The law firm of Clifford Chance has been cut loose from the lawsuit brought by investors in the wake of Diagnostic Ventures Inc.’s $1.7 billion collapse a decade ago.
U.S. District Judge Legrome D. Davis of the Eastern District of Pennsylvania granted summary judgment to the firm, saying that there was no evidence that investors relied on statements made by Clifford Chance, which had been DVI’s lead corporate counsel. Further, Davis said, none of the law firm’s statements could be considered public, which would be necessary for the plaintiffs to succeed on a fraud-on-the-market theory.
“The record does not establish that the plaintiff investors knew about or otherwise relied on any conduct or statements made by Clifford Chance at the time that they purchased or sold DVI’s securities,” Davis said in In re DVI Securities Litigation. “The record shows the opposite — that none of the alleged conduct was publicly disclosed and attributed to Clifford Chance.”
Michael Kachel, director of business development and marketing for Clifford Chance’s New York office, said that the firm wouldn’t be commenting on the court’s opinion.
Clinton Krislov, of Krislov & Associates in Chicago, said that he sees Davis’ release of Clifford Chance as part of the framework through which the judge will have the complex case proceed to trial. Krislov represents the plaintiffs.
“We think it’s unfortunate that the choreographer should escape liability just because they didn’t sign their work,” Krislov said, referring to Clifford Chance, which the plaintiffs had accused of engineering a plan for DVI to keep hidden its financial weaknesses.
In 2011, the U.S. Court of Appeals for the Third Circuit weighed in on the case when it was presented with appeals related to the certification of a class of plaintiffs against Clifford Chance and Deloitte & Touche, DVI’s accounting firm. The Third Circuit held that the class could be certified on the fraud-on-the-market theory with regard to Deloitte, but not Clifford Chance.
Davis’ recent opinion granting summary judgment to the law firm shared the logic of the Third Circuit’s opinion, holding that, because Clifford Chance’s advice to DVI wasn’t public, it doesn’t satisfy the presumption of reliance required to bring a fraud-on-the-market claim.
According to court papers, DVI was a health care finance company that extended loans to medical providers so that they could buy diagnostic medical equipment and leasehold improvements, and offered lines of credit for working capital secured by health care receivables. Founded in 1986, DVI was a publicly traded company with reported assets of $1.7 billion in 2003.
In August 2003, DVI filed for bankruptcy due to the public disclosure of alleged misrepresentations about the amount and nature of collateral pledged to lenders. Ultimately, the company’s chief financial officer, Steven Garfinkel, pleaded guilty to fraud, the bankruptcy trustee and multiple lenders filed lawsuits, and the company dissolved.
Investors took aim at the auditors and lawyers. The suits alleged Deloitte committed securities fraud by wrongfully issuing unqualified, or “clean,” audit reports for fiscal years 1999 to 2002, hiding DVI’s improper accounting practices, and declining to force the company to disclose its fraudulent acts.
The claims against Clifford Chance focused on events in late 2002 when Deloitte told DVI that it was required to disclose, in its SEC filings, certain weaknesses in DVI’s internal controls for monitoring non-performing assets and assessing impaired loans.
According to the suits, disclosing the information would have forced DVI to write down millions of dollars of assets and reverse income accrued on impaired loans.
Although DVI initially prepared a truthful Form 10-Q, the suits alleged that attorney John Healy, a partner at Clifford Chance, directed the company not to release it, and instead devised a “workaround” scheme to avoid having to disclose the weaknesses.
With Clifford Chance now out of the suit, the case will likely proceed to trial against Deloitte and a handful of core executives from DVI, Krislov said.
It isn’t unusual for the case like this to take 10 years to get to trial, but it is unusual that it would get this close to trial at all, Krislov said. This case hasn’t settled for a number of reasons, he said, chief among them is that the defendants chose to use their insurance money to defend instead of settle.
So far, five of the defendants have settled for a total of about $21 million, Krislov estimated, adding that those settlements were paid by personal funds, which is unusual in securities cases since they are usually settled with company assets or insurance money.
The settlements reached so far cover about 20 percent of the provable losses, Krislov said, which he called a good showing up to this point.
Lawyers from Cooley in New York, who represented Clifford Chance, couldn’t be reached for comment.
(Copies of the 14-page opinion in In re DVI Securities Litigation, PICS No. 13-0067, are available from The Legal Intelligencer. Please call the Pennsylvania Instant Case Service at 800-276-PICS to order or for information.) •