Fraud and legal Representation

This case is one of the larger fraud - legal malpractice cases we have seen.  In fact, the scope of the fraud is breathtaking.  Proskauer Rose LLP is involved in the case, and walks away with dismissal.  Here are some of the facts in Chambers v Weinstein  2014 NY Slip Op 51331(U)
Decided on August 22, 2014  Supreme Court, New York County  Sherwood, J.

"The Complaint avers, among other things, that based on Schleider's false representations that [*2]he would invest in certain investment transactions and take steps to protect those investments, Plaintiffs lent up to $6.7 million to defendant 148 Investment LLC (148), a company owned by Todd. Id., ¶¶ 30-31. Schleider engaged the KS Defendants to represent Plaintiffs in transactions with 148. Id., ¶ 32. In February and March of 2012, based on Schleider's representation that Weinstein had access to large blocks of Facebook shares that they intended to purchase through 148 prior to an initial public offering (IPO) and then sell them at a substantially higher price, Plaintiffs lent a total of $3.025 million to 148 to purchase pre-IPO shares in three separate transactions. However, 148 purchased no Facebook shares and did not otherwise invest the money. Id., ¶¶ 35-50. Instead, Todd, Schlieder, Weinstein, Muschel and 148 engaged in self-dealings and used Plaintiffs' money for their own personal expenses. Id., ¶ 51.

To further the fraudulent Facebook scheme, Todd represented to Plaintiffs that the transactions would be secured by collateral valued at $12 million, consisting of mortgages 148 held against a property known as 1741-1751 Park Avenue, New York (Park Avenue Property). Id., ¶ 75. The complaint avers that defendant 121 Park had made a $6 million mortgage to Kahal securing the Park Avenue Property and recorded same in March 2008.[FN1] Id., ¶ 76. In November 2011, Kahal assigned the mortgage to 148, which was recorded in June 2012. However, in or about March 2012, 148 reassigned the mortgage to Kahal. Both of the collateral assignments were performed without any consideration, but rather were made to deceive Plaintiffs. Id., ¶¶ 79-81, 88.

The Complaint also avers that in September 2011, Belle Glade Gardens Realty Group, LLC (BGG), a Florida company owned and controlled by Schleider, entered into an agreement with Prince of Belle Glade Gardens, LLC to purchase Belle Glade Gardens, a 384-unit apartment complex, for $16.4 million. Complaint, ¶¶ 118-120. Schleider retained defendant Greenberg to represent BGG in the transaction. Id. Although BGG deposited $120,000, Greenberg returned the down-payment to BGG in November 2011, thus terminating the purchase agreement. Id., ¶ 121-122. In February and April 2012, Schleider represented to Plaintiffs that the BGG transaction was still active and that he would be matching their investment therein. Id., ¶¶ 123. Based on the representation, Plaintiffs wired $2.5 million to Greenberg in February 2012, which was deposited into an escrow account for Schleider and a subaccount for BGG. Id., ¶¶ 124-125. Schleider subsequently directed Greenberg to wire $2.5 million to 148, but misrepresented to Plaintiffs that the $2.5 million was being held by Greenberg for the transaction. Id., ¶ 128. In April 2012, Schleider induced Plaintiffs to make an additional $330,000 investment, but later directed Greenberg to deduct its legal fees from the $330,000 wired by Plaintiffs, without disclosing that the BGG deal was no longer active. Id., ¶¶ 129-132. Schleider intended to and fraudulently turned over the BGG funds to 148 for use by Schleider, Todd, Weinstein and 148. Id., ¶ 133.

In 2011, Weinstein was prosecuted by the United States in the United States District Court of New Jersey (2011 Action). Proskauer represented Weinstein from December 31, 2012 to May 30, 2013 in the 2011 Action. Complaint, ¶ 226. As compensation for its services, Proskauer charged Weinstein $1 million as a minimum non-refundable fee. On December 20, 2012, Kahal paid the fee with a check containing a reference stating "Loan Return for 148 LLC." Id., ¶¶ 227-228. The Complaint alleges that Proskauer did not perform adequate due diligence to insure that the retainer funds were not proceeds of Weinstein's criminal activities, and that Proskauer had "actual knowledge" that Weinstein was prohibited by the government in the 2011 Action from engaging in financial transactions of more than $1,000. Id., ¶¶ 230-231. On January 3, 2012, Weinstein entered into a plea agreement whereby he admitted to committing wire fraud and money laundering. On May 20, 2013, Weinstein was charged by the United States with various criminal activities (2013 [*3]Action). The indictment alleges that Proskauer received $1 million. The Complaint alleges that Proskauer spent the $1 million within two weeks of its receipt from Kahal, and that Proskauer paid "an unknown portion of these funds to persons unknown" for the benefit of Weinstein, and "thereby intentionally engaged in a scheme to defraud Plaintiffs by agreeing to launder' funds for Defendant Weinstein and prevent their recovery by Plaintiffs." Id., ¶¶ 240-241. Proskauer moved to be relieved as Weinstein's attorney in the 2011 Action, in light of the allegations in the 2013 Action. The motion was granted on May 30, 2013. Id., ¶¶ 236-237."

"To state a claim for aiding and abetting fraud, a plaintiff must allege the existence of the underlying fraud, actual knowledge, and substantial assistance. Oster v Kirschner, 77 AD3d 51, 55 [1st Dept 2010]; Stanfield Offshore Leveraged Assets, Ltd. v Metro. Life Ins. Co., 64 AD3d 472, 476 [1st Dept 2009].

In this case, the parties do not dispute that Weinstein committed fraud prior to 2011 involving victims other than Plaintiffs. In fact, Weinstein was sentenced for fraud in the 2011 Action. The dispute in this case lies in whether fraud perpetrated against Plaintiffs in 2012 is adequately stated in the Complaint, and whether Proskauer had "actual knowledge" and gave "substantial assistance." Notably, Plaintiffs' allegations in the Complaint are primarily based on sworn statements, dated May 13, 2013, made by an FBI agent, Karl Ubellacker, in connection with the government's complaint filed in the 2013 Action. A copy of Agent Ubellacker's statement is annexed as exhibit B to Plaintiffs' opposition to Proskauer's motion to dismiss.

In opposition to the motion, Plaintiffs contend that Proskauer's actual intent can be inferred from the following factual circumstances. Proskauer knew of the allegations against Weinstein in the 2011 Action because it served as his defense counsel. It knew that Weinstein was prohibited from engaging in transactions over $1,000 without the approval of the government's special counsel. It knew that the $1 million retainer was "probably directly or indirectly" proceeds of the 2011 Action. Kahal paid Proskauer's retainer with a check bearing a notation that it was a "Loan Return for 148 LLC." Proskauer accordingly knew that the check never went to 148, but was diverted to pay [*4]Weinstein's legal fees, just as he had diverted funds in the 2011 Action. Additionally, after learning that the government might try to seize the diverted funds, Proskauer was told by Weinstein to "minimally" inquire about the source of funds with Todd, who replied in a manner as directed by Weinstein. Lastly, Weinstein admitted that the fraudulent scheme in the 2011 and 2013 Actions "was a key component of both." Plaintiffs' opposition, ¶¶ 53-63.

Plaintiffs' contentions are insufficient to defeat the motion. That a law firm represents a client accused of a prior fraud against certain victims does not support an inference that the firm knew about, much less aided and abetted, a subsequent fraud committed by the client against other victims. Here, the government's complaints in the 2011 and 2013 Actions named different sets of victims and Plaintiffs were not named in the 2011 Action. Thus, Weinstein's retention of Proskauer as defense counsel in connections with the 2011 Action does not support an inference that Proskauer knew of the subsequent fraud allegedly perpetrated against the Plaintiffs, which fraud was the subject of the 2013 Action. See National Westminister Bank v Weksel, 124 AD2d 144, 150 [1st Dept 1987] (while a law firm gains access to information in the course of representing a client, "the fact of legal representation, even as to transactions allegedly the subject of subsequent [fraud], does not itself support the inference of the high degree of scienter necessary to extend fraud liability [against the firm] on an aiding and abetting theory").

Plaintiffs' attempt to overcome this flaw by relying on Weinstein's recent motion, filed by his new counsel in the New Jersey federal court, seeking "specific performance" of his plea agreement made with the government in connection with the 2011 charges,[FN2] is also misplaced. Even if his argument in that motion were true (i.e., the fraud scheme in the 2011 and 2013 Actions was "a key component of both"), it does not give rise to an inference that Proskauer knew of the fraud concerning the Facebook IPO and other transactions implicated in the 2013 Action. For the same reason, the fact that the retainer fee was paid via a third-party check, with a notation that it was a "Loan Return for 148 LLC," does not infer that Proskauer "substantially assisted" Weinstein in defrauding Plaintiffs by laundering funds that were "probably directly or indirectly fraudulent proceeds" of the 2011 Action. The 2011 Action did not involve Plaintiffs, 148 or the Kahal Defendants. There is no allegation that Proskauer had "actual knowledge "(as opposed to Plaintiffs' speculative phrase "probably directly or indirectly") of any connection between Weinstein and Plaintiffs at the time the retainer was paid. This remains true even if Proskauer "knew" that Weinstein was prohibited from engaging in financial transactions of more than $1,000 or failed to perform sufficient "due diligence" as to the source of the funds.

Moreover, even though the intent to commit fraud may be divined from the surrounding circumstances, "substantial assistance" in aiding and abetting fraud "means more than just performing routine business services for the alleged fraudster." CRT Invs., Ltd. v BDO Seidman, LLP, 85 AD3d 470, 472 [1st Dept 2011] (citations omitted). Here, it is not alleged that Proskauer provided substantial assistance to Weinstein, other than routine legal representation in the 2011 Action, by making fraudulent misrepresentation or inducing Plaintiffs in connection with transactions implicated in the 2013 Action.

Further, when a plaintiff seeks to extend an alleged fraud beyond the principal actors, the requirement of CPLR 3016(b) must be "strictly adhered" to because "the alleged aider and abetter, by hypothesis, has not made any fraudulent misrepresentation and should not be called to account for the intentional tort of another unless the circumstances of his connection therewith can be alleged in detail from the outset." National Westminster, 124 AD2d at 149. The allegations against Proskauer do not meet CPLR 3016 (b)'s requirements. Plaintiffs' reliance on Eurycleia Partners, LP v Seward & Kissel, LLP (12 NY3d 553 [2009]) is also misplaced. Indeed, in Eurycleia, the Court of Appeals dismissed the aiding and abetting fraud claim against the law firm that prepared the [*5]offering memoranda for a hedge fund that later collapsed. The Court held that even though "a plaintiff need not produce absolute proof of fraud," the allegations in the amended complaint were "conclusory" and did not give rise to a "reasonable inference" that the law firm committed fraud or aided and abetted fraudulent activities. Id. 560-561. Here, the Complaint fails to allege that Proskauer knew and substantially assisted Weinstein in those transactions in which Plaintiffs assert they were defrauded. Thus, the aiding and abetting fraud claim shall be dismissed.

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