Legal News

Clifford Chance Dodges Fraud Lawsuit

By Nathan Koppel

It’s an issue near and dear to lawyers’ hearts: when can they be sued for their clients’ bad acts?

Lawyers usually are considered mere secondary actors, largely immune from liability — a principle espoused by the Supreme Court as recently as its 2008 Stoneridge ruling.

The Third Circuit yesterday continued the lawyerly love, ruling that scorned investors of Diagnostic Ventures, a health-care company, cannot bring a securities fraud class action against legal giant Clifford Chance, the AmLaw Litigation Daily reports. (Here’s the opinion.)

The plaintiffs in the case claimed that a Clifford Chance partner advised DVI not to disclose that its auditor had identified weaknesses in the company’s internal controls; instead, Clifford Chance allegedly devised a “workaround” to avoid disclosure, according to the Lit Daily. The DVI plaintiffs claimed that Clifford Chance was part of a scheme to defraud investors.

Clifford Chance has denied wrongdoing.

The Third Circuit sided with the firm. “Even assuming Clifford Chance developed the workaround to avoid disclosure of DVI’s material weaknesses, and DVI would have issued a truthful 10-Q if the law firm did not present this alternative, it was still DVI, not Clifford Chance, that filed it,” Judge Anthony Scirica wrote for the majority.

“Now there’s another circuit where lawyers can feel free to give advice on securities filings,” Clifford Chance’s lawyer, William Schwartz of Cooley, told the Lit Daily.

Clinton Krislov, counsel for the investors, said lawyers should be held to account for participating in fraud. “When a lawyer insinuates himself in the process sufficiently to be the creator, songwriter and choreographer to a fraud that should be sufficient to make him a primary violator” under  Supreme Court precedent.

Full post as published by Law Blog - WSJ.com on March 30, 2011 (boomark / email).