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California Firm Reaches Settlement In Legal Malpractice Case Over $1 Billion Ponzi Scheme

Sedgwick has reached a tentative settlement in a legal malpractice case which alleges the firm caused $210 million in investor losses due to its involvement in a Ponzi scheme.

A spokesman for the San Francisco law firm, which put off a March 3 trial to begin settlement discussions, confirmed that an agreement had been reached. Details of the settlement were not disclosed.

[caption id="attachment_1490" align="alignright" width="300"]

Flickr User Keith Ramsey[/caption]

 

The spokesman, Christopher Carter, said Sedgwick denies all liability in the case.

Calls were not returned by the firm’s lawyers, Peter Stone, a partner in the Palo Alto office of Paul Hastings, or Francis Scollan, a partner at Los Angeles-based Allen Matkins Leck Gamble Mallory & Natsis, who represents the receiver bringing the case.

 

The litigation is among many in which

law firms have been sued over Ponzi scheme losses.

“Law firms, along with auditors and other types of professional gatekeepers, are looked to by receivers and trustees,” said Kathy Phelps, a partner at Diamond McCarthy in Los Angeles and co-author of “The Ponzi Book: A Legal Resource for Unraveling Ponzi Schemes.”

Receivers and trustees in such cases question whether law firms “fulfill their gatekeeping functions, or did they allow fraud to slip by on their watch,” Phelps said.

The case against Sedgwick, brought in 2011, alleges that the firm caused $210 million in investor losses when it failed to alert its client, Medical Capital Holdings Inc., a purported medical receivables purchasing firm, about unauthorized loans its officers were making. Individual Sedgwick attorneys were not named as defendants.

Thomas Seaman, appointed receiver in 2009 as part of a U.S. Securities and Exchange Commission case, claimed that Sedgwick failed to disclose conflicts or obtain the necessary waivers on the loans and that it aided and abetted Medical Capital’s officers in breaching a fiduciary duty to its client. The receiver claimed that Medical Capital raised about $1.7 billion from 20,000 investors between 2003 and 2009.

In 2011, former Medical Capital president Joseph Lampariello pleaded guilty to wire fraud in connection with his role in the Ponzi scheme. He is scheduled to be sentenced on May 4.

The Sedgwick case focused on 22 allegedly fraudulent loans.

In 2013, U.S. District Judge David Carter of the Central District of California tossed $36 million in claims relating to two loans—although Sedgwick had moved to dismiss six loans totaling $60 million.

On Aug. 14, Carter denied Sedgwick’s move to offset claims against it by $374.9 million based on the value of settlements Seaman reached with banks and other third parties.

In January, he heard arguments over whether the rest of the claims should be thrown out on summary judgment. Sedgwick argued that the losses would have happened regardless of its conduct.

Carter had yet to rule when both sides filed court papers stating that they were in the midst of settlement.

At this stage, a settlement reflects that both sides face an unclear outcome, Phelps said.

“The law firm has challenged the trustee’s claims on a number of the different elements,” she said. “If the law firm is right, then the receiver gets nothing. If the receiver is right, and he can establish those elements, the law firm has very significant exposure.”

A version of this content was originally posted by Amanda Bronstad on nationallawjournal.com.

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