## Facts

- After the failure of American Continental Corporation (ACC) and its subsidiary Lincoln Savings & Loan Association (Lincoln), investors and the Resolution Trust Corporation (RTC) brought consolidated actions alleging wide-ranging fraud tied to Lincoln’s regulatory violations.
- Jones, Day, Reavis & Pogue (Jones Day) and certain partners (including William Schilling) served as counsel to ACC/Lincoln, including work on a major internal audit focused on compliance with federal thrift regulations.
- Plaintiffs presented evidence that Jones Day identified significant regulatory violations and then allegedly advised ACC/Lincoln on corrective measures designed to avoid detection by federal examiners.
- Plaintiffs also presented evidence that Jones Day helped prepare corporate resolutions to legitimate forged or backdated corporate records and acquiesced in destruction of documents related to the violations.
- Jones Day issued an opinion letter used in connection with ACC bond offering registration materials; plaintiffs alleged the opinion was materially misleading.
- Jones Day moved for summary judgment, arguing it could not be liable for providing legal advice to a client and that duties of loyalty and confidentiality to the client defeated duties asserted by investors and the RTC.

## Issues

1. Whether the evidence could support scienter under § 10(b) and Rule 10b-5 based on “recklessness,” as defined by an extreme departure from ordinary care creating an obvious risk of misleading investors.
2. Whether corporate counsel’s fiduciary duty runs to the entity (rather than management) and whether counsel must raise compliance concerns and withdraw if the client persists in violations.
3. Whether an attorney who provides an opinion letter included in an SEC registration statement acts as an “expert” for purposes of Securities Act § 11 liability.
4. Whether the record raised genuine disputes of material fact on claims under § 10(b)/Rule 10b-5, civil RICO, Arizona racketeering law, California securities statutes, and common-law fraud.

## Decision

- The court denied Jones Day’s motion for summary judgment.
- The court adopted a recklessness standard for § 10(b)/Rule 10b-5 scienter requiring a highly unreasonable omission or conduct involving an extreme departure from ordinary care that creates an obvious danger of misleading investors.
- The court held that the evidentiary record created triable fact issues regarding Jones Day’s knowledge and conduct, including alleged assistance in concealing regulatory violations, document-related conduct, and the securities-offering opinion letter.
- The court held that corporate counsel’s highest fiduciary duty is to the corporate entity, and that counsel must raise regulatory concerns with the client and withdraw if the client insists on continuing violations when continued representation would be a substantial factor in the ongoing misconduct.
- The court held that an attorney providing an opinion letter used in an SEC registration statement may be treated as an “expert” under § 11 and may face § 11 liability if the opinion is materially misleading and statutory elements are met.
- The court concluded that similar factual disputes precluded summary judgment on the asserted racketeering, state securities, and common-law fraud theories.

## Legal Principles

- For § 10(b) and Rule 10b-5, recklessness may satisfy scienter when conduct reflects an extreme departure from ordinary care that presents an obvious risk of misleading investors.
- Corporate counsel’s fiduciary duty runs primarily to the corporate entity, not to its officers, directors, or controlling persons.
- Counsel who becomes aware of serious regulatory violations must raise the matter with the client and must withdraw if the client persists and counsel’s continued services would be a substantial factor enabling the violations to continue.
- Duties of confidentiality do not categorically bar civil liability where a factfinder could conclude counsel knowingly facilitated ongoing illegal conduct.
- Lawyers who provide opinion letters included in registration statements may be “experts” under Securities Act § 11 and may be subject to direct statutory liability for materially misleading statements within the scope of their expertized portion.

## Conclusion

The court refused to remove issuer’s counsel from the case at summary judgment, holding that a jury could find reckless participation in a scheme that misled investors and regulators, that corporate counsel must withdraw rather than continue work that materially enables ongoing violations, and that attorneys issuing registration-statement opinion letters may face Securities Act § 11 expert liability.


In re Am. Cont'l Corp./Lincoln Sav. & Loan Sec. Litig., 794 F. Supp. 1424 (D. Ariz. 1992)