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Under financial pressure because of a soured PIPE deal, a British company traded on the Nasdaq stock market has filed a $100 million malpractice suit against the law firm that helped it arrange the transaction. CellPoint Inc., a provider of mobile networking technology, filed suit this week against international law firm Salans Hertzfeld Heilbronn Christy & Viener and Steven R. Berger, the New York-based Salans partner who represented them, in New York’s Supreme Court. The company claims that Salans failed to protect it when assisting on a $10 million PIPE (private investment in public enterprise) funding for the company late last year. “Berger and Salans held themselves out to CellPoint as knowledgeable commercial lawyers, familiar with financing documentation and securities requirements,” the company said in its suit. “Their advice fell below the standards for a reasonably competent attorney in this area.” Calls to Salans’ New York office were referred to managing partner John F. Cambria, who said the firm considered the suit “completely frivolous.” He refused to discuss the case further. CellPoint officials referred all questions to the lawsuit. At issue is the legal advice given to CellPoint about its relationship with Castle Creek Technology Partners, a Chicago-based investment firm that specializes in deals with public companies. CellPoint and Castle Creek first hooked up in December 2000, when the company secured $10 million from Castle Creek in exchange for convertible notes. Salans represented CellPoint in that deal and in other transactions with Castle Creek. The notes Castle Creek received were convertible in a so-called “toxic formula,” according to the suit, which means the share price was fixed at a 10 percent discount to CellPoint’s 20-day trading average. The setup allegedly allowed Castle Creek to sell CellPoint shares short in order to drive down the stock’s market price, giving the investment firm a better deal for the shares it was to buy. CellPoint said that Salans failed to advise it about the dangers of a toxic investment, failed to include a floor to the conversion price and failed to warn the company of consequences of certain provisions in the contract. The company claims that as a result of some of those provisions, it now faces claims from Castle Creek for interest rate increases from 6 percent to 15 percent, additional stock through conversion of notes and penalties exceeding $2 million. Additionally, it says that the terms of the deal have left other sources unwilling to provide the company with additional financing. Castle Creek, however, is not named as a defendant in the case. In its statement, CellPoint said it is in the process of negotiating a new agreement with the investment firm. As more companies find themselves in financial trouble, lawsuits will likely become the order of the day, many in the industry predict. Investors in venture capital firm San Vicente Group of Los Angeles, for example, sued the firm’s former managers in November, accusing them of breaching their fiduciary duty in the investments they chose. Venture attorneys not involved in the CellPoint case said that this suit could be a harbinger in their business. While there are some templates that help arrange financing deals, many of the particulars are negotiated on a deal-by-deal basis, leaving each agreement open to scrutiny. “There are a limited amount of funds to go around, and people are eking out every advantage they can get,” said one lawyer who asked not to be named. And with so many companies on the ropes, many will inevitably look for someone to blame, the attorneys warned. “In times of economic hardship, when people’s fortunes are disappearing, they often look for alternative ways to recover something,” a New York corporate lawyer said. “It does lead to scrutinizing deep pockets.” Copyright (c)2001 TDD, LLC. All rights reserved.

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