A former pharmaceuticals company officer’s legal malpractice suit against Lowenstein Sandler, claiming the firm failed to give him key advice about potential tax consequences tied to exercising nonqualified company stock options, must be dismissed because of his contention’s “speculative nature,” a state appeals court ruled Thursday.
The “theory of proximate cause [that the lack of tax advice led to the former senior vice president losing millions of dollars] is belied by the record and relies on gross speculation,” an Appellate Division, First Department panel wrote in its decision.
Steven Lisi, a former senior vice president of then-Flamel Technologies SA and Eclat Pharmaceuticals LLC, had sued Lowenstein in 2016 claiming that it committed malpractice while representing him in connection with his 2015 separation from the entities, which the panel’s opinion indicated were connected.
According to Lisi’s complaint, he’d hired Lowenstein in connection with negotiating the legal terms of the separation. (The panel referred to the two entities as the “company.”) He also alleged that he told the firm to “protect me” when he knew his relationship with the company had become strained.
In addition, he alleged that Lowenstein “failed to advise Lisi of the tax treatment and consequences concerning the exercise of options included” in his severance benefits. And near the December 2016 complaint’s end, he claimed that “as a direct and foreseeable and proximate result of Lowenstein’s professional negligence, carelessness, lack of skill and lack of diligence, Lisi has … suffered substantial damages in an amount to proved at trial, but not less than $5,300,000.”
The unanimous First Department panel described Lisi’s allegation specifically as Lowenstein—which is a large corporate firm found on the Am Law 200 list—being “negligent in failing to advise [Lisi] that the income realized from the exercise of his stock options would be taxed as ordinary income and that, had they so advised him, he would have sold his shares earlier or eliminated any market risk by shorting the shares in full or otherwise taking measures to eliminate risk.”
Justices David Friedman, John Sweeny, Cynthia Kern, Jeffrey Oing and Peter Moulton then wrote that “this theory of proximate cause is belied by the record and relies on gross speculation,” citing Gallet, Dreyer & Berkey LLP v. Basile and Sherwood Group v. Dornbush, Mensch, Mandelstam & Silverman.
In further explaining why Lisi’s proximate cause theory failed, the justices noted that his “complaint alleges that [he] shorted as much stock as possible” and said that “thus, he could not have shorted more stock before exercising his options.”
“Moreover, [Lisi’s] trading decisions demonstrate that he intended to speculate on the stock,” the panel said.
Then it wrote that “after he received his shares from his exercised stock options, [Lisi] did not begin immediately to sell them off to achieve a profit, despite the volatility of the stock market and the fact that the stock price at that time greatly exceeded his perceived investment in the stock. [Lisi] therefore assumed the risk that the stock price would plummet without notice,” citing National Union Fire Insurance Co. of Pittsburgh, Pa. v. Robert Christopher Associates.
The justices added that “the allegation that [Lisi] would have stopped speculating on the stock at a time when its shares were selling for an amount greater than his actual investment thus depends on ‘a chain of gross speculations on future events,’” quoting Phillips-Smith Speciality Retail Group II v. Parker Chapin Flattau & Klimpl.
“The speculative nature of the allegation is brought into sharper relief by the fact that the last time the stock sold for more than the amount of plaintiff’s actual investment was November 11, 2015, less than two months after plaintiff received his shares,” they also wrote.
In an email Friday, Philip Touitou, a partner in Hinshaw & Culbertson in New York who represented Lowenstein, said that “our clients are gratified that the Appellate Division confirmed well-settled precedent in this state holding that alternative outcomes based on perfect hindsight knowledge of market performance is nothing more than ‘a chain of gross speculations of future events’ that do not meet the test for proximate causation.”
Adam Newman of Newman Stehn in Merrick represented Lisi in the appeal. He declined to comment Thursday.