Legal Ethics

K&L Gates Missed 'Massive Fraud'; Its Probe of Co. a 'Stunning Failure,' Suit Says

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The bankruptcy trustee overseeing the liquidation of Pennsylvania-based Le-Nature’s Inc. has sued the largest Pittsburgh-based law firm and a certified public accountant for malpractice, contending that the inadequate probe they conducted for the company’s board in 2003 failed to spot a “massive fraud” that came to a head in 2006.

Trustee Marc Kirschner of New York called the investigation by K&L Gates and the CPA a “stunning failure” in the lawsuit he filed today in Allegheny County. It contends that the law firm ignored a number of red flags in concluding there was no merit to claims by the company’s chief financial officer that its chief executive officer was involved in corporate wrongdoing, reports the Pittsburgh Tribune-Review.

In the suit, Kirschner accuses the law firm and accountants of taking at face value explanations offered by former CEO Gregory Podlucky and failing “to conduct an even minimum investigation” before issuing an internal report that determined there was no evidence of fraud or malfeasance, the newspaper reports.

A law firm spokesman could not immediately be reached by the Tribune-Review. However, in a statement to the Am Law Daily the law firm denies the allegations.

Former law firm chairman Sanford Ferguson, who stepped down from that post in 1997, is also named as a defendant, the law blog notes. He is a corporate governance partner at K&L Gates.

A federal criminal investigation into allegations that Podlucky overstated earnings and looted the company before it went bankrupt reportedly is ongoing.

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