A prominent Long Island, N.Y., law firm is named as a defendant in a federal class action suit brought by investors who were allegedly bilked out of $20 million by a "boiler room" Ponzi scheme masterminded by two convicted felons.
But New York Supreme Court Justice Charles E. Ramos dismissed a nearly identical complaint against the firm brought in New York County earlier this year.
In Oster v. Kirschner, 602081/07, Ramos held that Avi and Ann Oster, who allegedly invested $2 million in the scheme, "fail[ed] to allege any actionable conduct" by Certilman Balin Adler & Hyman, one of several firms that provided counsel to the investment group, Cobalt Multifamily Investors.
"There are no allegations of any conduct undertaken by the Certilman Defendants that can be viewed as considerable, significant or substantial to the sale of the securities," Ramos wrote in his April decision granting Certilman's motion to dismiss.
The suit filed last week in Eastern District Court in Central Islip, N.Y., Hightower v. Cohen, CV-08-3229, repeats substantially the same allegations against Certilman, the Connecticut law firm of Cohen & Wurz and the New Jersey firm of Lum, Drasco & Positan.
According to the federal suit, Martin Unger, a partner in Certilman, along with other lawyers, "knowingly and recklessly prepared, amended and backdated" documents and "gave advice that assisted the scheme."
A New Jersey attorney, Philip L. Chapman of Lum, Drasco & Positan, and a Connecticut lawyer, Robert F. Cohen of Bristol-based Cohen & Wurz, are also named in the suit. Neither attorney returned calls for comment.
The operation, called Cobalt Capital Partners, was a limited partnership chartered in Delaware, essentially offering investors across the country a chance to invest in property redevelopment in Florida under the name Cobalt Multifamily Investors. Several of the 150 plaintiffs in the class action are from Long Island.
M. Allan Hyman, one of the managing partners of Certilman, acknowledged that his firm was "one of many lawyers that had been retained by Cobalt toward the end of their existence," but vehemently denied any wrongdoing by either Unger or the firm.
"This claim that was commenced recently against us has no merit, will be dismissed on motion and the decision in Oster v. Kirschner is almost certainly res judicata against the claimants in this case," Hyman said in an interview. "Under no circumstances was our firm or Mr. Unger involved in any fraud or complicity in aiding fraud."
The charges against the law firms center around a common allegation: that the criminal past of the Cobalt principals was known to all of the attorneys who worked with the entity, Jordan Factor, whose firm represents the majority of the plaintiffs in the federal case, said in an interview.
Two of the three principals had criminal records, said Factor, of Denver-based Gersh & Helfrich. His firm did not represent the Osters in the state case. Their suit was handled by Morrison Cohen.
According to the federal plaintiffs' complaint, Mark A. Shapiro, who served five years for bank fraud and was released from prison in 2003, "controlled the Cobalt entities personally."
Another man, Irving Stitsky, was involved in a prior "notorious boiler room" operation, said Factor, resulting in Stitsky's disbarment from the securities industry in 1998. In 2001, Stitsky pleaded guilty to conspiracy to commit securities fraud and was sentenced to 21 months in prison, according to court documents.
"In September 2004, Martin Unger drafted an opinion letter for Cobalt informing them that in his opinion, nothing prohibited Stitsky from running Cobalt's boiler room," Factor alleged.
The operation is described in the suit as soliciting funds by showing prospective investors "glossy brochures and other marketing materials" that detailed the partnership's "supposedly successful track record."
One brochure allegedly showed the average annual return of more than 50 properties indexed in Cobalt's portfolio since 1985. However, the partnership was not chartered until 2004 and none of the properties were acquired until 2005, according to the suit.
A large portion of the money invested was "siphoned off" by the principals and spent on houses and cars, according to Factor.
According to the suit, in preparing the December 2004 investor offering, Chapman and Lum Drasco "knew but intentionally concealed" material facts, including that Cobalt was operating as a Ponzi scheme; that Shapiro had a criminal record and as a condition of parole was forbidden from selling securities; and that Stitsky was under indictment in a separate case and had a criminal record.
On Dec. 1, 2005, federal agents raided the Cobalt headquarters, seizing bank records and informing the principals they were under investigation, according to the suit.
Subsequently, Unger wrote another opinion letter in which he "advised Cobalt ... that there was 'no requirement under the law' to disclose those facts to investors," according to the suit.
Relying on that advice, Cobalt salespeople "proceeded to raise an additional $3 million from investors," Factor said.
He alleges that Unger then helped draft another offering document, which was "back-dated to November 30, 2005, the day before the raid in order to give cover and to justify concealment of those facts."
Hyman said Unger had worked on some "discreet projects" for Cobalt but stressed there was no fraud perpetrated and expected that the current suit will be dismissed.
Hyman characterized Stitsky as "an employee" and not a principal of the organization, adding that "people who have been convicted of crimes were still entitled to counsel."
Robert M. Calica of Rosenberg Calica & Birney in Garden City, N.Y., is representing Certilman.