Trustee Flays K&L Gates Over $500M Le-Nature Scam

By Samuel Howard

Law360, New York (September 10, 2009) -- The trustee overseeing the liquidation of Le-Nature Inc. has accused K&L Gates LLP of malpractice for failing to discover evidence of a $500 million fraud while conducting an internal investigation of the collapsed beverage company.

U.S. Trustee Marc S. Kirschner filed suit Wednesday in the Court of Common Pleas of Allegheny County, Pa., claiming K&L Gates and accounting firm Pascarella & Wiker LLP are liable for malpractice, negligence, breach of contract, breach of fiduciary duty and negligent misrepresentation for allegedly botching the 2003 investigation.

The firms are on the hook for giving Le-Nature a clean bill of health despite numerous red flags, including details from three former senior executives at the company who warned about CEO Greg Podlucky’s dubious bookkeeping and rampant misrepresentations, according to the lawsuit.

“Defendants utterly failed to fulfill their obligation to conduct a complete and thorough investigation, abdicated their duty of independence, conducted a wholly deficient and improperly limited investigation, and issued a grossly misleading whitewash report absolving the CEO and other suspected wrongdoers of any improper conduct,“ Kirschner said.

Despite credible evidence to the contrary and a “virtual roadmap of red flags” the firms swallowed Podlucky’s explanations and issued a report dispelling any concerns about the company’s mismanagement, prolonging a ruinous Ponzi scheme for three more years, according to the complaint.

“Defendants’ misconduct empowered the insiders to continue to perpetrate the massive fraud that has cause the company more than half a billion dollars in damages,” the trustee added.

The internal investigation endorsed Podlucky and discounted the fraud claims even while the scheme was in full tilt; the year before the investigation Le-Nature had reported sales of $135 million whereas in reality net sales were less than $2 million, according to the complaint.

A spokeswoman for K&L Gates could not be reached for comment Thursday, and representatives for Pascarella & Wiker were not available.

However, in a statement to The Am Law Daily, K&L Gates strongly denounced the trustee’s suit as mercenary and exploitative.

"Mr. Kirschner's suit is his latest transparent attempt to search for an innocent deep pocket to pay for alleged losses claimed on behalf of the company that caused its own demise," the statement said, according to the publication.

Kirschner declined to comment on the lawsuit Thursday.

K&L Gates contends it was retained for a limited engagement several years before Le-Nature filed for bankruptcy in 2006 and faults Kirschner for shifting the blame for the massive fraud away from those responsible, according to Am Law.

Podlucky and other Le-Nature insiders orchestrated a Ponzi scheme at Le-Nature that raised new money and incurred proliferating debts to refinance investors, casting the illusion of a profitable business, according to the complaint.

Le-Nature’s fraud drove the company into bankruptcy in November 2006, three years after the firms’ deficient investigation, leading to the liquidation of the beverage producer.

The lawsuit seeks undetermined damages, costs and attorneys’ fees.

Kirschner is represented by Stonecipher Cunningham Beard & Schmitt PC and Kasowitz Benson Torres & Friedman LLP.

Counsel information for K&L Gates and Pascarella & Wiker was not immediately available.

The case is Marc Kirschner vs. K&L Gates et al. in the Court of Common Pleas of Allegheny County, Pennsylvania. The case number was not immediately available.