Two investors have filed a class action suit against Philadelphia-based Astor Weiss Kaplan & Mandel, alleging that the firm should have known its client, Mantria Corp., for whom it served as securities counsel, was engaged in a $54 million Ponzi scheme.
The suit had originally been filed last year in the U.S. District Court for the District of Colorado, but in December, then-Chief Judge Wiley Y. Daniel granted Astor Weiss’ motion to dismiss for lack of personal jurisdiction.
The suit was refiled in the Philadelphia Court of Common Pleas on January 4 and alleges negligent misrepresentation, breach of fiduciary duty and violations of both the Pennsylvania Uniform Fraudulent Transfer Act and the Pennsylvania Securities Act of 1972.
According to the complaint, plaintiffs Ronald and Margaret Greenspan were investors in Bala Cynwyd, Pa.-based Mantria and have filed suit on behalf of anyone who suffered losses after purchasing securities issued or promoted by either Mantria, Speed of Wealth LLC or any of their affiliates or subsidiaries since September 2007.
Mantria held itself out to be a company focused on green initiatives, including building housing developments in rural Tennessee and manufacturing an organic charcoal substitute called “biochar,” according to the complaint.
Together, Mantria and Speed of Wealth held a series of seminars, webinars, conference calls and Internet radio programs aimed primarily at retirement-age investors and, between September 2007 and November 2009, raised tens of millions of dollars, according to the complaint.
In return, the companies claimed investors could reap returns of anywhere from 17 percent on land purchases to 450 percent on the sale of biochar, the complaint alleges.
However, while Mantria claimed it made a profit on real estate sales, it actually only made about $139,000 from land sales in 2008 and about $56,000 from land sales in 2009, according to the complaint.
Mantria used investor funds to set up Mantria Financial, a bank with the sole purpose of financing Tennessee real estate sales, according to the complaint.
“In essence, all real estate sales made by Mantria, with the exception of three, were 100 percent financed by Mantria Financial with investor funds and purchased from Mantria Realty Operational Group,” the complaint alleges.
Likewise, Mantria used investor funds to build a fake biochar plant in Tennessee, which never produced anything other than a few test batches, according to the complaint.
Mantria never disclosed to investors that it was using their funds to pay other investors, according to the complaint.
Mantria also failed to disclose that neither of Speed of Wealth’s principals — Wayde and Donna McKelvy — were affiliated with a registered securities broker or dealer and that they were collecting a 12.5 percent commission on each sale, according to the complaint.
Ultimately, Mantria raised more than $54 million and only repaid investors about $17.5 million, according to the complaint.
The Securities and Exchange Commission has since filed permanent injunctions against Mantria principals Troy B. Wragg and Amanda E. Knorr, as well as against the McKelvys, according to the complaint.
On August 5, 2011, the U.S. District Court for the District of Colorado entered summary judgment against Mantria for selling unregistered and fraudulent securities, as well as for acting as unregistered broker-dealers, according to the complaint.
Neither Mantria, Wragg, Knorr, Speed of Wealth nor the McKelvys are parties to the suit filed January 4 in Philadelphia.
In August 2007, according to the complaint, Mantria hired Astor Weiss as its securities counsel.
The complaint alleges that all of Mantria’s securities offerings were reviewed, prepared or approved by the law firm and that “most, if not all, of the closings went through Astor Weiss.”
The firm was also tasked with conducting a “legal audit” of Mantria’s corporate structure, according to the complaint.
The complaint alleges that one of Astor Weiss’ first orders of business in representing Mantria was to register Wayde McKelvy as a broker-dealer.
“And as a result, Astor Weiss knew, or should have known, early in its engagement with Mantria that Wayde McKelvy was not a registered broker-dealer and should not be selling securities,” the complaint alleges.
According to the complaint, Astor Weiss had final approval authority over Mantria’s private placement memorandums, which the federal court in the SEC suit found to contain improper and incomplete disclosures.
For example, the complaint alleges, Christopher Flannery, an attorney with Astor Weiss from 1999 until 2009, approved Mantria’s August 2009 securities offerings predicting 450 percent returns for investors from biochar production in 2010 and 2011, despite knowing that the biochar facility was non-operational.
Flannery, who was dismissed for lack of jurisdiction from the Colorado suit and is not a named defendant in the Philadelphia suit, could not be reached at press time Friday.
According to the complaint, Flannery reported directly to and was supervised by the firm’s managing partner, David Mandel.
Reached Friday, Mandel told The Legal that the suit was “much ado about nothing” and that his firm had yet to be served with the January 4 complaint.
The suit alleges that Astor Weiss also had final approval of the materials used at Mantria’s various investor seminars.
According to the suit, Astor Weiss either knew or negligently failed to realize that Mantria was selling unregistered securities to unaccredited investors.
“In fact, on one such occasion in March 2009, Flannery at Astor Weiss pointed out in writing that at least four investors did not meet accreditation standards,” the complaint alleges. “Nonetheless, each was permitted to invest in Mantria with Astor Weiss’ oversight.”
The complaint also alleges that Flannery and Astor Weiss expressly advised Mantria that the securities did not need to be registered and that Mantria had no duty to disclose that the principals of Speed of Wealth were receiving a 12.5 percent commission.
Astor Weiss also acted as the escrow agent, collecting money from investors and funneling it back into Mantria, the complaint alleges.
“All told, Astor Weiss allowed at least $4.88 million in investor funds from the Speed of Wealth entities and at least another $16.7 million directly from investors to flow through its trust account,” the complaint alleges.
The complaint further alleges that investors in Mantria wrote their checks to Astor Weiss’ general trust account, which resulted in Mantria receiving money that belonged to at least one of the law firm’s other clients.
Counsel for the plaintiffs, Patrick Howard of Saltz Mongeluzzi Barrett & Bendesky in Philadelphia, declined to comment on the suit.