Opinion
01 Civ. 9824 (LAP)
September 23, 2002
MEMORANDUM AND ORDER
Plaintiff Dirk Karreman ("Karreman") brings this amended complaint against defendants Evergreen International Spot Trading, Inc. ("Evergreen"), First Equity Enterprises, Inc. ("First Equity"), Forex International Ltd. ("Forex"), Andre Koudachev ("Koudachev"), Polina Sirotina ("Sirotina"), Gary Farberov (a.k.a. "Gary Farber") ("Farberov") and Gary Geldman ("Geldman") for violations of federal law under the Racketeer Influenced Corrupt Organizations Act ("RICO"), 18 U.S.C. § 1961 et seq., common law fraud, conspiracy to commit common law fraud and conversion. Sirotina now moves to dismiss the amended complaint in its entirety pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure. For the following reasons, Sirotina's motion to dismiss the amended complaint is denied.
BACKGROUND
In or about 1997, Koudachev founded Evergreen and, along with Farberov, set up an affiliate of Evergreen (First Equity) the following year. (Am. Compl. ¶¶ 3, 11). Koudachev was the majority owner of and a principal in Evergreen and First Equity. (Id. ¶ 5). Farberov was a principal in Evergreen and First Equity as well as First Equity's president. (Id. ¶ 7). Koudachev, Sirotina, Farberov and Geldman (the "Individual Defendants") were principals who participated in the operation, control and management of Evergreen. (Id. ¶ 13). Evergreen employed at least four currency traders, including Felix Veksler, Albert Guglielmo ("Guglielmo"), Anthony Frisone and Mamed Mekhtiev ("Mekhtiev"). (Id. ¶ 24).
Sirotina was "Koudachev's closest confidant at Evergreen." (Id. ¶ 6). In or about 1998, the amended complaint alleges,
Koudachev appointed Sirotina Chief Financial Officer of Evergreen with the duties and responsibilities of running Evergreen's day-to-day business activities. Despite Koudachev's endorsement of Sirotina, certain Evergreen employees found Sirotina's skills and abilities to be inadequate for her position. Upon information and belief, certain Evergreen employees approached Koudachev and requested that he terminate Sirotina's employment with Evergreen on the grounds that she was unqualified and incompetent for her position. Upon information and belief, Koudachev responded to such employees that he could not terminate Sirotina because, "she knows everything about me — she knows about all of the accounts I have, where they are — I can't do it."
(Id. ¶ 15). Sirotina stayed on with Evergreen and traveled on a daily basis from her home in New Jersey to Evergreen's Manhattan offices to manage, promote and carry on the activities of Evergreen. (Id. ¶ 16).
Between 1998 and September 2001, Evergreen employed between 20 and 100 brokers, including a manager, Daniel Levden. (Id. ¶ 17). The brokers' job was to "cold call" and "pitch" potential investment clients, including Karreman. (Id.). "The essential `pitch' used was that the call came on behalf of a managed trading account and that all funds invested by the client would be put in a common pool, which would be traded through an Evergreen account in the foreign exchange currency market."
First Equity functioned as the "clearing-house" where Evergreen directed its clients to send their investment funds. (Id. ¶ 28). These funds were pooled into common trading accounts ("Accounts") from which Evergreen could trade foreign currency. (Id.). Defendants used the Accounts to make "margin deposits" into leveraged fund accounts at either of two financial institutions, the Chicago branch of First National Bank of Chicago or Forex. (Id.). The leveraged fund accounts "allowed Evergreen to trade in multiples of its client's cash deposits." (Id.)
Between March 2000 through August 2001, defendants, through Evergreen's brokers, made seven or eight international telephone calls from Evergreen's offices in Manhattan to Karreman in Australia. (Id. ¶ 18). The purpose of these calls was to convince Karreman to "enter into a business relationship with Evergreen and send funds to First Equity for the purported purpose of trading foreign currency." (Id. ¶ 19). Defendants did so by telling Karreman the names of several prominent Australian citizens purportedly trading with Evergreen, the "historically high level of success Evergreen purportedly had in trading foreign currency" and that Karreman could expect between a 20% and 30% rate of return on his investments. (Id.)
In June 2000, defendants sent Karreman a customer agreement, an account opening application and other related documentation. (Id. ¶ 21). Karreman executed the paperwork and returned it to defendants. (Id.). Upon the Individual Defendants' request, Karreman executed three separate wire transfers to First Equity. (Id. ¶ 22). From July 2000 through September 2001, the Individual Defendants caused First Equity to mail to Karreman in Australia a "monthly client statement." (Id. ¶ 33).
Between July 2000 through September 2001, "pursuant to an elaborate scheme," defendants "intentionally failed to consummate otherwise wholly legitimate trades utilizing all or part of plaintiff's funds, totaling approximately $1.975 million, in the foreign exchange currency market." (Id. ¶ 34). Rather, defendants "kept all of plaintiff's funds without justification and spent and/or absconded with all such funds to a presently unknown location." (Id.). Further, defendants "took steps to mislead and deceive plaintiff by either hiding from plaintiff the true state of affairs of his investments or by making affirmative misrepresentations." (Id. 35).
According to the amended complaint, as part of its fraudulent scheme, Evergreen collected approximately $200 million in client funds. (Id. ¶ 20).
In August 2000, Sirotina traveled to Zurich, Switzerland to open a bank account in her name at Bank Vontobel AG ("Bank Vontobel") for the purposes of wrongfully and unlawfully transferring Evergreen's client funds to herself and Koudachev. (Id. ¶ 50). Sirotina later transferred a portion of those funds to her personal account in New Jersey, without Evergreen client knowledge or authorization. (Id.). Sirotina also established numerous other secret accounts, "funded wholly from Evergreen's client funds, without Evergreen client knowledge or authorization." (Id. ¶ 51). These included accounts in the names of companies previously established by Sirotina, such as Spectrum and Crowne. (Id.). Further, in or about mid-November 2001, "Sirotina withdrew approximately $46,000 from one of these accounts by cashing two checks made payable to `cash.'" (Id.)
In or about July 2001, Koudachev and Sirotina began complaining to Evergreen's brokers that they were not bringing in enough money from clients and pressured brokers "`to perform better' and `bring more money in' by increasing the number of cold calls made to prospective clients, as well as increasing their calls to existing clients, including plaintiff." (Id. ¶ 37). From July 2001 through September 2001, Sirotina made such demands at least once every week and Koudachev, with Sirotina, made such demands any time he was in Evergreen's offices, which was at least once every month. (Id. ¶ 38).
On September 22, 2001, Farberov believed that Koudachev had disappeared with client monies and that everyone at Evergreen and First Equity "was in trouble." (Id. ¶ 39). Farberov planned to undertake a scheme to cover up the disappearance of client money. (Id.). Guglielmo requested that Mekhtiev meet Farberov, Gelman, Sirotina and himself at Evergreen's offices. (Id. ¶ 41). At that meeting, Farberov stated that "despite having deposited a total of over $95 million in the Forex account, First Equity had only withdrawn funds from the Forex account once since it had opened the account in 1998 and that one withdrawal amounted to just $1 million." (Id.). Further, the amended complaint alleges that Sirotina, Gelman and Farberov suggested a "further scheme to cover up the lost client funds":
[T]hey suggested that Evergreen continue to raise about $50 to $60 million a year, build the Accounts to approximately $160 million, and show the clients false monthly statements, thereby convincing them that their money was safe. When the Accounts were sufficiently built up, they suggested that Evergreen should "whack the pool" and tell the clients that Evergreen had "lost" $60 million of their money in the foreign exchange currency market and then return the remaining $100 million to the clients and go out of business. Sirotina, Gelman, and Farberov also urged that the group get Daniel Ledven involved in the cover up scheme because "he knew everything," notwithstanding that Ledven had left Evergreen some three years earlier, in or about 1998. . . .
Upon information and belief, during said meeting, Sirotina, Gelman, and Farberov stated that everyone at Evergreen and First Equity was "in trouble" and "was going to go to jail" for the disappearance of plaintiff's and other Evergreen client's funds. Upon information and belief, Sirotina, Gelman, and Farberov so stated intentionally to prevent or otherwise influence Mekhtiev and others from informing federal or other authorities of the fraudulent scheme and providing truthful testimony regarding the scheme to such authorities.
(Id. ¶¶ 42-43). In fact, the amended complaint alleges, between 1998 through September 2001, defendants "had already created and had been carrying out the scheme described by Sirotina, Gelman, and Farberov at the September 22, 2001 meeting." (Id. ¶ 44).
The amended complaint alleges that the Individual Defendants, including Koudachev and Sirotina, spent Karreman's and other clients' funds for their own personal purposes. Specifically, Karreman alleges that Sirotina — through the use of two American Express cards that were issued to Evergreen in Sirotina's name — wrongfully and unlawfully spent approximately $150,000 to $200,000 per year of such funds. (Id. ¶ 49). Karreman alleges that Sirotina's purchases for herself totaled approximately $500,000 in furs, jewelry, clothing and other personal items, through the use of United States mails and wires. (Id.). The alleged transactions included purchases made by Sirotina at Nieman Marcus, Bloomingdales, Bergdorf Goodman, Saks Fifth Avenue and Barneys. (Id.). Further, the amended complaint alleges that defendants "had no form of income other than that derived from the funds received for trading purposes from their clients, including plaintiff's funds." (Id. ¶ 46).
In September 2001, defendants shut down their operations and absconded with Karreman's and other Evergreen client's funds. (Id. ¶ 55). Karreman twice requested, on September 16 and 26, 2001, that Evergreen return all of his money to him immediately. (Id. ¶ 56). Shortly thereafter, "certain employees of Evergreen advised plaintiff that all client funds, including his, had disappeared and that Evergreen was unable to return any money to him." (Id. ¶ 56).
On November 7, 2001, Karreman filed a complaint in the United States District Court for the Southern District of New York. Karreman moved by order to show cause for expedited discovery and for attachment of certain assets pursuant to Rule 64 of the Federal Rules of Civil Procedure. I issued an Order granting Karreman's motion for expedited discovery and attachment of certain asserts up to a total of $2,100,000.
On November 28, 2001, Chirstos Tzaras filed a complaint in the United States District Court for the Southern District of New York against many of the same defendants in the instant case, including Sirotina. That case, captioned Tzaras v. Koudachev et al., was assigned docket number 01 Civ. 10726 and referred to me as possibly related to the instant case; on November 30, 2001, I accepted the Tzaras case as related. As in the instant case, the Tzaras case also alleges RICO violations.
On December 3, 2001, Sirotina moved to dismiss the complaint pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure for failure to state a claim upon which relief can be granted. On December 5, 2001, the parties agreed that the Court's prior stay order shall be modified to the extent of permitting Karreman to file an amended complaint.
On December 14, 2001, Karreman filed the instant amended complaint. The amended complaint contains five causes of action against defendants. The first two causes of action allege RICO violations, 18 U.S.C. § 1962 (c) and (d). Specifically, those counts allege that Evergreen, First Equity, Forex, the Individual Defendants and others formed an ongoing enterprise (the "Koudachev Group") to: (1) solicit Karreman, among other investors, for funds purportedly to trade in the foreign exchange currency market; (2) fabricate and conceal the noncompletion of foreign currency trades on behalf of Karreman; and (3) wrongfully and unlawfully spend and keep Karreman's funds. (Id. ¶ 60) The Koudachev Group allegedly engaged in interstate commerce, with a fraudulent purpose, through a pattern of racketeering activity that injured Karreman. (Id. ¶¶ 61-67). The third cause of action, directed at all defendants except Forex, alleges common law fraud, viz., defendants "intentionally failed to complete and consummate trades of all or part of Evergreen's client funds, including $1.975 million of plaintiff's funds, in the foreign exchange currency market, and instead kept all of plaintiff's funds without justification." (Id. ¶ 72). According to this count, Karreman reasonably relied on defendants' misrepresentations and omissions and was directly and proximately injured as a result. (Id. ¶¶ 75, 77). The fourth cause of action alleges conspiracy to commit common law fraud. (Id. ¶¶ 78-85). Finally, the fifth cause of action alleges conversion of Karreman's funds. Karreman seeks actual, compensatory and punitive damages, along with full reimbursement of his costs and expenses relating to this action.
On or about December 28, 2001, Sirotina moved to dismiss the amended complaint pursuant to Rule 12(b)(6). Sirotina asserts that the first two causes of action should be dismissed for failure "to particularize a valid claim" under RICO and that the remaining causes of action should be dismissed because they provide "no independent basis for federal jurisdiction." (Mem. Law Supp. Mot. By Def. Sirotina Dismiss Am. Compl. at 1-2).
At the time the amended complaint was filed, Karreman was represented White Case LLP ("White Case"). Subsequent to that filing, however, White Case sought to be relieved as counsel for Karreman. On February 25, 2002, I denied White Case's motion to withdraw as counsel for Karreman without prejudice to renewal after resolution of Sirotina's motion to dismiss. On April 12, 2002, James J. McGuire of White Case wrote to the Court renewing its motion for leave to withdraw as counsel for Karreman. On April 17, 2002, I granted White Case's renewed motion to withdraw.
On May 14, 2002, a superceding indictment in the United States District Court for the Eastern District of New York against Evergreen, First Equity, Forex, Koudachev, Sergei Habarov, Sirotina, Justin Fauci, Mekhtiev, Peter Papaemmanuel, Guglielmo, Philip Levenson and Brian Pasqualini was unsealed. (Letter from AUSA Schuman to the Court, dated May 16, 2002). The indictment charges defendants with conspiracy to commit mail and wire fraud, mail fraud, false statements and money laundering.
DISCUSSION
I. Standard for Rule 12(b)(6)
When deciding a motion to dismiss under Rule 12(b)(6), I must accept as true all well-pleaded factual allegations of the complaint and draw all inferences in favor of the pleader. See City of Los Angeles v. Preferred Communications, Inc., 476 U.S. 488, 493 (1986); Miree v. DeKalb County, 433 U.S. 25, 27 n. 2 (1977) (referring to "well-pleaded allegations"); Mills v. Polar Molecular Corp., 12 F.3d 1170, 1174 (2d Cir. 1993). In order to avoid dismissal, plaintiff must do more than plead mere "[c]onclusory allegations or legal conclusions masquerading as factual conclusions." Gebhardt v. Allspect, Inc., 96 F. Supp.2d 331, 333 (S.D.N.Y. 2000) (quoting 2 James Wm. Moore, Moore's Federal Practice ¶ 12.34 [a] [b] (3d ed. 1997)). Dismissal is proper only when "it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Conley v. Gibson, 355 U.S. 41, 45-46 (1957); accord Cohen v. Koenig, 25 F.3d 1168, 1172 (2d Cir. 1994).
II. Sirotina's Motion to Dismiss
While Sirotina's motion is based upon Rule 12(b)(6), her first argument is that Karreman's allegations do not satisfy the particularity requirements of Rule 9(b). (Mem. Law Supp. Mot. By Def. Sirotina Dismiss Am. Compl. at 3). Specifically, Sirotina argues that the allegations against her "do not particularize acts of criminality." (Id. at 4). With respect to the American Express charges, Sirotina asserts that the allegations in the complaint "are as consistent with innocence as with anything else" because the mere fact that she used two credit cards issued to her by Evergreen does not mean that "she stole anybody's money, or that she did so in connection with the alleged fraud." (Id.) Sirotina argues that Karreman "fails to connect the use of the two cards to the alleged fraud." (Id.). Further, Sirotina asserts that the allegation regarding the alleged cover-up at the September 22, 2001 meeting do not refer to Sirotina in any particular manner. (Id.). With respect to Sirotina's withdrawal of a portion of the $500,000 deposited by Koudachev, Sirotina asserts that the allegation "does not particularize who directed her to make that withdrawal." (Id.). Finally, with respect to the allegations that Sirotina opened numerous secret bank accounts with clients' funds, "[t]here are no particulars, other than the names of two companies that she established, Spectrum and Crowne." (Id. at 5).
Rule 9(b) provides that, in averments of fraud, "the circumstances constituting fraud . . . shall be stated with particularity." Fed.R.Civ.P. 9(b). This provision applies to RICO claims for which fraud is the predicate illegal act. Moore v. Painewebber, Inc., 189 F.3d 165, 172 (2d Cir. 1999).
"In the RICO context, Rule 9(b) calls for the complaint to specify the statements it claims were false or misleading, give particulars as to the respect in which plaintiffs contend the statements were fraudulent, state when and where the statements were made, and identify those responsible for the statements." Id. at 173; see also Int'l Telecom, Inc. v. Generadora Electrica del Oriente S.A., No. 00 Civ. 8695 (WHP), 2002 WL 465291, at *6 (S.D.N.Y. Mar. 27, 2002) ("To survive scrutiny under Rule 9 (b), fraud allegations generally should specify the time, place, speaker and content of an alleged misrepresentation."). At the same time, "[t]he complaint in a RICO action need not be specific as to each allegation of mail or wire fraud when the nature of the RICO scheme is sufficiently pleaded so as to give notice to the defendants." First Interregoinal Advisors Corp. v. Wolff, 956 F. Supp. 480, 485 (S.D.N.Y. 1997) (citing DiVittorio v. Equidyne Extractive Indus., 822 F.2d 1242, 1247 (2d Cir. 1987). "This is especially true when the sufficiency of the complaint is being considered before discovery has taken place and when the `information is exclusively in the possession of those participating in the fraud.'" Id. (quoting DiVittorio, 822 F.2d at 1247); see also Constellation Bank, N.A. v. C.L.A. Management Co., No. 94 Civ. 0989, 1995 WL 42285, at *22-23 (S.D.N.Y. Feb. 1, 1995); In re AnnTaylor Stores Sec. Litig., 807 F. Supp. 990, 1004 (S.D.N.Y. 1992).
A defendant need not commit fraud herself in order to be found liable for participating in a scheme to defraud. See, e.g., Blue Cross Blue Shield, Inc. v. Philip Morris, Inc., 113 F. Supp.2d 345, 367 (E.D.N.Y. 2000) ("RICO liability extends not only to the defendant who pulled the trigger, but also to the defendants who ordered and directed it.").
Sirotina's motion to dismiss the complaint for failure to plead with particularity should be denied. The amended complaint makes specific allegations with respect to the fraudulent scheme by the defendants in general and Sirotina in particular. Karreman alleges, inter alia: (1) that Sirotina was the CFO of and a principal in Evergreen, with the duties and responsibilities of running Evergreen's day-to-day business activities, (Am. Compl. ¶¶ 6, 13, 15); (2) that Sirotina, along with Koudachev, pressured Evergreen's brokers to "perform better" and "bring more money in" through an increase in the number of cold calls to prospective clients and calls to existing clients, (id. ¶ 37); (3) that Evergreen's brokers, under Sirotina's control, communicated with Karreman and convinced him to transfer funds by wire for the benefit of First Equity for the purported purpose of trading foreign currency, (Id. ¶ 17-22); (4) the time and place of numerous purchases made by Sirotina that were funded directly with the proceeds of the alleged fraudulent scheme, (id. ¶ 49); and (5) the defendants had no other form of income other than that derived from the fund received for trading purposes from their clients, (id. ¶ 46). At this stage of the proceedings, Karreman has more than adequately pled the existence of a fraudulent scheme and Sirotina's knowing participation in that scheme.
III. State Law Claims
Sirotina also argues that the Court should exercise its discretion and decline to exercise supplemental jurisdiction over the state law claims set forth in the amended complaint. (Mem. Law Supp. Mot. By Def. Sirotina Dismiss Am. Compl. at 6). Sirotina does not argue, however, that Karreman's state law claims fail to state a claim under Rule 12(b)(6) or fail to satisfy the particularity requirements of Rule 9(b).
Federal courts have power to decide state law claims that "derive from a common nucleus of operative fact" with claims arising under federal law. United Mine Workers v. Gibbs, 383 U.S. 715, 725 (1966). Pursuant to 28 U.S.C. § 1367 (c)(3), however, a district court may nonetheless decline to exercise supplemental jurisdiction over a claim if "the district court has dismissed all claims over which it had original jurisdiction." Here, all of the claims over which this Court had original jurisdiction have not been dismissed, nor has Sirotina provided any reason as to why I should not exercise supplemental jurisdiction over Karreman's state law claims. Therefore, Sirotina's motion to dismiss Karreman's state law claims is denied.
CONCLUSION
Sirotina's motion to dismiss the amended complaint is denied.
SO ORDERED.