Domino Effect

The collapse of Aequitas Capital reshapes legal landscape.

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The February 2016 collapse of Lake Oswego investment firm Aequitas Capital may develop into a financial windfall for a number of Portland law firms. But because of Oregon securities law, the suit is also pitting those firms and their attorneys against crosstown rivals.

Investors hit by the high-profile failure tapped Portland’s Stoll Berne to prepare a class-action lawsuit against Aequitas’s legal advisers, which was filed in April and could be worth more than $300 million. The advisers include respected Portland law firm Tonkon Torp as well as Chicago-based Sidley Austin and Aequitas’s auditors, Deloitte & Touche and EisnerAmper, which are based in New York.

The suit is possible because Oregon securities law allows jilted investors to seek damages from a failed firm’s advisers since they should have had intimate knowledge of their customer’s doings. The class-action suit means attorneys on both sides of the deal will be billing tens of millions to either wag a finger at the failed investment firm and those close to it or defend against the accusations.

Aequitas stopped doing business this year, and specialists are now sifting through its ashes and complex holdings to save what assets remain for distribution to first its lenders and then, if anything’s left, its investors. The company now owes about $710 million, according to the Oregonian, including $600 million to investors and an additional $110 million to banks.

While attorneys representing the irked investors may collect in the future, at the moment they are tapping their own pockets to keep the litigation alive.

“I would assume that most of these — especially the big ones — are being done on contingency,” says Jeff Dobbins, an associate law professor at Willamette University in Salem. Attorneys in such cases usually charge about one-third of what they recover for clients once the case is complete. In this case, that could be substantial since it’s expected to go well above $350 million.

Doing the math on that sounds impressive for the firms representing investors, but it can be diluted quickly depending on the number of law firms involved in the case, and how much time they spend investigating, filing and litigating the case. The one-third figure is also just a guideline and can dip down to one-sixth or go higher if the workload justifies the fee.

Attorneys keep detailed timesheets and expense reports to underpin their final payout. Stoll Berne partner Keith Ketterling says it’s too early to know how much his firm will get from the case. “The fees have to be approved by the court as being fair,” he says.

Already attorneys for the defendants are filing as many motions as possible to ratchet up the workload and pressure the investors and their attorneys. At those firms, partners often bill at about $500 an hour but refer simpler tasks to more junior lawyers to lower bills.

Regardless of the ultimate costs, the most likely outcome of the Aequitas suits is that they will be settled before a court date is set. Dobbins says settling the Aequitas suits will be complex and time-consuming because of the number of investors, Aequitas’s complex web of investments and the number of regions where Aequitas, its advisers and its investment advisers were located. “It requires that much more coordination. There’s going to be a big table somewhere,” he says.

Because of the local nature of the case, many of the attorneys at that table have likely shared tables and bar counters before, but now they’re pointing fingers at each other and trying to get the best outcome for their respective clients.
“I’ve done a lot of cases against other law firms — here and in other cities — and it’s never become personal,” says Bob Banks, a partner with Portland’s Samuels Yoelin Kantor. Banks is representing 18 investors in an attempt to recoup some of their investment from Private Advisory Group, an Aequitas affiliate that failed along with the company.

Since Aequitas only folded early this year, and the Securities and Exchange Commission filed its suit against the company in March, even more suits are expected from investors angry at investment advisers who recommended Aequitas as an investment. But Banks says the lawsuits shouldn’t be seen as an indictment of the firms that got tangled up with the company.

“These are good lawyers,” he says. “Clients can do things that lawyers don’t know about. We try to be careful about who we represent.”

Banks may be upbeat but one Portland attorney involved in the cases says he’s avoiding meeting privately with other attorneys related to the case to avoid any appearance of impropriety as well as hurt feelings. He asked not to be named because he’s acquainted with many of the attorneys on both sides of the case.

Willamette University’s Dobbins says the Aequitas failure is a big deal on many fronts. “This will keep the legal community in Portland busy for some time to come,” he says.