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CAUSE NO. _______ H.R. BAXTER, V.B. ELIZALDE, and R. MORALES, individually and on behalf of a class of all others similarly situated, PLAINTIFFS, VS. GARDERE WYNNE SEWELL, L.L.P., JULIAN NIHILL, RICHARD TULLI, THOMPSON & KNIGHT, L.L.P., and JOE RUDBERG DEFENDANTS. IN THE DISTRICT COURT _____JUDICIAL DISTRICT BEXAR COUNTY, TEXAS PLAINTIFFS’ ORIGINAL CLASS ACTION PETITION NOW COME PLAINTIFFS H.R. BAXTER, V.B. ELIZALDE, and R. MORALES, individually and on behalf of a class of all others similarly situated (hereinafter “Plaintiffs”), and file this their Original Class Action Petition against Defendants GARDERE WYNNE SEWELL, L.L.P. (“Gardere”), JULIAN NIHILL (“Nihill”), RICHARD TULLI (“Tulli”), THOMPSON & KNIGHT, L.L.P. (“T&K”), and JOE RUDBERG (“Rudberg”), and in support thereof would show the Court the following: I. DISCOVERY CONTROL PLAN DESIGNATION 1. Plaintiffs hereby notify the Court and Defendants that they intend discovery in this case to be conducted pursuant to Level 3, Tex. R. Civ. P. 190, and will move the Court for a discovery control plan by court order pursuant to Tex. R. Civ. P. 190.4. II. INTRODUCTION 2. This lawsuit involves a complex, multi-faceted international investment fraud scheme. Defendants actively aided and abetted and otherwise assisted the principals of a rogue investment advisor company, Sharp Capital, Inc. (“Sharp”), to defraud Plaintiffs of their investments. Defendants masterminded, engineered, assisted and perpetuated Sharp’s activities in Texas as an unregistered investment company/dealer selling unregistered securities through various machinations involving offshore entities and other devices designed to conceal Sharp’s operations from the oversight of U.S. and Texas securities regulatory authorities. As a result of Defendants’ actions, Sharp was able to operate from Texas for years without any legal restraints at all, engaging in wildly speculative investments in emerging market bonds and other debt instruments using Plaintiffs’ money as collateral. Defendants advised and counseled Sharp and its principals to establish the structures utilized in order to avoid the regulatory scrutiny of securities authorities, and otherwise aided and abetted Sharp to operate in Texas as a unregistered investment company/dealer selling unregistered securities. In doing so, Defendants aided and abetted the sale of unregistered securities in Texas by an unregistered dealer, in violation of the Texas Securities Act, and knowingly participated in the investment fraud and breaches of fiduciary duties perpetrated by Sharp. As a result of the scheme formulated by Defendants, Sharp collapsed and became the subject of federal investigation and intervention by the United States government, and its principals have been indicted by the United States Department of Justice. III. PARTIES 3. Plaintiff H.R. BAXTER is an individual residing in Monterrey, Mexico. 4. Plaintiff V.B. ELIZALDE is an individual residing in Monterrey, Mexico. 5. Plaintiff R. MORALES is an individual residing in Monterrey, Mexico. 6. Defendant GARDERE WYNNE SEWELL L.L.P. (“Gardere”) is a Texas limited liability partnership, based in Dallas, Texas and engaged in the practice of law throughout Texas. Gardere may be served with process by serving its managing partner, Mr. Larry Schoenbrun, at 1601 Elm Street, Suite 3000, Dallas, Texas 75201. 7. Defendant JULIAN NIHILL (“Nihill”) is an attorney residing in Dallas, Texas. Mr. Nihill may be served with process at his place of employment at 2300 Trammell Crow Center, 2001 Ross Avenue, Dallas, Texas 75201. 8. Defendant RICHARD TULLI (“Tulli”) is an attorney residing in Dallas, Texas. Mr. Tulli may be served with process at his place of employment at 1601 Elm Street, Suite 3000, Dallas, Texas 75201. 9. Defendant THOMPSON & KNIGHT, L.L.P. (“T&K”) is a Texas limited liability partnership, based in Dallas, Texas and engaged in the practice of law throughout Texas. T&K may be served with process by serving its managing partner, Mr. James Irish, at 1700 Pacific Avenue, Ste. 3300, Dallas, Texas 75201. 10. Defendant JOE RUDBERG (“Rudberg”) is an attorney residing in Dallas, Texas. Mr. Rudberg may be served with process at his place of employment at 1700 Pacific Avenue, Ste. 3300, Dallas, Texas 75201. IV. VENUE 11. Venue is properly maintained in this Court as to Defendant Thompson & Knight (“T & K”) pursuant to Texas Civil Practice and Remedies Code �� 15.002(a) because all or a substantial part of the events or omissions giving rise to Plaintiffs’ claims against said Defendant occurred in Bexar County, Texas. Sharp Capital was established in San Antonio, Texas; many Plaintiffs invested their money in San Antonio, Texas; and many of the fraudulent transactions described herein originated and were carried out in San Antonio, Texas. Venue is properly maintained in this Court as to the other Defendants pursuant to Texas Civil Practice and Remedies Code �� 15.005, because the claims arise out of the same transaction and occurrences or series of transactions and occurrences. V. FACTUAL BACKGROUND A. Formative Years: The Protexa Connection 12. Sharp Capital, Inc. is a Texas corporation founded in 1986 by Mauricio Gutierrez (“Gutierrez”) of Monterrey, Mexico and members of the Executive Committee of the Mexican industrial conglomerate Protexa. Sharp was registered as an Investment Advisor with the U.S. Securities and Exchange Commission in 1987. Managed by its principal Gutierrez, Sharp was originally based at 7710 Jones Maltsberger Road, in San Antonio, Texas, but moved to the Irving, Texas area in the early 1990s. 13. From its inception, Sharp provided investment advisor services to Mexican nationals, principally from Monterrey, Mexico. Investors like the Plaintiffs would sign investment management agreements with Sharp and would send their money to Sharp. Sharp would then pool its clients’ moneys in one bank account at Nationsbank, who acted as custodian of the funds, and purchase time deposit instruments, such as CDs, from U.S. banks and savings and loans. Thus from its inception Sharp acted like an unregistered mutual fund. When interest rates offered by U.S. banks began to fall, Sharp began to invest its clients’ pooled, unsegregated money in bonds, principally low risk Eurobonds. 14. Sharp also acted as type of loan brokerage or “clearing house” for its principal owner, Protexa. Sharp would arrange loans for Protexa and its various subsidiary companies with U.S. banks (such as Nationsbank) and then use its clients’ pooled money to purchase or guarantee the Protexa loans for Sharp’s own account. Thus, the loans to Protexa, a related party, would wind up “owned” by Sharp as custodian for its investor clients, including Plaintiffs, and carried on its balance sheet. Through this procedure, Plaintiffs became the ultimate “lenders” or guarantors to Protexa and bore all of the risks in case Protexa ever defaulted on the loans. Of course, none of this was ever disclosed to the Sharp investors, whose pooled money was used to guarantee the Protexa loans. Nor did Sharp ever disclose to the Plaintiffs that it was selling them unregistered securities and that it was operating as an unregistered mutual fund or investment company. 15. In the late 1980s and early 1990s, Sharp was represented by the Dallas law firm of T&K, which firm, upon information and belief, also represented and acted as legal counsel for Protexa at the same time. Since at least 1989, T&K was aware of Sharp’s practices in pooling its clients’ money in violation of the Investment Advisor’s Act, and was aware that Sharp’s activities could be construed to have created an “investment company” pursuant to U.S. securities laws. Thus T&K knew that Sharp was selling unregistered securities in Texas as an unregistered dealer. T&K’s advice to Sharp in 1989 was to “structure its operations so as to be outside the jurisdiction of the Advisors Act”, so that Sharp could “avoid the registration, reporting, auditing and similar requirements imposed on advisors registered under the Advisors Act.” However, T&K knew that Sharp never restructured its operations so as to be outside the jurisdiction of the Advisors Act because Sharp continued to receive investment money in, and sell securities from, the State of Texas during the following five (5) years that T&K represented Sharp. 16. In March, 1989, Sharp informed T&K that it wished to begin pledging or hypothecating its clients’ securities in order to maximize returns. It asked T&K if that were legal. T&K reported to Sharp that it would be legal for Sharp, as a registered investment advisor, to “effect pledges of client assets as part of that client’s desired investment strategy.” Two months later, Sharp informed T&K that it wanted to gain control of its clients’ assets, which at that time were in custodianship at Nationsbank. In May 1989, T&K assisted Sharp remove its clients’ funds from the custody of Nationsbank. T&K informed Nationsbank that “for the sake of administrative convenience and efficiency”, Sharp was going to replace Nationsbank as custodian of its clients’ assets, and would thenceforth “effect all investment transactions in its own name”. Thereafter Sharp, a company T&K already knew was a rogue investment company operating outside of U.S. securities laws, assumed absolute control over all of its customer assets. 17. In March, 1993, Sharp hired independent auditor PriceWaterhouse to perform a review of its operations. PriceWaterhouse found that Sharp was leveraging its clients’ investments in order to earn higher returns, but that the “leveraged transactions are not disclosed to customers.” PriceWaterhouse noted that as of February 8, 1993, Sharp had $32 million of customer funds which had been leveraged with debt of $76 million resulting in total booked investments of $108 million. PriceWaterhouse warned that the more Sharp leveraged at higher ratios, the higher the risk, and the greater the potential for problems. B. The 1993 SEC Investigation 18. By 1993, Sharp’s activities had caught the attention of the United States Securities and Exchange Commission (“SEC”), which launched an investigation. As a result of its review, on October 5, 1993, the SEC sent Sharp a letter informing Sharp of the “number and significance of the deficiencies and violations” of U.S. securities laws by Sharp. In particular, the SEC found that “Sharp’s pooling of client funds for the purchase of Eurobonds and the making of loans” met the definition of investment company under the Investment Company Act. More troubling to the SEC were Sharp’s loans to Protexa. The SEC found that the four members of Protexa’s Executive Committee owned 80% of Sharp’s stock, and that 3 Protexa employees were also employees or directors of Sharp. As a result, the SEC informed Sharp that the “loaning of client funds to companies with which control persons of the advisor are associated involves a significant conflict of interest”, and that the “adviser’s fiduciary duty to clients may be violated.” The SEC also voiced concern over the risk of Protexa’s defaulting on the loans. 19. The SEC also focused on Sharp’s activities with regard to its engaging in leveraged transactions using its clients’ funds. The SEC noted that Sharp’s contracts with its clients did not specifically authorize Sharp to engage in leveraged investment transactions using their money. Further, the SEC found that neither the leveraged transactions nor the risk associated with them had been disclosed to Sharp’s clients nor approved by the clients. The SEC warned Sharp that continuing with these types of activities could violate the anti-fraud section of the Advisor’s Act. 20. T&K (attorneys Joe Rudberg and David Emmons) closely supervised Sharp in responding to the SEC investigation. Defendant T&K prepared the response letter to the SEC, dated November 5, 1993, which response letter included statements designed to deceive the SEC into believing that Sharp either was not violating U.S. securities laws, or would cure its violations. For example, T&K informed the SEC that, inter alia, (i) Sharp had fewer than 100 clients, and therefore did not meet the definition of investment company (which was false); (ii) that Sharp had made loans with client funds to only two (2) Protexa subsidiaries, that Sharp’s clients were fully aware of the loans, and that in any event, Sharp would discontinue the loans to Protexa affiliates upon maturity; and (iii) that Sharp would revise all client contracts and provide adequate disclosures regarding the leveraged transactions. As a result of the T&K response letter, the SEC dropped their investigation and allowed Sharp to continue in operations for another five (5) years. C. The Search For A New Structure 21. 1. Thompson & Knight As a result of the SEC investigation, Sharp’s principal, Gutierrez, determined that he did not want Sharp’s activities to be regulated at all. He consulted with T&K, who advised Sharp that it could avoid U.S. securities regulatory scrutiny altogether by establishing a new structure using an offshore (preferably Bahamian) bank. In January, 1994, T&K sent Gutierrez a memorandum outlining how Sharp could use the offshore banking structure to “avoid unnecessary U.S. regulatory burdens”. T&K recommended that Sharp establish an offshore holding company and an offshore bank, preferably in the Bahamas, and that Sharp maintain the separateness or independence between Sharp Capital and the new entities. T&K advised Sharp to transfer and assign all of its investment advisory clients to the new Bahamian entities and to thereafter avoid any “crossover” of investment activities between Sharp and the new entities. 22. In June, 1994, T&K performed a corporate review of Sharp. That review confirmed that T&K knew that Protexa, or persons affiliated with Protexa, continued as the majority owners of Sharp, and that Sharp had not discontinued the Protexa loan program. The review also revealed that Sharp had no agreement with Nationsbank or other documentation evidencing its clients’ interests in the underlying Protexa loans that could be used in the event Protexa defaulted on the loans and “Nationsbank uses the Sharp client’s cash that secures the loan to repay the loan made by Nationsbank.” T&K concluded that, in the event of a default by Protexa, “the Sharp client has at most some equitable claim in the note and other collateral.” In an addendum, T&K listed several loans to Protexa affiliates and insiders (including Protexa’s principal owner Humberto Lobo Morales) valued at over $15 million. T&K noted that, contrary to Sharp’s representations to the SEC that it would discontinue the loans to Protexa affiliates, Sharp had renewed loans to three (3) Protexa affiliates in March and April, 1994, and had not sent out disclosures as represented to the SEC. In another addendum, T&K listed Sharp’s clients, which totaled approximately 130 clients, well above the 100 clients Sharp and T&K had represented to the SEC in the November, 1993 response letter. 23. T&K concluded in its June, 1994 review that, based on its pooling of client funds and apparent discretionary authority, Sharp was continuing to operate as an investment company in violation of U.S. law. In a separate internal T&K memorandum written by attorney Stephen Norris to Joe Rudberg, T&K warned that Sharp’s actions would “likely” give rise to further SEC action against Sharp and “could lead to significant third party (client) liabilities in certain circumstances.” Mr. Norris went on to stress that a simple “restructuring” “would not by itself eliminate all of the SEC compliance problems.” 24. Mauricio Gutierrez responded to the T&K review via a July 7, 1994 memorandum to Joe Rudberg and Stephen Norris, and concluded that Sharp’s current structure “does not allow for a comfortable level of doing business and ultimately restricts future expansion.” Gutierrez pointed out that he felt that the SEC would not bother Sharp anymore, since the SEC had not corresponded with Sharp since January, 1994. Gutierrez further affirmed that the Protexa loan program had not been discontinued as suggested by the SEC. He concluded his memo by reaffirming Sharp’s desire to pursue the alternate structure recommended by T&K in their January, 1994 memorandum. On July 25, 1994, Sharp employee Wayne Brown forwarded copies of the T&K review memorandum, Gutierrez’s response and other documents to Humberto Lobo, owner of Protexa. 25. Shortly thereafter, T&K stopped representing Sharp Capital. Apparently T&K decided that it could no longer represent both Sharp and Protexa. The conflict of interest that had always existed as a result of Sharp’s practice of making loans to Protexa affiliates and insiders using its clients’ money had been exposed by the SEC, and T&K could no longer ignore its own conflicts of interest. 26. 2. Gardere That same month, July, 1994, Sharp (through employee Toney Reed) contacted Defendant Gardere, via Gardere partner Julian Nihill (“Nihill”), to assist Sharp with the establishment of an offshore investment fund based in the Cayman Islands. Throughout August, Gardere began work on the offering documents for the new Sharp fund. Gutierrez liked what he saw in Gardere and, since T&K no longer represented Sharp, Gutierrez began to refer Sharp’s legal work to Gardere. On the morning of September 16, 1994, in advance of a meeting that afternoon, Gutierrez faxed Nihill a copy of T&K’s January, 1994 memorandum that set forth T&K’s recommended offshore bank structure. Gutierrez then turned to Gardere for advice on how to complete the restructuring work to avoid U.S. securities laws. In a March, 1995 memorandum, Gardere’s Nihill described the reasons for the new structure as being to “avoid being deemed an investment company” by the SEC. The new relationship proved lucrative for Gardere — by October, 1994, Nihill had opened 3 separate “matter” files on Sharp, and Gardere had billed Sharp over $35,000. 27. In late 1994, Sharp made additional directed loans (again via Nationsbank) to certain subsidiaries of Protexa totaling over $15 million, including a $10 million loan to bottling companies of Pepsi in Monterrey owned by Protexa (hereinafter the “Pepsi Loan”). In April, 1995, Gutierrez requested that Gardere provide an assessment of his and the other shareholders and directors of Sharp’s liability for selling said Pepsi Loan to a client of Sharp. In an April 20, 1995 letter, Nihill started his analysis by observing that 80% of the shares of Sharp were still owned by employees of Protexa. Nihill went on to note that “at no time was the fact that employees of Protexa were shareholders of Sharp Capital disclosed to the investor, notwithstanding the fact that during 1994 the [SEC] had specifically requested Sharp to make such disclosures in order to avoid any possible conflicts of interest.” 28. Nihill went on to analyze the exposure of (i) Protexa; (ii) Sharp; (iii) the Protexa-affiliated shareholders of Sharp; and (iv) Gutierrez himself, in case the Protexa/Pepsi companies defaulted on the loan. Nihill concluded that all parties were exposed to civil and criminal liabilities if Protexa’s interest in Sharp were exposed. Nihill concluded that the most harmful fallout from such disclosure would be adverse publicity and damage to the reputations of Sharp, Protexa and its owner, Humberto Lobo. Nihill concluded the letter by noting that the SEC might prohibit Protexa and Mr. Lobo from participating in any future U.S. registered debt offerings. Amazingly, Nihill, the attorney representing a registered investment advisor, was clearly more concerned about Sharp’s activities harming Protexa and its owner than harming the clients of Sharp. 29. By 1995, Sharp held over $27 million in Protexa loans on its books, constituting some 30% of Sharp’s assets. Gutierrez recognized the problems with the inherent conflicts of interest in holding the Protexa loans for the account of its clients. However, as Gutierrez stressed in a June, 1995 letter, Sharp’s “long standing relationship with the [Protexa] Group” made it important for Sharp to resolve its problems by setting up offshore in order to be able to “continue providing the service [to Protexa] we have provided during the past 9 years.” 30. Gutierrez’s focus on the restructuring scheme became even more intense after Nationsbank informed Sharp that they were going to discontinue serving as the intermediary in the Protexa loans. Gardere continued to analyze the issues and provide advice to Sharp on how to continue operations as it pleased. In particular, Gardere was asked to advise Sharp on how to establish the new Sharp-offshore bank structure so as to avoid the kind of problems that had been exposed during the SEC investigation. 31. The issue of the Protexa loans had become even more acute as a result of the Mexican peso devaluation in January, 1995 because Protexa stopped making principal and interest payments on the loans. Gutierrez became more concerned with the Protexa situation, and on June 15, 1995 he sent a letter to his partner, Lauro Martinez, with copy to Humberto Lobo Morales, raising the issues of (i) whether Sharp could continue in operations as a registered investment advisor; and (ii) how to handle the Protexa situation. In that letter, Gutierrez pointed out that “[i]t is a fact that Sharp Capital would not survive a complete audit of its compliance to certain U.S. regulations. The only solutions are to move the operations to an offshore structure, or to payoff all of the Protexa loans.” He mentioned the ongoing work by Gardere to restructure Sharp’s operations, and that the recommendations had been made to Protexa and its owner, Humberto Lobo, but pointed out that “the response has been the same as in the past, that is one of avoidance and apathy.” 32. Gutierrez informed Martinez that the majority of the periodic interest payments on the Protexa loans had not been made, and that the loans were “past due”, creating a situation akin to a “lit fuse”. Exhibiting a high degree of prescience, Gutierrez continued: H. Lobo and Grupo Protexa continue to avoid and neglect the problems of Sharp Capital and their current outstanding debts to Sharp Capital. Sharp will have serious cash flow problems in regards to client needs and any possible margin calls. There will be a high probability of a default, which could lead to a lawsuit by a client or by a custodian institution. Furthermore, while eliminating any other business strategies and possibilities, this would probably trigger an investigation by the U.S. regulatory body who could close the business of Sharp Capital and possibly impose a monetary fine and/or imprisonment upon the owners. 33. By July, 1995, Sharp and Gardere were involved in working out the final details for the restructuring using Dominion Bank in the Bahamas. Memorandums were prepared and circulated by Gardere outlining all of the issues and setting timetables. On July 27, 1995, Gardere lawyer Larry Pascal prepared a memorandum to Sharp outlining the proposed structure. That memo was followed by an August 3, 1995 memo from Pascal to Julian Nihill. Pascal pointed out in his memos that Protexa had defaulted on the $28 million in loans it held with Sharp. The proposed structure called for Protexa to divest from ownership in Sharp by selling its shares to Gutierrez. Protexa would instead become the owner of Dominion Bank through a $5 million “recapitalization”. Sharp would then assign the Protexa loans to Dominion and receive as compensation a certificate of deposit for the value of the Protexa loans. The effect would be for Sharp to remove the non-performing Protexa loans from its balance sheet and replace them with Dominion Bank-issued CDs, thus making Sharp appear to be in compliance with U.S. laws. Gutierrez and Gardere planned to have Sharp continue with the Protexa loans by simply passing the loans to Dominion, which was to be owned by Protexa. 34. Larry Pascal saw the dangers inherent in the proposed structure and noted in his memo that the new structure could lead to allegations of investment advisor fraud. However, Gardere decided to pull Pascal from the project and replace him with Gardere lawyer Rick Tulli. In an August 18, 1995 memo to the files, Pascal noted that Julian Nihill had suggested that Tulli had “more experience in this type of practice” and that Tulli should be Sharp’s contact person in the future for SEC regulatory issues. Referring to a meeting with the client, Pascal went on to observe that Gutierrez had met with Joe Rudberg of T&K, and that Mr. Rudberg (apparently representing Protexa) had tendered Protexa’s shares in Sharp back to Gutierrez, thereby making Gutierrez the sole shareholder of Sharp according to the plan. Thus in a sham transaction, T&K transferred the shares in Sharp Capital from one of its clients, Protexa, to another of its (recently former) clients, Mauricio Gutierrez. 35. By 1996, the Protexa loan situation, particularly with regard to the Pepsi Loan, had grown out of control due to Protexa’s default. As a result of prodding by the investor that had been sold the Pepsi Loan, Sharp was forced to file an arbitration proceeding against the debtor on the Loans, the Protexa/Pepsi companies. Thus just months after divesting Protexa of its shares in Sharp, Sharp was suing affiliates of Protexa on one of the Protexa Loans. T&K thereafter entered into the fray representing, of course, the Protexa defendants. Thus T&K resolved to represent Protexa in a lawsuit brought against Protexa by T&K’s former client, Sharp, over loan transactions that both T&K and Gardere knew were riddled with conflicts of interest. Both law firms knew that the conflicts of interest had never been disclosed to Sharp’s client, but nevertheless, Gardere and T&K proceeded to square off in litigation for years, with both firms racking up hundreds of thousands of dollars in fees. D. The New Structure: EMCA 36. In the summer of 1996 Sharp paired up with the French bank, Credit Commercial de France (“CCF”), and its Bahamian subsidiary, Handelsfinanz-CCF (“HF-CCF”) to create a company in the Bahamas to handle Sharp’s offshore investment activities. Based on their new relationship, Sharp thereafter transferred all of the Protexa loans to CCF. The new company created between Sharp and CCF, managed and administered in the Bahamas by HF-CCF, was called Emerging Market Capital Advisors (“EMCA”). On August 26, 1996, Nihill wrote a memo to the file discussing the new arrangement between Sharp, EMCA and CCF. He noted that the arrangement was set up by Gutierrez in order to evade SEC scrutiny of Sharp’s leveraged bond trading transactions, which Gutierrez had concluded was “against SEC rules.” The new arrangement was designed so that EMCA (which Nihill understood was owned by CCF) would “act as the purchaser of the bonds and repo agreements and [would] incur the leverage itself.” Gardere had been asked to review Sharp’s overall operations and “come up with a structure for the ownership and management of the various entities.” Thus by August, 1996, Nihill knew that Sharp Capital was moving all of its illegal leveraged bond trading activity to EMCA to evade SEC regulations. 37. In September, 1996, after a meeting with Gutierrez and Lauro Martinez, Gardere began preparing a legal review memorandum analyzing Sharp’s structure and operations. Nihill began his analysis with observations on Sharp’s goal of eliminating its custodianship of client securities. He noted that Sharp desired to “replace itself as custodian with an institution that the [Sharp] clients are comfortable with.” He went on to describe EMCA as having the “ability to take custody of securities and to effect trades in securities for its own account or for the account of others.” He then described the new proposed structure as calling for Sharp to remove itself completely as custodian of its clients’ funds and passing custodianship to EMCA. He noted that this would be a gradual process, occurring over a 12-18 month period, and that Sharp would in the meantime “accept…the ongoing SEC regulatory risks.” Once the custodial aspect was changed, the Sharp clients would thereafter deposit funds directly with EMCA and would look to Sharp, as the investment advisor, for investment advice. Sharp would then instruct EMCA to make trades on behalf of the clients. 38. Nihill’s legal review memorandum was then passed on to Gardere securities lawyer Rick Tulli, who added his comments on securities law aspects of the proposed EMCA structure. Gardere’s final memorandum, dated September 20, 1996, concluded that the EMCA structure was sound and would accomplish its purpose — being (as Nihill himself described it) to help Sharp “avoid U.S. securities and tax problems with respect to a foreign investment company”. The final memorandum, constituting Gardere’s official advice and recommendations on the EMCA structure, was then sent to Gutierrez. 39. Gutierrez and his partner Lauro Martinez went to work to promote EMCA to their clients. They spent thousands of dollars drawing up a glossy brochure for EMCA, modeled after one of CCF’s brochures. Gardere went to work revising the Sharp Capital client investment advisory contracts and created a new custodial agreement to be worked out with EMCA. On October 30, 1996, Gardere lawyer Rick Tulli prepared an instruction letter for Sharp to send to all of its trading counter parties, instructing them to transfer any securities or investment products to EMCA, care of Ivano Alliata. Sharp then used Tulli’s letter to get Swiss Bank, Wasserstein and other trading counter parties to transfer assets they held on Sharp’s behalf to EMCA in the Bahamas, who now became the custodian of Sharp’s clients’ investment assets. None of these transfers were ever disclosed to Sharp’s clients nor did any of Sharp’s clients ever approve of said transfers of their to EMCA. 40. With EMCA up and running, Gutierrez began to invest more of Sharp’s clients’ money in the risky emerging market bond market. Worse, Sharp continued to leverage this bond trading at ever higher margins. Counter parties selling emerging market bonds began to offer Sharp extremely high margin loan ratios of up to 80%. Gutierrez used Sharp’s clients’ pooled money to borrow the margin loans at lower rates than the yields they would receive on the trades, and Gutierrez pocketed the difference. The more Sharp leveraged, the higher the yield. 41. In the final analysis, EMCA was formed for two purposes: (i) to allow Sharp to continue with the Protexa loan program; and (ii) to allow Gutierrez and his partner Martinez to continue to pool Sharp’s clients’ money and use it to make leveraged investments that would be illegal under SEC regulations. Using EMCA for trades for Sharp’s clients, Gutierrez and Martinez could keep the net returns of the higher yields they were getting from the unregulated margin trading. Gutierrez and Martinez’s goal was to pocket the difference between what their clients expected to earn from interest on the liquid conservative investments they had invested with Sharp and the highly speculative investments in emerging market instruments Gutierrez and Martinez were making without the investors’ knowledge. 42. After Gardere counseled and aided and abetted Gutierrez and Martinez in the formation of their fraudulent schemes utilizing EMCA, Sharp began to implement said schemes by pooling Plaintiffs’ investment money in EMCA, in violation of Sharp’s agreements with Plaintiffs. Sharp would wire all of its clients’ money to EMCA and EMCA would then hypothecate and otherwise leverage the investors’ money to collateralize Gutierrez and Martinez’s highly speculative and risky investments in emerging market, including Russian, Mexican, Brazilian, and Venezuelan, debt instruments. The investors were not informed that their money was being sent to the Bahamas nor that it was being used as collateral for margin loans. 43. In late 1997, Gardere participated with Sharp in a massive fraud on the investors of a San Antonio based competitor of Sharp Capital — InverWorld. InverWorld contacted Sharp to enlist Sharp’s aid in laundering over $135 million through EMCA to cover losses in InverWorld’s balance sheets. On or about November 12, 1997, Gutierrez and Martinez called Nihill and Tulli to discuss the new transaction. Because the transaction would require EMCA to open an account for InverWorld, Gutierrez explained the basic outline for the transaction to the Gardere lawyers and asked Tulli to prepare an Investment Management Agreement for EMCA. Of course, Gardere by this time knew that Sharp (in conjunction with CCF) controlled EMCA, and that EMCA was not an independent company, so the request did not come as a surprise to Tulli, who dutifully carried out the request and prepared the EMCA Investment Management Agreement. InverWorld, Sharp, and CCF then carried out the money laundering transaction that is now the basis of two (2) federal court lawsuits and various criminal proceedings in San Antonio. E. Concealing The Fraud 44. In February, 1997, Sharp received a demand letter from an employee that it had fired, Mr. Federico Piers, who had worked on the EMCA Brochure. Mr. Pier alleged that he had been fired by Sharp for, inter alia, questioning Sharp’s (i) failure to account properly for trades; (ii) impermissible pooling of customer money at EMCA; (iii) failure to disclose its activities (including EMCA) properly to its auditors and investors; and (iv) failure to follow customer instructions in purchasing securities for customer accounts. Gardere responded on Sharp’s behalf via letter to Mr. Pier’s lawyer dated February 20, 1997 accusing Mr. Pier of having lost $63,000 of Sharp’s money through his many failures. Gardere litigation partner Bill Whitehill handled this matter for Sharp. Through his discussions with Gutierrez, redacted in his personal notes, Whitehill reviewed Pier’s allegations regarding Sharp’s illegal activities, revealing his understanding of the EMCA situation. 45. Mr. Pier never filed a lawsuit. Instead the parties negotiated, with Sharp offering to settle the case for $5,000. On February 11, 1997 Mr. Pier’s lawyer alleged that his client’s damages totaled $17,271.00. Gardere countered with $7,500.00. Then events took a turn. On or about February 24, 1997, upon information and belief, Gutierrez raised with Gardere the possibility that Mr. Pier might send a letter to the SEC informing the SEC of Sharp’s illegal activities. Bill Whitehill called in Gardere partner Rick Tulli to discuss the revelation. Mr. Tulli’s billing entry for that date reads “[c]onferences with Mr. Whitehill and telephone conference with Mr. Gutierrez, regarding possible letter to SEC by former employee, and possible consequences.” Upon information and belief, Gutierrez and his lawyers at Gardere decided that they should settle the Pier matter before any information regarding Sharp’s illegal practices got to the SEC. A few weeks later, Gardere settled the Pier claim and Sharp paid Mr. Pier $27,500.00, more than his original demand. Gardere went out of its way to make sure the SEC’s attention was not drawn once again to Sharp’s illegal activities. 46. By 1997 Gardere knew that Sharp controlled EMCA in conjunction with CCF and that EMCA was just a sham company set up to allow Sharp to do what it wanted with its clients’ money without the scrutiny of the SEC. Gardere knew that Sharp had not informed its customers of the transfer of custody to EMCA and that, in fact, as far as the Sharp clients were concerned, Sharp retained custody of their investments. Nevertheless, Gardere continued to assist Sharp carry out its schemes. Throughout this time period, for example, Gardere lawyer Tulli helped Sharp prepare its ADV forms for filing with the SEC, which filings failed to disclose the EMCA relationship, and Gardere otherwise did everything it could to help Sharp evade U.S. regulatory oversight. 47. Nihill and Tulli also managed to keep the lid on tight internally at Sharp. Whenever some of Sharp’s employees became nervous about the activities occurring at Sharp, Gutierrez would call Nihill or Tulli, who would reassure the employees that everything was legal, despite the fact that Defendants knew that what was going on at Sharp was illegal. Defendants’ representation of Sharp evolved into a representation of Gutierrez only, creating inherent conflicts of interests. Instead of acting for the benefit of the company, Sharp Capital, who was their real client, Defendants at all times acted for the benefit of Mauricio Gutierrez and Lauro Martinez, who had interests adverse to Sharp and its investors. 48. Throughout this time period, Gardere also continued to litigate the Protexa/Pepsi case against Sharp’s former counsel T&K. By January 1997, Gardere had billed Sharp over $175,000 for this contrived litigation, forcing partner-in-charge Nihill to apologize to his client and promise that “we can revisit those matters if we are unable to collect from [Protexa/Pepsi]“. By early 1998 Gardere had eight (8) separate matter files opened on Sharp, and Gardere lawyers were billing Sharp tens of thousands of dollars per month on various corporate structuring, acquisitions, finance, and litigation projects. F. Collapse And Cover Up 49. In the late summer of 1998 the bottom fell out of the emerging market bond market and all of Sharp’s customers’ money at EMCA was liquidated in margin calls. By August 1998 Gardere knew that Sharp and its principals were taking Sharp’s clients’ money and using it to pay margin calls made on EMCA, and they did nothing to stop this illegal practice. The Sharp investors thereafter lost upwards of $50 million. 50. Amidst the collapse of Sharp, Gutierrez engaged in several last acts of chicanery. The Pepsi/Protexa litigation had dragged on for years, but finally Gardere had won an arbitration award on Sharp’s customer’s behalf. In September, 1998, however, with his whole world crashing around him, Gutierrez sold the arbitration award to a lawyer in Monterrey who immediately sold the award back to Protexa. T&K lawyers then announced to the Court where the arbitration award was pending confirmation that the “parties” had “settled” in Mexico. Upon information and belief T&K and Gardere conspired together to aid their respective clients, Sharp and Protexa, effectuate this fraudulent transfer, to the detriment of the Sharp investor who lost everything. That Sharp investor has since sued the Protexa/Pepsi companies in Dallas Federal Court, and the Protexa/Pepsi companies, still represented by T&K, have asserted as a defense that the arbitration award has been legitimately transferred. 51. In late September, 1998 Sharp Capital sent a letter to its investors informing them of the losses suffered by Sharp. Faced with the prospect of an inevitable federal investigation, toward the end of September Gutierrez wired $250,000 of Sharp’s money to Defendant Gardere. This money belonged to the class of investors. Upon information and belief, Gardere thereafter surreptitiously passed the majority of this money back to Gutierrez to assist Gutierrez with his personal legal, including criminal, defense. 52. In November, 1998, Sharp’s and EMCA’s few and remaining assets were frozen as a result of intervention by the SEC. Thereafter the SEC and the U.S. Department of Justice began a criminal investigation of Sharp and its principals, including Gutierrez, Lauro Martinez, Rick Sands and Keith Gohde. 53. From the inception of the federal government’s investigation into the collapse of Sharp, Gardere and T&K engaged in activity designed to obstruct said investigation. Immediately following the SEC intervention, Defendant Gardere caused all of Sharp’s documents to be delivered to Gardere’s offices. Thereafter, Gardere only turned over documents to the SEC appointed Special Master as it saw fit. Despite an Order Freezing Assets issued by the United States District Court for the Northern District of Texas instructing all agents of Sharp to surrender all documents related to Sharp, Gardere withheld documents from the U.S. Government for over three (3) years, and only recently (2001) surrendered said documents to the U.S. Government. T&K never turned over any documents to the SEC or the Justice Department, and has resisted discovery from investor counsel at every turn. 54. Defendant Gardere also engineered the manner in which the liquidation of Sharp and EMCA would occur. Instead of appointing a Receiver, as is typical in SEC interventions, Gardere “suggested” to the SEC that a Special Master be named, and that said Special Master have severe restrictions placed on his power to investigate and pursue causes of action. For some reason, the SEC went along with Gardere’s suggestion, and a Special Master was appointed, which Special Master was not empowered to investigate or pursue claims against potentially liable third parties, such as Defendants. The Special Master thereafter became the representative of Sharp Capital. As a result, Gardere withdrew its representation of Sharp and instead proceeded to represent Gutierrez individually. 55. Having withdrawn its representation of Sharp, Gardere immediately began to engage in conduct adverse to its former client, Sharp Capital, and its client’s representative, the Special Master, in order to benefit the new client, Mauricio Gutierrez. At every turn, Gardere lawyer Dan Guthrie threatened and cajoled the SEC-appointed Special Master in order to prevent him from investigating claims against Gutierrez or from even advising the Plaintiffs as to their rights to pursue criminal complaints against Gutierrez. On February 22, 1999 Guthrie wrote to the Special Master complaining of the Special Master’s having informed some Plaintiffs of their rights to speak to the U.S. Attorney’s Office regarding criminal complaints against Gutierrez. Guthrie threatened the Special Master, who in his role as representative of Sharp was the sole contact for Plaintiffs with regard to the Sharp case, with legal action if he did not cease and desist from helping Plaintiffs. On March 1, 1999, Guthrie wrote another letter to the Special Master complaining of an update letter the Special Master was planning to send to Plaintiffs. Guthrie did not like the letter, and so had his partner, Richard Hull, re-draft the letter to be sent to the Plaintiffs. Thus from the beginning, Gardere lawyers endeavored to control and limit every aspect of the investigation and liquidation of Sharp Capital, to the detriment of Plaintiffs. 56. When the dust settled from the Sharp collapse, Sharp still held the non-performing Protexa loans on its books. Over time those loans were liquidated at a loss by the SEC appointed Special Master. In 2000 the SEC-appointed Special Master reached a settlement with Protexa, over the objections of investor counsel, whereby it sold some of the remaining Protexa loans to an offshore company that, upon information and belief, is controlled by Protexa. Thus Protexa was able to walk away virtually unscathed from the Sharp debacle, and stuck the Sharp investors with its bad debt. 57. In March, 2001 Gutierrez was indicted by the U.S. Department of Justice for investment advisor fraud and wire fraud. On May 9, 2001, a superseding indictment was handed down indicting Lauro Martinez, and Sharp employees Richard Sands and Keith Gohde. Specifically referenced in the indictments was the utilization of the very fraudulent offshore schemes concocted and set in motion by Defendants. VI. PLAINTIFF CLASS 58. Plaintiffs all executed Investment Advisory and Custody Agreements with Sharp (the “Agreements”) and opened investment accounts with Sharp in San Antonio or Irving, Texas. The Agreements expressly state that Sharp would manage Plaintiffs’ money in conservative, liquid investments, including U.S. Dollar-denominated and Euro-denominated debt instruments (EuroBonds, EuroCDs), money markets, and other conservative instruments issued by well-known banks and companies. In reliance on Sharp’s representations, Plaintiffs transferred a substantial amount of money to Sharp bank accounts in San Antonio or Irving, Texas for use in their accounts. 59. Throughout this time period, and up until September, 1998, Plaintiffs continued to receive monthly account statements from Sharp showing that their investments had been placed in secure investment instruments and were in fact profitable. At no time did Plaintiffs ever receive any indication from Sharp or from Defendants that their investments had been sent to the Bahamas and placed with EMCA, used to leverage risky investments in emerging markets, or were insecure or in danger of complete loss. 60. On or about September, 1998, Plaintiffs received a letter from Sharp informing Plaintiffs that their monies, which had allegedly been invested in supposedly safe and secure investment instruments, had in fact been invested in emerging market debt instruments through EMCA; that most of the money had been lost; and that what money remained was held in illiquid investments. On or about November, 1998, Plaintiffs received another letter from Sharp informing Plaintiffs that the SEC had launched an investigation into Sharp’s and EMCA’s activities and that the SEC had intervened into Sharp’s management and frozen Sharp’s and EMCA’s assets. 61. As a result of the SEC investigation and intervention, and independent investigation by counsel, Plaintiffs learned that the majority of their money that had been invested with Sharp had been pooled in EMCA, and had been hypothecated to collateralize Gutierrez’s and Martinez’s speculative and risky investments in emerging markets. Plaintiffs never knew of or authorized said investments of their money by Sharp and/or Gutierrez and Martinez. VII. CLASS ALLEGATIONS 62. Plaintiffs request this case be certified as a class action pursuant to Rule 42, T. R. C. P. Hundreds of Mexican investors invested money with Sharp Capital from 1986 to 1998. The number of affected investors are so numerous that joinder of all members is impracticable. There are common questions of law and fact that are common to the class and these common questions predominate over individual issues. The Named Plaintiffs’ claims are typical of the class claims. The Named Plaintiffs have no interest adverse to the interests of other members of the Class. The Named Plaintiffs will fairly and adequately protect the class’ interests. The Named Plaintiffs have retained counsel experienced and competent in the prosecution of class action and complex litigation. 63. Pursuant to Rule 42(a) and (b)(4), T. R. C. P., the Court should certify the following classes and subclasses: i. All persons or entities that held investment accounts with Sharp Capital as of September, 1998; and ii. Such other classes or sub-classes as the Court may determine. Excluded from the class are: a. Defendants; b. Any officer, director, employee, or promoter of Sharp Capital and EMCA; c. Any immediate family members of Mauricio Gutierrez, Lauro Martinez , or any other officer, director or employee of Sharp or EMCA; d. All persons, products or claims that are preempted by the Securities Litigation Uniform Standards Act. 64. The court should certify the class pursuant to Rule 42(b)(4), T. R. C. P., because questions of law or fact common to the members of the class predominate over any questions affecting only the individual members, and a class action is superior to the other available methods for the fair and efficient adjudication of the controversy. Many of the investors who are class members have amounts invested which are too small to justify the cost and expense of individual litigation and can only be assisted by a class action mechanism. VIII. DISCOVERY OF CAUSES OF ACTION 65. Sharp did not cease operations until September 1998, at which point, at the earliest, the investors could have been put on notice of Sharp’s financial problems and of the risk to their investments. Plaintiffs did not discover, and could not with the exercise of reasonable diligence, have discovered, Defendants’ wrongful acts and practices until recently. As described above, Defendants designed, engineered and implemented the offshore device described herein for the specific purpose of avoiding regulatory oversight of Sharp’s activities. After the collapse of Sharp, Defendants actively obstructed investigations by the federal government and withheld vital documents from the U.S. Government for three (3) years. Through such deliberate conduct, Defendants helped fraudulently conceal the true state of their activities from the Plaintiffs, suspending the limitations period. IX. CAUSES OF ACTION A. Primary Violations of the Texas Securities act 1. Sales of unregistered securities 66. Defendants are liable as primary violators of the Texas Securities Act for the sales of unregistered securities to Plaintiffs. Defendants acted as vital “links” in the chain of the selling process, and but for Defendants’ participation, Sharp Capital could not have continued to sell unregistered securities to Plaintiffs. The bonds and other debt instruments and participations in the Protexa loans qualify and meet the definition of securities as defined in the Texas Securities Act. 67. Plaintiffs signed investment contracts with Sharp. Sharp and Defendants thereafter acted together to illegally pool Plaintiffs’ money and purchase the securities described herein for the accounts of Plaintiffs. Plaintiffs will show that neither Defendants nor Sharp Capital ever registered those securities with the Texas Securities Commission and therefore they were sold to Plaintiffs as unregistered securities in violation of the Texas Securities Act. As a result of Defendants’ conduct in selling unregistered securities in Texas, Plaintiffs have lost their investments. Defendants’ violations of the Texas Securities Act are a proximate cause of actual damages to Plaintiffs, being the difference between their investments in Sharp as stated in their last account statement and the amount Plaintiffs received from the Special Master distribution. 2. Sales of Securities through Untruths or Omissions 68. Section 33(A) of the Texas Securities Act provides civil liability for persons who sell securities by means of untrue statements or omissions. Defendants qualify as “sellers” under the Act because they acted as vital “links” in the chain of the selling process, and but for Defendants’ participation, Sharp Capital could not have continued to sell securities to Plaintiffs. As the indictments and guilty pleas of Sharp’s principals attest, securities were sold to Plaintiffs using untruths and omissions. In particular, Sharp told Plaintiffs that their money was being invested in safe, liquid investments, which was a material misstatement. Sharp fabricated account statements and sent them to Plaintiffs. Sharp omitted to inform Plaintiffs that it was selling them unregistered securities and that it was operating as an unregistered dealer in violation of the Act. Finally, Sharp omitted to inform Plaintiffs that their money had been transferred to EMCA and had been invested in risky emerging market bonds and the Protexa loans. 69. With general knowledge of Sharp’s actions, Defendants nevertheless participated in and materially assisted Sharp in conducting and continuing its fraudulent sales activities, and thus Defendants constitute a link in the selling process. But for Defendants’ conduct, Sharp would not have been able to continue selling securities in Texas. As a result of Defendants’ conduct, Plaintiffs have lost their investments. Defendants’ violations of the Texas Securities Act are a proximate cause of actual damages to Plaintiffs, being the difference between their investments in Sharp as stated in their last account statement and the amount Plaintiffs received from the Special Master distribution. 3. Control Person Liability 70. Defendants are “control persons” pursuant to Section 33(F)(1) of the Texas Securities Act. In particular, Defendants formulated, devised, participated in and assisted the structures, activities and operations of Sharp. Moreover, as control persons, Defendants had actual knowledge of the schemes and fraudulent activities of Sharp and did nothing to stop them, but instead did everything possible to allow Sharp to continue the unlawful activities described herein. The principals of Sharp have all pleaded guilty to the conduct described herein. As control persons, Defendants are jointly and severally liable for the conduct of Sharp. Sharp and Defendants’ violations of the Texas Securities Act are a proximate cause of actual damages to Plaintiffs, being the difference between their investments in Sharp as stated in their last account statement and the amount Plaintiffs received from the Special Master distribution. 4. Co-Conspirator Liability 71. Defendants are jointly and severally liable as co-conspirators for Sharp’s primary violations of the Texas Securities Act. In particular, Defendants combined with Sharp to counsel and advise Sharp on how to avoid the Texas Securities Act and other securities laws and to operate as an unregulated, unregistered investment company/dealer, and to sell unregistered securities in the State of Texas. Defendants took various overt acts designed to assist Sharp accomplish the goal of operating in Texas as an unregistered securities dealer selling unregistered securities in Texas. Sharp and Defendants’ conspiracy to violate the Texas Securities Act is a proximate cause of actual damages to Plaintiffs, being the difference between their investments in Sharp as stated in their last account statement and the amount Plaintiffs received from the Special Master distribution. B. Aiding and Abetting Violations of the Texas Securities Act 1. Sales of unregistered securities 72. Defendants are liable as “aiders” for sales of unregistered securities to Plaintiffs. In particular, by their actions described herein, Defendants materially aided Sharp sell unregistered securities in Texas. The bonds and other debt instruments and participations in the Protexa loans sold by Sharp and Defendants qualify and meet the definition of securities as defined in the Texas Securities Act. Defendants knew that Sharp was selling unregistered securities to Plaintiffs in Texas. But for Defendants’ participation, Sharp Capital could not have continued to sell unregistered securities to Plaintiffs. 73. Plaintiffs signed investment contracts with Sharp. Sharp and Defendants thereafter acted together to illegally pool Plaintiffs’ money and purchase the securities described herein for the accounts of Plaintiffs. Plaintiffs will show that neither Defendants nor Sharp Capital ever registered those securities with the Texas Securities Commission and therefore they were sold to Plaintiffs as unregistered securities in violation of the Texas Securities Act. As a result of Defendants’ conduct in materially aiding Sharp sell unregistered securities in Texas, Plaintiffs have lost their investments. Defendants’ violations of the Texas Securities Act are a proximate cause of actual damages to Plaintiffs, being the difference between their investments in Sharp as stated in their last account statement and the amount Plaintiffs received from the Special Master distribution. 2. Sales of Securities by Unregistered Dealers 74. Defendants aided and abetted Sharp and/or EMCA in the sale of securities in the State of Texas without being registered as a dealer, in violation of Sections 12(A), 33(A)(1), and 33(F)(2) of the Texas Securities Act. Specifically, and as alleged herein, Defendants knew since 1986 that Sharp was functioning as an unregistered investment company, and that, since 1996, Sharp was utilizing EMCA, which was not registered as a securities dealer, to transact the sale of securities from Irving, Texas either directly or through Sharp Capital. All of the management of Sharp have been indicted as a result of Sharp’s illegal sales of securities in Texas. 75. With full knowledge of Sharp and EMCA’s violations of the Texas Securities Act’s registration requirements, Defendants intentionally and actively aided and abetted Sharp and/or EMCA sell securities in Texas, by means of the conduct described herein. With full knowledge that the foregoing unregistered dealers were selling securities in Texas, Defendants took actions designed to disguise the sale of securities by an unregistered dealer through various offshore devices, including the creation of EMCA. Defendants further actively and intentionally engaged in conduct designed to conceal and cover up the illegal sales of securities by an unregistered dealer occurring in Texas. Defendants knew of the violations of the Texas Securities Act by Sharp; set up the offshore corporate structure so that Sharp could violate the Texas Securities Act undetected; and perpetuated Sharp’s violations of the Texas Securities Act through its continued representation of Sharp and obstruction of federal authorities. 76. In performing the acts described herein to aid and abet the sale of securities in Texas by an unregistered dealer, Defendants acted with the intent to perpetuate the sale of securities by an unregistered dealer, or acted with reckless disregard for the truth or the law. In fact, in their zeal to remove Sharp from the regulatory purview of U.S. tax and Texas securities laws, Defendants acted with wanton and arrogant disregard for the protections afforded by the Texas Securities Act by engaging in the conduct described herein. As a result of Defendants’ conduct in aiding and abetting the sale of securities in Texas by unregistered securities dealers, Plaintiffs have lost their investments. Defendants’ violations of the Texas Securities Act are a proximate cause of actual damages to Plaintiffs, being the difference between their investments in Sharp as stated in their last account statement and the amount Plaintiffs received from the Special Master distribution. 3. Untruth or Omission 77. Defendants, acting with intent to deceive or with reckless disregard for the truth or the law, materially aided Sharp and its principals, Gutierrez and Martinez, in the sale of securities through the use of untrue representations or materially misleading omissions. In particular, and as set forth in the Indictments of Gutierrez and Martinez and resulting guilty pleas, Sharp and its principals sold securities to Plaintiffs using untruths and omissions. In particular, Sharp told Plaintiffs that their money was being invested in safe, liquid investments, which was a material misstatement. Sharp fabricated account statements and sent them to Plaintiffs. Sharp omitted to inform Plaintiffs that it was selling them unregistered securities and that it was operating as an unregistered dealer in violation of the Act. Finally, Sharp omitted to inform Plaintiffs that their money had been transferred to EMCA and had been invested in risky emerging market bonds and the Protexa loans. 78. With knowledge of the above, Defendants materially aided Sharp’s sales of securities through the use of untruths and materially misleading omissions. Specifically, with general awareness of Sharp’s fraudulent activities and violations of federal and state securities laws, including Sharp’s commingling of Plaintiffs’ money, hypothecation of Plaintiffs’ securities, failure to register as a dealer, failure to register securities, and transfer of client assets to EMCA, Defendants engaged in the conduct described herein, which conduct was primarily designed to set up and allow Sharp to carry out the activities described and protect and shield Sharp from regulatory scrutiny. Defendants’ actions as described herein allowed Sharp to continue to sell securities through the use of untruths and materially misleading omissions. 79. In performing the acts described herein to aid and abet the sale of securities through the use of untruths and materially misleading omissions, Defendants acted with the intent to perpetuate the sale of securities by Sharp, or acted with reckless disregard for the truth or the law. In fact, in their zeal to remove Sharp from the regulatory purview of United States tax laws and Texas securities laws, Defendants acted with wanton and arrogant disregard for the protections afforded by the Texas Securities Act by engaging in the conduct described herein. Defendants’ actions in aiding and abetting Sharp Capital caused Plaintiffs to enter into transactions or maintain their investments with Sharp. As a result of Defendants’ conduct in aiding and abetting the sale of securities in Texas through the use of untruths and materially misleading omissions, Plaintiffs have lost their investments. Defendants’ violations of the Texas Securities Act are a proximate cause of actual damages to Plaintiffs, being the difference between their investments in Sharp as stated in their last account statement and the amount Plaintiffs received from the Special Master distribution. C. Common Law Aiding and Abetting Violations of the Texas Securities Act and Conspiracy to violate the Texas Securities Act 80. Section 33(M) of the Texas Securities Act permits the assertion of common law causes of action in addition to the statutory causes of action created by the Act. The remedy provided by Section 33(F)(2) of the Act with regard to “aider” liability is not exclusive and therefore Plaintiffs hereby assert a cause of action against Defendants under the common law theory of aiding and abetting the violations of the Texas Securities Act and conspiracy to violate the Texas Securities Act. In particular, Defendants knowingly combined with Sharp and its principals to accomplish the purpose of avoiding the strictures imposed by the Act. Defendants undertook various overt acts in furtherance of the conspiracy to assist Sharp in violating the Act. 81. With full knowledge that Sharp was violating the Texas Securities Act in a variety of manners, Defendants aided and abetted and otherwise assisted Sharp to carry out its violations of the Act. Without Defendants’ assistance, Sharp would not have been able to carry out the violations of the Texas Securities Act described herein. Defendants’ common law aiding and abetting violations of, and conspiracy to violate, the Texas Securities Act are a proximate cause of actual damages to Plaintiffs, being the difference between their investments in Sharp as stated in their last account statement and the amount Plaintiffs received from the Special Master distribution. D. Participation In Breach of Fiduciary Duty 82. As registered investment advisors, Sharp and its principal Gutierrez owed fiduciary duties to Plaintiffs as the custodians of investment money entrusted to Sharp by Plaintiffs. The Defendants knew that the above fiduciary duties existed, and knew since at least 1989 that Sharp and its principals were breaching said fiduciary duties. With full knowledge that Sharp and its principals were breaching their fiduciary duties to Plaintiffs, Defendants participated in Sharp’s and its principals’s breaches of those duties by the conduct alleged herein. In particular, with full knowledge that Sharp and its principals were breaching their fiduciary duties to Plaintiffs, Defendants counseled Sharp and its principals on ways to continue to breach their fiduciary duties and get away with it, including the establishment of EMCA. When the SEC launched its investigation of Sharp, Defendants then engaged in conduct designed to obstruct said investigation. 83. Defendants’ participation in breaches of fiduciary duties are a proximate cause of actual damages to Plaintiffs, being the difference between their investments in Sharp as stated in their last account statement and the amount Plaintiffs received from the Special Master distribution. Moreover, in aiding, abetting and participating in the breaches of fiduciary duties as alleged herein, Defendants acted with malice and in conscious indifference to Plaintiffs’ rights. Defendants knew or should have known that their aiding, abetting and participation in the breaches of fiduciary duties set out above likely would result in extraordinary harm to the Plaintiffs. Accordingly, Plaintiffs are entitled to recover exemplary damages in excess of the minimum jurisdictional limits of this court. E. Aiding and Abetting/Conspiracy to Commit Fraud 84. By their conduct described herein, Defendants aided and abetted fraud, participated in and conspired with Sharp and its principals to commit fraud. In particular, with full knowledge that Sharp and its principals were committing fraud on Plaintiffs, including the fraud related to the Protexa loans, Defendants made the conscious decision to continue to aid and abet that fraudulent conduct by their actions as described herein. 85. Defendants’ actions in aiding and abetting and conspiring to commit fraud are a proximate cause of actual damages to Plaintiffs, being the difference between their investments in Sharp as stated in their last account statement and the amount Plaintiffs received from the Special Master distribution. F. Aiding and Abetting Conversion/Conspiracy To Commit Conversion 86. Defendants knowingly engaged in and conspired with Sharp and its principals to commit the tort of conversion. In particular, Plaintiffs owned investment moneys that they placed with Sharp for the purchase of securities and had, or should have had, the immediate right of possession to securities, cash, and assets in their accounts. Sharp and its principals were the custodian for all those assets, including all cash, securities or notes. Sharp and its principals commingled and then converted the Plaintiff Investors’ assets to their own benefit through the financial schemes described herein. Sharp’s and its principals’ actions constitute an unauthorized and wrongful assumption and exercise of dominion and control over the Plaintiff investors’ assets that is inconsistent with Plaintiffs’ rights. 87. Defendants conspired with and aided and abetted Sharp and its principals in converting the Investors’ assets by, inter alia, devising and counseling the various mechanisms Sharp could employ to continue to pool and convert Plaintiff’s investments, including the formation of EMCA, and later obstructing government investigators. The Defendants’ actions in aiding and abetting and conspiring to convert the Plaintiff investors’ assets are a proximate cause of actual damages to Plaintiffs, being the difference between their investments in Sharp as stated in their last account statement and the amount Plaintiffs received from the Special Master distribution. G. Breach of Fiduciary Duty as Subagent 88. Defendants breached fiduciary duties they owed directly to the Plaintiffs. There was a direct fiduciary relationship between Plaintiffs and the Defendants because Plaintiffs appointed Sharp as their agent for the custody and investment of their money, and, in turn, Sharp hired Defendants to act as counsel and agents for legal services. Through their Agreements with Sharp, Plaintiffs authorized Sharp to hire additional agents such as Defendants, and Sharp acted on that authority by hiring Defendants. Thus there was privity between Plaintiffs and Defendants via Sharp. Defendants therefore acted as sub-agents for the Plaintiffs and owed the same fiduciary duties to Plaintiffs, and are subject to the same liabilities, as Sharp. Defendants breached those fiduciary duties to Plaintiffs by the conduct described herein, and said breaches are a proximate cause of actual damages to Plaintiffs, being the difference between their investments in Sharp as stated in their last account statement and the amount Plaintiffs received from the Special Master distribution. Moreover, in breaching their fiduciary duties owed to Plaintiffs as subagents as alleged herein, Defendants acted with malice and in conscious indifference to Plaintiffs’ rights. Defendants knew or should have known that their participation in the breaches of fiduciary duties set out above likely would result in extraordinary harm to the Plaintiffs. Accordingly, Plaintiffs are entitled to recover exemplary damages in excess of the minimum jurisdictional limits. H. Breach of Attorney Standard of Conduct 89. Defendants breached duties owed by lawyers to persons who are not clients by violating the obligation set out in RESTATEMENT (THIRD) OF THE LAW GOVERNING LAWYERS (Tentative Draft No. 8) � 73. That rule provides in part: For purposes of liability under � 71, a lawyer owes a duty to use care within the meaning of � 74: (4) to a non-client when and to the extent that: the lawyer’s client is a trustee, guardian, executor, or fiduciary acting primarily to perform similar functions for the non-client; circumstances known to the lawyer make it clear that appropriate action by the lawyer is necessary with respect to a matter within the scope of the representation to prevent or rectify the breach of a fiduciary duty owed by the client to the non-client, where (i) the breach is a crime or fraud or (ii) the lawyer has assisted or is assisting the breach; the non-client is not reasonably able to protect its rights; and such a duty would not significantly impair the performance of the lawyer’s obligations to the client. 90. Additionally and alternatively, Defendants owed duties to Plaintiffs pursuant to Rule 4.01 of the Texas Rules of Professional Conduct. That rule provides that “In the course of representing a client, a lawyer shall not knowingly . . . (b) fail to disclose a material fact to a third person when disclosure is necessary to avoid making the lawyer party to a criminal act or knowingly assisting a fraudulent act perpetrated by a client.” The notes to that rule indicate that a duty is invoked not only when a client is planning a future fraudulent act, but also when a lawyer discovers that the client has committed a criminal or fraudulent act in the course of which the lawyer’s services has been used. Defendants breached each and all of these duties owed to Plaintiffs, and said breaches are a proximate cause of actual damages to Plaintiffs, being the difference between their investments in Sharp as stated in their last account statement and the amount Plaintiffs received from the Special Master distribution. Moreover, Defendants willfully and intentionally engaged in the wrongful conduct complained of herein, for which an award of punitive damages is sought. X . ACTUAL DAMAGES 91. Plaintiffs suffered the loss of tens of millions of dollars in damages that were proximately caused by the wrongful conduct described herein. The investors are entitled to recover the loss of their investment, plus interest thereon. In addition, the investors are entitled to recover their just and reasonable attorneys’ fees, for it would be inequitable not to award such fees to them. The investors have retained the undersigned attorneys and have agreed to pay them a reasonable attorneys’ fee for their work. 92. The exact amount of maximum damages proximately caused by Defendants’ wrongful conduct is unknown, but Plaintiffs believe that those damages will exceed $50 million. XI. PUNITIVE DAMAGES 93. The wrongful conduct set forth herein constitutes fraud or malice, willful acts or omissions, or gross neglect within the meaning of � 41.003, Tex. Civ. Prac. & Rem. Code. Plaintiffs are entitled to recover punitive damages in an amount necessary to punish the Defendants and to deter similar conduct of others in the future. 94. All conditions precedent to filing this Petition have been met. PRAYER WHEREFORE, Plaintiffs pray the Defendants be summoned to answer this Petition, and that the case be tried before a jury and that upon final judgment the classes and sub-classes as set forth in each cause of action hereof recover their damages as alleged herein, including their actual damages, punitive damages, and their costs and expenses of suit, including reasonable attorneys’ fees. Plaintiffs pray for such other relief to which they may be justly entitled. Respectfully submitted, MARTIN, DROUGHT & TORRES, INC. Bank of America Plaza, 25th Floor 300 Convent Street San Antonio, TX 78205 Facsimile: (210) 227-7924 Telephone: (210) 227-7591 By: EDWARD C. SNYDER State Bar No. 00791699 JESSE R. CASTILLO State Bar No. 03986600 G. WADE CALDWELL State Bar No. 03621020 J. WESLEY HORNBUCKLE State Bar No. 24010775

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