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JPMorgan Chase and a syndicate of major banks may proceed with their suit against the former general counsel and an in-house lawyer of Global Crossing Ltd., though a federal judge expressed strong doubts about the claims against the attorney defendants. James C. Gorton, the telecommunications company’s general counsel from 1998 to 2001, and counsel Jackie Armstrong, were among 23 former Global Crossing executives named in the $1.7 billion suit. The banks, which loaned the company more than $2 billion, claim the executives, led by former chairman Garry Winnick, engaged in a scheme to inflate revenue and disguise the true financial condition of the company, which sought bankruptcy protection in 2002. The former in-house lawyers had moved to have themselves dismissed from the case on the grounds that they either did not know, did not assist or, in the case of Gorton, actively opposed the sham transactions through which Global Crossing allegedly inflated revenue. Southern District of New York Judge Gerard Lynch denied the motion by Gorton and Armstrong, finding in JPMorgan Chase v. Winnick, 03 Civ. 8535, that the banks had made a sufficient showing that a fact-finder could infer that the lawyers were actively and knowingly involved in the transactions. But the judge also said the claims against the lawyers did not strike him as “particularly potent,” noting that many of the facts were subject to “conflicting interpretations and robust dispute as to whether they prove anything of much significance with regard to the knowledge and involvement of [the lawyers] in the fraud alleged here.” As general counsel, Gorton was the recipient of a letter by whistleblower Roy Olofson, a former financial executive who expressed unease about the company’s use of “swap” transactions to boost revenue. In these transactions, Global Crossing would book revenue on the exchange of network capacity with other companies, though often no money would actually change hands. The judge said this letter alone did not show Gorton’s knowledge of fraud, but he said the banks had advanced other evidence, including e-mail communications, “which, taken together, show not just what Gorton should or might have known, but what he actually knew.” Gorton, who had been a partner at Simpson Thacher & Bartlett before joining Global Crossing, appointed his old firm to investigate Olofson’s claims. The former general counsel noted this act and his opposition to one major swap transaction in arguing for his dismissal. But the judge noted that a fact-finder could determine that Gorton opposed the transaction because he thought it was risky from a business standpoint, not because it was fraudulent. Armstrong had argued that her role in negotiating and drafting documents for the transactions were routine tasks for an in-house counsel and therefore did not constitute substantial assistance. But Judge Lynch said the main issue was not the routineness of Armstrong’s tasks, but their contribution to the perpetration of a fraud. He noted that the cases she cited in her motion dealt mainly with banks that were not found liable for carrying out account management and transfer functions that benefited fraudulent schemes. He said these cases were “too different from the conduct alleged here to be instructive.” “Far from being a remote servicer of the primary violator, Armstrong is alleged to have been directly involved in bringing about — including negotiating — transactions, which while not themselves necessarily fraudulent, are alleged to have been carried out solely for the purpose of inflating revenue and thus could reasonably be understood as a proximate cause leading foreseeably to defrauding the banks,” Lynch wrote. WEAK CLAIMS But while he said the banks’ allegations were sufficient to survive the motion to dismiss, the judge made clear he thought the case against the lawyers was not worthwhile, especially since it was “doubtful whether these defendants can make a substantial contribution to compensating the banks, even if their liability is ultimately established.” The banks, he said, would be “well-advised to consider whether chasing multiple individual defendants on what appear to be weak claims is worth the candle.” Global Crossing executives last year paid a combined $325 million to settle employee and shareholder litigation. Simpson Thacher paid $19.5 million to head off potential claims that it failed to adequately investigate Olofson’s allegations. Gorton, now a partner in the New York office of Latham & Watkins, was represented by Edward Spiro of Morvillo, Abramowitz, Grand, Iason & Silberberg. Armstrong was represented by Ralph Ferrara of LeBoeuf, Lamb, Green & MacRae. JPMorgan Chase was represented by Michael Hirshfeld of Milbank, Tweed, Hadley & McCloy.

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