Business people contract.

Law Firm Facing Malpractice Lawsuit Arising Out of Alleged Bad Advice in White Collar Crypto Defense

FACTS OF THE UNDERLYING ACTION

On September 6, 2024, an action was commenced in New York State Supreme Court, New York County, on behalf of Steven Nerayoff, an attorney and alleged crypto founder, who, when working for the Ethereum blockchain, allegedly “invented the ‘Utility Token’ and a structured method for selling these new digital assets to the public in what became known as the ‘Initial Coin Offering’ (‘ICO’) and created the first ‘Security Token’ or ‘Tokenization’ and Security Token Offering (‘STO’).” Complaint ¶3. Nerayoff’s work with the Ethereum blockchain, which he alleges he was part of the creation of the Utility Token (“ETH”), allowed ETH and other tokens to be lawfully sold and traded – the second largest cryptocurrency asset by market cap next to Bitcoin.

Nerayoff alleges he retained the defendant, Covington & Burling LLP, in September of 2019 in connection with a criminal matter that charged Nerayoff with Hobbs Act Extortion, Hobbs Act Extortion Conspiracy, transmission of threats in interstate commerce, and conspiracy to so transmit. Complaint ¶5. The retainer agreement between Nerayoff and the defendant allegedly was for the defendant to provide pre-indictment legal services.  Nerayoff alleges he presented evidence of his innocence to the defendant, including videotapes of Nerayoff’s negotiations with the alleged victims and emails and messages between Nerayoff and his alleged victims which allegedly established that Nerayoff’s actions were lawful. Complaint ¶¶6-7.

The defendant allegedly advised Nerayoff not to meet with or share this information with the prosecutors handling his case. On January 10, 2020, Nerayoff was indicted, and the defendant withdrew from the representation of Nerayoff shortly thereafter. Complaint ¶8. Nerayoff alleges that because of the alleged malpractice, he spent the following three years and in excess of $1 million defending himself from the indictment that could have been staved off had the defendant presented the purported exculpatory evidence to the prosecutors in the fall of 2019. Nerayoff also alleges he lost business opportunities while being under indictment.  

Nerayoff alleges the defendant attorneys advised him that he should not meet with the prosecutors to discuss the alleged exculpatory evidence because the prosecutors would simply find another crime to charge him with. Complaint ¶¶ 19-23. Notably, this allegation seemingly implicates the attorney’s strategy and professional judgment.

In June of 2022, over two years after he was indicted and the alleged malpractice seemingly occurred, Nerayoff’s then attorneys commenced a dialogue with prosecutors in an attempt to establish Nerayoff’s innocence. As part of those conversations, Nerayoff’s successor attorneys provided the prosecutors with the alleged exculpatory evidence which was not provided pre-indictment. Complaint ¶¶9-10. Nerayoff goes on to allege that on March 21, 2023, prosecutors moved to dismiss all charges against him, and on May 5, 2023, the indictment was dismissed with prejudice. The exculpatory material that the prosecution cited as the basis for their motion to dismiss and which served as the basis for the court’s decision was allegedly the same material in the defendant’s possession shortly after the defendant was retained. Complaint ¶¶11-12.

ELEMENTS OF LEGAL MALPRACTICE IN NEW YORK

In order to fully understand the viability of the claims asserted in this matter, it is essential to understand the elements of legal malpractice. Under New York law, in order to plead a cause of action alleging legal malpractice, a plaintiff must allege that (1) the attorney failed to exercise the care, skill, and diligence commonly possessed and exercised by a member of the legal profession, (2) such negligence was the proximate cause of the actual damages sustained by the plaintiff, and (3) but for the defendant’s negligence, the plaintiff would not have incurred any damages. Zeppieri v Vinson, 190 A.D.3d 1173, 1174 (3d Dep’t 2021); Kaplan v Conway & Conway, 173 A.D.3d 452, 452 (1st Dep’t 2019); Abramowitz v Lefkowicz & Gottfried, LLP, 160 A.D.3d 790, 792 (2d Dep’t 2018).

In order to establish causation, a plaintiff must show that he or she would have prevailed in the underlying action or would not have incurred any damages “but for” the lawyer’s negligence. Lam v. Weiss, 219 A.D.3d 713, 716 (2d Dep’t 2023); Mackey Reed Elec., Inc. v. Morrone & Assoc., P.C., 125 A.D.3d 822, 823 (2d Dep’t 2015); Eisenberger v. Septimus, 44 A.D.3d 994, 995 (2d Dep’t 2007). The failure to establish proximate cause mandates the dismissal of a legal malpractice action regardless of the negligence of the attorney. Tanel v Kreitzer & Vogelman, 293 A.D.2d 420, 421 (1st Dep’t 2002).  As such, Nerayoff will have to show that he would not have incurred the alleged damages, including the costs associated with defending the case as well as the alleged loss of business opportunities “but for” the conduct of his counsel.

PROFESSIONAL JUDGMENT RULE

The Professional Judgment Rule, also known as the Judgment Call Doctrine, provides, “an attorney is not held to the rule of infallibility and is not liable for an honest mistake of judgment, where the proper course is open to reasonable doubt. Thus, ‘selection of one among several reasonable courses of action does not constitute malpractice.’” Graham v. Law Offs. of Spar & Bernstein, P.C., 2020 NY Slip Op 32563(U) (Sup. Ct. N.Y. Co. 2020) (citing Bernstein, 160 A.D.2d at 430; Rosner, 65 N.Y.2d at 738).

“[A]llegations with respect to whether the defendants exercised the degree of care, skill, and diligence commonly possessed by a member of the legal community amount[ing] to no more than his dissatisfaction with their ‘strategic choices’ … as a matter of law, did not support a malpractice claim.” Siracusa v. Sager, 105 A.D.3d 937, 938-39 (2d Dept. 2013) (dismissal affirmed where attorneys allegedly failed to confer with or prepare the plaintiff’s certified public accountant to testify) (citing Albanese v. Hametz, 4 A.D.3d 379, 380 [2d Dept. 2004]; Rosner v. Paley, 65 N.Y.2d 736, 738 [1985]; Bernstein v. Oppenheim & Co., 160 A.D.2d 428, 430-431 [1st Dept.1990]; Magnacoustics, Inc. v. Ostrolenk, Faber, Gerb & Soffen, 303 A.D.2d 561, 562 [2d Dept. 2003]). It seems that the facts go straight to the professional judgment of the defendant as to whether to advise Nerayoff to hold off on presenting the alleged exculpatory evidence or whether to have disclosed them pre-indictment. Nerayoff even alleges the defendant attorneys advised him that he should not meet with the prosecutors to discuss the alleged exculpatory evidence because the prosecutors would simply find another crime to charge him with. Complaint ¶¶ 19-23. That allegation seemingly goes directly to strategy.

WHAT TO LOOK FOR

While this case is in its infancy and there is probably a lot more to the story than meets the eye, it seems the allegations implicate the attorney’s professional judgment, which could be a roadblock to liability. For example, the defendant might argue the defendant attorneys’ recommendation not to present the evidence pre-indictment was strategic decision which could shield the defendant from liability. They may argue there are a slew of reasons why the defendant recommended the alleged course of action and that Nerayoff cannot hold the defendant liable when he is dissatisfied with his own decision not to speak with prosecutors before he was indicted.

In addition, if there was truly exculpatory evidence that the defendant attorneys possessed, or which Nerayoff himself admittedly possessed, there is nothing in the complaint explaining why it took over two years for Nerayoff’s new attorneys to present the purported same exculpatory evidence. Indeed, the procedural posture notwithstanding, the prosecutors have a duty to investigate possible exculpatory evidence. As such, the defendant might argue Nerayoff has not asserted any information to explain why, during the three years where he allegedly incurred damages, his subsequent attorneys (or Nerayoff himself) did not proffer the exculpatory evidence to the prosecutor or make a motion for relief from the court immediately. As such, the defendant might argue Nerayoff has not pleaded that the defendant proximately caused any damages. Furthermore, Nerayoff could have ignored the defendant’s advice not to speak with the prosecutors and presented the alleged exculpatory evidence anyway. As the saying goes – we shall see.