Szulik v. Tagliaferri

Decision Date21 August 2013
Docket NumberNo. 12 Civ. 1827(PKC).,12 Civ. 1827(PKC).
PartiesMatthew J. SZULIK, Kyle M. Szulik, and Michael Colleary, in his capacity as trustee of the Raymond W. Szulik Revocable Trust dated December 5, 2007, Plaintiffs, v. James S. TAGLIAFERRI, Patricia J. Cornell, and Barry B. Feiner, Defendants.
CourtU.S. District Court — Southern District of New York


Christine Tramontano, Gordon P. Katz, Robert Joseph Burns, Steven Leo D'Alessandro, Holland & Knight LLP, New York, NY, Daniel I. Small, Michael J. Stromsnes, Holland & Knight, LLP, Boston, MA, John L. Brownlee, Holland & Knight, LLP, McLean, VA, Stephen Patrick Warren, Tracy A. Nichols, Holland & Knight LLP, Miami, FL, for Plaintiffs.

John James Phelan, III, John J. Phelan, III, P.C., New York, NY, Paul K. Sun, Jr., Ellis & Winters, Raleigh, NC, Alan J. Goldberg, Margaret J. Gillis, Robert Stevenson Rosborough, Whiteman Osterman & Hanna LLP, Albany, NY, for Defendants.


P. KEVIN CASTEL, District Judge:

In a Second Amended Complaint (the “SAC”), plaintiffs allege that James S. Tagliaferri and Patricia J. Cornell, investment managers, made numerous improper investments and engaged in a “kickback” scheme with a thoroughbred horse racing company. Against Tagliaferri and Cornell, the SAC alleges violations of sections 10(b) and 20(a) of the Securities and Exchange Act of 1934 and Rule 10b–5 promulgated thereunder, as well as numerous state-law claims. The fraud-based claims are based solely on the alleged “kickback” scheme. Additionally, plaintiffs bring state-law claims against Barry B. Feiner, an attorney who performed legal work for several of the transactions detailed in the pleading. Defendants move to dismiss the complaint for failure to state a claim, pursuant to Rule 12(b)(6), Fed.R.Civ.P., and for failure to plead fraud with the particularity required by Rule 9(b), Fed.R.Civ.P., and the Private Securities Litigation Reform Act of 1995, 15 U.S.C. § 78u–4(b) (the “PSLRA”).

The Court concludes that the SAC alleges adequately the state-law claims against Tagliaferri and Cornell for breach of fiduciary duty; an accounting; negligence; and unjust enrichment. The Court dismisses the negligent misrepresentation claim. Plaintiffs' fraud-based claims—the four federal securities laws claims, the North Carolina statutory claim, and the fraudulent concealment claim—survive only insofar as they allege that nondisclosure of the “kickback” payments caused plaintiffs to needlessly pay management fees to TAG VI. The fraud-based claims are otherwise dismissed for failure to allege loss causation and/or proximate cause. As to Feiner, the Court concludes that the SAC alleges adequately claims for legal malpractice; aiding and abetting breach of fiduciary duty; aiding and abetting fraudulent concealment; and unjust enrichment.


For purposes of the Rule 12(b)(6) motions, all non-conclusory factual allegations are accepted as true and reasonable inferences are drawn in favor of plaintiffs as non-movants.

1. The Parties

Matthew Szulik (Matthew) and his wife, Kyle Szulik (Kyle), who “reside” in North Carolina, bring suit in their individual capacities.1 (SAC ¶ 12.)

Matthew and his father, Raymond Szulik (Raymond), brought suit as trustees of the Raymond W. Szulik Trust (the “RWS Trust”). ( Id. ¶ 13.) Raymond Szulik passed away on January 15, 2013. (Docket No. 172.) The Court granted plaintiffs' motion to substitute as a named plaintiff Michael Colleary, in his capacity as trustee of the Raymond W. Szulik Revocable Trust, in place of Matthew and Raymond, in their capacities as trustees of the RWS Trust. (Docket No. 187.) The two trusts merged on May 8, 2013, and the Raymond W. Szulik Revocable Trust is the surviving entity.2 (Docket No. 180.)

The Szuliks entrusted funds to the investment advisory firm “TAG VI,” a limited liability company (“LLC”) organized under the laws of the U.S. Virgin Islands. ( Id. ¶ 16.) Though prior versions of the complaint asserted claims against the entity TAG Virgin Islands, Inc. (“TAG VI, Inc.), that entity filed a Chapter 7 bankruptcy petition and is subject to an automatic litigation stay. TAG VI, Inc. is omitted as a defendant from the SAC.

Documents attached to the SAC refer to the entities “Taurus Advisory Group, LLC ( e.g., id. Ex. 3) and “TAG VI, Inc. ( E.g., id. Exs. 8, 20.) Plaintiffs' case caption states that “TAG VI, Inc. was formerly known as “Taurus Advisory Group, LLC.” See Szulik v. TAG Virgin Islands, Inc., 858 F.Supp.2d 532 (E.D.N.C.2012). A 2007 Form ADV indicates TAG VI, Inc. conducted its advisory business under the name Taurus Advisory Group, LLC. ( Id. Ex. 2.) The parties make little effort to differentiate between the various “TAG” entities. The Court refers to the entities as “TAG VI” unless otherwise noted.

Tagliaferri principally resides in the U.S. Virgin Islands, and Cornell principally resides in Connecticut. ( Id. ¶¶ 14–15.) At all relevant times, Tagliaferri and Cornell were equal co-owners of TAG VI. ( Id. ¶ 16.) Both have earned the designation Chartered Financial Analyst ( id. ¶¶ 14–15), and were the only Chartered Financial Analysts at TAG VI, which employed fewer than five people. ( Id. ¶ 22.) TAG VI was registered with the SEC as an Investment Adviser. ( Id. ¶ 17.) From 2003 to 2008, Tagliaferri and Cornell were registered as TAG VI Investment Adviser Representatives. Documents filed with the SEC describe their roles as “responsible for investment decisions which effect client portfolios.” ( Id. ¶¶ 20–21, 23; id. Ex. 2.)

Feiner is an attorney licensed to practice in New York. ( Id. ¶ 25.) Plaintiffs assert Feiner performed legal work in many of the transactions detailed in the SAC, but maintain they were unaware of Tagliaferri and Cornell's associations with Feiner. ( Id. ¶ 59.)

2. 1996 Investment Management Agreement

Matthew met Tagliaferri in the 1980s during a pickup basketball game in Connecticut. ( Id. ¶ 31.) The two developed a friendship, which “evolved into a trusted mentoring role.” ( Id.) By 1996, Matthew and Kyle had accumulated approximately $500,000 in savings and engaged TAG VI to manage their investments. ( Id. ¶ 32.)

Matthew and Kyle communicated to Tagliaferri and Cornell their investment objectives: “a ‘moderately aggressive portfolio’ with a mix of 40% large cap, 40% small cap, and 20% bonds.” ( Id. ¶ 35.) Shortly thereafter, Matthew and Kyle moved from New York to North Carolina. ( Id. ¶ 33.) In March 1996, Tagliaferri or Cornell sent an Investment Management Agreement (the “IMA”) to the Szuliks' North Carolina home.3 ( Id. ¶ 36.) Matthew and Kyle signed. Cornell signed on behalf of “Taurus Advisory Group, LLC.” ( Id. ¶¶ 37–38; id. Ex. 3.)

The IMA provided TAG VI with discretionary authority to “make purchases, sales, and otherwise effect transactions in stocks, bond (sic), and other securities.” ( Id. ¶ 39; id. Ex. 3.) It did not permit TAG VI to make unsecured loans to individuals or fund mortgages. ( Id. ¶ 41.) The agreement provided that TAG VI would be paid an annual fee of 1% of assets under management, payable on a quarterly basis. ( Id. ¶ 42; id. Ex. 3.) Tagliaferri and Cornell periodically issued TAG VI invoices to collect the fees. ( Id.) The Szuliks engaged State Street Bank (“State Street”)—previously Investors Bank & Trust (“IBT”) and Chemical Bank—as asset custodian.4 ( Id. ¶ 43.)

Matthew became President of Red Hat, Inc. (“Red Hat”), a North Carolina software company, in 1998, and directed its IPO the next year. ( Id. ¶¶ 44–45.) Over the course of the next decade, Red Hat became a multi-billion dollar S & P 500 company. ( Id. ¶ 46.) Matthew's wealth grew, as did his portfolio with TAG VI. ( Id. ¶ 50.) Until approximately 2006, the Szuliks' portfolio exceeded $60 million “substantially invested in high quality stocks and bonds.” ( Id. ¶ 72.) Matthew and Kyle continued to entrust “their investments to the complete discretion of TAG VI and its principals” ( id. ¶ 51), as they had come to view “Tagliaferri and Cornell as trusted friends and advisers.” ( Id. ¶ 87.)

In the mid–2000s, Tagliaferri and Cornell also began managing accounts for Raymond.5 ( Id. ¶ 61.) As Raymond was in his 90s, preservation of capital and liquidity were of paramount importance. ( Id. ¶ 62.) Plaintiffs do not allege there was an investment management agreement for the RWS Trust or that the trust paid fees to TAG VI.

3. Portfolio Transformation

At some point in 2005 or 2006, Cornell and Tagliaferri “became involved with” Feiner, who is alleged to have connections to business persons alleged to be disreputable, including members of the Galanis family.6 ( Id. ¶¶ 52–60.) TAG VI relocated to the U.S. Virgin Islands in 2006. ( Id. ¶ 74.) The same year, without notifying plaintiffs, Tagliaferri and Cornell “began to gradually liquidate the Szuliks' more conservative investments and replace them with securities that turned out to be worthless.” ( Id. ¶ 73.) Tagliaferri and Cornell also “used the Szuliks' money to make unsecured, non-recourse loans to individuals and entities.” ( Id.)

The fraud-based claims are based on a purported “kickback” scheme between TAG VI, Tagliaferri, Cornell, and International Equine Acquisitions Holdings, Inc. (“IEAH”), a small private company engaged in the thoroughbred horse racing business. According to the SAC, IEAH had a history of corporate mismanagement and its founder, Michael Iavarone, was once fined and enjoined from selling securities by the National Association of Securities Dealers. ( Id. ¶¶ 93, 95; id. Ex. 5.) It is alleged that between March 2007 and January 2009 Tagliaferri and Cornell invested approximately $20 million of Matthew and Kyle's money and another $650,000 from the RWS Trust in IEAH promissory notes, the majority of which were memorialized in “convertible note agreements” naming TAG VI, Inc. and not the Szuliks as payee.7 ( Id. ¶¶ 101–07; e.g., id. Ex. 6.) “TAG VI then executed ‘subnotes' to the Szuliks and other TAG...

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