Opinion
99 Civ. 1118(SWK)(KNF)
April 19, 2002
REPORT and RECOMMENDATION
I. INTRODUCTION
In this action, plaintiff Computer Enterprises, Inc. ("CEI") alleged, inter alia, that defendants Eric Aronson ("Aronson") and Jeremy Carman ("Carman"), officers of defendant Satellite Recovery Network, Inc. ("SRNI"), defendant Chris Norce ("Norce"), the owner of defendant Creative Capital Management, Inc. ("CCMI"), SRNI and CCMI committed securities fraud in violation of Section 10(b) of the Securities and Exchange Act of 1934 ("Exchange Act"), 15 U.S.C. § 78j(b), Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5 and Exchange Act Section 20(a), 15 U.S.C. § 78t(a); violated the Racketeer Influence and Corruption Organizations Act ("RICO"), 18 U.S.C. § 1961, et seq.; made negligent misrepresentations; committed conversion; and breached the parties' contract. Plaintiff also made a separate claim against Aronson for common law fraud.
Aronson and Carman failed to answer plaintiffs complaint. As a result, CEI made an application to your Honor that a default judgment be entered against them; the application was granted. Thereafter, your Honor referred the matter to the undersigned to conduct an inquest and to retort and recommend on the amount of damages, if any, to be awarded CEI. The parties were directed to make written submissions to the Court in connection with the inquest. Plaintiff complied with the Court's directive. However, neither Aronson nor Carman submitted any writing to the Court which challenges the arguments urged by plaintiff in support of its request for damages, costs and attorneys' fees. Plaintiffs request for damages, costs and attorneys' fees is analyzed below.
II. BACKGROUND AND FACTS
Based on the submissions made by CEI, the complaint filed in the instant action — the allegations of which, perforce of Aronson's and Carman's default, must be accepted as true, except those related to damages, see Cotton v. Slone, 4 F.3d 176, 181 (2d Cir. 1993); Greyhound Exhibit Group, Inc. v. E.L.U.L. Realty Corp., 973 F.2d 155, 158 (2d Cir. 1992) — and this Court's review of the entire court file in this action, the following findings of fact are made:
From in or about 1997, until approximately May 1998, the defendants engaged in a scheme to raise capital for SRNI, a company which sold a satellite tracking system, by marketing to investors an alleged private placement of SRNI common stock. The purported private placement was not registered either with the Securities and Exchange Commission ("SEC") or with the National Association of Securities Dealers ("NASD"). In furtherance of their scheme, in or about February 1998, Norce and Aronson had several telephone conversations with Peter Prete ("Prete"), an officer of CEI. During the course of their respective telephone conversations, Norce and Aronson made false representations and omissions of material facts to CEI concerning, inter alia, the quality of and risks associated with an investment in the SRNI private placement and the use to which The capital raised through the alleged private placement would be put. Norce and Aronson advised Prete falsely that an initial public offering of SRNI stock would occur within sixty (60) to ninety (90) days. Each also declared falsely that all paperwork germane to the SRNI proposed stock offering had been submitted to the SEC and to NASD. Prete was told by Norce and Aronson that only one million shares of SRNI stock had been issued for the private placement. Norce and Aronson each told Prete that the initial public offering would bring SRNI stock to the marketplace at a minimum price of $5.00 a share. Norce told Prete falsely that he would not make any commissions on CEI's investment because he would profit through the public offering as the owner of 10,000 shares of SRNI's outstanding shares of common stock.
Norce and Aronson assured Prete that an investment in SRNI's private placement would be at no risk to CEI because SRNI's initial public offering was guaranteed to happen soon. Furthermore, in a letter dated February 24, 1998, Aronson advised Prete that CEI's investment would be guaranteed by him, so that CEI would be placed in a "no lose situation." In part, the letter stated the following:
One very important thing that you and I have discussed, was the ability to secure the money you invest. In my opinion, there is only one way that I can assure you that your investment is safe, I can promise you that if this does not work out the way it is planned, I will raise additional capital or sell enough stock to cover our investment. This is a no lose situation and I will personally guarantee your investment.
In addition, Norce and Aronson advised Prete that SRNI was a stable and profitable company that had entered into contracts with customers and had sold its satellite tracking units to customers who were already using the equipment. Neither Aronson, Carman nor any other named defendant disclosed to CEI that a substantial portion of investor funds had been diverted for expenses that were unrelated to developing SRNI's business.
Aronson informed CEI that an investment of $75,000 would purchase a 5% interest in SRNI or 50,000 shares of the one million SRNI shares outstanding. On February 27, 1998, in reliance upon the misrepresentations and omissions of material facts which the defendants had made to CEI and, furthermore, lacking knowledge of the true facts concerning SRNI's financial condition and the risks associated with SRNI's product and its future business prospects, CEI sent a check in the amount of $75,000 to SRNI for the purchase of SRNI common stock. CEI made a memorandum endorsement on its check to indicate that the check represented the purchase of "50,000 Shares of the 1 Million Company Shar[es]." SRNI, through Aronson and Carman, later negotiated the check.
After CEI tendered its check to SRNI to acquire what it believed would be a 5% interest in SRNI or 50,000 shares of its outstanding common stock, Prete began contacting the defendants and requesting, among other things, that a stock certificate be sent to CEI along with information concerning the status of CEI's investment. CEI never received the requested stock certificate.
On or about May 12, 1998, Aronson was arrested and charged in a federal criminal complaint with securities fraud arising out of his activities concerning the marketing of the SRNI private placement. By December 1999, Aronson, Carman and SRNI had been indicted by a federal grand jury. The grand jury charged, among other things, that Aronson, Carman and SRNI had conspired to commit mail, wire and securities fraud. Thereafter, in September 1999, Aronson pleaded guilty to an Information that charged him with conspiring to commit mail, wire and securities fraud and with committing the substantive offense of wire fraud. These charges arose out of the defendants' scheme to raise capital for SRNI through the purported private placement of SRNI securities.
Plaintiff contends that Carman pleaded guilty to charges of mail fraud and securities fraud, arising out of the defendants' scheme to raise capital for SRNI through the purported private placement of SRNI securities. However, plaintiff has been unable to obtain any court documents that verify either Carman's plea of guilty or the offense(s) to which Carman pleaded guilty. Plaintiff contends only that it has communicated with a probation officer who indicated to CEI that Carman resolved his criminal case by tendering a plea of guilty.
"Although a plea of guilty can collaterally estop the re-litigation of issues in a subsequent civil action, estoppel extends only to the issues that were essential to the plea of guilty. Moreover, a party asserting collateral estoppel premised on a plea of guilty has the burden of establishing exactly which facts the plea of guilty establishes. See Goodridge v. The Harvey Group, 728 F. Supp. 275, 278-279 (S.D.N.Y. 1990) (citations omitted). Here, plaintiff is unable to specify to what offense(s) Carman pleaded guilty and what facts were established by his plea.
Based on the foregoing, CEI seeks an award of damages from Aronson and Carman of $75,000 with interest at the rate of 9% from February 27, 1998, the date on which the check made payable to SRNI in the amount of $75,000 was issued, to the date of the entry of judgment. In addition, CEI seeks an award of treble damages under 18 U.S.C. § 1964(c), and the attorney's fees it incurred in prosecuting this action, $14,537.50. CEI also seeks $235.00, the costs associated with prosecuting the action.
III. DISCUSSION
As noted earlier in this writing, in an inquest proceeding following a defendant's default, the court should accept as true all the well pleaded, factual allegations of the complaint, except those relating to damages. See Cotton, 4 F.3d at 181; see also Broadcast Music, Inc. v. R Bar of Manhattan. Inc., 919 F. Supp. 656, 658 (S.D.N.Y. 1996) ("A default judgment on well-pleaded allegations of a complaint establishes a defendant's liability. The allegations are to be accepted as true, except those relating to the amount of damages."). "Only 'in very narrow, exceptional circumstances' may a court find an allegation not 'well pleaded.'" In re Crazy Eddie Secs. Litig., 948 F. Supp. 1154, 1160 (E.D.N.Y. 1996) (quoting Trans World Airlines, Inc. v. Hughes, 449 F.2d 51 [2d Cir. 1971], rev'd on other grounds, 409 U.S. 363, 93 S.Ct. 647).
However, while a defaulting party ordinarily cannot contest the merits of the plaintiffs claim without "indisputable" contradictory evidence,see Trans World Airlines, 449 F.2d at 63-64, the court does have discretion to determine whether the facts alleged in the complaint state a valid cause of action. See Au Bon Pain Corp. v. Artect, Inc., 653 F.2d 61, 65 (2d Cir. 1981); see also In re Crazy Eddie Secs. Litig., 948 F. Supp. at 1161 (stating that "th[e] court must first examine the validity of plaintiffs' claims to determine the extent of damages they are legally entitled to recover, including . . . treble damages"); Weft, Inc. v. G.C. Investment Assoc., 630 F. Supp. 1138, 1141 (E.D.N.C. 1986) (stating that "[a]lthough [defaulting] defendant may not . . . attack the factual allegations of the complaint, he does not 'admit' the legal conclusions"); Wright, Miller Kane, Federal Practice and Procedure: Civil 3d § 2688 at 63 (1998) (stating "[e]ven after default . . . it remains for the court to consider whether the unchallenged facts constitute a legitimate cause of action, since a party in default does not admit mere conclusions of law").
Therefore, the Court is free to consider whether plaintiffs factual allegations are sufficient to state a claim for relief.
A. Securities Fraud
Section 10(b) of the Exchange Act, codified at 15 U.S.C. § 78j(b), provides as follows:
It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce or of the mails, or of any facility of any national securities exchange —
(b) To use or employ, in connection with the purchase or sale of any security registered on a national securities exchange or any security not so registered, any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors.
Rule 10b-5, promulgated by the SEC in 1948 pursuant to section 10(b), provides as follows:
It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange,
(a) To employ any device, scheme, or artifice to defraud,
(b)To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or
(c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security.17 C.F.R. § 240.10b-5.
"To state a cause of action under Rule 10b-5 [of the Securities Exchange Act], a plaintiff must plead that in connection with the purchase or sale of securities, the defendant, acting with scienter, made a false material representation or omitted to disclose material information and that plaitiff's reliance on defendant's action caused [plaintiff] injury." In re Time Warner Inc. Sec. Litig., 9 F.3d 259, 264 (2d Cir. 1993), cert. denied, 511 U.S. 1017, 114 S.Ct. 1397 (1994) (internal quotation omitted).
Causation under the federal securities laws has two elements; a plaintiff must allege both: 1) transaction causation, that is, that but for the fraudulent statement or omission, the plaintiff would not have entered into the transaction; and 2) loss causation, that is, that the subject of the fraudulent statement or omission was the cause of the actual loss suffered. See Suez Equity Investors, L.P. v. Toronto-Dominion Bank, 250 F.3d 87, 95 (2d Cir. 2001). Transaction causation is grounded upon a plaintiffs reliance upon a defendant's deceptive statements or omissions. Loss causation is akin to the tort concept of proximate cause. Therefore, in a typical situation, before a plaintiff would be permitted to recover, plaintiff would have to establish that the damages suffered were a foreseeable consequence of the misrepresentations. See Suez Equity Investors, L.P., 250 F.3d at 96.
"The purpose of § 10(b) and Rule 10b-5 is to protect persons who are deceived in securities transactions — to make sure that buyers of securities get what they think they are getting and that sellers of securities are not tricked into parting with something for a price known to the buyer to be inadequate or for a consideration known to the buyer not to be what it purports to be." Chemical Bank v. Arthur Anderson Co., 726 F.2d 930, 943 (2d Cir. 1984).
In the case at bar, Aronson, an officer of SRNI made false oral and written statements to Prete, an officer of CEI, concerning the quality of and the risks associated with an investment in SRNI through its private placement. Furthermore, Aronson omitted from his oral and written statements to Prete material facts concerning, among other things, the true purpose for which CEI's investment funds would be put by SRNI and the status of submissions to the SEC and the NASD. Aronson acted as he did to induce CEI to purchase SRNI securities. The record before the Court demonstrates that, but for the fraudulent statements and omissions made by Aronson on behalf of SRNI, plaintiff would not have purchased (or believed it had purchased) SRNI securities through its private placement. Aronson's false statements and omissions of material facts were intended to and did cause damage to CEI. The record also demonstrates that the economic loss suffered by CEI was a foreseeable result of the misrepresentations and omissions made by Aronson on behalf of SRNI.
With respect to Carman, the Court finds that plaintiff has not established that he had any direct contact with CEI or any CEI representative(s). Consequently, the record is devoid of any facts that establish that Carman made any fraudulent statements or omissions of material facts to CEI which induced it to invest in the SRNI private placement and thereby suffer a loss. However, plaintiff has alleged that Aronson and Carman are liable to it as controlling persons pursuant to § 20a of the Exchange Act. In its most pertinent part, that provision of the Exchange Act states the following:
Every person who, directly or indirectly, controls any person liable under any provision of this chapter or of any rule or regulation thereunder, shall also be liable jointly and severally with and to the same extent as such control person to any person to whom such control person is liable, unless the controlling person acted in good faith and did not directly or indirectly induce the act or acts constituting the violation or cause of action.15 U.S.C. § 78t(a).
There is no statutory definition of "control." However, the SEC has defined "control" as follows:
The term control (including the terms "controlling," "controlled by," and "under common control with") means the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a person, whether through the ownership of voting securities, by contract, or otherwise.
17 C.F.R. § 240.12(b)-2.
Actual control need not be established in order to make out a prima facie case under § 20a of the Exchange Act. All that is necessary is that a plaintiff establish that a person has control by virtue of his or her status. Plaintiff contends that Aronson and Carman were officers of SRNI. However, without more, the Court is unable to determine whether Carman's position in SRNI's corporate structure was superior to Aronson's. Therefore, the Court is not able to conclude whether Carman, by virtue of his position as an officer of SRNI, possessed the power either directly or indirectly, or through his ownership of voting securities, by contract or otherwise, to manage Aronson or to institute policies to affect Aronson's conduct. Accordingly, plaintiff has not established that Carman is liable to it for securities fraud under § 20(a) of the Exchange Act for conduct attributable to Aronson. Plaintiff has established that the instant fraudulent scheme violated the securities laws. Plaintiff has also established that Aronson's misconduct caused it to suffer a loss of $75,000: the money tendered to SRNI via check for the purchase of 50,000 shares of SRNI stock, which represented 5% of the one million shares of SRNI stock that CEI was told were outstanding.
B. RICO Claim 18 U.S.C. § 1962(c) provides that:
It shall be unlawful for any person employed by or associated with any enterprise engaged in, or the activities of which affect, interstate or foreign commerce, to conduct or participate, directly or indirectly, in the conduct of such enterprise's affairs through a pattern of racketeering activity or collection of unlawful debt.
To establish a civil RICO claim, a plaintiff must prove: "(1) conduct (2) of an enterprise (3) through a pattern (4) of racketeering activity."Sedima, S.P.R.L. v. Imrex, 473 U.S. 479, 496, 105 S.Ct. 3275, 3285 (1985).
1. Enterprise
An "enterprise" is statutorily defined as "any individual, partnership, corporation, association, or other legal entity, and any union or group of individuals associated in fact although not a legal entity." 18 U.S.C. § 1961(4). The Supreme Court has further clarified the meaning of enterprise in the RICO context by stating that a RICO enterprise may include "a group of persons associated together for a common purpose of engaging in a course of conduct." United States v. Turkette, 452 U.S. 576, 583, 101 S.Ct. 2524, 2528 (1981). Proof of the enterprise is established "by evidence of an ongoing organization, formal or informal, and by evidence that the various associates function as a continuing unit." Id.
In the case at bar, Aronson, Carman, Norce, SRNI and CCMI, acting together as a cohesive unit for the purpose of fraudulently obtaining capital from investors such as CEI, constitute an enterprise for RICO liability. See Securitron Magnalock Corp. v. Schnabolk, 65 F.3d 256, 263 (2d Cir. 1995).
2. Pattern
"[T]he pattern requirement should be interpreted to prevent the application of RICO to the perpetrators of 'isolated' or 'sporadic' criminal acts." See United States v. Indelicato, 865 F.2d 1370, 1383 (2d Cir.) ( en banc), cert. denied, 493 U.S. 811, 110 S.Ct. 56 (1989).
Defendants' commission of two predicate acts of racketeering in the last 10 years will suffice to prove a pattern, see 18 U.S.C. § 1961(5), provided that "the racketeering predicates are related, and that they amount to or pose a threat of continued criminal activity." H.J. Inc. v. Northwestern Bell Tel. Co., 492 U.S. 229, 239, 109 S.Ct. 2893, 2900 (1989) (emphasis in original); see also Cosmos Forms Ltd. v. The Guardian Life Ins. Co. of America, 113 F.3d 308, 310 (2d Cir. 1997) (stating that to constitute a pattern, the predicate acts "must be related and must reveal continued, or the threat of continued, unlawful conduct").
The Supreme Court has defined relatedness as "criminal acts that have the same or similar purposes, results, participants, victims, or methods of commission, or otherwise are interrelated by distinguishing characteristics and are not isolated events." H.J. Inc., 492 U.S. at 240, 109 S.Ct. at 2901. See also Indelicato, 865 F.2d at 1382 (relatedness of acts established by "proof of their temporal proximity, or common goals, or similarity of methods, or repetitions").
In the instant case, the acts perpetrated by the enterprise have a similar purpose and victim — the acts were designed to defraud CEI. This establishes the "relatedness" element of the pattern requirement of a RICO violation. Therefore, the sole issue for the Court to determine is whether CEI has sufficiently pleaded that the enterprise's acts amount to or pose a threat of continued criminal activity sufficient to establish the remaining element of the pattern requirement of a RICO violation.
"Whether the predicates proved establish a threat of continued racketeering activity depends on the specific facts of each case." H.J. Inc., 492 U.S. at 242, 109 S.Ct. at 2902. For guidance, the Supreme Court has stated:
"Continuity" is both a closed — and open-ended concept, referring either to a closed period of repeated conduct, or to past conduct that by its nature projects into the future the threat of repetition. . . . A party alleging a RICO violation may demonstrate continuity over a closed period by proving a series of related predicates extending over a substantial period of time. Predicate acts extending over a few weeks or months and threatening no future criminal conduct do not satisfy this requirement: Congress was concerned in RICO with long-term criminal conduct. Often a RICO action will be brought before continuity can be established in this way. In such cases, liability depends on whether the threat of continuity is demonstrated.Id. at 241-42 (emphasis in original) (citations omitted).
Thus, there are two types of continuity: closed-ended, in which the predicate acts occur over a substantial period of time; and open-ended, in which the acts do not necessarily occur over such a substantial period of time but, nonetheless, carry with them a threat of future criminal conduct. One type must be established before a pattern of racketeering activity can be found to exist.
a. Closed-ended Continuity
To determine whether the facts support a finding of closed-ended continuity, "[f]actors including the number and variety of predicate acts, the length of time during which they were committed, the number of victims and the occurrence of distinct injuries [must be] considered."Passini v. Falke-Gruppe, 745 F. Supp. 991, 992 (S.D.N.Y. 1990) (citation omitted).
The record evidence establishes that the relevant predicate acts were committed beginning in 1997 and continued to be committed until approximately May 1998. Therefore, at most, the predicate acts spanned a period of approximately 16 months. The Second Circuit has held that closed-ended continuity is not satisfied when the RICO pattern involves a scheme to defraud that lasts less than two years. See GICC Capital Corp. v. Technology Finance Group, Inc., 67 F.3d 463, 467 (2d Cir. 1995). Under the circumstances, as a matter of law, this Circuit's test for close-ended continuity has not been met.
The other factors, namely number, nature and variety of predicate acts and number of participants are similarly unhelpful to plaintiff.
"Where the predicate acts alleged are not inherently unlawful acts, such as murder or obstruction of justice, courts normally require a longer span of time to satisfy the continuity requirement." Renner v. Chase Manhattan Bank, No. 98 Civ. 926, 1999 WL 47239, at *9 (S.D.N.Y. Feb. 3, 1999). In the instant case, the enterprise defendants committed acts of securities fraud, mail fraud, and wire fraud. However, as these acts are typical of garden-variety fraud, they are not of assistance to plaintiff in meeting the continuity requirement. See Renner, 1999 WL 47239, at *9.
Furthermore, defendants were not involved in a far-reaching scheme perpetrated by a host of conspirators. The enterprise defendants consist only of Aronson, Carman, Norce, SRNI and CCMI. Its limited purpose appears to have been to defraud CEI and perhaps one other investor. Therefore, neither the number of participants, nor the number of victims, are of assistance to plaintiff.
b. Open-ended Continuity
To demonstrate open-ended continuity, plaintiffs must show that the nature of the enterprise itself gave rise to a threat of continuity, or must point to other external factors which evidence a threat of continued criminal conduct." China Trust Bank of N.Y. v. Standard Chartered Bank, 981 F. Supp. 282, 287 (S.D.N.Y. 1997) (citing GICC Capital Corp. v. Technology Finance Group, Inc., 67 F.3d at 466).
In the present case, the record evidence establishes that after Aronson's arrest in connection with the SRNI private placement fraudulent scheme, he continued to solicit investment capital for SRNI. He did so by making false representations concerning the SRNI outstanding shares and by omitting to disclose facts concerning SRNI's finances and his arrest on charges of securities fraud. Aronson's attempt to market SRNI securities post-arrest, is evidence that demonstrates that the enterprise posed a threat to the investing public by continuing to engage in criminal conduct. Aronson's post-arrest conduct establishes open-ended continuity and, thus, a RICO pattern. See Azrielli v. Cohen Law Offices, 21 F.3d 512, 521 (2d Cir. 1994). Therefore, the Court finds that plaintiff has adequately stated a RICO claim entitling it to recover treble damages, the costs it incurred in prosecuting the action and reasonable attorney's fees.
Negligent Misrepresentation
Under New York law, the elements of a claim for negligent misrepresentation are the following: "1) the defendant had a duty, as a result of a special relationship, to give correct information; 2) the defendant made a false representation that he or she should have known was incorrect; 3) the information supplied in the representation was known by the defendant to be desired by the plaintiff for a serious purpose; 4) the plaintiff intended to rely and act upon it; and 5) the plaintiff reasonably relied on it to his or her detriment." Hydro Investors, Inc. v. Trafalgar Power Inc., 227 F.3d 8, 20 (2d Cir. 2000). The New York Court of Appeals has explained that "in the commercial context, a duty to speak with care exists when 'the relationship of the parties, arising out of contract or otherwise, [is] such that in morals and good conscience the one has the right to rely upon the other for information.'" Kimmell v. Schaefer, 89 N.Y.2d 257, 263, 652 N.Y.S.2d 715, 719 (1996) (citing International Products Co. v. Erie R. Co., 244 N.Y. 331, 338). That court has also explained that three factors should be considered in determining whether a special relationship existed between the parties such that the injured party's reliance on the claimed negligent misrepresentations was justified. Those factors are: a) whether the person making the representation held or appeared to hold unique or special expertise; b) whether a special relationship of trust or confidence existed between the parties; and c) whether the speaker was aware of the use to which the information would be put and supplied it for that purpose. See Kimmell v. Schaefer, 89 N.Y.2d at 264, 652 N.Y.S.2d at 719.
Here, Prete knew of Aronson's position as an officer of SRNI and, thus, could reasonably have assumed that Aronson possessed expertise about SRNI's product, its operations and the number of customers who had purchased and were using SRNI's product. The record evidence supports a conclusion that Aronson wanted Prete to rely upon the representations he made concerning SRNI in order to gain Prete's confidence and to secure CEI's investment in SRNI's private placement. Moreover, Aronson gave his "personal guarantee" that CEI's investment would not be lost because Aronson would raise additional capital or sell enough stock to cover CEI's investment and, thereby, safeguard that investment from loss. As discussed supra, Aronson' s representations to CEI concerning SRNI were false and known by him to be false. As a result of Aronson's misrepresentations, as well as his omission of material facts, CEI was induced to invest $75,000 in SRNI's purported private placement and lost that investment.
Based upon the record evidence, the Court finds that plaintiff has set forth a claim under New York law for negligent misrepresentation against Aronson and Carman for the false representations made to further their fraudulent scheme.
C. Conversion
Under New York law, an action for conversion of money will lie "where there is an obligation to return or otherwise treat in a particular manner the specific money in question. . . . [C]onversion does not require defendant's knowledge that he is acting wrongfully, but merely an intent to exercise dominion or control over property in a manner inconsistent with the rights of another." Lopresti v. Terwilliger, 126 F.3d 34, 41-42 (2d Cir. 1997) (internal citations and quotations omitted).
In the case at bar, CEI entered into an agreement with the defendants after discussing with Aronson and Norce the purpose for which CEI's investment in the SRNI private placement would be used. Specifically, for $75,000, CEI was to acquire 50,000 shares of SRNI common stock and, thus, acquire a 5% interest in SRNI and permit SRNI to continue to operate its satellite tracking system business. After sending $75,000 to SRNI and after demanding that the defendants forward a stock certificate to it representing the purchase of 50,000 shares of SRNI common stock, plaintiff neither received the stock certificate nor any interest in SRNI. Moreover, after Aronson and Carman cashed CEI's $75,000 check, neither Aronson, Carman nor SRNI ever returned CEI's money to it.
Based on the above, the Court finds that all of the elements needed to establish a conversion claim against Aronson and Carman have been shown by CEI to exist in this action.
D. Breach of Contract Claim Against Aronson
The elements of a breach of contract claim under New York law are: 1) the existence [of] a contract; 2) due performance of the contract by the plaintiff; 3) breach of contract by the defendant; and 4) damages resulting from the breach. See Marks v. New York University, 61 F. Supp.2d 81, 88 (S.D.N.Y. 1999) (citing K. Bell Associates, Inc. v. Lloyd's Underwriters, 827 F. Supp. 985, 988 [S.D.N.Y. 1993]; see also, e.g., Coastal Aviation, Inc. v. Commander Aircraft Co., 937 F. Supp. 1051, 1060 [S.D.N.Y. 1996], affirmed, 108 F.3d 1369 [2d Cir. 1997]).
In February 1998, Aronson entered into an agreement with CEI. Under the terms of that agreement, in consideration of CEI's purchasing shares of SRNI common stock through SRNI's private placement, Aronson guaranteed that CEI's investment would not be lost. The parties' agreement was memorialized in a letter dated February 24, 1998, that Aronson sent to Prete. After plaintiff forwarded to SRNI a check for $75,000 to acquire 50,000 shares of SRNI common stock, Aronson failed to fulfill his obligation under the terms of the parties' agreement. As a result, CEI has been damaged by the loss of its $75,000. Consequently, the Court finds that CEI has stated a claim against Aronson for breach of contract.
E. Fraud Claim Against Aronson
CEI has made a claim of common law fraud against Aronson. The elements necessary to establish a claim of fraud under New York law are the following: "1) misrepresentation of a material fact; 2) the falsity of that representation; 3) scienter, or intent to defraud; 4) reasonable reliance on that representation; and 5) damage caused by such reliance."The Pits, Ltd. v. American Express Bank International, 911 F. Supp. 710, 719 (S.D.N.Y. 1996) (citing May Department Stores Co. v. International Leasing Corp., 1 F.3d 138, 141 [2d Cir. 1993]; Katara v. D.E. Jones Commodities, Inc., 835 F.2d 966, 970-71 [2d Cir. 1987]; Jo Ann Homes at Bellmore, Inc. v. Dworetz, 25 N.Y.2d 112, 119, 302 N.Y.S.2d 799). "The elements of common law fraud under New York law are 'essentially the same' as those required to state a claim under § 10(b) and 10b-5."See Cyber Media Group, Inc. v. Island Mortgage Network, Inc., 183 F. Supp.2d 559, 580 (E.D.N.Y. 2002).
CEI has established that Aronson made representations of fact concerning SRNI and its purported private placement which were not true and which were known to him to be untrue. Those misrepresentations have been discussed above and that discussion will not be repeated here. CEI has also established that Aronson's false representations were made to deceive it and to induce it to invest in SRNI's purported private placement. As a result of the misrepresentations made by Aronson, CEI suffered an injury, to wit, the loss of $75,000. The injury suffered by CEI was the natural and probable consequence of Aronson's misrepresentations. Furthermore, Aronson should reasonably have foreseen that the injury suffered by CEI would be a probable consequence of his fraudulent scheme. Accordingly, the Court finds that CEI has stated a claim against Aronson for common law fraud.
F. Damages
Based upon the above analysis, the Court finds that CEI is entitled to recover $225,000 from Aronson and Carman, jointly and severally, based upon its RICO claim. This amount is three times the $75,000 CEI sent to SRNI based, inter alia, upon the false representations and omissions of fact made by Aronson in his dealings with Prete. In addition, plaintiff is entitled to recover from Aronson, on its common law causes of action for fraud, and breach of contract, and to recover jointly and severally from Aronson and Carman for negligent misrepresentations and conversion, $75,000. The damages for the common law causes of action compensate CEI for the same loss as the RICO award; however, CEI is not entitled to double recovery for the same loss. See Phelan v. Local 305 of the United Association of Journeymen, 973 F.2d 1050, 1063 (2d Cir. 1992). Accordingly, to prevent double recovery by plaintiff, any recovery by CEI based upon the common law causes of action should be credited against the larger RICO award.
CEI has requested that it be awarded pre-judgment interest and post-judgment interest on any award of damages. The RICO statute does not contain a provision which addresses the award of pre-judgment interest or post-judgment interest. Therefore, any award of such interest is left to the discretion of the court. See Abou-Khadra v. Mahshie, 4 F.3d 1071, 1084 (2d Cir. 1993). However, when claims are entertained by the court, pursuant to its supplemental jurisdiction, the availability and calculation of pre-judgment or post-judgment interest is governed by the applicable state law; in this case, the law of New York. Marfia v. T.C. Ziraat Bankasi, 147 F.3d 83, 90 (2d Cir. 1998). New York's Civil Practice Law and Rules ("CPLR") provides the following:
Interest shall be recovered upon a sum awarded because of a breach of performance of a contact, or because of an act or omission depriving or otherwise interfering with title to, or possession or enjoinment of, property, except that in an action of an equitable nature, interest and the rate and date from which it shall be computed shall be in the court's discretion.
While CPLR § 5001(a) does not mention conversion explicitly, it has been applied to actions that sound in conversion. See Phillips v. Catania, 188 A.D.2d 1029, 592 N.Y.S.2d 998 (App.Div. 4th Dep't 1993);Eighteen Holding Corp. v. Drizin, 268 A.D.2d 371, 701 N.Y.S.2d 427 (App. Div. 1st Dep't 2000). CPLR § 5003 provides that "[e]very money judgment shall bear interest from the date of its entry. Every order directing the payment of money which has been docketed as a judgment shall bear interest from the date of such docketing." Accordingly, plaintiff may recover pre-judgment interest and post-judgment interest as a matter of right; and CPLR § 5004 informs that the rate of interest shall be 9% per annum.
A cause of action for fraud accrues when the fraud is discovered. See Rabito v. Tonetti, 253 A.D.2d 750, 751, 677 N.Y.S.2d 493, 494 (App.Div. 2d Dep't 1998). Plaintiff has not stated, with specificity, when it discovered the fraud perpetrated by Aronson. A cause of action for breach of contract accrues when the contract is breached. See Ely-Cruikshank Co., Inc. v. Bank of Montreal, 81 N.Y.2d 399, 599 N.Y.S.2d 501 (1993). Plaintiff has not indicated, with specificity, when Aronson breached his contract with CEI to safeguard it from loss. A cause of action for conversion accrues on the date the conversion occurs. See Vigilant Ins. Co. of America v. Housing Authority of the City of El Paso, Texas, 87 N.Y.2d 36, 44, 637 N.Y.S.2d 342, 347 (1995). The record does not make clear when plaintiffs check for $75,000 was negotiated by the defendants and not applied to the investment for which it was intended. Consequently, it is not possible to pinpoint the date on which the conversion relevant to the instant action occurred.
A cause of action based upon negligent misrepresentation accrues on the date of the alleged misrepresentation relied upon by plaintiff. In the instant case, beginning at some point in February 1998, Aronson is alleged to have made several oral representations to plaintiff that were false. However, the record demonstrates that, in a writing dated February 24, 1998, Aronson misrepresented facts concerning SRNI and the risks that plaintiff would face if it made an investment in SRNI's private placement. Within days of the date on which Aronson's letter was prepared, CEI issued a check to SRNI for $75,000 to participate in its private placement. Therefore, based solely upon the letter that Aronson sent to plaintiff, dated February 24, 1998, a date certain can be fixed for at least some of the negligent misrepresentations that caused CEI to invest in the SRNI private placement.
When a date certain upon which interest should begin to be computed cannot be established, CPLR § 5001 provides guidance for establishing the time from which pre-judgment interest shall begin to be computed. It states the following:
Interest shall be computed from the earliest ascertainable date the cause of action existed, except that interest upon damages incurred thereafter, shall be computed from the date incurred. Where such damages were incurred at various times, interest shall be computed upon each item from the date it was incurred or upon all the damages from a single reasonable intermediate date.
Given the lack of information in the record from which the Court can identify, with certainty, the date on which each of plaintiffs common law causes of action accrued, the Court finds that it would be prudent to fix a single reasonable intermediate date from which interest shall be computed on all damages arising out of plaintiffs common law causes of action. The record establishes that throughout March and April, 1998, after plaintiff tendered its check to SRNI, the defendants did not communicate with plaintiff. On or about May 12, 1998, Aronson was arrested in connection with the instant fraudulent scheme. Under these circumstances, the Court finds that pre-judgment interest should be computed from April 5, 1998, an intermediate point between the date on which plaintiff issued its check to SRNI and the date on which Aronson was arrested for his involvement in the instant fraudulent scheme.
Punitive Damages
Plaintiff seeks an award of punitive damages against Aronson on its fraud cause of action. In Walter v. Sheldon, 10 N.Y.2d 401, 223 N.Y.S.2d 488 (1961), the New York Court of Appeals explained that the discretionary award of punitive damages is typically reserved for those cases where "the wrong complained of is morally culpable, or is actuated by evil and reprehensible motives." Walker v. Sheldon, 10 N.Y.2d at 404, 223 N.Y.S.2d at 490. Although the fraud perpetrated by Aronson was reprehensible and he acted willfully, the Court is not persuaded that his conduct meets the outrageous or "evil" standard for which an award of punitive damages is designed. Furthermore, the deterrent effect that punitive damages are designed to have will be accomplished by the trebling of the RICO damages that should be awarded against Aronson. Therefore, the Court finds that an award of punitive damages against Aronson, based on plaintiffs fraud cause of action, is not warranted.
G. Attorney's Fees and Costs
In the Second Circuit, a party seeking an award of attorney's fees must support that request with contemporaneous time records that show "for each attorney, the date, the hours expended, and the nature of the work done." New York State Ass'n for Retarded Children, Inc. v. Carey, 711 F.2d 1136, 1154 (2d Cir. 1983). Data concerning the training and experience of counsel should also be provided to enable a court to assess whether the fees requested are comparable to those charged in the relevant legal community for similar cases by attorneys of like training and experience. See, e.g., Orchano v. Advanced Recovery, Inc., 107 F.3d 94, 97-98 (2d Cir. 1997). Attorney fee applications that do not contain the information noted above "should normally be disallowed." New York State Ass'n for Retarded Children, Inc., 711 F.2d at 1154.
In the instant case, plaintiff has submitted billing records from its counsel which identify the attorney(ies) who rendered legal services to plaintiff in connection with this action, the dates on which the services were rendered, the hours expended and the nature of the work performed. Plaintiffs submission does not contain any information containing the experience of the attorney(ies) who represented it in this action. Therefore, the Court is unable to assess whether the attorneys' fees charged in the instant case are comparable to legal fees charged in this community for similar cases handled by attorneys whose training and experience is similar to the training and experience of plaintiff's counsel. Under the circumstances, no award of attorney's fees should be made.
With respect to the costs plaintiff has incurred prosecuting this action, plaintiff has failed to itemize those costs. Therefore, the Court cannot assess the reasonableness of plaintiffs costs. Accordingly, no award for costs should be made to plaintiff.
IV. RECOMMENDATION
For the reasons set forth above, I recommend that CEI recover the following: 1) from Aronson and Carman, jointly and severally, upon its RICO claim, $225,000; 2) from Aronson on its fraud and breach of contract causes of action, and jointly and severally, from Aronson and Carman on plaintiffs negligent misrepresentations and conversion causes of action, $75,000. Plaintiff is also entitled to obtain pre-judgment interest on the damages awarded on its common law causes of action. The pre-judgment interest should be computed by the Clerk of Court beginning from April 5, 1998, at the rate of 9% per annum. Plaintiff is also entitled to receive interest at the rate of 9% per annum, on the common law causes of action, from the date the judgment is entered. To avoid any double recovery by plaintiff, I recommend that any recovery by CEI, based upon the common law causes of action, be credited against the larger RICO damages. I also recommend that no award be made to plaintiff for punitive damages or for the costs and attorneys' fees it incurred in prosecuting this action. However, with respect to the costs and attorneys' fees plaintiff incurred, I recommend that CEI be given a reasonable time to submit competent evidence to the court, in the form of affidavits or otherwise, to cure the deficiencies in its original submission concerning the costs and attorneys' fees it incurred in prosecuting this action.
Plaintiff shall serve defendants Aronson and Carman with a copy of this Report and Recommendation and shall submit proof of service to the Court.
V. FILING OF OBJECTIONS TO THIS REPORT AND RECOMMENDATION
Pursuant to 28 U.S.C. § 636(b)(1) and Rule 72(b) of the Federal Rules of Civil Procedure, the parties shall have ten (10) days from service of this Report to file written objections. See also Fed.R.Civ.P. 6. Such objections, and any responses to objections, shall be filed with the Clerk of Court, with courtesy copies delivered to the chambers of the Honorable Shirley Wohl Kram, 40 Foley Square, Room 2101, New York, New York, 10007, and to the chambers of the undersigned, 40 Foley Square, Room 540, New York, New York, 10007. Any requests for an extension of time for filing objections must be directed to Judge Kram. FAILURE TO FILE OBJECTIONS WITHIN TEN (10) DAYS WILL RESULT IN A WAIVER OF OBJECTIONS AND WILL PRECLUDE APPELLATE REVIEW. See Thomas v. Arn, 474 U.S. 140 (1985); IUE AFL-CIO Pension Fund v. Herrmann, 9 F.3d 1049, 1054 (2d Cir. 1993); Frank v. Johnson, 968 F.2d 298, 300 (2d Cir. 1992);Wesolek v. Canadair Ltd., 838 F.2d 55, 57-59 (2d Cir. 1988); McCarthy v. Manson, 714 F.2d 234, 237-38 (2d Cir. 1983).