LOCKE LIDDELL: $ 22 Mil Settlement Serves as Warning to Other Law Firms
Locke Liddell & Sapp’s agreement to pay $ 22 million to settle a suit alleging it aided a client in defrauding investors is expected to serve as a warning to other firms that they must take action when they learn a client’s alleged wrongdoing may be harming third parties. The Dallas-based firm agreed April 14 to settle a suit stemming from its representation of Russell Erxleben, a former University of Texas star football kicker whose foreign currency trading company was allegedly a Ponzi scheme. Erxleben pleaded guilty last November to federal conspiracy and securities-fraud charges and is to be sentenced in May.
Locke Liddell’s settlement comes on the heels of an $ 8.5 million settlement by Houston’s Sheinfeld, Maley & Kay and attorney Lee Polson. The two settlements, minus attorneys’ fees and expenses, are expected to bring investors a recovery of more than 60 cents on the dollar. And if those large settlements don’t get lawyers’ attention, the American Law Institute is considering making a lawyer’s duty to a third party clear in its Restatement of the Law Governing Lawyers.
The Texas disciplinary rules state that a lawyer may disclose confidential client information in order to prevent the client from committing a criminal or fraudulent act. Jim George, an Austin lawyer who is a member of the ALI, said he favors making it clear that a lawyer must tell people if a client is hurting them. "It’s a very simple legal proposition a lawyer can’t help people steal money," said George, of George & Donaldson.
George represents investors who lost $ 34 million they placed in Erxleben’s Austin Forex International. Daniel N. Matheson III, a former Locke Liddell partner who represented Erxleben, said in his deposition that he knew in March 1998 that $ 8 million in AFI’s losses hadn’t been reported to investors. AFI, which was founded in September 1996, shut its doors in September 1998. A few days later, Texas securities regulators seized its accounts and put the company into receivership. Harriet Miers, co-managing partner of Locke Liddell, said the firm denies liability in connection with its representation of Erxleben. "Obviously, we evaluated that this was the right time to settle and to resolve this matter and that it was in the best interest of the firm to do so," Miers said.
The Locke Liddell settlement covers partner Curtis Ashmos of Austin and former partners Daniel Matheson and Jane Matheson. Other defendants, including an accounting firm and an Austin businessman, remain in the case. The settlement agreement bars lawyers for the plaintiffs from talking to the media about the settlement. Judge Paul Davis of Travis County, Texas’s 200th District Court agreed April 17 to certify a class for settlement purposes.
If investors whose losses total more than $ 300,000 opt out of the settlement, Locke Liddell can walk away from it, according to the agreement. Janet Mortenson, the court-appointed receiver for Austin Forex, testified that settlement was reached after two long days of mediation. She said that investors would benefit from getting quick payment. Had the case been certified as a class action, Locke Liddell would have filed an interlocutory appeal, which could have delayed the case from going to trial for at least a year, Mortenson said. Mortenson also defended the 24.5 percent contingent fee being paid to Bickerstaff, Heath, Smiley, Pollan, Kever & McDaniel in Austin, Texas, for representing her. She said she had no money to pursue the claims against the law firms and was turned down by several firms because of the complexity of the case. "This is a perfect example of the appropriateness of contingency fees," Mortenson said.
Bickerstaff partner Michael Shaunessy was the lead lawyer for Mortenson. By filing the malpractice case on behalf of both Mortenson and the investors, the plaintiffs’ lawyers avoided a legal fight over who was the proper party to file suit. The case came together after Davis ruled that Mortenson owned the legal privilege and work product of Erxleben’s lawyers. Documents, including lawyers’ notes contained in the boxes that were turned over to Mortenson, formed the basis of the suit, which was filed last October.
Test Case
The case was viewed as a test of the Texas Supreme Court’s April 1999 ruling that a lawyer can be sued by a nonclient for negligent misrepresentation. In McCamish Martin Brown & Loeffler v. Appling Interests, however, the court made it clear that a lawyer could be liable only when the lawyer invites the nonclient to rely upon the lawyer’s opinions and misrepresentations.
Kathy Patrick, who represented Locke Liddell, questioned Mortenson at the fairness hearing about the state of the law on lawyers’ duty to third parties. Mortenson agreed that the case was on the "frontier of Texas law." Patrick, of Houston’s Gibbs & Bruns, also pointed out that Locke Liddell had credible defenses, including evidence that Erxleben may have concealed his conduct from his attorneys. Before the settlements, Mortenson had recovered only about $ 300,000 in cash, four cars and a $ 75,000 skybox for UT football games. As alleged in the petition, Erxleben traded on his football reputation to solicit investors. He allegedly represented that each investor’s account was maintained separately and that trading profits were allocated appropriately. But the plaintiffs claim the funds were placed into a single account and traded together as one large pool of money. The suit alleges that Erxleben sometimes misappropriated funds for his personal use and would allocate profits to individual investor accounts at his own discretion, often favoring some investors over others. The petition alleges the lawyers allowed AFI to sell unregistered securities, signed off on brochures and promotional materials that contained misrepresentations, and knew about the company’s growing losses for months before state securities regulators began investigating. This story originally appeared in the Texas Lawyer. (The Legal Intelligencer, April 26, 2000)
