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Akin Gump Strauss Hauer & Feld and a former partner recently settled a state court suit alleging fraud and securities law violations in connection with the firm’s representation of a now-defunct Internet startup in San Antonio called E-Court Inc. Dallas-based Akin Gump and former partner H. Dale Langley Jr., now a solo practitioner in Austin, paid a total of $2.625 million to the plaintiffs — a group of disgruntled investors from the Rio Grande Valley and the receiver for E-Court. Akin Gump and Langley deny the allegations in the suit. The suit settled days before it was set for trial in Hidalgo County in September 2003, but the money wasn’t paid to the defendants until December 2003, says John T. Klug, a lawyer for the Rio Grande Valley plaintiffs. The receiver is distributing the money to the Rio Grande Valley investors who were plaintiffs in the suit as well as to other E-Court investors who were not plaintiffs. Daniel Bishop II, the lawyer for the receiver, says all but $50,000 of the proceeds was paid to investors during January. He expects the receivership’s affairs to be resolved by the end of March. Klug, of counsel at Schirrmeister Diaz-Arrastia in Houston, says the settlement provides his clients 100 percent of the money they lost by investing in E-Court, although the contingent fee the plaintiffs are paying Klug and other plaintiffs lawyers comes out of that. Klug says the plaintiffs from the Valley are netting 67 percent of their investments, which totaled $1.4 million. Other investors in E-Court who were not named plaintiffs in the suit will get less, Bishop says, but they will net at least 45 percent of their investment, after expenses and attorney fees. “Probably the most extraordinary thing, quite frankly, is the recovery of money in excess of the investment,” Bishop says. “About $2.5 million was invested in the company, and the settlement is for about $2.62 million.” Bishop, a shareholder in Watson Bishop London Brophy, says only investors who actually paid for their stock are eligible for a payment. Bishop and Klug say most of the $2.62 million in settlement money came from insurance companies for Akin Gump and for Langley. The investor plaintiffs in Jose Pena, et al. v. Akin Gump Strauss Hauer & Feld, et al. are 17 residents of the Valley who bought stock in E-Court after a meeting in December 1999 at the Cimarron Country Club in McAllen, Texas, with E-Court executive James Chadwick. (Chadwick was a defendant in the suit, but the plaintiffs nonsuited him after he filed for Chapter 11 bankruptcy protection, Klug says.) As alleged in the plaintiffs’ seventh amended original petition, which they filed originally in 2001 in the 332nd District Court in Hidalgo County, Akin Gump failed to provide Chadwick with necessary private placement documents for the Cimarron Country Club meeting, and subsequently failed to inform the investors that Chadwick had a criminal record. The plaintiffs alleged in the petition that the firm knew, at least by the summer of 1999, about Chadwick’s record. “It is indisputable that it would have been material to a potential investor in E-Court to know that Chadwick had been convicted and was still on parole for, among other things, forgery, theft and burglary,” the plaintiffs alleged in August 2002 in a response to summary judgment motions filed by Akin Gump and Langley. George Brin, a lawyer for Akin Gump, denies the firm knew about Chadwick’s record before the December 1999 meeting in McAllen. A telephone listing for Chadwick was not available in Austin, and Klug says Chadwick was not represented by counsel at the time he was nonsuited. (Klug says the plaintiffs claimed Chadwick misrepresented his background and the prospects for E-Court, allegations Chadwick denied in an answer he filed in April 2001.) Chadwick, 33, did testify in a deposition in March 2002 that he has a criminal record stemming from his youth and was on probation until October 2000. “That was me being a really goofy kid for about six months of my life,” Chadwick said at the deposition, according to a transcript. However, Chadwick’s one-time lawyer in Pena notes that Chadwick hired Akin Gump for its expertise. “He went and sought legal advice from a large law firm,” says Stephen Orr, a partner in Orr & Olavson in Austin. Although Chadwick could not be located for comment, he alleged in a cross-action he filed in April 2001 against Akin Gump and Langley that the firm advised him he did not have to inform prospective investors that he had a record and was on parole. He also alleged the firm failed to provide him with the proper disclosure documents to raise money from investors. (Klug says 332nd District Judge Mario Ramirez struck Chadwick’s pleadings.) Akin Gump defense attorney Brin says the firm denies the allegations in the plaintiffs’ petition. He specifically says the firm did not know about Chadwick’s record as early as the plaintiffs allege in the petition. Brin also alleges that the firm counseled Chadwick against approaching the investors from the Valley, and immediately tried to protect E-Court from any problems created from the way Chadwick allegedly solicited the investors. As alleged in the petition, Chadwick did not provide the investors with the documents legally required for an unregistered private sale of stock. “Chadwick unfortunately was our client,” Brin says. “The big-picture aspect of it is that the alleged violations of the securities law that took place by Chadwick were simply never countenanced by Akin Gump lawyers, and, in fact, they seriously advised against it; and once it had been done, our position, of course, was we took the appropriate steps to try to minimize that,” says Brin, a partner in Brin & Brin in San Antonio. Those actions, Brin notes, included efforts by the firm beginning in January 2000 to handle a rescission offer that would effectively refund prior sales of E-Court stock that allegedly were not handled properly, including the sale to the Valley plaintiffs. Brin says the firm settled Pena v. Akin Gump in part to avoid a trial in Hidalgo County, an area of Texas that has a reputation for generous plaintiffs’ verdicts. “Many of the people who lost money in the matter were of course Valley residents, and any time that you have that situation, you have to be concerned about the venue,” he says. “It was very frustrating to me to have to settle,” he says. Langley refers comment to his lawyer, Charles Murray, a partner in Atlas & Hall in McAllen. Langley, like Akin Gump, denies the allegations in the petition, Murray says, adding that his client settled “to avoid the trouble and expense of litigation.” Murray notes, “E-Court went broke because of the dot-com bust where all of the Internet companies, or nearly all of them, went broke.” PRIVATE PLACEMENT In their petition, the plaintiffs bring various causes of action against Akin Gump and Langley. The receiver alleges Akin Gump and Langley were negligent and breached a fiduciary duty, and alleges the firm aided and abetted in the breach of a fiduciary duty and engaged in negligent misrepresentation. The receiver and the investor plaintiffs allege Akin Gump and Langley engaged in a civil conspiracy, aided and abetted fraud, and engaged in a conspiracy to defraud. Also, the investor and receiver plaintiffs brought fraud allegations against Akin Gump, and the investor plaintiffs alleged negligent misrepresentation, violations of the Texas Security Act, civil conspiracy to violate the act, and statutory fraud in stock transactions against the firm and Langley. The events described in Pena v. Akin Gump took place in the go-go times of 1999 and 2000 when dot-coms were hot and public offerings were the easy route to riches for many investors. As alleged in the petition, Chadwick formed E-Court in June 1999 with a business plan of selling a service to municipalities in Texas to collect traffic ticket payments over the Internet. By July 1999, Chadwick met with Langley, then a partner in Akin Gump, who agreed to do work for E-Court, and to sit on E-Court’s board in exchange for 600,000 shares of E-Court common stock, according to the petition. The plaintiffs allege in the petition that Langley learned by June 1999, or even earlier, that Chadwick had been “convicted of theft, forgery, burglary of habitation and impersonating a police officer,” and Langley advised Chadwick that his record “did not have to be disclosed to prospective investors.” “We vigorously dispute that allegation,” says Murray, Langley’s lawyer. From June through November 1999, as alleged in the petition, E-Court solicited investors using written materials approved by Langley, which indicated the company was prepared to make an initial public offering within six to eight months, but did not disclose Chadwick’s record or the fact that Langley and other directors were promised 600,000 shares of E-Court common stock for no consideration. During that period, E-Court raised between $500,000 and $1 million, according to the petition. After Langley left Akin Gump in the fall of 1999, he continued to do work for E-Court, but the petition alleges that other Akin Gump partners, including San Antonio-based partner Alan Schoenbaum, did work for E-Court. The petition alleges Schoenbaum and others learned about Chadwick’s record during that period. Around November 1999, as alleged in the petition, Akin Gump partner Brandon Janes of Austin advised Chadwick to resign as director and officer of E-Court because of his record. Schoenbaum declines comment, referring questions to Brin. Janes did not return a telephone message before press time on Feb. 5. Brin says the firm denies Schoenbaum knew about Chadwick’s record before the December meeting in the Valley. “Even if that were true, which we say is not true, it would be totally inappropriate for us to advise Valley investors of that kind of information,” Brin says. By Dec. 20, 1999, the petition alleges, Chadwick told E-Court’s board that a company called govWorks.com wanted to buy E-Court, which was doing business as PointOfPay.com Inc. Chadwick also informed the board then that he intended to sell some of his shares in E-Court, which were held by a company he controlled called Citadel Holdings, to investors in the Rio Grande Valley, the petition alleges. At that meeting in McAllen, the petition alleges, Chadwick and another E-Court executive made a sales pitch to the investors without providing them with all the proper private placement documents, and Chadwick told them the sale of the company was imminent and they would double their money. Chadwick did disclose, according to the petition, that the E-Court shares they were buying were actually owned by Citadel, and Citadel would provide up to $1.7 million in the proceeds to E-Court. But ultimately, Chadwick only provided about $100,000 to E-Court, and despite a demand letter from Schoenbaum in April 2000 to turn the funds over to E-Court, Chadwick didn’t do so, the plaintiffs allege in the petition. Bishop, the lawyer for the receiver, says E-Court had virtually no money by July 2000 when the company went into receivership. (The receivership stemmed from a separate civil suit filed by another investor in E-Court.) But Chadwick’s one-time lawyer, Orr, says Chadwick sold the investors from the Valley his personal stock in E-Court and was not obligated to turn the proceeds over to E-Court. Brin, for his part, alleges that Chadwick simply didn’t take the firm’s advice about the proper way to raise money through a private placement. But Klug says, “You never offer stock to people without a private placement memo. You give them the equivalent of a prospectus. You don’t send somebody down with a slideshow and say, ‘Hey, buy this stock.’”

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