City of N.Y. v. Hatu

THE CITY OF NEW YORK, Plaintiff, v. AMJED HATU, AMMAR SHAMAKH, MAEEN ALSAIDI,MUSSA HAMZA, AND AKRAM SHAMAKH, Defendants.

18 Civ. 848 (PAE)

UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK

May 31, 2019

OPINION & ORDER

PAUL A. ENGELMAYER, District Judge:

The City of New York (the "City") brings this action against various associates of the "Moflehi Enterprise" (the "Enterprise"), a group of wholesalers, distributors, and brokers that allegedly operated an unlawful cigarette distribution scheme between New York, New Jersey, North Carolina, and Virginia. Specifically, the City claims that the defendants violated the Contraband Cigarette Trafficking Act ("CCTA"), 18 U.S.C. §§ 2341 et seq.; the Racketeer Influenced Corrupt Organizations Act (the "RICO Act"), 18 U.S.C. §§ 1961 et seq.; the Jenkins Act, as amended by the Prevent All Cigarette Trafficking Act of 2010 (collectively, the "PACT Act"), 15 U.S.C. §§ 375 et seq.; and New York Public Health Law ("P.H.L.") § 1399-ll.

In September 2018, the Court granted a motion, by defendant Amjed Hatu, to dismiss the claims against him, as formulated in the City's Amended Complaint. See Dkt. 64. The Second Amended Complaint ("SAC"), Dkt. 95, the operative complaint now, enhances the allegations against Hatu, and reprises the City's claims against the following four defendants: Ammar Shamakh, Maeen Alsaidi, Mussa Hamza, and Akram Shamakh. Hatu is a principal of former defendant H&H Distributors ("H&H"), a wholesale cigarette distributor with a principal place of business in North Carolina. SAC at 3. The remaining defendants are individuals who allegedly either transported, or facilitated the transportation of, cigarettes from within North Carolina to other states. Id. at 2-3. The Court refers to these defendants as the "Non-Moving Defendants."

Hatu now moves to dismiss the SAC's claims against him, again on the grounds that these do not satisfy Federal Rules of Civil Procedure 12(b)(2) and 12(b)(6). This time, for the following reasons, the Court denies Hatu's motion to dismiss in its entirety.

I. Background

A. Facts¹

1. The Regulatory Background

In an effort to reduce the use of tobacco products, the State of New York and New York City impose considerable taxes on cigarettes. SAC ¶ 23. At the state level, this tax is imposed principally by New York Tax Law §§ 471 and 471-a. These statutes levy a tax of $4.35 per 20-cigarette pack on "all cigarettes possessed in the state by any person for sale," N.Y. Tax L. § 471, or "used" in the state, id. § 471-a. The City imposes an additional tax of $1.50 per 20-cigarette pack possessed by any person for sale or use in the City. N.Y.C. Admin. Code § 11-1302(a)(1). These taxes presumptively apply to all cigarettes sold within the State and City, and the individual claiming that a sale is not taxable under any of the applicable statutes bears theburden of establishing such an exemption. See N.Y. Tax L. § 471(1); N.Y.C. Admin. Code § 11-1302(e).

Both the New York Tax Law and New York City Administrative Code require that a tax stamp be affixed to cigarette packages to indicate that the requisite taxes have been paid. N.Y. Tax L. §§ 471, 473; N.Y.C. Admin. Code §§ 11-1302, 1304. These laws authorize "stamping agents" to pre-pay the cigarette taxes by purchasing tax stamps from the State and City. SAC ¶ 28. The cost of each stamp is equivalent to the amount of tax imposed on a pack of cigarettes. Id. Agents are required to affix the stamps to cigarette packs and to add to the cost of any such stamped pack the price of the stamp affixed thereto. Retailers, accordingly, adjust the price of the cigarette packs they sell to account for the higher cost of the stamped packs. Thus, the cost of the tax moves along the distribution chain before falling on the consumer. Id. Stamping agents are the only entities authorized to purchase and affix State and City tax stamps to cigarettes and to import into the State and City cigarettes that have not yet been taxed. Id. ¶ 29.

2. The Enterprise

In contrast to the rates applicable in New York State and New York City, North Carolina's cigarette tax rate is among the nation's lowest. Id. ¶ 30. New York State and New York City impose a combined $58.50 in excise taxes per each 200-cigarette carton. North Carolina imposes only $4.50 in analogous taxes on such a carton. Id. ¶ 2. These excise taxes are pre-paid and, in the manner above, are included in the retail price of cigarettes. Cigarettes are, accordingly, far more expensive in New York City than in North Carolina.

Important here, the difference between the higher New York cigarette tax rates and the lower North Carolina rate creates an arbitrage opportunity for individuals who sell cigarettes in New York despite having paid only the lower North Carolina tax on those cigarettes.

The SAC claims that the defendants engaged in such a scheme. As alleged, members of the Enterprise, inter alia, transported cigarettes that had been taxed in North Carolina to New York City for distribution throughout the State without paying the requisite New York State and City taxes. Id. ¶¶ 1-2.² The alleged role of each defendant in the Enterprise is as follows.

a. Transporters

Ammar Shamakh ("Ammar") and his employee Maeen Alsaidi ("Alsaidi"), both residents of New York, allegedly transported cigarettes purchased in North Carolina to New York for sale in the Bronx and elsewhere. Id. ¶¶ 4, 19-20. A member of the Enterprise in New York would transmit to the Transporters Ammar and Alsaidi via text message an order requesting a variety of cigarette brands and styles. Id. ¶ 37. Ammar and Alsaidi would then relay a nearly identical message via text message to a North Carolina Retailer who would fulfill the order. Id.

b. Retailers and Brokers

Akram Shamakh ("Akram"), a resident of North Carolina, id. ¶ 18, owns A&K Express, a convenience store located in North Carolina that sells cigarettes taxed in North Carolina, id. ¶ 5. Akram has admitted to selling large quantities of such cigarettes to Ammar and Alsaidi with the understanding that they would be transporting those cigarettes to New York. Id.

Mussa Hamza ("Hamza"), a resident of North Carolina, id. at ¶ 17, was a cigarette broker, id. at ¶ 6. Hamza has admitted that in this role he arranged the sale of large quantities of North Carolina-taxed cigarettes to Ammar and Alsaidi for sale in New York. Id.

c. H&H Defendants

H&H is a cigarette wholesaler located in North Carolina. Id. ¶ 7. The moving defendant Hatu is a resident of North Carolina. Id. ¶ 16. He and Shareef Hassan are principals of H&H.³ The SAC alleges that a retailer participating in the scheme, such as Akram and Hamza, would text a cigarette order to H&H, Hassan, or Hatu (collectively the "H&H Defendants"). Id. ¶ 37. This order would be virtually identical to that transmitted via text from the Enterprise in New York to the transporters and then to the retailers and Hamza. Id. H&H would fulfill these orders, delivering large quantities of North Carolina-taxed cigarettes to the transporters Ammar and Alsaidi, both directly and through Akram or Hamza, for distribution in New York. Id. Upon receiving the imported cigarettes in New York, other members of the Enterprise would then affix counterfeit New York tax stamps to the packaging and sell the cigarettes in New York at below-market prices.

H&H operated only in North Carolina and directly sold cigarettes only to the North Carolina Retailers. Nonetheless, the SAC alleges that Hatu knew that the cigarettes he and H&H supplied were destined for illegal distribution in New York City. In support, the SAC cites the following evidence set forth in the attached affidavits of Akram, Hamza, and Detective Jonathan Dubroff of the New York City Police Department ("NYPD").

First, Akram attests that Hatu and Hassan "recognized" that A&K's cigarette orders were far too large to be supplying only A&K's retail sales. Akram Aff. ¶ 15. He further states that he explained to Hatu and Hassan that he was purchasing large volumes of cigarettes to supplycigarettes to individuals transporting those "cigarettes to New York or other states." Id. Akram states that he would receive a text message from Ammar or Hamza with an order. He would then text the order to Hatu or Hassan. When H&H filled the order, "H&H employees would load the cases directly from the H&H van into the vehicles going to New York." Id. ¶ 18. Finally, Akram states that he has "had many conversations with Hatu and Hassan in which we all understood that the cigarettes they were selling to Ammar and Alsaidi were being transported to New York and other places for sale." Id. ¶ 20.

Second, Hamza attests that "Hatu and Hassan both knew that the cigarettes being delivered to Alsaidi and Ammar were going to be brought to New York." Hamza Aff. ¶ 9. He states that he had many conversations in 2016 and 2017 in which Hatu and Hassan demonstrated their understanding that the cigarettes H&H delivered to Alsaidi and Ammar were to be shipped to New York where they would be sold. Id.

Third, the Dubroff Affidavit sets forth the following facts, among others. Hatu allegedly created false invoices to hide the considerable number of sales he made to cigarette traffickers. Dubroff Aff. ¶ 20. For example, on January 9, 2017, during a telephone call, Hamza directed Hatu to invoice 150 cartons of cigarettes for Asia, 210 for Quality, and 210 for Madison, which were all names of North Carolina stores. Id. ¶ 20a. Similar conversations took place in 2016 on November 21, 23, and 28 and on December 2 and 19. Id. ¶ 20d. Other relevant conversations involving Hatu include a March 6, 2017 call between Hatu and Hassan. Compl. ¶ 48(5). During that call, which took place approximately one week after two Transporters had been stopped by the NYPD while delivering cigarettes in New York City, Hatu told Hassan that, earlier in the week, "Hamza and Akram's guy" had been "robbed on the highway" of 6,000 cartons of...