United States District Court, S.D. New York
MARIO FORGIONE, as Trustee of the Mario Forgione Ltd. Defined Benefit Plan, et al., Plaintiffs,
MATTHEW GAGLIO, et al., Defendants
For Mario Forgione, as Trustee of the Mario Forgione Ltd. Defined Benefit Plan, Mario Forgione Ltd., Plaintiffs: Michael Louis Abitabilo, Jackson Lewis LLP (WPlns), White Plains, NY; Paul Alvin Friedman, Jackson Lewis P.C., White Plains, NY.
For Matthew Gaglio, Johanna Gaglio-Bogen, Integrity Advisors Pension Consultants, Inc., Defendants: Richard Johnnie Babnick, Jr, LEAD ATTORNEY, Gary Anthony Varnavides, Sichenzia Ross Friedman Ference, LLP, New York, NY.
For Jeffrey Richgat, JR Pension Services, Inc., Defendants: Steven D. Feinstein, Giacomo, Gallo, Feinstein & Naishtut, LLP, Rye Brook, NY.
For N.Y. Rosbruch/Harnik, Inc., doing business as Strategies For Wealth, Park Avenue Securities, LLC, Defendants: Kara Fay, LEAD ATTORNEY, Skadden, Arps, Slate, Meagher & Flom LLP, Boston, MA; Thomas James Dougherty, LEAD ATTORNEY, Skadden, Arps, Slate, Meagher & Flom LLP (MA), Boston, MA.
OPINION AND ORDER
KATHERINE POLK FAILLA, United States District Judge.
From 2005 to 2012, Plaintiff Mario Forgione sought tax-planning advice on behalf of himself and his company. According to Forgione, the advice he received was not only incorrect -- and expensive to remedy -- but it was also predicated on fraudulent statements and undisclosed conflicts of interest. In December 2013, Forgione and his company commenced this action, mounting federal and state claims against those ostensibly involved in providing and implementing the advice, Defendants Matthew Gaglio, Johanna Gaglio-Bogen, Jeffrey Richgat, JR Pension Services, Inc. (" JR Pension"), Integrity Advisors Pension Consultants, Inc. (" Integrity"), N.Y. Rosbruch/Harnik, Inc. d/b/a Strategies For Wealth (" SFW"), and Park Avenue Securities LLC (" PAS"). Defendants have moved to dismiss the Complaint for failure to state a claim, arguing both legal and evidentiary deficiencies. For the reasons stated in this Opinion, these motions are granted in part and denied in part.
A. Factual Background
1. The Decision to Obtain Tax-Planning Advice
Mario Forgione Ltd. (the " Company") is a commercial and residential landscaping business owned and operated by Forgione and his wife, Elisa Forgione (collectively, the " Forgiones"), since 1996. (Compl. ¶ ¶ 10-12). From 2005 to 2012, the gross revenues of the Company varied between $1, 500, 000 and $2, 500, 000 per year. (Id. at ¶ 13).
In 2005, as the Company's revenues increased, the Forgiones began to explore financial planning options. (Compl. ¶ 66). On several occasions during the spring of 2005, the Forgiones met with Gaglio and Gaglio-Bogen at the Company's offices to discuss financial planning. (Id. at ¶ 68). During those meetings in 2005, and continuing through May 2012, Gaglio told the Forgiones that he was a registered financial advisor with an expertise in retirement programs and employee benefit plans. (Id. at ¶ ¶ 69, 73). Gaglio gave the Forgiones a business card, which indicated that he worked for Integrity, a financial services organization. ( See id. at ¶ ¶ 44, 71). The business card also noted Gaglio's position as a " Registered Representative and Financial Advisor" of PAS, a retail broker/dealer that, unbeknownst to the Forgiones, was an indirect wholly-owned subsidiary of Guardian Life Insurance Company (" Guardian"). ( See id. at ¶ ¶ 22, 71). The business card did not disclose that Gaglio's primary employment was as a Guardian life insurance agent working for SFW, a franchise office of Guardian. (Id. at ¶ 72). In the spring of 2005, Defendant Gaglio-Bogen provided Forgione and the Company with a business card stating that she was a pension consultant and a " registered representative" of PAS. (Id. at ¶ ¶ 53, 83).
2. The Tax-Planning Advice
During the 2005 meetings with Gaglio and Gaglio-Bogen, the Forgiones " clearly stated that they wanted to legally maximize tax savings for themselves." (Compl. ¶ 75). The Forgiones did not propose the creation of a retirement plan or a pension plan. (Id.). Rather, they simply told Gaglio that they wished to shelter some of their income from taxes. (Id.). Gaglio advised that they should begin to save for their retirement and suggested they do so by having the Company establish a defined benefit pension plan (the " Plan"). (Id.). He then recommended that the Plan be funded with whole life insurance policies taken out on the Forgiones, which Gaglio said would help the Forgiones and the Company meet their respective financial goals. (Id. at ¶ 76). Gaglio did not advise the Forgiones that the sole source of his compensation for this financial planning would derive from his sale of whole life insurance. (Id.).
The Forgiones relied on Gaglio for advice on how to design and administer a retirement program that was suitable for the Company. (Compl. ¶ 78). They also relied on Gaglio to draft the documents necessary to establish the Plan. (Id.). Gaglio assured Forgione and the Company that he would create a pension plan that would provide the Company with the appropriate tax deductions and tax-deferred benefits, and he reiterated these assurances to the Forgiones periodically from 2005 through 2012. (Id. at ¶ 79). In particular, Gaglio advised the Forgiones that they could establish a plan that would provide benefits only to themselves and that would be funded primarily by whole life insurance policies taken out on themselves. (Id. at ¶ 80).
Unbeknownst to the Forgiones, Gaglio and Gaglio-Bogen retained Richgat and his company, JR Pension, to administer the Plan and draft Plan documents. (Compl. ¶ ¶ 109, 111, 113, 131, 137, 157). The Forgiones first learned of Richgat's involvement in 2007, when Elisa Forgione noticed an invoice from Richgat and was advised by Gaglio-Bogen that she and Gaglio had retained Richgat as an actuary for the Plan. (Id. at ¶ 132). Plaintiffs allege that the drafting of Plan documents by Richgat was inappropriate because he was an actuary, and not an attorney. ( See id. at ¶ ¶ 112, 114).
3. The Plan
The Plan was a customized version of a " prototype plan, " i.e., a generic plan for which all terms have been approved by the Internal Revenue Service (the " IRS"). ( See Compl. ¶ ¶ 101, 119-20, 127). The " plan document" for a prototype plan is normally comprised of the prototype plan and an adoption agreement. (Id. at ¶ 104). The plan documents for the Plan consisted of a Guardian prototype and a Guardian adoption agreement. (Id. at ¶ 106).
Plaintiffs allege that Gaglio used Guardian products because he was required to do so as an employee of SFW. (Compl. ¶ 107). More importantly, Plaintiffs allege that the Plan was defective from its inception. ( See id. at ¶ ¶ 96, 142, 342-43). For example, Gaglio and Gaglio-Bogen permitted the Plan to be established for only two participants, the Forgiones, until 2008. (Id. at ¶ 86). Indeed, they specifically advised the Forgiones that they did not need to include their crew of landscapers as participants in the Plan because these employees were seasonal workers, even though some of these employees worked in excess of 1, 000 hours each year. ( See id. at ¶ ¶ 92-93, 366, 379).
Richgat, for his part, drafted the adoption agreement to permit benefit payments in the amount of 154% of a participant's monthly compensation. (Compl. ¶ 119). This provision, it is claimed, violates Section 415 of the Internal Revenue Code (" IRC"), which caps payments at 100% of monthly compensation. (Id.). Richgat never corrected that provision, nor did he advise the Forgiones that the Plan violated the IRC. (Id. at ¶ 120). Plaintiffs allege that Richgat's decision to include this provision in the adoption agreement constituted negligence in drafting the Plan or, worse yet, a conscious effort to increase the amount of whole life insurance that was sold to the Company. (Id. at ¶ 122). Either way, the provision resulted in the Company buying more life insurance from Gaglio to fund the Plan from 2005 through 2012. (Id. at ¶ 125). Plaintiffs further allege that Richgat failed to advise the Forgiones of his employment with Guardian and its attendant conflict of interest. ( See id. at ¶ 134). Richgat also failed to advise the Forgiones -- despite completing annual valuation reports for the Plan -- that the Plan was " top heavy, " i.e., that Plan account values were unduly weighted in favor of key employees. (Id. at ¶ 143; see also id. at ¶ 94 (" A pension plan which permits more than 60% of the assets to belong to highly compensated employees is a top-heavy plan[.]"); see generally 26 U.S.C. § 416 (outlining special rules for top-heavy plans)).
Contrary to what they had stated in 2005, Gaglio and Gaglio-Bogen informed the Forgiones in 2008 that they were in fact required to provide benefits to other Company employees. (Compl. ¶ 143). Even then, however, the Forgiones were only advised to provide benefits to two additional employees, and not to their entire landscaping crew, and were further advised to provide benefits in the form of whole life insurance policies that would be taken out on the two individuals. ( See id. at ¶ ¶ 143-44). Plaintiffs allege that if Gaglio and Gaglio-Bogen had advised the Forgiones that they were required to provide benefits to the Company's entire crew of landscapers, they would not have established the Plan. (Id. at ¶ 99).
4. The Conduct of the Individual Defendants
From 2005 through 2012, Gaglio and Gaglio-Bogen provided investment advice to the Forgiones regarding suitable investments for all components of the Plan. (Compl. ¶ 150). Indeed, according to the Complaint, (i) " Plan assets were remitted to [Defendant Gaglio] for investment, and . . . he provided investment advice with respect to the Plan, for an indirect fee that he received through commissions on Guardian life insurance he sold" (Compl. ¶ 201); and (ii) " [a]t all relevant times between 2005 and mid-2012, Defendant Gaglio-Bogen directed and made all decisions regarding the investment of the non-life insurance portion of the Plan" ( id. at ¶ 82). Gaglio-Bogen also provided " administrative" services to the Plan during this period, such as processing loans to participants. (Id. at ¶ ¶ 100, 154).
Between 2005 and 2012, Defendant Richgat, through his company JR Pension, regularly prepared invoices for actuarial services provided to the Company, detailing the services rendered and demanding fees. (Compl. ¶ 155). In addition to his actuarial duties, during the period from 2005 through 2012, Richgat is also alleged to have performed " administrative" tasks for the Plan. (Id. at ¶ 157).
5. Problems with the Plan
In 2012, the Forgiones realized that they could not sustain contributions to the Plan for four participants, and came to believe they were not being properly advised by Gaglio, Gaglio-Bogen, and Richgat. (Compl. ¶ 164). Upon consulting with other investment professionals, the Forgiones discovered that the Plan violated the IRC and was subject to disqualification, the latter of which would cause a forfeiture of the Plan's tax-exempt status. ( See id. at ¶ ¶ 95, 164-65). Specifically, the Forgiones learned that the Plan's provision for benefits equaling 154% of a participant's monthly income would violate the IRC. (Id. at ¶ ¶ 168-69). Additionally, the Forgiones discovered that, because the Company's landscapers worked in excess of 1, 000 hours each year, they were entitled to pension benefit contributions for the years 2005 through 2012. (Id. at ¶ 166). Finally, the Forgiones came to believe that whole life insurance was not a proper retirement investment vehicle for their business. (Id. at ¶ 171).
According to the Complaint, from 2005 to 2012, the Forgiones and the Company lost money as a result of the way the Plan was drafted and administered. (Compl. ¶ 173). As of April 6, 2011, the Company had paid $806, 487.63 into the Plan. Of that amount, $379, 450.30 was invested in whole life insurance policies for the Forgiones, yet the surrender value of these policies was a mere $255, 496.10. (Id. at ¶ 175). Perhaps more significantly, the Company allegedly incurred significant expenses in correcting the Plan and in filing an application with the IRS pursuant to its Voluntary Correction Program. (Id. at ¶ 142).
In the summer of 2012, the Forgiones discovered that Gaglio's compensation had been limited to commissions earned on whole life insurance products that he sold as a life insurance agent for Guardian. (Compl. ¶ 176). The Forgiones also learned that annual " Cost of Insurance Statements" -- which had been sent by Gaglio and Gaglio-Bogen to the Forgiones and the Company for several years during the period from 2005 to 2012, and which outlined the costs for " pension trust policies in your qualified retirement program" -- were false, because the Plan as designed and sold to the Forgiones and the Company had never been qualified. ( Id. . at ¶ 177 (emphasis in original)).
B. Procedural Background
Plaintiffs filed the instant action against Defendants, each of whom is alleged to have been involved in the sale or implementation of the Plan, on December 23, 2013. (Dkt. #1). Plaintiffs allege that Defendants violated the Employee Retirement Income Security Act of 1974 (" ERISA"), 29 U.S.C. § § 1001-1191c, ...