NEW YORK, Oct 7 (Reuters) - Less than a month after a Crowell & Moring associate was arrested in Hong Kong on the suspicion of stealing $2.5 million in client funds, the firm's problems are multiplying.
The 488-lawyer firm made headlines in September after the Manhattan District Attorney's office charged Douglas Arntsen, an associate with the firm, with first-degree grand larceny for embezzling money that had been placed in escrow for Regal Real Estate, a real-estate company represented by the firm. Arntsen was arrested in Hong Kong last month. He declined to waive extradition at a court hearing earlier this week, according to prosecutors.
Shortly after Arntsen's arrest, Crowell was hit with a $6 million lawsuit by Regal in state Supreme Court in Manhattan, accusing the firm of failing to return $5.5 million in escrow funds. This included the $2.5 million Arntsen allegedly stole from the firm's account. Regal said in its suit that Crowell could not confirm that it was still in possession of the other $3 million.
And this week, another real-estate company, Aristone Realty Capital, filed an amended complaint in a lawsuit it had brought in May against Crowell, Regal and others in connection with an alleged kickback scheme involving Arntsen and a purchase of property in Manhattan.
The suit by Aristone, also filed in state Supreme Court in Manhattan and seeking $1 million, claimed that Arntsen, acting as the seller's attorney, thwarted Aristone's efforts to purchase a building at 9 East 16th Street so he could sell it to another buyer and pocket higher escrow fees.
Arntsen resigned from Crowell on Sept. 12, days before he flew to Hong Kong. In response to inquiries, Crowell spokeswoman Nicole Quigley said the firm was cooperating with the District Attorney's investigation, and added, "We are conducting a thorough investigation into Mr. Arntsen's activities, and we are taking appropriate steps to rectify this matter."
DEFENDANTS 'ON NOTICE'
The amended complaint -- which added Arntsen as a defendant and now demands $6 million in lost profits -- accuses Crowell of colluding "to cover up Arntsen's malfeasance up to and before September 23, 2011 -- when the real truth began to emerge following Arntsen's arrest."
Moving to dismiss the original complaint, Crowell argued that attorneys are immune from liability for the actions of a client -- in this case, Regal. They also insisted that a contract for the sale of real property requires an agreement signed by the seller, which did not happen in the negotiations over the East 16th Street property. "The payment of a deposit does not constitute execution of the contract," the firm argued in court papers.
Luke McGrath of Dunnington, Bartholow & Miller, who represents Aristone, said in an interview that the original lawsuit had put the defendants "on notice that Doug Arntsen and perhaps others were engaged in, at minimum, unprofessional, improper and suspicious behavior."
In the amended complaint filed Wednesday, Aristone makes additional fraud and tort claims and refers to the criminal charges against Arntsen.
Arguments on the motion to dismiss are scheduled before state Supreme Court Justice Charles Ramos for Oct. 24.
Bruce Lederman of D'Agostino, Levine, Landesman & Lederman, who represents Regal, said they are reviewing Aristone's suit but that they believe it is without merit.
"Mr. Arnsten's actions with respect to deposits have absolutely no bearing on the earlier litigation," Lederman said. "Any attempt to amend the previous lawsuit, based upon Mr. Arntsen's actions with respect to the escrows, is simply an attempt to improperly use Mr. Arntsen's bad behavior to bolster an otherwise frivolous lawsuit."
The case is Aristone Realty Capital v. 9 E 16th Street et al, New York State Supreme Court, No. 651302-2011.
For Aristone: Luke McGrath of Dunnington, Bartholow & Miller.
For 9 E 16th Street: Bruce Lederman and Christopher Tarnok of D'Agostino, Levine, Landesman & Lederman.
For Crowell & Moring: John Thomas of Crowell & Moring
(Reporting by Jennifer Golson; additional reporting by Leigh Jones and Aruna Viswanatha)
Follow us on Twitter: @ReutersLegal
(An earlier version of this story stated that Crowell & Moring had 485 lawyers. It has 488.)