(CN) - An investor can pursue fraud claims against the accounting firm of a Bernard Madoff feeder fund after one of its partners advised him to invest with the Ponzi schemer in 2002, a New York appeals court ruled.
The First Judicial Department of New York's Appellate Division overturned an order dismissing claims against New York-based accounting firm Konigsberg, Wolf & Co. and its president, Paul Konigsberg, who also faces criminal charges and a lawsuit filed by the Securities and Exchange Commission over his alleged role in the largest Ponzi scheme in history.
Investor Mark Weinberg says the accounting firm and Konigsberg are liable because a partner in the firm, Steven Mendelow, steered him to invest in a Madoff feeder fund.
Madoff is serving 150 years in prison for fleecing investors in his $50 billion Ponzi scheme.
The SEC describes Konigsberg as a "longtime accountant" for many of Madoff's clients.
A lower court had dismissed the accounting firm and Konigsberg as defendants in Weinberg's lawsuit, but the appellate division reversed, saying the complaint adequately pleads claims of fraud, aiding and abetting fraud, and negligent hiring and supervision.
Weinberg says the firm hired Mendelow despite knowing that he had been sanctioned by the SEC in 1993 for Madoff-related fraud.
Konigsberg and the firm argued that Mendelow was not acting within the scope of his employment when he told Weinberg to invest in the feeder fund, FGLS Equity.
But the five-judge panel said Weinberg's allegations "are sufficient to withstand a motion to dismiss."
"Even if Konigsberg is not liable on an agency theory, he is on the pleaded conspiracy theory," the court wrote. "The complaint sufficiently pleads that both Konisberg and [the firm] should be liable for Mendelow's fraud because all three defendants conspired to defraud plaintiff."
Additionally, the "factual allegations support a claim for negligent supervision," the ruling states.
The panel further allowed Weinberg to pursue alternate causes of action, including his aiding and abetting claim, which asserts that he relied on information on the accounting firm's website about Mendelow's qualifications when he invested with FGLS.
Weinberg also claims Mendelow and Konigsberg directed the firm to ignore irregularities in the feeder fund's books and records, which would have revealed Madoff's fraud. Had he been informed of the "numerous warning signs," Weinberg says, he "would have redeemed his investment" in FGLS.
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