Buchanan Ingersoll & Rooney has just been hit with the second malpractice suit in three years stemming from work handled by former Washington partner Louis Diamond. A jury in the first suit held the firm and Diamond jointly liable for nearly $860,000. The latest suit, filed two weeks ago by the name partners of a lobbying shop in Washington, is asking for more than twice that.
When asked about the latter case, Buchanan’s general counsel, John Leathers, said, “All I can do at this point is investigate the allegations in the complaint because Mr. Diamond is no longer with the firm.” Diamond hasn’t been with Buchanan since 2007.
Both lawsuits arise out of Diamond’s work setting up employee stock ownership plans (ESOP). An ESOP establishes a trust fund in which company stock is allocated to individual employees. Contributions to the trust are usually tax-deductible. Both lawsuits claim that Diamond’s errors cost his clients those tax benefits.
In the first suit, Diamond has acknowledged that he’s responsible for a paperwork snafu that left his clients on the hook for taxes they sought to avoid. While at Buchanan in 2006, he was hired by Abeton Inc., an Oregon-based company, to create a stock ownership plan and transfer stock owned by co-founders Danny Johnson and Jerry Becker into the trust. To receive the tax benefits of the transfer, Johnson and Becker had to convert Abeton to a C-corporation by way of a form filed with the Internal Revenue Service. Diamond failed to file that form.
Although he admits the mistake, he said his clients could have easily corrected the problem. “The law is pretty well established that, as long as a mistake is corrected before the end of the year, it can be undone. They chose not to correct it,” he said.
Not so, said Daniel Skerritt, a partner at Portland, Ore.’s Tonkon Torp who represented Johnson and Becker. “The legal theory Mr. Diamond is pointing to was put forward as part of the defense, and it did not carry the day,” Skerritt said. In their suit, Johnson and Becker accused Buchanan and Diamond of legal malpractice, breach of contract and breach of fiduciary duty. On Feb. 27, 2008, a jury awarded Johnson $434,521 and Becker $424,774.
Diamond is well known among Washington-area lawyers who specialize in ESOP law. Christopher Roberts, a partner at Potomac, Md.’s Shulman Rogers Gandal Pordy & Ecker and a member of the industry group ESOP Association, said Diamond has been practicing ESOP law for about as long as it has been around. Diamond has been advising on ESOP law since at least the late 1970s and has moved among several now-defunct firms.
Beginning in 1981, he was a partner at Finley, Kumble, Wagner, Underberg, Manley, Myerson & Casey; its Washington spinoff Laxalt, Washington, Perito & Dubuc; Keck, Mahin & Cate; and Silverstein and Mullens, which was acquired by Buchanan in 2000. After he left Buchanan in 2007, Diamond briefly signed on with Paley Rothman. Today he runs a solo Washington practice as Diamond ESOP Advisors. His legal work doesn’t appear to have drawn criticism until after he joined Buchanan.
The suit filed last month alleges a different error on Diamond’s part but a similar problem for his clients. In 1998, Diamond, then at Silverstein, was hired by lobbyists Hector Alcalde and Kevin Fay to help them set up an ESOP and advise them on related investments designed to defer capital gains taxes. Diamond took the matter to Buchanan in 2000.
According to a complaint filed in U.S. District Court for the District of Columbia on July 20, Diamond allegedly provided bad advice on an ESOP-related investment. The complaint alleges that Diamond advised Alcalde and Fay to invest in a company that other ESOP lawyers recognized as problematic and that the IRS later dubbed a Ponzi scheme. As a result, Alcalde and Fay’s complaint says, the IRS has tried to collect $2 million in capital gains taxes, penalties and interest that Alcalde and Fay shouldn’t have had to pay. The complaint, filed by Harvey Cohen and John Prominski Jr. of the McLean, Va., office of Miles & Stockbridge, alleges professional malpractice and negligence.
Last week, Diamond said he couldn’t comment on the Alcalde and Fay case, because he had not been served with the complaint yet. He also said he hadn’t spoken to Buchanan about the suit.
Jeff Jeffrey can be contacted at jeff.jeffrey@-incisivemedia.com.