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Lawyers Accused of Missing Deadline in Accounting Malpractice Case

There should be a catchy phrase here… “malpractice lawyers hired to prosecute malpractice commit malpractice themselves?” I am not sure that is catchy enough but if the allegations in this case are true, the victims lost millions because of bad lawyering.

According to court documents filed in Manhattan, CMG Holdings Group, Inc. (CMG) and the XA Experiential Agency, Inc. (XA) hired a Park Avenue law firm, Eaton & Van Winkle, to represent them in case involving members of the XA management team who allegedly stole money from the two companies. XA is a subsidiary of CMG Holdings.

The alleged theft involved over $20,000,000.00. CMG and XA says the theft occurred between 2009 and 2014. They hired Eaton & Van Winkle in April of 2015 to help recover the pilfered funds.

As the lawyers began investigating the losses, they learned that an accounting firm, MaloneBailey LLP, had been auditing the companies’ books during the same time period. Should the auditors have caught the theft? That would have saved the company millions of dollars.

The engagement letter from the accounting firm specifically said the auditors would look for fraudulent financial reporting and misappropriation of assets. CMG and XA claim that had MaloneBailey done their work properly, they should have uncovered the fraud long before it reached $20 million.

Once the accounting malpractice was suspected, the two companies claim they asked the law firm whether or not MaloneBailey should be added to the lawsuit or be the subject of a separate accounting malpractice action.

For reasons not known to us, MaloneBailey was never timely added to the original lawsuit.  Ultimately the time period to sue the accountants expired. That is when CMG and XA decided to sue their lawyers.

According to the current legal malpractice complaint,

“Despite being aware of Plaintiffs’ meritorious claims for malpractice against MaloneBailey, LLP for its failure to identify and alert Plaintiff CMG to the massive internal fraudulent scheme which resulted in damages to Plaintiffs in excess of twenty million dollars ($20,000,000), at no time did Defendants take any steps to inform their clients of the date by which such a claim must be brought, warn them of the upcoming expiration of the statute of limitations against MaloneBailey, LLP or to toll the statute in order to preserve Plaintiffs’ claims for malpractice or to timely assert legal claims or arbitration against MaloneBailey, LLP.”

Why Eaton & Van Winkle never sued the accountants is the big question.

The two companies say that one of the two Eaton Van Winkle lawyers recommended to first concentrate on bringing a RICO claim against the officers who allegedly pilfered the money. RICO is a powerful anti-fraud tool that when used in the right case can provide triple damages and attorney’s fees. The accounting firm would later be added as a defendant in a separate lawsuit.

Shortly after discussing the possible claims against MaloneBailey, the lawyers filed a new amended complaint against the officers. That complaint was filed on June 26, 2015. The new complaint contained everything but the kitchen sink. It alleged the officers had committed RICO violations, breach of contract, breach of fiduciary duty, violated the faithless servant doctrine, tortious interference, aiding and abetting breach of fiduciary duty, misappropriations, unfair competition, usurpation of corporate opportunity, conversion and unjust enrichment. What it didn’t do, however, was add the accountants who allegedly botched the audit and should have detected the thefts.

The complaint was amended yet again in August of 2015 and still didn’t name the accounting firm.

According to the two companies, it wasn’t until October 2016 that their lawyers began discussing bringing claims against the accountants.

The lawyers began seeking documents from the accounting firm in late 2016. Based on our experience, those documents would be relevant both for the pending lawsuit against the corporate officers and to better evaluate potential malpractice claims against the accountants.

It should come as no surprise that the accountants were slow in producing documents. Very slow. It wasn’t until April 13, 2017 that MaloneBailey sent the requested documents. According to the two companies, the last date of services performed by the accountants was on April 10, 2014. Given New York’s three year statute of limitations for accounting malpractice, the accountants conveniently produced the documents 3 days after the statute of limitations had expired.

Assuming all the facts in the complaint are accurate, the lawyers waited too long.

It gets worse. The two companies say they didn’t know the statute of limitations had expired. Instead, they were relying on their lawyers. In May of 2017, the lawyers asked the clients for $10,000 to have an expert evaluate possible accounting malpractice claims against MaloneBailey. The companies paid the fee even though it was now well after the statute of limitations had expired.

One month later the lawyers withdrew from the case. We don’t why. The clear implication, however, is that they withdrew to hide the fact that the statute of limitations had expired during their watch. This theory is buttressed by the fact that CMG and XA say the lawyers never told them the statute of limitations had run.

Worse, the report that the clients paid for at the request of their lawyers indicated [MaloneBailey] auditors “failed to exercise due professional care in the performance of the audits of CMG’s financial statements and the preparation of their audit reports.”

Ouch! Their concerns about the accountants were right all along but it was now too late to act.

The two companies say they had no idea that their lawyers may have committed malpractice until their new lawyers told them in October of 2017 that the time period to sue the accountants had lapsed. In September 2019, the two companies sued their former lawyers for legal malpractice.

The original case against the bad actors who were accused of stealing the money was resolved before trial in 2019. The companies say that they received more than $13 million less than they should have and blame their former lawyers for not bringing a timely accounting malpractice claim.

Was there Legal Malpractice?

Obviously a lawsuit complaint paints everything in the light most favorable to the plaintiffs. Trying to determine what went wrong without hearing from the former lawyers is nearly impossible. There are many red flags, however, in the complaint that should cause the lawyers great concern.

We assume the lawyers were hired to sue the people who stole the money. They did that in late 2014 or early 2015. As time went on, the lawyers began gathering evidence and found that the company’s books were audited. There are many types of audits but in this case, the accounting firm’s engagement letter specifically said the audit included looking for fraud.

While no audit can uncover every fraud, there certainly seems to be a colorable claim against the accountants. That was buttressed by the expert report obtained by the lawyers.

We believe the success or failure of the case will depend on the representation agreement between the lawyers and CMG / XA and the conversations they had subsequently. Were the lawyers hired just to go after the former officers who stole money or anyone involved in the loss of funds? Even if they were hired only to go after the former officers, at one point do they have duty to tell the clients of the accounting malpractice claim? Did they have a duty to either opine on the statute of limitations for that claim or find someone knowledgable to do so?

We also would want to know why the lawyers withdrew? Did they withdraw because they weren’t getting paid? The complaint makes it appear that they withdrew after finding out they botched the accounting malpractice claims.

Finally, is this just a case of sour grapes. Under that scenario, the clients are upset because they feel abandoned by their lawyers and later received $13 million less than they were expecting.

We have our own opinions but will withhold judgment until all the facts are in. There are several important takeaways we can share now, however.

First, we represent the victims of legal malpractice. The average client doesn’t have the same legal acumen as their lawyers. If a lawyer sees a potential new or different claim, he or she should immediately notify the client. As clients, you should ask your lawyer in writing to do so.

If the case falls apart and we later step in to take a legal malpractice case, its nice when there is a paper trail from the client to the lawyer asking to be informed of all developments and potential claims that may arise.

Next, always remember that a legal malpractice case involves a case within a case. Even if the Eaton & Van Winkle lawyers did every terrible thing alleged in the complaint, one still must prove the underlying accounting malpractice.  In other words, simply proving your lawyers botched a deadline isn’t enough. Had they filed on time, would the companies have won the claim against the accountants? We are pretty sure that MaloneBailey would have fought back and not simply written a $13,000,000.00 check.

Finally, if your lawyer withdraws, make sure you obtain a full report in writing of everything that is going on in the case. Lawyers are often in a hurry to get out either because they aren’t getting paid or they perceive the client as a problem (or both). The client is fed up with the lawyer. Communications are usually at their low point.

Not knowing everything that is going on invariably leads to a “he said, she said” blow up down the road. It’s good to have the lawyer pinned down on everything happening in the case. (Smart lawyers will want you to succeed because that lowers the chance of a subsequent malpractice claim although not everyone always behaves rationally.)

We share this post not to dissuade anyone from bringing a legal malpractice claim. This post is presented simply to show the many facets of a legal malpractice claim and why it is often hard to find a lawyer to take on such a case. It’s not that we have a “brotherhood” or “sisterhood” and don’t want to sue other lawyers. The real question is can we win both cases and is there enough insurance to make such a difficult case worthwhile.

One final tidbit, the law firm the two companies are suing is no longer in business. That doesn’t mean they don’t have insurance, however.

To learn more, visit our legal malpractice information page. Ready to see if you have a case? Contact us online, by email [hidden email] or by phone at 877-858-1018. All inquiries are protected by the attorney – client privilege and kept strictly confidential.

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