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A court-appointed receiver cleaning up after an alleged Ponzi scheme is barred by the statute of limitations from filing a $200 million malpractice suit against Sedgwick, the San Francisco firm argued in court papers filed on July 11. The suit, filed on May 2 in federal court in Los Angeles, alleges that Sedgwick failed to meet its standards of care in approving undocumented loans for Medical Capital Holdings Inc., a financing firm charged by the U.S. Securities and Exchange Commission, along with various related entities and principals, with running a Ponzi scheme that defrauded investors out of $77 million. The SEC moved for a receiver to be appointed over Medical Capital Holdings; U.S. District Judge David Carter granted that request in 2009. The SEC suit remains pending. In a motion to dismiss the receiver’s malpractice suit, Sedgwick defended its actions and argued that the receiver was barred by a one-year statute of limitations on malpractice claims. “There’s a tendency when a business deal goes bad and people can look at things with hindsight to blame the lawyers for business judgments that were made. This case is a good example of that,” said Peter Stone, a partner in the Palo Alto, Calif., office of Paul, Hastings, Janofsky & Walker who represents Sedgwick. “We’ve seen a lot of those cases in the past years.” Medical Capital Holdings, based in Tustin, Calif., purchased accounts receivable and gave out loans to doctors, hospitals and others in the medical field in need of immediate financing. According to the receiver’s suit, Medical Capital Holdings and its affiliates raised about $1.7 billion from 20,000 investors between 2003 and 2009. Investors lost about $1 billion in principal and interest, according to the suit. “It sure looks like what they were doing was taking money from later investors and using them to pay off earlier investors, which is a classic identifying factor in a Ponzi,” said Stephen Walters, a partner in the San Francisco office of Los Angeles-based Allen Matkins Leck Gamble Mallory & Natsis, who represents the receiver. Sedgwick, he said, handled about one dozen loans for Medical Capital Holdings. “Our complaint is basically that the loans were unauthorized under the documents that had represented to investors how the money would be spent and the agreement of the trustees on how the money would be spent,” Walters said. “Sedgwick had reason to know that and was negligent in not advising the loans were improper.” Sedgwick also stands accused of failing to divulge a conflict of interest in simultaneously representing the various funds and Medical Capital Holdings, which charged about $300 million in administrative fees to manage the funds during that time. “Sedgwick was representing not only the fund that was making the loan, but they were representing the group of Medical Capital companies including the ones that relied on generating assets in order to get paid their fees,” Walters said. “Our claim is that Sedgwick had a conflict and should have been looking out for the interest of the loans.” Sedgwick maintained that the statute of limitations began to run from the point the receiver cut off Medical Capital’s attorney-client privilege with the firm in 2009. Sedgwick’s last loan was completed in 2007. Stone said that the alleged conflict had been disclosed to investors and, in any case, had nothing to do with its legal work. “What’s important to note is there’s no conflict they had with respect to loans,” he said. The loans were legitimate, Stone said, and what the receiver called “limitations,” such as the percentage of investor funds that could be used for lending, were estimates, not requirements that weren’t followed. Sedgwick’s alleged omissions had no effect on Medical Capital’s financial condition and the firm is not accused of being complicit in any wrongdoing, the motion argued. So far, Sedgwick is the only law firm to be sued in the Medical Capital case. Manatt, Phelps, & Phillips handled Medical Capital’s offerings to investors. Manatt initially represented the Medical Capital defendants in the SEC’s suit but withdrew early, citing $384,603 in unpaid legal bills. Manatt spokesman Lawrence Martinez did not respond to a request for comment. A hearing on Sedgwick’s motion to dismiss is scheduled for Aug. 15. Amanda Bronstad can be contacted at [email protected] .   

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