All we can say is WOW.
We have survived many things in 2009 – Madoff, the Great Recession, Swine Flu, and the death of Bea Arthur, but then we stumble across this gem in which two different law firms get sued, legal fees at issue are currently at $29 million and could go as high as $90 million. That doesn’t seem like such a big number, compared to say the fees in the Lehman bankruptcy, but in this case, the fees could approach 5% of the company’s value.
The story after the jump and the BigLaw connection (obviously, when you’re talking 8-figure fees, there’s a BigLaw firm somewhere in the mix).
Out in the Pacific Northwest, Sunwest Management, an owner/operator (the business equivalent of a singer/songwriter) of assisted living and retirement facilities, was facing a cash flow crisis – so what did it do?
According to the Oregonian, Sunwest started putting individual retirement facilities, each owned by a separate company, into bankruptcy to fend off lenders’ foreclosure efforts. Sunwest affiliates stopped making promised payments to investors and the lawsuits began. Then “controversial” CEO Jon Harder resigned and filed for personal chapter 11 bankruptcy. Investors started making noise and the SEC got involved, alleging fraud by the Company and Harder.
The SEC even used the magic “P word” in its complaint:
As the national credit markets tightened in 2007 and 2008, the house of cards Harder had built came crashing down on unsuspecting investors. Despite the dire financial condition, defendants continued to raise additional money from investors. By June 2008, they operated Sunwest virtually as a Ponzi scheme: money raised in the final offerings (supposedly for new properties) was used to pay old investors their 10 percent return and otherwise fund operations at existing facilities. Despite Sunwest’s dire financial situation, Harder took tens of millions of dollars out of the enterprise.
According to the SEC, Sunwest raised $300 million from 1,300 investors nationwide. The interesting twist in this case is that it wasn’t a pure Ponzi scheme. There was an actual underlying business, but the crimes allegedly occurred in the way money was shifted from winners to losers and skimmed off the top.
Each step added more lawyers and criminal cases and civil suits started flying. But like every orgy, eventually everyone wakes up, looks around and asks, “what have we done?”
According to the Oregonian, when you tally up the SEC charges, the bankruptcies, and the civil and criminal charges against individual executives, 31 firms have gotten a piece of the action so far. Professional fees for the Company were $2 million in March (JUST March), and average about $1.8 million for the past four months.
And here is where the Big Law scandal is found – the court appointed receiver has requested documents from four Portland law firms, including Davis Wright Tremaine (which prepared Sunwest’s offering memoranda), K&L Gates, and Thompson & Knight.
And how do you make your position worse if you’re the law firm that wrote the documents used to raise $400 million from 2,000 investors eventually used as part of the alleged Ponzi scheme? Piss-off the court-appointed receiver.
Michael Grassmeuck, the receiver, remarked that Davis Wright has been “dilatory and creative in erecting hurdles to the receiver’s access to client files.” That’s his polite way of saying the firm told him they would charge him $250,000 in copying fees.
The investor plaintiffs then go on to make a whole host of claims against Davis Wright that are amusing and sensational, but likely barred by Stoneridge. Just for goofs and giggles, here’s an example:
Davis Wright Tremaine and [Davis Wright partner Tim] Dozois [who has been named personally] prepared numerous documents that misled investors into thinking they were buying into particular properties, including memoranda, disclosure materials, tenancy in common agreements, triple net lease documents, warranty deeds, operating agreements, real property purchase agreements and escrow instructions.
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Very interesting but look likes Stoneridge will be protection.
Good post. Looks like a case to watch.