Law Firms Cannot Ignore Clients Who May Be Engaged in Ponzi Schemes

Posted by Ernest E. Badway on March 04, 2013

Regulators seem to believe that lawyers and their law firms act like ostriches when it comes to their clients and Ponzi schemes.  For example, a law firm paid $25 million to settle malpractice claims over legal services rendered to certain hedge funds and related entities controlled by a Ponzi Scheme artist, Arthur Nadel.  See SEC v. Nadel, M.D. Fla., 09-00087, 8/28/12, and http://en.wikipedia.org/wiki/Arthur_Nadel. 

Although the law firm continues to maintain its innocence, it settled with the Court appointed receiver over allegations that it failed to detect red flags from the fraudster’s activities during their representation of him between 2002 and 2009.  See Scoop Real Estate LP v. Holland & Knight LLP, Fla. 12th Cir. Ct., 2009-CA-014877, 2009, and  http://www.nadelreceivership.com/docs/Press_Release_HK-Settlement.pdf.  In his pleadings, the receiver argued that, if the firm acted sooner, things would have been different.  For its part, the law firm merely said that it wanted to end the litigation. 

In short, the lesson that lawyers and law firms must learn is that they have to implement systems to detect such potential frauds, or these law suits will undoubtedly become a terrible "cost of doing business."

Law Firm Must Defend Claims It Aided Client's Securities Violations

Posted by Ernest E. Badway on February 22, 2013

A California federal court refused to dismiss negligence and other state law claims against a law firm for allegedly helping its client commit federal securities law violations.  See Donell v. Nixon Peabody, LLP, C.D. Cal., No. CV 12-04084 DDP (JEMx), 9/5/12.

In this suit brought by the receiver of a defunct investment firm, the court rejected the law firm’s constitutional arguments regarding the right to bring such claims as well as its jurisdictional and standing challenges.  The lawsuit arose out of a SEC enforcement action against an investment firm, its principal and others.  The receiver accused the law firm of assisting in the principal's scheme of looting assets from the investment firm's clients.  The court found the receiver properly plead its complaint against the law firm, and found a sufficient basis for it preceding against the law firm given the alleged conduct.  Intriguingly, one of the law firm’s partners was also indicted along with the main fraudster.

In short, law firms are clearly a target when fraudulent activity occurs.  Law firms and their attorneys, therefore, must take precautions or trouble will follow them.

You May Be Able to Utilize Alternative Service in Securities Actions

Posted by Ernest E. Badway on February 20, 2013

In an interesting decision arsing out of a securities fraud action, plaintiffs were allowed to serve a non-American defendant corporation’s chief executive officer - a citizen of Canada - by alternative means.  See In re GLG Life Tech Corp. Securities Litigation, S.D.N.Y., 11 Civ. 09150 (KB) (GWG), 11/9/12.

The court indicated such service would provide notice to the corporation.  This decision was not issued in a vacuum.  This result was preceded by several attempted efforts at service and a foray into a negotiated waiver of service.  When all of these efforts failed, the motion was filed.  As such, the court indicated this alternative service would provide the required notice.

As securities litigation in many forms increasingly involves parties all over the globe, this decision may provide a blueprint for hauling international parties into an American court. 

The Proper Care and Feeding of Experts in Securities Matters

Posted by Ernest E. Badway on February 18, 2013

As many regular blog readers know, I have participated as an expert witness before.  It is fascinating to share with our readers other epxert experiences as well.  

Nonetheless, a number of issues relating to experts in securities cases have arisen over the last year.  In particular, many cases involve the threshold question as to if it is possible for an expert to be qualified or opine on the customs and practices of financial institutions.  There is case law across the United States that seems to indicate an uncertainty as to future court rulings.  However, some courts have indicated that they will require an expert to possess a great deal of experience with these particular issues before qualifying said expert to testify.

As a result, those wishing to propose such an expert should ensure that they have the right qualifications and experience to testify.

Lawyers and Issuers Really Need to Listen to SEC Comments Regarding Cyber Security

Posted by Ernest E. Badway on February 15, 2013

The SEC's Division of Corporation Finance has indicated that lawyers for issuers and issuers themselves should focus on and respond to the SEC' Staff's comments during the corporate filing review process.  

The SEC's Staff has seen that issuers and their counsel are not necessarily responding completely to comments.  The SEC Staff believes that this has caused the process to become more complicated.  In particular, the SEC Staff has suggested issuers are not responding to comments relating to cyber-security disclosures.  This is an essential issue that companies must address. 

This blog has previously discussed this critical issue in the past, and issuers and their counsel need to prepare the company to address and deal with these cyber-security issues.

Beware of the Rogue Stockbroker

Posted by Ernest E. Badway on February 13, 2013

We take a step back and speak directly to attorneys for a change, in particular, those lawyers who may recommend stockbrokers to their clients. 

In New York, attorneys are subject to the tort of negligent referral if they were to refer such a stockbroker, who then causes damage to the client.  Consequently, prior to making any such recommendation, attorneys should consider reviewing a stockbroker’s record prior to recommending such a person to their clientele.  FINRA's BrokerCheck provides a great resource for attorneys.  Essentially, the lawyer should engage in some due diligence as an initial step.  Another potential safety mechanism for lawyers would be to recommend more than one stockbroker when making these referrals.   

Thus, attorneys must be very careful and review all available public information before making these recommendations.