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I.B.T. PENSION FUND v. POLLACK

January 26, 1998

LOCAL 875 I.B.T. PENSION FUND, CHRIS McCLOUGHLIN and HEZEKIAH HOUSE JR. as Trustees of the Local 875 I.B.T. Pension Fund, Plaintiffs,
v.
SANFORD E. POLLACK, BURTON J. HOROWITZ, HOROWITZ AND POLLACK, P.C., INFINITY INTERNATIONAL INVESTMENTS LTD., MULK RAJ DASS, CHLOE PETERSON, GLENN P. PELLEGRIN JAMES T. KALYVAS, COMPAGNIE D'ETUDES ET DE PARTICIPATIONS S.A., NIGEL STOVIN-BRADFORD, FREDERICK GEVERS, JOACHIM D'SOUZA, STEWART N. ALTMAN AND STEWART N. ALTMAN AND ASSOCIATES, P.C., Defendants.



The opinion of the court was delivered by: GERSHON

 GERSHON, United States District Judge:

 The plaintiffs allege that the Local 875 I.B.T. Pension Fund ("the Fund") has been defrauded of $ 9.3 million -- over 20 percent of its assets-- because it was induced to devote that sum to an investment plan that was actually a scheme to steal the money through financial subterfuge. They seek recovery under the Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5, the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. §§ 1861 et seq., the Employee Retirement Income Security Act ("ERISA"), 29 U.S.C. §§ 1001 et seq., and the common law. Various defendants have now moved for dismissal for lack of personal jurisdiction, failure to plead fraud with particularity and failure to state a claim upon which relief may be granted.

 THE AMENDED COMPLAINT

 The Amended Complaint, which was filed on July 8, 1996, is a document consisting of over two hundred paragraphs that detail a complex scheme carried out on two continents by numerous individuals and entities.

 A. The Inducement to Invest.

 The Fund is a pension plan and trust, established pursuant to collective bargaining agreements, that provides retirement benefits to the members of Local 875, a labor union affiliated with the International Brotherhood of Teamsters. P 7. *fn1" The Fund is administered at offices located in Elmhurst, New York by a board of trustees (collectively "the Trustees"), whose members include the plaintiffs Chris McLoughlin and Hezekiah House, Jr. PP 7-9.

 The Fund formerly retained Horowitz & Pollack, P.C. ("H&P"), a New Jersey professional corporation, as its outside legal counsel. P 12. In the summer of 1993, Sanford Pollack, one of H&P's principals, approached the Trustees with an investment opportunity. PP 10, 31. Pollack explained that for $ 9.3 million the Fund could purchase a 10-year note, issued by one of the "top twenty-five" banks in Europe, with a face value of $ 10 million, which would yield interest at a rate of 7.5% ("the Note"). P 32. Pollack also represented that the purchase of the Note would be a "risk-free" investment because 1) the funds for its purchase would be maintained in a trust account in the United States controlled by H&P, and 2) these funds would not be transferred out of the account until the Note was delivered, at which point the Note would serve as its own security until it was sold again. P 33. On November 11, 1993 the Trustees forwarded a letter with instructions to purchase the Note to Michael Hedges of the New York City office of the investment firm of Bear Steams. P 34 *fn2"

 At a meeting of the Trustees on December 14, 1993, H&P resigned as outside counsel to the Fund both because it had performed legal services for Bear Stearns and because it stood to receive commissions on the transaction involving the Note. P 37. Stewart N. Altman, Esq. of Stewart N. Altman & Associates, P.C., a New York professional corporation, was then named as H&P's replacement. PP 23, 37. However, as will be seen, H&P did not leave the scene.

 On February 14, 1994 Edward Wright of Prudential Securities, the Fund's "investment monitor," P 36, sent a letter to the Trustees, which enclosed a recent Securities and Exchange Commission ("SEC") bulletin. The bulletin discussed a rise in fraudulent investment schemes involving transactions in "prime" bank notes supposedly issued by European banks. P 43. Although Altman became aware of the SEC bulletin, the information contained therein did not motivate him to undertake any investigation of the Fund's investment in the Note. PP 45-46. When Pollack was made aware of the SEC bulletin, he assured the Trustees that the investment in the Note in no way approximated the fraudulent schemes described in it. P 47.

 B. The Transfer and Misappropriation of the $ 9.3 Million.

 At this point, a host of new players must be introduced. Infinity Investments Ltd. ("Infinity") is a Louisiana corporation with its principal place of business in Houston, Texas. P 13. Mulk Ram Dass is the sole shareholder, sole director and president of Infinity. P 14. James T. Kalyvas was the "secretary and/or agent" for Infinity; and Chloe Peterson and Glenn P. Pellegrin were employees of the firm. PP 15-17.

 Compagnie d'Etudes et de Participations S.A. ("CEPA") is an investment management firm with its principal place of business in Geneva, Switzerland. P 19. Approximately one-third of CEPA, and four of the eight seats on its board of directors, are held by Compagnie de Gestion et de Banque Gonet S.A. ("Bank Gonet"), a Swiss bank that also has its principal place of business in Geneva. P 50. Frederick Gevers, a citizen and resident of Switzerland, was a manager employed by CEPA and, as such, acted as CEPA's agent. P 20. *fn3" Nigel Stovin-Bradford, a citizen and resident of the United Kingdom, is "a long-time associate" of Gevers. PP 18, 20.

 On March 2, 1994, Hedges of Bear Steams had a conference call with Dass and Kalyvas. P 49. Hedges represented that $ 10 million of the Fund's money was now in a Bear Stearns account and was available for purchase of the Note, a representation he repeated in an April 5, 1994 letter to Dass. P 49. Accordingly, in late May 1994 Dass sent Pellegrin to Europe for the purpose of opening an account at Bank Gonet. P 50. Thus, on May 25, 1994 an account was opened in the name of Dass and Pellegrin on behalf of Infinity, with Stovin-Bradford having power of attorney to act as Pellegrin's representative in dealings with Bank Gonet. P 50.

 Shortly thereafter, Peterson opened an account at Republic Bank in New York City, naming H&P as beneficial owner. P 51. Also at this time, Infinity appointed Horowitz as "attorney-in-fact" with respect to the $ 9.3 million of the Fund's money meant for purchase of the Note. P 52. On June 20, 1994 Dass directed Horowitz and/or Pollack to inform the Trustees that the Note would be delivered to the Fund's account at Bear Stearns after the $ 9.3 million was transferred to the account at Republic Bank. P 53. The Trustees effected this transfer the following day. P 54.

 By directing that the transfer of funds take place, the Trustees had unwittingly aided the cause of the conspirators arrayed against them. Republic Bank serves as the "dollar holding correspondent" for Bank Gonet, which means that the account opened there by Peterson was actually an account controlled by CEPA through Bank Gonet. P 55. Indeed, on June 22, 1994, without the Note having been delivered to the Fund's account at Bear Stearns, the $ 9.3 million in the Republic Bank account was electronically transferred by CEPA and Gevers to the account opened by Pellegrin at Bank Gonet in Geneva. PP 56-57.

 Most importantly, Stovin-Bradford arranged for the bulk of the money in the account at Bank Gonet to be transferred to Joachim D'Souza, a resident of Milan, Italy. PP 21, 64. To effect this transfer, Stovin-Bradford worked with D'Souza and Gevers to develop a document in which Gevers, on behalf of CEPA, declared that the funds being transferred were "clean, clear of non-criminal origin [ sic ] and from a legal source." P 66. Thereafter, on or about July 5, 1994 Stovin-Bradford and Pellegrin authorized the transfer of $ 8.3 million from the account at Bank Gonet to an account in D'Souza's name at Deutsch-Schweizerishe AG ("DSB"), a German bank. P 66.

 D'Souza was engaged in an effort to purchase a major share of DSB. The $ 8.3 million that had been transferred to his account at DSB was intended as partial satisfaction of an agreement between D'Souza and DSB pursuant to which he was to guarantee loans DSB had made to certain Turkish banks. P 69. However, when D'Souza failed to make additional payments pursuant to this agreement, DSB seized the $ 8.3 million. P 70. *fn4" In turn, in November 1994 DSB was closed by German banking authorities (for reasons not disclosed in the Amended Complaint), which then began to liquidate its assets. P 73.

 C. The Misrepresentations.

 Any concerns expressed by the Trustees were put off by a series of misrepresentations communicated to them by several of the defendants. Most of these were statements to the effect that delivery of the Note was imminent. Thus, on July 15, 1994 Gevers sent a letter to Stovin-Bradford stating that "the Pre-Advice" for the purchase of the Note would be sent to Bear Stearns "no later than 5 p.m., N.Y. time, Tuesday, July 19, 1994." P 78. This letter was in turn faxed to Horowitz and Pollack. P 78.

 On July 28, 1994 Kalyvas sent letters to Gevers and Horowitz that memorialized the substance of a conversation he had with Gevers on that date. Specifically, Kalyvas related that Gevers had declared that a note from the Union Bank of Switzerland would be "available" by no later that August 1, 1994. P 79. The following day, Stovin-Bradford sent a letter to Horowitz further confirming that "the paper was 'on order.'" P 79. On or about August 11, 1994 Hedges reported to Horowitz the substance of a conversation that he had with Gevers in which the latter had opined that "everything looks good" with respect to obtaining the Note. P 80.

 That $ 8.3 million of the Fund's money had been transferred to D'Souza's account and then seized by DSB did not stem the tide of misrepresentations. On September 23, 1994 Stovin-Bradford sent a letter to Peterson declaring that delivery of the Note would take place the following week. P 86. This letter was forwarded to Pollack, who put it before the Trustees at their September 27, 1994 board meeting. P 86. Similarly, on October 14, 1994 Gevers sent a letter to Stovin-Bradford in which he "confirmed that the net purchase price has been sent and is blocked for the purchase of the paper. . . . The paper is to be delivered to Bear Stearns as soon as received." P 82. This letter was also forwarded, through Pollack, to the Trustees. P 82.

 The defendants did more than assert that the purchase of the Note was imminent. On October 28, 1994, the sum of $ 150,262 was transferred from the Bank Gonet account to the Fund's account at Citibank in New York. P 93. Peterson explained in a letter of the same date that this payment represented interest accrued on the Fund's money through October 31, 1994. P 94. In reality, however, this was not a bona fide interest payment, but was instead a payment back to the Fund of the remnant of its own money that was left in the Bank Gonet account. P 94.

 The Trustees have to date been unsuccessful in their efforts to recover any portion of the $ 8.3 million from the German banking authorities. P 73. They have also discovered that whatever was left in the account at Bank Gonet, after all of the transfers set forth above, was itself transferred on or about February 1, 1995 to a bank account in the United States in Pellegrin's name. P 63. Further, it is perhaps needless to say that the Fund has never received the Note. Thus, the Fund has suffered the loss of its entire $ 9.3 million investment.

 D. The Claims.

 The Amended Complaint sets forth thirteen counts:

 Count One -- Securities Fraud and Conspiracy to Commit Securities Fraud, against the H&P Defendants, *fn5" the Infinity Defendants, *fn6" Stovin-Bradford, Gevers, CEPA and D'Souza, in violation of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and Rule 10b-5, 17 C.F.R. § 240.10b-5;

 Counts Two and Three -- RICO and RICO Conspiracy against the H&P Defendants, the Infinity Defendants, Stovin-Bradford, Gevers, CEPA and D'Souza;

 Count Four -- Breach of Fiduciary Duty under ERISA against the H&P Defendants, all of the Infinity Defendants save for Kalyvas, Stovin-Bradford, Gevers, CEPA, and D'Souza;

 Counts Five, Six, Seven and Eight -- Common Law Breach of Fiduciary Duty, Fraud, Conversion and Money Had and Received against Kalyvas and, as an alternative to Count Four, against the H&P Defendants, all of the Infinity Defendants save for Kalyvas, Stovin-Bradford, Gevers, CEPA, and D'Souza;

 Count Nine -- Negligence and/or Recklessness against Kalyvas and, as an alternative to Count Four or to a finding of fraud under Count Seven, against the H&P Defendants, all of the Infinity Defendants save for Kalyvas, Stovin-Bradford, Gevers, CEPA and D'Souza;

 Counts Ten and Eleven -- Breach of Contract and Action for Accounting against Gevers, CEPA, the H&P Defendants, the Infinity Defendants, Stovin-Bradford and D'Souza;

 Count Twelve -- Attorney Malpractice against Altman and Altman and Associates, P.C.; and

 Count Thirteen -- Attorney Malpractice against the H&P Defendants.

 E. The Instant Motions.

 The four European defendants-- CEPA, Gevers, Stovin-Bradford and D'Souza-- have filed motions to dismiss the Amended Complaint as to them. CEPA and Gevers assert that this action should be dismissed as to them for lack of personal jurisdiction, for failure to meet the pleading requirements of Rule 9(b) of the Federal Rules of Civil Procedure and for failure to state a claim as required by Federal Rule of Civil Procedure 12(b)(6). CEPA and Gevers have also moved to dismiss cross-claims asserted against them by the H&P Defendants.

 Stovin-Bradford and D'Souza, who is proceeding pro se, have filed motions to dismiss for lack of personal jurisdiction and for failure to state a claim.

 Finally, Altman and his firm have filed a motion to dismiss the single claim asserted against them, that of attorney malpractice, for failure to state a claim. If the claim is not dismissed, they ask that supplemental jurisdiction pursuant to 28 U.S.C. § 1367 not be exercised over the claim.

 I. PERSONAL JURISDICTION

 A. General Considerations.

 "On a Rule 12(b)(2) motion to dismiss for lack of personal jurisdiction, the plaintiff bears the burden of showing that the court has jurisdiction over [a] defendant." Metropolitan Life Ins. Co. v. Robertson-Ceco Corp., 84 F.3d 560, 566 (2d Cir.), cert. denied, 136 L. Ed. 2d 398, 117 S. Ct. 508 (1996). A district court has "considerable procedural leeway" in deciding a Rule 12(b)(2) motion. Marine Midland Bank, N.A. v. Miller, 664 F.2d 899, 904 (2d Cir. 1981). Here, some discovery has been taken on jurisdictional issues, but the court has not held an evidentiary hearing on the issue of the exercise of personal jurisdiction. In this procedural posture, the plaintiffs need only make a prima facie showing that personal jurisdiction exists, but this showing "must include an averment of facts that, if credited by the ultimate trier of fact, would suffice to establish jurisdiction." Metropolitan Life Ins. Co. v. Robertson-Ceco Corp., 84 F.3d at 567 (quotation omitted). In deciding the motion, all pleadings and affidavits must be construed in the light most favorable to the plaintiffs, and all doubts resolved in their favor. Hoffritz for Cutlery, Inc. v. Amajac, Ltd., 763 F.2d 55, 57 (2d Cir. 1985). *fn7" However, in a case involving non-U.S. parties, the court must be mindful of the Supreme Court's admonition that "(g)reat care and reserve should be exercised when extending our notions of personal jurisdiction into the international field." Asahi Metal Industry Co. v. Superior Court, 480 U.S. 102, 115, 94 L. Ed. 2d 92, 107 S. Ct. 1026 (1987).

 B. The New York Long Arm Statute.

 "Personal jurisdiction of a federal court over a non-resident defendant is governed by the law of the state in which the court sits-- subject, of course, to certain [federal] constitutional limits of due process." Robinson v. Overseas Military Sales Corp., 21 F.3d 502, 510 (2d Cir. 1994). Under New York's "long-arm" statute, N.Y. C.P.L.R. § 302:

 
1) the Court must determine whether [Section 302] provide[s] a basis for personal jurisdiction, and 2) if [it does], the Court must then conduct a constitutional inquiry to determine whether the exercise of personal jurisdiction over the defendant would offend due process pursuant to International Shoe Co. v. Washington, 326 U.S. 310, 90 L. Ed. 95, 66 S. Ct. 154 (1945), and its progeny.

 Sunrise Industries Joint Venture v. Ditric Optics, Inc., 873 F. Supp. 765, 770 (E.D.N.Y. 1995) (citation omitted).

 Section 302, in relevant part, reads as follows:

 
(a) Acts which are the basis of jurisdiction. . . . (A) court may exercise personal jurisdiction over any non-domiciliary, or his executor or administrator, who in person or through an agent:
 
* * *
 
3. commits a tortious act without the state causing injury to person or property within the state, except as to a cause of action for defamation of ...

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