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Tuesday, May 21, 2024 | Back issues
Courthouse News Service Courthouse News Service

Kids’ Charity Says Attorneys Abetted Fraud

MANHATTAN (CN) - A nonprofit devoted to children's education claims the Pryor Cashman law firm and its partner Donald Zakarin helped a convicted Ponzi-schemer roll it for $9.75 million.

The Alexander Dawson Foundation "is a Nevada charitable trust whose primary function is to support the Alexander Dawson schools in Nevada (pre-K to 8th grade) and Colorado (K to 12th grade). ADF serves the educational needs of over 1,000 children," according to the complaint in New York County Court. Also suing are Alexander Dawson Inc. (ADI), the foundation's investment arm, and the chairman of the Dawson board, Mario Borini, and his trusts.

The Dawson Foundation is a limited partner in North Hills LP, a "so-called hedge fund" whose chief admitted to the massive fraud in 2009, according to the complaint.

"This case is about how a law firm and a lawyer assisted a felon in his scheme to defraud a charitable foundation, two of its trustees, and the other plaintiffs out of millions of dollars," the complaint states.

"On July 30, 2009, Mark Bloom ('Bloom'), the former head of a so-called hedge fund named North Hills, L.P. ('North Hills'), pled guilty to five federal felonies relating to a Ponzi scheme that he had conducted over the course of eight years. The Ponzi scheme was not the product of Bloom's efforts alone. He had help. Specifically, as set forth more fully in this complaint, Bloom received substantial assistance in his scheme from Donald S. Zakarin and his law firm, Pryor Cashman LLP. Bloom revealed to Zakarin and Pryor Cashman in 2005 that he had been stealing money from North Hills - at that time, they could have shut Bloom's fraud down or withdrawn as his counsel. They did not. They chose instead to further the fraud by helping Bloom conceal his past and ongoing theft from the Plaintiffs and other victims of the Ponzi scheme until it finally came to light in late 2008.

"As a result of the fraud at North Hills, plaintiffs lost over $9,750,000. Eight and one- half million dollars of the lost funds were from ADF, a nonprofit foundation, and ADI, its investment arm, and were supposed to be used to educate children."

In December 2008, the Dawson plaintiffs sued Mark Bloom and his wife, and North Hills Management, in New York State Supreme Court. That case is pending.

In January 2011 they filed a separate lawsuit against the accountants for Bloom and North Hills, Brian Zucker and his firm Zucker & Associates, and others. That case is pending in the same court.

"North Hills ultimately proved to be a fraud," the complaint states. "Bloom unlawfully diverted at least $20 million from North Hills' bank accounts over a course of years. Bloom transferred the stolen funds to NHM, the company that acted as the General Partner of North Hills. Bloom then used NHM as his personal piggy bank. Bloom often transferred hundreds of thousands of dollars weekly, if not daily, from North Hills to NHM, and then to himself. ....

"Bloom also stole money from plaintiffs and the other investors in North Hills by accepting lucrative kick-backs in return for 'selling' the Philadelphia Alternative Asset Fund ('PAAF'), a purported commodities trading pool, to North Hills and other investors. In 2004 and 2005, Bloom received over $1.5 million in 'commissions' from the Philadelphia Alternative Asset Management Company ('PAAMCO') - PAAF's management company - for steering investors' money into PAAF."


Ninetten paragraphs later, the 24-page complaint states that Zakarin and Pryor Cashman learned of and substantially assisted Bloom's fraud: "Zakarin and Pryor Cashman represented Bloom in a suit against his previous employer, BDO Seidman, in 2004 and early 2005. In the first days of July 2005, after the fraud at PAAF was publicly disclosed, Bloom confessed his own fraud to Zakarin. Bloom told Zakarin not only about the money he stole from North Hills investors through kickbacks he had received from PAAMCO (which might now be discovered through investigations into PAAMCO's activities), but also about the millions of dollars he stole from North Hills investors through the 'notes receivable' and other accounting entries. Zakarin was so concerned about Bloom's fraudulent activities that he promptly recommended that Bloom retain criminal counsel (which Bloom did)." (Parentheses in complaint.)

At that point, the complaint states, Zakarin and Pryor Cashman created a "sham demand note."

According to the complaint: "At about the same time, Zucker - the accountant who kept the financial records of North Hills and NHM and who prepared the annual tax returns and K-1s for North Hills - was voicing concern to Bloom about the amount of money that Bloom had taken from North Hills. Zucker asked Bloom to provide him with a written note, which Zucker would then use to rationalize continuing to book Bloom's theft from North Hills as if it were a legitimate loan to Bloom.

"It was crucial to Bloom's scheme that he appease Zucker, because Bloom's other accounting firm, DGPW [Davis, Graber, Plotzker & Ward], was at the same time withdrawing its representation as North Hills' auditor in light of its knowledge of Bloom's fraud. (Notwithstanding its actual knowledge of the fraud and despite its special relationship with ADF, ADI, and the Borinis, however, DGPW failed to warn plaintiffs or any of North Hills' other investors of the fraud. Indeed, DGPW never even notified plaintiffs of their withdrawal as North Hills' auditor; aggravating this failing, DGPW continued to prepare the Borinis' personal tax returns through 2008 and in doing so relied upon Schedule K-1s for their North Hills investments that DGPW knew misreported the

returns of North Hills investors.) Bloom thus asked Zakarin to prepare a note that would make it appear that Bloom had legitimately borrowed the money from North Hills in the ordinary course of business.

"Zakarin knew from the outset that the proposed transaction would be improper even if the loan had been legitimate - indeed, Zakarin had sent Bloom an e-mail specifically informing him that it was not permissible for Bloom to borrow funds from North Hills for his personal use, even if the loan were documented in a note carrying a substantial interest rate. But of course, Zakarin also knew that the note would not document a legitimate loan because Bloom had already stolen the funds from North Hills that the note purportedly allowed him to borrow.

"Zakarin thus had a choice. He at least could have refused to draft for Bloom the fraudulent note that was going to help hide Bloom's theft. He also could have advised Bloom to come clean to North Hills' investors about his theft. He simply could have withdrawn from representing Bloom so as to extricate himself from Bloom's ongoing fraud. But he did none of those things.

"To the contrary, Zakarin made himself complicit by drafting the demand note in an effort to conceal the fact that Bloom had stolen funds outright from North Hills. The note, signed by Bloom, purported to obligate NHM to repay the amount of money that Bloom had misappropriated from North Hills as of December 31, 2004 - a total of $13.23 million. ...

"Given that the purpose of the demand note was simply to mask Bloom's wrongdoing - and that North Hills was not represented - it is no surprise that the note lacked any safeguards that might ensure repayment of the purported loan or that any other benefits actually accrued to North Hills. For example, the promissory note would at least theoretically have provided some legal benefit to North Hills if it had provided a due date for payment of principal and interest. It did not. Instead, the note provided that principal and interest were only payable on demand by North Hills. Of course, because Bloom controlled North Hills, Bloom (through NHM) would only have to repay North Hills if and when he demanded payment of himself. The note might also have provided a benefit to North Hills if it had been secured by, for example, some of the millions of dollars of real estate, art, or jewelry Bloom had acquired. But again, it was not. Finally, that the demand note was a pure fabrication intended to provide cover for Bloom's fraud is evidenced by the fact that when Pryor Cashman created the note in late July 2005, the note was backdated roughly seven months, to the end of 2004. Having drafted or having directed other attorneys within Pryor Cashman to draft the demand note, Zakarin was fully aware of its deficiencies and that the note was not what it posed to be - a debt instrument prepared in the ordinary course of business." (Citation to document omitted.)

The plaintiffs seek punitive damages for aiding and abetting fraud, and aiding and abetting breach of fiduciary duty. They are represented by Thomas Wiegand with Molo Lamken and Barry Margolis with Abrams Garfinkel Margolis Bergson.

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