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Two prominent Miami law firms and a top New York City firm are battling in court for control of fraud and malpractice lawsuits that arose from the 2003 collapse of the nearly $1 billion Lancer hedge funds. The funds’ managers, accountants and brokers are defendants in the lawsuits. On one side is New York-based Brown Rudnick Berlack Israels, which represents a group of Lancer investors who allegedly lost more than $460 million in two of Lancer’s investment funds. On the other side are the funds’ court-appointed Miami receiver, Marty Steinberg, and lawyers for individual investors who have filed suit seeking class status. In court documents, each side accuses the other of seeking total control of all Lancer investor litigation. The New York law firm won a round last week when U.S. District Judge Kenneth A. Marra in Fort Lauderdale, Fla., denounced a malpractice lawsuit brought by Steinberg against the hedge funds’ accountant, PricewaterhouseCoopers. Steinberg’s suit, filed Dec. 2, alleges that the accounting firm’s professional malpractice allowed the Lancer fraud to go undetected for years, contributing to hundreds of millions of dollars in losses to the fund and its investors. But Marra wrote that Steinberg’s suit was “a strategic attempt” to influence the judge’s ruling on a pending motion by the group of individual investor plaintiffs to transfer to New York all of the federal lawsuits brought in South Florida last year by all of the Lancer investors. Marra said Steinberg’s lawsuit — which he described as “duplicative” of the previously filed investor lawsuits — “will necessarily result in an additional drain” on Lancer’s “limited remaining assets.” Unlike the investors’ lawsuits, Steinberg’s lawsuit would be financed by the assets of the bankrupt funds, the judge noted. The assets are a potential source of indemnification for the investors. Steinberg declined to comment on the judge’s order, saying he had not seen it. His attorney in the lawsuit against PricewaterhouseCoopers, Roberto Martinez, a partner at Colson Hicks Eidson in Coral Gables, Fla., did not return calls for comment. In an interview and in court papers, Brown Rudnick partner Scott Berman, the lead attorney for the group of investors who have fought to have the Lancer litigation removed to federal court in New York, criticized Steinberg’s handling of the case. Berman alleges that he is being subjected to “spiteful harassment” by Steinberg, who had moved to have Miami bankruptcy attorney Harley Tropin act as lead counsel for all the investors in a consolidated case against the Lancer managers and financial services providers. Tropin, a partner at Kozyak Tropin & Throckmorton, is lead counsel for the prospective class plaintiffs and had agreed that all litigation proceeds would run through Steinberg’s receivership. Berman alleges that Steinberg “wanted the entire investor body to select his hand-chosen, contingency class action attorney” to pursue the investor claims. Steinberg’s motion to name Tropin lead consolidate counsel was denied. Berman called on Steinberg to limit his role. “The receiver’s duty is to marshal the estate’s assets,” he told the Daily Business Review. “The receiver has no standing to assert claims on behalf of the investors, who can assert them by themselves.” In an interview, Steinberg said he “vehemently disagrees” with Berman’s characterizations but prefers “to litigate the differences in court.” NUMEROUS RED FLAGS The Lancer hedge funds were frozen and thrown into receivership in July 2003 as a result of a Securities and Exchange Commission lawsuit alleging widespread fraud by the funds’ management. Investor lawsuits against the managers and their financial advisers followed. The hedge funds were based in Connecticut and the British Virgin Islands and were managed by founder and principal owner Michael Lauer. From 1995 until the SEC shut them down in 2003, the funds took in more than $900 million. As hedge funds, Lauer’s companies were not required to register with the SEC, were open only to investors with substantial net worth and provided limited information about their holdings. Those holdings consisted largely of high-risk shares traded on the over-the-counter market. In July 2003, attorneys from the SEC’s Miami office filed suit in U. S. District Court in Fort Lauderdale, alleging that Lancer management had engaged in a fraudulent practice known as “marking the close.” That is, the company had pumped up the prices of certain of their holdings by purchasing blocks of shares in thinly traded stocks at or near the close of the last trading days of the month. According to the SEC complaint, the purpose of the fraud was to generate outsized management fees based on the artificially inflated value and performance of the funds. The SEC case has not yet been tried. The SEC asked Southern District Chief Judge William Zloch, who has since recused himself from the case, to freeze the funds and appoint a receiver. Steinberg was appointed in July 2003. In addition to the bogus valuations, the SEC accused Lancer of misrepresentations and omissions in its marketing materials. These relied in part on bogus financial statements that PricewaterhouseCoopers had approved. The lawsuits filed against PricewaterhouseCoopers by Steinberg and the other investor plaintiffs allege that the accounting firm committed professional malpractice by ignoring numerous “red flags” on the hedge funds’ books. That allegedly allowed the fraud to continue and thrive, causing damages to the investors of “hundreds of millions of dollars,” according to Steinberg’s complaint. Steinberg’s attorneys have argued that simple administration and liquidation of the Lancer companies will provide an inadequate amount of money to reimburse the victims of the alleged Lancer fraud. As a result, it’s necessary for the receiver to sue Lancer’s deep-pocketed service providers, such as PricewaterhouseCoopers, to increase the payments. In addition, two groups of Lancer investors filed lawsuits against the funds’ directors, bankers and accountants in the Southern District of New York in fall 2003. One group filed as a purported class action, never certified, while the other filed as individuals. Meanwhile, other investors held a beauty contest among potential plaintiff attorneys. Most of the investors — those representing approximately 85 percent of the total capital invested with Lancer’s offshore fund — retained Brown Rudnick, while others retained Miami’s Kozyak Tropin Throckmorton. In November 2003, the Kozyak Tropin plaintiffs filed a class action in the Southern District of Florida against Lancer’s directors and financial consultants. The New York class action plaintiffs transferred their case to Florida, where it was combined with the Tropin lawsuit. The New York individual plaintiffs joined with the Brown Rudnick plaintiffs and also filed suit, as a group, against Lancer’s directors and financial consultants in Florida. ROB COURT OF OVERSIGHT? But the group plaintiffs were opposed all along to trying their case in Florida. In court documents, they say they agreed to file here only as a goodwill gesture toward Steinberg, who had been granted an order from Judge Zloch that channeled all Lancer litigation to Florida. Berman, who represents the group plaintiffs, alleges that he encountered “antagonism” rather than cooperation from Steinberg. In court documents, he claims that the receiver has “refused to cooperate” with Berman’s plaintiffs because Steinberg favored their inclusion in Harley Tropin’s class action. Berman wrote that Tropin seeks “total control” over all Lancer investor litigation, against the wishes of Berman’s clients. Tropin’s partner and co-counsel for the class plaintiffs, David Milian, countered that Berman’s wish to remove his clients’ lawsuit to New York would rob the federal court here of oversight of the Lancer cases and impede an equitable settlement that would include all the Lancer investors. “The bottom line is that there are limited resources here and everyone’s going to be chasing them,” Milian said in an interview. “All of the victims should share in the recoveries proportionately, not just the biggest and the fastest to the courthouse door.” In court documents, Steinberg’s attorneys have argued that even if Berman represents investors with the greatest losses, “majorities do not rule in a receivership,” which must act “in the best interests of all the parties who lost money.” Last month Judge Marra granted a motion by defendant PricewaterhouseCoopers to transfer all of the Lancer investors’ cases to New York. Steinberg’s attorneys then filed a motion to reconsider the order, cautioning Marra that transferring the cases to New York would rob the court of oversight, resulting in “uncoordinated” adjudication and reduced recoveries for all plaintiffs. On Nov. 30, Marra stayed his order removing the case to New York. Attorneys for the class plaintiffs say they have not yet had sufficient “face time” with Marra to convince him to revoke the order.

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