United States District Court, S.D. New York
July 23, 2004.
FRANK SIMON and SOL GELDZAHLER Plaintiffs,
CHARLES WEAVER; THE REGENTS OF THE UNIVERSITY OF SOUTHERN CALIFORNIA AT BERKELEY; WILLIAM NELSON; DIGITAL MOSAIC SYSTEMS Ltd., (U.K.); ARI FRIEDMAN; ELECTRO OPTICAL SYSTEMS; RICH LAPIERRE; DOUGLAS STEINFELD; FRANK WERBLIN, Phd.; TERRA OPS; CARL STEINBRENNER; DIGITAL MOSAIC SYSTEMS, (MA); STEVEN PIKE; ARGON ELECTRONICS; JOHN DOE 1 through 100; and JANE DOE 1 through 100; Defendants.
The opinion of the court was delivered by: RICHARD OWEN, Senior District Judge
OPINION AND ORDER
Plaintiffs Frank Simon and Sol Geldzahler are New York City
businessmen each of whom made unfortunate investments in Electro
Optical Systems Corporation ("EOSC"), allegedly under the control
of one Charles Weaver. Simon's investment of $80,000 was in 1998
and Geldzahler's $30,000 in 1999. They allege that Weaver, as
part of a "scheme to defraud," induced them to make these
investments and had no intention of paying plaintiffs a return on their investments. Compl. ¶ 33.
In 2000, Weaver allegedly told plaintiffs that he was creating a
new corporation, Digital Mosaic Systems ("DMS"), and was
transferring plaintiffs' investments in EOSC to stock in DMS. DMS
was allegedly created to market fingerprint technology developed
by defendant Dr. Frank Werblin, a professor of Neurobiology at
the University of California at Berkeley. At the time, however,
Weaver had not yet obtained the license to market this
fingerprint technology. Rather, Weaver was still negotiating with
Werblin for the license, which defendant Regents of the
University of Southern California ("Regents")*fn1 ultimately
had the power to grant. The complaint then alleges that "as part
of the ongoing conspiracy, combination and agreement," Weaver and
Werblin created a corporation named TERRAOPS, Compl. ¶ 38, and
that Weaver and Werblin then "set out to defraud investors by
covering themselves with the cloak and mantle of the University
of Southern [sic] California at Berkeley in order to lend
credibility to the scheme to defraud." Id.
However, the complaint alleges that Werblin soon thereafter
learned Weaver had a criminal past major securities fraud
resulting in a federal conviction. Upon discovering this, Werblin
decided to disassociate himself from Weaver, and, apparently
before any investors were defrauded, "Werblin exited the picture
and closed down TERRAOPS." Compl. ¶ 40. It is conceded that
Werblin also quickly informed the Regents of Weaver's criminal
past. See Def. Mem. Support at 9.
The complaint next alleges that, as a result of Werblin's
disclosure, the Regents then "knew or should have known . . .
that one of its employees and assigns was involved in a criminal conspiracy to defraud." Compl. ¶ 41. The Regents,
"in the face of overwhelming evidence that a fraud was occurring,
ignored the obvious facts" and in November 2000*fn2 granted
Weaver a license to Werblin's fingerprint technology. Id.
Plaintiffs claim that by granting the license to Weaver, the
Regents instantly "became an active co-conspirator with Weaver in
the conspiracy, combination and agreement to defraud" because the
Regents "knew or should have known . . . that the license was
granted to a known criminal who was utilizing the license in a
scheme to defraud." Id.
The complaint charges that, through their association with
Weaver, defendants Werblin, the Regents and over 200 other named
and unnamed individuals and corporations are liable for
violations of the Racketeer Influenced and Corrupt Organizations
Act ("RICO"), 18. U.S.C. § 1961,*fn3 aiding and abetting,
conversion, fraud, and securities violations under the Securities
and Exchange Act of 1934, §§ 20(a), 10(b), and Rule 10b-5.
Plaintiffs seek damages in the amount of $130,000,*fn4 plus
interest and punitive damages in the amount of $40,000,000.
Defendants Regents and Werblin move to dismiss the complaint
pursuant to Fed.R.Civ.P. 12(b)(1), (2) and (6).
In considering a motion to dismiss under Rule 12(b)(6), the
Court accepts the factual allegations of the complaint as true
and draws all reasonable inferences in favor of the plaintiffs.
See Chambers v. Time Warner, Inc., 282 F.3d 147, 152 (2d Cir.
2002). On the other hand, dismissal is proper "if it is clear
that no relief could be granted under any set of facts that could be proved consistent with the
allegations." Hishon v. King & Spalding, 467 U.S. 69, 73
Plaintiffs' first claim for relief is a RICO claim. To assert a
civil RICO claim under § 1964(c), a plaintiff must allege the
elements of § 1962: "(1) that the defendant (2) through the
commission of two or more acts (3) constituting a `pattern' (4)
of `racketeering activity' (5) directly or indirectly invests in,
or maintains an interest in, or participates in (6) an
`enterprise' (7) the activities of which affect interstate or
foreign commerce." Morin v. Trupin, 711 F. Supp. 97, 105
(S.D.N.Y. 1989) quoting Moss v. Morgan Stanley, Inc.,
719 F.2d 5, 17 (2d Cir. 1983). And when bringing a civil RICO action under
§ 1964(c), a plaintiff, in addition to alleging a violation of §
1962, must also allege that the plaintiff was "injured in his
business or property by reason of a violation of Section 1962."
18 U.S.C. § 1964(c). The plaintiffs here have failed to plead an
injury as a result of any actions on the part of either the
Regents or Werblin, the moving defendants. While the complaint
essentially alleges that in 1998 and 1999 the plaintiffs were
induced into investing in Weaver's EOSC and Weaver never intended
to or did pay back plaintiffs' investments, these events, which
allegedly caused plaintiffs' injury, all occurred before the
Regents or Werblin had any contact with either Weaver or DMS. The
record would permit the conjecture that the plaintiffs brought
these claims against the Regents and Werblin solely in search of
a deep pocket, the complaint making clear that Weaver, and not
the defendants named here, was the one who allegedly induced
plaintiffs to invest in EOSC as part of his scheme to defraud.
See Compl. ¶¶ 34-36. It was Weaver, not Werblin or the Regents,
who was "at all times relevant hereto the person of authority
charged with oversight responsibility for the audit and review of
the financial operations of DMS" and "caused substantial financial losses to
plaintiffs . . . through the gross mismanagement" of DMS. Compl.
Nowhere in the complaint do plaintiffs show the required
connection between their injuries and any actions of Werblin or
the Regents. See Morin, 711 F. Supp. at 106. Absent such
allegations, the RICO claim against Werblin and the Regents is
Plaintiffs' second claim is aiding and abetting the
aforementioned RICO violations. In order to properly allege a
claim for aiding and abetting, plaintiffs must show: "(1) the
existence of a . . . violation by the primary (as opposed to the
aiding and abetting) party; (2) `knowledge' of this violation on
the part of the aider and abettor; and (3) `substantial
assistance' by the aider and abettor in the achievement of the
primary violation." Browning Ave. Realty Corp. v. Rosenshein,
774 F. Supp. 129, 139 (S.D.N.Y. 1991), quoting Samuel M.
Feinberg Testamentary Trust v. Carter, 652 F. Supp. 1066, 1082
(S.D.N.Y. 1987). The knowledge element in an aiding and abetting
claim requires both actual and specific knowledge of the primary
party's violations. See Browning Ave. Realty, 774 F. Supp. at
143. Plaintiffs have failed to allege that Regents or Werblin had
knowledge of the primary party's (Weaver) alleged RICO
violations. Again, Weaver's alleged RICO violations as they
pertain to plaintiffs occurred before Werblin or Regents had any
contact with Weaver. Werblin and Regents could not have had any
knowledge of the RICO violations. Accordingly, the aiding and
abetting claim is dismissed.
Plaintiffs' third claim alleges fraud. A fraud claim requires
an allegation of reliance. See Center Cadillac, Inc. v. Bank
Leumi Trust Company of New York, 808 F. Supp. 213 (S.D.N.Y 1992).
Also, there must be an allegation of injury as a result of
defendants' alleged fraud. See Morin, 711 F. Supp. at 103. But
Werblin and the Regents did not come into the picture until 2000, after plaintiffs had
made their investments. Since plaintiffs fail to allege either
reliance on any representations by defendants or any injury due
to defendants alleged fraudulent activities, the fraud claims
must also be dismissed.
Plaintiffs' fourth claim is conversion. Conversion is the
"unauthorized assumption and exercise of the right of ownership
over goods belonging to another to the exclusion of the owner's
rights." Vigilant Insurance Company of America v. Housing
Authority of the City of El Paso, Texas, 87 N.Y.2d 36, 44
(1995). To withstand a motion to dismiss in a conversion claim, a
plaintiff must allege "(1) title to the property converted, or
his right to possession of that property; (2) an act of
conversion by the defendant; and (3) damages caused by the
conversion." Brass v. American Film Technologies, Inc.,
780 F. Supp. 1001, 1003 (S.D.N.Y. 1991). Plaintiffs fail to allege the
second element an act of conversion by the defendant with
regard to either Werblin or the Regents. The only hint of a
conversion allegation within the complaint is when Weaver told
plaintiffs he had created the new company, DMS. The complaint
alleges that "Weaver announced that all the `LOANS' made by the
plaintiffs to EOSC Ponzi scheme were being converted to stock in
DMS." Compl. ¶ 36. There is no mention of Werblin or the Regents
in this allegation. Thus, the complaint fails to allege any
conversion by Werblin or the Regents. Accordingly, plaintiffs
claim of conversion with regard to Werblin or the Regents must be
The plaintiffs' final claims are for securities fraud under §
10(b), Rule 10b-5 and § 20(a) of the Securities and Exchange Act.
To state a claim under § 10(b) and Rule 10b-5, a plaintiff must
plead (1) a misrepresentation or omission of a material fact in connection with the purchase or sale of a security; (2) scienter
on the part of the defendant; (3) the plaintiff's reliance on the
misrepresentation; and (4) damage to the plaintiff resulting from
the misrepresentation. See In re Scholastic Corp. Sec.
Litig., 252 F.3d 63, 69 (2d Cir. 2001). Plaintiffs' claim of
securities fraud must fail because, as stated above, plaintiffs
do not allege the third and fourth elements, that they relied on
any representations let alone that there were any of either
Werblin or the Regents or that these caused damage. Accordingly,
the § 10(b) and Rule 10b-5 claims are dismissed.
Plaintiffs claim under § 20(a) of the Securities and Exchange
Act the "controlling persons" section of the Act must also
fail.*fn5 Plaintiffs are claiming securities fraud with
regard to their investments in EOSC and it is also possible
though plaintiffs never make clear that they are claiming
securities fraud against DMS. However, in a § 20(a) claim,
plaintiffs must allege that defendants were controlling parties
of the entity in violation of the securities claims. Plaintiffs
never allege that Werblin or the Regents were ever controlling
parties of either EOSC or DMS. The complaint does not allege any
contact between EOSC and either Werblin or the Regents. And the
complaint merely alleges that Werblin was involved in
negotiations with DMS for a brief period before severing all ties
and, according to the complaint, the Regents merely granted a
license to DMS. At the same time, the complaint explicitly states
that Weaver was at all times the controlling party of both EOSC
and DMS. See Compl. ¶¶ 8,14. The § 20(a) claim is dismissed. Accordingly, defendants' motion is granted and plaintiffs'
vacuous complaint as to defendants Regents and Werblin is
dismissed. Given this, I need not address defendants' motion to
dismiss under 12(b)(1) for lack of subject matter jurisdiction
under defendants' theory of Eleventh Amendment immunity for the
Regents, nor need I address defendants' motion to dismiss under