FILED: NEW YORK COUNTY CLERK 05/23/2012 INDEX NO /2012 NYSCEF DOC. NO. 2 RECEIVED NYSCEF: 05/23/2012

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1 FILED: NEW YORK COUNTY CLERK 05/23/2012 INDEX NO /2012 NYSCEF DOC. NO. 2 RECEIVED NYSCEF: 05/23/2012 SUPREME COURT OF THE STATE OF NEW YORK COUNTY OF NEW YORK X JONATHAN BLOOSTEIN, STEVEN BRANDIS, DAVID GREENBERG, RICHARD HUANG, SALVATORE ROMO, JOSEPH ROSENHECK, JB 1042 INVESTOR LLC, SBRAN 1042 INVESTOR : LLC, DG 1042 INVESTOR LLC, RH 1042 INVESTOR LLC, SR 1042 INVESTOR LLC and JR 1042 INVESTOR LLC, Index No /2012 AMENDED COMPLAINT Plaintiffs, against MORRISON COHEN LLP, BRIAN SNARR and DOES 1 through 10, Defendants. Plaintiffs Jonathan Bloostein, Steven Brandis, David Greenberg, Richard Huang, Salvatore Romo and Joseph Rosenheck (collectively the "Investor Plaintiffs") and Plaintiffs JB 1042 Investor LLC, SBRAN 1042 Investor LLC, DG 1042 Investor LLC, RH 1042 Investor LLC, SR 1042 Investor LLC and JR 1042 Investor LLC (collectively the "1042 LLC Plaintiffs" and with the Investor Plaintiffs, all collectively "Plaintiffs"), by their attorneys Pryor Cashman LLP, as and for their Complaint against defendants Morrison Cohen LLP ("Morrison"), Brian Snarr ("Snarr") and Does 1 through 10 (the "Doe Defendants" and together with Morrison and Snarr, collectively "Defendants") state as follows: THE PARTIES 1. Plaintiff Jonathan Bloostein is an individual and a resident of the State of New York. Plaintiff Steven Brandis is an individual and a resident of the State of New York.

2 3. Plaintiff David Greenberg is an individual and a resident of the State of New York. 4. Plaintiff Richard Huang is an individual and a resident of the State of New Jersey. 5. Plaintiff Salvatore Romo is an individual and a resident of the State of Texas. 6. Plaintiff Joseph Rosenheck is an individual and a resident of the State of Florida. 7. Plaintiff JB 1042 Investor LLC is a limited liability company formed under the laws of the State of Delaware with an office in Wilmington, Delaware, of which plaintiff Jonathan Bloostein is the sole member. 8. Plaintiff SBRAN 1042 Investor LLC is a limited liability company formed under the laws of the State of Delaware with an office in Wilmington, Delaware, of which plaintiff Steven Brandis is the sole member. 9. Plaintiff DG 1042 Investor LLC is a limited liability company formed under the laws of the State of Delaware with an office in Wilmington, Delaware, of which plaintiff David Greenberg is the sole member. 10. Plaintiff RH 1042 Investor LLC is a limited liability company formed under the laws of the State of Delaware with an office in Wilmington, Delaware, of which plaintiff Richard Huang is the sole member. 11. Plaintiff SR 1042 Investor LLC is a limited liability company formed under the laws of the State of Delaware with an office in Wilmington, Delaware, of which plaintiff Salvatore Romo is the sole member. 12. JR 1042 Investor LLC is a limited liability company formed under the laws of the State of Delaware with an office in Wilmington, Delaware, of which plaintiff Joseph Rosenheck is the sole member. 2

3 13. Defendant Morrison is, upon information and belief, a limited liability partnership under the laws of the State of New York that exists for, inter alia, the purpose of the practice of law and that maintains an office at 909 Third Avenue, New York, New York. 14. Defendant Snarr is, upon information and belief, a member of Morrison, duly licensed to practice law in the State of New York and a resident of the State of New York. 15. The Doe Defendants are attorneys who at all times relevant to this matter were members of Morrison or otherwise associated with Morrison, and who performed legal services on behalf of Plaintiffs. ALLEGATIONS COMMON TO ALL CAUSES OF ACTION General Background 16. The Investor Plaintiffs are small to mid-sized business owners who sold shares of their businesses to their employees through Employee Stock Ownership Plan ("ESOP") transactions (the "ESOP Transactions"). 17. Pursuant to Internal Revenue Code provisions designed to encourage ESOP transactions (found at I.R.C. 1042), the Investor Plaintiffs sought to defer capital gains and thus capital gains taxes on their ESOP sales by reinvesting their sale proceeds (the "ESOP Proceeds") into qualifying U.S. corporate bonds, which, pursuant to applicable statutory and regulatory provisions, are known as qualified replacement securities or qualified replacement property. 18. A financial services company named Stonebridge Capital LLC ("Stonebridge") was engaged by the Investor Plaintiffs to structure the reinvestment of the ESOP Proceeds (the "Reinvestment Transactions"). 19. The Reinvestment Transactions were intended to allow the Investor Plaintiffs to realize economic benefits, including cash from the ESOP Proceeds, while deferring capital gains 3

4 and capital gains taxes on those proceeds and given the age of the Investor Plaintiffs and the structure of I.R.C. 1042, allow them to ultimately pay no capital gains tax on the ESOP Proceeds. 20. In or about the first half of 2007, the Investor Plaintiffs engaged defendants Morrison and Snarr as attorneys to represent and advise them in connection with the ESOP Transactions, with respect to the Reinvestment Transactions and with respect to matters relating to those transactions, including, without limitation, the long-term, permanent deferral of capital gains and capital gains taxes on the ESOP Proceeds. 21. As Defendants were aware at all times relevant to this matter, they were engaged to represent and advise the Investor Plaintiffs in the realization of economic benefits, including cash, from the ESOP Proceeds and the long-term, permanent deferral of capital gains and capital gains taxes on those proceeds. 22. Defendants accepted the above engagement and thus undertook to represent the Investor Plaintiffs and advise them in a proper, skillful and diligent manner. 23. Upon information and belief, Snan was the member of Morrison with primary responsibility for rendering such advice and providing such representation. 24. Upon information and belief, Snarr was assisted in that regard from time to time by other attorneys at Morrison, who are named as Doe Defendants in this action. The Reinvestment Transactions 25. The Reinvestment Transactions that the Investor Plaintiffs entered into and with respect to which Defendants were engaged as attorneys, were structured by Stonebridge. 26. Pursuant to the structure Stonebridge put into place, the Investor Plaintiffs each established a special purpose limited liability company (each a "1042 LLC" and collectively, the 4

5 1042 LLC Plaintiffs defined above) and each Investor Plaintiff contributed a portion of his respective ESOP Proceeds to his respective 1042 LLC. 27. Utilizing ESOP Proceeds and other funds, the 1042 LLC Plaintiffs purchased corporate bonds issued by various utilities that constituted qualified replacement securities, each of which bonds was insured against default by insurance policies issued by financial guaranty insurers for purposes of the Reinvestment Transaction and each of which bonds when insured, became a new security comprised of both the corporate bond issued by the utility and the insurance that protected against default (the "Bonds"). When a bond is insured like the Bonds here, it is often referred to as a "wrapped" bond. A wrapped bond is rated by bond rating agencies differently than an uninsured bond of the same corporate issuer, and as noted, is a different security, with its own CUSIP number. The credit rating on an insured bond is the higher of the credit rating of the corporate issuer of the bond or the credit rating of the insurance company that issued the insurance policy guaranteeing payment of the bond. 28. The 1042 LLC Plaintiffs issued promissory notes (the "1042 LLC Notes") to an entity named Stonebridge Pass-Through Trust ("Stonebridge Trust") in exchange for loans, which loans and notes were secured by the Bonds, the personal limited guarantees of Plaintiffs and certain mutual funds that were purchased by Plaintiffs with a portion of their ESOP Proceeds (the "Mutual Funds"). 29. To obtain the money to fund its loans to the 1042 LLC Plaintiffs, Stonebridge Trust securitized its loans to the 1042 LLC Plaintiffs and issued notes to Nomura International PLC ("Nomura"), in exchange for a loan from Nomura. 30. In effect, through a series of simultaneously closed transactions, Stonebridge Trust borrowed money from Nomura and loaned that money to the 1042 LLC Plaintiffs, 5

6 allowing the Investor Plaintiffs to realize economic benefits from their ESOP Transactions, while still being entitled to legally defer capital gains and capital gains taxes on the ESOP Proceeds. 31. The loans from Nomura to Stonebridge Trust (the "Nomura Loans") were secured and collateralized by the same Bonds that the 1042 LLC Plaintiffs had purchased and pledged to Stonebridge Trust, by the LLC Notes that the 1042 LLC Plaintiffs had issued to Stonebridge Trust, by the limited personal guarantees of the Investor Plaintiffs that had been provided to Stonebridge Trust and by the Mutual Funds that had been pledged to Stonebridge Trust. 32. The Reinvestment Transactions contemplated that in order to protect Nomura in the event there was a decline in the value of the Bonds (i.e., its collateral), the Nomura Loans would have two default triggers. These triggers were to be based on the ratings of the Bonds by Moody's Investor Services ("Moody's") and Standard & Poor's ("S&P"). The first trigger was to provide that if the credit rating of a Bond dropped to or below "Baa3" by Moody's or "BBB-" by S&P, Nomura would receive greater interest on the note for the loan (the "Downgrade Yield Trigger"). The second trigger was to provide that if a rating of a Bond (i.e. the rating of both the corporate utility and the rating of the insurer) dropped to or below "B2" by Moody's or "B" by S&P, Nomura could declare an event of default under the applicable trust indenture for each 1042 LLC Plaintiff (each a "Trust Indenture" and collectively the "Trust Indentures"), and cause the Bonds to be sold (the "Event of Default Trigger"). 33. Critically, if, upon default, Nomura was permitted to and did sell the Bonds, the Investor Plaintiffs would incur capital gains liability on the ESOP Proceeds and would immediately be responsible for the payment of capital gains taxes. That would defeat the very purpose of the Reinvestment Transactions, which as Defendants always knew the Investor

7 Plaintiffs entered into to defer capital gains and capital gains taxes, and ultimately to pay no capital gains tax, on the ESOP Proceeds, and would cause Plaintiffs other damages as well. 34. Accordingly, Defendants knew or should have known that any language in the documentation for the Reinvestment Transactions that would increase the possibility that Nomura could declare a "default," would inure to the detriment of Plaintiffs. Negotiation of the Transactional Documents 35. In the summer of 2007, Stonebridge sent Nomura a set of proposed transaction documents for the Reinvestment Transaction. Negotiation of the documents continued throughout that summer. 36. Defendants, as Plaintiffs' attorneys, were, among other things, to review all relevant documents on behalf of Plaintiffs, advise Plaintiffs with respect to those documents and protect the rights, interests and objectives of Plaintiffs in connection with those documents and the transactions to which they pertained. 37. At all times relevant to this matter, Defendants knew it was critical to the Reinvestment Transaction that there be a deferral of capital gains and capital gains taxes on the ESOP Proceeds. 38. Shortly before the closing of the transaction, there was an alteration of the trigger language in the draft Trust Indentures, which alteration was not requested by Nomura, butwhich altered the Event of Default Trigger permitting, among other things, Nomura to sell the Bonds. Specifically, the alteration changed a number of provisions relating to triggers that, among other things, created a new Event of Default tied only to the ratings of the financial guaranty insurance policies issued to insure the Bonds (the "Rating Trigger"), not to the ratings of the Bonds 7

8 themselves, which as indicated is the higher of the rating of the utility issuing the bond or the rating of the insurer of the bond. 39. The Rating Trigger is contained in the drafts and in the final, executed version of the Trust Indentures that Defendants reviewed prior to advising Plaintiffs to sign them. 40. As a result, the relevant Event of Default provisions in the Trust Indentures pertaining to the Rating Trigger state: Section 6.1 Events of Default (a) Each of the following shall constitute an Event of Default with respect to the affected class of Notes and only such Notes: * * * (v) the rating with respect to any financial guaranty insurance policy related to any Underlying Bond falls to or below "B2" by Moody's or "B" by S&P The foregoing change in the Reinvestment Transaction documentation and the new basis for default imposed by the Rating Trigger, created a fundamental risk in the Reinvestment Transaction to which Plaintiffs had not agreed, which Defendants knew Plaintiffs had not agreed to, which Plaintiffs were never advised about and which Defendants had they been acting with an appropriate level of skill, care and diligence as attorneys for Plaintiffs should not have allowed to have been inserted into the Trust Indentures. 42. In earlier court proceedings, Defendants have conceded that they failed to notice the alteration of the Rating Trigger in the Trust Indentures and that the provision should not have been permitted to be in the documents executed by Plaintiffs. 8

9 43. Ultimately, the ratings of the insurers that had issued financial guaranty policies on the Bonds were downgraded. When this occurred, Nomura invoked the Rating Trigger to declare Events of Default under the Trust Indentures. 44. Efforts by Plaintiffs and Stonebridge to challenge in court the propriety of Nomura's actions and invocation of the Rating Trigger in which proceedings Defendants served as Plaintiffs' counsel and in which they conceded their mistake and that the documents they permitted Plaintiffs to sign did not reflect Plaintiffs' intention were rejected based upon the language of the Trust Indentures. Indeed, this Court and the Appellate Division, First Department, have both held that Nomura's interpretation of the Trust Indentures, particularly as it related to the Rating Trigger, was proper. 45. Nomura demanded that the Notes secured by the Bonds for which the insurance was downgraded be paid immediately and that the affected Bonds be sold to provide the proceeds for that payment and was in a position to sell the Bonds itself, all challenges to its ability to do so having been flatly rejected by the Courts. 46. Nomura ultimately sold the Bonds that had been purchased by Plaintiffs SBRAN 1042 Investor LLC, DG 1042 Investor LLC, RH 1042 Investor LLC, SR 1042 Investor LLC and JR 1042 Investor LLC pursuant to a Settlement Agreement with Plaintiffs that was intended to limit and mitigate and did limit and mitigate the damages Plaintiffs would have suffered were Nomura to unilaterally sell the Bonds at a time and in a manner of its choosing, as the Courts, of this State had determined that it had a right to do. 47. Sale of the affected Bonds resulted in capital gains tax obligations being incurred by Plaintiffs Brandis, Greenberg, Huang, Romo and Rosenheck, which, as noted, is exactly what 9

10 the Reinvestment Transaction was supposed to prevent and precisely what Defendants were engaged to prevent and avoid as attorneys for Plaintiffs. 48. Plaintiff Bloostein entered into a transaction with Deutsche Bank (the "DB Transaction"), that was intended to limit and mitigate and did limit and mitigate the damages he would suffer were Nomura to unilaterally sell the Bonds at a time and in a manner of its choosing, as the Courts of this State determined it had a right to do, through which transaction the Bonds that had been purchased by JB 1042 Investor LLC (the "JB Bonds") were effectively "refinanced," but pursuant to which Bloostein was required to assume significant personal risk and incur significant expense that he would not have had to assume or incur if Nomura was not in a position to sell the JB Bonds. More particularly, Plaintiff Bloostein was required to personally assume 100% of the liability from any default on or reduction in the value of the JB Bonds for the remaining 26 years of the DB Transaction (his personal liability in that regard was limited to 16% under the original transaction for which Morrison Cohen had represented him and JB 1042 Investor LLC), purchase an interest rate swap for the remaining 26 years of the DB Transaction and provide Deutsche Bank with $14,000,000 in collateral that he must leave with the bank for the 26-year term of the Transaction and potentially supplement in the event the JB Bonds are downgraded, and which funds he would otherwise have deployed in his business which business has historically provided a 50% return on investment. 49. In addition, Plaintiffs suffered further losses caused by the need to repay the Nomura Loans. 50. As a direct and proximate consequence of Defendants' failure to notice, perceive and/or address the addition of the Rating Trigger to the Trust Indenture, and thus permitting and advising Plaintiffs to execute documents containing the Rating Trigger which imposed a 10

11 fundamental and massive economic risk on Plaintiffs to which Plaintiffs had not agreed, of which Plaintiffs were unaware and that Defendants were engaged to protect their client against Plaintiffs Brandis, Greenberg, Huang, Romo and Rosenheck have collectively incurred capital gains taxes in an amount to be proven at trial, but of no less than $23,324,306.69, that but for Defendants' negligence they would otherwise have not incurred. 51. As a direct and proximate consequence of Defendants' failure to notice, perceive and/or address the addition of the Rating Trigger to the Trust Indentures, and thus permitting and advising Plaintiffs to execute documents containing the Rating Trigger which imposed a fundamental and massive economic risk on Plaintiffs to which Plaintiffs had not agreed, of which Plaintiffs were unaware and that Defendants were engaged to protect their client against Plaintiff Bloostein was required to enter into the DB Transaction and to assume significant personal risk and incur significant expense that but for Defendants' negligence, Bloostein would not have had to have otherwise assumed or incurred, including, without limitation, the expense in maintaining an interest rate swap and the loss of the use of at least $14,000,000 that he was required to post as collateral that he otherwise could have deployed at a higher rate of return. 52. In addition and also as a direct and proximate consequence of Defendants' failure to notice, perceive and/or address the addition of the Rating Trigger to the Trust Indenture, and thus permitting and advising Plaintiffs to execute documents containing the Rating Trigger, Plaintiffs have collectively incurred additional damages in the form of fees and expenses attributable to having to repay the Nomura Loans in an amount to be proven at trial, but of no less than $1,857,879.41, that but for Defendants' negligence and the consequent need to repay the Nomura Loans, they would otherwise not have incurred. 11

12 53. In addition and also as a direct and proximate consequence of Defendants' failure to notice, perceive and/or address the addition of the Rating Trigger to the Trust Indenture, and thus permitting and advising Plaintiffs to execute documents containing the Rating Trigger, fees, costs and expenses incurred by Plaintiffs in connection with the ESOP Transactions and Reinvestment Transactions, have been wasted, which but for Defendants' negligence would not have been wasted and which has caused a loss to Plaintiffs in an amount to be proven at trial, but in an aggregate amount of no less than $1,000, In addition and also as a direct and proximate consequence of Defendants' failure to notice, perceive and/or address the addition of the Rating Trigger to the Trust Indenture, and thus permitting and advising Plaintiffs to execute documents containing the Rating Trigger, Plaintiffs incurred attorneys' fees and expenses litigating the propriety of Nomura's invocation of the Rating Trigger and otherwise contesting Nomura's efforts to sell the Bonds, that but for Defendants' negligence Plaintiffs would not have been incurred and which has caused a loss to Plaintiffs in an amount to be proven at trial, but in an aggregate amount of no less than $200,000. AS AND FOR A FIRST CAUSE OF ACTION (Legal Malpractice) 55. Plaintiffs repeat and reallege the allegations of paragraphs 1 through 54 as if fully set forth herein. 56. As retained attorneys, Defendants had a duty to represent, counsel and advise Plaintiffs with appropriate and proper skill, care and diligence. 57. Defendants breached that duty by negligently failing to notice, perceive and/or address the inclusion of the Rating Trigger in the Trust Indentures and/or allowing and advising Plaintiffs to respectively execute Trust Indentures containing the Rating Trigger. 12

13 58. As a direct and proximate consequence of Defendants' negligence, Plaintiffs Brandis, Greenberg, Huang, Romo and Rosenheck are liable for the payment of capital gains taxes in an amount to be proven at trial, but of no less than $23,324, that but for Defendants' negligence those Plaintiffs would not have the obligation to pay. 59. As a direct and proximate consequence of Defendants' negligence, Plaintiff Bloostein was required to enter into the DB Transaction and to assume significant personal risk and incur significant expense that but for Defendants' negligence, Bloostein would not have had to have otherwise assumed or incurred, including, without limitation, the cost of an interest rate swap during the 26 year term of the DB Transaction and the loss of the use of the collateral he has been required to post to secure the transaction, presently $14,000,000, that he has historically been able to deploy in his business with a 50% return on investment. 60. As a direct and proximate consequence of Defendants' negligence, Plaintiffs have collectively incurred additional damages attributable to having to repay the Nomura Loans in an amount to be proven at trial, but of no less than $1,857,879.41, that but for Defendants' negligence and the consequent need to repay the Nomura Loans, they would otherwise have not incurred. 61. As a direct and proximate consequence of Defendants' negligence, the fees, costs and expenses spent by Plaintiffs in connection with the ESOP Transactions and Reinvestment Transactions have been wasted, that but for Defendants' negligence Plaintiffs would not have been wasted, in an amount to be proven at trial, but in an aggregate amount of no less than $1,000, As a direct and proximate consequence of Defendants' negligence, Plaintiffs have incurred attorneys' fees and expenses litigating the propriety of Nomura's invocation of the 13

14 Rating Trigger and otherwise contesting Nomura's efforts to sell the Bonds, that but for Defendants' negligence Plaintiffs would not have incurred, in an amount to be proven at trial, but in an aggregate amount of no less than $200, As a direct and proximate consequence of Defendants' negligence, Plaintiffs did not receive value for the legal fees and disbursements paid to Morrison in connection with the transactions at issue in this action, including without limitation, the ESOP Transactions and the Reinvestment Transactions and are entitled to the return of all legal fees and disbursements paid to Morrison in connection therewith, in an amount to be proven at trial, but which total no less than $500, Thus, as a direct and proximate consequence of Defendants' negligence, Plaintiffs have suffered and will suffer monetary damage in an aggregate amount to be determined at trial, but believed to be in excess of $45,000,000. AS AND FOR A SECOND CAUSE OF ACTION (Declaratory Judgment Subsequent Losses By Bloostein and JB 1042 Investor LLC) 65. Plaintiffs repeat and reallege the allegations of paragraphs 1 through 64 as if fully set forth herein. 66. As retained attorneys, Defendants had a duty to represent, counsel and advise Plaintiffs with appropriate and proper skill, care and diligence. 67. Defendants breached that duty by negligently failing to notice, perceive and/or address the inclusion of the Rating Trigger in the Trust Indentures and/or allowing and advising Plaintiffs to respectively execute Trust Indentures containing the Rating Trigger. 68. As a direct and proximate consequence of Defendants' negligence, Plaintiff Bloostein was required to enter into the DB Transaction and to assume significant personal risk 14

15 and incur significant expense that but for Defendants' negligence, Plaintiff Bloostein would not have had to have otherwise assumed or incurred. 69. Among other things, Plaintiff Bloostein was required to personally assume 100% of the liability from any default on or reduction in the value of the JB Bonds for the remaining 26 year term of the DB Transaction (his personal liability in that regard was limited to 16% under to the original transaction for which Morrison Cohen had represented him and JB 1042 Investor LLC), purchase and pay for in each year of the term an interest rate swap, and provide Deutsche Bank with at least $14,000,000 in collateral that he is required to leave with the bank and potentially supplement in the event the JB Bonds are downgraded. 70. In the event that the JB Bonds are downgraded, Plaintiffs Bloostein and JB 1042 Investor LLC would suffer damages owing to liability on Bloostein's personal guaranty and the loss of the posted collateral or the need to post additional collateral. 71. Defendants are required to compensate Plaintiffs Bloostein and JB 1042 Investor LLC for all damages and losses ultimately incurred as a result of having to enter into the DB Transaction because, but for Defendants' negligence, Plaintiffs Bloostein and JB 1042 Investor LLC would not have incurred and would not incur such damages and losses. 72. Upon information and belief, Defendants contest Plaintiffs' position, as set forth in paragraph Accordingly, a dispute has arisen between the parties as to whether Defendants are required to compensate Plaintiffs Bloostein and JB 1042 Investor LLC for all damages and losses ultimately incurred as a result of having to enter into the DB Transaction. 15

16 74. Thus, Plaintiffs Bloostein and JB 1042 Investor LLC are entitled to a declaration that Defendants are required to compensate Plaintiffs Bloostein and JB 1042 Investor LLC for all damages and losses ultimately incurred as a result of having to enter into the DB Transaction. WHEREFORE, judgment as follows is respectfully prayed for: A. On the First Cause of Action and on behalf of all Plaintiffs (i) for compensatory damages in an amount to be determined at trial, but believed to be in excess of $45,000,000 and (ii) for disgorgement of attorneys' fees and costs paid to Defendants in an amount to be determined at trial, but believed to be in excess of $500,000; B. On the Second Cause of Action and on behalf of Plaintiffs Bloostein and JB 1042 Investor LLC, for a declaration that Defendants are required to compensate Plaintiffs Bloostein and JB 1042 Investor LLC for all damages and losses ultimately incurred as a result of having to enter into the DB Transaction; C. For interest, costs and attorneys' fees to the extent allowed by law; and D. For such other and further relief that the Court deems just and proper. Dated: New York, New York May 23, 2012 PRYOR CASHMAN LLP By: C. Kenneth A. Schulman David C. Rose 7 Times Square New York, New York (212) Attorneys for Plaintiffs 16