Recently, much has been published (including an article by me appearing in In-House) about the possible loosening of SEC restriction by not requiring finders in M&A situations to be SEC-registered. As I have noted, this possible SEC relief is limited; among other limitations, it relates only to M&A and not to the sale of equity.

Two days ago, a bankrupt cancer biotech company, Neogenix (and not its 940 shareholders who invested $50 Million), sued its officers and its outside lawyers based upon a continuous practice, undertaken by the company’s CFO and not halted by the lawyers, of paying a 10% commission on equity raises where the “finders” were not SEC-registered.

Some important caveats: the complaint is just that, a complaint, and the truth of the allegations must be proven; the complaint may have serious defects in terms of whether the various claims are barred by the statute of limitations; the claims are made on behalf of the company in bankruptcy, and I do not comment on whether the company itself can sustain this law suit and recover damages.

Notwithstanding, there are strong cautionary lessons which can be derived from reviewing this complaint:

First: If the method of raising capital is illegal by reason of non-registration of finders, then a company may be responsible to rescind all these transactions (give all the money back to the investors).

Second: When such a claim, which may lead to multi-million dollar rescission, is raised, it destroys a company’s financial statement, feeds an SEC investigation, eliminates the ability to raise additional funds, and not surprisingly contributes to bankruptcy and total failure.

Third: The board of directors has some duty to monitor the legality of financings.

Fourth: Outside counsel has some duty to advise the board if it believes (as alleged here) that a method of raising capital is illegal.

Next: Members of an “advisory board” are also named in the law suit, and are alleged to have fiduciary duties of care and good faith. Corporate counsel often suggest establishing advisory boards in part because they are not “fiduciary.” Although the facts alleged here are egregious, the complaint calls into question the nature of the fiduciary duty owed by advisory boards (as opposed to statutory boards of directors).

Lastly: When a company goes bankrupt, the lawyers for the company in bankruptcy often look around for breaches of duty by officers, directors, advisors, lawyers, and anyone else, which breach of duty may give rise to monetary liability to the company and thus funding to the bankruptcy estate. Thus the failure in bankruptcy of a company is not the end-point of risk for people who have served the company illegally, negligently or in breach of fiduciary duty.

The complaint, although long and “speaking,” is interesting and articulate. It can be accessed in the records of the United States District Court for the Eastern District in Civil Action 14-cv-4427.