By Nate Raymond
Sept 5 (Reuters) - The receiver for a defunct investment
company may proceed with a negligence lawsuit against the law
firm Nixon Peabody, a U.S. district judge in Los Angeles ruled
James Donell, the court-appointed receiver for NewPoint
Financial Services Inc, may go forward with a lawsuit accusing
Nixon Peabody of helping a NewPoint manager engage in fraud, the
NewPoint has been described by prosecutors as part of a
Ponzi scheme, and in June its former head of investment, John
Farahi, pleaded guilty to federal charges that he defrauded
investors through the sale of $20 million in investment
Donell's lawsuit accuses Nixon Peabody of helping Farahi and
says the firm should have known through its former partner,
David Tamman, that Farahi wasn't operating New Point properly.
Tamman in December was charged separately with 10 counts
including conspiracy and records alteration as prosecutors
accused him of obstructing a U.S. Securities and Exchange
Commission investigation into Farahi's fraud scheme.
Tamman's trial is set for Oct. 23, and he has pleaded not
Donell's lawsuit, filed in May 2010, claims that if Nixon
Peabody had done its job properly, Farahi's fraud could have
been cut short by two years.
Donell alleges that Nixon Peabody agreed to represent
NewPoint "knowing that Farahi was diverting corporate funds and
wasting corporate assets."
Nixon Peabody argued the Donell lacked the authority to
bring the lawsuit and that the case should be dismissed on
constitutional grounds, arguing the receiver was acting as a
prosecutor for the SEC or court.
Judge Dean Pregerson in Los Angeles rejected those
arguments, stating Donell was stepping into the shoes of
NewPoint and pursuing claims "that this private party could have
The judge also disagreed with Nixon Peabody's contention the
receiver failed to allege causation and that the firm had no
role in causing investor losses.
"Contrary to Nixon Peabody's contentions, (Donell) also
expressly alleges that the firm knew or should have known facts
that would have prevented or limited Farahi's alleged looting of
NewPoint in the first place, and provides sufficient facts to
support this allegation," Pregerson wrote.
A spokeswoman for Nixon Peabody declined comment.
The case is James H. Donell v. Nixon Peabody, U.S. District
Court for the Central District of California, No. 12-cv-04084.
For Donell: Byron Moldo, Ervin Cohen & Jessup.
For Nixon Peabody: Russell Ryan, King & Spalding.
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