McEssy v. Gray

WILLIAM H. McESSY, Plaintiff v. GREGORY W. GRAY, JR.; GREGORY P. EDWARDS; ARCHIPEL CAPITAL LLC;BIM MANAGEMENT, LP; and BENNINGTON INVESTMENT MANAGEMENT, INC. Defendants.

1:15-CV-1462

UNITED STATES DISTRICT COURT NORTHERN DISTRICT OF NEW YORK

December 13, 2019

APPEARANCES:

CHAPMAN, CUTLER LAW FIRM

Attorneys for plaintiff

111 West Monroe

Chicago, Illinois 60603

GREGORY W. GRAY, JR.

Defendant pro se

60 School Street #1192

Orchard Park, New York 14127

TARTER KRINSKY & DROGIN LLP

Attorneys for defendants Edwards

and Bennington Investment

Management, Inc.

1350 Broadway

New York, New York 10018

OF COUNSEL:

DAVID THOMAS AUDLEY, ESQ.

JOSEPH LOMBARDO, ESQ.

SARA TARANEH GHADIRI, ESQ.

MICHAEL J. GRUDBERG, ESQ.

DAVID N. HURD United States District Judge

MEMORANDUM-DECISION and ORDER

CONTENTS

I. INTRODUCTION .............................................................................................................. 2

II. BACKGROUND ................................................................................................................ 3

A. GRAY MEETS EDWARDS ......................................................................................... 3

B. FUNCTION AND FORM OF THE ARCHIPEL ENTITIES ........................................... 6

C. McESSY MEETS GRAY ............................................................................................. 8

D. GRAY'S SCHEME IS EXPOSED .............................................................................. 10

E. PROCEDURAL HISTORY ........................................................................................ 14

III. LEGAL STANDARD ..................................................................................................... 15

A. DEFAULT JUDGMENT ............................................................................................. 15

B. SUMMARY JUDGMENT ........................................................................................... 15

IV. DISCUSSION ............................................................................................................... 16

A. PLAINTIFF'S CLAIMS AGAINST ARCHIPEL AND BIM ........................................... 16

B. VICARIOUS LIABILITY OF EDWARDS, BENNINGTON, AND GRAY ..................... 23

C. PLAINTIFF'S CLAIMS AGAINST GRAY ................................................................... 29

1. SECURITIES FRAUD ............................................................................................ 29

2. COMMON LAW FRAUD ........................................................................................ 33

3. BREACH OF FIDUCIARY DUTIES ....................................................................... 34

4. SUMMARY ............................................................................................................ 35

D. PLAINTIFF'S CLAIMS AGAINST EDWARDS ........................................................... 36

1. SECURITIES FRAUD ............................................................................................ 36

2. COMMON LAW FRAUD ........................................................................................ 44

3. BREACH OF FIDUCIARY DUTY ........................................................................... 44

4. SUMMARY ............................................................................................................ 46

E. PLAINTIFF'S CLAIMS AGAINST BENNINGTON ..................................................... 47

F. DAMAGES ................................................................................................................ 48

1. BIM AND ARCHIPEL ............................................................................................. 48

2. GRAY .................................................................................................................... 50

V. CONCLUSION ................................................................................................................ 52

I. INTRODUCTION

Beginning in 2011 and continuing until 2015, Defendant Gregory W. Gray, Jr. ("Gray" or "American defendant") perpetrated an extensive Ponzi scheme. We know this, because he pled guilty to charges of securities fraud before the United States District Court for the Southern District of New York on December 23, 2015 for his conduct in managing theinvestments of his clients. What is uncertain is to what extent this conduct opens Gray, his investment companies, and his partner, defendant Gregory P. Edwards ("Edwards" or "Canadian defendant"), to civil liability.

Plaintiff William H. McEssy ("McEssy" or "plaintiff") stands first in line seeking an answer to that question. Plaintiff invested $5 million into one of Gray's investment partnerships, under the impression that his money would buy him a substantial number of shares in the ride-sharing company Uber. That impression was mistaken. Plaintiff now seeks to recover that lost capital, and to that end has sued Gray, Edwards, and the varied legal entities that he alleges were used to further the scheme: defendants Archipel Capital, LLC ("Archipel"), BIM Management, LP ("BIM") and Bennington Investment Management, Inc. ("Bennington").

Although several claims remain against the other defendants, at present, only three Counts of McEssy's Second Amended Complaint ("SAC") remain against defendants Edwards and Bennington: (I) securities fraud under § 10(b) of the Exchange Act, 15 U.S.C. § 78j(b) ("§ 10(b)"); (V) common law fraud; and (VII) common law breach of fiduciary duty. Plaintiff has moved for summary judgment under Federal Rule of Civil Procedure ("Rule") 56 against Gray, Edwards, and Bennington on those three counts. Edwards and Bennington have also moved for summary judgment under Rule 56. Finally, plaintiff has moved for partial default judgment against Archipel and BIM under Rule 55 on the same three counts.

II. BACKGROUND

A. GRAY MEETS EDWARDS.

In 2006, Gray formed Archipel, a venture capital firm, in Buffalo, New York. Dkt. 242-3 ("Gray Dep."), pp. 17, 34;¹ Dkt. 242-15, ¶ 5. At the time, however, he was still an employeeof Advanced Equities, another financial firm. Id. at 7. On November 14, 2006, he met Edwards, a Canadian institutional money manager with twenty-seven years of experience, through Advanced Equities. Dkt. 242-2 ("Edwards Dep."), pp. 4-5, Dkt. 238-9 ("Edwards Dec."), ¶ 2.

Edwards had retired and was working for an Ontario nonprofit designed to facilitate introductions between investors and start-ups. Edwards Dep. 5. Gray presented him with a pitch for an investment opportunity over a conference call. Id. Edwards left the call impressed by the pitch, and the nonprofit invested in the opportunity. Id. at 5-6.

The year 2007 would prove to be a busy one for the two investment professionals. Edwards organized Bennington in Canada in 2007 so that he could hold a Canadian securities license and provide advice to a venture capital fund. Edwards Dec. ¶ 9. Bennington never engaged in any actual business operations, and the Canadian defendant ceded its securities license in 2012. Id.

Meanwhile, over the course of the same year, Gray presented "many investment ideas" to Edwards' nonprofit. Edwards Dep. 6. The professional relationship between he and Edwards flourished, and the two engaged in ten venture capital investments without incident until the American defendant's time at Advanced Equity ended in February of 2008. Id. at 6-8; Edwards Dec. ¶ 10. These investments exceeded $12 million, and the Canadian defendant found the American defendant to be "professional and satisfactory." Edwards Dec. ¶ 10. Even after the American defendant left Advanced Equities, he and the Canadian defendant remained in contact because the latter was looking to start a venture capital company in the United States. Edwards Dep. 9.

As it turned out, however, Gray had not been entirely candid with Edwards. During 2008, he was being investigated for a series of grievances lodged against him beginning in2001. Gray Dep. 34. On December 17, 2008, while he was still getting Archipel "up and running," the New York Stock Exchange ("NYSE") disciplined him for engaging in unauthorized trades and for threatening customers who complained about those trades—as well as their families. Gray Dep. 34, 41-59; 242-15, ¶ 4. As a result, he was barred from association with New York Stock Exchange member firms for three years. Gray Dep. 42; 242-15, ¶ 4. The United States Securities and Exchange Commission ("SEC") upheld the censure on July 22, 2009. Gray Dep. 41.

While the investigative and adjudicative phase of Gray's NYSE discipline continued, the charges' existence came to Edwards' attention. Edwards Dep. 7. On November 5, 2008, he sent the American defendant an email telling him that "[n]ot disclosing [his] securities exchange issues [to the Canadian defendant] and the reasons [he was] fired from [Advanced Equities] shows [his] true character" and calling him "[p]athetic." Id. at 135. Nevertheless, he reviewed the charges, and decided that because they lacked any "mentions of fraud," he would stay the course and maintain his relationship with the American defendant. Id. at 8.

In 2009, Gray reached out to Edwards and explained that he had left Advanced Equities to pursue his own investment company: Archipel, a limited partnership. Edwards Dep. 6-8. Engaged as he was in a new enterprise, he asked the Canadian defendant if he would participate on Archipel's advisory board. Id. at 6-7. On November 18, 2009, the Canadian defendant provided a $75,000 loan to Archipel, solidifying their business relationship. Id. at 11.

As a result of that loan, Gray and Edwards possessed a sixty-five and twenty-five percent ownership stake in Archipel respectively.² See Edwards Dep. 162, Dkt. 242-15, ¶ 5. They also owned the same respective percentages of BIM, a limited partnership that theyformed to carry out their investment business. Dkt. 242-15, ¶ 6. Both defendants were general partners of BIM when it was first created in Delaware...