Federal Deposit Insurance Corp. v. O'Melveny & Myers
Ninth Circuit
969 F.2d 744 (1992)
Sahni and Day formed American Diversified Savings Bank (ADSB) to sell real-estate investments through limited partnerships, and retained the law firm O'Melveny & Myers (defendant) to prepare offering documents for potential investors. ADSB intentionally and fraudulently overvalued its assets and profits, and O'Melveny incorporated that misrepresented data into the offering documents it distributed. When the FDIC (plaintiff), as ADSB's receiver, later found the company insolvent, it sued O'Melveny for professional negligence, negligent misrepresentation, and breach of fiduciary duty; the district court granted O'Melveny summary judgment, and the FDIC appealed.
Whether a law firm owes investors and its own client a duty to act competently and avoid public harm once it learns that the client is disseminating fraudulent financial information, and whether a receiver standing in a defrauding client's shoes is barred by unclean hands from suing the firm.