Cupersmith v. Piaker
| Decision Date | 27 September 2016 |
| Docket Number | 3:14-cv-01303-TJM-DEP |
| Parties | NEAL A. CUPERSMITH, et al. Plaintiffs, v. PIAKER & LYONS P.C., et al. Defendants. |
| Court | U.S. District Court — Northern District of New York |
This action was commenced by sixty-six individuals and two estates alleging that the Defendants, the Piaker & Lyons accounting firm and two partners in the firm, Ronald L. Simons and Timothy N. Paventi, participated in and helped conceal a Ponzi scheme in which Plaintiffs unwittingly invested. Plaintiffs asserted claims against Defendants under several theories, with the only remaining claims being those asserting that Defendants aided and abetted the perpetration of the Ponzi scheme.
Defendants move to dismiss all remaining claims on the grounds that they are barred by the applicable statutes of limitations, and/or that Plaintiffs cannot establish the requisite elements of these claims. See dkt. # 127 (motion), dkt. # 129 (Def. MOL). Plaintiffs oppose the motion, dkt. # 137, and Defendants filed a reply. Dkt. # 138. For the reasons that follow, the motion is granted in part and denied in part.
The Ponzi Scheme allegedly involved Timothy McGinn and David Smith and a number of firms, including McGinn, Smith & Co., Inc., McGinn Smith Advisors, LLC, and McGinn Smith Capital Holdings Corp. (collectively, "McGinn Smith"). Plaintiffs allege McGinn Smith raised more than $119,000,000 from investors, making "numerous false and misleading misrepresentations and omissions of material fact" about potential returns on investments. They purportedly justified these claimed returns by paying off old investors with funds from new investors.
On April 20, 2010, the Securities and Exchange Commission ("SEC") commenced an emergency enforcement action in this Court against various McGinn Smith entities and Timothy M. McGinn and David L. Smith, alleging that McGinn Smith perpetrated a fraudulent scheme in violation of multiple federal securities laws and regulations. See Securities and Exchange Commission v. Mcginn, Smith & Co., et al., 1:10cv457 (N.D.N.Y.). McGinn Smith's assets were frozen and the Court appointed a receiver for the McGinn Smith entities. The violations alleged in the case included the sale of unregistered securities, acting as unregistered broker-dealers, and fraud in the offer and sale of securities in violation of Section 10(b) of the Exchange Act, 15 U.S.C. § 78j(b), and Rule 10b-5, 17 C.F.R. § 240.10b-5. The receiver was made permanent over McGinn Smith on July 22, 2010.
On January 26, 2012, Timothy McGinn and David Smith were indicted on criminal charges relating to the same scheme, including conspiracy, mail fraud, wire fraud, and securities fraud. On February 6, 2013, a court convicted Timothy McGinn on 27 of 29 counts. He was sentenced to 15 years in prison. On the samedate, a court convicted David Smith on 15 of 29 counts. He was sentenced to ten years in prison. On November 8, 2011, Defendant Ronald L. Simons pleaded guilty to one count of delivering and disclosing a false federal income tax return relating to McGinn Smith.
The Amended Complaint describes the McGinn Smith Ponzi scheme in detail. According to that pleading, the scheme involved four funds established between September 2003 and October 2005. These funds (referred to in the Amended Complaint as the "Four Funds"), were First Independent Income Notes LLC ("FIIN"), First Equity Income Notes LLC ("FEIN"), First Albany Income Notes LLC ("FAIN"), and Third Albany Income Notes LLC ("TAIN"). They were all unregistered investment companies.
The Four Funds were wholly owned subsidiaries of McGinn Smith Advisors, which served as managing member for each of them. The Advisors also served as investment advisor for the Four Funds. Another subsidiary, McGinn Smith & Co., acted as the placement agent for debt offering by the Four Funds, and raised approximately $90 million. McGinn Smith Capital served as trustee and servicing agent for each of the funds.
The Four Funds had between 150 and 300 investors, and McGinn Smith purportedly urged Plaintiffs to purchase notes on each of the funds, promising different levels of return depending on the investment. Each fund had three levels of investment, and promised returns ranged from 5% to 10.25%.
McGinn Smith also made another series of smaller-scale offerings, through a number of trusts. These trusts issued one or more tranches of notes and promoted interest rates ranging from 7.75% to 13%.
Each of the Four Funds allegedly invested more than 40% of its assets in securities. McGinn Smith did not register any of the Funds as investment companies, though it was required to do so. McGinn Smith disclosed the offering terms in Confidential Private Placement Memoranda ("PPMs"). These memoranda indicated that the Funds "were formed to identify and acquire various public and private investments, such asdebt securities, equity securities, collateralized stock, and other such investments that would add value to the portfolios."
Plaintiffs assert that the Funds did not disclose, however, that funds would be loaned, transferred or invested between the funds. Despite this, the Funds increasingly made unauthorized loans and transfers to and investments in affiliated McGinn Smith entities. By September 2009, about one-half of all the assets in the Four Funds had been loaned to or invested in affiliated, often cash poor, McGinn Smith entities. Indeed, it is alleged that only about $3.6 million of the $106 million raised by the Four Funds were actually invested in liquid, publically traded companies. At the same time, the funds loaned more than $8 million to one of the McGinn Smith principals. The money was purportedly used to pay his salary and for investment in one of his companies, and was never repaid.
Plaintiffs allege that the Four Funds never had assets sufficient to pay their investors. As of September 30, 2009, they had revenues of $12.9 million and had spent $37 million. At some point before that date the Chief Financial Officer analyzed the Funds and determined that the book value was $69 million and notes payable exceeded $86 million. The "net realizable" income of the Four Funds combined was $37 million, almost $49 million less than the amount owed investors.
Plaintiffs maintain that McGinn Smith concealed these facts about the Funds' financial status from investors, continuing to raise money from them. They also assert that McGinn Smith encouraged investors to roll over their notes when they became due. Plaintiffs contend that McGinn Smith did this so it could avoid having to repay investors, and instead could use the rolled-over capital to pay interest on the notes. In October 2008, McGinn Smith proposed a restructuring plan to investors that continued to mislead Plaintiffs. McGinn Smith blamed the poor financial condition of the Funds on the stress in financial markets, thus concealing the financial mismanagement in which McGinn Smith was engaged. McGinn Smith also failed to disclose toinvestors that the Four Funds' asset value was 50%, less than owed investors. Plaintiffs contend that McGinn Smith falsely suggested that note holders had a reasonable prospect of receiving their principal investment through the restructuring. The restructuring plan also extended the length of the notes and reduced the interest to be received. Despite the financial straights under which the Funds operated, McGinn Smith continued to sell notes to new investors and roll over old notes.
Plaintiffs assert that the financial fraud also included a series of trusts (the "Trusts"). McGinn Smith represented that the Trusts were created for specific purposes, such as purchasing alarm contracts, cable services contracts, and/or luxury cruises. A number of Trusts bearing various names were established, and they were often designated as "Junior" or "Senior." McGinn Smith claimed that returns on the Trusts would annually amount to between 7.75% and 13%, and that principal would be re-paid at maturity, which was five years. McGinn Smith charged what Plaintiffs allege were "largely undisclosed and concealed fees" which made the claimed rates of return "virtually impossible" to achieve. While the Trusts' claimed purpose was to invest in promissory notes, Plaintiffs allege their real purpose was to structure a series of transactions, using various McGinn Smith entities as conduits, to siphon and misappropriate investors' funds. The Trusts purportedly served as vehicles for paying "exorbitant and undisclosed fees to McGinn Smith" and "earned interest" to investors, to make loans to the McGinn Smith principals and affiliates, and to cover payroll. Investors' funds in the Trusts were commingled, diverted and misappropriated, "in direct contradiction to the represented investment purpose, and to the detriment of the investors."
Plaintiffs allege that from 1992 until at least 2008, Defendants served as outside auditors and accountants for McGinn Smith. Plaintiffs contend that they knew that an independent public accounting firm audited McGinn Smith's financial statements. Plaintiffs also contend that Defendant Piaker & Lyons did thisauditing, and worked closely with McGinn and Smith regarding all of the McGinn Smith entities. Defendants prepared the tax returns for McGinn Smith and each of the Funds and Trusts. Defendants purportedly reviewed documents related to the relationships among the McGinn Smith entities, the Funds, and the Trusts, talked with representatives of each of these entities in order to understand the McGinn Smith businesses, and review the books and records of McGinn Smith to verify the accuracy of journal entries, to confirm transactions, and to obtain evidence to support the audit opinions rendered from at least 1992 to 2008.
Plaintiffs allege that even though there...
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