Ethanex Complaint #3

IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF KANSAS

ERIC C. RAJALA, as Bankruptcy Trustee for ) ETHANEX ENERGY, INC., ) )

Plaintiff, ) Case No. 08-CV-2638 ) v. ) ) DEMAND FOR JURY TRIAL MCGUIRE WOODS, LLP, ) Serve: 1 James Center )

901 E. Cary Street ) Richmond, VA 23219-4030 )

) Defendant. )

THIRD AMENDED COMPLAINT COMES NOW Plaintiff, Eric Rajala, as bankruptcy Trustee for Ethanex Energy, Inc.

(“Ethanex”), by and through the undersigned counsel, pursuant to the Court’s Order dated May

14, 2010, and for his Third Amended Complaint against Defendant McGuire Woods, LLP,

alleges as follows:

Nature of the Case

1. Louis W. Zehil (“Zehil”) was a partner in the law firm of McGuire Woods, LLP

(“McGuire Woods”). Defendant McGuire Woods was retained to represent Ethanex in the

process of becoming a public company and raising capital for the development of ethanol

manufacturing plants. As explained in further detail below, Zehil used his position as a partner

of McGuire Woods, and as one of the McGuire Woods attorneys representing Ethanex, to

perpetrate a fraudulent scheme in which Zehil unlawfully came into possession of unrestricted

securities of Plaintiff and then unlawfully sold these securities at great profit and at great harm to

Plaintiff. In late February 2007, Zehil was charged with criminal violations of United States

Case 2:08-cv-02638-CM-DJW Document 135 Filed 08/24/10 Page 1 of 27

securities laws in the United States District Court for the Southern District of New York arising

out of the Ethanex transaction and several similar transactions.

Parties

2. Eric C. Rajala is the Trustee for Ethanex Energy, Inc., a corporation organized

under the laws of the State of Nevada. Ethanex Energy, Inc. is currently in bankruptcy in the

United States Bankruptcy Court for the District of Kansas, Case No. 08-20645-7. For purposes

of this pleading, Trustee Rajala and Ethanex Energy, Inc. may be referred to herein collectively

as “Ethanex.” As the Trustee for Ethanex, Rajala has the right to prosecute this action on behalf

of the Ethanex bankruptcy estate and, as Trustee for Ethanex, Rajala has rights of Ethanex as a

former client of Defendant McGuire Woods.

3. While in operation, Ethanex’s corporate headquarters were located in Basehor,

Kansas. Ethanex’s business plan included designing and developing ethanol plants.

4. Defendant McGuire Woods, LLP is a multinational law firm, organized as a

limited liability partnership under Virginia law. McGuire Woods’ principle offices are in

Richmond, Virginia.

5. Louis W. Zehil (“Zehil”) is a resident of Ponte Verde Beach, Florida and was

admitted to practice law in the State of New York in 1995. Between April 2004 and his

resignation in February 2007, Zehil was a partner of the law firm McGuire Woods, LLP and

worked primarily in its offices in Jacksonville, Florida and New York, New York.

6. Zehil created two shell entities which were under his complete domination and

control, Strong Branch Ventures IV, LLP (“Strong Branch”) and Chestnut Capital Partners II,

LLC (“Chestnut”). Upon information and belief, Strong Branch and Chestnut had no legitimate

purpose and existed solely to facilitate the fraud and wrongful acts described herein.

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7. Louis Zehil, Strong Branch and Chestnut are presently the defendants in a suit

pending in the United States District Court for the Southern District of New York, styled United

States Securities and Exchange Commission v. Louis Zehil, Strong Branch Ventures IV, LLP,

and Chestnut Capital Partners II, LLC, Case No. 07 Civ. 1439 (“the SEC litigation”). Ethanex

has previously filed a claim in those proceedings against the receivership estate. McGuire

Woods is not a party to the New York litigation. The United States District Court for the

Southern District of New York has now stayed the SEC litigation and has held it has the power

to stay all other actions against Zehil, Strong Branch and Chestnut in favor of the ongoing

federal criminal prosecution of Zehil. Pursuant to the Orders entered in the SEC litigation,

Plaintiff hereby dismisses, without prejudice, the claims made in the unserved Complaint in this

case against Zehil, Strong Branch and Chestnut, by the filing of this Amended Complaint.

8. In his dealings with Ethanex, Zehil acted in his capacity as a partner of Defendant

McGuire Woods. McGuire Woods billed Ethanex for the time Zehil devoted to his duties as

outside general counsel and as corporate secretary to Ethanex. In all, Ethanex paid McGuire

Woods more than $350,000.00 for legal services and expenses. As set forth at length below, an

essential instrument of the fraud was an opinion letter which Zehil was authorized by McGuire

Woods to execute on behalf of McGuire Woods.

9. At all times, Defendant McGuire Woods had the ability, right, obligation and duty

to control and monitor Zehil’s actions as an attorney and partner in McGuire Woods.

10. Defendant McGuire Woods had, and has, either actual or constructive knowledge

of all matters known to Zehil.

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11. In performing legal services for Ethanex, Zehil was assisted by several McGuire

Woods attorneys, including Nova D. Harb, Jonathan Sacks and Andrew H. Slaughter, and

utilized other resources and facilities of McGuire Woods.

Jurisdiction and Venue

12. Federal subject matter jurisdiction exists under 28 U.S.C. § 1332. There is

complete diversity between the parties. As set forth above, the Plaintiff is a corporation

organized under the laws of Nevada and has its principle place of business in Kansas. Defendant

McGuire Woods is organized under the laws of the State of Virginia and has its principle place

of business in the State of Virginia. Ethanex paid McGuire Woods legal fees to which it was not

entitled in excess of three hundred thousand dollars. McGuire Woods’ actions have caused

foreseeable consequential damages including, but not limited to, the payment of liquidated

damages by Ethanex, the cost of an investigation into McGuire Woods’ wrongdoing and the

eventual loss of Ethanex’s business as a going concern. The amount in controversy therefore

exceeds $75,000.00.

13. Subject matter jurisdiction is also proper based upon the general federal question

statute, 28 U.S.C. § 1331, in that the claims set forth below include Defendant’s jurisdiction

provided in violations of § 10(b) of the 1934 Securities Exchange Act, 15 U.S.C. § 78j and SEC

Rule 10b-5, 17 C.F.R. § 240.10b-5, propagated thereunder, and § 16b of the Securities Exchange

Act, 78j U.S.C. § 78p (b). 28 U.S.C. § 1331 and 15 U.S.C. § 78aa grant this Court subject matter

jurisdiction over a claim or controversy arising under the 1934 Securities Act, and the Court may

entertain all other claims pursuant to 28 U.S.C. § 1367, in that all such claims arise as part of the

same case or controversy between the parties.

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14. McGuire Woods is subject to personal jurisdiction pursuant to K.S.A. 60-

308(b)(2), in that its unlawful and tortious acts have caused, and were reasonably anticipated to

cause, economic injury within the State of Kansas. Defendant McGuire Woods purposefully

availed themselves of the privilege of doing business in Kansas with regard to the representation

of Plaintiff.

15. Venue is proper in this district pursuant to 28 U.S.C. § 1391(a) and (b), in that a

substantial part of the events and omissions giving rise to the claims, and a substantial part of the

property which is the subject of this litigation, is situated in this District.

Facts Common to All Counts

16. In the normal course of McGuire Woods’ business, Zehil and other McGuire

Woods lawyers specialized in representing companies seeking to raise capital in the public

market. One typical structure for such a transaction would be for McGuire Woods to arrange for

the client to merge with a small publicly traded company. After the merger, the client would be

the surviving entity and the name of the publicly traded company would be changed to that of his

client. In order to raise capital, at or prior to the merger, McGuire Woods would enlist investors

through a private placement transaction. Typically, these companies would enter into a

transaction referred to as a “Private Investment in Public Entity” (“PIPE”) solicitation at the time

of the reverse merger, or shortly thereafter, to generate financing for the newly-merged public

company.

17. In a PIPE transaction, a company typically offers unregistered, restricted shares to

investors at a discount to the market price or anticipated market price for the securities.

Investors typically enter into a registration rights agreement, which obligates the company to

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register the shares with the SEC in the future so that the shares may be resold on the public

markets.

18. In the usual course of a PIPE transaction, the stock issued to the PIPE investors is

not freely tradable because it is not yet registered with the United States Securities and Exchange

Commission (the “SEC”). Consequently, all shares issued in a PIPE transaction are required to

bear restrictive legends until such time as the SEC declares the registration statements for those

securities effective.

19. Defendant McGuire Woods was aware of, supported, and profited from offering

legal services to companies in search of capital and in the specialized practice in PIPE

transactions. McGuire Woods markets its services by claiming unique expertise in such

representations. By way of example, in September 2005, McGuire Woods co-sponsored a

conference/marketing presentation, at which Zehil was a featured speaker, on the use of such

reverse mergers and PIPE transactions to raise capital for small and start-up business.

The Ethanex Transaction

20. Ethanex’s predecessor, Armistead Energy, Inc., retained McGuire Woods as its

counsel. That relationship was documented by a June 15, 2006 engagement letter on McGuire

Woods’ stationary. McGuire Woods authorized Zehil to execute that engagement letter on

behalf of McGuire Woods. In the engagement letter, McGuire Woods stated that Zehil would be

the partner with general and primary responsibility for the representation, but that he would be

assisted by other McGuire Woods attorneys and staff. McGuire Woods agreed and promised as

follows: “[to] advise the Company [Armistead] in connection with, and the scope of our

engagement and duties to the Company will relate to, an equity financing and possible reverse

merger and related financing transactions and matters incident thereto. The Company may limit

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or expand our representation from time to time, provided that any substantial expansion must be

agreed by us.”

21. On July 17, 2006, Armistead filed the necessary paperwork with the Delaware

Secretary of State to change its name to “Ethanex Energy North America, Inc.”

22. Following the PIPE transaction format which McGuire Woods had successfully

used for other small companies, McGuire Woods prepared a private placement memorandum

and registration rights agreement on behalf of Ethanex Energy North America, Inc. The plan of

the PIPE offering was that the shares of Ethanex Energy North America, Inc. that were sold

pursuant to the PIPE offering would be converted to shares of a surviving publicly traded entity,

and then registered with the SEC for resale to the public.

23. In the Ethanex PIPE offering, investors subscribed to purchase 20 million units of

the PIPE securities. Each unit consisted of one share of class B common stock and a warrant to

purchase one share of class B common stock for a period of five years at an exercise price of

$1.50 per share. The investors in the offering collectively purchased 20 million units for a total

consideration of $20,000,000, or one dollar per unit.

24. On August 3, 2006, Ethanex Energy North America, Inc. closed the subscription

period for the PIPE offering.

25. On August 3, 2006, subscribers to the Ethanex PIPE offering entered into a

Registration Rights Agreement. Under the Registration Rights Agreement, Ethanex North

America, Inc. promised the shareholders that it would file a registration statement, allowing the

public sale of the securities, no later than 120 days after the merger with the public company and

would use its best efforts to cause the registration to become effective within 120 days from the

registration filing date. Under the terms of the Registration Rights Agreement, the company

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agreed to pay liquidated damages to the shareholders if the registration was not completed in a

timely manner.

26. The Subscription Agreement signed by the Ethanex PIPE investors, which was

prepared by McGuire Woods, required each investor to state that “the investor has no present

intention of selling” the securities that would be acquired through the PIPE offering and that

such securities would bear appropriate legends concerning the restrictions on transferability of

those shares until the registration of those shares became effective.

27. As planned in the PIPE offering, Ethanex Energy, Inc. merged with a publicly

traded company known as New Inverness Exploration Company on August 21, 2007, with

Ethanex the surviving entity. Although publicly traded, New Inverness was an unsuccessful

mineral exploration company and was little more than a corporate shell.

28. On September 1, 2006, Ethanex North America, Inc. merged into Ethanex

Energy, Inc., with Ethanex Energy, Inc., the Plaintiff, as the surviving entity. Thus the units sold

(subscribed) by Ethanex North America, Inc. in the Ethanex PIPE offering became shares of the

publicly traded entity, Ethanex Energy, Inc. (referred to herein as “Plaintiff” or “Ethanex”) f/k/a

New Inverness Exploration Company. McGuire Woods continued to represent Ethanex.

29. In the Ethanex PIPE offering, Zehil caused Strong Branch to purchase 750,000

units and caused Chestnut to also purchase 750,000 units of the PIPE offering. McGuire Woods

assisted in processing these transactions.

30. On September 1, 2006, McGuire Woods issued an opinion letter on McGuire

Woods’ letterhead to the transfer agent for the Ethanex shares, an entity called “Island Stock

Transfer” of St. Petersburg, Florida. The opinion letter was signed by McGuire Woods under the

actual authority McGuire Woods granted to Zehil. That letter, which was dated August 31,

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2006, directed Island Stock Transfer to issue shares to Strong Branch and Chestnut without the

restrictive endorsement which was required on the shares by the terms of the PIPE offering and

federal and state securities laws. As a result, Strong Branch and Chestnut were issued shares that

were on their face freely transferable without notice to the purchaser that the transfer was

unlawful because there was no effective registration of the Ethanex PIPE shares. McGuire

Woods assisted in processing the payments for these transactions.

31. Zehil, acting as “attorney in fact” for Strong Branch and Chestnut, exercised the

warrants issued with each unit, resulting in Strong Branch and Chestnut each owning 1,500,000

shares of Ethanex stock, for a total of 3,000,000 shares. Upon information and belief, based

upon the calculations performed by the SEC, Zehil (through the shells Strong Branch and

Chestnut) paid a combined price of $3,750,000 for these shares. McGuire Woods assisted in

processing the payments for these transactions.

32. Zehil, as a partner in McGuire Woods and using McGuire Woods’ stationary,

directed the transfer agent to send the Ethanex shares purchased by Strong Branch and Chestnut

to his attention at the New York office of McGuire Woods.

33. Between September 11, 2006 and November 10, 2006, Zehil caused Strong

Branch and Chestnut to unlawfully sell their three million shares of Ethanex stock to the

investing public for approximately $12.3 million, obtaining a profit of approximately $8.55

million dollars.

34. Although Zehil was a partner at McGuire Woods and the corporate secretary of

Ethanex at the time of the sale, McGuire Woods did not include any disclosure of Zehil’s

ownership or sales of Ethanex stock, in the disclosures it drafted for Ethanex or was obligated to

file for Ethanex.

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35. On January 3, 2007, Ethanex filed a Form SB-2, a SEC-mandated registration

statement, to obtain an effective registration of the shares sold in the Ethanex PIPE offering.

This Form SB-2 was drafted for Ethanex by McGuire Woods. Once the registration was

effective, the shares would be freely transferable. However, this registration statement did not

become effective as of that date and there was no registration statement on file, or effective,

when Zehil caused Chestnut and Strong Branch to sell their three million shares of Ethanex in

September and November of 2006.

36. As counsel for Ethanex, McGuire Woods was responsible for reviewing and

preparing Ethanex’s January 3, 2007 Form SB-2. That Form SB-2 was materially incorrect in

several respects, including failing to disclose that Strong Branch and Chestnut had already

unlawfully sold their Ethanex shares or that Strong Branch and Chestnut had, because of

McGuire Woods’ actions, been issued shares of Ethanex stock which did not bear the restrictive

endorsement.

37. As legal counsel to Ethanex, McGuire Woods was responsible for monitoring and

advising all aspects of the Ethanex’s formation/creation, organization, structure and

capitalization, including but not limited to the PIPE transaction and the conduct of the entities

and individuals involved. This included, without limitation, Tompkins Capital Group; the law

firm of Gottbetter & Partners LLP; Adam Gottbetter and Kenneth Goodwin (attorneys at

Gottbetter & Partners); the accounting firm of Bagell, Josephs, Levine & Company, LLC; Island

Stock Transfer; Strong Branch Ventures IV, LP; Chestnut Capital Partners II, LLC; and Louis

Zehil.

38. At the time McGuire Woods issued the false opinion letter allowing the Ethanex

shares to be issued to Strong Branch and Chestnut on an unrestricted basis, Zehil had already

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used his position at McGuire Woods to conduct very similar frauds in PIPE transactions for

several other McGuire Woods clients, including Gran Tierra Energy, Inc. in January, 2006;

Foothills Resources, Inc. in April, 2006; MMC Energy, Inc. in May, 2006; and Alternative

Energy Sources, Inc. in June, 2006. In each of these transactions, McGuire Woods issued a false

opinion letter to the transfer agent allowing Zehil to receive unrestricted shares of the company

and make unlawful profits from the sale of the shares.

39. At all times, Defendant McGuire Woods had the ability, right, obligation and duty

to control and monitor Defendant Zehil’s actions as an attorney and partner in McGuire Woods.

40. Zehil’s representation of Ethanex, his issuance of the McGuire Woods opinion

letter to the transfer agent and subsequent efforts to conceal the illegal transactions in the SEC

filings were within Zehil’s apparent and actual authority as a partner in McGuire Woods.

41. Zehil would not have been able to carry out his unlawful activities without the use

of his position at McGuire Woods, the use of other McGuire Woods attorneys and the

relationship of trust created between Ethanex and McGuire Woods.

42. In February, 2007, before the Ethanex stock registration was deemed effective by

the SEC, Ethanex was made aware of McGuire Woods’ unlawful activities.

43. On February 22, 2007, Ethanex fired McGuire Woods as outside counsel and

corporate secretary.

44. On or about February 28, 2007, criminal charges were commenced against

Defendant Zehil in the United States District Court for the Southern District of New York,

alleging felony violations of federal securities laws.

45. As a result of McGuire Woods’ conduct, Ethanex was required to obtain

replacement counsel and temporarily suspend its effort to finalize the registration of the Ethanex

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stock with the SEC. Excluding the preparation of this litigation by the undersigned counsel,

Ethanex spent approximately $96,463.71 in legal fees and costs in connection with the

investigation and the continuing work needed to remedy the injury caused by McGuire Woods’

misconduct.

46. By order of the SEC, the registration of the Ethanex PIPE shares became effective

on July 6, 2007. However, during the summer of 2007, the over the counter price for Ethanex

shares had dropped well below the PIPE offering price and well below the price at which Zehil

had sold and garnered his unlawful profits. The price of Ethanex shares, as adjusted for a reverse

1:10 stock split, has never recovered to the PIPE transaction price.

47. Because of the delay in obtaining SEC approval of the registration of the Ethanex

stock caused by McGuire Woods’ conduct, Ethanex was required to, and did, pay approximately

$592,000.00 in liquidated damages to eligible shareholders pursuant to the terms of the

Registration Rights Agreement.

48. When Ethanex terminated its counsel relationship with McGuire Woods, McGuire

Woods’ attorneys were working on several contracts and negotiations which were important to

Ethanex’s business. As a result of the termination of the attorney-client relationship, Ethanex

had to suspend negotiations on these transactions. The resulting delay caused Ethanex to incur

additional legal fees and to be unable to complete such contracts.

49. The conduct of McGuire Woods caused irreparable and substantial harm to

Ethanex’s operations and ability to operate as a going concern. McGuire Woods’ conduct

caused the failure of Ethanex as a business and the loss of its expectancies.

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50. Ethanex had the following reasonable business expectancies, without limitation:

a. that it would complete the PIPE transaction and that its securities would be

promptly and lawfully available for sale in the public markets as alleged above;

b. that it would be able to conduct itself in a financially prudent manner, including

retaining its capital and avoiding losing its capital and/or paying penalties;

c. that it would pursue its business and engage in the successful and profitable

construction and operation of ethanol plants;

d. that it would enjoy the benefits of the successful and profitable construction and

operation of ethanol plants, including but not limited to the profits resulting

therefrom; and

e. that it would ultimately enjoy the value of the ethanol plants.

These expectancies are hereinafter referred to as the “Expectancies.”

51. McGuire Woods’ conduct detailed herein damaged Ethanex in many ways,

including but not limited to the following:

a. by interfering with the Expectancies, as defined above;

b. by depriving Ethanex of the Expectancies, as defined above;

c. by causing Ethanex to lose its capital;

d. by causing Ethanex to pay the penalties described herein;

e. by causing Ethanex to need to obtain replacement counsel, with the resulting

damages;

f. by causing Ethanex to temporarily suspend its effort to finalize the registration of

the Ethanex stock with the SEC;

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g. by depriving Ethanex of the ability to proceed with its business plan and engage

in the successful and profitable construction and operations of ethanol plants;

h. by depriving Ethanex of the benefits of the successful and profitable construction

and operation of ethanol plants, including but not limited to the profits resulting

therefrom;

i. by depriving Ethanex of the value of the ethanol plants;

j. by depriving Ethanex of the ability to operate as a going concern;

k. by causing the failure of Ethanex as a business; and

l. by causing the total financial collapse of Ethanex.

These damages are referred to hereinafter as the “Damages.”

52. Ethanex filed for bankruptcy in March 27, 2008 and has ceased business

operations.

COUNT I

Violation of Section 10(b) of the Exchange Act and Rule 10b-5

53. Plaintiff hereby alleges and incorporates each and every allegation set forth in

preceding paragraphs of this Complaint as though fully set forth herein.

54. As set forth herein, McGuire Woods, directly or indirectly, knowingly or

recklessly, by use of the means or instrumentality of interstate commerce, or of the mails, or of

the facilities of a national security exchange in connection with the purchase and sale of

securities: (a) has employed schemes and artifices to defraud Ethanex and others; (b) has made

untrue statements of material fact, and have omitted and failed to state material facts necessary in

order to make statements made, in light of the circumstances under which they were made, not

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misleading; and (c) has engaged in transactions, acts, practices and courses of business which

operated or would operate as a fraud or deceit upon purchasers of securities.

55. Pursuant to the PIPE offering, in August 2006, Ethanex sold securities to

McGuire Woods’ partner Zehil in a transaction in which McGuire Woods represented Ethanex.

56. In the course of the sale, McGuire Woods did not disclose that its partner intended

to and did follow the same fraudulent scheme he had employed with the prior transactions to use

his position with McGuire Woods to unlawfully obtain unrestricted shares of the securities.

57. Defendant McGuire Woods then concealed this fraud in preparing a fraudulent

SEC Form SB-2 registration statement which did not reveal the unlawful issuance of

unregistered securities as a result of a McGuire Woods opinion letter or the unlawful resale of

the securities for the benefit of a McGuire Woods’ partner.

58. The misrepresentations were material to the transaction in that Ethanex was not

willing to violate the law by selling restricted securities as unrestricted securities and would not

have sold the securities had it been aware of the truth.

59. McGuire Woods’ partner Zehil obtained an unlawful gain in that he was able to

obtain the Ethanex shares at the price discounted in light of their unregistered status, yet received

shares which did not bear the restriction on transferability required by that unregistered status.

McGuire Woods received a direct benefit in the payment of legal fees for the Ethanex PIPE

transaction which would not have occurred had McGuire Woods divulged truthful information

about the representation.

60. As a result of the conduct of McGuire Woods, Ethanex was damaged as set forth

above, including but not limited to the Damages set forth in paragraph 51 and the total loss of the

Expectancies set forth in paragraph 50.

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61. By reason of the foregoing, McGuire Woods has directly or indirectly violated

Section 10(b) of the Exchange Act [15 U.S.C. § 78J(b)] and Rule 10 B-5 [17 C.F.R. § 240.10 B-

5].

WHEREFORE, Plaintiff Eric C. Rajala, as Trustee in Bankruptcy for Ethanex Energy,

Inc., respectfully prays that the Court enter judgment against McGuire Woods for actual

damages, punitive damages, prejudgment interests, costs, attorney’s fees and such other relief as

the Court deems proper, including but not limited to all relief available pursuant to Section 10(b)

of the Exchange Act [15 U.S.C. § 78J(b)] and Rule 10 B-5 [17 C.F.R. § 240.10 B-5].

COUNT II

Violation of K.S.A. 17-12a501



63. As set forth herein, McGuire Woods, directly or indirectly, knowingly or

recklessly, by use of the means or instrumentality of interstate commerce, or of the mails, or of

the facilities of a national security exchange in connection with the purchase and sale of

securities: (a) has employed schemes and artifices to defraud Ethanex and others; (b) has made

untrue statements of material fact, and have omitted and failed to state material facts necessary in

order to make statements made, in light of the circumstances under which they were made, not

misleading; and (c) has engaged in transactions, acts, practices and courses of business which

operated or would operate as a fraud or deceit upon purchasers of securities.



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70. By reason of the foregoing, McGuire Woods has directly or indirectly violated

K.S.A. Section 17-12a501 and Ethanex is entitled to the remedies provided by K.S.A. 17-

12a509(c), including return of all revenue received, actual damages, interest, costs and

reasonable attorney’s fees.

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the Court deems proper, including but not limited to all remedies provided by K.S.A. 17-

12a509(c).

COUNT III

Fraud

















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78. Ethanex did not, nor could it have discovered by the exercise of reasonable

diligence, the knowledge that McGuire Woods had defrauded it as described above.

79. McGuire Woods was under an obligation and duty to communicate truthful

information to Ethanex, in that McGuire Woods had been retained as counsel and business

advisors to Ethanex with regard to the transactions alleged herein.

80. McGuire Woods intended that Ethanex rely upon their obligation to speak the

truth in accepting McGuire Woods’ legal counsel as to those transactions.

81. Ethanex justifiably relied upon McGuire Woods, in that not only was McGuire

Woods Ethanex’s counsel and fiduciary, but also in that McGuire Woods touted itself as being a

respectable, powerful and ethical law firm and one of the largest law firms in the United States.

82. Ethanex has been injured by McGuire Woods’ fraud as set forth above, including

but not limited to the Damages set forth in paragraph 51 and the total loss of the Expectancies set

forth in paragraph 50.

83. McGuire Woods’ actions and omissions were done in a willful, wanton,

fraudulent and malicious manner in complete recklessness of the harm visited upon Ethanex, and

in complete abrogation of the special duties as the counsel to Ethanex. As a result, punitive

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damages should be awarded to punish the McGuire Woods and deter others from similar

conduct.




the Court deems proper.

COUNT IV

Tortious Interference with Business Expectancies



85. Ethanex had the following reasonable businesses expectancies, without limitation:

a. that it would complete the PIPE transaction and that its securities would be

promptly and lawfully available for sale in the public markets as alleged above;

b. that it would be able to conduct itself in a financially prudent manner, including

retaining its capital and avoiding losing its capital and/or paying penalties;

c. that it would pursue its business and engage in the successful and profitable

construction and operation of ethanol plants;

d. that it would enjoy the benefits of the successful and profitable construction and

operation of ethanol plants, including but not limited to the profits resulting

therefrom; and

e. that it would ultimately enjoy the value of the ethanol plants.

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86. McGuire Woods had knowledge of these expectancies, and indeed McGuire

Woods fostered these expectancies as the counsel selected and hired by Ethanex to complete

these transactions.

87. McGuire Woods, through their deliberate conduct and illegal activities referenced

herein, interfered with those business expectancies and prevented the timely effective registration

of the Ethanex securities.

88. But for the conduct of the McGuire Woods, Ethanex was reasonably certain to

have been able to register its stock in a timely fashion and to enjoy the anticipated benefit of the

effective registration in a timely fashion and with an unblemished record.

89. McGuire Woods acted without justification and in plain and conscious disregard

of the law in interfering with Ethanex’s expectancies.

90. As a direct and proximate result of the wrongful acts and omissions of the

McGuire Woods, Ethanex has been injured and damaged as set forth herein, including but not

limited to the Damages set forth in paragraph 51 and the total loss of the business expectancies

reference herein.

91. McGuire Woods’ actions and/or omissions were done in a willful, wanton and

malicious manner, in direct contravention not only of federal securities law, but also of the

fiduciary duties of counsel to Ethanex. As a result, punitive damages should be awarded to

punish the McGuire Woods and deter others from similar conduct.





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COUNT V

Negligence – Legal Malpractice



93. In offering its services to prospective clients, including Ethanex, McGuire Woods

represented itself to be an expert in federal securities law and the representation of public

companies. Because of this claimed expertise, McGuire Woods demanded and received

premium rates from its clients, including Ethanex.

94. In accepting the representation of Ethanex, McGuire Woods accepted a duty to

act with reasonable care, diligence and competence as counsel to Ethanex, with respect to the

firm’s work and its dealings associated with the Ethanex PIPE offering.

95. McGuire Woods was negligent and failed to exercise reasonable care and

competence with regard to the Ethanex PIPE offering. McGuire Woods’ negligent conduct

included its failure to properly document the relationship of stock purchasers and company

insiders; its issuance of a legally incorrect opinion letter to the transfer agent and failure to make

proper disclosures of insider interests in the PIPE offering.

96. McGuire Woods’ failure to exercise the proper degree of care caused injury to

Ethanex as described above, including but not limited to the Damages set forth in paragraph 51

and the total loss of the Expectancies set forth in paragraph 50.


malicious manner, in direct contravention not only of federal securities law but also of the

fiduciary duties as counsel to Ethanex. As a result, punitive damages should be awarded to

punish the Defendant and deter others from similar conduct.

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COUNT VI

Negligent Supervision



99. In addition to, or in the alternative to, McGuire Woods’ responsibility for the

conduct of Zehil as a partner in the firm, McGuire Woods had an independent duty to Ethanex,

as a client of the firm, to exercise reasonable care and competence with respect to the firm’s

work and its dealings associated with the Ethanex PIPE offering. Such duty included a duty to

exercise reasonable care and competence in supervising and monitoring the conduct of its

partner, Zehil.

100. McGuire Woods was negligent, in that it failed to exercise reasonable care or

competence in supervising and monitoring its partner Zehil in a series of transactions, including

the Ethanex transaction, in which McGuire Woods and Zehil issued false and fraudulent opinion

letters, on McGuire Woods stationary, without adequate control or supervision over his actions

and without any effective steps taken by McGuire Woods to prevent Zehil from committing the

wrongful acts alleged herein.

101. For a law firm of McGuire Woods’ stature, size, and claimed competence, the

danger to clients of a rogue partner in the securities law field must have been apparent and the

failure to take steps which would have prevented Zehil’s activities, or lead to the discovery of

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such activities before they injured Ethanex, was unreasonable, negligent and a breach of

McGuire Woods’ duties to its clients.

102. As a direct result of McGuire Woods’ failure to exercise the proper degree of

care, it caused injury to the client, Ethanex, because as a direct and proximate result of such

negligence, Zehil, a McGuire Woods’ partner, was permitted to unlawfully purchase and sell

unrestricted shares of Ethanex stock, and manipulate the market for such stock, causing Ethanex

damages as set forth herein. These damages include, without limitation, the Damages set forth in

paragraph 51 and the total loss of the Expectancies set forth in paragraph 50.



fiduciary duties as counsel to Ethanex. As a result, punitive damages should be awarded to

punish the Defendant and deter others from similar conduct.





COUNT VII

Breach of Fiduciary Duty



105. As counsel and corporate secretary for Ethanex, McGuire Woods owed to

Ethanex the highest degree of loyalty, good faith and honest dealing.

106. McGuire Woods encouraged Ethanex to trust in its honesty and ability.

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107. Ethanex did, in fact, rely upon McGuire Woods’ good faith and integrity in

retaining McGuire Woods as Ethanex’s counsel for the PIPE transaction and as general corporate

counsel and corporate secretary.

108. McGuire Woods betrayed the trust placed in it by Ethanex and breached their

fiduciary duties to Ethanex by abusing their role to engage in illegal activities and self dealing to

the detriment of Ethanex as set forth herein

109. McGuire Woods’ conduct caused Ethanex injuries as described herein, including

but not limited to the Damages set forth in paragraph 51 and the total loss of the Expectancies set

forth in paragraph 50.



fiduciary duties of counsel to Ethanex. As a result, punitive damages should be awarded to

punish the McGuire Woods and deter others from similar conduct.

111. As a result of McGuire Woods’ breach of fiduciary duty, and in addition to

damages and any other remedy, McGuire Woods should be deemed to have forfeited all right to

any fee paid by Ethanex for the legal work performed by McGuire Woods.





Conclusion


Inc., respectfully prays that the Court enter judgment against the Defendant McGuire Woods,

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LLP, for actual damages, punitive damages, prejudgment interests, costs, attorney’s fees and

such other relief as the Court deems proper, including but not limited to all remedies provided

for by federal and Kansas statute.

Demand for Jury Trial

Plaintiff requests trial by jury on all issues so triable.

Determination of Place of Trial

Plaintiff requests that trial of this matter be held in the United States District Court for the

District of Kansas, Kansas City Division.

Respectfully submitted,

EDGAR LAW FIRM LLC

/s/ David W. Edgar John M. Edgar David W. Edgar KS #19121 Brian T. Bear 1032 Pennsylvania Ave. Kansas City, Missouri 64105 Telephone: (816) 531-0033 Facsimile: (816) 531-3322 ATTORNEYS FOR PLAINTIFF

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27

CERTIFICATE OF SERVICE

The undersigned hereby certifies that a true and correct copy of the foregoing was served

via electronic transmission on this 24th day of August, 2010, to:

R. Lawrence Ward James M. Humphrey Cathy J. Dean Miriam Bailey Polsinelli Shugart PC 120 W. 12th Street, Suite 1700 Kansas City, MO 64105 [email protected] [email protected] [email protected] [email protected] Phillip R. Garrison Polsinelli Shugart PC 901 St. Louis Street, Suite 1200 Springfield, MO 65806 [email protected] ATTORNEYS FOR DEFENDANT /s/ David W. Edgar Attorney for Plaintiff


mailto:[email protected]





Documents

Ethanex Complaint #3