9th Circ. Revives Fraud|Case Against Law Firm

     PASADENA, Calif. (CN) — The Ninth Circuit ruled Monday that an investment group sufficiently pleaded its federal fraud case claiming it was scammed while trying to purchase pre-initial public offering shares of Facebook, reversing a federal judge’s dismissal.
     ESG Capital Partners negotiated the purchase with a man it believed was named Ken Dennis who was represented by law firm Venable LLP. In actuality, Dennis was a man named Tony Stratos, an alleged con artist whom Venable was also representing in an unrelated lawsuit involving a $7 million theft.
     Stratos’s primary contact with Venable for the Facebook deal, attorney David Meyer, helped him set up a front company called Soumaya Securities. Working through Meyer, Stratos convinced ESG Capital that he had access to millions of Facebook shares, so ESG Capital wired Venable and Soumaya Securities $11.25 million in three payments for Facebook shares that it never received.
     Eventually, ESG sued Stratos, Meyer and Venable, claiming federal securities fraud, state law fraud, conversion, breach of fiduciary duty and more. The U.S. government also indicted Stratos in connection with the Facebook fraud.
     But in 2013, a federal judge dismissed ESG’s action, finding that the group failed to sufficiently show that material misrepresentations or omissions on the part of the defendants, that the defendants knowingly defrauded the group or that the group had relied on the defendants’ statements.
     But writing for the Ninth Circuit’s three-judge panel on Monday, Circuit Judge Harry Pregerson said that ESG Capital sufficiently pleaded its claim under Section 10(b) of the Federal Securities Fraud Claim Act.
     Specifically, the panel found that material misrepresentation or omission was sufficiently pleaded because Meyer was the maker of false statements. Even though he made disclaimers that he was communicating information from Soumaya Securities, he made several false statements, including that he represented “Ken Dennis,” Pregerson wrote.
     Meyer also “made material omissions when he failed to reveal that there was no Facebook deal; that Stratos, not Soumaya Securities, was Venable’s client; and that ESG Capital’s $2.8 million deposit would be immediately dispersed to Stratos,” Pregerson wrote.
     ESG also pleaded strong evidence of scienter — that Meyer knew Stratos was using the alias “Dennis” and that ESG believed it was negotiating with “Dennis,” not Stratos, the panel found.
     “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,” Pregerson wrote.
     Finally, ESG Capital sufficiently pleaded its reliance claim, pointing out that it only wired money to Soumaya Securities after it had received assurances from Meyer, the panel ruled.
     And because ESG’s state law fraud claims run parallel to its federal law fraud claims, the group has sufficiently pleaded its state law claims, too, the panel found.
     However, the panel upheld the trial court’s dismissal of ESG’s state law breach of fiduciary duty claim, which is barred by a one-year statute of limitations.
     ESG Capital is represented by Margaret Grignon and Paula Mitchell from Reed Smith in Los Angeles and William Nystrom, Michael Paris and Jack Siegal with Nystrom Beckman & Paris in Boston.
     Venable is represented by Kevin Rosen, Matthew Kahn and Bradley Hamburger of Gibson, Dunn & Crutcher in Los Angeles.
     David Meyer is represented by David Willingham and Arwen Johnson from Caldwell Leslie & Proctor, also in Los Angeles.
     A spokesman at Gibson Dunn said the fight will go on.
     “While we respectfully disagree whether the complaint was properly pled, we will now vigorously challenge the merits of the allegations,” the firm’s spokesman said.
     None of the other attorneys responded to respond to phone calls or e-mails requesting comment on Monday.

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