Erben v. Raymond James European Holdings, Inc. et al
Filing
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ORDER granting 26 --motion to dismiss; amended complaint due 7/14/2011. Signed by Judge Steven D. Merryday on 6/30/2011. (BK)
UNITED STATES DISTRICT COURT
MIDDLE DISTRICT OF FLORIDA
TAMPA DIVISION
SALIH HALUK ERBEN,
Plaintiff,
v.
CASE NO: 8:11-cv-933-T-23AEP
RAYMOND JAMES EUROPEAN
HOLDINGS, INC., RAYMOND JAMES
INTERNATIONAL HOLDINGS, INC., and
RAYMOND JAMES FINANCIAL, INC.,
Defendants.
__________________________________/
ORDER
The plaintiff sues (Doc. 1) and alleges breach of contract, negligent supervision,
conversion, civil fraud, and a violation of the Racketeering Influenced and Corrupt
Organizations Act (“RICO”), 18 U.S.C. §§ 1961-68. The defendants move (Doc. 26) to
dismiss, and the plaintiff responds (Doc. 32) in opposition.
Allegations of the Complaint
Salih Haluk Erben is an investor who resides in Turkey. Each defendant is a
Florida corporation with a principal place of business in St. Petersburg, Florida. The
defendant Raymond James European Holdings, Inc., (“RJ European”) is a wholly
owned subsidiary of Raymond James International Holdings, Inc., (“RJ International”),
which is a subsidiary of Raymond James Financial, Inc. (“RJ Financial”).
In 2005, Erben became acquainted with Fethi Berkan, an employee and “portfolio
manager” for Raymond James Securities Turkey (“RJ Turkey”), a seventy-five percent-
owned subsidiary of RJ European. Promotional material describes RJ Turkey as “the
first U.S. member of the Istanbul Stock Exchange.” RJ Turkey (through Berkan)
persuaded Erben to invest with RJ Turkey based “on the representation that [Erben]
would be dealing with a U.S. brokerage with a sterling reputation and effective audit
controls.” As a result of Berkan’s inducement, Erben transferred more than six million
dollars to RJ Turkey to establish a “margin account”.
After the transfer, Erben frequently contacted Berkan to discuss trades. Erben
provided Berkan “buy or sell” instructions and Berkan promised to execute each
instruction by “arranging for margin loans through RJ[] [Turkey] and Turkland Bank as
required.” Erben signed “instruction documents” memorializing the transactions that
Erben authorized. Erben’s agreement with RJ Turkey prohibits trades in Erben’s
account without Erben’s consent. Although RJ Turkey provided Erben neither a
monthly statement nor a “trading confirmation,” Erben maintained an account record
that identified a “balance net of margin loans” equal to $8,735,790 at the end of 2006.
Without Erben’s knowledge, Berkan failed to follow Erben’s instructions, “routinely
traded without authorization,” and caused Erben to incur more than a million dollars in
commissions. The unauthorized trades resulted in the loss of “margin interest” and
depleted the value of the assets in Erben’s account. RJ Turkey disclosed the fraud to
Erben in May, 2007, after Erben sought to liquidate assets from his account in order to
finance the formation of an aviation business. Specifically, Erben sought money for a
deposit to secure the purchase of a fourteen million dollar aircraft. Upon Erben’s
requesting the liquidation of assets, Berkan informed Erben that RJ Turkey could
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provide Erben only a fraction of the deposit necessary for the aircraft. Erben was
invited to a meeting scheduled for the following day, May 3, 2007, at RJ Turkey.
At the meeting, Kerem Bozkurt and Emir Sarpyener, managers of RJ Turkey, and
Erkan Kilimci, a representative of Turkey’s “Capital Markets Board,” informed Erben of
Berken’s fraud. Berkan had disregarded Erben’s trading instructions and maintained a
“secondary account statement” to deceive Erben. Berken engaged in unauthorized
trades, which generated large commissions and dissipated the assets in Erben’s
account to the extent that “the account value was exceeded by the outstanding and
largely unauthorized margin loan.” The fraud resulted in Erben’s postponing the
aviation business and incurring a financial loss. Erben faced litigation by Turkland Bank
over the outstanding margin loan and ultimately lost his home.
Unable to help Erben, RJ Turkey told Erben to seek relief from the American
owners of RJ Turkey. Erben contacted Terrence Bedford, the chairman of RJ Turkey’s
board of directors and the president of RJ International. Additionally, Erben met with
John Critchlow, the auditor, controller, and a board member of RJ Turkey. After
determining that no parent corporation of RJ Turkey intended to atone for RJ Turkey’s
“liabilities” and Berken’s misconduct, Erben complained to Istanbul’s chief prosecutor.
The Capital Markets Board investigated but failed to determine when the fraud began
because RJ Turkey’s books and records were not susceptible to an audit. Additionally,
the Capital Markets Board investigation found (1) “conclusive evidence” of forgery of
Erben’s signature; (2) “significant,” unauthorized commissions; (3) excessive interest on
margin loans; (4) losses from unauthorized trades; (5) several deficiencies in RJ
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Turkey’s internal audit and control system; and (6) a failure to comply with approved
procedure.
In October, 2008, the Capital Markets Board suspended RJ Turkey from
operating in Turkey until RJ Turkey established a “capital adequacy ratio”. Erben was
unaware that RJ Turkey was “badly undercapitalized”. After RJ Turkey’s suspension,
RJ Turkey became “completely insolvent” with no recoverable assets. In October,
2010, an inspector for the Capital Markets Board testified (during a criminal proceeding
against several former RJ Turkey employees) (1) that RJ Turkey’s parent companies
completely controlled RJ Turkey, (2) that RJ Turkey and maintained “no independent
existence,” and (3) that “funds had been removed from RJ[] [Turkey] prior to its
insolvency”. At this time, RJ Turkey no longer maintains a presence in Turkey.
Discussion
In moving to dismiss, the defendants argue (1) that the complaint is “an improper
attempt to pierce the corporate veil” through three levels of parent corporations “based
on the alleged wrongdoing of a non-party Turkish subsidiary corporation and its Turkish
employee”; (2) that the plaintiff fails to allege facts showing that the defendants
purposefully created or used RJ Turkey to perpetrate fraud; and (3) that the complaint
otherwise fails to state a claim and fails to comply with Rules 8 and 9, Federal Rules of
Civil Procedure. In response, the plaintiff argues (1) that the defendants exaggerate the
plaintiff’s pleading burden, (2) that proof of fraud is not essential to piercing the
corporate veil, (3) that the plaintiff alleges facts sufficient to justify piercing the corporate
veil, and (4) that the complaint otherwise states a claim on each of the five counts.
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“[T]he corporate veil may not be pierced absent a showing of improper conduct.”
Dania Jai-Alai Palace, Inc. v. Sykes, 450 So. 2d 1114, 1121 (Fla. 1984) (quoting
Advertects, Inc. v. Sawyer Indus., Inc., 84 So. 2d 21, 23-24 (Fla. 1955)). “Improper
conduct is present only in “‘cases in which the corporation was a mere device or sham
to accomplish some ulterior purpose . . . or where the purpose is to evade some statute
or to accomplish some fraud or illegal purpose.’ ” Johnson Enter., Inc. v. FPL Group,
Inc., 162 F.3d 1290, 1320 (11th Cir. 1998) (quoting Dania Jai-Alai). As Dania Jai-Alai
explains:
The rule is that the corporate veil will not be pierced, either at law or
in equity, unless it be shown that the corporation was organized or
used to mislead creditors or to perpetrate a fraud upon them . . . . In
the absence of pleading and proof that the corporation was
organized for an illegal purpose or that its members fraudulently
used the corporation as a means of evading liability with respect to a
transaction that was, in truth, personal and not corporate, [a plaintiff]
cannot be heard to question the corporate existence but must
confide his efforts to the remedies provided by law for satisfying his
judgment from the assets of the corporation, if any can be found.
450 So. 2d at 1119-20 (quoting Riley v. Fatt, 47 So. 2d 769, 773 (Fla. 1950)) (citations
omitted). Accordingly, “[n]o liability attaches to the parent for the wrongful conduct of
the subsidiary unless the parent exercises control to the extent that the subsidiary exists
as the parent's mere agent or instrumentality.” Cook v. Smith, 2006 WL 580991, *2
(M.D. Fla. 2006); Johnson, 162 F.3d at 1320 (explaining that the plaintiff must show
both that the subsidiary was a “mere instrumentality” and that the parent engaged in
“improper conduct” in the organization or use of the subsidiary). A plaintiff must
demonstrate that the parent exhibited “more than a high degree of control” over the
subsidiary. Cook, 2006 WL 580991 at *2 (citing cases); In re Homelands of DeLeon
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Springs, Inc., 190 B.R. 666, 670-71 (M.D. Fla. 1995) (Funk, J.) (finding that piercing the
corporate veil requires that the shareholder dominated and controlled the corporation to
the extent that the corporation lacked an independent existence, that the corporate form
was used fraudulently or for an improper purpose, and that the fraudulent or improper
use of the corporate form caused injury to the plaintiff). However, “[l]iability rarely
attaches to a parent and indiscriminate use of the ‘mere instrumentality’ rule destroys
the purpose of corporate law.” Cook, 2006 WL 580991 at *2 (citing Brown v. Margrande
Compania Naviera, S.A., 281 F. Supp. 1004, 1005-06 (D. Va. 1968)).
Because the practice of commercial enterprise, both wholesome and
unwholesome, features means and forms unbounded in variety, no list of attributes
encompasses each fact or factor that might reveal or rebut the disregard or abuse of
corporateness. The factors typically and initially examined in assessing corporate
independence include (but are not limited to) (1) failure to observe usual corporate
formalities, (2) inadequate capitalization, (3) intermingling of assets and property,
(4) shared offices and contact information, (5) either a guarantee or a payment of the
corporation’s debt by the dominant shareholder or parent, (6) a lack of arms-length
transactions, (7) consolidated financial statements and tax returns, (8) dependence on
the parent to generate business, (9) a joint accounting and payroll system,
(10) financing derived from the parent, (11) failure to operate as an independent profit
center (but rather as a department of the parent corporation), (12) failure to pay
dividends, (13) non-functioning or interlocking officers and directors, (14) employment of
the same attorneys, and (15) a limited degree of discretion.
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In moving to dismiss, the defendants argue (1) that the complaint is devoid of
facts “as opposed to conclusory statements” showing that RJ Turkey was a “mere
instrumentality” of “three levels of parent corporations”; (2) that the plaintiff alleges “only
normal circumstances of ownership attendant with parent/subsidiary relationships”;
(3) that the allegations fail to satisfy the standard described in Dania Jai-Alai; (4) that
the complaint contains no facts showing that the defendants “organized or used RJ
Turkey to commit fraudulent acts or mislead creditors”; (5) that the complaint fails to
allege a fraudulent statement or omission by the defendants; and (6) that, although RJ
Turkey purportedly became undercapitalized and insolvent in 2008,1 the complaint
contains no allegation that RJ Turkey was undercapitalized and insolvent upon
formation. In response, the plaintiff argues that complaint alleges facts sufficient to
pierce the corporate veil, which allegations include (1) the ownership structure and
corporate relation between RJ Turkey, RJ European, RJ International, and RJ Financial;
(2) the defendants’ “dominance” of RJ Turkey “including placement of the [d]efendants’
officers and agents in key positions”; (3) the investigation and report by the Capital
Markets Board “regarding the failures of RJ[] [Turkey’s] audit procedures”; (4) the
testimony of the Capital Markets Board’s inspector, who “concluded that RJ[] [Turkey]
was completely dominated by its U.S. parents”; and (5) the allegation that RJ Turkey
was undercapitalized and that “funds were removed from RJ[] [Turkey] prior to its
collapse”.
1
“[I]nadequate capitalization refers to the amount of capital provided to a subsidiary upon its
formation. A subsidiary [that] incurs losses subsequent to its incorporation is not considered
undercapitalized.” In re Hillsborough Holdings Corp., 176 B.R. 223, 234 (M.D. Fla. 1994) (Nimmons, J.)
(citations omitted).
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In this instance, the complaint fails to allege facts sufficient to show either that the
defendants engaged in improper conduct or that RJ Turkey was a “mere instrumentality”
of the defendants. The complaint contains no facts supporting the defendants’ alleged
“dominance” over RJ Turkey. Rather, the alleged testimony of the inspector from the
Capital Markets Board provides unsupported conclusions (in the form of hearsay and
entitled to no weight) about the “dominance” and “control” of RJ Turkey by its U.S.
parent corporations. The complaint alleges (1) that two of the defendants’ officers
occupied a position on RJ Turkey’s board of directors, (2) that one of the defendants’
officers worked as an auditor and controller for RJ Turkey, and (3) that RJ European
owned a seventy-five percent interest in RJ Turkey. These facts, however, appear to
illustrate a typical parent-subsidiary relation and to provide little, if any, support for
piercing the corporate veil.
Furthermore, as the defendants argue, the complaint fails to allege that RJ Turkey
was insolvent and undercapitalized upon formation (which supports the allegation that
the corporation was “a mere device or sham”) but alleges that in 2008 RJ Turkey was
undercapitalized and became insolvent (which provides no support for the allegation
that the corporation was “a mere device or sham”). See Johnson, 162 F.3d at 1320; In
re Hillsborough Holdings, 176 B.R. at 234. The complaint contains no facts showing
either that the defendants dominated and controlled RJ Turkey to the extent that RJ
Turkey lacked an independent existence or that the defendants disregarded the
corporate form. The Capital Markets Board found that RJ Turkey both maintained an
inadequate audit and control system and failed to comply with approved audit and
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control procedures. However, these allegations (without more) fail to state a claim that
RJ Turkey maintained no independent existence, observed no corporate formality, and
served only as an artifice in a scheme to defraud or deceive.
Conclusion
Accordingly, because the complaint contains no factual support for piercing the
corporate veil, the plaintiff fails to state a claim. The defendants’ motion (Doc. 26) to
dismiss is GRANTED. The plaintiff may file an amended complaint no later than
July 14, 2011.
ORDERED in Tampa, Florida, on June 30, 2011.
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