In re American Continental Corp./Lincoln Savings and Loan Securities Litigation (Jones Day)

Brief Fact Summary.

Because of its activities on behalf of American Continental Corp. (ACC) (Defendant) and Lincoln (Defendant), the law firm of Jones Day (Defendant) was named as a defendant in four of the five separate actions that were filed following Lincoln Savings and Loan’s (Defendant) failure

Synopsis of Rule of Law.

Reckless conduct is the highly unreasonable omission involving an extreme departure from the standards of ordinary care, which presents a danger of misleading buyers or sellers that is either known to the defendant or so apparent that the actor must have been aware of it.

Facts.

Jones, Day, Reavis & Pogue (Jones Day) (Defendant) was retained by American Continental Corporation (ACC) (Defendant) to perform a major internal audit of Lincoln Savings and Loan’s (Lindoln) (Defendant) Federal Home Loan Bank Bond (FHLBB) compliance and to help Lincoln (Defendant) deal with the FHLBB’s direct investment regulations.  Jones Day (Defendant) found numerous regulatory violations.  Jones Day (Defendant) was named as a defendant in four of the five separate actions that were filed after Lincoln (Defendant) failed.  According to the evidence, Jones Day (Defendant) instructed ACC (Defendant) in how to rectify deficiencies so that they would not be evident to FHLBB examiners and that its attorneys participated in creating corporate resolutions to legitimize forged and backdated corporate records.  The firm also provided an opinion letter in an ACC (Defendant) bond registration statement.  Jones Day (Defendant) moved for summary judgment.

Issue.

Is reckless conduct the highly unreasonable omission involving an extreme departure from the standards of ordinary care, which presents a danger of misleading buyers or sellers that is either known to the defendant or so apparent that the actor must have been aware of it?

Held.

(Bilby, J.)  Yes.  Reckless conduct is the highly unreasonable omission involving an extreme departure from the standards of ordinary care, which presents a danger of misleading buyers or sellers that is either known to the defendant or so apparent that the actor must have been aware of it.  The record raises material questions concerning §  10(b), racketeer Influenced and Corrupt Organizations Act (RICO), Arizona Racketeering Act (AZRAC), common law fraud and deceit, and violations of Cal. Corp. Code §§ 25401 and 25504.1.  A question of fact also remains as to whether buyers were injured by the Jones Day (Defendant) opinion letter.  Additionally, Jones Day (Defendant) is an expert under § 11 of the Securities Act, and its advice influenced the conduct of ACC/Lincoln (Defendant).  Therefore, the order denying summary judgment is affirmed

Discussion.

Attorneys are required to inform a client in a clear and direct manner when the client’s conduct violates the law.  If the conduct continues, the lawyer must withdraw if the representation will result in violation of the rules of professional conduct or other law.  Jones Day’s (Defendant) payment eventually totaled $75 million to settle both the claims of ACC (Defendant) bondholders and stockholders, and the government claims against the firm.
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