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Ever since New York Attorney General Eliot Spitzer began investigating the mutual fund industry about 18 months ago for “widespread illegal trading schemes,” he has also been examining the advice brokers got from lawyers. No lawyers or firms have been charged yet with wrongdoing, and one expert thinks it would be a difficult case to make. But on Sept. 15, Piper Rudnick and a lawyer in its New York office were sued for malpractice by two former brokerage house executives. The two are being investigated for mutual fund trades they brokered, and they claim they were advised that the trades were perfectly legal. Goldberg v. Hirschberg, No. 112317/04 (New York Co., N.Y., Sup. Ct.). Ryan Goldberg and Michael Grady were vice presidents at Brean Murray Inc. and, the complaint says, traded in mutual funds on behalf of large institutional clients, including Canary Capital Partners, which has been at the center of the scandal. After meeting with a potential client in October 2001 and discussing their ability to trade after the market closes at 4 p.m. Eastern, they were asked about “the propriety” of late trading. They allegedly called lawyer Michael Hirschberg, who agreed to research the matter. Although the complaint acknowledges that there was no written retainer (or written opinions), they claim that an attorney-client relationship was formed through their oral communications. Hirschberg told them, the complaint alleges, that trading isn’t barred by Security and Exchange Commission rules until next-day prices are posted, which normally occurs at 6 p.m. From 5:30 p.m. until 5:45 p.m., they had a “green light to go,” the complaint says he told them. Thanks to this allegedly negligent advice, the complaint says, the plaintiffs are now being investigated by the SEC and the attorneys general of New York and New Jersey. They have already spent more than $500,000 on their defense and expect to spend another $1.5 million before it’s all over. Their complaint requests damages of more than $1 million. The defendants are represented by Gerson Zweifach, a partner at Washington’s Williams & Connolly, who referred to a statement issued by Piper: “The plaintiffs were not clients of the firm. We believe that the suit is without merit.” The lawyer who brought the suit, Ronald Minkoff of New York’s Frankfurt Kurnit Klein & Selz, declined to discuss it. It seems clear, however, that the issue of whether the lawyers were retained will be one battleground. In the absence of a written opinion, said John Coffee, a professor at Columbia Law School, two questions will be central: What did the client tell the lawyer? And what was the lawyer’s advice? “I’m sure that you’re going to see two very different characterizations of the facts,” he said. If lawyers led the clients to believe that 4 p.m. isn’t recognized as a deadline, their advice could be construed as misleading, Coffee said. On the other hand, he continued, if experienced brokers ignored clear warnings because they were shopping for an opinion, their suit may not survive. In any case, he added, a malpractice claim will be far easier to win than a civil or criminal case brought by Spitzer, who would have to prove that lawyers participated in fraud as primary actors and didn’t just provide negligent advice.

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