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A multimillion-dollar merger involving Monsterbook.com is developing into a monster of a problem for Jones Day. On Aug. 2, California’s 2nd District Court of Appeal, an intermediate-level court based in Los Angeles, ruled that a former shareholder in the now-defunct online directory company had made a viable claim that Jones Day may have committed fraud that cost him $3.45 million in stock. Jones Day represented Transmedia Asia Pacific Inc. in acquiring Monsterbook.com, in which Frank Vega was a 23% shareholder. To pull off the deal, Jones Day secured $10 million in investment financing from a third party between the merger offer date of March 8, 2000, and the closing on April 13. The financing transaction, however, included so-called “toxic” stock provisions, in which investors received convertible preferred stock that diluted the shares of other Transmedia stockholders. As the court noted, “toxic” stock financing is a “desperate and last resort of financing for a struggling company,” ending up in bankruptcy 95% of the time. Vega, who was represented by Heller Ehrman White & McAuliffe in the deal, accuses Jones Day of hiding the existence of the “toxic” stock provisions to induce him into giving up his valuable Monsterbook.com stock for Transmedia’s worthless shares. Vega claims that Jones Day knew that a full disclosure of the terms of financing would have “killed the acquisition,” and that the firm told Vega, Monsterbook.com and Heller Ehrman that the $10 million financing was “standard” and “nothing unusual.” In opposing Vega’s suit, Jones Day’s lawyers argued that as counsel for an adverse party in the deal, they had no duty to disclose the terms of a third-party investment contract. The appeal court, in Vega v. Jones, Day, Reavis & Pogue, No. B170659, disagreed. “While an attorney’s professional duty of care extends only to his own client and intended beneficiaries of his legal work, the limitations on liability for negligence do not apply to liability for fraud,” Justice Paul Boland wrote. “Accordingly, a lawyer communicating on behalf of a client with a non-client may not knowingly make a false statement of material fact to the non-client,” he wrote. Justices Candace Cooper and Laurence Rubin concurred. Neither La Jolla lawyer Manuel Ramos, who represented Vega, nor Jones Day’s attorney, James Fogelman, a partner at L.A.’s Gibson, Dunn & Crutcher, could be reached for comment.

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