Metropolitan News-Enterprise


Tuesday, July 12, 2016


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Court Revives Claims That Venable Aided Stock Fraud




The Ninth U.S. Circuit Court of Appeals yesterday reinstated a suit by a private investment company claiming that Venable LLP helped a convicted con man steal $11.25 million in a bogus sale of pre-initial public offering Facebook shares.

U.S. District Judge Otis D. Wright erred in dismissing the suit for failing to sufficiently plead that Venable and former partner David Meyer had actual knowledge of the fraud, perpetrated by a man calling himself “Ken Dennis.” His real name is Troy Stratos, and he was convicted this year on federal fraud charges growing out of the scheme.

He’s reportedly facing pending criminal fraud charges over his alleged swindling of comedian Eddie Murphy’s wife Nicole Murphy out of $8 million.

Meyer left Venable and joined Arent Fox LLP as a corporate partner in 2012.  

In its March 2013 complaint, ESG alleged Stratos conned ESG into thinking he managed assets on behalf of Mexican billionaire Carlos Slim, whom he said was purchasing a large block of Facebook shares ahead of its 2012 IPO. ESG also accused Meyer and Venable of concealing Stratos’ true identity, setting up a shell corporation named Soumaya Securities—Soumaya was the name of Slim’s late wife—opening bank accounts on the corporation’s behalf, sending wire instructions to ESG and vouching for the Facebook deal’s legitimacy.

‘Maker’ Ruling

Judge Harry Pregerson said Wright was mistaken in holding that Meyer was not the “maker” of fraudulent statements contained in his communications with the investors, because he prefaced them with “[i]t is Soumaya’s understanding….”  

The court, Pregerson said, was unconvinced “that such a short, easy preface could shield a messenger from liability in all circumstances.”  Besides, he wrote, the complaint alleged that Meyer made other false statements, and did so directly to the plaintiff, including that “Dennis” was affiliated with Slim and that the con man was “who he says he is.”

Pregerson also cited the complaint’s allegations that Meyer corresponded with Stratos at the same email address that Stratos used to communicate with ESG, that Meyer was copied on the latter emails, and that Meyer told ESG that a $2.8 million deposit would be released to Soumaya, when it actually went to Stratos’ personal client trust account.

The appellate jurist went on to say that Wright had imposed too heavy a burden on the plaintiff in ruling that ESG failed to plead scienter under the heightened standard of the 1995 Private Securities Litigation Reform Act. The standard is stringent, but “not insurmountable,” Pregerson said.

“ESG Capital need not prove its case at the outset,” he wrote. “Rather, it has to provide a narrative of fraud—facts which, if true, substantiate an explanation at least as plausible as a nonfraudulent alternative. While no single factual allegation substantiates an inference of attorney Meyer’s scienter, ESG Capital has provided a narrative that strongly points to the existence of scienter.”

He referred specifically to allegations that Meyer and Stratos had spoken on the phone more than 100 times and met in person 25 times during the nine-month period in which the scheme was being perpetrated, including an all-day meeting after the fraudulently obtained deposit was wired; that Meyer had consistently authorized payments from Stratos’s trust account; and that Venable opened bank accounts for Stratos knowing he had been “black listed” and couldn’t open them in his own name.

State Claims

Pregerson went on to say that ESG necessarily pled a claim of fraud under California law, which imposes a more relaxed standard, and that Wright erred in holding that state law claims for conversion, unjust enrichment and unfair competition were barred by the one-year statute of limitations regarding claims of professional liability against attorneys.

Because Venable and Meyer may have committed those torts without violating a professional obligation to the client in the course of providing legal services, the appellate jurist explained, those claims are not time-barred on the face of the complaint. ESG’s claim for breach of fiduciary duty, on the other hand, could only have accrued in the course of legal representation and is therefore time-barred, Pregerson said.

Judge Consuelo Callahan and Senior Judge Dorothy W. Nelson joined in the opinion.

The case of ESG Capital Partners v. Venable LLP, 13-56684, was argued in the Ninth Circuit by Margaret Grignon of Reed Smith LLP for ESG, by Kevin Rosen of Gibson, Dunn & Crutcher for Venable, and by David Willingham of Caldwell Leslie & Proctor PC for Meyer.


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