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In re Adler

January 8, 2007


The opinion of the court was delivered by: VICTOR Marrero, United States District Judge



In an earlier proceeding in this matter, by Decision and Order dated November 8, 2005 (the "Order")*fn1 the Court granted the motion for summary judgment filed by plaintiff Edwin Mishkin, as Trustee (the "Trustee") for the liquidation of the business of Adler, Coleman Clearing Corp. ("Adler"). The Order, which provides a summary of the facts relevant to the matter now before the Court, determined that the Trustee was entitled to recover from defendant Philip Gurian ("Gurian") on two claims: under the common law alter ego doctrine and Section 20(a) ("§ 20(a)") of the Securities Exchange Act of 1934 (the "Exchange Act"), 15 U.S.C. § 78t(a), for payment of certain default judgments the Trustee had obtained against six Bahamian Companies (the "Bahamian Companies") named as defendants in the underlying case. The Trustee also possessed a judgment by default against a seventh entity, Roddy DiPrimo, S.A. ("DiPrimo"). The Trustee charged in this case that all of these entities (collectively, the "Bahamian Entities") were sufficiently controlled by Gurian and used by him to commit massive securities fraud that eventually brought about Adler's financial collapse.

In establishing one of the elements of liability required under the Trustee's two theories -- Gurian's use of the controlled Bahamian Entities to commit the underlying fraud and primary securities violations -- the Court's summary judgment ruling relied in part on the default judgments entered against the Bahamian Companies (the "Bahamian Judgments") in actions brought by the Trustee alleging that those entities engaged in wrongful securities trading and other unlawful conduct that caused Adler's demise. On Gurian's appeal of this Court's Order, the Court of Appeals for the Second Circuit vacated the judgment and remanded for further proceedings insofar as the Order had relied on the Bahamian Judgments to support a finding that the prerequisite element of fraudulent misconduct had been satisfied as to the Trustee's two claims. See Mishkin v. Gurian (In re Adler, Coleman Clearing Corp.), No. 05-6245-BK, 2006 WL 2374238 (2d Cir. Aug. 14, 2006).

In his supplemental motion for summary judgment now before the Court,*fn2 the Trustee seeks to establish Gurian's liability for the default judgment the Trustee had obtained on November 26, 1996 against DiPrimo (the "DiPrimo Judgment") from the Bankruptcy Court in Adler's liquidation proceeding. The Trustee here asserts that Gurian sufficiently controlled DiPrimo as well and used it to engage in the unlawful short selling of certain stocks (the "Hanover House Stocks") traded by Hanover Sterling & Company, Ltd. ("Hanover"), a securities firm that served as one of Adler's introducing brokers and whose financial failure ultimately resulted in Adler's liquidation. According to the Trustee, Gurian was DiPrimo's alter ego and control person, and as such was responsible for DiPrimo's manipulative stock trading in violation of the federal securities laws that played a substantial role in Adler's losses. Consequently, the Trustee maintains that Gurian may be rendered liable for the injury to Adler caused by DiPrimo's misconduct and for payment of the DiPrimo Judgment.


In order to prevail on a motion for summary judgment, the moving party must demonstrate that "the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Fed. R. Civ. P. 56(c). A fact is "material" if it "might affect the outcome of the suit under the governing law." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). A motion for summary judgment should be granted unless the evidence adduced by the non-moving party is "sufficient ... for a jury to return a verdict for that party." Id. at 249.

In determining whether genuine issues of material fact exist, "[t]he evidence of the non-movant is to be believed, and all justifiable inferences are to be drawn in his favor." Id. at 255 (citing Adickes v. S.H. Kress & Co., 398 U.S. 144, 158-59 (1970)). Once the moving party has made a showing that no genuine issue of material fact remains to be tried, the burden shifts. In the face of a properly supported motion for summary judgment, the opposing party cannot "get to a jury without 'any significant probative evidence tending to support' [the existence of a disputed fact]." Id. at 249 (quoting First Nat'l Bank of Arizona v. Cities Serv. Co., 391 U.S. 253, 290 (1968)). The non-movant, however, cannot create a genuine issue of fact and defeat summary judgment through "[c]onclusory allegations, conjecture, and speculation." Kerzer v. Kingly Mfg., 156 F.3d 396, 400 (2d Cir. 1998). As the Second Circuit has recognized: "[T]he moving party may obtain summary judgment by showing that little or no evidence may be found in support of the nonmoving party's case. When no rational jury could find in favor of the nonmoving party because the evidence to support its case is so slight, there is no genuine issue of material fact and a grant of summary judgment is proper." Gallo v. Prudential Residential Servs., Ltd., 22 F.3d 1219, 1223-24 (2d Cir. 1994) (citations omitted).



The elements of the alter ego theory of liability, a doctrine designed to prevent corporate fraud, were articulated by the Second Circuit in Babbitt v. Vebeliunas (In re Vebeliunas), 332 F.3d 85 (2d Cir. 2003). To warrant piercing the corporate veil under New York law*fn3 and thereby imposing liability on a person who effectively dominates or controls the vital affairs of a corporate entity, a plaintiff must establish that: "(1) the owner exercised such control that the corporation has become a mere instrumentality of the owner, who is the real actor; (2) the owner used this control to commit a fraud or 'other wrong'; and (3) the fraud or wrong results in an unjust loss or injury to the plaintiff." Id. at 91-92 (citing Freeman v. Complex Computing Co., 119 F.3d 1044, 1052 (2d Cir. 1997) and Morris v. New York Dep't of Taxation & Fin., 623 N.E.2d 1157, 1060 (N.Y. 1993)) (quotation in original). The Second Circuit also enunciated a number of criteria that weigh in evaluating the element of control. Among the considerations listed, insofar as relevant to this action, are: (1) the absence of the formalities that constitute and manifest the corporate existence, for example, issuance of stock, election of directors, and keeping of corporate records; (2) the use of corporate funds deposited in or taken out of the corporation's accounts for personal rather than corporate purposes; (3) overlap in ownership, officers, directors, and personnel; (4) use of common office space, address and telephone numbers of corporate entities; (5) the extent to which the allegedly dominated corporation displayed business discretion; (6) whether the corporation in question had property that was used by the controlling person or corporation as if it were its own. See id. at 90 n.3 (quoting Wm. Passalacqua Builders, Inc. v. Resnick Developers South, Inc., 933 F.2d 131, 139 (2d Cir. 1991)).

In support of his motion, the Trustee asserts that, under Gurian's direction and control, DiPrimo engaged in various fraudulent schemes involving Hanover House Stocks that had the effect of putting Hanover out of business, which in turn caused Adler to fail. DiPrimo's unlawful practices included market manipulation by short selling Hanover House Stocks that DiPrimo did not own and thus could not deliver, and that was designed to defraud Hanover by artificially affecting the price of the securities, as well as extortion and employee raids that sought to bring about Hanover's demise.

1. Control of DiPrimo

To establish his contention that Gurian controlled DiPrimo at all times relevant to this action, the Trustee presents statements made by Gurian constituting admissions of his connection to DiPrimo and of his control of its corporate activities for his own purposes. This evidence consists of the following testimony.

First, during Gurian's criminal prosecution on charges of securities law violations Gurian stated, as part of the conspiracy he acknowledged during his plea allocution and to which he pled guilty, that he caused a Bahamian attorney to organize several Bahamian business companies, which included DiPrimo and five of the other Bahamian Entities, "for the benefit of the defendants [which included Gurian] in order to disguise and conceal the true owners and participants in various stock transactions as well as to defraud the investing public ... by disguising the fact that defendants participated in the sale of securities and profited by virtue of the sales." (See Transcript of Guilty Plea Before the Honorable Mark Rizzo, United States Magistrate Judge, United States v. Gurian, No. 99-CR-215-T-23A, (M.D.Fla. 1999) (the "Gurian Criminal Case"), February 2000 ("Guilty Plea"), attached as Ex. F to the J.A. to the Initial Br. of Appellant Philip Gurian in Miskhin v. Gurian, No. 05-6245-BK (2d Cir. Mar. 21, 2006) ("App. Rec."), at 168.)

Second, in his plea agreement relating to various charges of conspiracy to commit securities fraud involving the initial public stock offering of SC&T International ("SC&T"), Gurian admitted that he caused the shares in question "to be issued to offshore accounts that Gurian controlled." (Plea Agreement entered in the Gurian Criminal Case (the "Plea Agreement"), attached as Ex. E. to App. Rec., at 132.) The SC&T Prospectus for that offering, produced by the Trustee, indicates that DiPrimo was among six entities that purchased SC&T shares involved in the unlawful transaction Gurian described --- the same six entities specified in the indictment and Guilty Plea allocution in the Gurian Criminal Case. (See Prospectus, SC&T International, Inc., attached as Ex. M to the Affidavit of Sharon T. Hynes in Support of the Trustee's Supplemental Memorandum of Law in Support of Trustee's Motion for Summary Judgment, dated September 12, 2006 ("Hynes Aff."), at 31.)

Third, at a criminal trial at which he appeared as a cooperating witness called by the Government, Gurian testified about the SC&T transaction. There, he asserted that he and an associate, "through six foreign companies that I controlled," registered a portion of the SC&T shares. (See Transcript of Trial Before The Honorable Raymond J. Dearie, United States v. Nazareno, CR-98-1129(S) (E.D.N.Y. 1998) ("Nazareno Trial"), attached as Ex. O to App. Rec., at 515.)

Fourth, in a deposition given in this action, Gurian admitted that he and two associates controlled the operations of the Bahamian entities that were listed among the companies involved in the sale of the SC&T shares that comprised one of the securities fraud transactions to which Gurian pled guilty in the Gurian Criminal Case, and that he caused those Bahamian entities to open securities accounts whose trading he or one of his associates directed. (See Mishkin v. Gurian, No. 97 Civ. 3817 (S.D.N.Y. 1997), Deposition of Philip Gurian, Apr. 21, 2005 ("Gurian Dep."), attached as Ex. I to App. Rec., at 200-01 (48-49).)

Fifth, at a 1998 trial in Hong Kong arising from the sequence of events following Adler's collapse, Gurian admitted that he engaged in some "trading for Roddy DiPrimo for some period of time." (Transcript of the Trial of Hans Joerg Schneeberger, Criminal Case No. 1163 of 1997 (the "Hong Kong Trial"), attached as Ex. J to App. Rec., at 377 (M-0)). In his deposition taken for this case, Gurian was asked about that aspect of his Hong Kong Trial testimony and stated ...

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