In a new series of fraud allegations against Philadelphia lawyer Michael Kwasnik, a bankruptcy trustee in Wilmington contends that he participated in transactions that improperly drained more than $1 million from a failed investment company where he served as general counsel.
The lawsuit, brought by trustee Richard W. Barry, asserts that Kwasnik helped orchestrate insider transactions that transferred assets out of Liberty State Benefits of Pennsylvania for the benefit of himself and other insiders.
Barry contends that the transfers, which he says were concealed from the company's board of directors, contributed to its insolvency and its current inability to pay more than $17 million in claims from investors, many of them elderly.
Barry also alleges that minutes of company board meetings "tell a startling story of gross negligence, deceit, theft, and conversion."
The lawsuit names Kwasnik's law firm, Kwasnik, Kanowitz & Associates, as a defendant and accuses Kwasnik's partner, Howard Z. Kanowitz, of being a coconspirator.
The law firm improperly represented both sides of transactions in which company assets were sold to outside parties for less than their worth, the lawsuit charges.
"The malpractice by defendants [Michael] Kwasnik, Kanowitz, and the Kwasnik law firm was and is a cause in fact . . . of the [investment company's] loss of cash wrongfully removed from its business, its financial failure, and its inability to pay in excess of $17 million in alleged noteholder and investor claims," the lawsuit says.
In a statement released Sunday by Wilmington lawyer William A. Hazeltine, Kwasnik disputed Barry's allegations against himself and his father, William, head of Liberty State's parent company, and accused Barry of pursuing a political vendetta.
"The trustee is wrong on the facts," the statement said. "The Kwasniks have evidence demonstrating that the trustee's attack on their character is politically motivated. Mr. Kwasnik and his father also have evidence showing that they are victims of forgery. They have never profited from Liberty State Benefits. The true facts have already been presented in the public record."
In a telephone interview, Kanowitz denied that he had engaged in a conspiracy and contended that he had conducted himself properly.
"I was not engaged in any of these transactions," he said, "and the people who are making these allegations are going to have to come forward and give their proofs."
The lawsuit also names as defendants members of the board of directors of Liberty State Financial Holdings Corp., Liberty State's Cherry Hill parent; the company's former accountant, Daniel Duffy; and others.
Kwasnik, a former Democratic candidate for the New Jersey General Assembly, is the target of multiple allegations of fraud and attorney misconduct, not only by the bankruptcy trustee but also by Liberty State investors and the Office of Attorney Ethics in New Jersey, a state Supreme Court agency that enforces professional rules governing lawyers.
In charges dating to 2007, the office alleges that Kwasnik engaged in "fraud, deceit, misrepresentation, and dishonesty" in his representation of clients. Among other alleged infractions, the office accuses him of investing clients' money in Liberty State Financial Holdings Corp. and in a start-up bank without their knowledge. No hearing has been held on the charges, and no final determination has been made on whether the allegations have merit.
To file the complaints, the attorney ethics office must find what it believes is "clear and convincing evidence" of ethics violations.
Before its Chapter 11 filing on July 29, Liberty State Benefits had been in the business of what is called life settlements. It bought the right to collect life insurance payouts of elderly policyholders for a premium over the surrender value.
It planned to collect the payouts when the original policyholders died. Such settlement transactions have drawn increasing scrutiny from federal regulators and members of Congress.
Although proponents say such settlements can generate money for elderly policyholders, the transactions have also been used to defraud investors, and several principals of such investment companies have been prosecuted and convicted.
Contact staff writer Chris Mondics at 215-854-5957 or email@example.com.