Claims Reinstated Against NJ Law Firm Relating To Alleged Role In Ponzi Scheme

An intermediate appellate court in New York has ruled that plaintiffs adequately alleged claims of aiding and abetting fraud, breach of fiduciary duty, and conversion against a law firm that had drafted the private placement memoranda soliciting investment in the Cobalt Multifamily entities, an alleged Ponzi scheme, whereby the main defendants, convicted criminals — one of whom had been banned from the securities industry by the SEC — were able to allegedly perpetrate a fraud resulting in over $22 million in losses to investors. 

As the court explained in its decision, Cobalt raised capital for its operations through the sale of securities to members of the public, including the plaintiffs, who claimed that as a result of the alleged fraud they lost virtually their entire investment. The defendants included the New Jersey law firm of Lum, Danzis, Drasco & Positan, LLC, and one of its partners, Philip L. Chapman. Specifically, these defendants were accused of playing a key role in perpetrating the fraud by preparing private placement memoranda, as well as furnishing other legal services such as serving as escrow agent for the transactions. The complaint asserted claims for conspiracy and aiding and abetting common law fraud, conspiracy and aiding and abetting breach of fiduciary duty, conversion and conspiracy and aiding and abetting conversion, and violations of New Jersey state law.
 
Interestingly, a federal court in the Eastern District of New York had dismissed aiding and abetting claims against the firm in a putative class action brought by Cobalt investors (Hightower v. Cohen, CV 08-3229 (E.D. N.Y. Sept. 30, 2009). The federal court reasoned that the operative fraud causing the plaintiffs' harm was the alleged Ponzi scheme, and it felt constrained to dismiss the aiding and abetting claims against the lawyer defendants because the plaintiffs had not alleged that they had actual knowledge of the alleged underlying fraud that caused harm to the plaintiffs. The New York appellate court found that the plaintiffs sufficiently alleged actual knowledge of the underlying fraud, i.e., the alleged Ponzi scheme, and substantial assistance. It ruled that to the extent the federal court “took a narrow view of the ‘actual knowledge’ requirement under New York law, we respectfully disagree with the decision.”
 
The case is Oster v. Kirschner, 2010 N.Y. Slip Op. 05981 (App. Div. July 6, 2010). Attorneys involved include Donald H. Chase, Morrison Cohen; Scott C. Tuttle, Jillian M. Amagsila, and Anne P. Richter, McManus, Collura & Richter; and William E. Goydan, Wolff & Samson.