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Let’s call it the not-so-friendly skies. The re-reincarnation of the airline Pan American is suing Sheppard, Mullin, Richter & Hampton and one of the firm’s D.C. attorneys for legal malpractice. Filed in D.C. Superior Court, the suit alleges that Sheppard, Mullin, which represented two of the airline’s subsidiaries in the past, breached a fiduciary duty by agreeing to represent Pan Am’s general counsel, John Nadolny, without the company’s knowledge. According to the complaint, Nadolny had forged a $320,000 bond meant to secure a settlement Pan Am had reached with the Air Line Pilots Association. When inspectors from the bond company came calling, Nadolny turned to attorneys at Sheppard, Mullin, including John Fornaciari, a partner and white-collar defense attorney at the firm, for advice on how to best handle the insurance company’s investigation. Nadolny had worked with Fornaciari in the past on Pan Am-related litigation in New England and in Florida. Sheppard, Mullin agreed to take Nadolny on as a client, but here’s the interesting part: For several months it allegedly didn’t inform Pan Am that it had done so, nor did it alert Pan Am to the problem with the pending bond. Pan Am alleges that this clandestine relationship resulted in damage to the company’s reputation and a snarled Transportation Department proceeding that has remained stalled for two years. And the bond, which Nadolny conjured out of thin air complete with a forged signature, wasn’t the only misdeed involved. The former Pan Am senior vice president and general counsel pleaded guilty in late March in the U.S. District Court of New Hampshire to providing false financial information to the Transportation Department and was sentenced last week to six months in a federal prison. Pan Am’s suit against Sheppard, Mullin is still in the discovery phase, and neither party is doing much talking. But the case provides an interesting, though convoluted, look at what can happen if your wayward in-house counsel lawyers up with one of your outside law firms. Sheppard, Mullin, of course, isn’t taking the accusations lightly. “My clients believe that they made proper professional judgments, gave excellent advice to their clients, and complied fully with applicable ethical standards,” says Alan Strasser, Sheppard, Mullin’s attorney and a partner with Robbins, Russell, Englert, Orseck, Untereiner & Sauber. J. Michael Hannon, the attorney for Pan Am and founder of the Hannon Law Group, says, “We don’t comment on litigation.” FORGING A BOND Three sister companies — Pan Am Railways Inc., Pan American Airways Corp., and Boston-Maine Airways Corp. — filed the suit in March. Sheppard, Mullin had represented Pan Am Railways and Pan American Airways in separate pieces of litigation, both state court actions in Massachusetts and in Florida. According to the complaint, the firm dealt with Nadolny on a regular basis in connection with both cases. At the time, it was also representing Timothy Mellon, the owner of all three companies and the grandson of Gilded Age banker Andrew Mellon, in federal court in Connecticut. According to the complaint, when Nadolny realized in early May 2005 that the insurance company had discovered the errant bond, he approached Sheppard, Mullin about taking his case. The firm wrote up a retainer agreement stating that Nadolny could wait to inform Pan Am about the bond until three days after the insurance company decided on its course of action. Pan Am alleges that this was an attempt “to protect Nadolny from exposure to a criminal investigation.” Meanwhile, Boston-Maine, the third plaintiff and the only one Sheppard, Mullin did not represent, was in the middle of a DOT review on whether or not it could purchase and operate more large aircraft. The Air Line Pilots Association opposed Boston-Maine’s application to own and operate more planes, citing financial fitness problems and a lack of compliance with federal and state statutes as well as federal aviation standards. On June 1, 2005, the pilots union submitted findings to the Transportation Department that Nadolny had forged the bond that was meant to secure the union’s settlement. “We said, basically, you can’t trust these people in terms of what they submit,” says Marcus Migliore, a managing attorney for the union. According to DOT filings, the union was informed by an investigator from the American Financial Group that the bond was a fake. Nadolny was fired a few days after the union’s filing with the department. The company then discovered that Nadolny had also falsified bank statements and financial records, which in turn led to a DOT inspector general’s investigation. Pan Am’s attorney would not comment on how Nadolny falsified the documents without someone in the company’s financial department noticing, and the company’s president, David Fink, did not return calls for comment. In a letter to the Transportation Department, however, the company says that Nadolny, who had worked for the company and its affiliates for 18 years, was “afforded considerable autonomy with minimal direct supervision.” In the July 26, 2005, letter, the counsel for Boston-Maine describes the “stunning revelation” as happening during a conference call in which Nadolny admitted to altering the figures, to the “shock and astonishment” of all present. “He offered no explanation for those alterations, and the telephone call with him was brief.” Pan Am alleges that if Sheppard, Mullin had made the company aware of its general counsel’s fabrication, the company would have fixed the problems privately, its reputation would not have been tarnished, and Boston-Maine, a Pan Am subsidiary, would now have authorization to purchase the Boeing 727s it wants to use in expanding its operations instead of still being stuck in a department review. Hence the suit against Sheppard, Mullin. Pan Am alleges that the firm violated D.C. Bar rules concerning conflicts of interest by not disclosing its representation of Nadolny. Barry Cohen, a malpractice attorney with Crowell & Moring not involved in the case, says that, while complaints can’t be taken at face value, “if it’s true what they’ve said, the firm, I believe, could not take on the representation of the general counsel without informing Pan Am.” Leslie Corwin, a partner and malpractice expert with Greenberg Traurig, says informing clients about possible conflicts is always the best tactic. “The ethical guidelines are sometimes not as clear as we would like them to be,” says Corwin, who also is not involved in the case. “My advice always is disclosure because of that.” Sheppard, Mullin, however, disputes that its lawyers violated any ethical rules and argues that because the firm never represented Boston-Maine, it has no obligation to the company. The firm is seeking to have Boston-Maine dismissed as a plaintiff, a motion on which Superior Court Judge Lynn Leibovitz has yet to rule. PAN AM PLAYS A CARD Once upon a time, Pan Am sold tickets for future flights to the moon. Now, it specializes in hot spots like Trenton, N.J. Guilford Transportation Industries, a railroad operation owned by Mellon, purchased the Pan Am brand in 1998, as the once-famed airline sank into bankruptcy for a second time. Now the company has a small number of planes, continues to fight with the pilots union, and is struggling with the investigation, which still hasn’t been resolved despite concerned letters from members of New Hampshire’s congressional delegation, including Sen. John Sununu (R). In fact, in an Oct. 11, 2005, letter to then-Transportation Secretary Norman Mineta, Pan Am President Fink pleaded with the department to conclude its fitness review, emphasizing the company’s dire straits. At the end of the letter, Fink copied several New Hampshire congressional members and, oddly, the White House chief of staff at the time, Andrew Card Jr. Hannon, Pan Am’s attorney, did not respond to questions about why the company copied Card in the letter. Despite the pleas to folks in high places, the review is ongoing. Mary Peters, the secretary of transportation, said in a July 2007 letter to Sununu, “[O]ther outstanding fitness issues require our further review and consideration.” “This case raised specific issues that we had to examine,” says Bill Mosley, a spokesman with the department. “There’s been no determination.” Nadolny, through his counsel Bjorn Lange, a public defender in New Hampshire, had declined to cooperate with Sheppard, Mullin or Pan Am during his criminal investigation, citing his Fifth Amendment rights and attorney-client privilege. Now that he has been sentenced, however, both parties will be eager to depose him in order to complete discovery. One remaining mystery is why Nadolny did the things he did. “My own view is that he did it out of a sense of misguided loyalty to the company,” says Lange. “It’s cost him his license to practice law.” It may also end up costing Sheppard, Mullin a big chunk of cash.
Attila Berry can be contacted at [email protected].

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