Corporate Fiduciary and Securities
Corporate Fiduciary Representative Experience
Defense of Oil Field Services Company in Fiduciary Duty Litigation
We defended an oilfield specialty services company against claims of aiding and abetting breach of fiduciary duty, fraud, and theft of trade secrets brought by a former customer – a much larger, publicly traded entity alleging $65 million in damages. We defended the case by attacking the plaintiff’s own internal controls and accounting practices, drawing upon our substantial knowledge of internal controls over financial reporting and public company accounting rules. We were able to obtain a good settlement before trial and before the plaintiff obtained a substantial verdict against the remaining co-defendants.
Martin Shareholder Oppression and Fiduciary Duty Litigation
As part of their representation of Scott Martin in a large variety of matters, Philip Werner and David Ayers represented Scott in a shareholder derivative and individual suit involving its investment in Martin Resources Management Corporation (“MRMC”), a closely-held energy corporation in the business of transportation, storage, terminaling and processing of energy resources.
Werner and Ayers prosecuted causes of action against members of management and the Board of Directors for, among other claims, shareholder oppression, breach of fiduciary duty, wrongful entrenchment and dilution, abuse of control, gross mismanagement, and fraud stemming from the Directors’ alleged improper issuance of well over $50 million of MRMC stock for the purpose of entrenching management and diluting certain minority shareholders.
MRMC and the MRMC Employee Stock Ownership Trust also opposed Martin and KCM in this action, and, along with the other defendants, asserted counterclaims for over $20 million in alleged damages against all plaintiffs and other third parties. After two years of intense litigation, the case settled favorably for Martin and KCM in excess of $300,000,000 on October 2, 2012.
Petroleum Products Trading Company Shareholder Oppression and Fiduciary Duty Litigation
In this Georgia case, we represented a minority shareholder in a closely-held petroleum products marketing and terminaling company against the company’s single dominant shareholder and board of directors, for breach of contract, fraud, unjust enrichment, and breach of fiduciary duty both as direct and derivative causes of action. Among other things, our client alleged that the company breached its promise to buy back his shares at a certain value and that the company’s directors breached their fiduciary duties to him by engaging in “conflicting interest transactions” under Georgia law.
After Judge James Bass of the Chatham County Superior Court denied the defendants’ motion to dismiss, the case settled for a confidential amount.
Fuel Oil Trading Company Shareholder Oppression and Fiduciary Duty Litigation
While at his previous firm, partner Jason Williams represented a minority shareholder of a fuel oil trading company in a dispute with its majority shareholders involving breach of contract, shareholder oppression, and breach of fiduciary duty. The case settled shortly after Judge Tad Halbach granted his client’s motion for partial summary judgment on an ongoing profit-sharing contract.
Successful Defense in Retaliatory Fiduciary Litigation
In response to Scott Martin’s lawsuit against MRMC in Harris County, MRMC (under the direction of Scott’s brother), sued Scott in Longview (Gregg County), Texas. In that case, MRMC alleged that Scott breached his fiduciary duty by filing the Harris County lawsuit, alleging that the act of filing the lawsuit caused MRMC to lose financing. The potential liability to Scott was massive, and Scott – who lived in Houston, not Longview – faced a very well-funded corporate opponent that was well-known in Gregg County. MRMC presented a damage model of over $80,000,000 while arguing for a total award (with punitive damages) of $150,000,000. Such a judgment would have been catastrophic to Scott.
After a two-week jury trial in Gregg County, the jury returned a very favorable verdict to Scott: an award of just under $2 million. The entire dispute, including nearly a dozen other related cases, settled within the next year.
Largest Legal Malpractice Verdict Ever
On behalf of Scott Martin and his partnership, Philip Werner and David Ayers sued Andrews Kurth for malpractice after a Texas appeals court refused to enforce a settlement agreement when an earlier version of the agreement contained provisions that would have protected Scott. Because the later agreement cancelled all prior negotiations, the earlier version was unenforceable as well, leaving Scott with none of its protections. In November 2015, a Harris County jury in 234th District Court found that Andrews Kurth committed malpractice and awarded our clients economic damages totaling $197.6 million. The National Law Journal reported this as the sixth largest verdict in 2015 and it has been reported as the largest jury verdict ever in a legal malpractice case. The case settled under a confidentiality agreement in March 2016, before entry of judgment.
Successful Defense of Law Firm Accused of Wrongful Transfer of Securities
We defended a law firm accused of tortious interference and fraud based on allegations that the law firm, in pursuing enforcement of an arbitration award, wrongfully prevented the transfer of certain securities. According to the plaintiff, the decline in the value of the stock during the period of the so-called “hold” caused the plaintiff damages. The district court granted summary judgment in favor of our law firm client, reasoning that the law firm’s qualified immunity and privilege protected it from the plaintiff’s claim. The First Court of Appeals, in a reported opinion, affirmed the district court’s take-nothing judgment.
Successful Presuit Settlement for Nonprofit Denuded by For-Profit Parent
We represented large private-equity controlled company that had management rights over a nonprofit subsidiary that it had acquired from another company. After our client discovered that the selling party had denuded the nonprofit subsidiary of its former corporate parent.
On behalf of the nonprofit, we made presuit demand, alleging that the former directors of the nonprofit (who also served as directors and officers of the former for-profit parent) breached their fiduciary duties to the nonprofit by placing the interests of the former for-profit parent ahead of those of the nonprofit. Matter settled confidentially without litigation.
Summary Judgment for Finance Executive Accused of Theft
In this defense of a financial executive of mid-sized private company, we prevailed on a no-evidence motion for summary judgment in case in which our client acknowledged misleading his employer about company finances, not because of any intent to misappropriate money, but because the CEO did not want to know the truth about how much money the CEO spent. We obtained discovery showing that the CEO spent money with abandon, lived lavishly, borrowed freely from his companies, and used company funds for personal purposes. A Harris County District Judge granted our client’s motion for summary judgment because the plaintiff failed to come forward with competent proof that our client caused any of the company’s losses.
Favorable Verdict for Finance Executive Accused of Theft and Breach of Fiduciary Duty
In a highly contested and complex case involving allegations of breach of fiduciary duty, theft, and fraud, we defended a financial executive whose former employer threatened him not only with a claim that would have wiped out his personal fortune, but also with criminal prosecution. The employer alleged theft of cash, leading to an error-ridden forensic audit. Our probing discovery led to evidence that other senior managers participated in a variety of overrides of the company’s internal controls. After a trial spanning a month, the jury verdict awarded our client more money than it awarded to his former employer. And although the jury found breach of fiduciary duty and theft occurred, the jury declined to find fraud. The jury also declined to find “clear and convincing” evidence of our client’s breach of fiduciary duty and theft. Moreover, the jury’s verdict included an award of punitive damages in favor of our client – not the plaintiff employer – based on the jury’s finding that the employer had violated the Texas wiretapping statute during its poorly executed forensic audit. The jury also awarded our client actual damages based on his counterclaims for the employer’s refusal to pay our client on his deferred compensation and monies our client had loaned his employer.
Although the court disregarded some of the jury’s findings, the jury sent a clear message that the employer had overreached. The jury’s verdict and court’s final judgment kept our client from any criminal prosecution, as well as the catastrophic damages (both actual and punitive) the company sought. The case ultimately settled confidentially.
Arbitration Award Denying $19 Million Against Admitted Fiduciary
As part of the Martin litigation, Scott had founded Inspiration Biopharmaceuticals to develop genetic therapies for the treatment of hemophilia; Scott’s son suffers from the rare blood disorder. Scott wanted his brother Ruben to invest and at first, Ruben did, through a newly formed entity, Martin Biopharmaceutical Investments, LLC (“MBI”). Scott contributed his existing shares in Inspiration to MBI. MBI thus held the shares of Scott, Ruben, and the others in MBI.
Scott wanted Ruben to invest more. But Ruben refused. Ruben had other ideas about how to spend the family fortune. Many lawsuits followed. In the discovery phases of the other lawsuits, Ruben discovered documents showing Scott continuing to invest in Inspir/ation. Of course, Scott’s continued investments went directly to Inspiration, and did not make them through the family entity, MBI, in which Ruben owned a part, because Ruben had declined Scott’s many efforts to persuade Ruben to invest more.
However, when Ruben found an appraisal valuing Inspiration as worth as much as $1.7 billion, he used this as a basis for another lawsuit Scott. Ruben alleged that Scott’s later investments directly into Inspiration – not into the family entity MBI – breached Scott’s fiduciary duties to MBI. According to Ruben, Scott usurped MBI’s corporate opportunity, requiring, among other things, Scott to pay $19 million to Ruben to make up for the lost opportunity. Again, an eight-figure liability was a major risk to Scott. The arbitration panel denied Ruben’s claim and found no breach of fiduciary duty occurred. The arbitration panel issued this award in July 2012. Ruben’s other main countersuit against Scott had failed that January. By early October 2012, Ruben had settled all outstanding litigation with Scott.
Securities Representative Experience
Successful Defense of Former Energy Merchant CFO in Multiple Class Actions, Derivative Suits, and Government Investigations
At a prior firm, David Bissinger defended the former chief financial officer of major energy merchant in multiple legal proceedings arising out of an accounting restatement that reclassified more than a quarter billion dollars of cash flow from operations as cash flow from financing activities. The representation spanned more than three years, including an extensive SEC investigation, a large shareholder class action, three federal ERISA class actions, a state court derivative case, a federal court derivative case, and other matters.
Successful Defense of Former Mutual Fund Officer
At a prior firm, David Bissinger defended former mutual fund chief investment officer in connection with SEC/Eliot Spitzer investigation regarding alleged market timing.
No-Action Resolution of FINRA Commingling Investigation
We defended a registered representative of major brokerage firm in a matter in which our client admitted to having commingled customer’s funds in representative’s personal bank account. After extensive written discovery and on-the-record interviews, FINRA issued “no action” letter.
No-Action Resolution of FINRA Inquiry Against Municipal-Bond Whistleblower
FINRA initiated an inquiry against Ryan O’Hara, a financial advisor in the municipal bond industry, after O’Hara blew the whistle on a longstanding price-fixing scheme in the municipal bond business. In that scheme, according to O’Hara, RBC Capital Markets, LLC (“RBC”) had contracts with 98 municipalities to act as “financial advisor.” RBC assigned those financial advisory contracts to Rathmann for Rathmann to become financial advisor – sort of an outside CFO function for municipal issuers. In exchange, Rathmann agreed that in those instances in which he acted as financial advisor, Rathmann would cause RBC to be named as the senior managing underwriter and to get RBC to receive an above-market underwriting discount.
FINRA’s inquiry suggested wrongdoing not by Rathmann or RBC, but by O’Hara for uncovering the scheme and reporting it to various participants via anonymous emails. Yet another enforcement authority, the Texas Attorney General, obtained a settlement from Rathmann and RBC in which they paid $450,000 “in lieu of civil penalties and fines and in partial reimbursement” of the Texas AG’s costs and expenses. Rathmann contended that “[n]either Rathmann & Associates nor myself were assessed any penalties or fines.” These statements, in which Rathmann minimized the Texas AG settlement, inspired O’Hara to adopt the pseudonym “Nathan Thurm” from the 1980s Saturday Night Live character, portrayed by Martin Short, in which Thurm, a shady, sweaty, cigarette-smoking lawyer, would nervously deny his clients’ various misdeeds.
O’Hara responded to FINRA by asserting his First Amendment right to use anonymous speech on these matters of very public concern, observing that “[a]nonymity is a shield from the tyranny of the majority . . . . It thus exemplifies the purpose behind the Bill of Rights and of the First Amendment in particular: to protect unpopular individuals from retaliation . . . at the hand of an intolerant society.” McIntyre v. Ohio Elections Comm., 514 U.S. 334, 341 (1995). FINRA took no further action.
Successful Settlement with Bank Regulator in Avoiding Penalties
We represented Carriage Services in its challenge of a rule of the Texas Department of Banking had issued in which the Department sought to penalize Carriage for cancelling contracts with customers who defaulted on their obligations to Carriage. Carriage sold contracts for pre-need funeral services. Occasionally, purchasers default. Upon default, the Texas Finance Code required Carriage to refund some of the payments under a formula designed to reflect the funds Carriage would no longer need to provide the funeral services. However, the Texas Department of Banking’s new rule would have increased Carriage’s refund to defaulting customers to 100% of all principal paid in, plus interest, regardless of cost to Carriage. The Department based its new rule for this draconian refund on another statute that had nothing to do with defaulting customers, but that imposed such draconian refunds on unscrupulous sellers who “churn” or “twist” by soliciting customers to cancel one contract only to replace that contract with another. This draconian refund made sense with respect to so-called “solicited cancellations,” but Carriage challenged its application to customers in default.
Within a few months of filing suit in Travis County district court, the Carriage entered into an agreement that allowed Carriage to continue its practice of providing refunds to defaulting customers without having to pay the penalties associated with solicited cancellations.
No-Action Letter for Advisor in FINRA Forgery Investigation
We represented a local broker in responding to a FINRA inquiry in which the broker’s former firm alleged that it fired him because the broker had tampered with paperwork reflecting customer orders. According to FINRA and our client’s former employer, the broker sent the home office forms with blacked out fields. However, the broker located the documents he had sent the firm and those versions of documents, in the condition in which he faxed them to his home office, contained no blacked out fields. They were intact. This led to the conclusion that the blacking out of the documents occurred not under our broker’s watch, but in the home office of the brokerage firm.
We argued that the brokerage firm had a motive to tamper with the documents because our client refused to submit to a new supervisory program that would have delegated the firm’s home office (in the Midwest) of its supervisory responsibilities to another broker in the Dallas-Fort Worth area. (Our client was located in the Houston area.) Because this delegation of supervisory authorities would have cost our client more money (by forcing him to pay an outsider for work our client already paid the home office to do), our client had refused. To make matters worse, the brokerage firm also had asked our client to increase his indebtedness under his outstanding note to the firm and to repay sums not due to the firm. Our client had refused these demands too. We cited these demands in our response to FINRA, arguing that the firm decided to retaliate by the manufacturing the forgeries. After receiving our response, FINRA took no further action against our client.
SEC Municipal Bond Investigation
The firm represented of local issuer in connection with SEC’s investigation into various aspects of municipal-bond industry.
Successful Defense of Investor in Alleged Pump-and-Dump Scheme
We defended an early-stage investor in publicly-held company in private state-court securities litigation in which another investor sought to disgorge our client’s gains, alleging that our client had knowingly aided a supposed pump-and-dump scheme. We obtained a favorable settlement for our client early in the litigation, which continued against other defendants for more than five years.
Successful Defense of Broker-versus-Broker Fraud Claim Arising out of Bond-Trading Dispute
In this unusual dispute between bond brokers, we defended Institutional Capital Management, Inc. (“ICM”) in an eight-day NASD hearing filed by Len Claus and his brokerage firm, IMS Securities (“IMS”). ICM and its broker, Jerry Short, had initially indicated that it would buy $2.4 million of “inverse floater” collateralized-mortgage obligation bonds from Claus/IMS, but then ICM instructed Claus/IMS to sell the bonds to another broker-dealer, Sterling Financial Investment Group. However, Sterling refused to buy Claus’s bonds.
Claus and IMS alleged fraud and breach of contract. In response, ICM and Sterling alleged that Claus bought bonds before finalizing his sale to Sterling, contrary to securities industry rules. Claus alleged more than $400,000 in losses because, according to Claus, no one would buy Claus’s bonds as they plummeted in price.
We demonstrated in cross-examination that Claus’s own trading history undermined his damages theory. Claus claimed that he engaged in an “aggressive marketing campaign” throughout February 2005 to mitigate his losses, and that he had to sell the bonds for a steep discount in order to mitigate his losses. However, buried in Claus’s own trade report, an entry showed that he sold the bonds for the same price he had paid – 89½ – to another brokerage firm. This trade destroyed the heart of Claus’s damages theory. So, to revive some substance to his theory, Claus then testified that “he had given his word” to that buyer that he would resell the bonds to another firm “by the end of February.” This story raised another problem for Claus: it appeared that he had “parked” the bonds in violation of industry rules that forbid a broker from agreeing to repurchase securities with no loss to the party accommodating the broker.
The NASD panel appeared to agree with this theory in its award (per NASD policy, it contained no reasoning) to Claus of $20,000 in actual damages and $40,000 in attorney’s fees, far less than the $400,000 that Claus demanded.
Successful Defense of Selling-Away Securities Arbitration
We defended registered representative of major broker-dealer against FINRA customer claim. The customer accused our client of selling real-estate limited partnerships without broker-dealer’s authorization. The customer sought more than $15,000,000 in damages, including $4,400,000 in out-of-pocket losses. After an eight-day hearing, a FINRA arbitration panel awarded $1.3 million, a fraction of what the customer demanded and significantly less than the broker and firm had offered in mediation.
Recovery of Funds from Fraudulent Forced Sale of Private Company Shares
We filed, prosecuted, and obtained a favorable settlement for senior executive arising out of Parsons Corporation’s acquisition of 3D International, Inc. (“3D/I”). Our client alleged 3D/I forced him to sell his shares for book value despite 3D/I’s concealed knowledge of pending merger at rumored premium of two or three times book value. (The actual merger price remains confidential.) The case settled confidentially within nine months of service of process.
Recovery of Multimillion-Dollar Settlement for Investor in Auction-Rate Securities
We represented Sexton Interests, a privately held entity, who had followed the advice of its broker at a major firm to invest large seven-figure amount into instruments known as “Auction Rate Preferred Securities,” a variety of auction-rate securities that collapsed in the credit crisis of 2008.
The broker had assured Sexton that these “ARPS” were as good as cash, and the brokerage firm listed the instruments as “cash equivalents” on Sexton’s account statements. Secretly, however, the firm knew that the ARPS were far less stable for investors, and paid better compensation to brokers, than typical “cash equivalents,” such as certificates of deposit or money-market instruments.
After our firm conducted thorough discovery that revealed, in the firm’s internal records, the disparity between what the brokerage firm knew versus what it had told Sexton, the brokerage firm settled subject to a confidential agreement.
Recovery of Losses for Investor in Municipal-Bond Mutual Fund Arbitration
Represented Trustee claimant in FINRA arbitration concerning unsuitability of municipal bond funds. Case settled favorably before final hearing.
Recovery of Losses from Real-Estate Investment Scam
We represented an investor in real estate fraud case who suffered losses when the real-estate management company enticed investor to release the liens the investor held in certain properties but failed to provide investor new liens in other properties, despite the company’s promise to do so. After we filed suit, obtained a motion for temporary restraining order, and secured a lis pendens on company’s real-estate holdings, the case settled confidentially.
Recovery of Record-Setting Losses for Wealthy Mexican Investor
Representation of the claimants in then-largest reported securities arbitration claim in history of NYSE arbitration. The dispute involved broker’s falsified account statements to portray customers as holding blue-chip stocks and bonds; in reality, broker had put vast majority of customers’ funds in “the shadowy world of Canadian gold stocks” that paid broker large kickbacks.
Recovery of Losses for Elderly Investor in Junk Bond Churning Case
Represented claimant in NASD customer claim of securities fraud; broker used forged account transfers in taking portfolio of millions of dollars in investment-grade municipal bonds and degrading it into portfolio consisting of obscure and speculative “junk.” After eight-day hearing, NASD arbitration panel awarded claimant $375,000, more than 100% of claimant’s out-of-pocket losses against respondent Corporate Securities Group, Inc. (n/k/a Wachovia Securities Financial Network). Three other firms settled for confidential amounts.
Recovery for Elderly Investors in Unsuitable Investments
In two successive NASD arbitrations, we represented four investors in cases against then-First Union Securities broker Dan O’Brien, later suspended for “selling away,” for the sale to elderly, retired, and inexperienced investors of explosive and unsuitable high-tech money managers; and fraudulent sale of illiquid and unsuitable variable and equity-indexed annuities. Among these investments was a variable annuity issued by American Skandia and marketed to brokers as “the little blue pill” for brokerage commissions. Both arbitrations settled for confidential sums.
Recovery of Losses from Churning
We represented a family and a family limited partnership in a churning case against Global, its principals, and the broker, Eduardo Bustani, whom FINRA later barred from the securities industry. Mr. Bustani had churned the Canavatis’ accounts as much as 40 times on an annualized basis, buying and selling more than $66 million in securities in a fifteen-month period. (Turnover rates of more than six are presumptively fraudulent.)
Bustani compounded Global’s churning by trading the accounts on margin and using short selling and put writing to further undermine the stability of the accounts. Bustani capped off this reckless trading in March 2008 by buying substantial long positions in Bear Stearns (just as it was imploding) and shorting Lehman Brothers (just as it was rebounding from losses that spring, and well before its collapse later that fall). This “long Bear/short Lehman” position created a perfect storm of losses in an already dangerously explosive portfolio.
After Global fired its original Washington, D.C., law firm and reassigned the case to a skilled Houston securities litigator, the parties settled for a confidential sum.
Recovery of Losses from “Principal Protection Notes”
We represented a family and its privately-held business to recover losses suffered when UBS recommended “100% Principal Protection Notes” to them as appropriate to fulfill the family’s desire (reflected in their emails to their broker) to get “out of the market.”
In reality, UBS knew that the “100% Principal Protected Notes” were based on the shaky credit of Lehman Brothers and the toxic assets that Lehman Brothers held. UBS also knew that these so-called “Notes” paid substantially more commissions to its brokers than certificates of deposit or U.S. Treasuries. Yet to investors, including the D’Agostaros, UBS marketed the “Notes” as part of its “Investment Strategies for Uncertain Markets.”
After a short discovery phase, the case settled under a confidentiality agreement.