Fladgate faces potential £10m payout as Izodia gets around to negligence action

<a class=Fladgate faces potential £10m payout as Izodia gets around to negligence action” />Fladgate may have to pay out in excess of £10m in damages if the negligence action brought against the firm by former dotcom company Izodia is successful.

As reported on The Lawyer.com (4 August), the West End firm is being sued over the actions of a Fladgate partner that led to Izodia director Dr Gerald Smith stealing £33m from the ­dotcom business and transferring it to Jersey company Orb.

Jones ;Day ;litigation ­partner Craig Shuttleworth, who is leading Izodia’s legal team, said the claim only related to £7.8m of the ­missing millions.
“Izodia has managed to get £23m of the money back already through litigation with the Royal Bank of ­Scotland [RBS] in Jersey, so this claim is just in ­relation to the £7.8m deposited in the Bank of Scotland in Reading,” explained Shuttleworth. “The reason the amount we’re seeking is higher than the £7.8m is that it also includes interest, bringing the figure to around £10m.”

In the claim, which was filed on 1 August, Fladgate has been named as the first defendant, while its corporate secretarial arm Walgate Services has been identified as the second defendant.

The claim alleges that the firm’s former corporate head Nicholas Greenstone, deeming himself to have the power of a company secretary through Walgate, “signed a forged and fraudulent minute purporting to record a board meeting of Izodia”. The meeting did not take place and Greenstone did not have the authority to sign the papers that allowed Izodia’s money to be transferred in a fraudulent manner.

The ;claim ;goes ;on: ­“Moreover, ;after ;the first stage of fraudulent ­misappropriations had taken place, Fladgate took a series of steps to conceal that misconduct from Izodia which ;included ;[…] ­deliberately misleading an independent ;advisor appointed by Izodia.”

Along with Greenstone, former Fladgate partner Simon Pithers is identified in the claim form as one of the lawyers to have acted ­unlawfully against Izodia. In addition, Paul Leese and Andrew McKenzie, both of whom are still partners at Fladgate, are said to have contributed to the breach
of duty.

Shuttleworth said the lawyers have been added to the claim only as a “safety valve”.

“We’ve named the partners for thoroughness,” said ­Shuttleworth. “It’s not a ­likely situation, but Fladgate could decide to disown the ­partners, so then we’d need to go after the partners that are liable on an individual basis.”
Although the multi-million-pound fraud took place in 2002, Izodia was only able to launch proceedings against Fladgate six years later as it needed the cash recovered in Jersey to fund the action.

“Initially Izodia had to pick and choose who it went after so it had to be Smith first, then RBS in Jersey. After RBS Izodia had the funds to go up against
the balance of people,” explained Shuttleworth. “Fladgate is basically the final wave of the large claims.”

Fladgate, which is being represented by Reynolds Porter ;Chamberlain ­
partner Nick Bird, declined to comment.

The news of the action came as The Lawyer revealed (4 August) that Greenstone had been reprimanded by the Solicitors Regulation Authority (SRA) for his actions that led to the fraud.

Greenstone, who left Fladgate in 2003 and who now works for Merchant Capital, was admonished for his conduct, which was not fraudulent but which allowed others to implement a multimillion-pound deception.

While ;at ;Fladgate Greenstone acted for Jersey company Orb, which was being investigated by the Serious Fraud Office after millions went missing from Izodia. The cash had allegedly been transferred to Orb subsidiaries.
Prior to this Greenstone signed a document that led to Smith ­transferring money fraudulently from the ­dotcom to Orb.

The SRA adjudicator John Lymbury held that: “Quite apart from any other factor, Mr Greenstone to have handed an undated document and place himself in the hands of anyone who may have had a dishonest intent was an act which not only impairs proper standard of work, but also brings Mr Greenstone’s reputation into questions and/or that of the profession generally.”

The case was referred to Legal Services Ombudsman Zahida Manzoor after a shareholder felt that the SRA did not go far enough. Manzoor did not believe ­further action should be taken.

However, Manzoor said: “In my view the evidence before the SRA suggested that, despite his 30-plus years in the profession as a corporate lawyer, Mr ­Greenstone was guilty of an extremely naive error of judgement and an act of foolishness in trusting his associate Mr Smith with a signed document to do with whatever he wanted.”