Opinion
No. 01 Civ. 781 (JFK).
April 6, 2005
OPINION and ORDER
This is a fraud case that will be tried to a jury beginning on April 7, 2005. Plaintiffs, Defendant Fahnestock and Defendantpro se Vuono have moved in limine to exclude evidence.
I. PLAINTIFF'S MOTIONS
Plaintiffs move to exclude the following: (1) evidence that persons not on trial were not named as defendants in this action; (2) evidence concerning tax deductions that Plaintiffs may have taken for the investment losses they incurred as a result of Defendants' allegedly fraudulent conduct; (3) evidence relating to the September 1997 transactions between Defendant CSDesign, Inc. and Momentum Investments Ltd.; (4) evidence relating to Plaintiffs' assets; and (5) evidence concerning certain missing audiotapes of former Plaintiff Terry Wilkinson.
A. Persons Not Named As Defendants
Plaintiffs did not sue Meyer Feldman, Sydney Capland and Jeffrey Mason, three Canadians who introduced Plaintiffs to Rayvon, Inc. (Vuono's company). Plaintiffs claim that they did not assert claims against these persons because of personal jurisdiction and forum non conveniens concerns. (Pl. Mem. in Supp. at 2). They move to exclude evidence relating to their decision not to sue on Fed.R.Evid. 402 and 403 grounds. Fahnestock argues that Plaintiffs' decision not to sue the three Canadian promoters bears on the promoters' credibility because they knew at depositions that they would be free from criminal or civil charges. (Fahn. Mem. in Opp. at 1).
The Court agrees with Fahnestock. These witnesses appear on Plaintiffs' witness list. (Pl. Prop. Pre-Trial Order, Exh. A). The defendant's attorney is permitted to challenge the credibility of the plaintiff's witness on cross-examination by asking questions pertaining to the plaintiff's decision not to bring suit against that witness.
B. Plaintiffs' Tax Deductions
Plaintiffs spend several pages of their memorandum pushing for the exclusion of any evidence regarding tax deductions that they may have taken for the investment losses that the allegedly incurred as a result of Defendants' activities. Plaintiffs also request that Defendants be precluded from arguing that the value of any such deductions should offset any potential damages awarded to Plaintiffs. (Pl. Mem. in Supp. at 3-9). Fahnestock correctly concedes the point on damages but intends to prove on cross-examination that certain Plaintiffs made representations about Rayvon to Canadian tax authorities that were inconsistent with their current position. Fahnestock notes that these representations were covered at length in Plaintiffs' depositions. (Fahn. Mem. in Opp. at 4).
Fahnestock certainly may explore on cross-examination whether Plaintiffs' representations to the Canadian tax authorities contradict their current position. Furthermore, while disclosure of tax returns is generally disfavored, evidence of Plaintiffs' tax deductions is probative of investor sophistication and, by extension, justifiable reliance. See Smith v. Bader, 83 F.R.D. 437 (S.D.N.Y. 1979) (Sweet, J.). These issues go to the heart of fraud.
C. The CSDesign-Momentum Transaction
Two years after Terry Wilkinson's investment in the alleged fraudulent scheme, CSDesign (Wilkinson's company) sold the assets at issue in this litigation — shares of Rayvon Class B preferred stock — to another Wilkinson entity, Momentum Investments Ltd. Plaintiffs seek exclusion of this evidence on Fed.R.Evid. 403 grounds. Defendants contend that Wilkinson's ownership of two investment entities and the transaction between them undermines the notion that he is a neophyte investor and tends to prove sophistication and experience in private financial transactions, as well as access to lawyers and accounts. The Court agrees. This subject clearly is a fertile area for cross-examination, and the Court sees no danger of unfair prejudice.
D. Plaintiffs' Net Worth
Plaintiffs make a Fed.R.Evid. 403 objection to the admission of evidence concerning their wealth and assets. In a nutshell, they claim that this evidence is not necessarily indicative of investor sophistication. While Plaintiffs are correct that wealth, by itself, does not necessarily equate to sophistication, there is no Rule 403 problem here. Even if Fahnestock "has a long list of examples of the plaintiffs' prior investment experience" (Pl. Mem. in Supp. at 13), evidence of Plaintiffs' assets just adds another stroke of color to the overall portrait. Plaintiffs will have ample opportunity to paint their own picture. Finally, the Court rejects Plaintiffs' argument that the only purpose for this evidence is to convince the jury that Plaintiffs do not deserve significant compensation.
E. The Missing Audiotapes
1. Spoliation Issue
In the late stages of this litigation, Wilkinson apparently recalled having mailed tapes of conversations with Vuono, Minicucci and others to the former law firm of Plaintiffs' counsel, Mr. Grannis. On October 28, 2004, Plaintiffs' counsel, Mr. Kobre, informed Fahnestock's counsel, Mr. Wilson, that the tapes could not be located and that Wilkinson had not preserved them. Mr. Kobre informed Mr. Wilson that Wilkinson had made notes of these conversations and that these notes already had been produced. Plaintiffs claim the loss of the tapes was not in bad faith. They argue that in absence of bad faith or gross negligence, no possibility of an adverse inference based on spoliation exists. Therefore, any evidence concerning the lost tapes should be precluded. (Pl. Mem. in Supp. at 9-11).
Plaintiffs misstate the law. A party seeking an adverse inference instruction based on spoliation must establish (1) the controlling party's obligation to preserve the evidence, (2) destruction with a culpable state of mind, and (3) relevance in the sense that the unavailable evidence was of the nature alleged by the party affected by its loss. See Residential Funding Corp. v. DeGeorge Financial Corp., 306 F.3d 99, 107-09 (2d Cir. 2002). Even in absence of "bad faith" or "gross negligence," mentioned by Plaintiffs, "the `culpable state of mind factor' is satisfied by a showing that the evidence was destroyed `knowingly, even if without intent to [breach a duty to preserve it], or negligently.'" Id. at 108 (quoting Byrnie v. Town of Cromwell, 243 F.3d 93, 109 (2d Cir. 2001)). The distinction is that a finding of bad faith or gross negligence, by itself, might be sufficient circumstantial evidence to support a finding of relevance, whereas knowledge or ordinary negligence would not. See id. at 109.
At this point, the Court has no idea what kind of evidence Defendants will present concerning the loss of the tapes. Defendants do not even hint at the spoliation issue in their papers. The Court will make determinations as objections arise. Eventually the Court will decide if the evidence warrants an adverse inference instruction. For the present, the Court denies Plaintiffs' motion to exclude this evidence.
2. Admissibility of Wilkinson's Notes
Instead of directly engaging the spoliation issue, Defendants adopt a motion in limine in which former Defendant Minicucci sought to prevent Plaintiffs from introducing evidence of the alleged tape recordings, including all notes based on such tapes and all testimony pertaining to such tapes, on unreliability and Fed.R.Evid. 1002 grounds.
Absent bad faith in the destruction or loss of the audiotapes, Wilkinson surely may testify as to his best recollection of the conversations. Fed.R.Evid. 1004(1). If need be, his notes may be provided in order to refresh his recollection, but these notes themselves are not admissible. A out-of-court statement consistent with the declarant's testimony is not hearsay only if it is offered to rebut a charge of recent fabrication or improper influence or motive. Fed.R.Evid. 801(d)(1)(B). There has been no charge of recent fabrication — indeed, everyone has known for five months that the tapes were lost — and prior consistent statements may not be admitted simply to bolster the witness, even if he is discredited. See Tome v. United States, 513 U.S. 150, 157 (1995).
II. FAHNESTOCK'S MOTIONS
Fahnestock moves to exclude the following evidence: (1) that it failed adequately to supervise Minicucci, (2) that it improperly hired Minicucci, (3) that one of its branch managers knew of Vuono's spotty history, and (4) that it improperly listed per-share stock prices on certain monthly statements. Fahnestock also moved to exclude evidence concerning "prime bank frauds," the hiding of evidence in a prior action and the expenses of caring for the Schuelers' quadriplegic child. Plaintiffs represent that they do not intend at present to offer evidence on the matter of the Schuelers' quadriplegic child, other prime bank fraud schemes or an alleged fraudulent response to a subpoena in a prior action. (Pl. Mem. in Opp. at 1).
A. Inadequate Supervision of Minicucci
Fahnestock moves for exclusion of evidence of negligent supervision of its broker, Minicucci. Fahnestock argues that (i) Plaintiffs stated in their summary judgment briefs that facts concerning Minicucci's supervision had nothing to do with the respondeat superior claim, (ii) negligent supervision has nothing to do with fraud, (iii) there is no negligent supervision claim, and (iv) the alleged negligence of Minicucci's managers based on regulatory requirements is irrelevant. (Fahn. Mem. in Supp. at 5-7). Plaintiffs counter that the evidence goes to the extent of trust and authority that Fahnestock placed in Minicucci, which is at the heart of the respondeat issue. (Pl. Mem. in Opp. at 2). This round goes to Plaintiffs. Fahnestock surely plans to defend by arguing that Minicucci acted outside his authority. No one can know the scope of that "authority" without determining how loosely Fahnestock leashed Minicucci, if at all. Plaintiffs are correct that this evidence goes to the heart of the case.
B. Improper Hiring of Minicucci
Fahnestock moves for exclusion of evidence concerning Minicucci's apparently less-than-stellar employment history. Fahnestock contends that Minicucci's prior history, and Fahnestock's decision to hire Minicucci, is irrelevant in absence of a negligent hiring claim. Fahnestock also raises Fed.R.Evid. 403 objections because of (i) the need to determine industry standards for hiring new brokers, (ii) Minicucci was never charged with wrongdoing in any "boiler room" matter, and (iii) Minicucci's career at Prudential, his former firm, was uncontroversial. (Fahn. Mem. in Supp. at 9-10). Plaintiffs respond that evidence of an employee's prior misconduct is relevant to whether the employee's conduct could reasonably have been anticipated, which bears on the respondeat issue. (Pl. Mem. in Opp. at 5). The Court agrees. Again, this evidence goes to the heart of whether Minicucci was acting under Fahnestock's flag or on a frolic when he committed the allegedly fraudulent acts.
C. Fahnestock's Branch Manager and Vuono
Fahnestock seeks to exclude evidence that Stanley Wong, Fahnestock's branch manager, knew about Vuono's cloudy background but did nothing despite also knowing that Vuono was involved in obtaining money from investors who had accounts at Fahnestock. (Fahn. Mem. in Supp. at 11). Plaintiffs point out that Wong was head of Fahnestock's flagship branch on Wall Street, and that knowledge attributable to him is attributable to Fahnestock. (Pl. Mem. in Opp. at 7). Plaintiffs are correct again for the same reasons given in Parts II.A and II.B, supra. All of this evidence goes to Fahnestock's knowledge of misrepresentations or omissions, or its reckless indifference to the truth or falsehood of those misrepresentations and omissions, which ultimately may prove scienter, a necessary element of fraud. See Small v. Lorillard Tobacco Co., 94 N.Y.2d 43, 57 (1999); Klembczyk v. Di Nardo, 265 A.D.2d 934, 935 (4th Dep't 1999).
D. Stock Pricing on Plaintiffs' Statements
Fahnestock moves for exclusion of evidence regarding the pricing of Rayvon stock on Plaintiffs' monthly statements beginning in July 1995. Fahnestock says that the price of the stock was sometimes listed at $25 per share and sometimes listed with an asterisk (*), indicating a zero market value. Fahnestock claims that no explanation for the pricing was found during discovery and that the pricing differences, while possibly suggesting negligence in preparation of the statements, are irrelevant to a fraud claim. (Def. Mem. in Supp. at 15). This argument fails. The foundation of a fraud claim is the existence of a material misrepresentation or omission. How could evidence of inaccurate per-share prices on Plaintiffs' monthly statements possibly be irrelevant? This evidence also may tend to prove or disprove Plaintiffs' justifiable reliance and any contention that Fahnestock was sunk in the alleged fraud just as deeply as Minicucci.
III. VUONO'S MOTION
Defendant pro se Aurelio Vuono moves to exclude any evidence relating to S.E.C. v. Hasho, et al., an action brought against him fifteen years ago. Vuono claims that the matter was "settled" and irrelevant to the instant case. (Vuono Motion). Plaintiffs contend that the S.E.C. barred Vuono from working in the securities industry after this proceeding. They contend that evidence concerning this action is relevant to the case against Vuono because he never disclosed the fact that he had been barred from the industry. Plaintiffs also contend that the ban was part of Vuono's history that was within the knowledge of Minicucci and Wong, and by extension Fahnestock. (Pl. Mem. in Opp. at 8-9).
First of all, S.E.C. v. Hasho was NOT "settled." On February 13, 1992, after trial of Vuono and others, Judge Edelstein issued an Opinion and Order containing his findings of facts and conclusions of law. It was not a happy day for Vuono and his co-defendants. The Order determined that the only appropriate remedy for their actions was the imposition of injunctions.S.E.C. v. Hashc, 784 F. Supp. 1059, 1111 (S.D.N.Y. 1992). On March 9, 1992, Judge Edelstein filed a final judgment of permanent injunction and order of disgorgement against Vuono. Now, perhaps Mr. Vuono made an honest mistake in wording his motion; perhaps, being pro se, he does not know the difference between a settlement and a judgment after a bench trial. One thing is certain: Mr. Vuono's pro se status will not save him if he makes one more misrepresentation to this Court, whether it be in a written submission, under oath or in any other manner.
As for the merits of the motion, it is clear that the evidence of Vuono's ban from the securities industry, imposed by Judge Edelstein at the conclusion of Hasho, is admissible in this action. The evidence is probative of the possibility of material omissions (failure to inform Plaintiffs of the ban) by Vuono, Minicucci and Fahnestock.