Fox Intern. Relations v. Fiserv Securities, Inc.
| Decision Date | 20 March 2007 |
| Docket Number | Civil Action No. 04-5877.,Civil Action No. 05-1559. |
| Parties | FOX INTERNATIONAL RELATIONS, Michael Lisitsa, and Natan Lisitsa, Plaintiffs, v. FISERV SECURITIES, INC., Eric Laucius, Michael Kogan, Ilya Zamarin, First Security Investments, Inc., and Does I-III, Defendants. Gene Sterin and Flora Sterin, H/W, Plaintiffs, v. Fiserv Securities, Inc., Eric Laucius, Michael Kogan, and Does I-II, Defendants. |
| Court | U.S. District Court — Eastern District of Pennsylvania |
David P. Temple, James Hickey, John Joseph Gallagher, Law Offices of John J. Gallagher, P.C., Philadelphia, PA, for Plaintiffs.
David Eric Robinson, Glenn A. Weiner, Michael K. Coran, Klehr Harrison Harvey Branzburg & Ellers, L.L.P., Lathrop B. Nelson, III, Montgomery McCracken Walker and Rhoads, L.L.P., Steven L. Bloch, Berger & Montague, P.C., Brian Patrick Seaman, Stradley Ronon Stevens & Young, Philadelphia, PA, Margaret Manolakis, Stradley, Ronon, Stevens & Young, LLP, Malvern, PA, for Defendants.
On September 18, 2003, defendant Michael Kogan ("Kogan"), an unlicensed securities broker, pled guilty to several counts of mail and wire fraud in violation of 18 U.S.C. §§ 1341 and 1343. On January 22, 2004, Kogan was sentenced to, inter alia, 87 months imprisonment, 3 years supervised release, restitution of $5,655,350.18, and a special assessment of $1,800. United States v. Kogan, C.R. No. 03-306 (E.D.Pa. Jan. 22, 2004); see also Kogan v. Lindsay, 2006 WL 1548855, *1 . Kogan is currently incarcerated in the United States Penitentiary, Canaan in Waymart, Pennsylvania.
Arising out of Kogan's fraud are two similar lawsuits presently before this Court: Fox International Relations v. Fiserv Securities, Inc. (C.A. No. 04-5877) and Sterin v. Fisery Securities, Inc. (C.A. No. 05-1559).1 Plaintiffs in Fox International Relations are Fox International Relations, Michael Lisitsa, and Natan Lisitsa; plaintiffs in Sterin are Gene Sterin and Flora Sterin (collectively "plaintiffs"). Plaintiffs allege violations of the Securities Exchange Act of 1934 (the "Exchange Act"), Rule 10b-5, the Pennsylvania Securities Act ("PSA"), common law fraud, breach of fiduciary duty, and negligent supervision.
Presently before the Court are four motions to dismiss pursuant to Federal Rule of Civil Procedure 12(b)(6), filed by defendants Laucius and Fiserv in Fox International Relations and Sterin. For the reasons set forth below, each of the motions to dismiss is granted in part and denied in part.
The following facts are taken from the Third Amended Complaint in Fox International Relations, the Second Amended Complaint in Sterin, or are matters of public record.2 All facts are presented in the light most favorable to plaintiffs. This Memorandum sets forth only the factual allegations necessary to explain the Court's ruling.
Plaintiff Fox International Relations is a Pennsylvania partnership that invested money borrowed from "friends and associates." Fox, Third Am. Compl. at 3, 7.3 Plaintiffs Michael Lisitsa and Natan Lisitsa are managing general partners in Fox International Relations. Id. at 3. In August 1996, Fox International Relations, Michael Lisitsa, and Natan Lisitsa, began making investments with defendant Kogan. Id. at 5. At that time Kogan was employed by Jefferson Gersch, a brokerage firm. Id.
In January 2000, the National Association of Securities Dealers suspended Kogan's brokerage license for improperly transferring a customer account and forging a customer signature. Fox, Third Am. Compl. at 4; Sterin, Second Am. Compl. ¶¶ 18-19. Plaintiffs did not know that Kogan's license was suspended. Fox, Third Am. Compl. at 4; Sterin, Second Am. Compl. ¶ 18. At the time his license was suspended, Kogan was working for Jefferson Gersch. Fox, Third Am. Compl. at 4; Sterin, Second Am. Compl. ¶¶ 18-19.
After his license was suspended, Kogan began to work for the Penn Financial Group ("PFG"), a "brokerage firm." Fox, Third Am. Compl. at 3, 6; Sterin, Second Am. Compl. ¶¶ 11, 19. Defendant Laucius was the president and majority shareholder of PFG. Fox, Third Am. Compl. at 3; Sterin, Second Am. Compl. ¶ 9.
Defendant Fiserv, "a registered broker/dealer,"4 was a clearing broker5 for PFG. Fox, Third Am. Compl. at 3-4, 7-8; Sterin, Second Am. Compl. ¶¶ 11, 30. As the clearing broker, Fiserv held and processed brokerage accounts for PFG, executed securities trades, transferred or wired funds into and out of accounts, and processed deposits and withdrawals. Fox, Third Am. Compl. at 4, 7-8; Sterin, Second Am. Compl. ¶¶ 11, 30. In addition, Fiserv caused account "statements to be sent to PFG's clients reflecting activity on the account[s]." Fox, Third Am. Compl. at 4, 8; Sterin, Second Am. Compl. ¶¶ 11, 30.
After Kogan joined PFG, plaintiffs Fox International Relations, Michael Lisitsa, and Natan Lisitsa began making investments through Kogan and PFG.6 Gene Sterin and Flora Sterin began making investments through Kogan and PFG in December 2000. Sterin, Second Am. Compl. ¶¶ 17, 23.
All plaintiffs invested money through Kogan and PFG by writing checks directly to Fiserv. Fox, Third Am. Compl. at 6; Sterin, Second Am. Compl. ¶ 23. Their purpose was to buy and sell securities "with the ultimate goal of maximizing investment profit." Fox, Third Am. Compl. at 6; Sterin, Second Am. Compl. ¶ 23.
However, Kogan illegally transferred plaintiffs' money into other accounts. These accounts were owned or controlled by Kogan or by his wife. Fox, Third Am. Compl. at 8; Sterin, Second Am. Compl. ¶ 32.
To avoid detection Kogan changed plaintiffs' customer address accounts at Fiserv "to various unknown addresses." Fox, Third Am. Compl. at 7-8; Sterin, Second Am. Compl. ¶¶ 29, 38. As a result of these changes, Fiserv mailed plaintiffs' account statements to incorrect addresses. These account statements were "frequently returned" to Fiserv as undelivered. Fox, Third Am. Compl. at 8; Sterin, Second Am. Compl. ¶¶ 38-39.
In place of the misdirected Fiserv account statements, Kogan mailed plaintiffs fake monthly statements himself. Fox, Third Am. Compl. at 7; Sterin, Second Am. Compl. ¶ 26.7 The statements sent by Kogan "were not reflective of the true status of [plaintiffs'] investment portfolio." Fox, Third Am. Compl. at 17; Sterin, Second Am. Compl. ¶ 80. In many cases, plaintiffs' Fiserv accounts contained "little to no funds." Fox, Third Am. Compl. at 7; Sterin, Second Am. Compl. ¶ 26.
On February 11, 2003, an arrest warrant was issued for Kogan for illegal activity related to plaintiffs' allegations. Fox, Third Am. Compl. at 10; Sterin, Second Am. Compl. ¶ 48. Laucius and PFG discontinued their brokerage business in March 2003. Fox, Third Am. Compl. at 10; Sterin, Second Am. Compl. ¶ 49.
Defendant Laucius knew that Kogan's brokerage license was suspended when Laucius hired Kogan to work for PFG. Fox, Third Am. Compl. at 6; Sterin, Second Am. Compl. ¶¶ 19, 20. Laucius also knew that Kogan was having "problems" with some of his accounts, "specifically, false account statements, returned mail for accounts with bad addresses, and missing quarterly account statements." Fox, Third Am. Compl. at 6; Sterin, Second Am. Compl. ¶ 21.
Nevertheless, Laucius gave Kogan the Fiserv software, account number, and password so that Kogan could sign into the Fiserv program from Kogan's computer to execute trades in customer accounts. Fox, Third Am. Compl. at 6; Sterin, Second Am. Compl. ¶ 23.8 Laucius also allowed Kogan to sign Laucius' name on journal entries for Fiserv. Fox, Third Am. Compl. at 6; Sterin, Second Am. Compl. ¶ 22.9 In short, Kogan was given full, unsupervised access to process daily trades with Fiserv. Fox, Third Am. Compl. at 9; Sterin, Second Am. Compl. ¶ 41.
Further, Laucius "was involved in the drafting, producing, reviewing or supervising the false and misleading statements" sent by Kogan. Fox, Third Am. Compl. at 5; Sterin, Second Am. Compl. ¶¶ 13, 14. These false account statements were "generated from PFG" and sent "through PFG and Defendant Eric Laucius." Fox, Third Am. Compl. at 17; Sterin, Second Am. Compl. ¶ 80. Laucius also knew that Kogan received large deliveries of blank paper, similar to paper used by Fiserv. Fox, Third Am. Compl. at 7; Sterin, Second Am. Compl. ¶ 27.10
Fiserv "was fully aware" that Kogan was an unlicensed broker. Fox, Third Am. Compl. at 9; Sterin, Second Am. Compl. ¶ 42. Yet Kogan was "given full access by Fiserv and PFG to process daily trades with Fiserv, including unsupervised access to passwords and security functions." Fox, Third Am. Compl. at 9; Sterin, Second Am. Compl. ¶ 41. As a result, Kogan executed the purchase and sale of securities through PFG and cleared the transactions through Fiserv on a daily basis. Fox, Third Am. Compl. at 3, 6; Sterin, Second Am. Compl. ¶¶ 10, 24.
Defendant Fiserv was "entrusted with the control of plaintiffs [sic] investment portfolios." Fox, Third Am. Compl. at 16; Sterin, Second Am. Compl. ¶ 76. However, Fiserv permitted Kogan "to make trades and changes" in plaintiffs' accounts without power of attorney or letter of authorization. Fox, Third Am. Compl. at 8; Sterin, Second Am. Compl. ¶ 33. Ordinarily, Fiserv "requires a letter of authorization for check deposits, wire transfers, and journal entries, when funds are being transferred or deposited into accounts other than those whose names are on the checks." Fox, Third Am. Compl. at 9; Sterin, Second Am. Compl. ¶ 44.
"On several occasions Fiserv shut down trading accounts that were operated by Kogan for various trading violations," but permitted Kogan to open other trading accounts shortly thereafter. Fox, Third Am. Compl. at 9; Sterin, Second Am. Compl. ¶...
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