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By Samson Habte
A wealthy investor who accused Holland & Knight of facilitating a Ponzi scheme was not entitled to the $34.5 million verdict that a jury awarded him in 2012, a California appeals court ruled April 2.
The plaintiff, Rahim Sabadia, claimed that he lost $16 million in cash, and incurred an additional $18 million in loan obligations, in a series of real estate investments that H&K structured on behalf of an Atlanta developer.
That developer, M. Shi Shailendra, came under SEC scrutiny for defrauding investors and was permanently barred from selling securities in 2014.
Sabadia filed this suit against H&K in 2010, accusing the firm of malpractice and fraud and alleging that it helped Shailendra with a series of transactions that bore the “classic elements of a Ponzi scheme,” in the words of a fraud examiner.
A jury awarded the plaintiffs $34.5 million, but the appeals court said that verdict couldn’t stand because “Shailendra’s dishonest acts broke the causal connection” between H&K’s alleged misconduct and the plaintiffs’ claimed investment losses.
In a 126-page opinion, the court said the plaintiffs couldn’t show that H&K had “actual or constructive knowledge of Shailendra’s secret misappropriations” in ten investment transactions that the firm handled for the developer.
The court said said “nothing suggests” that the firm knew that Shailendra was pocketing funds he received from investors, or that it “had access to his personal records or other sources of information” that could have established constructive knowledge of those thefts.
The fraud was difficult to detect, the court said. It noted that a forensic accountant who Sabadia hired was able to uncover the misappropriations by examining “accounting records and bank statements” that were acquired “only as a result of a court order or subpoena.”
The plaintiffs thus couldn’t establish causation, a necessary element of all the claims they asserted, the court said.
"[T]he theory that Shailendra’s misappropriations and respondents’ losses were foreseeable in light of H&K’s misconduct fails with respect to all ten transactions,” Justice Nora M. Manella wrote.
Justices Norman L. Epstein and Thomas L. Willhite Jr. joined the opinion.
The plaintiffs were represented by Enenstein Pham & Glass APC; Bruce Adelstein, Los Angeles; and Michelle J. Correll, Los Angeles. Holland & Knight was represented by Gibson Dunn & Crutcher LLP; Horvitz & Levy LLP; and Klinedinst P.C.
The case is Sabadia v. Holland & Knight, LLP , 2018 BL 115454, Cal. Ct. App., 2d Dist., B242773, 4/2/18 .
To contact the reporter on this story: Samson Habte in Washington at shabte@bloomberglaw.com
To contact the editor responsible for this story: S. Ethan Bowers at sbowers@bloomberglaw.com
The ABA/BNA Lawyers’ Manual on Professional Conduct is a joint publication of the American Bar Association Center for Professional Responsibility and Bloomberg BNA.
Copyright 2018, the American Bar Association and The Bureau of National Affairs, Inc. All Rights Reserved.
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