On May 27, 2022, Plaintiff Melanie E. Damian, in her capacity as the Court-Appointed Receiver for Today’s Growth Consultant, Inc. d/b/a The Income Store (“TGC”) (the “Receiver”) filed a complaint against Defendant SmithAmundsen, LLC (“Defendant”) in the Northern District of Illinois seeking damages, restitution, interest, and costs.  Specifically, the complaint alleges two claims for legal malpractice and aiding and abetting breach of fiduciary duty.

This action stems from a prior action filed by the Securities and Exchange Commission (“SEC”) against TGC and its founder, Kenneth D. Courtright, III (“Courtright”), wherein the SEC alleged TGC and Courtright violated federal securities laws and sought civil penalties and injunctive relief to halt their wrongful activity.

We previously wrote about PLB Investments LLC et al v. Heartland Bank and Trust Co. et al., a related case initiated by various defrauded investors of TGC against two bank defendants concerning TGC’s website services Ponzi scheme.

In PLB Investments, investors brought a putative class action against defendants alleging that the financial institutions violated the Illinois Fiduciary Obligations Act (“FOA”) and aided and abetted TGC’s Ponzi scheme.  As more fully discussed in our prior article, TGC solicited investors to enter into Agreements, wherein the investors agreed to provide up-front and ongoing payments for TGC to build, acquire, and monetize online websites.  Investors paid an upfront fee to TGC to purchase, host, maintain, and market the investors’ websites in exchange for TGC’s guarantee that investors would receive a minimum rate of return in perpetuity on the revenues TGC generated from those websites.  TGC raised at least $75 million from more than 750 investors during a nearly three year period, but TGC failed to honor its promises and in a classic Ponzi-like fashion, used new investor proceeds to pay earlier investors.

Defendants provided TGC with typical banking services, including deposit accounts, commercial loans and revolving lines of credit, ACH capabilities, and transfers into, out of, and among TGC’s accounts.  The court dismissed on the pleadings plaintiffs’ claims against one defendant bank, but allowed their claims to continue against the second defendant bank.  The decision highlighted the importance of challenging the absence of facts to support the element of actual knowledge in an aiding and abetting case.

In the instant action, Plaintiff is a court-appointed Receiver of TGC, the perpetrator of the website services Ponzi scheme.  The defendant is SmithAmundsen LLC (“SmithAmundsen”), a Midwest law firm that previously represented TGC as its primary securities counsel.

In early 2016, TGC, through a recommendation by its general counsel, Michael J. Polachek (“Polachek”), retained SmithAmundsen to analyze whether TGC’s Consulting Performing Agreements (“Agreement(s)”) constituted a “security” for state or federal regulatory purposes and to advise on related compliance requirements.  SmithAmundsen also assisted TGC with an SEC subpoena in another case involving Smart Money Financial Group (“Smart Money”), one of TGC’s principal investors.  Plaintiff alleges that Smith Amundsen, through its representation of TGC, obtained direct knowledge of TGC’s business model, Agreements, and related legal affairs, yet failed to investigate TGC’s representations about its finances and website ownership structure and failed to advise TGC of the impropriety of its business operations, the illegality of failing to register the Agreements with the SEC, and the process for how to correct its violations.

The Receiver alleges that the failure to independently verify the facts about TGC, give advice necessary to prevent or rectify unlawful behavior, investigate any “red flags,” and counsel against violations of laws amounts to SmithAmundsen’s breach of its duty to exercise ordinary care and a knowing and substantial assistance in Courtright’s breach of his fiduciary duty to investors.  Based on these allegations, the Receiver seeks to recover damages suffered by TGC and its investors.

The complaint emphasizes the broad reach of a Ponzi scheme, including how a plaintiff may implicate and target third parties rendering professional services (law firms, accountants, consultants, etc.) as potential defendants under negligence and aiding and abetting theories in an effort to recoup losses to investors.