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United States District Court, S.D. New York

February 25, 2004.

OSRECOVERY, INC., et al., Plaintiffs, -against- ONE GROUPE INTERNATIONAL, INC., et al., Defendants

The opinion of the court was delivered by: LEWIS KAPLAN, District Judge Page 2


The second amended complaint (the "Complaint" or "Cpt") in this civil RICO and securities fraud action alleges that defendants, led by One Groupe International, Inc. ("One Groupe"), were involved in a fraudulent operation consisting initially of the sale of non-existent, supposedly gold-backed "electronic currency" and then by a mammoth Ponzi scheme — a guaranteed high-yield investment program that resulted in losses of investments once estimated to be worth more than $250 million. The matter is before the Court on plaintiffs' motion for a preliminary injunction and other relief.

  I. Facts

  A. The Complaint

  The initial plaintiff in this action, OSRecovery, Inc., is a New York corporation that purports to represent the interests of approximately 3,400 individuals who were account holders or investors in the allegedly fraudulent scheme described in the Complaint. More than 2,000 individual alleged investors have joined as plaintiffs in subsequent amended complaints.

  The Complaint alleges that defendants David C. Reed and Randy L. Johnson, Jr., and a number of entities controlled by them*fn1 carried out a scheme to defraud investors which involved two elements. The first was the sale to investors of so-called electronic currency, or "e-currency," accounts denominated in "OSGold," the balances of which supposedly were (i) 100 percent backed by gold bullion, (ii) usable to purchase goods and services on the Internet, and (iii) Page 2 accessible with a debit card. The second was the sale to investors, for OSGold, of high-yield investment programs known as "OSOpps," which promised investors returns of 30 percent per month on three-month and 45 percent per month on twelve-month investments as well as the guaranteed return of principal on maturity. The OSGold, according to the Complaint, was not gold-backed or convertible into gold, as the defendants represented. The OSOpps investment programs, it asserts, were simply a Ponzi scheme that paid the promised returns for a brief period from capital put up by new investors and then collapsed. In any case, the Complaint asserts, the entire operation ceased without explanation in mid-2002, leaving the investors holding the bag.*fn2

  Reed, Johnson, and their entities (collectively, the "One Groupe Defendants") are not the only defendants in the action. The Complaint alleges that they acted together with a number of so-called Exchange Makers — entities that purport to convert hard currencies into e-currency-including Ecommerce Exchange, Inc.; Pinnacle Dynamics, LLC d/b/a FastGold, and its owner, James Shupperd; Gold Now Corp. and its owner, Graham Kelly; Euro Gold Line and its owner, Frank Zuchristian; Gaithman's Gold Nation Ltd. and its owner, Eric Gaither; and Gold-Today and its owner, Michael Moore.*fn3 Plaintiff sues as well the Latvian Economic Commercial Bank ("Lateko") and Parex Bank ("Parex"), both organized in Latvia, which allegedly played a role in the debit card aspect of the scheme;*fn4 International Negotiations Team ("ENT") and its principal, Rick Young, which supposedly are attempting to negotiate with the One Groupe Defendants on behalf of defrauded Page 3 investors;*fn5 and Pecunix, Inc. ("Pecunix"), which is said to be a reincarnation of the One Groupe Defendants or, at least, their allegedly fraudulent operation.*fn6

  The Complaint contains twelve claims for relief: Number Defendants*fn7 Brief Summary of Claim 1 All except Lateko, Parex, INT & Misrepresentation that OSGold gold-backed and failure to disclose that OS Opps was a Ponzi scheme in violation of § 10(b) of the Exchange Act and Rule 10b-5 Young 2 All defendants Civil RICO violations — 18 U.S.C. § 1962 3 All defendants Common law fraud 4 All defendants Aiding and abetting common law fraud 5 All defendants Negligent misrepresentation 6 All defendants Breach of fiduciary duty 7 One Groupe, OSGold, OSOpps, Reed, Conversion Johnson, Ecurrency, INT, Young 8 One Groupe, OSGold, OSOpps Account stated 9 One Groupe, OS Gold, OSOpps, Reed, N.Y. GEN. Bus. L. § 349(a) Johnson, Ecurrency, Gold Now, Kelly, Young, INT 10 Ecurrency, Gold Now, Gaithmans, Gold Today Breach of contract 11 All defendants except Lateko, Parex Unjust enrichment and Pecunix

 Page 4

 12 All defendants Constructive trust

 B. The Motion

  At the outset of this case, plaintiff presented an order to show cause seeking a temporary restraining order and a preliminary injunction, among other relief. The Court granted a temporary restraining order freezing assets of the One Groupe Defendants and restraining them from destroying, altering or otherwise tampering with records relating to their business practices, in each case pending the hearing of the preliminary injunction motion.*fn8 None of the defendants timely filed papers in opposition to or appeared at the hearing on the motion for a preliminary injunction and an order of attachment.*fn9 The Court then extended the temporary restraining order, allowed Parex and the Exchange Makers to submit additional papers, and granted an application for expedited discovery.*fn10

 C. The Fraud

  As the One Groupe Defendants, save, for Johnson, have not appeared in this action and as Johnson has not opposed the motion, the crux of plaintiffs' showing is unrebutted.*fn11 Page 5 Accordingly, the Court will set out its findings with respect to the core of plaintiffs' claims.*fn12

  1. The One Groupe Defendants' Fraudulent Scheme

  The first part of the One Groupe Defendants' scheme involved what purported to be a gold-backed Internet currency system called OSGold. They ran an Internet web site — — which described OSGold as "an online monetary system." A user supposedly purchased "gold" by paying hard currency to a One Groupe-approved "Exchange Service Provider." The "gold" thus purchased, less a fee, was credited to the user's OSGold account with One Groupe. According to the One Groupe Defendants, the balances were 100 percent backed by gold bullion. The user then was given an anonymous debit card by means of which the user could spend his or her OSGold, convert it into cash, or transfer it to other OSGold accounts.*fn13

  Following the launch of OSGold, the One Groupe Defendants began offering for sale interests in purportedly high-yielding investment programs called OSOpps, upon which they Page 6 guaranteed returns of 30 percent per month on three-month and 45 percent per month on twelve-month investments as well as the return of the entire principal at the conclusion of the investment term.*fn14 Investments in OSOpps were to be made with OSGold or another so-called "e-currency". known as e-gold through another web site operated by the One Groupe Defendants,

  In fact, it appears that the entire operation, as alleged, was a Ponzi scheme. The OSGold accounts never were backed, in whole or in part, by gold bullion. There appear never to have been any investments underlying the so-called OSOpps. Money paid for OSGold accounts and OSOpps appears to have been used to pay some returns to early OSOpps investors and Otherwise misappropriated.*fn15 Then, in mid-2002, the OneGroupe Defendants abruptly — and without explanation — suspended operations, leaving plaintiffs and others with no means of getting back any V of the money they put into the scheme.*fn16

  The Court finds that plaintiffs are likely to establish that the entire One Groupe-OSGold — OSOpps operation was a thorough-going fraud from beginning to end. Specifically, they are likely to prove that OSGold accounts never were backed by gold, that the One Groupe defendants misappropriated funds placed in OSGold accounts, that the OSOpps investment opportunities were non-existent, a Ponzi scheme and certainly never likely to pay any investment return, and that the One Groupe Defendants all knew it and acted with intent to defraud. Moreover, they are likely to Page 7 establish that Reed holds substantial proceeds from the fraud in offshore accounts in Latvia, Panama, Mexico and Hong Kong.*fn17

  2. The Exchange Makers

  In contrast to the One Groupe Defendants, three of the Exchange Makers-Gaithman's Gold Nation Ltd. and its owner, Eric Gaither; Pinnacle Dynamics, LLC d/b/a FastGold, and its owner, James Shupperd; and Ecommerce Exchange, Inc. — profess innocence of any fraudulent intent.

  Mr. Gaither of Gaithmans Gold Nation asserts that he never met any of the One Groupe Defendants. He acknowledges that his business bought OSGold from the One Groupe Defendants for his customers. But he denies any knowledge of or involvement with OSOpps and contends that his role "was solely to facilitate the exchange in digital currency [his] customers were interested in, including (on occasion) OSGold, the digital currency, but not OSOpps, the investment vehicle."*fn18

  Mr. Ortega of Ecommerce Exchange, Inc., relates that he and his partners bought the business from defendant Johnson and another after OSGold and OSOpps were out of operation. While the purchase agreement is not entirely clear, it arguably transferred both the "company and its assets" to the buyers.*fn19 Page 8

  Finally, James Shupperd of Pinnacle Dynamics, LLC, acknowledges involvement with Reed pursuant to which he took over the FastGold website in or about late 2000. For a brief period, FastGold was the exclusive site for exchanging OSGold. In time, however, Reed set up Ecommerce Exchange and began competing with FastGold as a result of which the latter's profits declined. Mr. Shupperd then learned about OSOpps and himself invested over $150,000 in it although, he says, he had nothing to do with OSOpps and never knew precisely what investments it supposedly was involved in. Still later, he was approached, he says, by principals of OSRecovery, who asked him to exchange approximately $3.5 million for OSGold which, in due course, he did. When he learned in the summer of 2002 that OSGold was having financial difficulties, he states that he suspended trading in OSGold on his web site. He says that he lost the $ 150,000 that he put into OSOpps and $33,000 in OSGold.*fn20

  Plaintiffs have not sought to refute any of these assertions.

  3. INT and Young International Negotiation Team ("INT") and its principal, Rick Young, are another matter.

  In the late spring of 2002, as the One Groupe scheme was unraveling, the One Groupe Defendants recognized that investors soon would seek to recover their money. They posted a notice online to the effect that they were working with INT, a purportedly independent negotiation team, to handle claims. Despite the supposed independence of INT, at least some of its various Internet Page 9 postings to investors came from Reed.*fn21 Moreover, INT discouraged claimants from alerting authorities to these events, claiming that "no one has a chance in hell of ever getting a dime" if reports were made.*fn22 Some time later, INT indicated that One Groupe's failures were due in part to poor investments. Plaintiffs therefore claim that INT and Young engaged in a corrupt effort to stall and to prevent claimants from suing or, going to authorities as a means of aiding Reed and others to get away with their ill-gotten gains.

  Young denies this in a declaration that purports to account for his involvement in this matter. He claims that he invested and lost money in OSOpps and did not know Reed at the outset. When Reed terminated the operation, a number of other investors, including Vicky Benoit, contacted him, told him that they had lost money in the OSOpps and OSGold ventures, and advised him that they believed that Reed had left the country with the money. He claims that "plaintiff then asked him to attempt to find Reed and his assets, although it is far from clear, given the full context of Young's declaration, that "plaintiff as used in the declaration means OSRecovery as distinguished from one or more individuals who claim to have lost money and who Young believes are connected with OSRecovery.

  In due course, Young claims to have located Reed in Cancun, Mexico, and so advised "plaintiff." Before providing any additional information, he demanded a retainer and a fee. He was paid $5,000 by one Robert McLean. Young's declaration then recites that it annexes "a copy of an e-mail confirming that [Young] was hired by persons who [he] believe[s] to be representatives of Page 10 the plaintiff to find David Reed," but no such document in fact is attached to the declaration.*fn23 In any case, Young claims that he then engaged in further research and conversations with Reed and concluded that Reed did not have substantial assets.*fn24

  At this point, the story becomes even stranger. Young says that his initial clients declined his offer to continue negotiations with Reed, which is not surprising in view of his advice that Reed probably did not have substantial assets. Undeterred by his view that there was little or nothing to recover, Young then decided to offer his services to others and set up a web site for that purpose.*fn25 He claims that 8,650 claimants have authorized exclusively him to seek to recover funds on their behalf.*fn26 He claims to have negotiated an agreement with Reed "to transfer funds on a periodic basis" and set up a network to transfer those funds to his clients*fn27 but no evidence of any such agreement, payments or transfers has been provided. Nonetheless, Young expresses great umbrage at plaintiffs on the theory that the litigation is thwarting his efforts to recovery anything.*fn28 In essence, he claims that OSRecovery is his competitor and that it has named him in this action, Page 11 without good reason, simply to place him at a competitive disadvantage.

  The truth concerning Young and INT is not self evident. There is no evidence that he was part of the OSGold and OSOpps fraud at the outset. And it may be, as he claims, that he is nothing more than an innocent competitor of OSRecovery who genuinely believes that litigation and the involvement of law enforcement are counterproductive in obtaining any recovery for the defrauded investors. On the other hand, his efforts to prevent the involvement of law enforcement and courts, and to stall investors, certainly served the interests of the fraudsters. Moreover, his own story is improbable. Why would Reed, if he absconded to Mexico with the investors' money, ever enter into an agreement with Young — of the existence of which Young has offered no tangible evidence — to make periodic payments at all, much less through Reed?*fn29 And this becomes all the more unlikely given Young's conclusion that the money is gone and that Reed no longer has substantial assets.

  In the last analysis, the circumstantial evidence is sufficient, Young's denials notwithstanding, to warrant a finding that plaintiffs, at least at this preliminary stage, are likely to demonstrate that Young and INT joined the scheme in its later stages and thus are likely to prevail on the merits against them.

  4. The Banks

  The role of Lateko and Parex in these events revolves around their alleged role in Page 12 providing the anonymous debit cards that were used to attract investors in OSGold and OSOpps and to facilitate the investors' financial activities.

  According to Mr. Zuchristian, he and Reed entered into a partnership after February 2001 to form Card Accounts, which provided anonymous debit cards that permitted their holders to withdraw hard currency from any ATM machine in the world that participated in the CIRRUS system.*fn30 Card Accounts initially issued 2,500 such cards to OSGold account holders using a master account at Lateko set up in Zuchristian's name.*fn31 Within that master account were individual sub-accounts to which each anonymous debit card corresponded. In order for the holder to withdraw from a sub-account, Zuchristian first had to allocate funds to the relevant sub-account.*fn32 In or about March 2002, when OSGold began to falter, Reed abandoned Card Accounts. Shortly thereafter, Zuchristian "relocated the company to Euro Gold Line."*fn33 Subsequently, it appears that the debit cards became inoperative.*fn34

  The Complaint alleges that Parex performed essentially the same role as Lateko at an earlier date.*fn35 The evidence with respect to Parex, however, shows only that one OSOpps investor Page 13 obtained an anonymous debit card from Parex in an envelope bearing the name and return address of Ecommerce Exchange, Reed's company.*fn36

  II. Discussion

  A. Preliminary Injunction

  The principal injunctive relief that plaintiffs seek, if granted, would enjoin:

  1. The One Groupe Defendants from selling or offering for sale OSGold and OSOpps and from transferring or dissipating their assets, and

  2. The Exchange Makers and the banks from transferring or dissipating any assets of any of the One Groupe Defendants that are in their hands.*fn37

  There is neither opposition to nor reason to deny an order barring the One Groupe Defendants and the Exchange Makers*fn38 from selling or offering for sale OSGold and OSOpps, although that activity appears already to have ceased.*fn39 The proposed asset freeze order, however, is a different matter.

  The stated purpose of the freeze order aspect of the preliminary injunction is "to Page 14 prevent [defendants] from disposing of, transferring or assigning their assets."*fn40 Plaintiffs claim that they are threatened with irreparable injury should such transfers occur in that "defendant's [sic] conduct threatens to frustrate a potential money judgment."*fn41 But this prayer for relief encounters a fundamental problem on which the parties' papers are entirely silent.

  In Grupo Mexicano de Desarrollo, S.A. v. Alliance Bond Fund, Inc.,*fn42 the Supreme Court held that a federal court does not have the power, in the exercise of its general equitable jurisdiction, to issue a preliminary injunction in an action for money damages to prevent a defendant from transferring assets in which the plaintiff claims no lien or equitable interest. The New York Court of Appeals reaffirmed the same principle, as a matter of New York law, a year later in Credit Agricole Indosuez v. Rossiyskiy Kredit Bank*fn43 Accordingly, the freeze order that plaintiffs seek is Page 15 impermissible as a matter of law.*fn44

 B. Order of Attachment

  Plaintiffs seek also an order attaching any assets of the One Groupe Defendants that are located in the State of New York.

  Orders of attachment in federal cases in New York are governed, by virtue of Fed.R.Civ.P. 64, by Article 62 of the New York Civil Practice Law and Rules, Section 6201, which provides in relevant part that such an order is appropriate, in a proper case, where the defendant (a) "is a nondomiciliary residing without the state, or is a foreign corporation not qualified to do business in the state," or (b) "with intent to defraud his creditors or frustrate the enforcement of a judgment that might be rendered in plaintiffs favor, has assigned, disposed of, encumbered or secreted property, or removed it from the state or is about to do any of these acts."*fn45 Such relief is proper where the plaintiff has a cause of action, where it is likely to prevail on the merits, and where the amount demanded exceeds all counterclaims known to the plaintiff.*fn46

  The record before the Court establishes that all of the corporate One Groupe Defendants are foreign corporations not qualified to do business in New York, that Reed and Page 16 Johnson are non-domiciliaries,*fn47 and that plaintiffs are likely to prevail as against them. They therefore are entitled to an order of attachment with respect to any assets of those defendants in the State of New York.


  For the foregoing reasons, plaintiffs' motion for a preliminary injunction and an order of attachment is granted to the following, and only the following, extent:

  1. Defendants other than Parex Bank and Latvian Economic Commercial Bank are enjoined, pending the final determination of this action, from selling or offering for sale any interest in OSGold or OSOpps; and

  2. An order of attachment is granted against any assets located in the State of New York of defendants One Groupe International, Inc.,,, and David C. Reed, Randy L. Johnson, Jr., to the extent of $250 million.

  The preliminary injunction is conditioned upon plaintiffs posting, on or before March 3, 2004, a bond or other sufficient security in the amount of $5,000. The effectiveness of the order of Page 17 attachment is conditioned on plaintiffs first giving an undertaking, in accordance with N.Y. CPLR 6212(b), in the amount of $100,000.

  The motion is denied in all other respects.

  The foregoing constitute the Court's findings of fact and conclusions of law.


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