GlobalTort : Commentary from lawyers and experts on mass torts, law, insurance and science

Law firm are starting to generate some headlines - and material payments - in some of the cases alleging that law firms aided and abetted corporate malfeasance. LAW360 includes an article that opens with news of to significant settlement payments:

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 Securities claims continue to intensify against lawyers for their roles in events.  

LAW 360 recently posted a story on  a suit proceeding against Proskauer in connection with Mr.  Stanford's scams.  ("[A] fourth suit revived by the ruling alleges Proskauer attorney Thomas V. Sjoblom and others facilitated the scheme by hampering a U.S. Securities and Exchange Commission investigation into the scheme.")

 Another suit is proceeding against Quarles & Brady. ("Aggrieved investors in a company called Radical Bunny LLC contend the company sold unregistered securities to fund Mortgages' operations and falsely claimed loans it made to the mort were backed by collateral. Mortgages allegedly sold its own stock and separately raised millions through Radical Bunny's securities sales, U.S. District Judge Frederick J. Martone wrote in his order.")

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The corporate aiding and abetting debate goes on at OpinioJuris. This latest post includes a helpful link to and quote from the complaint to put matters into better context. They are:

"Here is paragraph 37 of the Complaint:

Despite the well-documented use of child labor on cocoa farms in Cote d’Ivoire, Defendants not only purchased cocoa from farms and/or farmer cooperatives which they knew or should have known relied on forced child labor in the cultivating and harvesting of cocoa beans, but Defendants provided such farms with the logistical support to do so with little or no restrictions from the government of Cote d’Ivoire."

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As to corporate liability under ATS for aiding and abetting a tort,  the debate goes on here, here and here at OpinioJuris as to the amicus brief first noted here. The issue in short is whether Nestle can be held liable under the ATS if it knew it was contracting with persons who were violating local labor laws, or whether it also must be proven that Nestle intended its contracting to help further the violations of local labor laws. That issue includes sub-issues regarding the degree of international consensus required to establish a rule of international law and how one proves up an international consensus. The issues plainly are important to companies contracting with known law breakers. 

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OpinioJuris includes three posts on corporate aiding and abetting liability in the context of an appeal to the Ninth Circuit in Doe vs. Nestlé.  One post links to and previews an amicus brief written by various law professors for the National Association of Manufacturers. They are Professors Samuel Estreicher, John McGinnis, Michael Ramsey, Mark Weisburd, Ernest Young and Julian Ku.  That brief  of course opposes any “extension” of corporate liability. Two other posts - here (disagrees with reliance on Visaljavic) and here (disagrees with reliance on Rome Statute) -  are by Kevin Jon Heller, and contradict the legal arguments advanced by NAM.   As frequent readers may recall, Mr. Heller's views  were noted before on GlobalTort - here and here. It will interesting to see the outcome. 

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Bravo, again ! Last month Galleon's boss was convicted on multiple counts of insider trading.  This week,  AUSA's in New York  obtained additional insider trading convictions against former Galleon traders, as described here in Dealbook.

Now,  the NYT's insightful and provocative financial reporter, Joe Nocera, is asking the right questions. They include asking whether  we will or should see efforts to claw-back from investors the ill-gotten gains achieved through insider trading.  After all, aren't investors aiding & abetting when they invest in businesses operating outside the law? 

Mr. Nocera does not cover the topic, but RICO law provides analogies, and may even be applicable. Under RICO,  the financial fruits of crime are frequently subject to forfeiture, including forfeiture by "innocent" persons, such as the family members of criminals. For historic perspective, go here for paid access to an early 1980s law review on RICO, go here for a 1990s article on RICO, and go here for a 2010 article on property rights, divorce and property subject to RICO forfeiture.

Perhaps Judge Rakoff  would cover the topics during his teaching at Columbia - he is a scholar as to RICO, white collar crime and other subjects, including science, as is described here by Wikipedia. Indeed, Judge Rakoff wrote this treatise on civil and criminal use of RICO. 

Mr. Nocera artfully raises the issues relevant to public policy, such as deterring the creation of wealth through illegal and/or fraudulent investment tools. Thus, he writes:

But there were plenty of red flags around Rajaratnam, too. Hedge fund managers will tell you that there were always rumors about insider trading at Galleon. Indeed, it was at the heart of Rajaratnam’s business model.

It is implausible that every one of Rajaratnam’s sophisticated investors were in the dark. Yet the law says that, unlike the Madoff investors, they bear no responsibility for ignoring red flags. On the contrary: They are being rewarded for looking the other way. And even though Rajaratnam is likely to spend years in prison — and will have to pay tens of millions of dollars in restitution and fines — he will remain supremely wealthy, as will his family. This is one more contrast to Madoff, whose family is likely to be penniless by the time the trustee is finished.

The phrase I find myself muttering a lot these days is: “There oughta be a law.” There oughta be a law, for instance, that executives who create corporate cultures that encourage employees to commit fraud, as Angelo Mozilo did at Countrywide, should be held criminally liable for fostering that culture. But there isn’t any such law, so Mozilo gets a pass, despite all the fraudulent mortgages Countrywide underwrote.

The more I think about it, the more I’m convinced that there ought to be a law that says that if a fund manager’s “edge” is insider trading, his investors should have to pay a price, too. Maybe then, they’d be less willing to look the other way when their fund manager starts doing things he shouldn’t.

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Piracy on the water is now attracting investment capital and it's being used to upgrade equipment, according to a U.S. Navy official and Bloomberg's account of the story.   Bloomber's story has more detail, but the opening  is set out below. As the Bloomberg story notes, crime flourishes when other work is not available. 

The article notes that many ships fail to follow best practices, and thus make themselves easy targets. It's interesting to read this and wonder how much of a subsidy our nation and others are providing to the insurance industry by providing warships and soldiers to reclaim pirated ships and protect foolish ship owners. Insurers spend lots of time placing ads claiming they find and root out lots of fraud and crime.  If all those words are true, one wonders why they can't manage their insured ships away from the pirates.

"Piracy syndicates are selling shares in planned attacks, fueled by a surge of ransom payments that help attract investors, the U.S. Chief of Naval Operations said.

Piracy syndicates in villages, mainly in largely ungoverned Somalia, solicit investors who buy shares in the attack missions and gain a corresponding share of ransoms paid by the shipping industry, Admiral Gary Roughead said.

“The ransoms fuel the business, the business invests in more capability, either in a bigger boat, more weapons, better electronic-detection means to determine where the ships are,” Roughead said in an interview in Bloomberg’s Washington Bureau today. “So it’s a business.”

The average ransom payment rose 36-fold over five years to $5.4 million last year, compared with $150,000 in 2005, according to the Louisville, Colorado-based One Earth Future Foundation. The payments are fueling increased raids, adding at least $2.4 billion to transport costs because vessels are being diverted onto longer routes to avoid attacks off east Africa, the non-profit group said earlier this year. "

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Liability for aiding and abetting tortious conduct is back in focus due to legislation proposed by Senator Specter that would overturn Stoneridge.  A post on the D & O blog post collects current nformation, also with links also to Pointof Law. Past GlobalTort posts are collected under the topic aiding and abetting.

One has to wonder why financial professionals thunk they can ealistically argue they are especially deserving of protection against this common law cause of action that is not as radical as some claim. In Illinois, for example, well-regarded Jenner & Block litigated and lost the Thornwood appellate decision regarding an aiding and abetting claim against the firm in connection with a client engagement. . Key excerpts are as follows;

 "In Illinois, a claim for aiding and abetting includes the following elements:

"(1) the party whom the defendant aids must perform a wrongful act which causes an injury; (2) the defendant must be regularly aware of his role as part of the overall or tortious activity at the time that he provides the assistance; (3) the defendant must knowingly and substantially assist the principal violation." Wolf v. Liberis, 153 Ill. App. 3d 488, 496 (1987)(recognizing the elements of claims for aiding and abetting and concert of action but failing to find liability where there were no allegations that the codefendant agreed to assist or substantially assisted in the commission of tort resulting in the plaintiff's injury).

Further, the Restatement (Second) of Torts controls recovery under the theory of concert of action in Illinois. Wolf, 153 Ill. App. 3d at 496. It provides:
"For harm resulting to a third person from the tortious conduct of another, one is subject to liability if he (a) does a tortious act in concert with the other or pursuant to a common design with him, or (b) knows that the other's conduct constitutes a breach of duty and gives substantial assistance or encouragement to the other so to conduct himself, or
(c) gives substantial assistance to the other in accomplishing a tortious result and his own conduct, separately considered, constitutes a breach of duty to the third person." Restatement (Second) of Torts §876 (1979).

Although Illinois courts have never found an attorney liable for aiding and abetting his client in the commission of a tort, the courts have not prohibited such actions. In Reuben H. Donnelley Corp. v. Brauer, 275 Ill. App. 3d 300 (1995), for instance, the court considered a claim of aiding and abetting made against one defendant and his attorneys. While not specifically considering whether the claim could be maintained against the attorneys as a matter of law, the court implicitly accepted that such a claim could be maintained when it held that there could be no liability because the underlying conduct involved a breach of contract, not a tort. Brauer, 275 Ill. App. 3d at 310.

Similarly, Illinois courts recognize that claims for conspiracy may be maintained against attorneys where there is evidence that the attorneys participated in a conspiracy with their clients. See, e.g., Bosak v. McDonough, 192 Ill. App. 3d 799, 804-05 (1989) (recognizing conspiracy claim against attorney but finding insufficient evidence to impose liability). Accordingly, we see no reason to impose a per se bar that prevents imposing liability upon attorneys who knowingly and substantially assist their clients in causing another party's injury. As we have recognized, " '[o]ne may not use his license to practice law as a shield to protect himself from the consequences of his participation in an unlawful or illegal conspiracy.' " Celano v. Frederick, 54 Ill. App. 2d 393, 400 (1964), quoting Wahlgren v. Bausch & Lomb Optical Co., 68 F.2d 660, 664 (7th Cir. 1934). The same policy should prevent an attorney from escaping liability for knowingly and substantially assisting a client in the commission of a tort."

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Here is a link to an American Lawyer article detailing a defrauded investor's suit against the SEC for failing to uncover and stop Mr. Madoff's fraud. According to the article, plaintiff's counsel is a former SEC lawyer who acknowledges sovereign immunity rules but has tried to plead around them. The claims are asserted under the Federal Tort Claims Act.

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Talk about a global tort. While waiting to transport one of my daughters this evening, I spent a few minutes reading the guilty plea (thanks, NYT) by Sanford's CFO, James Davis. What raw fraud and greed. Hard to imagine why it was so hard for regulators to figure it out.

Reading the plea, it seemed to me plain that "Lawyer A" will be soon charged with being a central part of the fraud over at least the last two or three years of the scheme. So, I ran a quick Google search to see who might be lawyer A. The search turned up a late Friday AmLaw blog post that provides lots of reminders about past stories on Sanford, and reports in this post that an investor class action was filed late Friday afternoon against the Proskauer law firm and Thomas Sjoblom, saying he is "Lawyer A."

Not a good year for the legal profession.

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An Amlaw article here details global government cooperation with respect to potential claims arising from the Madoff ponzi scheme. Accoridng to the article:

"Gerhard Jarosch, spokesman for the Vienna public prosecutor's office, told The Associated Press his office is aiding the U.S. Justice Department and Britain's Serious Fraud Office in separate investigations of Bank Medici AG and its chairwoman, Sonja Kohn."

***
"The Wall Street Journal, citing affidavits filed in the case, reported Friday that prosecutors from all three investigations believe Madoff -- sentenced a week ago to 150 years in prison -- paid Kohn in exchange for allegedly funneling billions of dollars in European investments to Madoff. "

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The AmLaw blog post here describes and includes a link to a newly filed complaint that seeks $ 1 billion and a class action for Mexican investors hurt by the Stanford ponzi scheme. The complaint invokes aiding and abetting claims against Willis and an insurance broker. Of note, the complaint was not filed by a typical class action firm and instead was filed by Strasburger & Price, an old-line and full-service Texas law firm typically aligned with corporate interests that some might think would indicate the firm would not file a class action suit. According to the article:

"The complaint states that the defendants gave Stanford Financial "safety and soundness" letters designed to help it market its investments. "Willis and BMB crossed the line from being mere insurance brokers for the Stanford Financial Group," the complaint alleges. "In creating and submitting these letters into the stream of commerce, [the defendants] actively and materially aided Stanford Financial to perpetrate the massive Ponzi scheme now alleged by the SEC."

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