Law firm
N.Y. firm sued for advising clients to invest in Ponzi scheme
Tarrytown, N.Y., law firm has been sued for fraud and breach of contract by a New Jersey woman who claims the firm advised her to place substantial funds with a money manager who was operating a Ponzi scheme that collapsed last year.
In a lawsuit filed earlier this month in Westchester County Supreme Court (See Complaint), Patricia Romano claims her former lawyers at Cushner & Garvey advised her to invest funds from an $875,000 settlement with her ex-husband with Edward Stein, a purported money manager, who embezzled the funds. Under the settlement agreement, the funds were supposed to be placed in trust accounts at Morgan Stanley.
Last year Stein was arrested and charged with running a $30 million Ponzi scheme.
Romano also alleged that Cushner & Garvey did not disclose that Stein was a client, from whom it also took fees for referrals.
The suit calls the lawyers' conduct "wrongful and egregious." Romano, who is suing individually and on behalf of two trusts, is seeking at least $700,000 from the law firm and its two partners, Todd S. Cushner and Lawrence A. Garvey.
Stein's scheme began in 1998 and came crashing down in April 2009, when the Eastern District of New York U.S. Attorney's Office and the Securities and Exchange Commission brought criminal and civil charges against him. Stein pleaded guilty in June 2009 to four counts of securities fraud and one charge of wire fraud. He was sentenced in February to nine years in prison.
Cushner & Garvey and its two lawyers were not charged with wrongdoing in the Stein investigation. But the firm is facing at least three other civil suits for advising clients to invest with Stein.
Cushner in an interview said he had not seen Romano's complaint and could not comment. But regarding the suits against his firm, he said he was "confident there was no wrongdoing on our part."
Stein, who Cushner acknowledged had been a client, "harmed a lot of people," some of whom were now trying to recoup losses through the law firm's insurance policy, he said.
"Stein had 125 victims," Cushner said. "I consider myself one of them."
Larry H. Krantz, a lawyer for Romano at Krantz & Berman, declined comment.
Cushner & Garvey is represented by Matthew K. Flanagan at Catalano Gallardo & Petropoulos, who declined to comment.
Romano hired Cushner & Garvey in 2006 to represent her in a dispute with her ex-husband over payments due under their divorce agreement. The matter resulted in a settlement of $875,000, which was to be placed in separate trusts to benefit Romano and her two daughters.
Under the terms of the settlement, the funds were to be deposited with Morgan Stanley. Instead, according to the complaint, Cushner & Garvey advised Romano to disregard the settlement terms and invest with Stein in Counsel Financial LLC.
The law firm advised that Counsel Financial would "guarantee" a 10.5 percent annual return, an amount significantly higher than a Morgan Stanley account would provide, minus the 1 percent management fee for Stein.
Romano received no documentation on Counsel Financial or its investments. The Cushner & Garvey lawyers told Ramano they had known Stein for years and said they had numerous other clients who invested with him.
In July 2007, she authorized Cushner & Garvey to invest the funds with Counsel Financial.
In a criminal information filed at the time of Stein's guilty plea, Counsel Financial is described as a company that raised money to loan to law firms to finance litigation. But according to the information, Stein took millions of dollars intended for Counsel Financial to pay redemptions for other entities in the scheme.
In Romano's case, she claims that Cushner & Garvey without her permission wired the money out of her escrow account not to Counsel Financial but instead to Prima Capital Management Corp., an entity controlled by Stein. Once transferred, Stein embezzled the money, the complaint said.
Romano did not receive statements from August 2007 to March 2008, the complaint said, but she did receive monthly "interest" payments from Stein, which were intended to leave the impression the money was being properly managed.
In April 2008, Cushner & Garvey drafted trust agreements called for under the settlement terms, and Stein had Romano complete paperwork to transfer the trusts' accounts.
Romano began having concerns about the accounts in February 2009, which she communicated with the law firm and Stein, the complaint said. After failing to get assurances from Stein, she directed him to transfer the funds in March 2009 to a new account, but was unable to get his cooperation.
She then called her accountant, who told her that Stein had been under investigation. She then contacted Garvey, who told her what he had learned about the investigation. Days later, Stein was arrested.
Romano is suing the firm and its two partners for legal malpractice, fraud, breach of fiduciary duty and contract, unjust enrichment and conversion.
Her lawsuit follows three others filed against Cushner & Garvey for its alleged role in the Stein fraud.
In Nassau County, the firm is facing a suit by Eric Reichenbaum, a commercial lender and former client in Great Neck, N.Y., who alleges the lawyers solicited him to lend money to Stein. Reichenbaum placed $1 million with Stein, according to an amended complaint filed in April 2009. Reichenbaum is represented by Stephen Wexler at Burkhart, Wexler & Hirschberg. Cushner & Garvey has denied the allegations (See answer).
In July 2009, a group of trusts created by Frank Calandra Jr. of Fox Chapel, Pa., sued Cushner & Garvey for receiving and illegally retaining funds Stein transferred out of their account at Signature Bank Corp., which was also named as a defendant. The case, which began in the Court of Common Pleas in Allegheny County, Pa., has since been transferred to the Southern District of New York. The trusts, which are seeking at least $100,000, are represented by Jones Day partner Roy A. Powell in Pittsburgh (See Notice of Removal and Complaint).
In Rockland County, the Cushner firm is facing a complaint filed in August 2009 by Estelle Romisher, a widow who in 2006 turned to Cushner to draft her will. Cushner, the complaint alleged, personally introduced her to Stein, with whom she invested.
Romisher's complaint said after learning of Stein's arrest, she contacted Cushner, who informed her the law firm had about 10 clients whose funds were invested with Stein. She is seeking $2.5 million.
In an October 2009 answer, Cushner & Garvey admitted that Cushner and Stein met together with Romisher in 2006 during her will signing, but otherwise denied the allegations.
Romisher is represented by Dennis E.A. Lynch of Feerick Lynch MacCartney.
Brian E. Maas, a lawyer at Franfurt Kurnit Klein & Selz who represented Stein in the criminal and civil cases, declined to comment.
(Published by Law.com – July 12, 2010)