purpose of real estate finances" and that Cucciniello owed Matthews money given him by Rado and Matthews. Matthews sought and was granted an order enjoining Cucciniello from disposing of or transferring any real or personal property and requiring Cucciniello to deposit into the court both his personal financial records and those of Rado. Later, in June 1975, Matthews amended his pleadings to include claims on
behalf of third parties whose funds he had solicited and turned over to Cucciniello. A deluge of complaints by other investors followed after Matthews sued Cucciniello. Of these suits, two named Matthews as a defendant, and Rado was named as a defendant in these suits as well as in a third. These complaints were consolidated with a number of complaints in which Cucciniello was the sole defendant.
Trial began on November 12, 1975 and, after several delays, was concluded in April 1976. Although the trial did not focus on Matthews' knowledge and underlying intent, the court concluded that it was "clear beyond peradventure" that Matthews was "a full-fledged co-conspirator" with Cucciniello, and found that Matthews and Cucciniello were jointly and severally liable for nearly $500,000 in claims. The trial judge clearly did not believe Matthews' claim that he had been duped by Cucciniello for over a year. As evidence of Matthews' knowledge of the fraudulent nature of the deals, the court pointed to Matthews' presence at the solicitation of Dr. Rodgers, his co-signing of the investment guarantee, and his personal receipt of at least $11,000 from Dr. Rodgers at that time.
While Matthews' appeal of the court's decision was pending, he was graduated from law school and applied to take the July 1976 bar examination. Matthews' certified statement to the Committee on Character,*fn2 filed as part of his bar application, discussed the pending legal proceedings and also noted that criminal fraud charges had been brought ...