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Malpractice Suit Tugs K&L Gates Into Long-Running Case
The Legal Intelligencer
September 11, 2009
The years-long court proceedings involving alleged accounting fraud and the ultimate liquidation of beverage maker Le-Nature's Inc. now includes Pittsburgh law firm K&L Gates.
The trustee of Le-Nature's has sued the firm, partner Sanford B. Ferguson and accounting firm Pascarella & Wiker in Allegheny County Common Pleas Court for their alleged "stunning failure" to detect fraud in the company during an internal investigation they were hired to undertake three years before the collapse of Le-Nature's, according to the complaint in Kirschner v. K&L Gates.
The liquidation trustee, Marc Kirschner, claims that the firms' failure to uncover the fraud resulted in $500 million in damages.
In a statement, K&L Gates said the trustee has previously faulted others within Le-Nature's for the same alleged losses. The firm said Kirschner is not suggesting K&L Gates committed any fraud but that it should still be responsible for the losses.
"K&L Gates believes that Mr. Kirschner's lawsuit against it has no merit whatsoever, that his claim that K&L Gates is responsible somehow for Le-Nature's alleged damages resulting from the alleged fraudulent acts of Le-Nature's own senior management is reckless and irresponsible, and that Mr. Kirschner's suit is his latest transparent attempt to search for an innocent deep pocket to pay for alleged losses claimed on behalf of a company that caused its own demise," the firm said in the statement.
A call to Pascarella & Wiker's Carl Wiker, who was also named in the complaint, was not returned by press time. A call to Kirschner's attorney was also not immediately returned.
The suit makes claims of professional malpractice, negligence, breach of contract, breach of fiduciary duty and negligent misrepresentation. It suggests the firms were unqualified to handle the investigation and said they failed to "conduct an even minimally competent investigation" even though they were "presented with a virtual road map of red flags concerning fraud."
"Despite that extensive information and innumerable 'red flags' signaling the possibility of fraud, defendants conducted an investigation that was so deficient that they not only failed to uncover the fraud but also inexcusably issued a written report that provided a clean bill of health to the wrongdoers that enabled them to retain their senior management positions and to continue to loot and harm the company," Kirschner said in the complaint.
K&L Gates was hired in 2003 by a special committee of Le-Nature's board after the company's chief financial officer and other financial officers abruptly resigned. Upon their resignation, they had alerted the company's minority shareholders and outside auditors to areas of concern and unusual activities by the CEO, according to the complaint.
K&L Gates was hired to conduct the investigation and was given information by those who resigned in order to explain their concerns. The firm then hired Pascarella & Wiker to help with the financial aspects of the investigation, according to the complaint.
K&L Gates corporate partner Ferguson expressly represented to the committee that he had experience in these types of investigatory matters, according to the complaint, but one of his first steps on the first day of the engagement suggested that was inaccurate.
"He directed a librarian at K&L Gates to identify and obtain copies of articles discussing how internal corporate investigations should be conducted," Kirschner said in the complaint.
The complaint accuses the firms of using a "skeletal staff" to investigate a "limited" number of transactions even though they were given broad discretion to look at a number of matters. It also claimed that instead of conducting an "independent" investigation, the firms allowed CEO Greg Podlucky, a main focus of the investigation, to dictate certain aspects of the investigation and allowed him to verify certain transactions and documents without obtaining third-party verification, according to the complaint.
The complaint lays out numerous pieces of information that were allegedly given to the firms as part of their investigation that raised red flags. It also said the firms failed to satisfy the standard of care because they allowed Podlucky to be directly involved in parts of the investigation and gave him advanced warning about the topics certain interviews would cover.
According to the complaint, the firms allegedly issued a draft version of their final report to Podlucky for his review and comment before giving it to the committee.
K&L Gates issued its report to the committee in December 2003, which, according to the complaint, stated there was "'no evidence of fraud or malfeasance'" with regard to the transactions, according to the complaint.
In October 2006, AIG alerted Le-Nature's shareholders that it thought the company had forged AIG letters relating to the purchase of equipment AIG helped finance. In the complaint, Kirschner took issue with the allegation that K&L Gates didn't suggest a new investigation was needed once the AIG information came to light.
In September 2006, Podlucky had asked Ferguson and K&L Gates to help the company with its initial public offering and Ferguson brought in some of the firm's London attorneys to help, according to the complaint. It was during that time in October that the AIG information came to light. The minority shareholders sought and won a temporary restraining order to stop the IPO in light of the AIG news. Podlucky put Ferguson in charge of negotiating with the shareholders to try and vacate the TRO, according to the complaint.
A custodian was appointed by the courts to lead the company's management. The custodian filed an affidavit in November 2006 with the Delaware Chancery Court citing evidence of financial fraud, according to the complaint, and bankruptcy soon followed for the company.
