This article originally ran in Law360 on December 21, 2015.
Thompson Coburn LLP told a Pennsylvania federal judge on Monday that negligence claims brought against it by the Chapter 7 trustee of Valley Forge Composite Technologies Inc. should be dismissed because no connection exists between the firm’s counseling and the CEO’s illegal sales of military-grade components to China.
Trustee John P. Neblett is alleging Thompson Coburn attorney Michael Hawthorne gave the anti-terrorism technology developer “negligent” advice on what to report in a U.S. Securities and Exchange Commission filing about the viability of a company investment, and prepared SEC reports that misrepresented Valley Forge’s real revenue stream.
But Thompson Coburn and Hawthorne said Monday, in a response brief supporting a November bid to dismiss claims against them, that the harm for which Neblett seeks to hold them liable arose from the company’s illegal sales to China, which has no connection to the firm’s legal advice regarding SEC disclosures.
Further, the defendants said, just one month after Valley Forge retained Hawthorne, the company’s general counsel informed the entire board of directors of his concerns that the company, formerly headed by Louis J. Brothers, was engaged in illegal sales.
“Regardless of what Brothers communicated to the company, the company is liable for his bad acts because it was on notice of his actions in May 2012 from its own inside general counsel,” the brief said.
The suit stems from Valley Forge’s illegal sale of military-grade electronic chips to China, which had been going on since 2009 and was discovered by the federal government in 2013, according to court documents.
The trustee alleges the scheme was operated by and personally benefited Brothers, who was charged in August 2014 with 31 criminal counts, including conspiracy and money laundering. He pled guilty to seven counts of the indictment in July, the trustee said.
The suit, which also asserts claims against two small firms, accuses Hawthorne of preparing false SEC filings stating that the company's revenues were entirely from sales of “momentum wheels and various mechanical devices for special projects.”
The complaint also alleges that Hawthorne did not follow the advice of Valley Forge's general counsel, Keith McClellan, who purportedly informed Hawthorne that there was credible evidence Brothers was misrepresenting the commercial viability of a cargo-baggage screening technology.
Thompson Coburn and Hawthorne called for the suit’s dismissal last month, arguing that Valley Forge’s downfall wasn’t a result of the law firm’s actions and that the claims are barred by the in pari delicto doctrine since the company bears primary responsibility for the illegal chip sales.
The trustee fired back earlier this month, saying that Valley Forge could have saved itself from legal and financial ruin if Thompson Coburn had properly investigated the company and brought the scheme to the board’s attention. The trustee also argued that the suit isn’t blocked by the in pari delicto doctrine because Valley Forge never benefited directly from the illegal conduct but instead was a victim of Brothers' actions.
In its response Monday, the firm said the trustee has leveled new allegations that are not found in the live complaint, but that the claims still fail.
“Plaintiff has not alleged that the Thompson Coburn defendants were in any better position to investigate than the company itself, as the company’s general counsel already knew of the issue and had reported his concerns to the board of directors,” the brief said. “An attorney owes no duty to his client to investigate facts that are already in the client’s possession.”
An attorney for the trustee did not immediately respond to a request for comment Monday evening.
The trustee is represented by Ahmed A. Massoud and Lisa Pashkoff of Massoud & Pashkoff LLP.
The Thompson Coburn defendants are represented by Nicholas M. Centrella and Joshua J. Voss of Conrad O'Brien PC.
The cases are Neblett v. Clairmont Paciello & Co. PC et al., case numbers 4:15-cv-01622, 4:15-cv-01731 and 4:15-cv-01826, in the U.S. District Court for the Middle District of Pennsylvania.
--Additional reporting by Dani Meyer. Editing by Ben Guilfoy.
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