Amerio v. Gray

STEVEN AMERIO and ANDREW GOLDBERG,Individually and as Co-Lead Plaintiffs on behalf of all others similarly situated, Plaintiffs v. GREGORY W. GRAY, JR.; GREGORY P. EDWARDS; ARCHIPEL CAPITAL LLC;BIM MANAGEMENT LP; and BENNINGTON INVESTMENT MANAGEMENT, INC. Defendants.

5:15-CV-538

UNITED STATES DISTRICT COURT NORTHERN DISTRICT OF NEW YORK

September 3, 2019

APPEARANCES:

CHERUNDOLO LAW FIRM, PLLC

Attorneys for plaintiffs

AXA Tower One 17th Floor

100 Madison Street

Syracuse, NY 13202

WILENTZ GOLDMAN & SPITZER PA

Attorneys for plaintiffs

90 Woodbridge Center Drive, Suite 900

Woodbridge, NJ 07095

GREGORY W. GRAY, JR.

Defendant pro se

60 School Street #1192

Orchard Park, NY 14127

TARTER KRINSKY & DROGIN LLP

Attorneys defendants Edwards,

Archipel Capital LLC, BIM Management

LP, and Bennington Investment

Management, Inc.

1350 Broadway

New York, NY 10018

OF COUNSEL:

JOHN C. CHERUNDOLO, ESQ.

J. PATRICK LANNON, ESQ.

KEVIN P. RODDY, ESQ.

JAMES E. TONREY, JR., ESQ.

MICHAEL J. GRUDBERG, ESQ.

DAVID N. HURD United States District Judge

MEMORANDUM-DECISION and ORDER

I. INTRODUCTION

On April 30, 2015, plaintiff Andrew Goldberg ("Goldberg") brought this suit alleging an ongoing pattern of securities fraud—among other claims—against defendants. Plaintiff Steven Amerio joined the action on December 22, 2017, via plaintiffs' Second Amended Complaint, which is also the current operative pleading. In substance, Goldberg and Amerio allege that defendant Gregory W. Gray ("Gray"), as the managing partner of defendant Archipel Capital, LLC ("Archipel"), and a general partner of defendant BIM Management LP ("BIM"), duped clients into investing in a company whose prospects Gray overstated at every opportunity.

Defendant Gregory P. Edwards ("Edwards"), meanwhile, is BIM's other general partner, and had at least some measure of control over Archipel and BIM, as well as full control of his own investment company, defendant Bennington Investment Management, Inc.("Bennington"). Plaintiffs allege that Edwards gave extra weight and validity to Gray's machinations, especially in the face of Gray's troubled disciplinary history in investment circles, and plaintiffs allege that they also expected him to supervise Gray. Given the expansive number of investors that plaintiffs allege succumbed to the scheme, plaintiffs have now moved to certify those allegedly led astray by defendants as a unified class under Federal Rule of Civil Procedure ("Rule") 23. Edwards and BIM responded in opposition and plaintiffs replied.

II. BACKGROUND

The claims began with the creation of the defendant corporate entities. Archipel was firstborn, created by Gray in 2005. Second Amended Complaint ("SAC"), ¶ 10.¹ Gray retained a 65.1% interest in Archipel, but Edwards also held a 25% interest.

In December of 2008, the New York Stock Exchange ("NYSE") formally censured and barred Gray from association with any NYSE member firms. SAC ¶ 17. NYSE found that Gray had engaged in unauthorized trades in multiple customer accounts and had harassed and threatened—even with death—complaining customers and their families. SAC ¶ 17. The Securities and Exchange Commission upheld Gray's discipline on appeal. SAC ¶ 146. As a result, in February 2008, Gray surrendered his securities license, and he remains unlicensed. SAC ¶ 147.

Despite Gray's invalid license, he and Edwards incorporated BIM in Delaware on May 10, 2011, with Gray and Edwards maintaining the same ownership interests in it as they each held in Archipel. SAC ¶ 20. Several Archipel offshoots ("the Archipel entities") followed inlater years, each targeting the acquisition of stock in varied industries to varied success. SAC ¶¶ 22-29. BIM functions as the General Partner of each Archipel entity. SAC ¶ 21. Gray directed BIM's "investment and operational activities," apparently alongside Edwards. Id. Across all of the Archipel entities, defendants raised approximately $19.6 million from at least 140 individuals and investors. SAC ¶ 33.

At some point, Gray and Edwards became aware of Everloop, Inc. ("Everloop"), a corporation from California attempting to develop social media for children not yet old enough to legally access social media sites such as Facebook. SAC ¶ 36. Looking to capitalize on Everloop, defendants formed Bennington-Everloop, LP ("BELP") to raise funds to invest in it. SAC ¶ 35.

However, Everloop's founder distrusted Gray for his less than exemplary disciplinary record. SAC ¶ 14. Goldberg and Amerio allege that Edwards formed Bennington, which he solely owned, to lend his credibility to the enterprise and to secure Gray's relationship with Everloop. Id. Gray, for his part, worked for Bennington as an advisor. SAC ¶ 15. The tactic apparently worked, because Everloop gave Edwards a seat on its Board of Directors, and Gray an advisory seat. SAC ¶ 47.

The players and their roles being set, Goldberg and Amerio allege that Gray proceeded to direct investor business into Everloop through a series of misstatements and misrepresentations. From the outset, the Private Placement Memorandum ("PPM") that BELP produced for potential investors included biographical and risk sections, but neither section informed potential investors as to Gray's disciplinary history. SAC ¶¶ 49-50. Instead, the PPMs described Gray as "a registered investment advisor for NASD Licenses: Series 6, 7, 63, 65." SAC ¶ 161.

Goldberg and Amerio make several further allegations as to Gray's conduct in inducing investments. Specifically, plaintiffs allege that Gray made: (1) a false representation that Everloop had obtained educational grants in the total amount of $27 million; (2) a false representation that Everloop was launching a learning channel network with a literacy education publisher; (3) a false representation concerning the extent to which Everloop had developed a text messaging product that plaintiffs allege never progressed past its initial stages; (4) false representations in 2012 that Everloop was in advanced stage meetings with Major League Baseball and the National Football League regarding the use of Everloop products; (5) several further false statements between 2011 and 2013 regarding possible investment in Everloop by other investors, including Facebook executives; and (6) Everloop's general financial condition including its cash flow, indebtedness, and its registered users. SAC ¶¶ 42-46, 57-59, 64, 66, 74, 79, 80.

Plaintiffs allege that Gray distributed these misrepresentations through "investor meetings." SAC ¶ 54. These meetings took the varied forms of breakfast, lunch, and dinner meetings and occurred during "several occasions" during the summer of 2012. SAC ¶ 78.

On November 27, 2013, BELP investors learned that Everloop intended to enter a licensing agreement with a start-up company owned by an Everloop investor. SAC ¶ 90. BELP objected to Everloop's deal, and the parties agreed to resolve the dispute through mediation. Id. Goldberg and Amerio allege that the BELP investors still do not know the full terms of the mediated settlement. SAC ¶ 91.

Goldberg and Amerio nevertheless believe that the settlement was in the amount of $650,000, and that Gray misused $350,000 of the settlement by channeling the funds to another Archipel entity. SAC ¶ 92. In so doing, Gray allegedly required each BELP investor to sign a confidentiality release in order to receive any of the settlement payout. SAC ¶ 203.This allowed Gray to falsely inform the investors that the settlement was for only $300,000, trusting to their confidentiality agreement to prevent them from uncovering the true value of the settlement. Id. Gray also allegedly misdirected funds from some Archipel entity investment vehicles to others and falsified documents to cover his commingling of funds. See generally SAC ¶¶ 102-31.

The investors eventually discovered Gray, Edwards, and the Archipel entities' misrepresentations.² SAC ¶ 89. In response, Goldberg filed a complaint in the Northern District of New York on April 30, 2015. Dkt. 1. He later amended that complaint on December 9, 2015. Dkt. 53. On December 22, 2017, Goldberg filed the second amended complaint, including Amerio as co-plaintiff. SAC. Plaintiffs bring twelve claims for relief:

1. All defendants' alleged violation of § 10(b) of the Exchange Act, 15 U.S.C. § 78j(b) ("§ 10(b)"); and SEC Rule 10b-5, 17 C.F.R. § 240.10b-5, through the misleading contents of the PPMs, and through their varied misrepresentations to secure Everloop investments. SAC ¶¶ 142-184.

2. Gray's additional liability for the same as a control person of the Archipel entities under § 20(a) of the Exchange Act, 15 U.S.C. § 78t(a) ("§ 20(a)"). SAC ¶¶ 185-96.

3. Gray's alleged violation of 18 U.S.C. § 1962(a) of the Racketeer Influenced and Corrupt Organizations Act ("RICO"), which allows plaintiffs to bring a civil claim under 18 U.S.C. § 1964, for fraudulently appropriating $350,000 from the settlement with Everloop and distributing it to other Archipel funds. SAC ¶¶ 197-214.

4. All defendants' alleged fraud for their misrepresentations, including the PPMs and their statements concerning Everloop. SAC ¶¶ 215-22.

5. All defendants' negligent misrepresentations in providing the PPMs and the "other representative materials" that plaintiffs relied on in deciding to invest in Everloop, and failing to use reasonable diligence in verifying the accuracy of the same. SAC ¶¶ 223-29.

6. All defendants' breach of a fiduciary duty to plaintiffs for the entirety of their conduct. SAC ¶¶ 230-38.

7. Conversion against Gray for exercising unlawful dominion and control over plaintiffs' investment funds. SAC ¶¶ 239-46.

8. Gray's alleged unjust enrichment in receiving plaintiffs' property as a result of the scheme. SAC ¶¶ 247-51.

9-12. Four different counts of violations of New York Debtor and Creditor Law for fraud and presumptive fraud. SAC ¶¶ 252-67.

Goldberg and Amerio's motion for class certification is considered on the parties' submissions without oral argument.

III. LEGAL STANDARD

"A class may be...