Here’s a much longer article on the Kronish Lieb Weiner & Hellman legal malpractice case from Supreme Court, New York County, by Anthony Lin.
Savvy Clients’ Damages Ruled Not Firm’s Fault
New York Law Journal
A Manhattan judge has thrown out a legal malpractice suit by a group of brokers who claimed Kronish Lieb Weiner & Hellman provided them with faulty advice leading to a violation of a rule of the National Association of Securities Dealers and subsequent penalties and fines.
Even if the law firm had negligently advised the plaintiffs, Supreme Court Justice Jane Solomon said, the latter were “sophisticated professionals” already aware of the NASD rule in question. Therefore, the firm’s actions were not the proximate cause of the plaintiffs’ injuries, she wrote in Smookler v. Kronish Lieb, 604165/02.
Francis A. Smookler, Mark Pelletieri and Anthony Galeotafiore were brokers with First Allied Securities when they retained Kronish Lieb in 2001 to represent them in the creation of their own broker-dealer firm, to be called Canterbury Securities Holdings Inc.
Kronish Lieb was specifically charged with drafting a private placement memorandum to raise money for the new venture. The law firm also advised its clients to retain another, smaller firm, McCabe & Flynn, to handle regulatory matters, which the brokers did.
The trio’s employment agreements with FAS, which dated back to 1996, required them to inform the brokerage of any outside business activities as well as abide by all relevant exchange and government regulations.
Kronish Lieb lawyers allegedly told the brokers the transaction would “go a little smoother” if they resigned before the private offering closed but it would be fine if they chose not to quit. The brokers neither resigned nor informed FAS of their plans for Canterbury until after the private placement closed, raising $770,000.
The NASD began proceedings against the three brokers in 2002, charging they violated the association’s Rule 3040, which bars brokers at NASD member firms from participating in private securities transactions outside the scope of their employment without prior notice to their employer.
As part of their settlement with the NASD, the brokers refunded $250,000 to their investors, agreed to a 90-day suspension of their licenses and each paid a $5,000 fine. They later withdrew their application for a broker-dealer license for Canterbury.
In their malpractice claim against Kronish Lieb, they claimed $30 million in damages. The law firm counterclaimed for $19,000 in unpaid fees.
Justice Solomon said the terms by which Kronish Lieb was engaged clearly excluded regulatory matters, and she rejected the plaintiffs’ contention that they were entitled to rely on the law firm’s advice because of its reputation and expertise in the area of private offerings.
The judge said there was a “vast difference” between the regulatory and financial aspects of the Canterbury transaction. She noted that early depositions of the plaintiffs suggested they had not relied on Kronish Lieb for advice on the NASD rule.
In any case, she said, the plaintiffs were already obligated to observe the NASD rules as part of the terms of their employment by FAS. The judge agreed with Kronish Lieb’s contention that the proximate cause of their injuries was their own knowing violation of the NASD rule, rather than any conduct by the firm.
Solomon also rejected the plaintiffs’ argument that the case required a comparative analysis of the relevant knowledge of the attorney and the client to determine proximate cause. Even under such an analysis, she said, the brokers’ prior obligation to follow NASD rules and their knowledge of the particular rule at issue would likely outweigh the impact of any advice provided by Kronish Lieb.
The plaintiffs were represented by Stanley Zinner of White Plains’ Greene & Zinner. Kronish Lieb was represented by Max Gitter of Cleary Gottlieb Steen & Hamilton.