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CBD Startup Wants Susman Godfrey Taken Off Fraud Case

March 24, 2022

Katryna Perera of Law360

A CBD startup being sued over claims it coaxed investors into funding more than $60 million based on false and misleading information has asked an Oregon state judge to disqualify Susman Godfrey LLP from representing the plaintiffs, saying the firm had inside information on the startup when it took on the case.

Lawyers from Markowitz Herbold PC, who are representing the defendant, Sentia Wellness Inc. founder Nitin Khanna, filed a motion Friday to disqualify Susman Godfrey. They claimed one of the firm's attorneys, Rachel Black, received confidential information from Khanna when she was briefly contacted in 2020 to represent Sentia in a similar matter that has since been resolved.

"It is unusual that we file a motion to deny pro hac vice admission," said David Markowitz of Markowitz Herbold. "However, the attorneys at Susman Godfrey flouted the professional conduct rules. They had confidential information on our clients. They elected to take the other side and did not meet their obligation ... they should withdraw from this case immediately."

Susman Godfrey and Black did not immediately respond to requests for comment on Tuesday.

According to the motion, Sentia contacted Black in 2020 to potentially represent Khanna and others in a similar dispute with investors. Susman Godfrey ran a conflict check, identifying Khanna and others from Sentia as "potential clients" while simultaneously identifying Sentia investors, including Measure 8 Venture and Curaleaf Executive Chairman Boris Jordan, as "potential adverse parties."

The motion states it was "imperative" the firm clear any conflicts before Khanna and Sentia disclosed any confidential information. Once the conflict check was cleared, the underlying facts of the dispute were revealed to Black, and strategic considerations and goals were discussed, according to the motion.

The motion states the disclosed information was "material, privileged, and confidential" and "could be significantly harmful" to Khanna and Sentia. However, Black was never officially retained since the parties resolved the dispute internally.

In February 2021, Susman Godfrey agreed to represent Measure 8 and the other plaintiffs in the current lawsuit. When the firm ran a conflict check, the former dispute was flagged. However, when Black was asked about the previous matter, she said she had "no recollection of the case" and the firm concluded no conflicts existed, according to the motion.

"Only two minutes after being told that Susman had explored bringing a breach of fiduciary duty claim that is the exact inverse of the one that plaintiffs … [Susman] concluded that no conflicts existed," the motion states. "It was not enough time to determine whether Susman had received information from [Khanna] … nor were those two minutes sufficient to research Oregon's ethical rules."

The defendants claim the firm violated Oregon law by failing to notify Khanna and Sentia it was taking on the plaintiff's case, and by violating a duty of confidentiality to Khanna and Sentia, who had previously been "prospective clients" of Susman Godfrey.

According to Markowitz Herbold, Oregon law states that even if a lawyer is not retained, they cannot use the information they receive from a potential client.

Additionally, law firms can be disqualified from representing clients "whose interests are materially adverse to a prospective client when it has received information from the prospective client that could be 'significantly harmful' to that person in the 'same or substantially related matter,'" Friday's motion states.

The motion argues the confidential information Susman Godfrey received from Khanna enabled it to "win the race to file — and gain all its attendant advantages — better value the claims, defenses, and counterclaims, and inform pre-suit settlement strategy."

The lawsuit against Khanna, filed in Oregon's Multnomah County Circuit Court in January, claims Khanna and others committed securities fraud, violating Oregon securities laws by giving investors misleading and false information so he could raise funds.

According to the complaint, investors ultimately purchased more than $74 million in debentures in Sentia, but almost a year after investing in Sentia, investors learned Khanna had made untrue statements, including that he had not officially worked for Sentia for more than nine months.

In September 2019, things started to unravel when Khanna emailed investors, stating Sentia's revenue had grown slower than expected. He reassured investors, though, that Sentia would reach its projections "only one quarter late," according to the complaint.

However, Sentia's year-end financial statements issued to investors in February 2020 painted a different picture. According to the complaint, the report revealed Sentia's customers had returned more than $4 million worth of products in the fourth quarter of 2019 alone and that Sentia's January 2020 revenue was below $1 million.

The investors claim that following the discovery of Khanna's alleged misrepresentations, he did not dissolve Sentia and return the remaining funds to investors as requested, but instead sold certain company assets to a nonviable company.

The investors are represented by Robert S. Banks Jr. of Banks Law Office PC, and Geoffrey L. Harrison, Oleg Elkhunovich and Jordan Rux of Susman Godfrey LLP.

Khanna is represented by Vivek Kothari and David Markowitz of Markowitz Herbold PC.

Counsel information for the other defendants was not immediately available.

The case is Measure 8 Ventures LP et al. v. Khanna et al., case number 22CV00946, in the Circuit Court of the State of Oregon, County of Multnomah.

--Editing by Lakshna Mehta.

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