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CLEFT OF THE ROCK FOUND. v. WILSON

January 31, 1998

CLEFT OF THE ROCK FOUNDATION, MARK ANDRE, MA FUND, DANIEL THOMSON, and JOHN DIFRANCES, Plaintiffs, against ROBERT C. WILSON, EURO SCOTIA FUNDING LIMITED, EURO SCOTIA FUNDING (U.S.A.), INC., EURO SCOTIA GROUP LIMITED, EURO SCOTIA FUNDING (BARBADOS) LIMITED, EURO AMERICAN INSURANCE CO., LTD., DEBENTURE GUARANTY CORPORATION, VERONICA CANINO WILSON, SAMUEL L. BOYD, DOUGLAS McCLAIN, DEBORAH McCLAIN, DONALD EDEL, EDWARD NICHOLAS CANINO, GARY LONG, ROBERT CARTER DYE, JOHN BALAZOVIC, SYLVIA BALAZOVIC, PETER DALE, DIETER WICKI, JAMES GARRO, BADON INTERNATIONAL LIMITED, GAMBIA LIMITED, FLUENTVENTURE LIMITED, and ALITHIA COMPANY, LTD., Defendants.


The opinion of the court was delivered by: SPATT

 SPATT, District Judge.

 This diversity action is brought by the plaintiffs against the defendants - fourteen (14) individuals and interconnected companies controlled by one or more of them - for compensatory and consequential damages based upon claims of conspiracy, common law fraud, breach of fiduciary duty, constructive fraud, conversion, monies had and received, and promissory estoppel. Presently before the Court is the motion by the defendant Samuel L. Boyd ("Boyd" or the "defendant") to dismiss pursuant to Fed. R. Civ. P. 12(b)(2), for lack of personal jurisdiction.

 I. BACKGROUND

 The facts set forth below are taken from the Complaint.

 The plaintiffs are as follows:

 
1) Cleft of the Rock Foundation ("Cleft"), is a not-for-profit corporation organized under the laws of the State of New York, with a principal place of business at 16 Mystic Lane, Northport, New York. Cleft raises funds which are used to support Christian evangelical and charitable projects;
 
2) Mark Andre ("Andre"), resides in Northport, New York. Andre is the president of Cleft and the managing partner of the plaintiff, MA Fund;
 
4) Daniel Thomson ("Thomson") resides in Northport, New York. Thomson is Andre's son-in-law; and
 
5) John DiFrances ("DiFrances") resides in Dousman, Wisconsin. DiFrances is Andre's brother-in-law.

 The plaintiffs allege that the defendants defrauded them of more than $ 3.9 million and caused Thomson more than $ 500,000.00 in additional damages, using primarily three fraudulent schemes. Commencing in the Summer of 1993, each of the defendants allegedly agreed and conspired with the codefendant Robert C. Wilson ("Wilson"), a resident of Florida, and each other, to defraud the plaintiffs, to breach their fiduciary duty to the plaintiffs, to misappropriate and convert the plaintiffs' funds through three fraudulent schemes, and then to secrete and launder those funds through: Boyd's attorney trust account at Nations Bank of Texas, N.A., in Dallas, Texas; an account maintained by the defendant Debenture Guaranty Corporation ("Debenture") at the First American Bank in Knoxville, Tennessee; various offshore accounts; and other accounts currently unknown.

 The primary vehicle allegedly utilized to perpetrate the conspiracy was Euro Scotia Funding, Limited ("ESFL") - a now defunct corporation organized under the laws of Nova Scotia, Canada, with its last principal place of business, upon information and belief, in Halifax, Nova Scotia - and its affiliated international corporations, namely, the defendants Euro Scotia Funding (U.S.A.), Inc. ("ESF-USA"), Euro Scotia Group Limited ("ESG"), Euro Scotia Funding (Barbados) Limited ("ESF-Barbados"), Euro American Insurance Co. Ltd ("Euro American"), and Debenture (collectively, the "Euro Scotia Group"). These transnational corporations are allegedly interconnected by Wilson's beneficial ownership and control and by other interlocking executive officers and directors. Almost all of the individual defendants were, or represented themselves as, executive officers or directors of one or more of the Euro Scotia Group's corporations. Boyd represented himself as an attorney for Wilson and those corporations.

 The representations allegedly made by Edel, McClain, and Wilson to Andre and DiFrances about the Euro Scotia Group, directly and through the brochure, which laid the foundation for the schemes, were allegedly false for the following reasons:

 
1) the Euro Scotia Group was not a legitimate investment bank, nor well-connected with reputable and well established banks, investment consultants, and accounting firms, but rather was a vehicle for Wilson and his co-conspirators to carry out fraudulent schemes against the plaintiffs and others;
 
2) the funds that Andre and DiFrances entrusted, on behalf of the MA Fund, Cleft, and DiFrances, to the Euro Scotia Group's accounts for use in the Bond-Stripping Fund were not kept secure, but were immediately taken by the defendants for their own personal use and benefit;
 
3) with a couple of exceptions, the Euro Scotia Group's executive officers and directors listed in the brochure did not have prior work experience with prestigious international banking and investment concerns;
 
4) two of the private placements which the brochure claimed were arranged by ESG purportedly were made in December 1992 and April 1993, before it was even incorporated; and
 
5) upon information and belief, the Euro Scotia Group did not invest the monies of the MA Fund, Cleft, and DiFrances in safe, profitable investments.

 The three alleged fraudulent schemes were executed as follows.

 A. Bond-Stripping Scheme

 During their meeting on August 23, 1993, McClain allegedly told Andre that he was Vice President of the Euro Scotia Group, an investment bank with an international clientele. McClain represented that the Euro Scotia Group managed hundreds of millions of dollars for many individual and corporate investors, including Edel, First Boston, and certain church organizations with which Andre was familiar. McClain represented that the Euro Scotia Group obtained above-market returns for its clients and itself by, among other things, following investment strategies that focused on anomalies in international capital markets. McClain assured Andre that Euro Scotia Group could provide profitable and safe investment opportunities for Andre and for Cleft and MA Fund, giving Andre a copy of the Euro Scotia Group's brochure.

 On that same day, McClain advised Andre that the Euro Scotia Group had developed a high return bond investment program, which McClain called a Bond-Stripping Fund. McClain allegedly represented that the Bond-Stripping Fund yielded a minimum of 60%, and perhaps as high as 230%, per year return with virtually no risk. McClain explained that the bond-stripping program achieved such remarkable returns by repeating over leveraged trades capitalizing on the incremental differences in interest rates for short-term and long-term bonds. McClain allegedly represented to Andre that the Bond-Stripping Fund was managed by Pauli & Co., Inc., a broker-dealer in St. Louis, Missouri, but that the trades would clear through Bear Stearns & Co. ("Bear Stearns") in New York. He represented that the accounting for the Bond-Stripping Fund would be handled by Ernst & Young in Barbados.

 Although Andre allegedly did not understand the intricacies of the Bond-Stripping Fund, he trusted McClain and relied upon his representations. On or about the evening of August 23, 1993, Andre advised McClain that he would transfer funds that he managed in the MA Fund and Cleft to the Euro Scotia Group to invest in its Bond-Stripping Fund. On or about August 26, 1993, shortly before he was to leave for the airport, McClain presented Andre with a letter dated August 25, 1993, written on the Euro Scotia Group letterhead and signed by McClain as "Vice President." This letter purported to confirm the agreements and discussions that they had had over the past two days, which the letter represented had been incorporated into two subscription agreements for profit-sharing notes which accompanied the letter. In the letter, McClain represented that "both Cleft and the MA Fund will receive a minimum of 35% annual rate of return credited by Euro Scotia Funding Limited's investment strategies." Complaint P 57. Other than signing the two subscription agreements, one committing the MA Fund and Cleft to deposit $ 1 million and $ 500,000.00, respectively, into the Bond-Stripping Fund, Andre also signed a Bear Stearns authorization giving Wilson trading authority for, and appointing him as attorney-in-fact with power over, the funds of MA Fund and Cleft to be placed in the Bond-Stripping Fund. Relying on Edel and McClain's representations about the Euro Scotia Group and the Bond-Stripping Fund, and following instructions given to him by either McClain or Wilson, from on or about September 7, 1993 through November 15, 1993, Andre deposited funds belonging to the MA Fund and Cleft to their respective subaccounts in ESFL's account at Bear Stearns for investment in the Bond-Stripping Fund. Thus, by March 15, 1994, the Euro Scotia Group had received $ 221,673.48 from Cleft, $ 1,561,465.33 from MA Fund for investment in the Bond-Stripping Fund. In addition, on or about March 15, 1994, DiFrances wire-transferred approximately $ 60,000.00 to the Euro Scotia Group's bank account at Barclay's Bank in New York for investment in the Bond-Stripping Fund.

 The plaintiffs allege that the Euro Scotia Group did not operate any bond-stripping fund. Indeed, the Euro Scotia Group transferred funds they received from the MA Fund, Cleft, Andre, and DiFrances for the Bond-Stripping Fund to other Euro Scotia Group accounts and, upon information and belief, to Boyd's attorney trust account and other accounts. These transfers were made in order to secrete and launder these monies and to accomplish other objective of the Euro Scotia Group, Wilson, and other co-conspirators.

 On or about January 23, 1995, Wilson allegedly told DiFrances that the Bond-Stripping Fund had made substantial gains for DiFrances and that Wilson would have Euro Scotia Group return to DiFrances the funds taken from him and the profits in the Bond-Stripping Scheme. Wilson told DiFrances to call the defendant Peter Dale ("Dale") with wiring instructions. On or about January 24, 1995, Dale obtained from DiFrances instructions to transfer funds back to him, but no such transfer was made.

 In Spring 1995, the Euro Scotia Group began to have talks with Andre, Thomson, and DiFrances about a global settlement of claims that the plaintiffs had initiated against the defendants. On or about May 17, 1995, Thomson telephoned the defendant John Balazovic ("Balazovic") and asked him to obtain statements for the Cleft and MA Fund subaccounts at Bear Steams. Balazovic allegedly told Thomson that he would ask Wilson about obtaining such statements and would inquire about the subaccounts. Later that day, Balazovic spoke by telephone with Thomson and attempted to assuage Thomson's concerns about the funds in the subaccounts by representing that the funds had been withdrawn a couple of days before in anticipation of the effort to settle their dispute with the plaintiffs. However, the plaintiffs learned that this was false. On or about May 16, 1995, Chris Pauli, a principal of Pauli & Co. in St. Louis, informed Thomson during a telephone conversation that the Cleft and MA Fund subaccounts did not contain any funds and that those accounts had not had any activity in the prior six months. Thus, the funds of Cleft and MA Fund at Bear Steams had been withdrawn at least six months before, and not just recently in anticipation of the settlement, as Balazovic had represented to Thomson.

 On or about June 2, 1995, Wilson faxed Andre a letter in which he represented to Andre that he would make available to him all the monies that he had sent to the Euro Scotia Group in connection with the three schemes as soon as certain transactions were closed. The plaintiffs allege that no such monies were ever made available to Andre, Cleft, MA Fund, or Thomson. Despite numerous requests, none of the monies transferred on behalf of Cleft, MA Fund, Andre and DiFrances to the Euro Scotia Group for investment ...


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