A $50 million malpractice lawsuit filed against Holland & Knight earlier this month and an unrelated civil action filed in August against mega New York law firm Proskauer Rose are raising questions about just how much due diligence law firms must perform on clients.

The legal industry expects more malpractice, conspiracy and aiding and abetting lawsuits to be leveled against law firms as the economy falters and more financial frauds and Ponzi schemes unravel.

``The perpetrator of the fraud has no money, so of course plaintiffs look for any deep pockets around,'' said Bruce Katzen, a partner at Kluger Kaplan Silver-man Katzen and Levine in Miami and a former CPA. ``The accountants and the lawyers or brokerage firms, those deep-pocket defendants become the targets because they have so much malpractice insurance.''

The suit against Holland was filed by investors and receivers and the suit against Proskauer Rose was filed by investors, all of whom alleged to be victimized by Ponzi schemes.

In the case of Holland & Knight, a 1,000-lawyer Florida-based firm, the plaintiff was the receiver in a $347 million Ponzi scheme in Sarasota Circuit Court. The suit followed a similar one against the firm filed in March by wronged investors.

INCOMPLETE RESEARCH

The suit in Sarasota alleges Holland & Knight and partner Scott MacLeod prepared disclosure documents for investors that failed to mention Arthur Nadel, who headed the Scoop Management hedge fund, was a disbarred New York attorney who had drained a client's escrow account. The firm and MacLeod are also accused of conflicts of interest by simultaneously representing Nadel and his investment funds.

The receiver's suit seeks $50 million in punitive damages.

Karen McBride, a spokeswoman for Holland & Knight, denied any wrongdoing by the firm. ``We've done nothing wrong, and we intend to vigorously defend the case,'' she said.

Securities work, or representing financial firms or hedge funds in public offerings, is considered the riskiest area of law. For that reason, typically only large law firms with dedicated conflicts departments and plenty of malpractice insurance take such cases. Legal malpractice insurers specifically ask law firms in applications whether they handle securities cases, and then charge a considerable extra sum if they do. The deductibles are as high as $1 million.

But the work can be highly lucrative. For example, the lawsuit against Holland & Knight alleges the firm took hundreds of thousands of dollars in legal fees from Nadel.

``You definitely want to check out who your client is before you take a case, but with securities cases, the bar is higher, obligations are higher,'' said Glen Waldman, a partner with HellerWaldman in Coconut Grove. ``I wouldn't do any securities cases because it's a highly specialized area, and that's how you can get yourself in trouble.''

Several lawyers said they believed Holland & Knight should have done the research necessary to unearth the fact that Nadel had been disbarred in New York.

SIMPLE GOOGLE SEARCH

Large law firms routinely do extensive background checks on clients, particularly in the financial arena. In this case, some lawyers wondered whether a simple Google search would have picked up the Nadel disbarment, and they questioned whether someone below MacLeod dropped the ball. In smaller firms, paralegals and librarians do the checks. In large firms, sophisticated conflicts departments undertake them.