"See No Evil, Hear No Evil” Not a Valid Defense for Law Firm Accused of Aiding & Abetting Securities Fraud

A New York appeals court has held that a law firm’s “see no evil, hear no evil” claim can’t shield it from allegations that it aided and abetted securities fraud in an investor suit.

Investors brought suit against the New Jersey firm Lum, Drasco & Positan (sued under its previous name of Lum, Danzis, Drasco & Positan), as well as other defendants, after losing the $1.9 million they had invested in Cobalt Multifamily Investors I, LLC, a purported REIT that turned out to be a Ponzi scheme. Cobalt went into receivership after its principal backers, which included convicted felons, were indicted on federal securities fraud charges in March 2006. The plaintiff investors alleged that the law firm consciously chose to turn a blind eye to the Ponzi scheme and criminal histories of the management when Cobalt asked it to prepare the offering memoranda for Cobalt’s next “investment vehicle.”

A trial court had dismissed the claims against the firm, apparently buying the firm’s argument that even if the firm did know of the principals’ backgrounds and misrepresentations in the memoranda, that was not enough to alleged “actual knowledge” of the Ponzi scheme. But the appellate court disagreed and reinstated the aiding and abetting charges against the firm, stating: “To say that defendant attorneys merely furnished legal services to help solicit investments in [Cobalt], and did not have knowledge of the fraud they helped perpetrate, is drawing distinctions based on gradations of knowledge that are simply not tenable… This court cannot and will not endorse what is essentially a ‘see no evil, hear no evil’ approach.”

Also See:

British Lawyer Arrested for Participating in 11-Year Tax Fraud Scheme Involving Swiss Bank Accounts

New York-Based Securities Lawyer Is One of Four Defendants Sentenced to Prison for Role in $7 Million Fraudulent Stock Manipulation Scheme

Myspace Settles Federal Regulators’ Charges about Sharing Personal Information with Advertisers and Misleading Millions of Users

Majority of Banks Will Miss FATCA Compliance Deadline According to Banking Executives: KPMG Survey

Texas County District Attorney and Private Counsel Indicted for Charges of Conspiracy, RICO, Bribery, Extortion, and Honest Services Fraud