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OSRECOVERY, INC. v. ONE GROUPE INTERNATIONAL

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

MEMORANDUM OPINION

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 — www.osgold.com — 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 ...


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