BigLaw Feels the Heat as Failed Companies and Their Trustees Blame Law Firms for Their Demise
Updated: Several law firms are facing malpractice suits accusing them of contributing to the demise of bankrupt companies, leading to harm to shareholders or investors.
Some of the suits seek hundreds of millions of dollars in damages. Among the firms targeted are Bryan Cave, Sedgwick, Holland & Knight, and Baker & McKenzie.
The Am Law Daily has news of suits against three law firms, and Reuters has news of a fourth.
Bryan Cave is facing two malpractice suits seeking $100 million in damages filed by trustees for a bankrupt mortgage loan brokerage and one of its affiliates, according to the Am Law Daily and CalCoastNews.com.
The suit claims Bryan Cave failed to advise Estate Financial Inc. about the need to comply with securities laws, allowing investors who bought mortgage-backed securities to lose $100 million. Two EFI officials pleaded guilty to fraud in the sale of the securities in 2009.
“The facts presented in this complaint tell a tragic story of how one of the most prestigious law firms in the country completely abandoned legal principles and its fiduciary, contractual and ethical obligations in an overzealous attempt to orchestrate a restructure of a mortgage broker/investment company,” alleges the EFI suit (PDF), filed in U.S. Bankruptcy Court in California.
Bryan Cave spokesman Bennett Kleinberg issued a statement saying the suits are without merit. “These lawsuits are nothing more than an unfortunate and misguided attempt by the bankruptcy trustees to hold Bryan Cave liable for events that occurred solely at EFI and EFMF and which apparently began long before the firm was retained,” he said in the statement.
Another law firm, Sedgwick, is facing a $200 million malpractice suit in connection with a failed financial services company that raised money from investors to buy accounts receivable from health care providers, according to Reuters. The Securities and Exchange Commission sued the company, Medical Capital Holdings Inc., in 2009 after it defaulted on nearly $1 billion in investor notes.
The suit claims Sedgwick represented Medical Capital’s investment arm, which had a duty to pay principal and interest on loan notes, and its loan administration division, which had an interest in servicing as many loans as possible. In many cases, accounts receivable that had been purchased to justify payments of administrative fees were “entirely bogus,” the suit says.
Sedgwick partner Michael McGeehon told Reuters in an email that the firm is “in no way responsible” for any of Medical Capital’s losses. “The firm denies, and will vigorously contest, the allegations made against it,” McGeehon said.
Meanwhile, two law firms are facing suits in bankruptcy court filed by Industrial Enterprises of America, currently in Chapter 11 proceedings, according to the Am Law Daily. In the latest suit, IEAM claims corporate insiders participated in a “large-scale scheme to loot” the company, and they were aided by Holland & Knight.
“Had H&K represented IEAM faithfully with the vigor and loyalty required, the existence of the conspiracy would have been laid bare, its purpose defeated, and the [conspiracy] denied its illicit gains,” the suit (PDF) claims.
Holland & Knight issued a statement to the ABA Journal saying its work for Industrial Enterprises mostly involved the defense of a single litigated matter, and all of its work was handled in a professional manner. “Industrial Enterprises’ complaint includes nonspecific allegations against Holland & Knight, most of which involve conduct that occurred during a time period in which Holland & Knight did not represent Industrial Enterprises and involve work Holland & Knight did not do. Unfortunately, financially distressed companies all too often make frivolous allegations, and that is the case here.”
IEAM has also sued Baker & McKenzie and former partner Martin Weisberg, claiming Weisberg enabled a massive fraud. The firm declined the Am Law Daily’s request for comment.
Updated on May 9 to include a statement from Holland & Knight.
