Did a partner at one of China’s largest law firms conspire with her husband to steal $10 million from a group of U.S. clients?
 
That’s the charge being leveled in a securities fraud lawsuit now in federal court in New York, naming Beijing-based DeHeng Law Offices and a former partner at the firm, Helen Lv (pronounced Lü), as defendants. After two earlier complaints in the case were dismissed with leave to replead, a third amended complaint was filed September 14.
 
Lv has not responded to the lawsuit and could not be reached for comment. DeHeng managing partner Wang Li did not respond to a request for comment but, in a statement, the firm said: “Both the two complaints were denied by the [New York federal] court due to lack of facts and legal relationships. The disputes in the complaints were those among investors, nothing to do with DeHeng, and their complaints were pure frivolous ones.”*
 
Melissa Rubenstein, a Philadelphia-based counsel with Reed Smith who has been representing DeHeng in the New York suit, declined to discuss the case. The firm has not filed an answer addressing the substance of the case but previously moved to dismiss on procedural grounds, arguing lack of jurisdiction and failure to state a cognizable claim.
 
Plaintiffs Pope Investments, Jayhawk Private Equity Fund, and five other investment funds allege that in 2008 they were trying to acquire Shanghai Atrip Medical Technology Co. Ltd. (SMT), a Chinese company that distributes hospital equipment and operates dialysis centers. They made use of a complex variable interest entity (VIE) structure in which a U.S.–listed company they controlled called Aamaxen Transport Group Inc. (AAXT) would own SMT through a series of offshore vehicles and a wholly owned foreign enterprise in China.
 
According to the suit, the funds’ $12.5 million investment was to be channeled through these entities too. Of that amount, plaintiffs say roughly $1.4 million allegedly went to pay professional fees, including an unstated amount to DeHeng, which was hired as Chinese counsel to both SMT and AAXT, as well as the various entities, with Lv serving as lead adviser.
 
DeHeng has 1,200 lawyers in 21 China offices and four overseas offices in New York, Paris, Brussels, and The Hague. It has regularly worked on major cross-border transactions; the firm was one of the Chinese firms that advised the Agricultural Bank of China in its $22 billion initial public offering in 2010. There is another large Chinese firm with a similar name, Deheng Law Firm, that is not involved in the case.
 
According to the complaint, Lv provided a legal opinion letter stating that the VIE structure was sound. But the plaintiffs claim they were misled about the ownership of one of the vehicles involved in the transaction. That entity, Kamick Assets Ltd., turned out to be controlled by a man named Shao Ganghua, the suit alleges; the plaintiffs claim they believed he was merely a representative of SMT chief executive Chen Zhong. Shao could not be located for comment.
 
Shortly after the deal closed in April 2008, the suit claims, Shao used his control of Kamick to clean out a bank account containing the plaintiffs’ $10 million investment.
 
In a subsequent investigation in the fall of 2008 aimed at recovering the money, the plaintiffs say they found documents identifying Lv as Shao’s wife. They claim they also found some of the money had been diverted to a company in which Lv was listed as a director.
 
“Unbeknownst to [plaintiffs], the SMT transactions were actually a complicated scheme, which allowed Shao, Kamick, Lv, and/or DeHeng to steal the money invested by the [plaintiffs],” the funds charge in their complaint. That money, the complaint continues, has “since been dissipated through hundreds of ATM withdrawals in [China] and Hong Kong, wire transfers to other entities, and other purchases.”
 
The federal suit originally included financial advisers on the deal as well as New York law firm Guzov Ofsink, which handled U.S. law aspects of the deal. The advisers and Guzov Ofsink were subsequently dropped from that action, but a separate suit was brought against them in New York state court in May, charging fraud, breach of contract, negligence, and legal malpractice. Those defendants have moved to dismiss the case on the grounds that they could not have known Shao intended to embezzle the investors’ money.
 
Jim McMullen of Leawood, Kansas–based Shapiro & McMullen, one of the lawyers on the plaintiffs side and the former general counsel of Jayhawk Private Equity, says those other defendants failed their duties to protect their clients’ interests in other ways but the funds don’t believe they directly participated in the embezzlement.
 
But DeHeng is in a different category. McMullen asserts that the findings of the plaintiffs’ investigation offer clear evidence that “the lead partner at DeHeng [on the deal] actually and knowingly participated in the theft.”
 
The current whereabouts of Lv, whose Chinese name is Lv Helan, could not be determined. She is no longer listed on the DeHeng website, and a former colleague there, who was unaware of the New York suit says Lv left the firm suddenly a few years ago and no one seemed to know where she had gone. He recalls that she was a skilled and experienced lawyer, as well as a pleasant person.
 
A human resources manager at Beijing’s Guantao Law Firm confirmed that Lv joined that firm from DeHeng a few years ago as a partner but subsequently left on her own accord. She still shows up as a DeHeng lawyer on the Chinese Ministry of Justice’s online directory of lawyers, which states that she is 44 years old and was licensed to practice in China in 1995.
 
In moving to dismiss the case, DeHeng has argued that plaintiffs have not adequately alleged the intent that is a necessary element of a securities fraud case, contending that receipt of its normal fees could not be considered an adequate motive. The firm also charged that the funds had not shown that DeHeng was aware of the connection between Lv and Shao. In a March 2011 motion to dismiss, DeHeng said the plaintiffs “have alleged no facts that should have raised any ‘red flags’ or otherwise would have put the law firm on notice that anyone was intending to embezzle the AAXT investor’s money.”
 
DeHeng has also fought the case on jurisdictional grounds. Plaintiffs point to the Chinese firm’s New York affiliate DeHeng Chen, which they apparently served, and language on DeHeng’s website as evidence that the firm “holds itself out as a global partnership.” But DeHeng argues that it and DeHeng Chen are separate legal entities, and that the Chinese firm does not do business in New York. Moreover, the firm maintains that the locus of the transaction was in China and that, therefore, any claims should be arbitrated there.
 
U.S. District Judge Louis Stanton in the Southern District of New York has twice dismissed the action. Last November, he ruled that the plaintiffs had not pleaded intent to defraud with particularity. In August the judge found they had not adequately alleged that the securities fraud at issue had taken place in the United States. In both instances, however, he granted the plaintiffs leave to replead the case.
 
In their most recent complaint, the funds cite their purchase of U.S. shares in AAXT as the basis for their securities fraud claim and note that the share purchase agreement was signed and executed in New York.
 
McMullen says DeHeng is trying to use jurisdictional and procedural objections as delaying tactics. “These actors are going to do as much as they can to avoid arguing the merits of the case,” he says.
 
Arbitrating the case in China, says McMullen, would not be an appealing option. He notes that they encountered several difficulties in even finding out what happened to the money. “The lack of ability to use criminal and civil processes there has been frustrating,” he says.
 
An investigation led by Dechert Hong Kong partner Basil Hwang managed to trace some of the money and uncovered much of the evidence cited by the plaintiffs, McMullen says.
 
Hwang declined to discuss the investigation directly but said he had encountered a number of cases over the years in which foreign investors in China had essentially been ripped off, though he says relatively few go public.
 
“In many cases, the investors are embarrassed and try to keep it quiet,” says Hwang.
 
He also says these case can highlight the difficulty of holding Chinese lawyers and firms accountable. Ethical rules in China are poorly developed, and the state-controlled bar groups don’t really play an active disciplinary role, notes Hwang. As a result, he says, many Chinese lawyers may cross lines few would dare to in the West, such as investing in deals in which they are advising or ignoring obvious conflicts of interest. Foreign clients eager to move ahead with China investments are frequently willing to just go along.
 
“People often turn a blind eye to it as long as they can get their deal done,” says Hwang.
 
*Updated, 10/9/12, 10:30 ET:  Comment taken from a statement issued by DeHeng was added in the third paragraph.
 
Email: alin@alm.com .