Sidley Austin offices in Washington, D.C.
Sidley Austin offices in Washington, D.C. (Photo: Diego M. Radzinschi/ALM)

Sidley Austin is stuck facing a proposed class action accusing it, along with fellow law firm Tonkon Torp and a set of accounting firms and banks, of contributing to an alleged securities fraud by now-defunct investment fund Aequitas Management LLC.

U.S. District Judge Michael Mosman in Portland, Oregon, has shot down most of a motion to dismiss the suit, brought by Aequitas investors against law firms Sidley and Tonkon Torp; auditors EisnerAmper LLP and Deloitte & Touche LLP; and banks TD Ameritrade Inc. and Integrity Bank & Trust. The ruling, dated July 5 and entered in the public court record on July 7, refused to clear Sidley and its co-defendants of potential liability for allegedly helping Aequitas mislead investors.

Mosman’s decision makes official a set of recommendations released in April by U.S. Magistrate Judge John Acosta. In addition to recommending that many claims remain intact, the magistrate found that some claims weren’t laid out with enough specific detail. But the magistrate held that the Aequitas investors—represented by Hagens Berman Sobol Shapiro and Stoll Berne—should be allowed to amend the complaint to fix those issues.

The proposed class action started in April 2016, but the allegations stem from actions Aequitas took during the years before it publicly declared insolvency in early 2016. The collapse was quickly followed by a U.S. Securities and Exchange Commission lawsuit against the investment group.

The proposed investor class action alleges that Sidley, Tonkon Torp and the other defendants—all of which provided legal counsel and financial services to Aequitas at different points between 2011 and 2016—contributed to a string of alleged misconduct by Aequitas during its efforts to sell securities and raise money from investors.

According to the lawsuit, Aequitas’ alleged misdeeds include failing to tell investors about issues with specific investments and using “financial engineering” that allowed the investment group to overstate the health of its finances.

An amended complaint lodged in May 2016 alleges that despite having its own financial struggles, Aequitas used investors’ money to fund large bonuses, private aircraft and company parties. The investors also allege that Aequitas ran something similar to a Ponzi scheme, relying on funds coming in from new investors to meet its obligations to repay others.

“By 2014, virtually all new investor money was used by Aequitas to satisfy obligations to prior investors and to pay Aequitas’ operating costs, including lavish expenses and salaries,” the amended complaint said.

Sidley is accused of advising Aequitas as far back as 2014 regarding the sale of securities, preparing offering documents and risk disclosures that allegedly helped Aequitas mislead investors. The suit makes similar allegations against Tonkon Torp, a well-known corporate firm in Portland that offered legal counsel to Aequitas for several years in connection with securities sales.

The suit also makes allegations that EisnerAmper and Deloitte bore some responsibility, as they audited Aequitas’ financial statements during the time of the investment fund’s alleged misconduct.

Brad Brian of Munger, Tolles & Olson, who’s representing Sidley, did not immediately respond to a request for comment on Monday. One of the lead plaintiffs lawyers, Keith Ketterling of Stoll Berne, also didn’t immediately respond.