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April 11, 2011 7:15 PM

Baker & McKenzie, Ex-Partner Sued for Alleged Roles in IEAM Collapse

Posted by Brian Baxter

Baker & McKenzie and former partner Martin Weisberg have been sued over their alleged roles running a stock scheme that contributed to the collapse of Pittsburgh-based Industrial Enterprises of America (IEAM).

In a scathing 22-page complaint filed against the firm and Weisberg in U.S. bankruptcy court in Delaware on Monday, plaintiffs claim both defendants enabled a massive fraud at IEAM, which filed for bankruptcy in May 2009.

"[Baker & McKenzie]'s participation in defrauding [IEAM] out of more than $150 million spanned years and knew little bounds," states the complaint filed on behalf of IEAM and its shareholders by Steven Thomas of Venice, Calif.-based Thomas, Alexander & Forrester and Christopher Loizides of Delaware's Loizides. "IEAM had the right not to have criminals for its attorneys."

According to the complaint, Baker & McKenzie hired Weisberg as a partner in 2005 solely because of the fees he would bring to the firm through his relationship to IEAM and its former CEO John Mazzuto. The complaint states that Weisberg and his former firm had numerous conflicts of interest that were not disclosed to the plaintiffs, and that the defendants violated "ethical rules by participating in the looting of IEAM--a looting that could not have occurred without defendants' legal expertise."

Plaintiffs claim that Weisberg and Baker & McKenzie "knowingly drafted false documents with the express purpose of duping the investing public and regulators acting on their behalf." The two defendants allegedly used stock plans to reward themselves and their coconspirators in the scheme, according to the complaint. The civil suit also states that "Baker did not merely assist or participate in the fraud, it actually conceived the engine that drove it."

The complaint claims that one current Baker & McKenzie partner, litigator Brendan Cook in Houston, was aware of inadequate disclosures in public filings made by the firm and its former partner Weisberg. 

A Baker & McKenzie spokeswoman provided the following statement to The Am Law Daily on Monday: "Since this is a pending litigation matter and we have not studied the complaint, we will have no further comment at this time."

Weisberg was one of six individuals indicted by federal prosecutors in Brooklyn in October 2007 on charges of making $55 million in fraudulent profits from private stock sales. The New York Law Journal, a sibling publication, reported on Weisberg's past, including his trial and acquittal on similar charges brought by federal prosecutors in Texas in 1991. At the time of the Texas indictment, Weisberg was a partner at Morgan, Lewis & Bockius. He subsequently resigned from the firm, only to be hired by Baker & McKenzie a little more than a decade later.

Weisberg then resigned from Baker & McKenzie in October 2007 after being hit with securities fraud and money laundering charges by federal prosecutors, as well as a civil suit filed by the SEC. He was indicted a second time in May 2008 on charges of stealing from a client escrow account in a separate fraud scheme. Both sets of charges are pending.

Richard Albert, a partner at New York firm Morvillo, Abramowitz, Grand, Iason, Anello & Bohrer, is representing Weisberg on the criminal charges. He did not immediately respond to a request for comment about the civil suit filed against his client on Monday.

As previously noted by The Am Law Daily, former IEAM CEO Mazzuto and outside lawyer James Margulies, a founding partner of Cleveland firm Margulies & Levinson, were indicted by state prosecutors in New York last May for running a $60 million stock scheme. (Margulies had worked as IEAM's CFO and general counsel, and served on the company's board of directors.)

IEAM plaintiffs' counsel Thomas, a former Sullivan & Cromwell partner and the subject of a cover story in the February 2008 issue of The American Lawyer for his role securing a $522 million verdict against accounting firm BDO Seidman, was traveling on Monday and unavailable for comment.

The suit filed in Delaware by Thomas claims that while Baker & McKenzie reaped at least $1.7 million in legal fees from its work for IEAM, a breach of fiduciary duties by the firm resulted in losses of more than $150 million to the company and its shareholders. IEAM is seeking $600 million in damages. (Click here for more documents related to the fall of IEAM, including stock certificates and court records pertaining to Mazzuto, Margulies, and Weisberg.)

Last year Baker & McKenzie replaced Skadden, Arps, Slate, Meagher & Flom as the world's most profitable law firm, as ranked by The American Lawyer, with more than $2.1 billion in gross revenue.

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