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Gardere Wynne Sewell has agreed to pay $1.2 million for violating an order calling for the firm to produce records from former client Sharp Capital Advisors Inc. for litigation filed by the Securities and Exchange Commission. The Dallas-based firm failed for 2 1/2 years to comply with an agreed order dating back to November 1998 requiring the firm to produce all Sharp Capital books, documents and records to a special master in the SEC suit. U.S. District Judge Barbara Lynn of the Northern District of Texas must approve the June 19 settlement. She is presiding over the SEC’s civil suit against Sharp Capital and its former president, Mauricio A. Gutierrez. The suit also names Emerging Markets Capital Advisors Ltd, an affiliate company based in Bermuda, as a relief defendant. But even if Lynn approves the settlement, Gardere Wynne may not be able to wash its hands of the Sharp Capital affair. The firm, along with Dallas’ Thompson & Knight, is a defendant in a class action suit filed in the 150th District Court in Bexar County. The plaintiffs, investors in Sharp Capital, allege the defendants aided and abetted the principals of Sharp Capital to defraud them of their investments, and “masterminded, engineered, assisted and perpetuated” Sharp Capital’s activities in Texas as an unregistered investment company selling unregistered securities. They allege the defendants helped Sharp Capital violate the Texas Securities Act. The suit names Gardere Wynne and partner Richard Tulli and former partner Julian Nihill, now a solo practitioner in Dallas, and Thompson & Knight and partner Joe Rudberg. Timothy McCormick, a member of the executive committee at Thompson & Knight, says the allegations in H.R. Baxter, et al. v. Gardere Wynne Sewell, et al. are totally without merit. “We ended our relationship with Sharp in 1994. This is long before any of the transactions that gave rise of the claims for the losses of these investors,” McCormick says. “We were never involved in the SEC investigation. In fact, they never contacted us.” He says he cannot say why the firm ended its relationship with Sharp Capital. Douglas Dodds, a partner in McGinnis, Lochridge & Kilgore in Austin, Texas, represents Thompson & Knight and Rudberg, but he did not return a telephone message by press time. Edward Fernandes, a partner with Brobeck, Phleger & Harrison in Austin, who represents Gardere Wynne, Tulli and Nihill, also says the claims in the class action are meritless. He argues, as well, any claims asserted in the state court suit belong to the Sharp estate. The settlement agreement between Gardere Wynne, the SEC and the special master in the Sharp Capital litigation in Lynn’s court calls for the $1.2 million to settle all of the firm’s claims with the Sharp estate, including claims made in Baxter v. Gardere Wynne if they are found to be derivative claims. “The parties recognize that if, as GWS contends, all claims stated in the Baxter Lawsuit are claims belonging to the Sharp estate or are derivative of such claims, those claims will have been satisfied and released pursuant to this Agreement,” the lawyers write in the agreement. But Edward Snyder, the plaintiffs’ lawyer in the class action suit, says that clause sounds like Gardere Wynne, the SEC and the special master are trying to get around his suit. “They are trying to make an end run around us,” alleges Snyder, an associate with Martin, Drought & Torres in San Antonio who has filed other suits stemming from the Sharp Capital affair. Snyder says he is seeking $50 million to $60 million in actual damages for the class, plus punitives. The plaintiffs are bringing a number of claims against the defendants including primary violations of the Texas Securities Act, aiding and abetting violations of the act, participation in breach of fiduciary duty, aiding and abetting a conspiracy to commit fraud, and aiding and abetting conspiracy to commit conversion. The defendants have removed Baxter v. Gardere Wynne to federal court, but Snyder has filed a motion to remand on the grounds the All Writs Act does not allow removal. DAMAGE DONE? The $1.2 million from Gardere Wynne will be used to help compensate investors who lost money with Sharp Capital. In Securities and Exchange Commission v. Sharp Capital Inc., et al., the SEC alleges the defendants lost as much as $80 million of client funds in highly leveraged investments in speculative securities of Eastern European and South American companies. The suit alleges the defendants made the investments without telling the investors. Most of the investors were from Mexico and Latin America, according to the SEC. Stephen D. Good, Gardere Wynne’s managing partner, says the 290-lawyer firm inadvertently failed to produce the documents. He says the firm produced about 75 boxes of Sharp Capital documents to the SEC in late 1998, but withheld about 27 more boxes of documents to review them for privilege. While that review was under way, he says, the parties in the SEC’s civil suit against Sharp Capital agreed to a settlement in principle, so the firm dropped the effort. “Nobody in our firm went back to work on the privilege log. They never asked for it again,” Good says. “Nobody thought they were still interested in them.” He says that it wasn’t until 2001, when Gutierrez was indicted on fraud charges, that lawyers at the firm “realized we still had the documents.” He won’t identify the lawyers at the firm who were responsible for creating the privilege log. Fernandes, Gardere Wynne’s lawyer, says the firm produced the documents a year ago at the request of either the SEC or the Department of Justice. “The SEC two years later wanted to follow up on the outstanding request,” he says. The additional 27 boxes of documents were produced in June 2001 to Dallas lawyer Ralph Janvey, the special master in the Sharp Capital litigation. Janvey, a partner in Krage & Janvey, says that many of the documents he received in June 2001 from Gardere Wynne were not privileged, and would have helped him recover more money than he did for the investors. He says he has so far distributed about $12 million to investors. The SEC says Janvey has recovered a total of $17 million. But Good disputes Janvey’s contention that information in the tardily produced documents would have helped the master recover more money for the approximately 150 investors. “We felt there was no real damage to the estate. They felt there was damage,” he says. “That’s why it’s a settlement. We just compromised.” He says the payment is covered by insurance; he won’t say how much of a deductible the firm must cover. SEC lawyer Spencer Barasch, associate administrator of enforcement in the Fort Worth region, also finds it a stretch to believe Gardere Wynne simply forgot about 27 boxes of documents. “Here they not only represented the client, but they negotiated the language of the very order it is that they violated. So we find it highly irregular that they would have inadvertently overlooked 27 boxes of documents,” Baracsh says. DOCUMENT DILEMMA The federal court suit against Sharp Capital was filed in November 1998. The order that appoints Janvey as special master that month also calls on Sharp Capital to produce all of its documents, books and records to Janvey. Gardere Wynne delivered about 75 boxes of documents to Janvey in December 1998. In January 1999, the firm notified Janvey that all nonprivileged documents had been produced, and a privilege log would be provided that month. According to the agreed order between the SEC and Gardere Wynne, that privilege log was never provided and a “large number” of Sharp Capital documents that previously were withheld were not privileged and should have been produced more than two years before they were ultimately delivered in June 2001. The SEC and Janvey filed a motion on June 25 asking Lynn to approve the settlement with Gardere Wynne. In March 2001, Gutierrez was indicted by a grand jury in Dallas on 10 counts of fraud, including violations of the anti-fraud provisions of the Investment Advisers Act of 1940. The indictment alleged Gutierrez and Sharp Capital invested client funds in high-risk, speculative investments and also misappropriated client funds. Gutierrez pleaded guilty to two of the 10 charges and is awaiting sentencing in October by U.S. District Judge Sidney Fitzwater of Dallas, says his lawyer, Dan J. Guthrie Jr., a solo practitioner in Dallas. Guthrie says he expects the other charges to be dismissed.

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