United States District Court, S.D. New York
April 6, 2005.
FREDERICK W. CRIGGER, DSMCKEE INVESTMENTS INC., DAVID S. McKEE, JACK SCHUELER, EVA SCHUELER, TERRY WILKINSON and CSDESIGN INC., Plaintiffs,
FAHNESTOCK AND COMPANY, INC., RAYMOND MINICUCCI and AURELIO VUONO, Defendants.
The opinion of the court was delivered by: JOHN KEENAN, Senior District Judge
OPINION and ORDER
This is a fraud case that will be tried to a jury beginning on
April 7, 2005. Plaintiffs, Defendant Fahnestock and Defendant
pro se Vuono have moved in limine to exclude evidence.
I. PLAINTIFF'S MOTIONS
Plaintiffs move to exclude the following: (1) evidence that
persons not on trial were not named as defendants in this action;
(2) evidence concerning tax deductions that Plaintiffs may have
taken for the investment losses they incurred as a result of
Defendants' allegedly fraudulent conduct; (3) evidence relating
to the September 1997 transactions between Defendant CSDesign,
Inc. and Momentum Investments Ltd.; (4) evidence relating to
Plaintiffs' assets; and (5) evidence concerning certain missing
audiotapes of former Plaintiff Terry Wilkinson. A. Persons Not Named As Defendants
Plaintiffs did not sue Meyer Feldman, Sydney Capland and
Jeffrey Mason, three Canadians who introduced Plaintiffs to
Rayvon, Inc. (Vuono's company). Plaintiffs claim that they did
not assert claims against these persons because of personal
jurisdiction and forum non conveniens concerns. (Pl. Mem.
in Supp. at 2). They move to exclude evidence relating to their
decision not to sue on Fed.R. Evid. 402 and 403 grounds.
Fahnestock argues that Plaintiffs' decision not to sue the three
Canadian promoters bears on the promoters' credibility because
they knew at depositions that they would be free from criminal or
civil charges. (Fahn. Mem. in Opp. at 1).
The Court agrees with Fahnestock. These witnesses appear on
Plaintiffs' witness list. (Pl. Prop. Pre-Trial Order, Exh. A).
The defendant's attorney is permitted to challenge the
credibility of the plaintiff's witness on cross-examination by
asking questions pertaining to the plaintiff's decision not to
bring suit against that witness.
B. Plaintiffs' Tax Deductions
Plaintiffs spend several pages of their memorandum pushing for
the exclusion of any evidence regarding tax deductions that they
may have taken for the investment losses that the allegedly
incurred as a result of Defendants' activities. Plaintiffs also
request that Defendants be precluded from arguing that the value of any such deductions should offset
any potential damages awarded to Plaintiffs. (Pl. Mem. in Supp.
at 3-9). Fahnestock correctly concedes the point on damages but
intends to prove on cross-examination that certain Plaintiffs
made representations about Rayvon to Canadian tax authorities
that were inconsistent with their current position. Fahnestock
notes that these representations were covered at length in
Plaintiffs' depositions. (Fahn. Mem. in Opp. at 4).
Fahnestock certainly may explore on cross-examination whether
Plaintiffs' representations to the Canadian tax authorities
contradict their current position. Furthermore, while disclosure
of tax returns is generally disfavored, evidence of Plaintiffs'
tax deductions is probative of investor sophistication and, by
extension, justifiable reliance. See Smith v. Bader,
83 F.R.D. 437 (S.D.N.Y. 1979) (Sweet, J.). These issues go to the heart of
C. The CSDesign-Momentum Transaction
Two years after Terry Wilkinson's investment in the alleged
fraudulent scheme, CSDesign (Wilkinson's company) sold the assets
at issue in this litigation shares of Rayvon Class B preferred
stock to another Wilkinson entity, Momentum Investments Ltd.
Plaintiffs seek exclusion of this evidence on Fed.R. Evid. 403
grounds. Defendants contend that Wilkinson's ownership of two
investment entities and the transaction between them undermines the notion that he is a neophyte investor and
tends to prove sophistication and experience in private financial
transactions, as well as access to lawyers and accounts. The
Court agrees. This subject clearly is a fertile area for
cross-examination, and the Court sees no danger of unfair
D. Plaintiffs' Net Worth
Plaintiffs make a Fed.R. Evid. 403 objection to the admission
of evidence concerning their wealth and assets. In a nutshell,
they claim that this evidence is not necessarily indicative of
investor sophistication. While Plaintiffs are correct that
wealth, by itself, does not necessarily equate to sophistication,
there is no Rule 403 problem here. Even if Fahnestock "has a long
list of examples of the plaintiffs' prior investment experience"
(Pl. Mem. in Supp. at 13), evidence of Plaintiffs' assets just
adds another stroke of color to the overall portrait. Plaintiffs
will have ample opportunity to paint their own picture. Finally,
the Court rejects Plaintiffs' argument that the only purpose for
this evidence is to convince the jury that Plaintiffs do not
deserve significant compensation.
E. The Missing Audiotapes
1. Spoliation Issue
In the late stages of this litigation, Wilkinson apparently
recalled having mailed tapes of conversations with Vuono,
Minicucci and others to the former law firm of Plaintiffs' counsel, Mr. Grannis. On October 28, 2004, Plaintiffs' counsel,
Mr. Kobre, informed Fahnestock's counsel, Mr. Wilson, that the
tapes could not be located and that Wilkinson had not preserved
them. Mr. Kobre informed Mr. Wilson that Wilkinson had made notes
of these conversations and that these notes already had been
produced. Plaintiffs claim the loss of the tapes was not in bad
faith. They argue that in absence of bad faith or gross
negligence, no possibility of an adverse inference based on
spoliation exists. Therefore, any evidence concerning the lost
tapes should be precluded. (Pl. Mem. in Supp. at 9-11).
Plaintiffs misstate the law. A party seeking an adverse
inference instruction based on spoliation must establish (1) the
controlling party's obligation to preserve the evidence, (2)
destruction with a culpable state of mind, and (3) relevance in
the sense that the unavailable evidence was of the nature alleged
by the party affected by its loss. See Residential Funding
Corp. v. DeGeorge Financial Corp., 306 F.3d 99, 107-09 (2d Cir.
2002). Even in absence of "bad faith" or "gross negligence,"
mentioned by Plaintiffs, "the `culpable state of mind factor' is
satisfied by a showing that the evidence was destroyed
`knowingly, even if without intent to [breach a duty to preserve
it], or negligently.'" Id. at 108 (quoting Byrnie v. Town of
Cromwell, 243 F.3d 93, 109 (2d Cir. 2001)). The distinction is
that a finding of bad faith or gross negligence, by itself, might be sufficient circumstantial evidence to support
a finding of relevance, whereas knowledge or ordinary negligence
would not. See id. at 109.
At this point, the Court has no idea what kind of evidence
Defendants will present concerning the loss of the tapes.
Defendants do not even hint at the spoliation issue in their
papers. The Court will make determinations as objections arise.
Eventually the Court will decide if the evidence warrants an
adverse inference instruction. For the present, the Court denies
Plaintiffs' motion to exclude this evidence.
2. Admissibility of Wilkinson's Notes
Instead of directly engaging the spoliation issue, Defendants
adopt a motion in limine in which former Defendant Minicucci
sought to prevent Plaintiffs from introducing evidence of the
alleged tape recordings, including all notes based on such tapes
and all testimony pertaining to such tapes, on unreliability and
Fed.R. Evid. 1002 grounds.
Absent bad faith in the destruction or loss of the audiotapes,
Wilkinson surely may testify as to his best recollection of the
conversations. Fed.R. Evid. 1004(1). If need be, his notes may
be provided in order to refresh his recollection, but these notes
themselves are not admissible. A out-of-court statement
consistent with the declarant's testimony is not hearsay only
if it is offered to rebut a charge of recent fabrication or improper influence or motive. Fed.R. Evid.
801(d)(1)(B). There has been no charge of recent fabrication
indeed, everyone has known for five months that the tapes were
lost and prior consistent statements may not be admitted simply
to bolster the witness, even if he is discredited. See Tome v.
United States, 513 U.S. 150, 157 (1995).
II. FAHNESTOCK'S MOTIONS
Fahnestock moves to exclude the following evidence: (1) that it
failed adequately to supervise Minicucci, (2) that it improperly
hired Minicucci, (3) that one of its branch managers knew of
Vuono's spotty history, and (4) that it improperly listed
per-share stock prices on certain monthly statements. Fahnestock
also moved to exclude evidence concerning "prime bank frauds,"
the hiding of evidence in a prior action and the expenses of
caring for the Schuelers' quadriplegic child. Plaintiffs
represent that they do not intend at present to offer evidence on
the matter of the Schuelers' quadriplegic child, other prime bank
fraud schemes or an alleged fraudulent response to a subpoena in
a prior action. (Pl. Mem. in Opp. at 1).
A. Inadequate Supervision of Minicucci
Fahnestock moves for exclusion of evidence of negligent
supervision of its broker, Minicucci. Fahnestock argues that (i)
Plaintiffs stated in their summary judgment briefs that facts
concerning Minicucci's supervision had nothing to do with the respondeat superior claim, (ii) negligent supervision has
nothing to do with fraud, (iii) there is no negligent supervision
claim, and (iv) the alleged negligence of Minicucci's managers
based on regulatory requirements is irrelevant. (Fahn. Mem. in
Supp. at 5-7). Plaintiffs counter that the evidence goes to the
extent of trust and authority that Fahnestock placed in
Minicucci, which is at the heart of the respondeat issue. (Pl.
Mem. in Opp. at 2). This round goes to Plaintiffs. Fahnestock
surely plans to defend by arguing that Minicucci acted outside
his authority. No one can know the scope of that "authority"
without determining how loosely Fahnestock leashed Minicucci, if
at all. Plaintiffs are correct that this evidence goes to the
heart of the case.
B. Improper Hiring of Minicucci
Fahnestock moves for exclusion of evidence concerning
Minicucci's apparently less-than-stellar employment history.
Fahnestock contends that Minicucci's prior history, and
Fahnestock's decision to hire Minicucci, is irrelevant in absence
of a negligent hiring claim. Fahnestock also raises Fed.R. Evid.
403 objections because of (i) the need to determine industry
standards for hiring new brokers, (ii) Minicucci was never
charged with wrongdoing in any "boiler room" matter, and (iii)
Minicucci's career at Prudential, his former firm, was
uncontroversial. (Fahn. Mem. in Supp. at 9-10). Plaintiffs
respond that evidence of an employee's prior misconduct is relevant to whether the employee's conduct could reasonably have
been anticipated, which bears on the respondeat issue. (Pl.
Mem. in Opp. at 5). The Court agrees. Again, this evidence goes
to the heart of whether Minicucci was acting under Fahnestock's
flag or on a frolic when he committed the allegedly fraudulent
C. Fahnestock's Branch Manager and Vuono
Fahnestock seeks to exclude evidence that Stanley Wong,
Fahnestock's branch manager, knew about Vuono's cloudy background
but did nothing despite also knowing that Vuono was involved in
obtaining money from investors who had accounts at Fahnestock.
(Fahn. Mem. in Supp. at 11). Plaintiffs point out that Wong was
head of Fahnestock's flagship branch on Wall Street, and that
knowledge attributable to him is attributable to Fahnestock. (Pl.
Mem. in Opp. at 7). Plaintiffs are correct again for the same
reasons given in Parts II.A and II.B, supra. All of this
evidence goes to Fahnestock's knowledge of misrepresentations or
omissions, or its reckless indifference to the truth or falsehood
of those misrepresentations and omissions, which ultimately may
prove scienter, a necessary element of fraud. See Small v.
Lorillard Tobacco Co., 94 N.Y.2d 43, 57 (1999); Klembczyk v. Di
Nardo, 265 A.D.2d 934, 935 (4th Dep't 1999).
D. Stock Pricing on Plaintiffs' Statements
Fahnestock moves for exclusion of evidence regarding the
pricing of Rayvon stock on Plaintiffs' monthly statements beginning in July 1995. Fahnestock says that the price of the
stock was sometimes listed at $25 per share and sometimes listed
with an asterisk (*), indicating a zero market value. Fahnestock
claims that no explanation for the pricing was found during
discovery and that the pricing differences, while possibly
suggesting negligence in preparation of the statements, are
irrelevant to a fraud claim. (Def. Mem. in Supp. at 15). This
argument fails. The foundation of a fraud claim is the existence
of a material misrepresentation or omission. How could evidence
of inaccurate per-share prices on Plaintiffs' monthly statements
possibly be irrelevant? This evidence also may tend to prove or
disprove Plaintiffs' justifiable reliance and any contention that
Fahnestock was sunk in the alleged fraud just as deeply as
III. VUONO'S MOTION
Defendant pro se Aurelio Vuono moves to exclude any
evidence relating to S.E.C. v. Hasho, et al., an action brought
against him fifteen years ago. Vuono claims that the matter was
"settled" and irrelevant to the instant case. (Vuono Motion).
Plaintiffs contend that the S.E.C. barred Vuono from working in
the securities industry after this proceeding. They contend that
evidence concerning this action is relevant to the case against
Vuono because he never disclosed the fact that he had been barred
from the industry. Plaintiffs also contend that the ban was part of Vuono's history that was within the knowledge of Minicucci and
Wong, and by extension Fahnestock. (Pl. Mem. in Opp. at 8-9).
First of all, S.E.C. v. Hasho was NOT "settled." On February
13, 1992, after trial of Vuono and others, Judge Edelstein issued
an Opinion and Order containing his findings of facts and
conclusions of law. It was not a happy day for Vuono and his
co-defendants. The Order determined that the only appropriate
remedy for their actions was the imposition of injunctions.
S.E.C. v. Hashc, 784 F. Supp. 1059, 1111 (S.D.N.Y. 1992). On
March 9, 1992, Judge Edelstein filed a final judgment of
permanent injunction and order of disgorgement against Vuono.
Now, perhaps Mr. Vuono made an honest mistake in wording his
motion; perhaps, being pro se, he does not know the
difference between a settlement and a judgment after a bench
trial. One thing is certain: Mr. Vuono's pro se status will
not save him if he makes one more misrepresentation to this
Court, whether it be in a written submission, under oath or in
any other manner.
As for the merits of the motion, it is clear that the evidence
of Vuono's ban from the securities industry, imposed by Judge
Edelstein at the conclusion of Hasho, is admissible in this
action. The evidence is probative of the possibility of material
omissions (failure to inform Plaintiffs of the ban) by Vuono,
Minicucci and Fahnestock. IV. CONCLUSION
Plaintiffs' motions are denied. Fahnestock's motion to exclude
Wilkinson's notes of his taped conversations with Vuono,
Minicucci and others is granted. Fahnestock's remaining motions
are denied. Vuono's motion is denied.
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