Abujudeh v. Smith

Background

Charlie Abujudeh alleged that, between January and July 2020, he participated in a scheme to manipulate and sell penny stocks through aggressive and deceptive tactics. The Department of Justice later charged him, and he pleaded guilty in May 2022 to one count of conspiracy to commit securities fraud. He received two years’ probation, a lifetime ban on trading penny stocks, and an order to forfeit approximately $253,000. In a separate Securities and Exchange Commission proceeding, he agreed to a settlement that included a five-year penny-stock ban and a $5,053,403 payment.

Abujudeh alleged that Patrick Smith and Smith Villazor LLP represented him during the Department of Justice and Securities and Exchange Commission investigations. He claimed that the defendants falsely said they would pursue cooperation and settlement, advised him not to answer questions at a Securities and Exchange Commission hearing except by asserting his constitutional protection against self-incrimination, and misrepresented the agencies’ willingness to negotiate. He alleged that the defendants’ conduct led to his charges and resulting penalties and expenses.

Abujudeh’s amended complaint asserted fraud and fraudulent inducement. He had previously asserted legal-malpractice and New York Judiciary Law claims, but withdrew those claims after defendants raised defenses, including the statute of limitations. Defendants moved to dismiss the amended complaint under Federal Rule of Civil Procedure 12(b)(6), which tests whether a complaint states a legally sufficient claim.

Court’s Analysis

The court first determined that the fraud and fraudulent-inducement claims were “thinly veiled” legal-malpractice claims. Although the amended complaint replaced references to negligence and malpractice with fraud, it sought the same damages based on the same alleged conduct. The court explained that a fraud claim against an attorney must involve intentional misrepresentations and damages separate from those caused by the alleged malpractice. In the court’s view, Abujudeh’s claims instead rested on the defendants’ alleged failure to carry out the promised legal strategy.

The court next held that the claims were time-barred. Because the action was based on state-law claims and the court’s jurisdiction rested on the parties’ diverse citizenship, the court applied New York’s choice-of-law rules. It concluded that the claims accrued in California, where Abujudeh resides and sustained the alleged economic loss, and that California’s one-year limitations period applied. The court found that Abujudeh learned of the alleged wrongdoing in 2021 but did not bring the action until June 2024.

The court also held that the amended complaint failed to state a claim even assuming the claims were timely. Fraud and fraudulent inducement require proof that the defendants’ alleged misrepresentations directly and proximately caused the plaintiff’s damages. The court concluded that Abujudeh’s guilty plea to participating in the market-manipulation scheme severed the causal connection between the defendants’ alleged misrepresentations and the claimed damages.

Finally, the court applied New York’s rule requiring a plaintiff suing an attorney over representation in a criminal matter to allege actual innocence or a credible claim of innocence while the underlying determination of guilt remains undisturbed. The court found that Abujudeh had not made such an allegation. It therefore concluded that the rule applied regardless of whether the claim was labeled fraud, fraudulent inducement, or malpractice. The court did not decide defendants’ separate argument that the amended complaint failed to adequately allege fraudulent intent because it found the complaint independently deficient.

Disposition

Judge Naomi Reice Buchwald granted defendants’ motion. The Clerk was directed to terminate all pending motions, enter judgment for all defendants, and close the case. The opinion does not state that the motion or judgment was entered with or without prejudice.