Lowenstein Sandler has defeated a $5.3 million malpractice suit brought by a pharmaceutical executive who alleged that the firm negligently advised him on the tax treatment of his stock options in a separation agreement.
Steven Lisi retained Lowenstein in 2012 to negotiate the terms of his employment as senior vice president with Flamel Technologies SA and Eclat Pharmaceuticals, now known as Avadel Pharmaceuticals, and again hired the law firm in April 2015 to negotiate his separation from Flamel.
Lisi, who is now CEO of biopharmaceutical company AIT Therapeutics, alleged in a suit filed last year against Lowenstein and partners Marie DeFalco and William Greenbaum that Lowenstein failed to give him any advice about the tax treatment of his stock options in the negotiation and execution of his separation agreement.
Specifically, Lisi argued the firm negligently failed to advise him that he would be taxed at the ordinary income rate on the increase in the value of his option shares upon exercise, rather than at the capital gains rate. Lisi alleged that, but for this failure to advise, he would not have been “left vulnerable to market fluctuations in the stock price of Flamel,” because he would have employed alternative investment strategies.
Lowenstein argued that Lisi’s malpractice suit was refuted by an email from DeFalco, in which she advised that stock “received in connection with employment” is subject to taxation “as compensation income … i.e., ordinary income subject to payroll taxes.” Lisi said he had no record or recollection of having received it.
Ruling on a motion to dismiss, Manhattan Supreme Court Justice Shirley Werner Kornreich said Lisi’s lack of records and recollection are insufficient to challenge the authenticity of the email. But the judge said the email itself does not “unambiguously refute Lisi’ s allegation of professional negligence.”
Kornreich said Lisi’s malpractice claim fails because his allegations are insufficient to show that but for Lowenstein’s failure to give proper tax advice, his trading losses would have been avoided.
Kornreich said Lisi’s strongest argument is that, had he been properly advised, he might have sold his shares sooner, before their value sank below his tax liabilities.
“Though intuitively compelling, this contention is still entirely speculative. Lisi held on to his shares for months before he began selling, despite Flamel’s declining stock price. His choice not to immediately liquidate his shares when they began to lose value suggests that Lisi was waiting for Flamel’s stock price to recover before selling, and again belies his claim that he sought to avoid all market risk,” the judge said.
Neither the risk of a market downturn nor Lisi’s decision to speculate in the market was caused by any lack of tax advice from Lowenstein, the judge said.
“Lisi’s suggestion, with the benefit of hindsight, that properly advised he would have avoided his losses by charting a different course, is entirely speculative and insufficient to state a legal malpractice claim,” Kornreich ruled, dismissing his complaint.
Lisi’s attorney, Adam Newman, of Merrick, declined to comment.
Philip Touitou, a partner at Hinshaw & Culbertson who defended Lowenstein, said he was “grateful for the court’s careful consideration and analysis of the arguments.”