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Law Firm to Pay $25 Million for Failing to Detect Securities Fraud

Florida-based law firm Holland & Knight will pay $25 million to settle a three-year lawsuit accusing the firm of failing to spot evidence that its client Arthur Nadel was engaged in a Ponzi scheme, according to Reuters. But first the settlement must be approved by the federal district court presiding over the case. Mr. Nadel, a hedge-fund manager, engaged in a Ponzi scheme that cost investors $168 million. The $25 million settlement amount is substantial for a firm of Holland & Knight’s size. In 2011, Holland & Knight grossed $568 million, but only about $500,000 of that sum was for advising Mr. Nadel’s hedge funds. Holland & Knight continues to deny any wrongdoing.

Law Firm’s Failure to Investigate Hedge Fund Manager Enabled Securities Fraud.

 

Beginning in 2002, Holland & Knight advised Nadel’s hedge funds and management companies and prepared private placement memoranda used to attract new investors to the funds. According to the plaintiffs, Holland & Knight should have properly investigated Mr. Nadel and advised the hedge funds about his “troubled background,” such as Mr. Nadel’s 1982 disbarment for taking money out of a client’s escrow account.

Mr. Nadel himself pleaded guilty to securities fraud and was sentenced in 2010 to serve 14 years in prison. He served well under two years before he died in prison at the age of 80.

This is not the first big hit that Holland & Knight has suffered this year. In April, Holland & Knight was ordered by a California state court to pay $34.5 million to settle malpractice claims brought by investors who lost money on investments with Atlanta developer Shi Shailendra. The law firm is appealing that verdict.

Whistleblowers Can Often Spot Securities Fraud before Federal Authorities.

 

A securities fraud scheme can do tremendous harm long before the scheme is uncovered by federal authorities. In many cases, only a whistleblower has access to the information that could stop securities fraud in its earlier stages. This makes whistleblowers a crucial part of the SEC’s enforcement efforts.

In recognition of their vital role, whistleblowers may be eligible for financial awards under the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) of 2010 if information that they voluntarily supplied assists the SEC to successfully prosecute securities violations.

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