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Attorney, K&L Gates face malpractice suit again

| Tuesday, May 15, 2012, 8:48 p.m.

A leading Pittsburgh law firm and one of its top attorneys again will face a claim of legal malpractice over the 2006 collapse of LeNature's Inc. in Latrobe after an appeals court overturned an Allegheny County judge's ruling dismissing a lawsuit.

The Superior Court ruled on Tuesday that Judge Stanton Wettick was wrong when he dismissed a lawsuit against Sanford Ferguson and law firm K&L Gates and a Pittsburgh accounting firm, Pascarella & Wiker. They were hired to investigate allegations of mismanagement by LeNature's CEO Gregory Podlucky, who founded the beverage company in 1992.

Podlucky is serving 20 years in a federal prison after pleading guilty to charges of mail, wire and bank fraud, money laundering and submitting fraudulent tax returns. He masterminded a scheme that bilked banks and other lenders out of $856 million. His wife, son, brother and several other former company executives also are serving prison sentences for their roles in the fraud.

The three-judge panel ordered the lawsuit reinstated.

Michael Rick, a spokesman for K&L Gates, declined to comment yesterday. Carl Wiker did not respond to a request for comment.

The lawsuit was filed by Marc Kirschner of New York, a court-appointed trustee empowered to recover as much money as he could in order to pay off creditors, who are owed $661 million, according to court records.

When three members of the board of directors suspected that Podlucky was stealing from LeNature's, they hired K&L Gates to investigate. Wettick dismissed the lawsuit in 2010, ruling that Ferguson represented the directors, not the company.

But in the Superior Court ruling, Judge John Musmanno said the attorney-client relationship existed between K&L Gates and LeNature's. According to the decision, the law firm was providing legal representation to LeNature's through the special committee of directors, and Ferguson's legal duties "extended beyond the special committee" to the company itself.

In his lawsuit, Kirschner alleged that LeNature's could have "avoided Podlucky's massive looting" if K&L Gates "had ... discharged their duties and obligations properly." The company would have been dissolved earlier than 2006, thereby preserving its financial assets to pay off creditors and investors, according to the lawsuit.

Musmanno said Kirschner established that the law firm "was a substantial factor in causing harm to LeNature's in the form of increased liabilities, decrease in the value of assets, additional looting of the company and corporate waste, all of which were permitted to continue because of the malpractice."

LeNature's problems began in 2003 when the company's chief financial officer and two assistants resigned after Podlucky denied them access to key financial documents. They suspected wrongdoing and reported their fears to three board members who had invested in LeNature's. The directors hired K&L Gates to investigate.

On Nov. 25, 2003, Ferguson gave Podlucky a draft of his report and allowed him to edit it. On Dec. 5, he gave a copy to the directors. In his conclusion, Ferguson "found no evidence of fraud or malfeasance." The finding by Ferguson allowed Podlucky to continue looting his company through unneeded borrowing, according to Musmanno.

In September 2006, Podlucky hired Ferguson to help him prepare for an initial public stock offering for LeNature's on the London Stock Exchange. Before the deal could be completed, more allegations of fraud by Podlucky surfaced and the company was forced into bankruptcy, triggering a federal investigation by the U.S. Attorney's Office in Pittsburgh.

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