New Jersey Attorney General Paula Dow on Friday sued Philadelphia lawyer Michael Kwasnik and others, accusing them of orchestrating a multimillion dollar Ponzi scheme that depleted elderly investors' retirement accounts.
The lawsuit alleges that $5 million of the $13.5 million raised by Kwasnik and others for investment in Liberty State Benefits, a family-affiliated firm, was paid to Kwasnik, his law firm, or members of his family.
The lawsuit alleges that while the company said investor funds would be used to bolster and promote the business, they went in some instances to pay promised returns to earlier investors, a defining characteristic of a Ponzi-style fraud.
Kwasnik and securities salesmen Joseph Schifano and Daniel McCorry also broke New Jersey securities laws by failing to register with state securities regulators, the lawsuit alleged.
Filed in state Superior Court in Essex County in North Jersey, the suit demands restitution of investor funds and asks that the court issue an order permanently barring Kwasnik and others from selling investment securities.
"Investor funds were partly used in a Ponzi scheme to pay existing investors and for other improper purposes, including the fraudulent and unjust enrichment of individual defendants and members of their families," the lawsuit alleged.
It names Michael Kwasnik's father, William, who was CEO of Liberty State Benefits' parent company, and securities salesmen Schifano and McCorry as defendants.
The suit also names as a defendant William P. Leonard, described in the complaint as a Cherry Hill investment adviser and former chairman of the board of Liberty State Financial Holdings Corp., the parent company of Liberty State Benefits.
Kwasnik denied in a prepared statement that he had done anything wrong and said that New Jersey authorities had mistakenly accused him.
"The Kwasniks state that the N.J. Bureau of Securities is wrong on the facts, wrong in their accounting and wrong on their application of the law," Michael Kwasnik said. "The civil claims made are unsupported by the weight of the true evidence."
Leonard, 82, also disputed the allegations against him.
"I introduced them to some of my clients," he said. "My clients put money with them, and that is all I know."
Dow's lawsuit is one of a number of legal complaints against Kwasnik that allege misappropriation of funds. But it is by far the most pointed, and, since it bears the name of New Jersey's top state law-enforcement official, substantially raises the stakes.
Kwasnik, a former Democratic State Assembly candidate and a graduate of Rutgers University law school in Camden, also is the target of allegations by New Jersey's Office of Attorney Ethics that he broke ethics rules by covering shortfalls in his law-firm checking account with funds from client trust accounts, among other alleged infractions.
Until it and its parent corporation filed for Chapter 11 bankruptcy protection in Wilmington on July 29, Liberty State Benefits of Pennsylvania was in the business of purchasing so-called life settlements.
The company offered cash payments to affluent and elderly life insurance policy holders above the surrender value - or built up cash value of the policy - but less than the promised life insurance payment itself.
It had planned to collect the insurance payouts when the original policy holders died, paying the premiums to the insurer until then.
According to its offering documents, investors would loan the company money for three years to purchase policies and pay premiums and other administrative costs, earning 12 percent interest.
In his answers to earlier lawsuits in connection with Liberty State Benefits, Kwasnik has consistently maintained that while he may have attended meetings with investors, he never participated in marketing the company.
But in her lawsuit, Dow alleges that Kwasnik in fact participated in sales pitches, and on at least one occasion drove a client to the bank where his investment check was deposited.
The complaint, signed by New Jersey Deputy Attorney General Stacy-Ann T. Davy, said Kwasnik and other defendants engaged in a series of material misrepresentations by, among other things, claiming that the investments were guaranteed.
The company itself failed to inform investors that its life settlement policies had been pledged as collateral on a $2.3 million loan from Westdale Construction Co. Ltd., a hedge fund based in Canada, the lawsuit said.
Liberty State Benefits eventually defaulted on that loan, a fact that never was disclosed to investors, the lawsuit charged. The company also falsely represented to investors that it had been the subject of an audit, the lawsuit alleged.
Contact staff writer Chris Mondics at 215-854-5957 or email@example.com.