Honig v. Kornfeld

• Decision Date: 17 August 2018
• Docket Number: CASE NO.: 18-80019-CV-MIDDLEBROOKS/BRANNON
• Court: U.S. District Court — Southern District of Florida
• Parties: Paul HONIG, Carla Honig, David Lippman, Carolyn Lippman, John Hertvik, Gerald Roy, and Hermant Nanavaty, on behalf of themselves and a class of all others similarly situated, Plaintiffs, v. Barry M. KORNFELD, et al., Defendants.

339 F.Supp.3d 1323

Paul HONIG, Carla Honig, David Lippman, Carolyn Lippman, John Hertvik, Gerald Roy, and Hermant Nanavaty, on behalf of themselves and a class of all others similarly situated, Plaintiffs,

v.Barry M. KORNFELD, et al., Defendants.

CASE NO.: 18-80019-CV-MIDDLEBROOKS/BRANNON

United States District Court, S.D. Florida.

Entered August 20, 2018

Signed August 17, 2018

Andrew Steven Kwan, James Wallace Beasley, Jr., Joseph George Galardi, Beasley Kramer & Galardi PA, Jason S. Haselkorn, Jonathan Brennan Butler, Charles Leroy Pickett, Jr., Ciklin Lubitz & O'Connell, West Palm Beach, FL, Matthew N. Thibaut, Haselkorn & Thibaut PA, Palm Beach, FL, for Plaintiffs.

Robert Charles Harris, Hunter Taubman Fischer & Li LLC, Bradley D. Redlien, Coral Gables, FL, Douglas James Kress, Schwed Kahle & Jenks, P.A., Palm Beach Gardens, FL, Gary Steven Betensky, Richman Greer, P.A., Debra Anne Jenks, Robert John Harvey, Jenks & Harvey LLP, Jon Andrew Jacobson, Jacobson Law P.A., West Palm Beach, FL, Nathaniel Mark Edenfield, Richman Greer, P.A., Jacob Benjamin Monk, Shutts and Bowen LLP, Miami, FL, Gregg Jeffrey Breitbart, Michel Alexis Morgan, Kaufman Dolowich & Voluck, LLP, Allan Michael Lerner, Fort Lauderdale, FL, Brennan Moss, Pro Hac Vice, Pia Anderson Moss & Hoyt, Salt Lake City, UT, Benette L. Zivley, Pro Hac Vice, Pflugerville, TX, Andrew Broin Thomson, Neil S. Baritz, Baritz & Colman, LLP, Boca Raton, FL, for Defendants.

James H. Gilchrist, Sr., Fort Pierce, FL, pro se.

ORDER ON MOTIONS TO DISMISS

DONALD M. MIDDLEBROOKS, UNITED STATES DISTRICT JUDGE

THIS CAUSE comes before the Court on Motions to Dismiss filed by the following Defendants: Barry M. Kornfeld, Ferne E. Kornfeld, First Financial Tax Group, Inc., and FEK Enterprises (the "Kornfeld Defendants") (DE 41); Albert D. Klager, Michele Klager, and Atlantic Insurance & Financial Services, Inc. (the "Klager Defendants") (DE 53); H.D. Vest Investment Services, Inc. ("HD Vest") (DE 63); Kovack Securities, Inc. ("KSI") (DE 64); Henry Wieniewitz ("Mr. Wieniewitz") and Wieniewitz Wealth Management, LLC ("WWM") (collectively, the "Wieniewitz Defendants") (DE 65); Jerry Davis Raines ("Mr. Raines") (DE 66); Gordon C. Hannah ("Mr. Hannah") and Retirement Planning Solutions, LLC ("RPS") (collectively, the "Hannah Defendants") (DE 69); GBH CPAS, PC ("GBH") (DE 70); Old Security Financial Group, Inc. ("OSFG"), Tony MacKenzie ("Mr. Mackenzie"), and Robert S. Davis, Jr. ("Mr. Davis") (collectively, the "OSFG Defendants") (DE 74); Douglas R. Andrew ("Mr. Andrew") and Paramount Financial Services, Inc. ("Paramount") (collectively, the "Paramount Defendants") (DE 75); Shield Financial Group, Inc. ("Shield") and David Ouellette ("Mr. Ouellette") (collectively, the "Shield Defendants") (DE 79); Lynette M. Robbins ("Ms. Robbins") and Theodore F. Leutz ("Mr. Leutz") (collectively, "Knowles Defendants") (DE 94); and James H. Gilchrist ("Mr. Gilchrist") (DE 111)¹ (collectively, with the exception of GBH, the "External Sales Agent Defendants"). All motions to dismiss have been fully briefed.

This cause also is before the Court upon Defendant HD Vest's Motion to Stay Discovery Pending a Determination of this Court's Subject-Matter Jurisdiction, filed on August 8, 2018. (DE 135). This motion has not yet been briefed.

I. BACKGROUND

This action arises from an alleged Ponzi scheme orchestrated by non-parties Robert H. Shapiro ("Shapiro") and his company, Woodbridge Group of Companies, LLC d/b/a Woodbridge Wealth ("Woodbridge"). Plaintiff's allegations, many of which were taken from a related pending enforcement action brought in this District against Shapiro and Woodbridge by the SEC (SEC v. Robert H. Shapiro, Woodbridge Group of Companies, LLC et al. , 17-24624-CV-MGC (S.D. Fla.) (the "SEC Action") ), describe a scheme by which Plaintiffs were marketed and sold promissory notes, fund equity units, and other offerings as low-risk, high-yield investments backed by high interest rate loans made to commercial borrowers. (DE 6 (hereinafter "First Amended Complaint" or "FAC") ¶¶ 2, 11).

A. The Scheme

Shapiro and Woodbridge offered two primary types of investments: (1) a twelve-to-eighteen month term promissory note marketed as paying a 5-8% annual return on a monthly basis known as a First Position Commercial Mortgage ("FPCM"), and (2) seven different private placement fund offerings with five-year terms ("Fund Offerings"), marketed as paying a 6-10% annual return on a monthly basis and, at the end of five years, a 2% accrued dividend and share of the profits (collectively, the "Woodbridge Investments" or the "Investments"). (FAC ¶ 74). Neither of the Investments were ever registered with the SEC or another government agency. (FAC ¶ 75).

Plaintiffs allege that the Shapiro and Woodbridge's purported revenue source was: (1) the development and sale of properties for a profit (FAC ¶ 77), and (2) the interest a Woodbridge affiliate would be receiving on loans to third-party owners of commercial real estate (FAC ¶ 76). Woodbridge purportedly told investors that it would pool money from its many investors and lend it to these third-party borrowers for a short term, and for only about two-thirds of the value of the real estate securing the transaction, which would ensure that the properties that secure the mortgages are worth considerably more than the loans themselves at closing. (Id. ). These third-party borrowers were allegedly paying Woodbridge 11-15% annual interest for short-term financing. (Id. ).

Plaintiffs allege that despite being told that they would be repaid from high interest rates that Shapiro's companies were earning on loans made to third-party borrowers, all of the third-party borrowers were actually companies affiliated with Shapiro and had no revenue or bank accounts, and did not actually pay interest on the loans. (FAC ¶¶ 3, 78). Instead, Shapiro relied on new investor funds from the Woodbridge Investments to pay the interest and dividends owed to its earlier investors, constituting a Ponzi scheme. (FAC ¶¶ 4, 78, 79). Shapiro employed the RS Trust, whose trustee is Shapiro, to conceal his fraudulent scheme and hide the fact that most of the third-party borrowers and owners of the underlying property were Shapiro and his family. (FAC ¶ 97). "None of the publicly available documentation indicated the RS Trust was the ultimate owner of the underlying properties that had been purchased with funds from" the Investments, and the vast majority of loans were made to entities that Shapiro controlled and which had no revenue. (Id. ).

B. Sales of the Investments through Sales Agents

To sell the FPCMs and Fund Offerings, Shapiro purportedly had a team of thirty in-house employees and a network of hundreds of external sales agents to solicit investments from the public. (FAC ¶ 80). Many of the sales agents were not licensed or registered with any regulatory agency, which was purportedly not disclosed to investors. (FAC ¶ 82). Woodbridge paid external sales agents a 9% wholesale rate, and the sales agents in turn offered the FPCMs to their investor clients at 5% to 8% interest, and the external sales agent received the difference. (FAC ¶ 83). Woodbridge also offered incentives to the external sales agents for promoting the FPCMs, including cash bonuses and the opportunity to earn 25 basis points on each FPCM sale for each FPCM sale closed by a colleague of a sales agent through a program called "Pass It On." (FAC ¶¶ 84). Nina Pederson, the Comptroller of Woodbridge, mischaracterized transactions from Woodbridge's operating account that were often used to pay commissions to Woodbridge's external sales force, and to pay for mortgages on property secretly purchased through the RS Trust. (FAC ¶¶ 62, 102).

To sell the Investments, Woodbridge provided the sales agents with uniform, scripted information and sales materials which were in turn provided to investors (the "Woodbridge Script"). (FAC ¶ 85). Plaintiffs allege that all of the information in the Woodbridge Script was false, and that in addition to outlining Woodbridge and Shapiro's purported source of revenue, Woodbridge told investors that the borrowers were "bona fide commercial property owners who could not obtain traditional loans and were willing to pay higher rates for short-term financing." (FAC ¶¶ 85-86). The Woodbridge Script purportedly told the investors that their investment, to be used to loan money to a third-party borrower, was "secured by a hard asset collateral – the property itself." (FAC ¶ 89). Woodbridge also told FPCM investors that they had a "pro rata first-position ‘lien’ interest in the underlying properties," which meant that the investor would have priority over any other liens or claims on a property if the property owner defaulted. (FAC ¶ 91). Plaintiffs allege that Woodbridge raised at least $1.22 billion from investors in the Investments, but issued only $675 million in "loans" for real estate securing those investments, which generated just $13.7 million in interest from third-party borrowers. (FAC ¶ 93).

The external sales agents were supervised by non-party Dayne Roseman ("Roseman"), the Managing Director of Woodbridge who was responsible for supervising the external sales agents and sales program of the Woodbridge Investments. (FAC ¶¶ 61, 95). Roseman was purportedly "responsible for ensuring that the sales force followed the Woodbridge [S]cript, knowing that representations relating to the Woodbridge [I]nvestments were false or misleading," and withholding such information from investors. (FAC ¶ 96).

1. Kornfeld Defendants

Defendants Barry and Ferne Kornfeld, principals of First Financial Tax Group, were employed as external sales agents for Woodbridge. (FAC ¶¶ 104-05). The Kornfeld Defendants are Florida residents. (FAC ¶¶ 19-22). Mr. Kornfeld purportedly held himself out to be a "financial advisor with an ‘unsurpassed level of expertise’ and promises ‘trusting relationships with his clients’ and ‘the best...