An investment bank cannot recover for legal malpractice against Morrison & Foerster because, even though the law firm allegedly missed a central fact while doing public-stock-offering due diligence, the bank’s malpractice claim was time-barred after it didn’t act on a public report about fraud committed by the coal company making the stock offering, an appeals court has ruled.
A New York Appellate Division, First Department panel has found that Brean Murray, Carret & Co., a boutique investment bank, could have brought a malpractice lawsuit against Morrison & Foerster in 2011, when a public report confirmed Puda Coal Inc.’s fraudulent transfers of ownership of Shanxi Coal, but launching the legal action in 2016 was too late.
Brean Murray was on “inquiry notice” of Puda Coal’s fraudulent transfers in 2011 and therefore, even though Morrison & Foerster in conducting due diligence allegedly missed the fact that Puda did not possess its purported 90 percent interest in China state-owned Shanxi Coal, it failed on its own “to make a reasonable investigation,” the panel wrote, quoting MBI International Holdings v. Barclays Bank PLC.
“The alleged malpractice occurred in December 2010 when defendant [Morrison & Foerster] issued its opinion letter that ‘nothing has come to our attention that leads us to believe’ that the registration statement ‘contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading,’” the panel wrote. “Thereafter, a public report which broke the news of Puda’s fraud on April 8, 2011, confirmed that the fraudulent transfers of ownership of Shanxi Coal were documented in government filings.”
The panel continued, “There was nothing preventing plaintiff from accusing defendant of substandard care in April 2011, based on defendant’s opinion letter, when compared to statements made in the public report and the securities litigation that followed in April 2011.”
The panel, composed of Justices Rolando Acosta, David Friedman, Barbara Kapnick, Troy Webber and Peter Moulton, also tossed back the investment bank’s argument that the malpractice statute of limitations had been tolled on the basis of equitable estoppel. The justices wrote in their opinion, issued Tuesday, that the doctrine of equitable estoppel “will not toll a limitations statute where plaintiffs possessed timely knowledge sufficient to have placed them under a duty to make inquiry and ascertain all the relevant facts prior to the expiration of the applicable statute of limitations,” quoting Rite Aid v. Grass.
Moreover, the justices wrote that any special reliance that the investment bank claimed it should have been able to place in Morrison & Foerster’s strong legal reputation, and claimed expertise in China-based companies, was wrongheaded.
Brean Murray’s contention that “it relied on [Morrison & Foerster] because it was a large, international law firm with alleged expertise in China-based companies, and because it trusted that defendant would comply with professional standards and its fiduciary duty to advise plaintiff if its work product was deficient, is misplaced,” the panel wrote.
The panel likewise knocked back the banks’ argument that Morrison & Foerster’s eventual withdrawal as counsel to the bank had acted as a “concealment” that left Brean Murray “in the dark regarding the extent of [Morrison & Foerster’s] potential liability.”
“Even if plaintiff’s allegations of concealment were true, ‘plaintiff [has] failed to demonstrate [its] due diligence, for [it was] on inquiry notice by at least  and failed to make a reasonable investigation,’” the unanimous panel said, again quoting MBI International Holdings. Moreover, the justices noted that “’there is no independent cause of action for concealing malpractice,’” quoting Zarin v. Reid & Priest.
Puda Coal is today described by Bloomberg as a supplier of metallurgical coking coal in China “through its indirect equity ownership in Shanxi Puda Coal Group Co. Ltd.”
In its 2016-filed lawsuit, Brean Murray — which has offices across the country and in China — contended that it was a co-lead underwriter, along with Macquarie Capital (USA) Inc., to underwrite an offering of Puda stock in the U.S. market. The bank further alleged that through Macquarie it had engaged Morrison & Foerster to serve as underwriter’s counsel in connection with the Puda offering.
John Williams, a partner at Williams & Connolly, represented Morrison & Foerster and could not be reached for comment. Nor could Kyle Kolb, an associate at Olshan Frome Wolosky representing Brean Murray.