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McGuireWoods remains in the hot seat for the securities fraud committed by one of its former partners. The U.S. District Court in Kansas denied the law firm’s motion to dismiss a lawsuit brought by the bankruptcy trustee for defunct ethanol fuel manufacturer Ethanex Energy Inc. Former McGuireWoods partner Louis Zehil represented Ethanex and, according to the lawsuit, directed the fraudulent transfer of Ethanex securities for his own gain. Zehil pleaded guilty last year to securities fraud related to Ethanex Energy and two other companies. In a Dec. 21 decision, U.S. District Judge Carlos Murguia rejected the law firm’s argument that under the heightened pleading standard set forth in the U.S. Supreme Court rulings in Ashcroft v. Iqbal and Bell Atlantic Corp v. Twombly, the trustee did not plead a viable cause of action. “Defendant attempts to stretch the Twombly/Iqbal standard beyond its limits,” the judge wrote. The heightened standard, established in 2007, requires a plaintiff to show the “plausibility” of the allegations in the complaints. Murguia dismissed the motion without prejudice, concluding that the issue “may be appropriate for resolution at the summary judgment stage.” McGuireWoods’ attorney, Cathy Dean, declined to comment about the decision. She is a senior partner at Polsinelli Shugart in Kansas City, Mo. A spokesman for McGuireWoods also declined comment. The bankruptcy trustee is Eric Rajala, represented by the Edgar Law Firm in Kansas City, Mo. Ethanex hired Zehil to take the company public in 2006. According to the lawsuit, he created two private investment companies that unlawfully acquired Ethanex stock and sold the restricted shares at a huge loss to Ethanex but at a huge profit for Zehil. The complaint alleged that Zehil wrote an opinion letter in 2006 on behalf of McGuireWoods directing the fraudulent transfer of Ethanex stock to those companies. It further alleged that McGuireWoods had actual or constructive knowledge of Zehil’s conduct and that it failed to disclose his ownership or sale of Ethanex stock. The law firm fired Zehil in 2007. A civil U.S. Securities and Exchange Commission case is pending against him in New York. Specifically, the bankruptcy trustee’s lawsuit claimed that McGuireWoods violated federal and Kansas securities laws and is liable for legal malpractice, negligent supervision and breach of fiduciary duties. It also alleged that the law firm tortiously interfered with “business expectancies.” The complaint identified those expectations as acquiring financing, operating as an alternative fuel company, constructing new facilities and making a profit. The law firm’s motion to dismiss focused on the trustees’ business expectancy claim. McGuireWoods argued that it was speculative, and not plausible, as required by the Supreme Court decisions. The court disagreed. “Although the court will not permit purely speculative evidence to reach the jury, defendant has not established that lost profits and business expectancies are unrecoverable as a matter of law based on the pleadings.” Leigh Jones can be contacted at [email protected].  

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