This article originally ran in Law360 on November 24, 2015.
Thompson Coburn LLP urged a Pennsylvania federal court Monday to dismiss claims brought by the Chapter 7 trustee of Valley Forge Composite Technologies Inc., saying its downfall stemmed from the CEO's decision to illegally sell military-grade components to China, not the law firm's actions.
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 the law firm said Monday that those claims are misleading and do not hit at the actual reason the company collapsed.
“Valley Forge suffered its demise because of the illegal conduct of its former CEO, conduct which started three years before the company retained the Thompson Coburn defendants,” the brief said. “No facts are alleged that, if proven, would permit any fact finder to conclude that any advice given by the Thompson Coburn defendants caused Valley Forge’s demise or that they could have done anything to prevent it.”
Despite the factual allegations in the complaint, Valley Forge’s alleged damages arose from the company'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, the firm argued. This scheme, masterminded and carried out by the company's former CEO Louis J. Brothers, was unknown to the Thompson Coburn defendants and began three years before Valley Forge retained Hawthorne, in 2012, the firm 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, who purportedly informed Hawthorne that there was credible evidence Brothers was misrepresenting the commercial viability of a cargo-baggage screening technology.
Hawthorne advised Brothers to cancel a meeting with the company's board of directors meant to discuss a purported contract for the sale of screening technology to the Guatemalan government, the suit says. Brothers then released a public announcement, prepared by Hawthorne, representing that the company reached an agreement in principle for commercial development of the technology, but no such agreement existed, according to the suit.
Thompson Coburn argued Monday that despite the allegations regarding the Form 8-K and press statement about the “THOR system,” the form does not state or suggest that a contract exists, only that there is a proposed agreement. Further, the law firm said, Hawthorne did not even join Thompson Coburn until after that release and filing.
The firm added that the trustee's claims should be barred by the in pari delicto doctrine because the company bears primary responsibility for the illegal chip sales.
Speaking to Law360 on Tuesday, the trustee's attorney Ahmed A. Massoud of Massoud & Pashkoff LLP said he believes the Thompson Coburn parties are twisting the facts to make it as favorable as possible for their side and devote little time or space to talking about the alleged actions of Hawthorne. Massoud said Hawthorne knew the THOR system was not even functional or operative but still pressed ahead with an announcement about a proposed deal.
“It wasn't even being developed,” Massoud said. “There was no product to even engage in an agreement in principle.”
Massoud said his side will be filing a response within the next two weeks.
The firm and Hawthorne are fighting claims of gross negligence and breach of fiduciary duty.
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.
--Editing by Edrienne Su.
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