Lawyer Alleges Pryor Cashman Lawyer Aided Fraud by Fund

Lawyer Alleges Pryor Cashman Lawyer Aided Fraud by Fund
The New York Law Journal by Brendan Pierson  -  January 9, 2012

A charitable foundation that fell victim to a Ponzi scheme run by former hedge fund manager Mark Bloom has filed a lawsuit accusing Donald S. Zakarin of Pryor Cashman of taking actions that furthered Mr. Bloom's fraud. The Alexander Dawson Foundation, which raises money for children's education, and two of its trustees filed their suit, Alexander Dawson Foundation v. Zakarin, 650026/12, on Jan. 4 in the Manhattan Commercial Division. They are represented by MoloLamken and Abrams Garfinkel Margolis Bergson. Pryor Cashman issued a statement calling the suit "baseless" and "an unwarranted and undeserved attack on attorneys whose professional conduct met the highest legal and ethical standards." According to the suit, the foundation lost $9.75 million by investing in North Hills LP, Mr. Bloom's hedge fund. In June 2009, Mr. Bloom admitted to running his fund as a Ponzi scheme and pleaded guilty to five felonies. He is now in prison. "The Ponzi scheme was not the product of Bloom's efforts alone," the lawsuit says. "He had help." Mr. Bloom, the lawsuit alleges, "revealed to Zakarin and Pryor Cashman in 2005 that he had been stealing money from North Hills—at that time, they could have shut Bloom's fraud down or withdrawn as his counsel. They did not. They chose instead to further the fraud by helping Bloom conceal his past and ongoing theft from the Plaintiffs and other victims of the Ponzi scheme until it finally came to light in late 2008."  Between 2001 and 2009, according to the suit, Mr. Bloom stole at least $20 million of his investors' money for himself, buying a $5.2 million Upper East Side home, "at least $750,000 in art and $600,000 in jewelry, and hundreds of thousands of dollars for parties, travel, personal services and clothing," according to the complaint.  The first sign of foul play came to light in the summer of 2005, when the Philadelphia Alternative Asset Fund, a commodities trading pool whose management company had been paying Mr. Bloom hefty commissions for leading his clients to invest there, was revealed to be a Ponzi scheme and put into receivership by the Commodity Futures Trading Commission.

The lawsuit alleges that, shortly after that fraud was discovered, Mr. Bloom confessed his own fraud to Mr. Zakarin, who had been representing him since 2004 in a dispute with his former employer, BDO Seidman. Allegedly, Mr. Bloom confessed not only that he had invested his clients' money with the fraudulent Philadelphia Alternative Asset Fund in order to receive kickbacks, but that he had stolen millions of dollars of his clients' money in various other ways and had falsified his accounting statements.  Upon learning of the fraud, Mr. Zakarin advised Mr. Bloom to retain criminal counsel, the suit alleges. He then helped Mr. Bloom draft a $13 million loan agreement from North Hills to Mr. Bloom in order to cover up the theft, the suit claims. In one e-mail, he told Mr. Bloom that the loan document would "enhance [Bloom's] position" in a criminal case, according to the suit.  "Zakarin knew from the outset that the proposed transaction would be improper even if the loan had been legitimate—indeed, Zakarin had sent Bloom an e-mail specifically informing him that it was not permissible for Bloom to borrow funds from North Hills for his personal use, even if the loan were documented in a note carrying a substantial interest rate," the suit alleges. "But of course, Zakarin also knew that the note would not document a legitimate loan because Bloom had already stolen the funds from North Hills that the note purportedly allowed him to borrow."  "Zakarin thus had a choice," the suit said. "He at least could have refused to draft for Bloom the fraudulent note that was going to help hide Bloom's theft. He also could have advised Bloom to come clean to North Hills' investors about his theft. He simply could have withdrawn from representing Bloom so as to extricate himself from Bloom's ongoing fraud. But he did none of those things."  In fact, the suit alleges, Mr. Zakarin opposed the suggestion of Victor Rosenzweig of Olshan Grundman Frome Rosenzweig & Wolosky, the independent director of North Hills Management, the hedge fund's general partner, that North Hills retain independent counsel for the purpose of the loan. Later, Mr. Zakarin opposed Mr. Rosenzweig's call for Mr. Bloom to confess his fraud to his investors, according to the suit. The plaintiffs are asserting claims for aiding and abetting fraud and aiding and abetting breach of fiduciary duty. "This case is baseless and what is worse, those behind it, having already had more than complete discovery, are fully aware it is baseless," said Pryor Cashman managing partner Ronald H. Shechtman in an e-mailed statement. "It is an unwarranted and undeserved attack on attorneys whose professional conduct met the highest legal and ethical standards of the bar. We will aggressively defend this claim and seek sanctions against the plaintiffs and their counsel." "The plaintiffs' last investment with Mr. Bloom and Bloom's diversion of funds occurred more than a year before we were retained," Mr. Shechtman added. "As plaintiffs are fully aware, while adhering to our strict duty of confidentiality, we consistently exhorted Bloom to liquidate all assets and repay investors as quickly as possible and plaintiffs actually recovered $5 million of their losses after our retention. This is a desperate attempt by the plaintiffs to shift their own responsibility for their losses, nothing more."  The plaintiffs filed a separate lawsuit against Mr. Rosenzweig and his firm and against Mr. Bloom's accountant, Brian Zucker of Zucker & Associates in Manhattan Supreme Court last January (NYLJ, Jan. 14, 2011). That case, Alexander Dawson Foundation v. Zucker, 650053/11, is pending. They also sued Mr. Bloom and North Hills shortly after the fraud was revealed. That case is Alexander Dawson Foundation v. Bloom, 603590/08.  Brendan Pierson can be contacted at bpierson@alm.com.