By Nate Raymond
Sept 5 (Reuters) - The receiver for a defunct investment company may proceed with a negligence lawsuit against the law firm Nixon Peabody, a U.S. district judge in Los Angeles ruled on Wednesday.
James Donell, the court-appointed receiver for NewPoint Financial Services Inc, may go forward with a lawsuit accusing Nixon Peabody of helping a NewPoint manager engage in fraud, the court ruled.
NewPoint has been described by prosecutors as part of a Ponzi scheme, and in June its former head of investment, John Farahi, pleaded guilty to federal charges that he defrauded investors through the sale of $20 million in investment instruments.
Donell's lawsuit accuses Nixon Peabody of helping Farahi and says the firm should have known through its former partner, David Tamman, that Farahi wasn't operating New Point properly.
Tamman in December was charged separately with 10 counts including conspiracy and records alteration as prosecutors accused him of obstructing a U.S. Securities and Exchange Commission investigation into Farahi's fraud scheme.
Tamman's trial is set for Oct. 23, and he has pleaded not guilty.
Donell's lawsuit, filed in May 2010, claims that if Nixon Peabody had done its job properly, Farahi's fraud could have been cut short by two years.
Donell alleges that Nixon Peabody agreed to represent NewPoint "knowing that Farahi was diverting corporate funds and wasting corporate assets."
Nixon Peabody argued the Donell lacked the authority to bring the lawsuit and that the case should be dismissed on constitutional grounds, arguing the receiver was acting as a prosecutor for the SEC or court.
Judge Dean Pregerson in Los Angeles rejected those arguments, stating Donell was stepping into the shoes of NewPoint and pursuing claims "that this private party could have brought itself."
The judge also disagreed with Nixon Peabody's contention the receiver failed to allege causation and that the firm had no role in causing investor losses.
"Contrary to Nixon Peabody's contentions, (Donell) also expressly alleges that the firm knew or should have known facts that would have prevented or limited Farahi's alleged looting of NewPoint in the first place, and provides sufficient facts to support this allegation," Pregerson wrote.
A spokeswoman for Nixon Peabody declined comment.
The case is James H. Donell v. Nixon Peabody, U.S. District Court for the Central District of California, No. 12-cv-04084. . . .