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KAHN v. CHASE MANHATTAN BANK

March 29, 1991

ROSELYN KAHN, JAN KAHN, INDIVIDUALLY AND AS CUSTODIAN FOR BRAD MICHAEL KAHN AND BRENDAN ADAM KAHN UNDER THE UNIFORM GIFTS TO MINORS ACT, CRAIG KAHN, INDIVIDUALLY AND AS CUSTODIAN FOR ALEX KAHN UNDER THE UNIFORM GIFTS TO MINORS ACT, JAN KAHN AND CRAIG KAHN AS TRUSTEES FOR AND ON BEHALF OF FOUR SEASONS MANUFACTURING CO., INC. PENSION TRUST AND JAN & CRAIG'S WINDOW FACTORY, LTD. BY ITS TRUSTEE, RONALD LIPSHIE, PLAINTIFFS,
v.
CHASE MANHATTAN BANK, N.A., THOMAS J. GREENE, GRUNTAL & CO., INC., WOODMERE SECURITIES, INC., RICHARD CAHN, BRUCE C. BLACK, SHEPPARD MESSING, JEFFREY P. BERG, MATTHIAS & BERG AND MICHAEL R. MATTHIAS, DEFENDANTS.



The opinion of the court was delivered by: McKENNA, District Judge:

MEMORANDUM AND ORDER

Defendants Chase Manhattan Bank, Matthias & Berg, Jeffrey P. Berg, and Michael R. Matthias each move to dismiss the plaintiff's claims under the Racketeer Influenced and Corrupt Organizations Act ("RICO"), the Securities Exchange Act of 1934, and state law, and defendant Gruntal & Company moves to dismiss plaintiff's RICO claim. For the reasons stated below, the motion of Gruntal & Company is granted, and the motions of Chase Manhattan Bank, Matthias & Berg, Jeffrey P. Berg and Michael R. Matthias are granted in part and denied in part. These motions and the underlying case arise out of a series of fraudulent financial transactions, orchestrated by defendant Bruce Black, which together deprived the plaintiffs of over $800,000 and forced Jan & Craig's Window Factory, Ltd. into bankruptcy.*fn1

BACKGROUND

Black was hired by Gruntal & Company as a registered representative in 1986 after being discharged from a similar position with Merrill Lynch for engaging in unauthorized trading in customers' accounts. Black was dismissed by Gruntal in November, 1987, also for engaging in unauthorized trading.

Black then joined defendant Woodmere Securities, and in the winter of 1987-88, retained defendants Jeffrey Berg and Michael Matthias as attorneys for himself and Woodmere in various transactions. During the same period of time, Black transferred his personal checking account with defendant Chase Manhattan Bank to the Chase branch at 1149 Wantagh Avenue, Wantagh, New York. The officer in charge of the branch was defendant Thomas J. Greene.

In September, 1988, Jan and Craig Kahn were introduced to Black, who offered to obtain additional financing of not less than $2,000,000 for the Window Factory. Later that month Jan & Craig's Window Factory entered into a written Financial Consulting Agreement with Woodmere by which Woodmere promised to obtain the additional financing. The Window Factory then issued checks to Woodmere Securities in the amount of $125,000,*fn2 which represented an up-front retainer fee. Black endorsed these checks in the names of "Woodmere Securities, Inc./Bruce Black" and deposited them into his personal checking account at Chase with the aid of Greene, who knew that Black had no authority to deposit the checks into his personal account.

In October, 1988, plaintiff Roselyn Kahn, the mother of Jan and Craig Kahn, transferred her securities account from Shearson Lehman Hutton to Woodmere Securities, where Black would act as her stockbroker. Roselyn Kahn instructed Woodmere to sell all of the securities that had been transferred from Shearson to Woodmere. Woodmere issued three checks to Roselyn Kahn totalling in excess of $103,000, which represented the proceeds from the sales of the securities. Black then endorsed these checks with Roselyn Kahn's and his own names and deposited them into his personal account at Chase with the knowledge of Greene.

In November, 1988, Black suggested that Jan and Craig Kahn merge the Window Factory into Grason Industries, Inc., a public company whose sole asset was $265,000 in cash, which would enable Woodmere to finance the business through a secondary offering. Later in November, Black introduced the Kahns to defendant Jeffrey Berg, a partner in the Los Angeles law firm of Matthias & Berg, whom the Window Factory and Jan and Craig Kahn retained to represent them in the merger. In addition to a retainer agreement, the Window Factory executed two "Waiver of Conflict of Interest" forms which stated that Matthias & Berg represented Woodmere Securities (as well as Steven Scott and Capital Resources & Marketing, who had identified Grason to Black as a potential merger candidate) in ongoing matters unrelated to the merger. The waivers did not reveal that neither Black, Woodmere Securities, Scott, nor Capital Resources & Marketing would be represented by independent legal counsel in the merger.

In December, 1988, Jan and Craig Kahn delivered to Black two checks totalling $92,742.06 drawn on the account of and also made payable to plaintiff Four Seasons Manufacturing Co. Pension Trust for the purpose of opening an investment account with Woodmere for the Window Factory's pension plan. Black, with the knowledge of Greene, endorsed the checks as "Bruce C. Black, TTEE" and deposited them into his personal account at Chase. That same month Black formed "D.L. Cabot & Co., Inc.," which replaced Woodmere as underwriter for the Window Factory's securities. The Kahns executed a revised "Waiver of Conflict of Interest" form with Matthias & Berg that stated that the law firm represented D.L. Cabot in matters unrelated to the Window Factory transactions. The waiver did not disclose that D.L. Cabot would not have independent representation in those transactions, nor was it revealed that Berg and Matthias secretly owned 15% of D.L. Cabot.

In early April, 1989, Black convinced Jan and Craig Kahn that it would not be possible to raise $2,000,000 in a public offering of Grason stock until some buying activity raised the price of the stock. To that end, Jan Kahn, acting as custodian for plaintiffs Brad Kahn and Brendan Kahn, issued two $10,000 checks from their college fund to D.L. Cabot for the purchase of Grason stock, and Craig Kahn, acting as custodian for plaintiff Alex Kahn, issued a similar $15,000 check. Black had previously opened two more checking accounts with Greene at Chase's Willow Wood Shopping Center branch in the names of "D.L. Cabot & Co., Inc." and "D.L. Cabot & Co., Inc. Client Trust Account." There was no proper corporate authorization from D.L. Cabot & Co. in Chase's files for either account. Black endorsed the checks "D.L. Cabot" and deposited them into the D.L. Cabot account at Chase.

In July, 1989, Black was arrested and charged in the United States District Court for the Eastern District of New York with violating federal mail fraud statutes.

THE MOTIONS

Grunt ...


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