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Serova v. Teplen

February 16, 2005


The opinion of the court was delivered by: Hon. Harold Baer, Jr., District Judge:


Plaintiff Yelena Serova ("Serova") brought this action against defendants Philip H. Teplen ("Teplen"), and Michael and Barbara Eden ("the Edens") alleging: (i) legal malpractice (against Teplen only); (ii) breach of fiduciary duty (against Teplen only); (iii) violation of New York Judiciary Law § 487 (against Teplen only); (iv) disgorgement of legal fees (against Teplen only); (v) securities fraud under the Securities Exchange Act of 1934 Section 10(b), 15 U.S.C. Section 78j(b), and Rule 10b-5, 17 C.F.R. Section 240.10b-5; (vi) common law fraud; (vii) negligent misrepresentation; (viii) corporate waste and mismanagement; and (ix) violation of the Business Corporation Law of the State of New York and Shareholders Agreement (against the Edens only). This Court has jurisdiction over this action pursuant to 15 U.S.C. Section 78aa and 28 U.S.C. Section 1332(a)(2). Serova's claims arise from actions taken by Teplen as Serova's attorney, and by the Edens as members of the Board of Directors of a company in which Serova invested. All defendants now move to dismiss all but the first claim pursuant to 15 U.S.C. Section 78u-4(b) and Rules 12(b)(6), 9(b), and 23.1 of the Federal Rules of Civil Procedure. For the reasons set forth below, defendants' motion to dismiss is GRANTED.


The following facts are taken from the allegations of the amended complaint unless otherwise stated.

A. The Parties

Serova is a citizen and resident of the country of Russia. 09/29/2005 Amended Complaint ("Am. Compl.") ¶ 12. While a student at Touro College, New York, Serova sought to obtain permanent residency in the United States. Id. ¶ 16. Serova is a 30% shareholder in a company now known as Allarus Technology Management, Inc. ("Allarus"). Id. ¶ 13.

Teplen is a resident of the State of New York and an attorney practicing in New York who holds himself out as an expert in immigration matters. Id. ¶ 14, 16. While generally his conduct is less than exemplary, some of the alleged conflicts of interest are blatant and reprehensible. Nonetheless and without adequate knowledge of the facts, Serova not only retained Teplen to assist her in obtaining permanent resident status in the United States but to provide other legal services as well. Id. ¶ 16.

Michael Eden is the founder and chief executive officer of Allarus, a New York corporation formerly known as Rupert Technologies Group, Inc. ("Rupert"). Id. Prior to the events at issue, Barbara Eden, Michael Eden's wife, wholly owned the corporation's common stock. Id. The Edens are both members of the Board of Directors of Allarus. Id. ¶ 15.

B. Events Leading to the Litigation

In September 2001, Serova, a student at Touro College, contacted Teplen about obtaining permanent residency in the United States. Id. ¶ 16. Teplen advised Serova to apply for an EB-5 immigrant investor visa, which requires the petitioner to invest at least $500,000 in a United States business. Id. ¶ 17. Teplen advised Serova that the then United States Immigration and Naturalization Service ("INS") looked unfavorably on investments that merely met the minimum requirement and recommended that Serova invest over $1 million. Id. ¶ 18. Pursuant to a retainer agreement dated October 2, 2001, Serova retained Teplen to "assist in development for acquisition or establishment of business, negotiate transaction, draft[] purchase agreements and shareholder agreements" as well as to facilitate the visa application. Id. ¶ 19. Although the retainer agreement stated that Teplen did not guarantee any particular outcome, Teplen told Serova at the time the agreement was concluded and at all times thereafter until the visa application was denied that if she invested over $1 million, she was virtually certain to obtain an EB-5 visa. Id. ¶¶ 20, 29. Teplen also told Serova that he would find a suitable investment opportunity for her. Id. ¶ 21.

By early 2002, Teplen had introduced Serova to Michael Eden, Teplen's client and long-time friend, for the purpose of developing an investment opportunity. Id. ¶ 22. At that time and at all times thereafter, Teplen and Mr. Eden only disclosed that Mr. Eden was Teplen's "friend" and neither disclosed that Teplen had in the past represented the Edens or their company, Rupert. Id. Mr. Eden was then running Rupert, a small computer services business, which was renamed Allarus once the Serova investment was made. Id. Teplen discouraged Serova from investing in any ventures other than Rupert/Allarus. Id. ¶ 23.

Serova attended three or four meetings with Michael Eden regarding a possible investment in Allarus. Id. ¶ 24. At those meetings, Allarus was not represented by an attorney and Mr. Eden acted as an agent for his wife, Barbara Eden. Id. Teplen was present at each of those meetings as Serova's attorney but he failed to negotiate any of the terms of the investment on her behalf and, indeed, had private discussions with Mr. Eden regarding the investment. Id. ¶¶ 24, 25. Thereafter, Teplen acted as the sole attorney in the transaction and drafted all the closing papers. Id. ¶ 26. Serova was informed on numerous occasions that Teplen had no involvement with Allarus. Id.

Pursuant to an agreement dated June 28, 2002 among Serova, Allarus, and Barbara Eden (the "Investment Agreement"), Serova invested $1,162,000 in Allarus and received 30% of its stock. Id. ¶ 27. At all relevant times Mr. Eden acted as the representative officer of Allarus and agent for his wife. Id. Under the Investment Agreement, Allarus used $240,000 of Serova's funds to redeem thirty of the existing hundred shares from Mrs. Eden. Id. ¶ 27. The purchase price paid for the redemption of Mrs. Eden's stock was deposited in an account jointly owned by the Edens. Id. There was also a separate Shareholders Agreement dated June 28, 2002 between Serova and Mrs. Eden. Id. ¶ 28; Shareholders Agreement, Ex. D to 10/14/2005 Affidavit of Defendant Philip H. Teplen ("Teplen Aff."). Serova alleges that the Shareholders Agreement was one-sided in favor of the Edens/Allarus and that the terms were never the subject of a negotiation. Am. Compl. ¶ 40. The Shareholders Agreement identifies Teplen as an officer of the company. Shareholders Agreement, Ex. D to Teplen Aff., at 3.

On August 10, 2003, Serova's EB-5 visa application was denied. Am. Compl. ¶ 30; Department of Homeland Security Notice of Decision ("Notice of Decision"), Ex. C to Teplen Aff. After Serova's visa was denied, Teplen advised Serova to refile her application. Am. Compl. ¶ 31. Serova declined to do so because she had consulted another attorney and learned that less than 15% of EB-5 visas are actually granted. Id.; see 10/14/2005 Mem. of Law of Defendant Philip H. Teplen in Supp. of Mot. to Dismiss ("Teplen Mem.") at 4, n. 3. Had Serova known that fact from the outset, she would not have invested in Allarus. Am. Compl. ¶ 31.

Teplen did not advise Serova about many of the requirements for obtaining an EB-5 visa until after she had invested in Allarus. Id. ¶ 32. One example was the requirement that Serova file tax returns from the previous five years. Id. ¶35. Teplen knew that Serova's parents would fund the investment, however, and that as they are Russian citizens, they would be unlikely to have the required tax documentation. Id. Had Serova known about the tax return requirement, she would not have invested in Allarus. Id. ¶ 32.

Neither Teplen nor the Edens disclosed to Serova that Teplen became an executive vice president of Allarus at about the time Teplen submitted Serova's EB-5 visa application to the INS. Id. ¶ 37. Nor did Teplen or the Edens disclose the fact that within days after her investment, Teplen and Allarus jointly leased space in the Empire State Building. Id. ¶ 38. Serova alleges that Teplen and the Edens had to have negotiated the lease prior to her investment but that they did not disclose this fact to her. Id. ¶ 39. Pursuant to the lease, the annual rent for the space was $195,300 for the first two years, which was approximately half Allarus' gross annual sales in the preceding year. Id.

Teplen represented Michael Eden, Barbara Eden, or their business before, during, and after Teplen represented Serova. Id. ¶ 41. Serova maintains that Teplen's independence in representing her interests was compromised as a result of his relationship with the Edens and, consequently, Serova's investment was made on "legal terms that were decidedly one-sided in favor of Allarus." Id. ¶¶ 41-43. She alleges that Teplen had a motive to commit fraud and other misdeeds alleged in the complaint for "enhanced legal fees from a complicated visa application" and representation in the subject transaction, and for "unwarranted and excessive compensation" from the investment. Id. ¶¶ 51, 53. She further alleges that the Edens had a motive to commit fraud for "immediate financial gain from the sale of Mrs. Edenl's [sic] stock, the capitalization of the company which had no operating capital and minimal profits from operations," and for excessive compensation from the investment. Id. ¶¶ 51, 53.

Serova claims that the defendants squandered her investment within eighteen months. Id. ¶ 56. The unaudited financial statements of Allarus show that as of December 31, 2002, a mere six months after Serova's investment, Allarus had shareholders' equity of only $517,443. Id. ¶ 54. This diminution in shareholder equity resulted from Allarus's net loss of $406,283 for the period from June 28 through December 31, 2002. Id. ¶ 54. For the year ended December 31, 2003, Allarus lost $426,584 and had only $36,223 on hand. Id. ¶ 55. Serova alleges that her losses were proximately and substantially caused by: (i) the unwarranted and excessive compensation given to the defendants after her investment was made; (ii) Allarus' financial obligation under the undisclosed joint lease; and (iii) the ...

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