United States District Court, S.D. New York
For Estate of Ernest Gottdiener, Estate of Judit Gottdiener, Ervin Tausky, Suan Investments, Plaintiffs: Frederick Martin Oberlander, The Law Offices of Frederick M. Oberlander, PC, Montauk, NY.
For Felix Sater, Salvatore Lauria, Defendants: Nader Mobargha, Beys, Stein & Mobargha LLP (LEXINGTON), New York, NY.
OPINION AND ORDER
LORNA G. SCHOFIELD,
UNITED STATES DISTRICT JUDGE.
On March 18, 2013, Plaintiffs commenced this civil suit against Defendants for violations of the Racketeer Influenced
and Corrupt Organizations Act (" RICO" ). On August 2, 2013, Plaintiffs filed the First Amended Complaint (the " Complaint" ). The case is now before this Court on Defendants' Motion to Dismiss Pursuant to Federal Rule of Civil Procedure 12(b)(6), filed on August 29, 2013. For the reasons stated below, Defendants' motion is granted.
I. Factual Background
The following facts are taken from the Complaint and accompanying exhibits except as otherwise noted.
A. Palagonia & D.H. Blair & Co.
Plaintiffs are Ervin Tausky, Suan Investments and the estates of Ernest and Judit Gottdiener. (Compl. ¶ ¶ 48-50). In the 1990s, Plaintiffs invested their money with Alfred Palagonia, a non-party who was a broker with D.H. Blair & Co. Inc. (" Blair" ). (Compl. ¶ ¶ 1, 72). Between 1995 and 1998, Palagonia frequently traded Plaintiffs' accounts without authority, causing them to purchase and hold securities as part of a scheme to defraud (Compl. ¶ ¶ 11, 141-42), particularly securities of U.S. Bridge of New York, Inc. (" USBNY" ) and Holly Products, Inc. (" Holly" ). (Compl. ¶ ¶ 12, 38, 125). As a result, Plaintiffs sustained $2.1 million in trading losses, $5 million in commission losses and $800,000 in legal fees and expenses, for a total of $7.9 million. (Compl. ¶ ¶ 143-45). In the federal criminal case against Palagonia and others, the court found that Plaintiffs were entitled to restitution of $1.3 million from Palagonia on account of his criminal conduct. (Compl. ¶ 147). A copy of the restitution order is attached as Exhibit D to the Complaint. Plaintiffs also have won judgments totaling $2.2 million and received more than $1 million from third parties to offset their losses. (Compl. ¶ ¶ 148-49).
By the 1990s, Blair, once a well-known national investment firm, had become an operation set up for the fraudulent sale of new issues and their manipulation in the aftermarket. (Compl. ¶ 105). Palagonia was the head of a group of brokers at Blair -- referred to in the Complaint as the " Palagonia Group" or the " Palagonia Group Criminal Enterprise," an " association-in-fact RICO enterprise" -- that perpetrated a " pump and dump" scheme, in which the brokers obtained control over large blocks of speculative small cap securities, artificially inflated their prices with manipulative, high-pressure sales tactics, and then unloaded their positions to reap the profits. (Compl. ¶ ¶ 102, 106-08, 116). The Complaint names 37 issuers of these securities, including USBNY and Holly. (Compl. ¶ 146). The brokers' tactics included fraudulently representing the viability of the stocks, omitting risks in their sales presentations and falsely claiming to possess inside information. (Compl. ¶ 108). To induce potential customers to open accounts and existing customers to hold onto their stock despite losses, the brokers promised the customers future allocations of new issues as riskless investments. (Compl. ¶ 109). To maintain the artificially inflated prices of the securities, the brokers followed a " no net-sales policy," in which brokers directed by their customers to sell would do so only when they could find matching buy orders. (Compl. ¶ 110). The brokers never informed
their customers about this policy prior to their purchases, and on occasion accepted purchase orders in spite of the fact that they contained pre-set sell instructions. (Compl. ¶ 112). This policy was enforced internally by Blair's Chairman, Blair's head trader and Palagonia, who deprived noncompliant brokers of allocations to future new issues. (Compl. ¶ 112). The Palagonia Group of brokers engaged in this scheme under the supervision of Palagonia and in coordination with Blair's Chairman and Vice Chairmen, in an arrangement that the Complaint refers to as the " D.H. Blair Criminal Enterprise." (Compl. ¶ ¶ 105, 107, 113).
In 2001, Palagonia pleaded guilty to state and federal charges. The Complaint suggests that his federal guilty plea encompassed racketeering activity, including the " pump and dump" scheme as to the USBNY and Holly stocks. (Compl. ¶ 40, Exs. I, J). However, the federal indictment and the transcript of his guilty plea, appended to the Complaint as Exhibits I and M, make clear that Palagonia's federal plea did not include a racketeering charge or involve Holly stock. In fact, Palagonia pleaded guilty to one count of securities fraud conspiracy and one count of money laundering conspiracy, both as part of the " pump and dump" scheme involving only USBNY stock. (Compl. Exs. I, M). It is unclear what his state plea encompassed.
The Complaint further alleges that in a 2011 deposition, Palagonia testified that he was bribed by White Rock Partners & Co., Inc. (" White Rock" ) to " pump" Holly and USBNY stock and that Plaintiffs were direct victims of the scheme as to those stocks. (Compl. ¶ 38). Excerpts from the deposition, appended as Exhibit L to the Complaint, show that Palagonia testified that he " str[uck] a deal with [Defendant] Sal[vatore] L[au]ria that [he] was going to buy those two stocks and . . . place them with clients" in return for cash payments from Defendant Lauria (Compl. Ex. L, at 17); that Palagonia agreed in his testimony that he did " the same thing . . . with regard to the [USBNY] stock [he] did with regard to the Holly Products stock" (Compl. Ex. L, at 16); and that he also agreed that " the judgment creditors in this case were [his] victims" regarding the USBNY and Holly stocks (Compl. Ex. L, at 42-43).
B. Defendants & White Rock Partners & Co., Inc.
Defendants Lauria and Felix Sater were partners at White Rock, a registered securities broker-dealer that operated from 1994 to 1996. (Compl. ¶ ¶ 117-18). White Rock operated for the primary purpose of profiting from a " pump and dump" scheme that " often involv[ed] the same securities as the Blair 'pump and dump' scheme . . . ." (Compl. ¶ 120).
White Rock fraudulently sold to the public the stocks of Holly and USBNY, among others. (Compl. ¶ 125). The partners at White Rock (the " White Rock Partners" ), including Defendants, secretly acquired control over large blocks of the shares of Holly and USBNY by agreeing to compensate individuals associated with the two companies with the proceeds of their eventual fraudulent sale. (Compl. ¶ ¶ 129-30). These shares were held by nominees that concealed their ownership by, inter alia, depositing the securities in accounts at White Rock. (Compl. ¶ 129). White Rock Partners drove demand for the securities by paying undisclosed commissions -- up to half of the selling price -- to brokers at White Rock, Blair and other firms for selling Holly and USBNY shares. (Compl. ¶ 131). To insulate the inflated prices of the securities from market forces, White Rock Partners, Palagonia and others made false representations to customers
to dissuade them from selling and willfully failed to execute sell orders unless they could be matched with corresponding buy orders. (Compl. ¶ 133). They then sold their own shares at the inflated prices, making tens of millions of dollars in proceeds. (Compl. ¶ 132). The proceeds were laundered through offshore nominee bank accounts that then paid cash to White Rock Partners. (Compl. ¶ 135).
The Complaint alleges that the foregoing facts demonstrate the existence of an entity that Plaintiffs call the " White Rock-Blair Criminal Enterprise," comprised of White Rock Partners, Palagonia and other brokers at Blair. (Compl. ¶ 137). According to Plaintiffs, the White Rock-Blair Criminal Enterprise also encompassed brokers at other firms, individuals associated with Holly and USBNY, those who participated in the laundering of the scheme's proceeds, and members of the Bonanno, Genovese and Colombo crime families. (Compl. ¶ ¶ 138.1-4).
In 1998, Defendants pleaded guilty to federal racketeering charges and alleged predicate acts of securities fraud, including the " pump and dump" scheme as to Holly and USBNY stocks. (Compl. ¶ 41). Specifically, Defendants each pleaded guilty to one RICO violation, including predicate acts of securities fraud regarding the USBNY and Holly stocks. (Compl. Exs. E-F). Defendant Lauria was sentenced on February 5, 2004, and Defendant Sater was sentenced on October 23, 2009, after a period of cooperation with the federal government. (Compl. ¶ ¶ 76, 93, Exs. G-H). The criminal Informations to which Defendants pleaded guilty, the judgments against them and Defendant Sater's sentencing transcript are appended to the Complaint as Exhibits E through H and N.
The Complaint alleges that, although Defendant Lauria's conviction became final in 2004, it " was hidden from the public by the Eastern District of New York federal court and not available to the public until it was 'unhidden'" (Compl. ¶ 31); and that Defendant Sater's " entire case, including his sentencing, was concealed for 15 years, illegally as we now know" (Compl. ¶ 74). The enforcement of Judge I. Leo Glasser's sealing orders in the criminal cases and the eventual unsealing of the documents in question were exhaustively litigated before Judges Glasser and Brian Cogan in the Eastern District of New York as well as multiple times in the Second Circuit. On March 12, 2013, Judge Glasser unsealed a substantial number of documents in the criminal case against Defendant Sater, some of which are now exhibits to the Complaint. Plaintiffs filed this action approximately one week later.
II. Plaintiffs' Claims
Based on the facts above, Plaintiffs bring two claims against Defendants Sater and Lauria: a violation of substantive RICO, 18 U.S.C. § 1962(c), and a RICO conspiracy in violation of 18 U.S.C. § 1962(d). (Compl. ¶ ¶ 155-66). Plaintiffs bring the substantive RICO claim against Defendants for their own participation in the conduct of the White Rock-Blair Criminal Enterprise, predicated on Defendants' aiding and abetting Palagonia's securities fraud. (Compl. ¶ ¶ 5, 8.4.1, 9, 160). Alternatively, Plaintiffs bring a conspiracy RICO claim against Defendants for their agreement to further the operation of the D.H. Blair Criminal Enterprise or the Palagonia Group Criminal Enterprise, predicated on Palagonia's acts of securities fraud. (Compl. ¶ ¶ 6, 8.4.2, 9, 166). Plaintiffs seek treble damages under RICO, as well as punitive damages and legal fees. (Compl. ¶ ¶ 150-53).
On a motion to dismiss, the Court accepts as true all well-pleaded ...