A Huge Loss, and a Search for The Money

Pope Inv. II LLC v Belmont Partners, LLC  2014 NY Slip Op 30349(U)  February 4, 2014  Sup Ct, New York County  Docket Number: 651479/12  Judge: Jeffrey K. Oing is the story of a huge investment, a huge loss, and the search for missing monies. 

"A Securities Purchase Agreement, dated April 14, 2008, documented the AAXT Investment (Compl.,18). The Investor plaintiffs, along with other investors not named as plaintiffs, invested approximately $12.5 million in AAXT in exchange for 4,008,188 shares of AAXT's Series A Senior Convertible Preferred Stock (Id.). Of the $12.5 million, approximately $10,132,522.35 was left in net proceeds after fees were paid to Deheng and named defendants Guzov and Belmont (Compl., 24). In conjunction with the closing of the AAXT Investment, AAXT and SMT entered into the China Control Agreement (Compl., 23). SMT transferred all of the economic benefits and liabilities of
its business to Anhante in exchange for the net proceeds of the AAXT Investment, namely, $10,132,522.35 (Id.). Pursuant to the China Control Agreement, AAXT effectively became the  indirect beneficial owner of SMT (Id.).

After the AAXT Investment closed, Guzov placed the net proceeds, $10,132,522.35, in a Hong Kong & Shanghai Banking Corporation Limited ("HSBC") account under ABM's name for holding before they were transferred to SMT (Compl., 40, 45). Plaintiffs allege, however, that Shao and/or Kamick retained control of AMB and the bank account at issue, and that they were not aware that Shao and/or Kamick could exercise control over the net proceeds (Compl., 28). The complaint alleges that Shao embezzled most or all of the money in the ABM account within several days (Compl., 29)."

"The complaint also alleges that Shao and Lv had been  conspiring to embezzle the money invested in AAXT since 2007 (Compl., 31). On September 4, 2008, Lv, acting on Kamick's behalf, e-mailed Meuse and Luckman, asking that they act as a bridge between Kamick and the AAXT Investors to avoid legal action (Compl., 33). On September 18, 2008, Lv informed the AAXT Investors that their investment had been invested elsewhere, contrary to the Transaction Documents and SEC filings (Compl., 34). After Deheng had advised Kamick to transfer the net
proceeds out of ABM's account, Lv informed the AAXT investors in an e-mail dated October 9, 2008 that Deheng would no longer be representing Kamick (Compl., 35). According to the complaint,
after the net proceeds were removed from ABM's account, the funds were deposited into Shao's personal bank account, accounts of entities controlled by Shao, and an account controlled by Lv
(Compl., 37). "

The Group plaintiffs allege that Guzov and Ofsink committed legal malpractice by violating New York Rules of Professional Conduct Rule 1. 7 (b) ( 4) . That Rule requires a lawyer who has decided to represent two clients, regardless of an apparent conflict of interest, obtain written consent from each affected client. The Group plaintiffs claim that defendants Guzov and
Of sink represented AAXT and Kamick for the SMT Transactions without their written consent.
In support of dismissal of this claim, defendants Guzov and Ofsink rely on William Kaufman Org., Ltd. v Graham & James LLP, 269 AD2d 171, 173 (1st Dept 2000) to argue that "a violation of a
disciplinary rule does not generate a cause of action." That reliance is misplaced. That case also stands for the proposition that "some of the conduct constituting a violation of a disciplinary rule may also constitute evidence of malpractice" (Id.). Nonetheless, a violation of a disciplinary rule, standing alone and without more, does not generate a cause of action (Schafrann v N.V. Famka, Inc., 14 AD3d 363, 364 [1st Dept 2003]) The issue, thus, is whether there is more than just a violation of the Rule. A review of the complaint demonstrates that it does not
sufficiently plead what negligent conduct defendants Guzov and Of sink allegedly perpetrated to support the legal malpractice claim. Specifically, the allegations of failure to vet Shao and
[* 16] "disclose information surrounding Shao, his management of Kamick, and his personal relationship with Lv are insufficient to substantiate claims of attorney malpractice without allegations that such a duty existed and that these omissions were the proximate cause of the Group plaintiffs' damages."

"This broad and conclusory allegation, however, without more, is insufficient. Even if the Group plaintiffs were to contend that defendants were negligent by failing to conduct due diligence on
Shao and disclose information regarding his management of Kamick and his personal relationship with Lv, nowhere does the complaint allege that defendants had a duty to conduct such due diligence or disclose such information, and that this failure was the proximate cause of plaintiffs' damages. Accordingly, defendants' motion to dismiss the Group plaintiffs' legal malpractice claim (Count VI) is granted, and it is hereby dismissed without prejudice."

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