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By Tim O'Brien

The fallout from Lampf, Lipkind, Prupis, Petigrow and LaBue's disastrous entanglement with a failed Florida surety bond company during the late 1980s continued last week. One of the West Orange firm's clients---one of more that 100 clients that collectively lost more than $25 million when Lampf, Lipkind lawyers steered them into investing in the ill-fated insurer---won a legal malpractice suit against the firm for $449,600.

A six-member federal jury, sitting in Newark, awarded the judgment to the profit-sharing plan of Marprowear Corp. of Fairfield, a menswear wholesaler, last Tuesday following a one-week trial. Marprowear's profit-sharing trustees bought two unites, for that sum, in a $20.1 million private placement for southeastern Insurance Group Inc., (SIG) of Fort Lauderdale in April 1986.

The jury deliberated only three hours before finding that the 17-lawyer tax boutique was negligent in its legal representation of Marprowear when it pitched the investment in 1986, and that Lampf, Lipkind's negligence was a proximate cause of the profit-sharing plan's loss. Moreover, the jury found that Marprowear's executives were not negligent when they invested in the surety company, even though they signed a certification saying they had "carefully read" the private placement memorandum, which detailed the highly speculative nature of the investment.

That issue, the responsibility of the client/investor to read the prospectus and make an independent business judgment on the risks, was critical not only to this case but to a 1988 shareholders derivative action brought by 19 Lampf, Lipkind clients against the firm, SIG and others. The question, though, was never resolved; the suit died in August 1990 when U. S. District Judge Alfred Lechner tossed out all the major claims after finding that the plaintiffs filed the action after the statute of limitations had expired.

But Marprowear's attorney, Princeton solo practitioner Glenn Bergenfield overcame the presumption-of-signature argument. In his summation, Bergenfield told the jurors, "Now as to the claim---that these guys didn't read the private placement memorandum, and that they should have, the question here really is what's the relationship between client and lawyer? It's different, again, between somebody else, an insurance salesman who comes to your door and puts some documents under your nose, if you don't read them shame on you, that's right---But is that so with your lawyer?"


Bergenfield conceded that the three top executives of the family-owned business did not read the 58-page prospectus, with exhibits, saying that "based on what Mr. [Neil] Prupis and Mr. [William] Lipkind were telling them, why should they read it. This is standard stuff."

Lampf, Lipkind issued a terse statement saying it was "disappointed by the jury's verdict which the firm believes was against the weight of the evidence." James Keegan, who represented the firm, declined to comment, saying only that he will press several motions on which Superior Court Judge Donald Goldman had reserved judgment when they were made by Keegan at the 11th hour, as the 2-year-old case was about to go to trial.

One of those motions relates to the unsuccessful shareholders' derivative action brought by the 19 Lampf, Lipkind clients, which was filed in August 1988 by Newark's Sills Cummis Zuckermann Radin Tischman Epstein & Gross. Keegan, a partner with Bendit, Wenstock & Sharbaugh in West Orange, says in his papers that Marprowear should have been estopped from claiming that the oral representations of the Lampf, Lipkind partners about the private placement affected Marprowear's decision to invest.

Keegan pointed out that Sills Cummis partner Theodore Abeles told federal judge Lechner in August 1990, shortly before Lechner dismissed the case, that the sales pitch made by Lampf, Lipkind partners to his 19 plaintiffs, including Marprowear had a "relatively minor" effect on their decision to invest.

Although Judge Goldman declined to hear the motion before completing the trial, he permitted Keegan, over Bergenfield's objection, to read to the jury portions of Abeles' statements to Lechner, and he filled the jurors in on the background of the sills Cummis suit.

Marprowear was the only one of those 19 plaintiffs to return to state court to press a malpractice case, and in fact, many of Lampf, Lipkind's clients who lost money in SIG continued to stay with the firm for their tax and pension work.

The 1986 SIG underwriting, and the subsequent operation of the surety bond company, had turned to the Lampf, Lipkind partnership into an appendage of the insurer. Not only did the firm's partners act as unpaid underwriters, they were owners---a third of firm bought units and the firm's principals owned 23.25 percent of SIG's class A voting stock---officers, directors, counsel, lenders and landlord. The four name partners at the time---William Lipkind, Stephen Lampf, Neil Prupis and Paul Petigrow---invested $2 million in the underwriting, while Neil Prupis said that he had his relatives had put up a total of $2 million.

Almost all of the rest of the money came from the firm's clients; mostly small Essex County area businesses, many of which invested pension and profit sharing funds into SIG.


SIG was headed by Ronald Prupis, Neil Prupis's brother who had not experience in surety bond work and who was later fired for incompetency. Ronald Prupis hired Petigrow's younger brother, Richard---a former Lampf, Lipkind partner---as a $100,000-a-year aide, but he, too, was later pushed out after a consultant concluded he couldn't handle the job. Neil Prupis held 15 unpaid positions with SIG or its New Jersey or Florida subsidiaries, while Lipkind held eight. Almost all of the members of the board of directors, who held their annual meetings---with spouses---in Bermuda, were Lampf, Lipkind lawyers, clients, friends or relatives.

SIG, founded in 1983, began writing surety bonds in several states after receiving the net proceeds from the private placement. But despite the fresh funds and another $35 million in premiums earned between 1986 and 1988, court records who that the company went broke, with one former SIG executive estimating that by 1990 the firm had claims approaching $40 million.

SIG filed for bankruptcy while it and the subsidiaries were taken into receivership by the New Jersey and Florida insurance departments. In addition to the waste and lavish spending, which indeed a trip to Hawaii, again with spouses, and limousine service, the federal shareholders suit alleged fraud, self-dealing, conflicts of interest, and extortion of small-time contractors unable to buy surety bonds elsewhere. A consultant ultimately retained to examine the operation, in the wake of the losses, reported that employees complained of everything from drug use, sexual harassment and nepotism to expense account abuse and embezzlement.

The Sills Cummis complaint called SIG "a cash cow."

Lampf, Lipkind received $815,876 as general counsel to the insurer, and all told billed SIG at least $1.4 million between 1985 and 1989. In addition, when SIG began to crumble, the top partners spent more hours on SIG problems, writing off up to $500,000 worth of legal work in 1988, according to Neil Prupis. Moreover, a portion of the net proceeds from the private placement went to pay off SIG loans on which Lampf, Lipkind partners were personal guarantors, although those planned disbursements were listed in the prospectus.

The U. S. Treasury Department accused SIG of routinely manipulating its balance sheets, in part to defer claims on bad surety underwriting, while New Jersey and Florida insurance regulators said SIG and its affiliate companies often failed to protect themselves by taking collateral or by spreading the risk through reinsurance. Those practices are standard in the industry, especially when writing high-risk bonds, as SIG was doing.

The debacle cost the firm dearly. It lost clients and billings, non-name partners defected, and between early 1988 and 1991 the firm shrunk by half, from a peak of 26 lawyers to 13, although turnover has since stabilized and the firm has begun to grow again.

However, if the judgment stands, it will be eaten by the equity partners---Lampf, Lipkind has a two-tier system---because the firm does not have malpractice insurance for securities cases.