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The 5th U.S. Circuit Court of Appeals will hear arguments on May 6 in a Dallas securities fraud case that left 10 defendants facing a $223 million judgment. But two of the defendants dismissed their appeal and sued three Dallas attorneys and two firms, alleging breach of fiduciary duty, conspiracy to breach fiduciary duty and negligence. The two defendants-turned-plaintiffs, Richard Straza and his daughter, Robyn Straza, allege in their suit that Lawrence “Larry” Friedman and Ernest Leonard were “masquerading” as their attorneys when they actually were representing the interests of Dale Sterritt, Robyn’s husband at the time and a key figure in the securities fraud suit. Friedman and Leonard were attorneys in the Dallas firm of Friedman, Driegert & Hsueh, itself a defendant in the Strazas’ suit. Leonard represented the Strazas in the securities fraud case. The father and daughter also allege in Straza, et al. v. Friedman, et. al. that another attorney, Chris Weil, “conspired” in the legal strategy that victimized them. Weil’s firm, Weil & Petrocchi in Dallas, also is a defendant in the Strazas’ suit. Attorney Daniel J. Sheehan Jr., who represents the Strazas, alleges that three attorneys, Friedman, Leonard and Weil, used Richard Straza in an effort to protect Dale Sterritt. “He [Straza] was used as a pawn, and that is wrong,” alleges Sheehan, with Daniel Sheehan & Associates in Dallas. The three attorneys named as defendants denied all the allegations in their answers to the Strazas’ suit. “This is a sham lawsuit designed to get at our malpractice policy,” alleges Leonard, who currently practices with Friedman in Dallas’ Friedman & Feiger. Leonard is being represented by Plano, Texas, attorney John Roach, a former justice on the 5th Court of Appeals in Dallas. Friedman and Weil decline to comment on the record about the Strazas’ suit. “We believe it’s inappropriate to litigate cases through the media,” says Rob Roby, Friedman’s attorney and a partner in Dallas’ Gwinn & Roby. William Cobb, Weil’s attorney and a partner in Dallas’ Cowles & Cobb, was out of town at a trial and unavailable for comment by press time. The Strazas’ suit, filed in February 2001 in a Dallas County Court at Law No. 5, alleges causes of action for breach of fiduciary duty and conspiracy to breach fiduciary duty and negligence. The suit bounced around in three county courts before being assigned to visiting Judge John McCraw of McKinney, a former justice on the 5th Court of Appeals, Sheehan says. A Sept. 16 trial date has been set. In the underlying securities fraud case, Rahr, et al. v. Sterritt, et al., the Strazas were hit with a $33.5 million judgment after a federal jury in Dallas found they had “engaged in conduct constituting conspiracy to commit fraud,” according to the final judgment. STANDSTILL AGREEMENT The judgment against the Strazas is part of the $223 million verdict in the suit brought by Stewart Rahr, a New York businessman who alleged that he was defrauded by Sterritt and his father into investing in Sterritt-controlled Continental Investment Corp. (CIC). U.S. District Judge Joe Fish of the Northern District of Texas in Dallas signed off on the final judgment in Rahr on July 10, 2000. The Strazas retained an attorney to appeal the judgment but changed their minds and instead hired Sheehan to sue Friedman, Leonard, Weil and the two firms. Leonard alleges that the Strazas sued him and Friedman’s former firm in exchange for Rahr’s agreement not to object to a discharge of the judgment against them should there be a subsequent bankruptcy proceeding. While judgments, like other debts, could be discharged in a bankruptcy proceeding, Rahr could object to discharging the $33.5 million judgment because it was based on a fraud finding against the Strazas. Rahr and CIC signed a standstill agreement with the Strazas in November 2000. The agreement abates any efforts to collect the judgment against the Strazas if they prosecute an action against the three attorneys and their firms. The agreement further requires the Strazas to set up a special account in which any proceeds realized from the suit would be deposited. Under the standstill agreement, the Strazas are to take “all reasonable and necessary steps” to provide CIC and Rahr with priority over other creditors in executing on the depository account. Leonard alleges that the Strazas are using the standstill agreement to get around the prohibition against assignment of malpractice judgments. But Sheehan says there has been no assignment of the claim. He says the Strazas decided to enter the agreement with Rahr and CIC because they were not in a position to pay as much as $2 million in insurance premiums on a bond to prevent judgment creditors from going after their assets to satisfy the judgment. Under terms of the standstill agreement, CIC and Rahr agreed not to attempt to collect on the judgment during the depository period, which will continue until the Strazas’ action has ended. The Strazas allege in their suit against the three attorneys and the two firms that Sterritt first approached Rahr about investing in CIC in 1995, telling him that the quarry the corporation owned in Atlanta would be turned into a municipal waste dump. According to the petition, Rahr became “suspicious” of the Sterritts by mid-1998 and reported Dale Sterritt’s activities to the CIC board of directors, prompting three independent board members to remove him as the chairman of CIC. Sterritt and his father went to Weil, who had been their longtime attorney, the Strazas allege in the suit. “Weil immediately associated Lawrence Friedman to help with the battle,” the suit alleges. In 1998, Dale Sterritt sued the CIC directors in Sterritt v. Blahitka in Dallas’ 298th District Court, and Richard Straza intervened in the suit. Sheehan alleges that the three defendant attorneys, Friedman, Leonard and Weil, used Richard Straza to help Dale Sterritt. Dale Sterritt told Richard Straza a hostile takeover of CIC was being attempted and that Straza’s existing investment in the company — representing his life savings — was threatened, the Strazas’ suit alleges. “No legitimate reason existed for Richard Straza to appear in [Dale Sterritt's suit against the CIC directors],” the Strazas allege in their suit. Sheehan alleges that Richard Straza’s intervention in the suit against the CIC directors was encouraged because he had standing to sue and the CIC directors had challenged Dale Sterritt’s standing to bring the suit. “[Richard] Straza came to us and asked us to intervene [on his behalf],” Leonard says, adding that Straza was concerned about protecting his retirement funds. After the intervention, Leonard prepared most of the pleadings and motions for all the Sterritt parties and “largely masterminded” the suit against the CIC directors, the Strazas allege in their suit. The Strazas’ suit also alleges that Friedman appeared in the suit against the CIC directors to represent two Sterritt-controlled entities, Swan Financial Services and the Woodlands Ventures Inc., and Wilma Graham, a family friend used by the Sterritts as “a front” for Swan. Friedman filed a petition to intervene in that suit on behalf of Richard Straza. The Strazas allege in their suit that Friedman and Dale Sterritt arranged for $75,000 from Woodlands “to be routed through Richard Straza’s bank account and immediately transferred to Friedman.” “Although Sterritt structured this as a ‘loan’ to Straza, it was merely a mechanism for Sterritt to pay Friedman without actually appearing to do so,” the Strazas’ suit alleges. Sheehan alleges that Richard Straza’s intervention in the suit against the CIC directors led to his entanglement in the securities fraud suit. During the trial of the securities fraud case, Rahr’s attorney pointed out Richard Straza’s effort as an intervenor to return Dale Sterritt to CIC’s board, “an effort orchestrated by Friedman, Leonard and Weil,” the Strazas’ suit alleges. The Strazas allege in their suit that Lawrence Fossi, Rahr’s lead counsel in the securities fraud case, told Leonard that he would dismiss the Strazas from the securities fraud suit. Fossi’s terms, according to the suit, were that the Strazas had to discontinue dealings with Dale Sterritt and provide financial statements. The Strazas claim they were willing to meet those terms. They allege in the suit that their chance for settlement was thwarted when Leonard “falsely reported” to Fossi that they had refused to provide financial information and told them that “Fossi isn’t serious about settling.” “That’s outrightly false,” Leonard says of the Strazas’ allegation. Leonard contends he made the comment that Fossi wasn’t serious about settling several months before the plaintiffs’ lawyer made any offer. Leonard alleges Richard Straza rejected the two settlement offers that were made, one of which would have required the Strazas to agree to “a several million-dollar judgment” that would not be executed on as long as they had no more contact with Dale Sterritt. Legal experts hired by both sides in the case differ in their views on the actions of Friedman and Leonard. Gerald Powell, a Baylor University School of Law professor and trial advocacy expert, reviewed the case for Friedman’s firm and said in an April 5 letter to Roby, Friedman’s lawyer, that he found the “trial strategy and tactics” employed by the firm to be “reasonable.” Powell, who declines to comment about the case, said in his report that Leonard adopted a trial strategy that “the Strazas had no connection to the alleged wrongdoing of Dale Sterritt and that Rahr was a rich, successful and aggressive businessman who had no reluctance to sue innocent people to accomplish his purposes.” “In my opinion, this strategy was well within the zone of reasonable trial strategies, and its adoption does not constitute negligence or a breach of fiduciary duty,” Powell wrote. Amon Burton Jr., an Austin attorney and adjunct professor at the University of Texas School of Law, looked at the case from an ethics perspective on behalf of the Strazas. In a Feb. 4 report to Sheehan, Burton said in his opinion that “the Friedman defendants had joint and simultaneous attorney-client relationships from time to time” with several individuals — including Dale Sterritt and Richard Straza — and Sterritt-controlled entities. Burton said in the report that Friedman’s notes as well as an invoice sent to Richard Straza “reflect significant involvement” in the suit against the CIC directors before a motion for intervention was filed on Richard Straza’s behalf. Burton did not return a phone call by press time.

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