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Sidley Allegedly Helped Woodbridge Keep $1.3 Billion Ponzi Going

Dec. 4, 2019, 4:54 PM

The bankruptcy trustee tasked with cleaning up a $1.3 billion real estate Ponzi scheme has accused Sidley Austin LLP in California state court of helping Woodbridge Group of Companies LLC defraud investors.

Sidley and nine other law firms “aided and abetted numerous securities violations and fraudulent acts,” according to the complaint filed in California Superior Court Dec. 2. Woodbridge filed for bankruptcy in 2017 and a liquidation trust began helping investors recover their losses earlier in 2019.

State regulators started investigating Woodbridge several years before the scheme collapsed in 2017. Sidley “helped devise a plan to circumvent” a Massachusetts regulator’s 2015 order to stop selling unregistered securities in the state, the complaint says.

The firm allegedly drafted “misleading” letters that “concealed material information” about consent orders Woodbridge entered with Massachusetts and Texas regulators. The letter ultimately sent to Massachusetts investors said Woodbridge would continue to meet its obligations if investors didn’t cancel their agreements, which was “blatantly false,” the complaint says.

When California regulators came calling in 2016, Sidley allegedly “sought to fend off the Ponzi scheme inquiry and continued to assist Woodbridge with its fraudulent scheme.”

Sidley advised Woodbridge to remove a misstatement from some of its offering documents in 2016. But the law firm told Woodbridge the misstatement didn’t “require a corrective disclosure, even though Sidley was aware at the time of past and current investigations” in several states, the complaint says.

A Woodbridge private placement memorandum Sidley approved “falsely represented that no state regulatory agency had passed upon the contents or accuracy of the representations” within the offering documents, according to the complaint. Several state regulators had actually reviewed the documents and “notified Woodbridge of false statements.” Woodbridge raised nearly $700.8 million from the “false and misleading” memoranda “that were the product of Sidley’s advice,” the complaint says.

Robert Shapiro, Woodbridge’s former president and CEO, was sentenced to 25 years in prison in October for his role in the scam. He agreed to pay around $120 million in disgorgement and Securities and Exchange Commission fines in 2018. The agency’s actions against brokers who sold Woodbridge securities are ongoing.

Causes of Action: Aiding and abetting securities fraud (Cal. Corp. Code §§ 25401, 25504.1 et seq.); aiding and abetting fraud; aiding and abetting breach of fiduciary duty; negligent misrepresentation; professional negligence; aiding and abetting conversion; avoidance and recovery of actual fraudulent transfers (Cal. Civ. Code § 3439.04(a)(1)); avoidance and recovery of constructive fraudulent transfers (Cal. Civ. Code § 3439.04(a)(2)).

Relief: General and consequential damages of at least $500 million (includes claims against other defendants); rescission and restitutionary damages; avoidance of all fraudulent transfers and a preliminary and permanent injunction against any further fraudulent transfers; punitive damages; attorneys’ fees; court costs; pre-and post-judgment interest.

Response: A Sidley spokesperson didn’t immediately respond to a Dec. 4 request for comment.

Attorneys: Miller Barondess LLP represents the bankruptcy trustee.

The case is Goldberg v. Halloran & Sage LLP, Cal. Super. Ct., No. 19STCV42900, complaint filed 12/2/19.

To contact the reporter on this story: Jennifer Bennett in Washington at jbennett@bloomberglaw.com

To contact the editors responsible for this story: Rob Tricchinelli at rtricchinelli@bloomberglaw.com; Steven Patrick at spatrick@bloomberglaw.com