The New York Law Journal by Mark Hamblett - March 16, 2010
A former McGuireWoods partner admitted yesterday to using his position as counsel to small companies to make $10 million in illegal profits. One-time securities lawyer Louis W. Zehil pleaded guilty to securities fraud and conspiracy to commit securities fraud before Southern District Judge Deborah A. Batts, admitting he used his position as counsel for several companies to secretly buy and then sell millions of shares at favorable prices. "I knew what I was doing was wrong," Mr. Zehil told the judge. "I take full responsibility for my actions." Mr. Zehil, 44, a resident of Florida, worked at McGuireWoods until 2007 when he was forced to resign after it was revealed he had issued fraudulent opinion letters for the handling of private investments in public entities. Mr. Zehil worked at the firm's Jacksonville, Fla., and New York offices, specializing in representing small companies that were going public through reverse mergers, transactions in which the companies become public by merging with publicly traded shell corporations. In these so-called "PIPE" transactions, investors commit to buying a set number of restricted shares at a discount price to the market price (or the anticipated market price following the reverse merger) and the issuer agrees to file a resale registration statement at a later date so the investor can resell the shares in the public market. Until the registration for the resale takes place, the shares are not freely tradeable. Mr. Zehil, however, issued opinion letters to the stock transfer agents of seven companies to which he was counsel, stating there was no need to have the shares they were sending Strong Branch Ventures IV and Chestnut Capital Partners II marked with a legend noting the shares were restricted. Both Strong and Chestnut were front companies owned by Mr. Zehil. With other PIPE investors holding restricted shares based on his legitimate opinion letters, Mr. Zehil was able to sell his own "unrestricted" shares and net $10 million between January 2006 and February 2007. The companies were Gran Tierra Energy Inc.; Foothills Resources Inc.; MMC Energy Inc.; Alternative Energy Sources Inc.; Ethanex Energy Inc.; GoFish Corp.; and Kreido BioFuels Inc. Mr. Zehil never informed his clients that he was buying the shares. He appeared to choke up yesterday when Judge Batts walked him through the procedures and consequences of his guilty plea. "I'm a little nervous," he told the judge, asking if he could allocute by reading a prepared statement.
The conspiracy involved an unnamed associate at the firm who has not been charged. Mr. Zehil said the associate mailed the opinion letters to the companies and was aware that what she was doing was illegal. Nonetheless, Mr. Zehil said he believed the associate went along with the scheme only because she was deferring to his senior position at McGuireWoods. "I acted alone," he told the judge, adding that he "circumvented my firm's opinion policies." When Judge Batts asked if that was entirely true that he acted alone, given that Mr. Zehil was admitting to a conspiracy, defense lawyer Andrew M. Lawler spoke up. "My client is just trying to make it clear that he is accepting primary responsibility" and that the associate followed directions because of his "position with the firm," Mr. Lawler said. Mr. Zehil's actions were first discovered by a firm associate, who reported the matter to the firm's managers in February 2007. Partners at McGuireWoods investigated. Mr. Zehil admitted issuing the opinion letters but at first denied owning the Strong and Chestnut front companies. The partners then informed clients what Mr. Zehil had done, forced his resignation and reported him to the Securities and Exchange Commission, which filed a companion civil suit against Mr. Zehil in the Southern District, Securities and Exchange Commission v. Zehil, 07 Civ. 1439. That suit is pending. "What Louis Zehil did was contrary to everything that McGuireWoods stands for," William Alcott, a partner at the 900-lawyer Richmond, Va.-based firm, said yesterday in an interview. Fortunately, he added, the firm "discovered what he was doing, although he took great pains to do it in secret. We demanded his resignation and we turned him in." Mr. Zehil, a 1995 graduate of Columbia Law School, worked at Hale & Dorr and White & Case before moving to the New York office of Jones Day as an associate. He joined McGuireWoods' 35-lawyer New York office as a partner in 2004. Mr. Zehil is scheduled to be sentenced in United States v. Zehil, 07 Cr. 659, on July 26. Securities fraud carries a maximum of 20 years in prison and conspiracy a maximum of five years, but the plea agreement between Mr. Zehil and the government states that his stipulated U.S. Sentencing Guidelines range is from five years and three months to 61/2 years. Southern District Assistant U.S. Attorney Eugene Ingoglia represented the government. Mr. Zehil and Mr. Lawler, a solo practitioner, declined comment following the guilty plea. Mark Hamblett can be reached at firstname.lastname@example.org.