Law Firm's Failure To Carry Out Due Diligence Deemed Inconsequential-Client Knew of Negatives
A New York County Supreme Court Justice dismissed a legal malpractice claim prior to trial this summer finding -- So What? An investment banking firm that served as an underwriter for a public offering of stock, retained a law firm to conduct due diligence and investigate the issuing corporation. The law firm hired a private investigation firm which discovered that the issuing corporation had sold off its major assets and was worthless. An associate at the firm emailed the investigative report to the client and the partners at his firm. Apparently, no one read the report and the law firm issued a positive report on the issuing corporation's stock offering. The deal closed, the issuing corporation ripped off the investors and everyone got in trouble.
The investment banking firm (client) paid out $15 million in fines and penalties to settle an SEC action and sued the law firm for not advising it that the issuing corporation was about to perpetrate a fraud. The Court dismissed the legal malpractice claim because the plaintiff could not satisfy the "but for" causation element. Why? The Court said that since the client admitted it was provided with the critical details of the fraudulent representations of the issuing corporation (when the associate at the law firm emailed the investigative report) they could never prove that the law firm caused the client's damages.
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