Opinion
99 cv 9365 (GBD).
March 11, 2003
MEMORANDUM OPINION ORDER
Plaintiff commenced this action against his brokerage firm, its principles, and his brokers, alleging federal and state securities, RICO, and pendant common-law claims in connection with investments he made in the foreign currency market. Plaintiff seeks damages in the amount of $409,000 plus interest and reasonable attorneys fees. Plaintiff has moved for partial summary judgment on the state law claims relating to the Alaska Securities Act, conversion, and breach of fiduciary duty. Defendants oppose plaintiff's motion. For the following reasons, plaintiff's motion for partial summary judgment is granted.
All defendants have asserted their Fifth Amendment privilege against self-incrimination as they are the subject of on-going criminal investigations in New York and Alaska. Consequently, defendants MaCaull and Eisner only submitted a one page opposition letter to plaintiff's motion generally claiming that material issues of fact exist. Defendants Winthorpe, First Foreign, and Salice submitted a short opposition and supplemental addendum generally claiming that plaintiff's investments were not securities, but not addressing any of plaintiff's other claims. Defendant Pasculli, a pro se defendant, did not submit any materials.
I. Background
Plaintiff is a mechanic who works and resides in Alaska. Defendants Winthorpe Grant, Inc. and First Foreign Holding Corp., are New York corporations that operate as commodity broker-dealers, and solicit new investors, in part, by directing their agents to make "cold calls." Defendants Michael MacCaull and Gill Pasculli, Jr. are the president and vice-president, respectively, of Winthorpe. Defendants Lawrence Salice and Bradley Eisner are stockbrokers employed by Winthorpe.
A "cold call" is an unsolicited phone call made by a stockbroker to an individual whereby the stockbroker aggressively encourages the individual to invest money.
Plaintiff alleges that around March 1999, he received a "cold call" at his place of business from defendant Eisner. By the conclusion of the conversation, plaintiff had agreed to open an account with Winthorpe and make an initial investment of $4000 in the foreign currency exchange market. Defendant MacCaull, a more senior Winthorpe stockbroker, later took over management of plaintiff's account.
Plaintiff alleges that MacCaull represented to plaintiff that First Foreign was Winthorpe's clearing broker, and that any sums sent to First Foreign would be held in trust for the benefit of plaintiff's accounts with Winthorpe. Over the course of the next three months, plaintiff wire transferred an additional $420,000 to First Foreign's accounts at Key Bank. However, in late May 1999, plaintiff instructed defendants to close his account and return the balance. On June 1, 1999, Winthorpe wire transferred roughly $11,000 to plaintiff's Anchorage bank account, claiming that plaintiff had lost the remaining $409,000 in the market. Plaintiff then brought this suit against defendants, seeking to recover $409,000 plus interest and attorney's fees.
In addition to this civil action, two criminal investigations have been instituted against defendants. On August 4, 1999, the New York State Attorney General obtained a temporary restraining order ("TRO") against defendants in New York State Supreme Court. The TRO restrained defendants from offering or selling securities from within New York, and from removing any money obtained from the sale of securities. It further directed defendants to appear for depositions. Upon application by the Attorney General, a court in Suffolk County also issued a search warrant for Winthorpe's offices. The TRO and search warrant were issued upon information and belief that defendants violated New York State's securities laws, misappropriated investor funds, and engaged in other fraudulent practices.
The second criminal investigation was instituted in the State of Alaska, by the Alaska Division of Banking, Securities, and Corporations (the "Division"). On October 27, 1999, an Alaska Administrator of Securities entered a Temporary Order to Cease and Desist against the defendants. In that Order, the Administrator of Securities determined that defendants had been acting as broker-dealers without registration in Alaska, as well as knowingly and intentionally engaging in fraudulent business practices. On February 23, 2000, defendants Eisner and MacCaull entered into consent agreements with the State of Alaska. In those consent agreements, they neither admitted nor denied any violation of the Alaska Securities Act, but agreed, among other things, to cease and desist from the activities described in the October 27 Order, and to neither directly nor indirectly engage in the securities business in the State of Alaska.
Plaintiff contends that all defendants entered into consent agreements, however, plaintiff has only annexed copies of Eisner and MacCaull's consent agreements.
Plaintiff also argues that the Orders and consent decrees in both the New York and Alaska criminal investigations should have collateral estoppel effect by precluding defendants from arguing they are not liable in plaintiff's civil suit. It is not entirely clear, however, that the Orders or consent decrees from New York or Alaska constitute final judgments on the merits, as required by collateral estoppel principles. Even though collateral estoppel does not apply here, the Orders and consent decrees still have strong evidentiary value in light of the fact that defendants have asserted their Fifth Amendment privilege and refused to defend this suit.
In the action at bar, defendants have asserted their Fifth Amendment privilege against self-incrimination, and thus little discovery has occurred and no depositions have been taken.
In an Order dated January 3, 2000, Judge Lewis A. Kaplan denied defendants' motion to stay plaintiff's civil action during the pendency of the criminal investigations.
II. Discussion
Summary judgment in favor of the moving party is appropriate if "the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." FED. R. CIV. P. 56(c). The responsibility of a court at this stage is not to try disputed issues of fact, but to assess whether there are any factual issues to be tried. See Knight v. U.S. Fire Ins. Co., 804 F.2d 9, 12 (2d Cir. 1986). However, "the mere existence of some alleged factual dispute between the parties will not defeat an otherwise properly supported motion for summary judgment; the requirement is that there be no genuine issue of material fact." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986) (emphasis in original). The inferences drawn from the facts will be viewed in the light most favorable to the non-moving party. See Matsushita Electric Industr. Co. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986). A party opposing summary judgment may not rely upon mere allegations or denials, but must set forth specific facts showing that there is a genuine issue for trial. See Anderson, 477 U.S. at 248.Where a party in a civil suit asserts his or her Fifth Amendment privilege, a court may properly draw an adverse inference. "The Fifth Amendment does not forbid adverse inferences against parties to civil actions when they refuse to testify in response to probative evidence offered against them[.]" Baxter v. Palmigiano, 425 U.S. 308, 318 (1976). A claim of privilege is admissible evidence against the party asserting the privilege, as the constitution does not bar its admission. See Brink's Inc. v. City of New York, 717 F.2d 700, 710 (2d Cir. 1983),citing Baxter, 425 U.S. at 318. The adverse inference that may be drawn will be given no more evidentiary value than the facts of the case warrant, and in any event, is still one of many factors a court will consider in reaching its final determination. See United States v. Dist. Council of New York City, 782 F. Supp. 920, 925-26 (S.D.N.Y. 1992).
A. The Alaska Securities Act Claims
Plaintiff argues that defendants violated § 45.55.030 of the Alaska Securities Act by unlawfully operating as broker-dealers in the State of Alaska. Further, plaintiff contends that defendants violated § 45.53.010 of the Act by defrauding him in connection with the foreign exchange currency investments he made.
1. Section 45.55.030(a)
Section 45.55.030(a) of the Alaska Securities Act provides that "[a] person may not transact business in this state [Alaska] as a broker-dealer or agent unless the person is registered under this chapter." ALASKA STAT. § 45.55.030(a) (2001). A broker-dealer is defined as "a person engaged in the business of effecting transactions in securities for the account of others or for the person's own account[.]" ALASKA STAT. § 45.55.990(7) (2001).
Plaintiff argues that the foreign exchange currency investments were securities, and that defendants sold these securities to him even though they were not registered broker-dealers in Alaska, in violation of § 45.55.030(a) of the Alaska Securities Act. Defendants respond only by summarily stating, with no substantive analysis, that a genuine issue of material fact remains as to whether plaintiff's transactions were securities. Further, defendants do not respond at all to plaintiff's contention that defendants were not registered to sell securities in Alaska.
A security is defined under the statute as "[an] investment contract; . . . or any other commodity offered or sold to the public and not regulated by the Commodity Future Trading Commission[.]" Alaska Stat. § 45.55.990 (32). In SEC v. Howey Co., 328 U.S. 293 (1946), the Supreme Court adopted a three part test to determine if a transaction constitutes an investment contract, and consequently, a security. The transaction must involve: 1) an investment of money; 2) a common enterprise; and 3) profits derived solely from the efforts of others. See SEC v. Howey Co., 328 U.S. 293, 301 (1946). The Supreme Court of Alaska has adopted the Howey definition of an investment contract. See Am. Gold Diamond Corp. v. Kirkpatrick, 678 P.2d 1343, 1346 (Alaska 1984).
Plaintiff easily meets the first element of the Howey test, as he invested a total of $420,000 over the course of three months. Plaintiff also meets the second element, namely, that a common enterprise existed. Defendants received a commission for every trade that plaintiff effected, and consequently there was a "clear financial interdependence between investor and promoter." Wheeler v. State, 659 P.2d 1241, 1248 (Alaska Ct.App. 1983).
Under the third part of the Howey test, plaintiff must show that the profits in the transactions were derived solely from the efforts of others. In Kirkpatrick, supra, the Alaska Supreme Court noted approvingly the manner that the Ninth Circuit framed the question. The Ninth Circuit found that the appropriate inquiry is "whether the efforts made by those other than the investor are the undeniably significant ones, those essential managerial efforts which affect the failure or success of the enterprise." Kirkpatrick, 678 P.2d at 1346, quoting SEC v. Glen W. Turner Enter., Inc. 474 F.2d 476 (9th Cir. 1973).
Plaintiff, therefore, must show that defendants had a managerial role over his account, significant enough to affect the failure or success of his investments. Plaintiff's Affidavit in support of his motion for summary judgment asserts the following: 1) Eisner assured plaintiff that Winthorpe and its traders were experts, who had extensive experience in the foreign currency markets, and that they would protect his investment; 2) MacCaull gave assurances to plaintiff that Winthorpe and First Foreign were reputable companies whom plaintiff could trust; 3) Salice, the president of Winthorpe, called plaintiff and told him that the Winthorpe traders would handle his account prudently, and that plaintiff should call him if he needed any assistance; 4) plaintiff received over two dozen phone calls and faxes from defendants during the period he was investing; 5) when plaintiff asked the value of his account, MacCaull told him "Don't worry," and that "We want to be doing business with Ron Schruefer 10 years from now;" 6) on a conference call between plaintiff, MacCaull, Salice, and Pasculli, Pasculli introduced himself as the president and owner of First Foreign, and the three defendants all assured plaintiff that his investment was protected and that his account was being well managed; 7) on that same conference call, plaintiff stated that he did not understand what was happening, and MacCaull responded, "That's o.k. That's what we're here for;" 8) defendants took commissions from plaintiff's account. Plaintiff's Aff.
Plaintiff has put forward sufficient evidence to show that defendants' efforts regarding his transactions were undeniably significant and that they were the type of managerial efforts that affect the success or failure of an enterprise. Therefore, plaintiff's transactions meet all three elements of the Howey definition of an investment contract. As this Court finds that the transactions were investment contracts, this Court also finds that they necessarily constituted securities, and that defendants acted as broker-dealers when they effected transactions in these securities.
Section 45.55.030(a) also requires plaintiff to show that defendants were not registered to sell these securities. Plaintiff has annexed the October 27, 1999 Temporary Order to Cease and Desist issued by an Alaska Administrator of Securities. In that Order, the Administrator of Securities made a factual finding that defendants were not registered to sell securities in Alaska based upon a review of the Division's records. The records also revealed that, with the exception of Eisner, all of the defendants had been barred or suspended from any association with the National Association of Securities Dealers ("NASD") for previous violations of securities laws, and at all relevant times, these defendants were prohibited from engaging in the offer or sale of securities. Defendants do not respond to plaintiff's allegations that defendants were not registered in Alaska, as they have asserted their Fifth Amendment privilege. As noted earlier, a court in a civil action may properly draw an adverse inference from a defendant's silence. This Court therefore finds that defendants were not registered to sell securities in Alaska.
Accordingly, plaintiff has shown that defendants unlawfully acted as broker-dealers by failing to register in violation of § 45.55.030 of the Alaska Securities Act, and summary judgment is granted in favor of plaintiff on this claim.
2. Section 45.55.010(a)
Next, plaintiff moves for summary judgment on his claim that defendants violated § 45.55.010(a) of the Alaska Securities Act. That section prohibits fraudulent activity in connection with the sale of securities:
A person may not, in connection with the offer, sale, or purchase of a security, directly or indirectly
(1) employ a device, scheme, or artifice to defraud;
(2) make an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they are made, not misleading; or
(3) engage in an act, practice, or course of business that operates or would operate as a fraud or deceit upon a person.
ALASKA STAT. § 45.55.010(a) (2001).
Plaintiff contends that defendants committed fraud and made material omissions by failing to inform him that they were unregistered in Alaska and failing to inform him of their disciplinary history with the NASD. As noted earlier, defendants have asserted their Fifth Amendment privilege and have not specifically responded to any of plaintiff's allegations. Rather, they only generally deny that they engaged in fraudulent behavior and generally claim that plaintiff received good advice on his investments. This Court, therefore, finds that defendants have committed fraudulent activity in violation of § 45.55.010(a) of the Alaska Securities Act, and summary judgment will be granted in favor of plaintiff on this issue.
Defendants Winthorpe, First Foreign, and Salice also submit an affidavit by their attorney, Samuel Rieff. In his affidavit, Rieff claims that plaintiff eagerly participated in the investment transactions and that once the criminal investigations conclude, defendants will be able to provide a reasonable explanation for the events in this case. However, Rule 56(e) of the Federal Rules provides that "[s]upporting and opposing affidavits [for summary judgment] shall be made on personal knowledge[.]" FED. R. CIV. P. 56(e). Rieff does not have personal knowledge of any of the events of this case, and therefore, his affidavit has little to no utility.
B. Conversion
Plaintiff argues that rather than investing the $420,000, defendants converted the money for their own personal use. Defendants returned only $11,000 of the original $420,000 plaintiff invested. Plaintiff claims that defendants converted the remaining $409,000.
Conversion is "any unauthorized exercise of dominion or control over property by one who is not the owner of the property which interferes with and is in defiance of a superior possessory right of another in the property." Schwartz v. Capital Liguidators, Inc., 984 F.2d 53, 53 (2d Cir. 1993), quoting Meese v. Miller, 79 426 (N.Y.S.2d 496, 500 (4th Dep't 1981). Where the original possession by the defendant is lawful, conversion does not occur "until the defendant refuses to return the property after demand or until he sooner disposes of the property." Id. at 54, quoting Johnson v. Gumer, 464 N.Y.S.2d 318, 319 (4th Dep't 1983).
Plaintiff argues that defendants did not invest the money as instructed. In support of his claims, plaintiff has annexed a copy of an affidavit submitted to the New York State Supreme Court in support of the Attorney General's application for a TRO by Brian Ford, the Attorney General's confidential investigator. Based upon Ford's investigation into defendants' activities, Ford concludes in his affidavit that defendants engaged in fraudulent activity by, among other things, failing to follow customers' orders regarding account transactions, and withdrawing large sums of money from the corporate account payable to Winthorpe's principals and to "cash." Pl's Exh E. Plaintiff also has annexed a copy of a statement from First Foreign's bank account, the clearing firm that plaintiff wrote his checks to. Plaintiff claims that this statement shows that none of his money was held in a segregated investment account, as promised. Further, plaintiff has annexed a copy of Pasculli and Salice's personal bank account statements which reflect unusually large and irregular deposits of more than tens of thousands of dollars. Plaintiff contends that this shows that Pasculli and Salice deposited customer funds into their personal bank accounts.
Defendants have asserted their privilege against self incrimination and have not responded to any of plaintiff's specific allegations and proof with regard to his conversion claim. In light of the adverse inference this Court may properly draw from defendants' silence, as well as the strong evidence presented by plaintiff, this Court finds that no reasonable jury could find in favor of defendants on the conversion claim. Therefore, this Court grants summary judgment in favor of plaintiff on the conversion claim.
C. Breach of Fiduciary Duty
Plaintiff argues that defendants owed him a fiduciary duty, and breached it by failing to adequately disclose the risks of the investments, making material omissions regarding defendants' broker-dealer status and disciplinary history, defrauding him, and converting his money. "The relationship between a stockbroker and its customer is that of principal and agent and is fiduciary in nature[.]"Conway v. Icahn Co., Inc., 16 F.3d 504, 510 (2d Cir. 1994). The fiduciary obligation extends only so far as the matters entrusted to the broker. See Rush v. Oppenheimer Co., Inc., 681 F. Supp. 1045, 1055 (S.D.N.Y. 1988).
Plaintiff has shown that defendants were not registered as broker-dealers in Alaska and failed to disclose (with the exception of Eisner) their disciplinary past with the NASD, and that under the Alaska Securities Act, this constitutes fraud. Plaintiff has also shown that defendants converted his money by using it for their own personal gain, rather than investing it. By asserting the Fifth Amendment, defendants necessarily have failed to deny plaintiff's allegations or provide any evidence to the contrary.
Defendants have provided no evidence to conclude that disputed issues of fact exist for trial. Plaintiff has presented sufficient uncontroverted evidence to meet his burden, and summary judgment is granted in favor of plaintiff on the fiduciary duty claim.
III. Conclusion
For the foregoing reasons, this Court grants partial summary judgment in favor of plaintiff on the Alaska Securities Law claims, the conversion claim, and the breach of fiduciary duty claim.
SO ORDERED