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Law Firm's Answer to $80 Million Legal Malpractice Suit Focuses on Trustee Plaintiff's Role
Smith Gambrell is accused of faulty representation of International Management Associates, which bilked investors of $150 million
Fulton County Daily Report
September 12, 2008
The language in defendants' answers to lawsuits tends to be curt -- with widespread use of the one-word sentence "denied" sprinkled with the occasional "admitted" for innocuous statements of fact.
But Smith, Gambrell & Russell's answer to an $80 million malpractice action filed against the firm by the bankruptcy trustee for one of its former clients takes an unusual, philosophical tack, starting with an excerpt from a recent decision from the 7th U.S. Circuit Court of Appeals.
The passage, by Chief Judge Frank H. Easterbrook, questions the motivation of plaintiff-trustees -- such as, the answer implies, William F. Perkins, the trustee who's claiming that Smith Gambrell was professionally negligent in its representation of the now-defunct investment firm International Management Associates, which bilked professional football players and other wealthy investors of some $150 million.
"The filing of lawsuits by a going concern is properly inhibited by concern for future relations with suppliers, customers, creditors, and other persons with whom the firm deals (including government) and by the cost of litigation," the firm quotes Easterbrook, who is widely known for applying economic theory to legal analysis.
Adding bold and italic type to the decision from Maxwell v. KPMG, 520 F.3d 713, Smith Gambrell quotes Easterbrook:
"The trustee of a defunct enterprise does not have the same inhibitions. ... [T]he trustee of a defunct business has little to do besides filing claims that if resisted he may decide to sue to enforce. Judges must therefore be vigilant in policing the litigation judgment exercised by trustees in bankruptcy ... imposing sanctions for the filing of a frivolous suit."
Thus, from Smith Gambrell's perspective, a key to the case is the role played by Perkins, who has alleged that the firm represented IMA so poorly that it not only allowed one of the company's principals to embezzle from investors long after the wrongdoing could have been discovered, it also "helped," according to the complaint, that principal "continue his criminal misconduct."
The firm says Perkins is a trustee, but Perkins' lawyers argue that he's really a receiver -- and that titular distinction could make all the difference in terms of what he can recover.
H. Lamar "Mickey" Mixson at Bondurant, Mixson & Elmore, who represents Smith Gambrell and co-defendant C. Gladwyn Goins, a former counsel in the firm's Washington, D.C., office, said in an interview that Perkins is only a trustee. While with the firm, Goins served as outside general counsel to IMA.
By being the trustee, Mixson said, Perkins "stands in the shoes of the corporation" -- a corporation that, according to the trustee, ran a Ponzi scheme. The law doesn't allow lawbreakers to recover financially, Mixson noted, adding, "He can't recover any more than the corporation can."
Not so, countered Robert E. Shields, Perkins' lawyer at Doffermyre, Shields, Canfield & Knowles. Shields pointed to the wrongful conduct of IMA principal Kirk S. Wright, who killed himself while awaiting sentencing for his federal fraud and money laundering convictions.
Shields said Wright's actions can't be attributed to the company or Perkins because other IMA officers and directors were not aware of and did not participate in Wright's crimes.
"He was not the alter ego for the company in these circumstances," Shields said.
Shields added that Perkins isn't just the trustee -- he's also the receiver, which means he can recover.
"It was in his role as a receiver that he filed this suit," Shields said, explaining that Perkins first was appointed receiver when the case was initiated in Fulton County Superior Court, and again in the federal action filed by the Securities and Exchange Commission. "The receiver represents the creditors" and doesn't stand in the shoes of the company, he said.
THE DEFENSE
After Easterbrook's cameo, the lawyers for Smith Gambrell and Goins, a former SEC lawyer who now has his own practice in Virginia, responded to some key allegations.
Perkins alleged that Goins, in response to an SEC investigation of IMA, gave the SEC "fabricated" and error-filled brokerage statements -- with major numerical discrepancies -- from accounts IMA held at Fidelity Investments and J.B. Oxford & Co. Goins "failed to review" those statements, or if he did, he failed to exercise ordinary care, the complaint alleges.
In their answer, Smith Gambrell and Goins say this claim is "without merit."
"I don't think [Goins] had any duty [as an attorney] to verify the accounts, but in fact, he called the account representatives at the brokerage houses and talked to them about the accounts," Mixson said. The representatives, Mixson added, did not indicate to Goins that anything was wrong. Also, he pointed out, the SEC never alleged that the numbers in the statements didn't add up.
Shields said that, consulting the 2004 bankruptcy court file, he's got account statements from J.B. Oxford with the same date as the statements Goins filed with the SEC. But, he added, the statements in the 2004 file, gathered as a result of Perkins' subpoena to the brokerage house, show the account had a balance of $1.4 million, while the statements Goins sent to the SEC show about $60 million.
It was apparent on the documents' face that something was wrong, Shields said, and that would have triggered Goins' obligation to look further.
Perkins also alleged that Smith Gambrell and Goins told IMA not to hire an auditor -- despite promising in materials sent to investors as part of a private placement memorandum that the company would be audited. Instead, the complaint said, Goins pointed the company toward Oregon-based Ashland Accounting, which did performance measurements under Association for Investment Management and Research standards rather than an audit.
In their answer, Smith Gambrell and Goins say that, on the contrary, Goins tried to help IMA find an auditor and only suggested that Ashland Accounting's evaluation be done in addition to an audit.
Finally, the trustee alleged that Goins developed such a close relationship with Wright that he "failed to maintain the degree of professional skepticism and independent judgment" required of an attorney. The basis of that allegation is that Goins was attempting to form a business, intended to market IMA funds, with the wife of the managing partner of Ashland Accounting.
IMA's former lawyers counter that although Goins did form the business -- called Centricity, which is now defunct -- its purpose was not to market IMA funds but rather to identify minority- and women-owned investment advisory firms as potential investment advisers of institutional funds. What's more, the answer goes on, Goins "never marketed any IMA funds" through the company he helped found.
"None of these alleged bases for liability occurred in the manner portrayed by the Plaintiff, none give rise to liability to the Plaintiff and the Plaintiff was not damaged by any of them," the answer goes on. "The only parties damaged in this matter are SGR and Goins, who have been forced to defend against meritless claims."
Shields, of course, has a different view. "That's contrary to Centricity documents," he said, explaining that he has a notebook from a Centricity seminar held in Chicago around the time Goins left his employ at Smith Gambrell. The three inches of documents in the notebook identify Goins as the chairman of Centricity's board, Shields said, and in addition to containing marketing and other materials related to IMA, assures investors about the safety of the funds Centricity is pushing -- which include IMA funds.
Only after its philosophical argument and its analysis of Perkins' primary allegations does the answer move into a series of 25 affirmative defenses and, on page 11, settle into the standard answer format in which each paragraph of the complaint is addressed and, for the most part, denied.
Shields's take on his opposing counsel's form of an answer: "I was a little irritated at all of that preamble in an answer," he said, adding he'll consider filing a motion to strike. "I'm not saying we're going to do that, but we're going to take a hard look at it."
"He shouldn't be surprised," Mixson responded. "There's nothing in the first part of the answer or in any part of the answer that is remotely confrontational except that it states our client's position accurately and correctly and cites the legal authority on which it is based."
The case is In re: International Management Associates, jointly administered under No. 06-62966 and adversary proceeding No. 08-06382.
