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The Red Hot Law Group of Ashley, once Atlanta, Ga.’s version of a Silicon Valley law firm, has settled legal malpractice claims brought by a failed dot-com and its shareholders. Red Hot, acquired by McKenna Long & Aldridge in October 2001, entered into a $2.2 million class action settlement that will go to 89 YuSave shareholders, and it also paid $35,714 to its one-time client, YuSave.com Inc., which once shared office space with the law firm. YuSave, pronounced why-you-save, once billed itself as the next big thing in Internet e-commerce. It boasted in a November 1999 press release that more than 2,000 manufacturers were loading products onto its Web site. One company alone would place 35,000 office products on its site, YuSave said. But YuSave filed for bankruptcy just one year after that press release, and when investors claimed they were misled about the startup’s prospects, the company pointed fingers at the Red Hot lawyers who prepared its investment offering documents. The settlement agreement in Fulton County Superior Court doesn’t disclose what portion of the settlement, if any, will be paid by the law firm, which was sued along with several of the defunct dot-com’s former officers. One of the plaintiffs’ attorneys, Jay D. Brownstein of Brownstein & Nguyen, said his clients were satisfied with the settlement and glad the court approved it last week. Red Hot’s attorney, James T. McDonald Jr. of Swift, Currie, McGhee & Hiers, its founder, Evelyn A. Ashley, and the former Red Hot lawyer who handled much of the YuSave work, Michael R. Siavage, didn’t return calls. Other attorneys involved in the class action either said they didn’t know what portion of the settlement Red Hot agreed to pay or they refused to provide that information. Brownstein said plaintiffs were not privy to the amounts the various defendants agreed to contribute to the $2.2 million settlement, nor were those amounts disclosed in the written agreement. Red Hot, which maintains its name and offices as part of McKenna Long, admitted no liability under the settlement. YuSave’s attorney, David N. Krugler of Cash Krugler & Fredericks, said the $35,714 payment from Red Hot to his client was in settlement of legal malpractice claims YuSave had against its former law firm. YuSave maintained that Red Hot’s malpractice led to the shareholder suit and effectively prevented the company from raising additional funds, Krugler said. YuSave was brought into the case late, after its bankruptcy case was dismissed and at a time when all the parties to the class action were in negotiations to settle the litigation, Krugler said. The amount Red Hot paid his client, he added, was “the best we could do,” given YuSave’s late entry into the case. Red Hot also was brought into the class action, filed in 2001 by shareholders against six corporate officers of YuSave. The YuSave outside investors were represented by Jerry L. Sims of Sims Moss Kline & Davis and Brownstein. INVESTORS CRY FRAUD YuSave was among the dot-coms nurtured by the Red Hot Law Group, founded in 1998 by Ashley, and the Red Hot Technology Accelerator, founded a year later by Ashley’s husband, tech consultant Alan McKeon. The firm did the legal work to get startup companies off the ground; handled corporate contract work; set up strategic alliances and licensing deals; handled copyright, trademark and trade secret registration; and did mergers and acquisitions. The Accelerator operated out of Red Hot’s law offices and was designed to guide young companies toward funding or strategic partnerships. Red Hot doubled in size — from four to eight attorneys — from 1998 to 1999. At its peak, Red Hot had about a dozen lawyers. YuSave at one time rented office space for $1,000 a month from Red Hot Technology Accelerator, according to court documents. But YuSave floundered, filing for Chapter 11 bankruptcy protection in late 2000. Several months later, in March 2001, shareholders filed suit against the tech company, alleging fraud and violations of securities laws in connection with a sale of stock that began in July 1999 and raised about $4 million from about 100 investors in 16 states. According to court documents, Red Hot Law advised YuSave on the stock sale, including the contents of two private placement memoranda that went to potential investors. The suit says YuSave wrongly assumed its stock offering was exempt from registration requirements. But the private sale was subject to registration laws, the suit says, because some of the investors were not accredited investors, and federal and state law requires such sales to be registered. Accredited investors, according to plaintiffs’ attorney Sims, are those with an income level that presumes they are capable of making substantial investments. The plaintiff stockholders also say the two private placement memos sent out during the stock sale didn’t contain information about executive compensation, principal stockholders or an audited balance sheet. Nor did the memos tell them what factors YuSave used to calculate the stock price of 63 cents or that YuSave’s business plan relied on software that had not yet been developed. The stockholder suit also says that the memos claimed that almost 600 manufacturers had signed on with YuSave when in fact few, if any, manufacturers had done so. Rothchild v. Gunning, No. 2001CV35390. SHIFTING BLAME The suit originally named six current or former officers of the company but didn’t name YuSave since it was in bankruptcy at the time the complaint was filed. A Fulton judge dismissed three of those officers after finding they were not part of the company at the time the private placement memos were issued. The officers, however, pointed fingers at their lawyers, prompting the plaintiffs to add Red Hot as a defendant last year. The plaintiffs argued in a brief that YuSave officials had “inextricably inserted issues of Red Hot Law’s involvement and possible negligence in connection with the Offering into the case.” The YuSave officials later filed cross claims against Red Hot, which countered that company officials, not the lawyers, were responsible for YuSave’s failures. Red Hot also argued in briefs that it represented the corporation, not its officers, and that shareholders could not assert malpractice claims against YuSave’s attorneys. One defendant, YuSave director Graham Pifer, said in a deposition that Red Hot lawyers were at all YuSave board meetings. That “was one of the security blankets or one of the reasons we were so excited about getting into their incubator,” Pifer said. Red Hot, he added, was not only YuSave’s legal counsel “but they had an invested stake in not only making sure that we were successful, but making sure that we did everything exactly as it should be. I mean, we were in their offices, for heaven’s sake.” Company officers, Pifer said, relied on the lawyers 100 percent “to make sure all of the T’s were crossed and I’s dotted.” Carl W. Mullis III of Paul, Hastings, Janofsky & Walker, who represented Pifer and another former director, said his clients did nothing wrong, adding that the complaint made no allegations against them individually. Mullis said he believes they ultimately would have been dismissed from the case on a motion for summary judgment had the case not settled. He declined further comment. Susan W. Housen of Holland & Knight, who represented YuSave’s chief executive officer, John D. Gunning, said the settlement was not an admission of liability on the part of her client. YuSave, she said, was still a corporation but was not currently operational. Had the case not settled, the judge originally assigned to the case, Fulton Superior Court Judge Bensonetta T. Lane, would have had to decide whether the plaintiff shareholders as well as the corporate officers could bring malpractice claims against the Red Hot lawyers. Brownstein said there is Georgia law that supports third-party claims against professionals such as lawyers or accountants when those professionals know that third parties will rely on their work product. In those situations, he said, “They do have a duty to that third party.” Had the case not settled, Brownstein added, the plaintiffs would have proceeded with their malpractice claim against Red Hot. Lane, upon reviewing the settlement, apparently discovered a conflict of interest and recused herself. Fulton Superior Court Judge Thelma Wyatt Cummings Moore, in a Sept. 23 order, certified the class of shareholders and approved the settlement that was filed with the court July 8. The settlement amount, according to plaintiffs’ lawyer Sims, is about 55 percent of the investment made by the 89 members of the plaintiff class. He said no class member objected to the settlement. The actual amount each class member will receive will vary depending on the number of shares they purchased. Moore will hold a hearing to determine the amount of attorney fees to be awarded to Sims and Brownstein.

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