Opinion
Index No. 653468/2015
03-17-2021
WIMBLEDON FINANCING MASTER FUND, LTD., Plaintiff, v. WESTON CAPITAL MANAGEMENT LLC, et al; Defendants.
NYSCEF DOC. NO. 1702 Schecter, J.
Seq no. 64 Hon. C.E.Ramos, J.H.O.
Findings of Fact and Conclusions of Law
FINDINGS OF FACT
1. Several defendants have defaulted in this plenary action. This is the second damages inquest, based on such defaults, referred by Justice Jennifer Schecter to the undersigned as "Special Referee".
2. The first damages inquest, which was conducted on September 17, 2019, concerned both phases of the multi-party, multi-year fraudulent conspiracy perpetrated against Wimbledon Financing Master Fund, Ltd. ("Wimbledon") and its sister investment fund, Weston Capital Partners Master Fund II, Ltd. ("Partners II").
3. After the issuance of our Report of findings of fact and conclusions of law on December 10, 2019,1 the Court confirmed the Report and entered an order against Weston Capital Management LLC ("WCM") and Weston Capital Asset Management LLC ("WCAM"), Wimbledon's investment advisors, and Jason Galanis ("Galanis") and Arie Jan van Roon, individual participants in the conspiracy, on February 21, 2020.
4. A judgement against the same parties was entered on October 26, 2020 (the "Wimbledon Judgment"). The Wimbledon Judgment awards two categories of damages to Wimbledon for the Arius Libra phase of the fraudulent conspiracy and scheme. The first category was for the misappropriations, including (i) the Partners II Judgment against Arius Libra Inc., which covers transfers from the Partners II account through December 2011; (ii) additional transfers from the Partners II account in April and May 2012; and (iii) the misappropriation of cash distributions and hedge fund securities from Wimbledon totaling $1,117,409.33 (not including prejudgment interest). The Court awarded compensatory damages, jointly and severally, against WCM, WCAM and Galanis in the amount of $12,562,572.5.
The second category was for aiding and abetting the breaches of fiduciary duty committed by WCAM. The Court awarded compensatory damages, jointly and severally, against WCAM and Galanis, in the amount of $1,710,506.02 (calculating prejudgment interest through October 26, 2020, the date the Wimbledon Judgment was entered).
5. The $12,562,572.5 figure is the result of the reduction of $33,002,376.95, the total compensatory damages due to Wimbledon in the first damages inquest, by Gerova-related damages and the "Return of Partners II Fees". This figure also only includes prejudgment interest through September 17, 2019, the date of the first damages inquest. This figure was increased to $12,880,420.04 to account for prejudgment interest calculated through February 25, 2020, the date of the second damages inquest.
6. This, the second damages inquest, concerns only Paul Parmar ("Parmar"), who is the fifth defendant to have defaulted in this plenary action. Justice Schecter entered an order on December 17, 2019, finding that Parmar is in default and referred the matter for a damages inquest hearing, which took place on February 25, 2020.
7. Unlike the first damages inquest, this damages inquest only concerns Mr. Parmar's role as a co-conspirator in the Arius Libra phase of the fraudulent scheme directed at Wimbledon and Partners II.
8. Wimbledon "was an exempted liability company organized under the laws of the Cayman Islands and is currently in liquidation. Wimbledon was a 'fund of funds' that invested primarily in other hedge funds that made loans to third parties."
9. Partners II was an exempted liability company organized under the laws of the Cayman Islands.
10. Defendant David Bergstein ("Bergstein") is an individual who was indicted for various counts of conspiracy to commit investment adviser fraud and securities fraud, aiding and abetting investment adviser fraud (against Wimbledon and Partners II), securities fraud (against Partners II) and conspiracy to commit wire fraud. Bergstein was subsequently convicted.
11. Defendant Jason Galanis ("Galanis") is an individual who was indicted for and pleaded guilty to four counts of securities fraud, conspiracy to commit securities fraud, investment adviser fraud and conspiracy to commit securities fraud in connection with a bribery and "pump and dump" scheme involving Gerova Financial Group, Ltd. ("Gerova"). In 2007, Galanis settled fraud charges asserted by the SEC in connection with an unrelated investigation, and the SEC barred Galanis from serving as a director or officer of a public company for five years.
12. Defendant Albert Hallac ("Hallac") "is the founder of Weston and at all relevant times was the chief executive officer of Weston. Hallac was a principal of Weston and actively managed Wimbledon and Partners II. Hallac pleaded guilty to defrauding both Wimbledon and Partners II.
13. Defendant Keith Wellner ("Wellner") "was WCAM's general counsel, chief compliance officer and chief operating officer and actively managed Wimbledon and Partners II. Wellner pleaded guilty to defrauding Wimbledon and Partners II.
14. Defendant WCAM is a limited liability company organized and existing under the laws of the State of Delaware and is wholly owned by WCM. WCAM is an investment advisor registered with the Securities and Exchange Commission ("SEC"). WCAM was the investment manager for both Wimbledon and Partners II.
15. Defendant Parmar is an individual who has had a long relationship with Bergstein since 2006. Parmar had loaned approximately $85 million to Bergstein, a loan that Bergstein had not repaid, unrelated to the Arius Libra scheme. Parmar admitted that the Arius Libra subsidiary Pineboard Holdings ("Pineboard") was created to "orchestrate fraudulent solutions" to repay Bergstein's debts to Parmar.
16. Pineboard was a sham because it was formed by Bergstein as a vehicle for repaying millions of dollars he owed Parmar for unrelated debts." A criminal complaint has been lodged against Parmar in New Jersey for a similar medical billing scheme.
17. Defendant General Health Technologies LLC ("General Health"), a shell company managed by Parmar, never appeared in the plenary action and a default judgment was issued against it.
18. Sage Group Consulting Inc. ("Sage"), which received "loan" proceeds from Partners II as part of the fraudulent payments to Parmar, was not a defendant in the plenary action but was a defendant in a special proceeding brought pursuant to CPLR 5225(b) and 5277 by Wimbledon. Parmar also was defendant in this special proceeding. Both defaulted and judgment was awarded against them, jointly and severally.
19. Arius Libra, Inc. ("Arius Libra") is a shell company owned and/or controlled by Bergstein. Parmar was an Arius Libra insider (he was on its board) and was involved in the scheme to make Wimbledon falsely believe that Arius Libra was acquiring a medical billing company from Parmar's company (Pineboard).
20. Sage sought unsuccessfully to vacate the default in the motion court and on appeal.
21. At the end of 2008, WCAM suspended investor redemptions in Wimbledon, thereby preventing investors from accessing their capital in the fund. WCAM decided to liquidate Wimbledon and informed investors of that decision in September 2009. WCAM informed investors that WCAM would manage the liquidation of the investments in the Wimbledon master fund and that 85% of the capital would be returned to the investors over the next three years.
22. Galanis, who controlled Fund.com and Gerova, approached Hallac and proposed the acquisition of Weston by Fund.com in order to enable Gerova to gain control over the Wimbledon hedge fund assets and funds under management. In October 2009, Galanis offered to have Fund.com acquire Weston for $9.6 million. Hallac, on behalf of WCM, agreed. As the quid pro quo, Hallac and Weston agreed to contribute Wimbledon's hedge fund assets to Gerova. Hallac and Wellner did not inform Wimbledon's investors or its board of directors that Wimbledon's investment advisor had agreed to be acquired by Fund.com, and that as a result Galanis would control WCAM. Nor did they disclose that Galanis also controlled Gerova and was therefore on both sides of the transaction.
23. Weston agreed to contribute Wimbledon's hedge fund assets to Gerova on or about December 31, 2009. Those assets comprised investments in limited partnership interests of nine hedge funds: Ambit Bridge Loan Fund I LLC ("Ambit), Aramid Entertainment Fund Limited ("Aramid"), CAM Opportunity Fund I LLC, ("CAM"), CanGap LP ("CanGap"), HM Ruby Fund 7 LP ("HM Ruby"), Lomond Capital LLC ("Lomond"), Longview Fund LP ("Longview"), Quantek Opportunity Fund LP ("Quantek") and Shelter Island Opportunity Fund LLC ("Shelter Island").
24. The Gerova transaction was consummated on January 23, 2010. Wimbledon's hedge fund assets were contributed to Gerova and Wimbledon received restricted shares in Gerova.
25. Roughly one year after the Gerova transaction closed, it collapsed.
26. Almost immediately after the news reports about Gerova surfaced in early 2011, Galanis and Bergstein concocted the next phase of the scheme. In February and March 2011, Galanis and Bergstein drafted phony agreements for themselves purporting to give them security interests in certain of Wimbledon's assets.
27. Bergstein admitted in a taped telephone call with Galanis that the 'loans' from Gion and DPRE were actual "bullshit transaction[s]" and Gion had "zero security."
28. Galanis then introduced Hallac and Wellner to Bergstein in April 2011. Shortly thereafter, Bergstein informed Hallac that he was a creditor of Gerova and proposed an unwinding of the Gerova deal with Wimbledon. The proposed unwinding required WCAM to contribute Wimbledon's remaining hedge fund assets to Arius Libra, a Bergstein shell company, in exchange for an interest in Arius Libra.
29. While Gerova purported to be a reinsurance business, Arius Libra purported to be a medical billing business.
30. Arius Libra was falsely represented by Parmar, an Arius Libra insider and director, Bergstein and others as a company that would acquire medical billing assets from a company called Pineboard Holdings, which was controlled by Parmar, who would be appointed CEO. Pineboard Holdings was a sham because it was formed by Bergstein as a vehicle for repaying millions of dollars, he owed Parmar for unrelated debts.
31. The unwind transaction was consummated in July 2011 but was not disclosed to Wimbledon's board or its investors. The unwind agreement "required Wimbledon to pay approximately $5 million to Gerova insiders, including Weston and Galanis. Because Wimbledon had a zero cash balance in July 2011, the payments Wimbledon agreed to make had to be funded by a different source. Unbeknownst to Wimbledon and Partners II, that different source turned out to be Partners II, a sister hedge fund run by WCAM and Hallac.
32. Under the guise of acquiring a medical billing business from Parmar, Weston agreed to make a series of loans to Arius Libra from Partners II, and, in August 2011, Weston contributed Wimbledon's remaining hedge fund assets to Arius Libra for a 59.5% interest in Arius Libra. Wimbledon's hedge fund assets were pledged as collateral for the Partners II loans, without Wimbledon's knowledge. Partners II's investors were not informed of the existence of the loan or that one of Partners II's hedge fund assets had been prematurely liquidated to have sufficient cash to make the loans.
33. None of the Partners II funds were used to acquire a medical billing business. Pineboard, the Arius Libra subsidiary that was to acquire the medical billing business, never did so.
34. Parmar never transferred any assets to Pineboard. The Partners II "loan" was transferred principally to companies controlled by Parmar, Hallac, Bergstein, Galanis and Bergstein's lawyers.
35. Between August and November 2011, Partners II transferred $8,735,572 to WCAM, Bergstein, Galanis, their shell companies and other conspirators. $3,025,675 was paid back to Partners II, leaving a principal outstanding balance of $5,709,897. Under the note executed by Darius Libra, interest accrued on the outstanding principal amount of the loans prior to the maturity date of the loans, December 30, 2011. This pre-maturity date interest amounted to $168,323, which increased the outstanding balance due on the loan on the maturity date of $5,878,220. Of these loan amounts, Partners II distributed $1.6 million to General Health and Sage directly.
36. On August 18, 2011, Partners II wire transferred $250,000 to General Health, on September 19, 2011, Partners II wire transferred $850,000 to General Health, and, on October 3, 2011, Partners II wire transferred $700,000 to Sage.
37. On or about December 30, 2011, Arius Libra defaulted on the outstanding loans from Partners II.
38. Partners II sued Arius Libra on the outstanding loan amounts. Aries Libra did not appear in the case and, on April 4, 2013, Partners II obtained a default judgment against Arius Libra in the amount of $6,619,586.77, including pre-judgment interest. The Judgment only covered transfers from Partners II to Arius Libra in the period August 3, 2011 through November 18, 2011.
39. In April and May of 2012, WCAM additionally transferred $200,000 from the Partners II account to General Health Technologies, which has defaulted and for which a separate judgment has been obtained. This transfer was not included in default judgment Partners II obtained against Arius Libra.
40. In December 2011, Bergstein, Parmar and others prepared and personally delivered a presentation to Wimbledon investors. Among other things, the investor presentation falsely stated that a Bergstein entity, Owari Opus, arranged a loan against Wimbledon's hedge fund assets. But there was no such loan by Owari Opus. Partners II made these loans without the knowledge of Partners II or Wimbledon, whose hedge fund assets secured these loans. The presentation also represented to Wimbledon's investors that the value of Pineboard's assets was $24 million, which was a complete fabrication as Pineboard had no assets.
41. The description and valuation attributed to Pineboard was for a different Parmar company, Pegasus Bluestar, which contributed no assets to Pineboard. The investor presentation provided a profit and loss statement for Pineboard, which was a profit and loss statement for Pegasus.
42. The misleading presentation also was transmitted to Wimbledon's board of directors in January 2012.
43. Notwithstanding the contemporaneous record concerning Parmar's involvement in the misleading investor presentation, Parmar falsely denied having any involvement whatsoever in the December 2011 investor presentation in a response to a Wimbledon interrogatory.
44. From August 2011 through June 2014, while the hedge fund investments were supposedly controlled by Arius Libra, there were $1,648,903.44 in distributions from CAM and Quantek, two of Wimbledon's hedge fund assets. None of those funds was distributed to Wimbledon or its investors.
45. On June 17, 2014, investors filed a Winding-Up Petition against Wimbledon in the Grand Court of the Cayman Islands, Financial Services Division (the "Grand Court").
46. On July 17, 2014, the Grand Court appointed Joint Official Liquidators Christopher D. Johnson and Russell Homer to conduct a court-supervised liquidation of Wimbledon.
47. After the Joint Official Liquidators were appointed in July 2014, the balance in the Wimbledon Master Fund account of $531,494.11 was transferred to them. On or about October 16, 2015, Wimbledon commenced a lawsuit, on summons with notice, against multiple individuals and entities, including Parmar. Wimbledon filed its complaint on or about December 21, 2015, which was amended twice thereafter.
48. Before this suit was commenced, Partners II assigned to Wimbledon its claims relating to the events described in the complaint. Wimbledon sued Parmar and General Health for Fraud and Conspiracy to Commit Fraud (Arius Libra) (Against Parma) (Second Cause of Action); Fraud and Conspiracy to Commit Fraud (Partners II loan) (Against Parmar) (Third Cause of Action); Aiding and Abetting Fraud (Against Parmar) (Fourth Cause of Action); Aiding and Abetting Breach of Fiduciary Duty (Against Parmar) (Sixth Cause of Action); (Violation of New York Debtor and Creditor Law §§ 276, 276-a and 278 (Against General Health) (Eighteenth Cause of Action); Violation of New York Debtor and Creditor Law §§ 273 and 278 (Against General Health) (Nineteenth Cause of Action); Violation of New York Debtor and Creditor Law §§ 275 and 278 (Against General Health) (Twentieth Cause of Action). Parmar appeared in the case and participated in discovery.
49. In his supplemental response to Wimbledon's first document request seeking, among other things, documents and communications reflecting the transfer of assets to Arius Libra or Pineboard, Parmar asserted his Fifth Amendment privilege not to incriminate himself.
50. Parmar invoked his Fifth Amendment rights in connection with several requests, including to requests seeking documents relating to the investor meeting in December 2011, the actual sale of assets or equity interests in MD Tablet, and forecasts for Arius Libra and Pineboard.
51. When Wimbledon moved to compel Parmar to produce responsive documents, neither Parmar nor his counsel attended the hearing scheduled by the Court for November 15, 2018 and refused to participate by telephone after the Court directed one of the parties to call Parmar's counsel, Timothy Parlatore.
52. Justice Schecter subsequently granted a default judgment against Parmar and referred the matter to us for a damages inquest.
53. General Health did not appear in the case. Wimbledon has a default judgment against it.
54. Wimbledon does not include herein the causes of action against Parmar that other defendants successfully moved to dismiss, notwithstanding Parmar's default - namely, the causes of action for breach of fiduciary duty (Fifth Cause of Action - Against Parmar), negligence (Eleventh Cause of Action - Against Parmar), gross negligence (Twelfth Cause of Action - Against Parmar) and Unjust Enrichment (Sixteenth Cause of Action - Against Parmar).
55. Parmar was served with notice of the damages inquest.
56. On February 25, 2020, the damages inquest was held. Neither Parmar nor counsel for Parmar appeared at the inquest.
57. 28 exhibits were marked for identification and admitted into evidence. Wimbledon called Steve Pomerantz, a mathematician and economist, as its expert witness on damages. No objections to Mr. Pomerantz's qualifications as an expert witness were lodged.
58. Parmar participated in the Arius Libra phase of the fraudulent conspiracy against Wimbledon and is jointly and severally liable for the fraud damages incurred by Wimbledon and Partners II for that period.
59. During the Arius Libra phase, Wimbledon's assets distributed $1,117,409.33 (net of the amount remaining when Wimbledon's liquidators took control of the account).
60. These funds were paid directly to Wimbledon's account. WCAM caused all of these funds to be paid to WCAM and others. Wimbledon's investors did not receive any of these funds. Absent the fraud, these funds would have been distributed to Wimbledon's investors.
61. With respect to Partners II, the judgment against Arius Libra was $6,619,586.77. WCAM caused additional transfers from the Partners II account in April and May 2012, the net total of which is $275,000, including to Parmar and his companies. The total misappropriated from Partners II was $6,894,586.77.
62. Partners II also paid fees to its fiduciary WCAM totaling $963,388.74 after July 2011 through 2012. WCAM and its principals breached their fiduciary duties to Partners II during this period and have forfeited all fees paid during the period of faithlessness.
63. Parmar, along with the other conspirators, aided and abetted that breach of fiduciary duty.
CONCLUSIONS OF LAW
64. By defaulting, a defendant is deemed to admit all traversable allegations in the complaint, including the allegations of liability, but a defaulting defendant "does not admit the plaintiff's conclusion as to damages." Rokina Optical Co. v. Camera King, 63 N.Y.2d 728, 730 (1984). If damages are not in a sum certain, the court may direct a reference to conduct a damages inquest. CPLR 3215(b), (e). 2. "[I]f the defaulting party fails to appear in person or by representative" at the damages inquest, the party seeking damages may submit the proof required by affidavit or oral testimony of witnesses in open court. 22 N.Y.C.R.R. § 202.46.
65. "The true measure of damages [for fraud] is indemnity for the actual pecuniary loss sustained as the direct result of the wrong." Hotaling v. Leach Co., 247 N.Y. 84, 87-88 (1928); Bernstein v. Kelso & Co., 231 A.D.2d 314, 322 (1st Dep't 1997); Orbit Holding Corp. v. Anthony Hotel Corp., 121 A.D.2d 311, 314 (1st Dep't 1986)
66. To restore Wimbledon and Partners II to the position they were in before the commission of the Arius Libra fraud, Wimbledon should be awarded damages equal to the misappropriated distributions from the hedge fund assets, the misappropriation of the Partners II loan proceeds, and the misappropriation of the funds from the Wimbledon and Partners II bank accounts. For Parmar, who is jointly and severally liable with WCM, WCAM and Galanis, the fraud damages amount totals $12,880,420.04 (with interest through the date of the second damages inquest).
67. WCAM, an investment advisor, breached its fiduciary duties to Wimbledon and Partners II. "The measure of damages for breach of fiduciary duty is the amount of loss sustained, including lost opportunities for profit on the properties by reason of the faithless fiduciary's conduct". Herman v. Herman, 162 A.D.3d 459, 460 (1st Dep't 2018); 105 East Second Street Associates v. Bobrow, 175 A.D.2d 746, 746 (1st Dep't 1991). See also Ault v. Soutter, 203 A.D.2d 131, 131 (1st Dep't 1994) (corporate director who breached his fiduciary duty "is [] accountable for the waste of corporate assets notwithstanding the absence of proof that he benefitted personally, and he is liable for all damages flowing from his breach of fiduciary duty as a director, whether those consequential damages occurred during or after the actual period of his wrongful inaction").
68. As Justice Kornreich ruled on the motion to dismiss, "[t]o the extent Wimbledon separately seeks disgorgement of illicit profits, such damages fall within the scope of well settled breach of fiduciary duty damages."
69. Parmar, who aided and abetted WCAM's breaches of fiduciary duties, is jointly and severally liable for those breaches. See Visual Arts Found., Inc. v. Egnasko, 91 A.D.3d 578, 579 (1st Dept' 2012). The total of aiding and abetting damages that should be awarded to Wimbledon are $1,710,506.02, representing the fees paid to WCAM by Partners II during the period of faithlessness ($963,388.74) and pre-judgment interest on those fees through October 26, 2020, the date the Wimbledon Judgment was entered.
70. As aforesaid, Wimbledon is entitled to judgment on the fraud damages totaling $12,880,420.04 (with interest through the date of the second damages inquest) and judgment on aiding and abetting damages of $1,710,506.02, representing the fees paid to WCAM by Partners II during the period of faithlessness ($963,388.74) and pre-judgment interest on those fees through October 26, 2020, the date the Wimbledon Judgment was entered. Dated: March 17, 2021
/s/_________
C.E. Ramos, J.H.O.