Justia Corporate Compliance Opinion Summaries

Articles Posted in Legal Ethics
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Mark Ciccarello formed a company named F.E.M. Distribution, LLC for the purpose of marketing and selling a product line called “Lotus Electronic Cigarettes.” In 2013, Ciccarello faced federal criminal charges related to his operation of another business that sold and marketed synthetic cannabinoids. As a result of the federal charges, some of F.E.M.’s assets were seized by the federal government. To prevent further seizure of F.E.M.’s remaining assets, Ciccarello contacted attorney Jeffrey Davies; Ciccarello and Davies discussed options for safeguarding F.E.M.’s assets, which included the possible sale of F.E.M. to another company. Davies drafted documents to form two new companies, Vapor Investors, LLC, and Baus Investment Group, LLC, which collectively owned Lotus Vaping Technologies, LLC. Davies put together a group of investors. The members of Vapor and Baus orally agreed with Ciccarello that he would receive $2 million and a majority ownership interest in Baus in exchange for the sale of F.E.M.’s assets to Lotus, the shares to be held by Bob Henry until Ciccarello's federal problems concluded. F.E.M. was sold to Lotus, and Ciccarello continued to act as CEO and manage operations. In January 2014, the federal government issued a letter stating it had no further interest in Ciccarello’s involvement in Lotus. Ciccarello requested his shares in Baus be returned and that the sale documents be modified to reflect him as the owner of the Baus shares. However, this was never done. In June 2014, Ciccarello was incarcerated due to his federal criminal case. Lotus ceased making monthly payments to Ciccarello in July 2014 and never resumed. At some point in 2014, Ciccarello was also ousted from Lotus by its members and Bob Henry took over his role as CEO. In April 2016, Ciccarello sued Lotus, Vapor, Davies, Henry, and several other investors involved in the sale of F.E.M. to Lotus, seeking recovery of damages Ciccarello alleged he suffered as a result of the structure of the sale. Ciccarello’s claims against Davies was negligence claims asserting legal malpractice. Shortly after Ciccarello made his expert witness disclosure, Davies moved for summary judgment, arguing that even if Davies represented Ciccarello at the time of the F.E.M. sale, Davies was not negligent in his representation. After review, the Idaho Supreme Court determined the district court did not err in granting summary judgment in favor of Davies, denying Ciccarello’s motion for reconsideration, or denying Ciccarello’s motion for relief under Idaho Rule of Civil Procedure 60(b). View "Ciccarello v. Davies" on Justia Law

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Nutmeg LLC, formerly managed by Goulding, served as an investment advisor and sole general partner of more than a dozen investment funds, each a limited partnership under Illinois or Minnesota law. Goulding’s management of the Funds ended in 2009, when the SEC brought an enforcement action against him, Nutmeg, and others under the Investment Advisors Act of 1940, alleging that Nutmeg misappropriated client assets and failed to maintain proper records. The district court found that the SEC made the showing necessary to warrant the issuance of a restraining order prohibiting Goulding from managing the Funds and granted the SEC’s unopposed motion to appoint attorney Weiss as receiver for Nutmeg. Unsatisfied with Weiss’s performance, Goulding and limited partners from certain funds managed by Nutmeg filed an individual and derivative action on behalf of the Funds, alleging breach of fiduciary duty and legal malpractice. The court dismissed the federal securities law claim, claims against Nutmeg, all legal malpractice claims against Weiss and her firm, and two breach of fiduciary duty claims. The Seventh Circuit Affirmed, holding that even when viewed in the light most favorable to the plaintiffs, no reasonable jury could find that either Weiss or her firm willfully and deliberately violated any fiduciary duties. View "Goulding v. Weiss" on Justia Law

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Brooks, Debtor's CEO, was charged with financial crimes. In class action and derivative lawsuits, Debtor proposed a global settlement that indemnified Brooks for liability under the Sarbanes Oxley Act (SOX), 15 U.S.C. 7243. Cohen, Debtor’s former General Counsel and a shareholder, claimed that the indemnification was unlawful. The district court approved the settlement, Cohen, represented by CLM, appealed. The Second Circuit vacated, noting that the EDNY would determine CLM’s attorneys’ fees award. Debtor initiated Chapter 11 bankruptcy proceedings. The Bankruptcy Court confirmed Debtor’s liquidation plan, with a trustee to pursue Debtor’s interest in recouping its losses from the ongoing actions.Brooks died in prison. Because his appeal had not concluded, some of his convictions and restitution obligations were abated. Stakeholders negotiated a second global settlement agreement, under which $142 million of Brooks’ restrained assets were to be distributed to his victims; $70 million has been remitted to Debtor. The Bankruptcy Court awarded CLM fees for the SOX 304 claim; the amount would be determined if Debtor received any funds on account of the claim. CLM’s Fee Appeal remains pending at the district court.CLM requested a $25 million reserve for payment of its fees. The Bankruptcy Court ordered Debtor to set aside $5 million. CLM’s Fee Reserve Appeal remains pending. CLM then moved, unsuccessfully, for a stay of Second Settlement Agreement distributions. In its Stay Denial Appeal, CLM’s motion requesting a stay of distributions was denied. The Third Circuit affirmed. The $5 million reserve is sufficient. A $5 million attorneys’ fees award for 1,502.2 hours of legal work totaling $549,472.61 of documented fees would yield an hourly rate of $3,328.45 and a lodestar multiplier of over nine. In common fund cases where attorneys’ fees are calculated using the lodestar method, multiples from one to four are the norm. View "SS Body Armor I, Inc. v. Carter Ledyard & Milburn, LLP" on Justia Law

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This case involved questions of how the attorney-client privilege should apply in the context of derivative litigation. The nonprofit corporations involved in this matter were the Pittsburgh History and Landmarks Foundation (“the Foundation”) and its subsidiary, the Landmarks Financial Corporation (“the Corporation”), which managed the Foundation’s endowment. Plaintiffs were five former members of the Boards of Trustees of the Foundation and the Corporation who alleged they were improperly and ineffectively removed from the Boards in an attempt to thwart their oversight of the Foundation’s president, whom they believed was engaging in actions that were improper and not in accord with the Foundation’s mission. The Foundation’s Board created a Governance Task Force to review various practices of the Foundation; the Task Force recommended that both Boards be reduced substantially in number. The Foundation Board approved this recommendation and removed all trustees then serving from both Boards; significantly smaller boards were elected and as a result of these consolidations, and Derivative Plaintiffs lost their seats on the Boards. In accord with standard procedures for bringing a derivative action adopted by the Pennsylvania Supreme Court in Cuker v. Mikalauskas, 692 A.2d 1042 (Pa. 1997). The Supreme Court rejected the Commonwealth Court’s adoption of a qualified attorney-client privilege as set forth in Garner v. Wolfinbarger, 430 F.2d 1093 (5th Cir. 1970), which the Supreme Court viewed as inconsistent with prior Pennsylvania caselaw emphasizing predictability in the application of the attorney-client privilege. However, the Commonwealth Court’s decision not to apply the fiduciary or co-client exceptions to the attorney-client privilege under the facts of this case was affirmed. The matter was remanded for further al court and the Commonwealth Court and remanded the matter to the trial court for further proceedings. View "Pgh History v. Ziegler" on Justia Law

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Maynard, Cooper & Gale, P.C. ("MCG"), petitioned the Alabama Supreme Court for a writ of mandamus to direct the Jefferson Circuit Court to vacate its July 30, 2018 order denying MCG's motion for a change of venue and to enter an order transferring the underlying action to the Madison Circuit Court on the basis of the doctrine of forum non conveniens. In late 2017, AAL USA, Inc. ("AAL"), a Delaware corporation doing business in Alabama, and Oleg Sirbu, a resident of Dubai, United Arab Emirates (collectively, "the plaintiffs"), sued MCG, asserting a claim of legal malpractice pursuant to the Alabama Legal Services Liability Act ("the ALSLA"), and seeking, among other relief, disgorgement of all attorney fees paid by the plaintiffs to MCG. AAL maintained, repaired, and overhauled helicopters through various government contracts or subcontracts on United States military bases. MCG represented the plaintiffs from 2014 through October 28, 2016; two MCG attorneys, Jon Levin and J. Andrew Watson III, were shareholders of MCG whose allegedly wrongful conduct was performed within the line and scope of their employment with MCG. The events giving rise to this litigation began in September 2016, when AAL received a "base-debarment" letter notifying it that it no longer had access to certain military bases outside the continental United States. MCG chief financial officer Keith Woolford forwarded this letter to MCG, and, according to the plaintiffs, MCG "immediately embarked in a central role in [MCG CEO Paul] Daigle's and Woolford's scheme to steal the assets of AAL." The complaint alleged that Levin worked closely with Woolford and Daigle to draft the APA pursuant to which Black Hall Aerospace, Inc., Daigle, and Woolford would purchase all of AAL's assets, as a way to cure the base-debarment problem. The plaintiffs alleged that MCG knew that the APA would "gut" the plaintiffs –- its current clients –- while simultaneously benefiting Daigle, Woolford, and BHA –- other clients of MCG -- and that this "clear and irreconcilable conflict of interest ... was never disclosed to [the plaintiffs]." The Alabama Supreme Court concluded MCG carried its burden of showing that Madison County's connection to the action was strong and that Jefferson County's connection to the action was weak. Thus, the circuit court exceeded its discretion in refusing to transfer the case to the Madison Circuit Court in the interest of justice. MCG's petition for a writ of mandamus was granted. View "Ex parte Maynard, Cooper & Gale, P.C." on Justia Law

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Olagues is a self-proclaimed stock options expert, traveling the country to file pro se claims under section 16(b) of the Securities and Exchange Act of 1934, which permits a shareholder to bring an insider trading action to disgorge “short-swing” profits that an insider obtained improperly. Any recovery goes only to the company. In one such suit, the district court granted a motion to strike Olagues’ complaint and dismiss the action, stating Olagues, as a pro se litigant, could not pursue a section 16(b) claim on behalf of TimkenSteel because he would be representing the interests of the company. The Sixth Circuit affirmed that Olagues cannot proceed pro se but remanded to give Olagues the opportunity to retain counsel and file an amended complaint with counsel. View "Olagues v. Timken" on Justia Law

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The three underlying legal actions, involving breach of contract, breach of fiduciary duty, stock valuation, bankruptcy, and appeals, took place in Illinois. Plaintiffs, including attorneys involved in the underlying actions, sought to indemnification in post-trial proceedings. Defendant is a Delaware corporation with offices in Illinois. The Delaware Court of Chancery awarded plaintiffs $79,540.14 for pursuing the post-trial action and $241,492.50 for the Illinois proceedings, plus 20% of the expenses they incurred enforcing their indemnification right through this proceeding. The court cited the corporations’ bylaws, under which the plaintiffs are entitled to mandatory if indemnification would be permitted under the Delaware General Corporation Law and Section 145(a) of that law. View "Dore v. Sweports Ltd." on Justia Law

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Vint Hughes and H-D Transport, an Idaho partnership, appealed the grant of summary judgment in favor of Michael Pogue and Lawson & Laski, PLLC (collectively Pogue) in a legal malpractice action. Hughes and H-D Transport brought suit against Pogue claiming that at various points starting in October 2011, until present, Pogue had an attorney-client relationship with both Hughes and H-D Transport. In August of 2011, Hughes and Andrew Diges entered into a 50-50 partnership, under the name H-D Transport, to haul hydraulic fracturing fluid. Disagreements arose between the partners concerning the operation and finances of the partnership. On October 21, 2011, Diges hired Pogue to draft a formal partnership agreement. Diges told Hughes that he had hired an attorney to prepare a partnership agreement, and about a month later Pogue, Hughes and Diane Barker, the partnership bookkeeper, participated in a conference call regarding the partnership. Despite the efforts to create a partnership agreement, Pogue, on behalf of Diges, sent Hughes a letter “regarding the problems and irregularities concerning the operation of H-D Transport, and to propose a wind-up of the business.” Pogue filed a complaint requesting declaratory relief, an accounting, and a dissolution of the partnership (the Dissolution Action). In the complaint, Pogue named H-D Transport and Diges as the plaintiffs and Hughes as the defendant. Following trial of the Dissolution Action, the district court entered findings of fact and conclusions of law which largely decided issues in Hughes’ favor. Diges was ordered to repay H-D transport more than $50,000, including $1,500 in partnership funds for legal fees paid to Pogue. Following trial, but prior to the district court’s decision in the Dissolution Action, Hughes and H-D Transport filed the present action naming Pogue and his firm as defendants, alleging two counts of professional negligence and breach of fiduciary duty and two counts of unreasonable restraint of trade under the Idaho Competition Act. The district court granted Pogue’s motion for summary judgment on all claims, concluding Hughes and H-D Transport failed to establish that an attorney-client relationship existed with Pogue. The Supreme Court found that it was unreasonable, under the facts of this case, for Hughes to believe he had an attorney-client relationship with Pogue. The Court therefore affirmed the district court judgment. View "H-D Transport v. Pogue" on Justia Law

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The Company was organized as a limited liability company in 2007; its sole managing member was another LLC, whose sole members were the Ngs, who controlled and managed the Company. Defendant was one of the Company’s lawyers. The Company’s stated purpose was to serve as an investment company making secured loans to real estate developers. The Managers actually created the Company to perpetrate “a fraudulent scheme” by which the Company transferred the money invested in it to another entity the Managers controlled. Defendant knew that the Managers intended to and did use the Company for this fraudulent purpose and, working with the Managers, helped the Company conceal the nature of its asset transfers. The Company was eventually rendered insolvent and its investors filed an involuntary bankruptcy petition. The bankruptcy trustee filed suit against Defendant, alleging tort claims based on Defendant’s involvement in the Company’s fraud. Defendant argued that the claims are barred by the in pari delicto doctrine. The court of appeal affirmed dismissal, finding that the in pari delicto applies to the trustee and rejecting an argument that the doctrine should not bar her claims because the wrongful acts of the Managers should not be imputed to the Company. View "Uecker v. Zentil" on Justia Law

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Trusts that owned fifty percent of the common stock of nominal defendant IMS alleged that two of the company's three most senior officers mismanaged the company in breach of their fiduciary duties. Trusts moved to compel IMS to produce the senior officers' work email accounts. The senior officers asserted the attorney-client privilege but did not invoke the work product doctrine. The court concluded that the In re Asia Global Crossing, Ltd. factors weighed in favor of production, absent a statutory override that could alter the common law result. Because IMS conducted its business in Maryland, the federal government and the State of Maryland were the sovereigns whose laws IMS must follow when dealing with its employees' email. The Federal Wiretap Act, 18 U.S.C. 2510 et seq.; the Federal Store Communications Act, 18 U.S.C. 2701; the Maryland Wiretap Act, Md. Code, Cts. & Jud. Proc. 10-401 to 10-414; and the Maryland Stored Communications Act, Md. Code, Cts. & Jud. Proc. 10-4A-01 to 10-4A-08, did not change the common law privilege analysis. Accordingly, the court granted the motion to compel. View "In re Info. Mgmt. Servs., Inc. Derivative Litigation" on Justia Law