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Smith Gambrell Entangled in Hedge Fund Scandal
Alleging legal missteps by law firm, bankruptcy trustee demands more than $80 million in damages
Fulton County Daily Report
August 06, 2008
Smith, Gambrell & Russell and one of its former attorneys are caught up in the expensive brouhaha surrounding International Management Associates, a now-defunct investment firm which bilked pro football players, a former Scientific-Atlanta CEO and other well-heeled investors of some $150 million.
IMA's bankruptcy trustee, William F. Perkins, told a federal court last month that the law firm and a former counsel from its Washington, D.C., office, C. Gladwyn Goins, represented IMA so poorly that they not only allowed the company's founder, Kirk S. Wright, to embezzle from investors long after his wrongdoing could have been discovered but also "helped Wright to continue his criminal misconduct."
Those alleged legal missteps cost the company "tens of millions" of dollars, according to the complaint, which demands that the firm and its former counsel pay more than $80 million in damages, plus attorney fees and litigation costs.
Wright in May was convicted in the U.S. District Court for the Northern District of Georgia of securities fraud, mail fraud and money laundering. Less than a week later, while awaiting a sentence that could have reached 710 years in prison and $16 million in fines, he hanged himself with bed sheets in his Union City, Ga., jail cell. He was 37.
In a July 9 filing, the trustee for Wright's former company claimed that Goins and his one-time firm breached their representation contracts with IMA by not carrying out some of their duties as attorneys and by being professionally negligent in how they dealt with the Securities and Exchange Commission.
The trustee also said that Goins and the firm breached their fiduciary duty to IMA "by placing their own interest in securing fees and expectation of future profits from a continued relationship with the IMA Entities ahead of their professional judgment and duties."
Both Smith Gambrell's managing partner, Stephen M. Forte, and his firm's counsel, H. Lamar "Mickey" Mixson at Bondurant, Mixson & Elmore, said they'd mount a vigorous defense against the suit but declined to comment further because the litigation is pending.
Goins, reached at his law offices in Alexandria, Va., referred comment to his attorney, John A. Chandler at Sutherland, who declined to discuss the case.
The defendants' answers are due Aug. 22.
The bankruptcy trustee is represented by Robert E. Shields, Everette L. Doffermyre, Samuel W. Wethern and Sheryl L. McCalla of Doffermyre, Shields, Canfield & Knowles.
The bankruptcy trustee is represented by Robert E. Shields, Everette L. Doffermyre, Samuel W. Wethern and Sheryl L. McCalla of Doffermyre, Shields, Canfield & Knowles.
HEDGE FUND MECCA
The trustee's effort to pin at least part of the blame for one of the largest investment scams Atlanta has ever seen on Smith Gambrell and Goins is the latest move in a complex series of cases and investigations stemming from what once was Wright's dream of using hedge funds to create an African-American financial mecca.
Wright, the founder of IMA, had a classic entrepreneur's story -- for a while. He launched IMA out of his house in Manassas, Va., in the mid-1990s, using money he got from a personal injury suit when he was hurt in a car wreck at age 19, according to a 2006 Wall Street Journal story. He eventually moved the company to Atlanta after joining forces with two anesthesiologists here who connected him with wealthy African-American doctors and with pro football players, all willing to invest heavily in the hedge funds IMA's marketing materials said to have produced a 27 percent average annual gain between 1998 and 2004.
According to information from the U.S. Department of Justice, Wright threw himself a $500,000 wedding, owned real estate here and in California, including a vast home in Marietta and possessed six luxury cars -- an Aston Martin and a Lamborghini among them.
But the beginning of the end came in early 2006, when IMA collapsed after writing bad checks to football players eager to get their money back. Wright, who claimed the losses resulted from mismanagement by others, went into hiding, but federal agents eventually arrested him by the pool at the Ritz-Carlton in Miami Beach, where he was staying under an alias.
Wright's death left some 500 investors -- including his mother, former Scientific-Atlanta CEO Bill Johnson, former Denver Bronco Steve Atwater and former Tennessee Titan Blaine Bishop -- with steep losses. Wright also died with an unpaid $20 million default judgment assessed against him in an SEC enforcement action.
And he left behind pending litigation -- including IMA's bankruptcy reorganization and a suit by a group of football players alleging that the NFL Players Association put IMA on a list of approved investments but failed to vet the company as promised.
BLAMING THE LAWYERS
The latest move in all that litigation attempts to pull Wright's former lawyers at Smith Gambrell into the blame game.
Wright, according to the trustee's complaint, hired Smith Gambrell in 2000, when he learned that IMA was the subject of an informal SEC investigation. The relationship later expanded, as evidenced by a series of engagement letters, filed as exhibits to the suit.
The letters show that Smith Gambrell agreed to develop and implement compliance systems applicable to a federally registered investment adviser and for the creation and registration of a broker-dealer. The firm also said it would represent IMA in connection with the preparation of confidential offering memoranda for four of its hedge funds and represent the company in another, later SEC investigation, launched in 2003.
Goins had "primary responsibility for the representation" throughout most of IMA's tenure as a client of the firm, the trustee alleged.
Though Goins would not comment for this story, even to confirm biographical information, research and interviews indicate that he is a former SEC lawyer who got his J.D. from Case Western Reserve University in 1976, followed by an LL.M from Georgetown University in 1979. Goins left Smith Gambrell in January 2004; the firm's managing partner, Forte, declined to discuss the reasons for that departure.
NOT ADDING UP
As IMA's primary counsel, the complaint alleged, Goins did not exercise the ordinary skill, care and diligence required of someone in his position.
One example, according to the trustee, occurred when the SEC asked for information about IMA's assets under management and account statements during the 2003 investigation. The trustee said Goins simply took the statements Wright faxed him -- statements that purported to be from Fidelity Investments and J.B. Oxford & Co. -- and sent them to the SEC without first authenticating them or even checking the dollar amounts.
The numbers didn't add up, the trustee said, concluding that the statements were fake. The stated total value of all the assets held in various accounts was $59 million on one page of a statement; on the next page, the total value is listed as $43 million, according to an exhibit filed with the complaint. Ultimately, according to the complaint, the accounts had only about $2 million in them.
"Had Goins reviewed the falsified account statements with even the slightest care, it would have been obvious to him that there were serious discrepancies," the trustee argued, adding that seeing the discrepancies would have obliged Goins to inquire further.
WHAT'S THE DUTY?
The question to be answered in litigation, of course, is the scope of Goins' and Smith Gambrell's duty to authenticate the statements.
Walter E. Jospin, a Paul, Hastings, Janofsky & Walker lawyer who defends clients in SEC enforcement matters, said it's difficult for a lawyer to identify a forged statement from a brokerage house. Also, he added, SEC regulations don't require an attorney to do the math to see if numbers on an account statement add up, or even, necessarily, to send the statement to an auditor.
"The duty, in my view, is to conduct reasonable diligence on the issue, and I don't think that includes analyzing financial statements or brokerage statements," said Jospin, who has no connection with the case. "Obviously, if there are red flags, that's another matter."
J. Randolph Evans, a partner at McKenna Long & Aldridge who heads the firm's financial institutions practice and handles legal malpractice and ethics issues, said, "There is a duty not to knowingly transmit information that you know is false. That's a clear boundary. Another clear boundary is you don't have to do the work of the investigating government entity, whether that's the SEC or someone else. In between those two boundaries, the law is less clear."
He said the government has argued, citing the Sarbanes-Oxley Act, that lawyers have an independent obligation to verify the accuracy of the information they are sending to the SEC. But, he added, "I don't think a court has gone that far yet."
NO INTENTION TO AUDIT
The trustee also alleged that the firm's work was problematic when it helped IMA prepare confidential offering memoranda for four of its hedge funds. The memoranda contained "one or more statements that were knowingly false and materially misleading," the complaint said. Specifically, the trustee alleges, each memorandum said that IMA would be sending to investors the company's audited financial statements.
"Goins and other persons at Smith, Gambrell & Russell knew that none of the IMA Entities had ever been audited and that ... IMA had no intention of having the financial statements of the funds audited," the complaint said.
Goins recommended against an audit and instead told IMA to use Ashland Accounting, an Oregon-based firm, to assess the company's performance under Association for Investment Management and Research standards, the complaint said.
Even when Ashland advised Goins of "numerous inconsistencies and discrepancies" in the client accounts and that "substantial data" were missing, the firm sent the documents to the SEC, and, the complaint alleged, in so doing exposed the company to liability for securities law violations.
The question to be answered, said Jospin, is, "Did the issuer have the present good faith intention to audit the financial statements. ... Now, if [Goins] advised them not to do the audit, that's inconsistent with the offering memoranda, but that's a factual issue I can't speak to."
Finally, the trustee alleged that Goins developed such a close personal relationship with Wright that he lacked independent judgment. As evidence of Goins' alleged failure to maintain the proper skepticism and distance, the trustee noted that Goins was in the process of co-founding an investment-fund marketing company, with IMA slated to be one of its clients.
Evans said the crux of the trustee's claims here could turn on the duty a lawyer owes to the company, which, by law, is separate and distinct from what would have been owed to an individual officer or director.
But, he added, another important issue in cases such as this is how any lawyer should react when he suspects wrongdoing by his clients.
"The lawyer's question is, 'Who am I supposed to alert?'" he said, adding that a lawyer cannot alert the SEC or the IRS without violating his duty to his client, but that he must tell someone in the company -- not that that necessarily presents a solution. "If there isn't a board, and I tell the CEO," he said, "that's like telling the fox that the fox is in the henhouse and some chickens are missing."
The bankruptcy case is In re: International Management Associates, No. 06-62966 (Bankr. N.D. Ga.). The trustee's adversary proceeding, which may be found in that file, also is styled Perkins v. Smith, Gambrell & Russell, No. 08-06382 (Bankr. N.D. Ga.).
