Squire Patton, large law firm, allegedly helped a CEO illegally funnel money out of his company and out of the company’s employee stock plan and to his own account, among other frauds.
Longtime Client Sues Squire Patton for Malpractice, Fraud
October 15, 2014: Legal malpractice, lawyers, fraud
A Pennsylvania company has filed a nine-count complaint against its longtime outside general counsel, Squire Patton Boggs, over allegations the firm was conflicted in representing the company and its sole founder and allegedly helped that founder inappropriately benefit from the company’s stock plan to the tune of millions of dollars.
In Alliance Holdings v. Squire Patton Boggs, filed in the Eastern District of Pennsylvania on Oct. 10, Alliance and the trustee of its employee stock ownership plan said Squire Patton helped Alliance founder David Fenkell have nearly exclusive control over the company’s operations from 1995 until he stepped down in 2012. During that time, according to the complaint, Squire Sanders—which has since merged and become Squire Patton Boggs—represented a personal company of Fenkell’s that allegedly profited from Alliance. Squire Patton also represented other entities doing business with Alliance that allegedly paid what Alliance described in the complaint as “kickbacks” to Fenkell’s personal company rather than those fees going to Alliance.
Alliance further alleged that Squire Patton was conflicted in representing Fenkell, the company and the stock plan in a suit over alleged Employee Retirement Income Security Act violations. In that suit, a putative class of a subsidiary company’s employees sued Alliance, its stock plan and Fenkell arguing the stock the plaintiffs were transferred was not as valuable as it was purported to be.
According to the complaint, a federal judge found in the class action case that the price paid for the stock was greater than its market value and that Fenkell breached his fiduciary duties to the Alliance stock plan. That judge had also ruled Alliance was liable as a co-fiduciary for Fenkell’s breaches. Alliance alleges in its complaint that it could not raise an advice of counsel defense in the underlying suit or raise claims against Fenkell because of Squire Patton’s joint representation.
It was very soon after that court decision that Squire Patton helped Fenkell modify his employment agreement to provide for indemnification of any legal expenses he may face and for an $11 million severance if he was ever terminated without good cause, according to the complaint.
Additionally, Alliance alleged that Squire Patton and others were “siphoning off” money from the company to pay for allegedly unnecessary consulting services from a company formed by the wife of the Squire Patton relationship partner for Alliance.
When Fenkell stepped down and a new CEO took over, the new CEO learned of the payments to the partner’s wife’s company and hired a new law firm and forensic accounting firm to help investigate further. It was then, according to the complaint, that Alliance found out about the alleged “plundering” of its employee stock ownership plan and Squire Patton’s alleged failures to report Fenkell’s actual pay structure to the company’s compensation committee.
Fenkell was placed on administrative leave in October 2012. Alliance terminated its relationship with Squire Patton that December. Fenkell resigned from the company in November 2012, claiming good reason for his resignation and arguing for the severance payments to kick in.
A number of lawsuits have followed.
Fenkell sued Alliance in the Philadelphia Court of Common Pleas in early 2013 and filed another suit against the company and current CEO this year. The first suit is in the midst of discovery and the depositions of a number of current or former Squire Patton attorneys were ordered, according to the state court docket.
In May 2013, the Alliance stock plan trustee sued Fenkell; his personal company; a number of the companies mentioned in the Squire Patton complaint as having done business with Fenkell and Alliance; and the former Squire Patton relationship partner and his wife, Paul and Lianne Sefcovic. Both Fenkell and the Sefcovics are represented in that case by attorneys at Jackson Lewis. A call to one of those lawyers, David Johanson, was not immediately returned.
Alliance is being represented in the federal case against Squire Patton by Blank Rome attorneys Laurence S. Shtasel, William H. Roberts and Jeremy A. Rist. Morgan, Lewis & Bockius attorneys are representing Alliance in the state court action and the federal court action against Fenkell and others.
“We strongly deny these allegations and will defend ourselves vigorously,” a Squire Patton spokesman said in an emailed statement about the federal suit against it.
According to the complaint against the firm, Alliance is raising two claims of legal malpractice for violating the duty of loyalty and the duty of care, one count of breach of contract, one count of aiding and abetting the breach of fiduciary duty, one count of fraud, one count of aiding and abetting fraud, a count of civil conspiracy, a count of knowing participation in ERISA violations and one count of independent breaches of ERISA fiduciary duties. Alliance does not identify in the complaint the specific amount of monetary damages it is seeking.
Alliance argued in the complaint that Squire Patton never sought waivers from the company on these issues, and that if it did, Fenkell was incapable of granting them because of his own conflicts.
Alliance argued Squire Patton allowed the company to continue to use a corporate governance structure in which Fenkell was the sole director of Alliance and the sole trustee of the stock plan for several years.
In outlining the breach of contract claim, Alliance noted it paid Squire Patton more than $7 million in legal fees over the years.
Alliance said Fenkell breached his fiduciary duty to the company by benefiting personally from various contracts, allowing his allies to benefit from contracts with Alliance, causing himself to be paid “excessive” compensation and causing Alliance to enter a new employment agreement that benefited Fenkell and not Alliance.
“Squire Sanders and its attorneys knew of these breaches by Fenkell … and failed to advise Alliance and/or the Alliance ESOP of them,” Alliance said in the complaint.
In its fraud allegation, Alliance alleged Squire Patton made false statements to the company and omitted other information over the course of the parties’ relationship.
“By the time its misconduct was discovered in the fall of 2012, Squire Sanders had progressed from assisting Fenkell and Fenkell’s associates in covertly diverting tens of millions of Alliance dollars to themselves out of the proceeds of Alliance and or ESOP transactions to stooping to conspiring with Fenkell to steal Alliance money and pay its partner, Paul Sefcovic, hundreds of thousands of dollars,” Alliance said in its complaint.
“As a grand finale, as Fenkell’s schemes began to unravel, Squire Sanders drafted a new employment agreement for Fenkell and then an amendment to that employment agreement, granting Fenkell obscene severance pay under broad and biased termination provisions, and indemnifying Fenkell and his wife for breaches of fiduciary duties that had already been adjudicated against him.”
Alliance is seeking, among other relief, compensatory damages, punitive damages and disgorgement of all legal fees paid from 1995 through 2012.
Originally posted by Gina Passarella on the The Legal Intelligencer website.
