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In re Agape Litigation

January 29, 2010

IN RE AGAPE LITIGATION
X ADRIANNE CLARKE, TL HORIZONS LLC, MAXIMILIAN ENTERPRISES LLC AND EQUITY TRUST COMPANY CUSTODIAN FBO ADRIANNE CLARK IRA, PLAINTIFFS,
v.
NICHOLAS COSMO, AGAPE WORLD INC., AGAPE MERCHANT ADVANCE LLC, AGAPE WORLD LLC, ANTHONY MASSARO, JASON KERYC, DAVID PETRY, HUGO LEON ARIAS, SEBASTIAN TAUZ, MARTY HARTMANN, SR., MARTY HARTMANN, JR., ELIZABETH (LAST NAME UNKNOWN), LAURIE SAVARESE, BANK OF AMERICA, N.A., MF GLOBAL, INC., ALARON TRADING CORPORATION D/B/A ALARON FUTURES & OPTIONS, XYZ CORPS 1-10, JOHN DOE 1-10, JANE DOE 8A, COMPANY 1, COMPANY 2, AND JOHN DOES 11-200, DEFENDANTS.
X SEAN LEGURNIC, PLAINTIFF,
v.
SALVATORE CICCONE INDIVIDUALLY AND IN HIS OFFICIAL CAPACITY AS AN OFFICER OF AGAPE WORLD, INC., ANTHONY CICCONE INDIVIDUALLY AND IN HIS CAPACITY AS AN OFFICER OF AGAPE WORLD, INC., NICHOLAS COSMO, INDIVIDUALLY AND IN HIS CAPACITY AS PRESIDENT OF AGAPE WORLD, INC., AGAPE WORLD INC., AGAPE MERCHANT ADVANCE LLC, PREMIUM PROTECTION PLAN, LLC, BANK OF AMERICA, N.A., MF GLOBAL, INC., ALARON TRADING CORPORATION, D/B/A ALARON FUTURES & OPTIONS, COMPANIES 1-10, AND JOHN DOES 1-10, DEFENDANTS.



The opinion of the court was delivered by: Spatt, District Judge.

This Document Relates to: All Actions

These three cases, In re Agape Litigation, 09-CV-1606 ("the Class Action Complaint"), Clarke, et al v. Cosmo, et al., 09-CV-1782 ("the Clarke Complaint"), and Legurnic v. Ciccone, et al., 09-CV-1436 ("the Legurnic Complaint"), all arise in connection with a now well-publicized Ponzi scheme allegedly perpetrated by Defendant Nicholas Cosmo ("Cosmo"). See Robert E. Kessler, President of N.Y. Investment Firm Charged in Ponzi Scheme, Document Shows, Newsday, January 27, 2009, at A4. In addition to Cosmo, each of these Complaints name various other defendants, including Bank of America, N.A. ("BOA") and MF Global, Inc. ("MF Global"). In particular, all three Complaints allege claims against BOA and MF Global for: (1) common law negligence; (2) aiding and abetting fraud; and (3) aiding and abetting a breach of fiduciary duty. The Class Action Complaint asserts an additional claim against BOA and MF Global for aiding and abetting commodities fraud while the Clarke Complaint adds RICO and RICO conspiracy claims against both companies.

Presently before the Court are motions by BOA and MF Global to dismiss the three Complaints under Fed. R. Civ. P. 12(b)(6). For the reasons that follow, their motions are granted. However, the Court will afford the Plaintiffs one opportunity to amend their pleadings for the sole purpose of adding new factual allegations that bear on their claims against BOA for aiding and abetting fraud and aiding and abetting breach of fiduciary duty.

I. BACKGROUND

The following factual background is derived from the allegations contained in the Plaintiffs' three Complaints. The allegations are assumed to be true for the purposes of these motions.

A. The Ponzi Scheme Operated by Nicholas Cosmo

On January 15, 1999, this Court sentenced Cosmo to 21-months imprisonment and three years of supervised release after he pleaded guilty to fraud. As a result of his conviction, Cosmo, then a stock-broker, was stripped of his license to deal securities and was barred from associating with any investment broker-dealer. Not long after completing his term of supervised release, Cosmo formed Agape World, Inc. ("Agape").

From October of 2003 through his most recent arrest in January of 2009, Cosmo devised and orchestrated a Ponzi scheme through Agape and various other entities under his control. Agape held itself out as a company that provided short-term bridge loans to businesses and individuals that were unable to obtain financing from commercial banks. Through direct solicitation and various brokers, Agape was able to raise an estimated $400 million by promising investors enticing short-term returns of 12 to 15%.

In actuality, although Agape received approximately $400 million from investors between October of 2003 and January of 2009, the company made only approximately $25 million in loans. Large returns paid to early investors simply came from money paid by subsequent investors. Cosmo used the investments to finance a lavish lifestyle and pay Agape brokers handsome commissions for soliciting new investors. In order to compensate for the lack of revenue from legitimate loans, Cosmo used investor money to make risky bets in the commodities market. In the process, he lost approximately $80 million.

On January 26, 2009, Cosmo was arrested and charged with wire fraud and mail fraud. The United States Commodity Futures Trading Commission ("CFTC") has also commenced an action against Cosmo and Agape, alleging that they defrauded customers in violation of the Commodity Exchange Act ("CEA").

B. The Allegations Against Bank of America

Cosmo and Agape had a relationship with a BOA branch office in West Hempstead, New York. In light of this relationship, BOA effectively established an unofficial branch within Agape headquarters in Hauppauge, New York to provide on-site banking services. The branch was staffed by one unnamed BOA employee and was dedicated solely to Agape's "needs and purposes." Class Action Compl. ¶ 53; Legurnic Compl. ¶ 64; Clarke Compl. ¶ 110. Located within Agape's office space, this branch had full access to BOA's systems and possessed the ordinary capabilities of a conventional BOA branch. The BOA employee at Agape's headquarters had access to Agape's business records and personal contact with Agape employees, including Cosmo.

Agape and BOA also shared proprietary information. For example, Agape investors noticed that they would receive solicitations from Agape and Cosmo whenever they held large deposits in their BOA accounts. According to the Plaintiffs, this account information permitted Agape to engage in direct and targeted solicitations of BOA customers. In turn, Agape investors received solicitations from BOA regarding credit cards, mortgages, and investment products. The Plaintiffs also allege that an unnamed BOA representatives endorsed Agape and Cosmo. In particular, one BOA representative who previously worked at the West Hempstead branch told an unnamed investor that Agape was a "wonderful company" and that Cosmo was a "great guy". Class Action Compl. ¶ 86; Clarke Compl. ¶ 132-33.

As evidence of BOA's integration into Agape's affairs, the Plaintiffs highlight two specific examples. In December of 2008, given the state of the economy, a number of Agape investors expressed interest in withdrawing their investments. On December 24, 2008, one such unnamed investor demanded that Agape return his $200,000 investment. An unnamed broker, acting on that investor's behalf, approached Cosmo about returning the money and was directed to the BOA employee staffed to Agape headquarters. At Cosmo's request, the BOA representative issued the broker a check for $162,500, which was then signed by Cosmo and delivered to the investor.

In a separate incident, an unnamed Agape broker was advised by Cosmo that an investor's withdrawal request was delayed because Agape was waiting on a $28 million payment from BOA in connection with a project in Maine. Cosmo told the broker that the redemption was delayed because the payment from BOA was necessary to provide Agape with sufficient funds to pay the numerous investors seeking redemptions. When the broker approached the BOA representative to inquire about this issue, he was told that the payment not yet been made. However, the BOA representative failed to inform the broker that the scheduled payment was for only $1 million and not the $28 million suggested by Cosmo.

Agape maintained 13 separate accounts with BOA; an operating account and 12 subsidiary accounts in the names of Agape brokers. At certain intervals, BOA permitted Cosmo to take monies from these subsidiary accounts and move them to the Agape operating account. Cosmo commingled these investors funds without segregating the money according to investor name or the purported loan for which the investment was secured. Cosmo also used this operating account to wire funds to Panama and Switzerland.

According to the Plaintiffs, a review of these accounts would have shown that Agape used investor deposits for: (1) significant wire transfers totaling $100 million or more; (2) personal payments to Cosmo; (3) interest payments to certain investors; and (4) payments to brokers. The Plaintiffs contend that these were "red flags" or badges of fraud that should have induced BOA to investigate Cosmo and Agape; particularly in light of Cosmo's criminal history and the well-publicized regulatory warnings concerning investment schemes.

C. The Allegations Against MF Global

MF Global is a futures commission merchant ("FCM"), an entity that solicits or accepts orders for the purchase or sale of commodities. When Agape was inundated with requests for redemptions from investors, Cosmo started using investor funds to trade on the commodities market in order to generate revenues that would be sufficient to cover the calls from investors. MF Global established the commodities trading accounts through which Cosmo executed these trades. Through his trading activity, Cosmo lost $80 million on risky investments in the commodities market.

The Plaintiffs contend that, in opening the accounts, MF Global enabled Cosmo to operate as an unregistered commodities trader. The Plaintiffs further contend that MF Global violated certain duties imposed by the common law and the CEA by establishing these accounts without investigating Cosmo. According to the Plaintiffs, even a cursory investigation would have revealed that Cosmo was barred from associating with investment broker-dealers.

II. DISCUSSION

A. Standard - Fed. R. Civ. P. 12(b)(6)

Under the now well-established Twombly standard, a complaint should be dismissed only if it does not contain enough allegations of fact to state a claim for relief that is "plausible on its face." Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570, 127 S.Ct. 1955, 1974, 167 L.Ed. 2d 929 (2007). The Second Circuit has explained that, after Twombly, the Court's inquiry under Rule 12(b)(6) is guided by two principles. Harris v. Mills, 572 F.3d 66 (2d Cir. 2009) (citing Ashcroft v. Iqbal, 129 S.Ct. 1937, 1949, 173 L.Ed. 2d 868 (2009)). "First, although 'a court must accept as true all of the allegations contained in a complaint,' that 'tenet' 'is inapplicable to legal conclusions,' and '[t]hreadbare recitals of the elements of a cause of action, supported by mere conclusory statements, do not suffice.'" Id. (quoting Iqbal, 129 S.Ct. at 1949). "'Second, only a complaint that states a plausible claim for relief survives a motion to dismiss' and '[d]etermining whether a complaint states a plausible claim for relief will . . . be a context-specific task that requires the reviewing court to draw on its judicial experience and common sense.'" Id. (quoting Iqbal, 129 S.Ct. at 1950). Thus, "[w]hen there are well-pleaded factual allegations, a court should assume their veracity and . . . determine whether they plausibly give rise to an entitlement of relief." Iqbal, 129 S.Ct. at 1950.

B. Negligence

Each of the Complaints assert negligence claims against BOA and MF Global. "To establish a prima facie case of negligence under New York law, 'a plaintiff must demonstrate (1) a duty owed by the defendant to the plaintiff, (2) a breach thereof, and (3) injury proximately resulting therefrom.'" Lerner v. Fleet Bank, N.A., 459 F.3d 273, 286 (2d Cir. 2006) (quoting Solomon ex rel. Solomon v. City of New York, 66 N.Y.2d 1026, 1027, 489 N.E.2d 1294, 1294, 499 N.Y.S.2d 392, 392 (1985)). Although a plaintiff must establish each of these discrete elements, "[t]he threshold question in any negligence action is: does defendant owe a legally recognized duty of care to plaintiff?" Hamilton v. Beretta U.S.A. Corp., 96 N.Y.2d 222, 232, 750 N.E.2d 1055, 727 N.Y.S.2d 7 (2001). In order to demonstrate this threshold element, "[t]he injured party must show that a defendant owed not merely a general duty to society but a specific duty to him or her, for '[w]ithout a duty running directly to the injured person there can be no liability in damages, however careless the conduct or foreseeable the harm.'" Id. (quoting Lauer v. City of New York, 95 N.Y.2d 95, 100, 711 N.Y.S.2d 112, 733 N.E.2d 184 (2000)).

As the allegations against BOA and MF Global differ, the Court will address them separately.

1. Bank of America

BOA contends that the Plaintiffs' negligence claim must fail because it owed no legal duty to Cosmo's investors. The Plaintiffs recognize the general rule in New York that "'[b]anks do not owe non-customers a duty to protect them from the intentional torts of their customers." Lerner, 459 F.3d at 286 (quoting In re Terrorist Attacks on Sept. 11, 2001, 349 F. Supp. 2d 765, 830 (S.D.N.Y. 2005)). Nevertheless, the Plaintiffs suggest that an important exception to this general rule is applicable in this case. In advancing this argument, the Plaintiffs rely on two cases-Lerner and In re Knox, 64 N.Y.2d 434, 477 N.E.2d 448, 488 N.Y.S.2d 146 (1985)-for the proposition that a financial institution does owe a duty to non-customers where it has "knowledge that funds it holds are being improperly misappropriated by a fiduciary." Class Pls. Mem at 26. However, the Plaintiffs' theory of liability rests on a misreading of these cases.

In Lerner, the Second Circuit noted that the negligence analysis is different in the context of trust accounts held by banks. Id. at 287. Citing In re Knox, 64 N.Y.2d at 438, the Second Circuit explained that although a bank generally has no duty to monitor trust accounts in order to guard against misappropriation, "a bank may be liable for participation in such a diversion" if the bank had "notice or knowledge that a diversion" was intended or executed by its customer. Id. In such circumstances, "'[the bank] is under the duty to make reasonable inquiry and endeavor to prevent a diversion." Id. at 287-88 (quoting Bischoff ex rel. Schneider v. Yorkville Bank, 218 N.Y. 106, 111, 112 N.E. 759, 760 (1916)). The Plaintiffs argue that BOA's purported knowledge about Cosmo's suspicious account activity triggered a duty to monitor the Agape's accounts.

However, the problem with this argument is that Agape did not hold trust accounts with BOA. Rather, the 13 Agape accounts referenced in the Complaints were merely conventional depository accounts. Neither the Plaintiffs nor the Court have been able to locate a case which even suggests that New York law imposes upon banks a duty to protect non-customers from a fraud involving depository accounts. See Renner v. Chase Manhattan Bank, No. 98-CV-926, 1999 WL 47239, at *14 (S.D.N.Y. Feb. 3, 1999) (finding that the duty is only triggered where trust accounts are concerned). Thus, the Court has no ...


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