Legal Malpractice

Criminal Indictments and Legal Malpractice

By (Andrew Lavoott Bluestone)

We've been revisiting this theme over the past year. When one thinks legal malpractice, the most common image is that of the personal injury client whose statute of limitations was blown.  However, today we see a significant rise of legal malpractice in the financial field.  Trustees in bankruptcy, receivers and cases coming out of the Enron and REFCO cases are becoming much more common.  Here is an article from Law.Com by Susan Beck about Mayer Brown , Refco
and Weil Gotshal, with a senior partner facing criminal charges.
 

"Understandably, Mayer Brown partners were worried about their exposure. The firm had just paid a huge settlement because of another client caught in a fraud, Commercial Financial Services Inc. Several former Mayer Brown partners say the firm paid roughly $100 million in 2005, and not all was covered by insurance. At the firm's annual partners meeting in April 2006, Mayer Brown's then general counsel, James Holzhauer, told partners that if the firm was hit with another big claim, it risked being thrown out of the lawyer-owned mutual insurance company Attorneys' Liability Assurance Society, according to three former partners. At the same time, Holzhauer and others in management tried to reassure partners about Refco. Recalls one: "They kept saying, don't worry about Refco. It's not like CSF." (Holzhauer became chairman in June 2007.)

But trouble was brewing. The bankruptcy court had appointed Joshua Hochberg as examiner to explore possible claims against Refco's outside professionals, and he brought a prosecutor's zeal to his task. The Washington, D.C., partner at McKenna Long & Aldridge had been chief of the fraud section at the U.S. Department of Justice and had supervised the Enron task force. For Refco, he amassed more than a million documents and interviewed 33 people. (So as not to interfere with the criminal investigation, he did not interview any Refco insiders.)

During the remainder of 2007, the bad news for Collins and Mayer Brown snowballed. Hochberg's report was released that July and came down hard on Collins and Mayer Brown, stating that the firm could be sued for malpractice, aiding and abetting the breach of fiduciary duty, and, most alarmingly, aiding and abetting fraud. In late July 2007, on the heels of this report, Weil sued Mayer Brown for RICO fraud and other claims, seeking more than $735 million for THL. The next month, Refco's trustee Kirschner sued Mayer Brown, seeking $2 billion. The following October, Mayer Brown was added as a defendant to the Refco shareholders' complaint.

Mayer Brown wasn't the only one targeted for civil liability. Bankruptcy trustee Kirschner also sued THL, Refco's auditors, the underwriters for the IPO, and even some of the parties who had done round-trip loans with Refco. In fact, the only one connected to Refco who didn't get sued was Weil. The firm may have escaped a lawsuit because of a friendly relationship with the trustee's lawyers at Quinn Emanuel Urquhart Oliver and Hedges, who didn't feel comfortable suing a firm that refers work to them. "We advised the trustee early on that, based on our working relationship with Weil, Quinn Emanuel would not undertake to investigate or bring claims against Weil," says one partner at Quinn. Kirschner hired another law firm, Milbank, Tweed, to bring claims against THL, and it's not clear if Milbank reviewed possible claims against Weil. Kirschner and Milbank declined to discuss the matter.

On the morning of Dec. 18, 2007, Mayer Brown partners were summoned to a meeting. Speaking from New York, Chairman Holzhauer informed the lawyers that Collins had been indicted. "It was short and to the point," said one lawyer. "He said Joe and the firm had engaged in no wrongdoing." The partner adds, "It shook me. I was not expecting this news." Attorneys who gathered in New York openly asked if this might lead to an Arthur Andersen-type crisis that could bring down the firm."

Full post as published by New York Attorney Malpractice Blog on November 05, 2008 (boomark / email).