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Freund v. Lerner

August 10, 2010

STEPHANIE FREUND, INDIVIDUALLY AND DERIVATIVELY ON BEHALF OF NOMINAL DEFENDANT MORGEN EVAN & COMPANY, INC., PLAINTIFF,
v.
MARK LERNER, SHELDON KLEEGER, STANLEY TOBIN, BRUNO ZHENG WU, HANS BETHGE, ATTILIO ARIETTI, BILL WEIRICH, MORGEN, EVAN INTERNATIONAL, INC., MORGEN EVAN KK (JAPAN), MORGEN EVAN REDROCK, INC., MORGEN EVAN HONGYAN CAPITAL, INC., YANG LAN, AMY LIU, CHARLOTTE LERNER, AMY LEVY KLEIN, JEAN JACQUES MONDOLONI, ARIETTI & PARTNERS, MATRIX CAPITAL MARKETS GROUP, NEXTMARKT, INC., ANGERMANN GMBH, TM CAPITAL CORP., MERGERS & ACQUISITIONS INTERNATIONAL, INC., ATVG, INC., YANG LAN HER VILLAGE MULTIMEDIA CO. LTD, WOMBAT CAPTAL, INC., REDROCK CAPITAL HOLDINGS LTD., AND SUN MEDIA INVESTMENT HOLDINGS, LTD., DEFENDANTS, AND MORGEN, EVAN & COMPANY, INC., NOMINAL DEFENDANT.



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

OPINION & ORDER

In this case, the plaintiff, Stephanie Freund ("Plaintiff" or "Freund"), brings suit against her soon-to-be former husband, Mark Lerner ("Lerner"), and a raft of other individuals and entities that Lerner associated with professionally and personally. Freund brings thirteen causes of action against these defendants, including alleged violations of every section of the civil RICO statute, federal trademark infringement, and a variety of state law claims. According to Plaintiff, she and Lerner are each fifty-percent shareholders in a company they founded, Morgen, Evan & Company, Inc. ("MECO"). Freund claims that Lerner, along with the other defendants, engaged in a scheme to divert business and money that was intended for MECO by doing business through a variety of other corporate entities and by committing tax fraud. Defendants Lerner, Morgen, Evan & Company, Inc., and Morgen, Evan International, Inc., move to dismiss the Amended Complaint for failure to state a claim. For the reasons that follow, the motion is GRANTED, and the case is DISMISSED.

I. BACKGROUND

Plaintiff Freund is a resident of New York, while defendant Lerner, an investment banker, is a resident of Connecticut. Am. Compl. ¶¶ 59-60. The two were married in 1991, and are currently litigating their divorce in state court; Freund also maintains a separate civil suit in state court against Lerner. Id. ¶¶ 61, 130. In addition to Lerner, Plaintiff brings suit against a broad array of other defendants associated with her husband, including corporate entities formed by Lerner, a trade association, Mergers and Acquisitions International, Inc. ("M&A International"), business partners in Lerner's various endeavors, Lerner's accountant and business assistant, and Lerner's mother and sister. Id. ¶¶ 62-126. Freund's overarching claim is that the defendants engaged in a "racketeering scheme to siphon business, business opportunities, and millions upon millions of dollars from nominal defendant Morgen, Evan & Company, Inc." Am. Compl. ¶ 1. The alleged purpose of the scheme is to divert money and business from MECO, and by extension Freund, and to avoid paying taxes. Id. ¶ 9.

MECO was formed as an investment banking firm by Lerner and Freund in 1992. Am. Compl. ¶ 131. Plaintiff claims that she and Lerner were each fifty percent shareholders in MECO, and that Lerner was "at all times the principal" in the business. Id. ¶¶ 1, 100. While Freund claims she retains the fifty percent interest in the company, Lerner provides documents which indicate that he is currently the sole shareholder. See Decl. in Supp. of Mot. to Dismiss, Ex. D (Schedule K-1 Tax Filing). From 1992 to 2005, Plaintiff alleges that Lerner did "virtually" all his business through MECO, and that he ran the business with no role played by Freund. Am. Compl. ¶¶ 133-36. As a successful investment banker, Lerner completed a significant number of transactions through the company. Id. ¶¶ 17-19.

A. Diversion of MECO Business to Other Corporate Entities

Beginning in 2005, however, Lerner allegedly began to form a variety of other corporate entities "to further the RICO scheme and to assist in his violations of a series of other laws." Am. Compl. ¶ 211. Defendant Morgen Evan International ("MEI") was formed by Lerner in 2005, allegedly so that he could have a separate corporate entity from MECO that he could use to fund a third entity, defendant Morgen Evan Redrock, and to collect income and pay expenses outside of MECO and therefore "deprive [MECO] and thus Freund of her interest in the fruits of the transactions generating that income." Id. ¶¶ 212-215. Plaintiff claims MEI was the "wrongful beneficiary of significant amount of money," specifically because it received $525,000 in 2007 from various entities. Id. ¶¶ 221-22. Plaintiff further alleges that Lerner caused MEI "to finance [defendant] Wombat Capital and other entities, thereby investing funds which properly belonged to [MECO]." Id. ¶ 226. Lerner allegedly used MEI to assist him in hiding and moving substantial assets of MECO, including "to send tens of thousands of dollars" from MECO to MEI in 2007, and "many tens or hundreds of thousands of dollars since the creation of" MEI. Id. ¶¶ 234-36. According to Freund this "diversion of business. constitutes a flagrant violation of Lerner's fiduciary duties to [MECO]." Id. ¶ 219, 237 (also referring to these actions as "conversion"). MEI was used "both as a vehicle for the deposit of monies from deals which belong to [MECO]. and as a receptacle for monies Lerner has embezzled from [MECO]."

Am. Compl. ¶ 238. Although MEI is a fairly successful entity according to Plaintiff, it allegedly claimed to have less than $1,000 in taxable income pursuant to a 2007 tax return, and "upon information and belief. similar inconsequential amount of revenue" in other years. Id. ¶¶ 227-28. Freund claims that the "inconsistency is explained by Kleeger & Tobin [Lerner's accountant and assistant, respectively] assisting Lerner in evading federal and state taxes owed by [MEI]" and by "treating the various Morgen Evan entities as divisions of [MECO]." Id. ¶¶ 230-31. Plaintiff also claims that Lerner, through a series of transactions between MECO and MEI "and various other entities, engaged in money laundering and tax evasion." Id. ¶ 232. Lerner also allegedly commingled personal funds and funds of other entities, including MECO, with MEI.

Id. ¶ 233. All of the above, according to Freund, was in furtherance of "Lerner's RICO scheme." Id. ¶ 239.

Defendant Morgen Evan KK ("MEKK") was formed in or about 2007 "to provide a vehicle for Lerner to deposit corporate fees in a bank account overseas without the money being sent to the United States," some of which were diverted from MECO to MEKK. Am. Compl. ¶¶ 240-41. Plaintiff alleges "upon information and belief" that Lerner commingled personal funds and funds of other entities, including MECO, with MEKK. Id. ¶ 242. MEKK allegedly "has served to further Lerner's RICO scheme" by "assisting in the movement of money out of the accounts of [MECO] and preventing monies from entering that account in the first place." Id. ¶ 243. Plaintiff claims that MEKK aided and abetted Lerner's violation of fiduciary duties to MECO. Id. ¶ 244.

Defendant Morgen Evan Redrock ("MERR") began in 2007 as a joint venture of MECO and defendant Redrock Capital Holdings. Am. Compl. ¶¶ 249, 251. Freund alleges that this venture by Lerner committed infringement of MECO trademark, though what trademark is not specifically delineated. Id. ¶ 255. As with the other entities, Freund alleges that "Lerner commingled personal funds and funds of other entities, including [MECO], with [MERR]." Id. ¶ 263. Plaintiff further claims that MERR, along with certain other individual defendants, "have conspired to and have in fact convert [sic] funds which belong to [MEI] in violation of RICO and a series of other state and federal laws." Id. ¶ 264. They "hold back fees, move money, extend loans and take other actions to hide money." Id. ¶ 265. In addition, "upon information and belief" defendant Bruno Zheng Wu, a business associate of Lerner, used MERR to "circumvent Chinese laws, including laws against tax evasion and money laundering." Id. ¶ 269.

Freund makes similar allegations about three other entities created by or associated with Lerner. Defendant Morgen Evan Hongyan ("MEH") was formed in 2007 by Lerner, Wu, and defendant M&A International, and was allegedly "set up as a shell corporation to do nothing but serve as a conduit for illegal fund transfers" and used to "circumvent various Chinese laws, including laws against tax evasion and money laundering." Id. ¶¶ 275-76. Defendant Nextmart, Inc. ("Nextmart") was formed by Wu prior to 2008 to sell clothing, but after 2008 "was designed to house financial business and thereby circumvent [MECO]." Id. ¶ 279. Specifically, in 2008 Lerner allegedly was "involved in the privatization of the Chinese national airline" and "caused the investment banking fees for this billion dollar deal to be funneled through Nextmart instead of through [MECO]." Id. ¶¶ 282-83. Finally, Freund claims that Lerner utilized defendant companies Wombat Capital, Inc. ("Wombat") and ATVG, Inc. ("ATVG") to divert funds allegedly earned by MECO. See id. ¶¶ 290-92.

B. M&A International

Plaintiff also asserts that a trade association, defendant M&A International, was a participant and vehicle for Lerner's alleged RICO scheme. In 1999, Lerner, with Freund's knowledge, caused MECO to join M&A International; Lerner became President and Chairman of the association in 2001, and is currently the Vice President in charge of the Asia Pacific Region. Am. Compl. ¶¶ 173-75, 188. MECO, as well as other Morgen Evan entities, are members of M&A International. Id. ¶¶ 195-200. Plaintiff claims that Lerner changed the focus of M&A International's business operations, and that it now does business transactions by "in essence, becoming a huge international bank" with the members "becoming part of an informal financial network which does business, moves money, exchanges financial information and assists member firms in avoiding showing reportable monies." Id. ¶¶ 179-80. She alleges that Lerner has done a "considerable amount of business" through this organization using entities other than MECO, and that doing so "constitutes an illegal diversion of business" from MECO in violation of fiduciary duties "and in violation of a series of other laws." Id. ¶¶ 191-93. M&A International, ...


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