Marini et al v. Adamo et al
Filing
234
FINDINGS OF FACT AND CONCLUSIONS OF LAW. For the reasons explained herein, the Court concludes that plaintiffs have shown by a preponderance of the evidence that Adamo, H. Edward, and Bolton violated Section 10(b) of the Exchange Act, as well as New York common law for claims of unjust enrichment, and money had and received. Plaintiffs have also demonstrated that Adamo breached his fiduciary duty to Marini. The Court also finds that plaintiffs have proven by clear and convincing evidence that A damo, H. Edward, and Bolton committed fraud in violation of New York common law. On the state law claims, once the damages issue on the Exchange Act claim is resolved, the Court will enter judgment in the amount of $11,304,079, plus pre-judgmen t interest calculated at a rate of 9% from January 1, 2005 to the present, as well as post-judgment interest. With respect to the claims against Mrs. Adamo for unjust enrichment, as well as money had and received, the Court concludes that suppl emental briefing is necessary to assist the Court in determining whether liability exists and, if so, the amount of such liability. The Court will set a schedule for additional briefing on the amount of damages for the Exchange Act claim, as well as the claims against Mrs. Adamo, in light of this Memorandum and Order. SO ORDERED. Ordered by Judge Joseph F. Bianco on 2/6/2014. (Lamb, Conor)
UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF NEW YORK
_____________________
No 08-CV-3995 (JFB) (ETB)
_____________________
ROCCO MARINI, JOSEPHINE MARINI, AND T&R KNITTING MILL, INC.,
Plaintiffs,
VERSUS
HAROLD ADAMO, JR., LISA ADAMO, THE BOLTON GROUP, INC., AND H. EDWARD
RARE COINS & COLLECTIBLES, INC.,
Defendants.
___________________
MEMORANDUM AND ORDER
February 6, 2014
__________________
JOSEPH F. BIANCO, District Judge:
(the “Exchange Act”), as well as claims of
fraud, breach of fiduciary duty, unjust
enrichment, and money had and received
under New York common law. From 2002
to 2007, plaintiffs purchased or traded for
eighty-six rare coins from Adamo. In 2008,
plaintiffs discovered that these coins were
worth significantly less than what they had
paid for them. Plaintiffs allege that Adamo
did not simply overcharge them for these
items, but that Adamo committed fraud and
other illegal actions over the course of their
business relationship. Plaintiffs seek
recovery of their out-of-pocket economic
loss of $11,304,709, plus interest, as well as
punitive damages in an amount equal to
their out-of-pocket loss.
Plaintiffs Rocco Marini (“Marini”),
Josephine Marini (“Mrs. Marini”), and T&R
Knitting Mill (“T&R”)1 (collectively,
“plaintiffs”) bring this action against Harold
Adamo, Jr. (“Adamo”), Lisa Adamo (“Mrs.
Adamo”), The Bolton Group, Inc.
(“Bolton”), and H. Edward Rare Coins &
Collectibles,
Inc.
(“H.
Edward”)
(collectively, “defendants”), asserting claims
under Section 10(b) of the Securities
Exchange Act of 1934, 15 U.S.C. § 78j(b)
1
Defendants argue that T&R should be dismissed
from this action because plaintiffs claim that T&R
never owned any coins and never purchased any
coins. (Defs.’ Mem. at 25.) However, plaintiffs make
clear that T&R is only a plaintiff because defendants
declined to stipulate that all coins purchased by
Marini with T&R funds were actually on behalf of
Marini. (Pls.’ Mem. at 107.) Because it now appears
that defendants have abandoned that argument, and
because the testimony at trial demonstrated that all
coins bought using T&R funds were actually on
behalf of Marini, T&R is dismissed from this action
with no effect on plaintiffs’ recovery.
Having held a bench trial, the Court now
issues its findings of fact and conclusions of
law, as required by Rule 52(a) of the Federal
Rules of Civil Procedure, and concludes,
after carefully considering the evidence
introduced at trial, the arguments of counsel,
1
and the controlling law on the issues
presented, that plaintiffs have met their
burden of proof on all of their claims against
defendants Adamo, H. Edward, and Bolton,
including meeting their burden of proof
under the “clear and convincing evidence”
standard required to prove each element of
the common law fraud claim. Specifically,
the Court finds that plaintiffs have proven
that they are entitled to the following relief:
(a) Adamo, H. Edward, and Bolton are liable
for violations of the Exchange Act, but the
Court is requesting supplemental briefing on
the issue of damages on this claim;2 (b)
Adamo, H. Edward, and Bolton are liable
for $11,304,079 in compensatory damages
for committing common law fraud; (c)
Adamo is liable for $11,304,079 in
compensatory damages for violations of the
breach of fiduciary duty; and (d) Adamo, H.
Edward, Bolton, are liable for $11,304,079
in compensatory damages for unjust
enrichment and money had and received.
Plaintiffs are also entitled to pre-judgment
and post-judgment interest. However, the
Court, in its discretion, declines to award
punitive damages.
2003 for $100,000.
Among Adamo’s
fraudulent oral misrepresentations to induce
Marini to purchase coins were the following:
(1) Adamo would be buying the same coins
as Marini; (2) the coins were liquid and
Marini could sell his coins within 24 to 48
hours; and (3) Adamo would only charge a
small commission on each coin. Adamo
knew these and other material statements
were false when he made them. Adamo was
able to perpetuate the fraud for several
years, and induce Marini to buy additional
coins usually at grossly inflated prices, by
sending Marini written coin statements that
contained false values for Marini’s coins.
The oral false statements, as well as the false
values in the written coin statements, were
material and reasonably relied upon by
Marini. In reaching its verdict, the Court
has carefully examined all of the evidence,
including the credibility of each of the
witnesses based upon their demeanor, and
their answers to the questions in light of all
of the evidence in the case. Mr. Marini’s
testimony was highly credible on each and
every one of the key elements of the case
and was often corroborated extensively by
other evidence in the case, such as coin
statements from Adamo, e-mails, taped
recordings with Adamo, and wire records
and checks. Marini testified that, in addition
to the more than $11 million that Marini
paid to Adamo for coins through checks and
wire transfers, he also paid Adamo
approximately $4.7 million in cash.
Although Adamo vigorously disputed that
such cash was provided to him, the Court
found Marini’s testimony on that issue to be
fully credible in light of his demeanor and
all the evidence in the case. In contrast,
Adamo’s testimony on each of the key
issues was lacking in credibility based not
only on his demeanor, but also based upon
the internal inconsistencies in his testimony
over time, the fact that much of his
testimony was contradicted by other credible
As set forth in detail below, plaintiffs
presented overwhelming evidence that
Adamo defrauded Marini by making a series
of false and material misrepresentations in
order to induce Marini to buy numerous
coins from Adamo, for investment purposes,
at grossly inflated values over a period of
several years.
For example, Adamo
purchased a 1988 $1 Morgan Silver Dollar
in April 2003 for $200, and then sold that
same exact coin to Marini in December
2
Although the Court concludes that Adamo, H.
Edward, and Bolton are liable for violations of the
Exchange Act, the Court needs supplemental briefing
to determine the amount of damages because (as
discussed infra) the Court has determined that, under
the statute of repose, plaintiff can only recover on
that particular claim for damages for any transactions
that occurred on or after September 30, 2003.
2
defendants agreed that the transactions at
issue in this case constituted “securities”
under the Exchange Act, and, in exchange,
plaintiffs dismissed the RICO claim. (ECF
No. 156.)
evidence in the case, and the fact that his
testimony defied common sense in many
instances. In short, the credible evidence
offered by plaintiffs overwhelmingly proved
their claims against Adamo, H. Edward, and
Bolton, including compensatory damages in
the amount of $11,304,079.
The Court held a bench trial beginning
on October 22, 2012, and continuing over
twelve days of testimony.3 The Court heard
closing statements from both parties on
April 12, 2013. Both sides submitted
exhibits to be considered by the Court—
including excerpts of depositions—as well
as post-trial proposed findings of fact and
conclusions of law.
With respect to the claims against Mrs.
Adamo for unjust enrichment, as well as
money had and received, the Court
concludes that supplemental briefing is
necessary to assist the Court in determining
whether liability exists and, if so, the
amount of such liability.
I.
The Court has fully considered all of the
evidence presented by the parties, as well as
their written submissions. Below are the
Court’s Findings of Fact and Conclusions of
Law.
BACKGROUND
On September 30, 2008, plaintiffs filed
their complaint alleging violations of the
Exchange Act, the Racketeer Influenced and
Corrupt Organizations Act (“RICO”), 18
U.S.C. §§ 1961 et seq., as well as various
causes of action under state law. Plaintiffs
filed an amended complaint on October 17,
2008. On November 28, 2008, defendants
filed a motion to dismiss, and the Court
denied that motion on February 13, 2009.
Defendants answered the complaint on
March 2, 2009. After the completion of
some discovery, plaintiffs filed a second
amended complaint on June 22, 2010, and
defendants answered on July 22, 2010.
II.
FINDINGS OF FACT
The following section constitutes the
Court’s Findings of Fact4 pursuant to
Federal Rule of Civil Procedure 52(a)(1).
These Findings of Fact are drawn from
witness testimony at trial and the parties’
trial exhibits.
A. Marini’s Cash Earnings
Marini began buying and selling
“irregular” sweaters at flea markets in 1978,
when he was 15 years old. (Tr. at 773-76.)
Marini then transitioned to supplying these
sweaters to flea market and street sellers at
wholesale. (Id. at 776-77.) Marini began
generating significant revenue from this
enterprise, and the payments were
On October 16, 2010, defendants moved
for partial summary judgment on plaintiffs’
securities fraud and RICO claims, as well as
on plaintiffs’ state law fraud, breach of
contract, and New York General Business
Law § 349 claims. On September 26, 2011,
the Court granted defendants’ motion with
respect to the General Business Law claim,
but denied the motion with respect to all
other claims.
3
Both sides consented to a bench trial. (See Joint
Pretrial Order (“PTO”), ECF No. 200, ¶ 5; Letter
Consenting to Pls.’ Request for a Bench Trial, June
20, 2012, ECF No. 171.)
4
To the extent that any Finding of Fact reflects a
legal conclusion, it shall to that extent be deemed a
Conclusion of Law, and vice-versa.
On April 11, 2012, the Court so-ordered
a stipulation between the parties in which
3
“primarily cash.” (Id. at 780.) Marini
testified that by his early twenties, he had
“generated $5 million of cash.” (Id. at 821.)
As stated infra, Marini used this cash to
partially fund his purchases of coins.
C. The Parties’ Friendship and the
Beginning of the Coin Purchases
Mrs. Marini met Mrs. Adamo in May of
1992 when they both lived on the same
block in Manhasset Hills, New York. (Tr. at
353, 999.) The Marinis and the Adamos
became close friends; they are godparents to
each other’s children. (Id. at 383, 514.) The
families spent considerable time socializing
with one another and traveling together. (Id.
at 383, 1000.)
Defendants vigorously dispute Marini’s
version of events regarding the “cash hoard”
story in their post-trial submissions, labeling
it a “ridiculous [] fabrication” “from
beginning to end.” (Defs.’ Mem. at 8.)
However, the Court finds Marini’s
testimony regarding the cash credible, and
defendants have introduced no credible
evidence to dispute plaintiffs’ evidence
besides baseless accusations.
In 2002, approximately ten years after
they became friends, the Adamos surprised
the Marinis by unexpectedly joining them
during a Caribbean vacation. (Id. at 384-85.)
During the vacation, Marini and Adamo
began discussing a coin transaction Adamo
recently completed. (Id. at 387-89, 121718.) Marini expressed interest in investing in
coins with Adamo. (Id. at 389, 1218.)
In 1984, Marini and his father founded
T&R. (Tr. at 362). Marini is currently the
sole shareholder of the corporation. (Id. at
888.)
B. Adamo the Coin Dealer
In August 2002, Adamo encouraged
Marini to purchase coins through him during
a breakfast at the Seacrest Diner. (Id. at
389.) Marini credibly testified that Adamo
made the following representations during
this conversation or in the days following
this meeting:
Adamo is employed as a buyer and seller
of rare coins and collectibles (id. at 1195)
and is extremely knowledge about rare coins
(id. at 1203-06). Adamo founded H. Edward
and Bolton and uses those companies to sell
rare coins. (Id. at 1195.) Adamo and his wife
Mrs. Adamo are the sole owners and
directors of Bolton and H. Edward; Adamo
is the President of H. Edward and Bolton,
while Mrs. Adamo is the Vice President of
H. Edward. (Id. at 1195-98.) The parties
agree that Mrs. Adamo did not sell plaintiffs
any coins or make any representations
regarding the value of coins.5 (JPTO ¶ 17.)
5
However, Mrs. Marini testified that she witnessed
Mrs. Adamo use a corporate credit card to pay for
lunch on at least one occasion and that Mrs. Adamo
spent her husband’s money. (Id. at 1010.)
4
Marini would be purchasing coins at
the “dirt bottom” (id. at 389), and
they were “poised to rise in value”
(id. at 392).
Marini would be buying the “same
coins” Adamo purchases for himself
(id. at 393, 395), and their
“investment portfolio[s] would be
pretty much identical” (id. at 439).
Marini “[could not] go wrong with”
these coins because “they were the
top one percent of one percent.” (Id.
at 393.)
Adamo had “never seen these kinds
of coins go down.” (Id. at 394.)
In May 2003, Adamo recommended that
Marini sell one of his coins, a 1937-D
Buffalo nickel that Marini purchased from
Adamo seven months earlier. (Tr. at 477,
932.) Marini credibly testified that Adamo
stated, “I’m strongly advising you to sell.
I’m selling my coin, you should sell yours as
well.” (Id. at 932.) Marini sold the coin back
to Adamo for a profit of $180,000. (Id. at
477.) This was not the only coin that Adamo
bought back from Marini resulting in a
profit for plaintiffs. In 2002, Marini bought
a 1915 $50 round NGC MS65 from Adamo
for $135,000. (Id. at 1376; PX2 at PL508.)
In 2008, Adamo purchased the coin back
from Marini for $200,000. (Tr. at 1322,
1376.) However, records indicate that
Adamo actually sold that coin to another
entity for $125,000. (PX 33 at CAMI34.) As
discussed in more detail infra, plaintiffs
allege that this practice of occasionally
giving Marini a significant return on his
investment was a misrepresentation intended
to induce plaintiffs to purchase more coins.
The coin market had gone up “300
percent in the past” and was “poised
to repeat itself in the next 5, 10, 15
years” (id. at 390), with investment
“potential” of “20 to 30 percent” (id.
at 407).6
The
coin
purchases
were
investments. (Id. at 393.)
The coins were liquid and Marini
“could get out in 24 to 48 hours at
the current price.” (Id. at 397.)
Adamo would only charge a “small
commission.” (Id. at 395.)
Adamo asked Marini that he only sell
coins through Adamo. (Id. at 878.) Marini
never bought coins from anyone besides
Adamo and never sold coins to anyone other
than Adamo until after their relationship
ended. (Id. at 611). In addition, Marini never
selected any coins; he solely relied on the
advice and representations of Adamo
regarding which coins to buy. (Id. at 447.)
Moreover, although Marini clearly bought
coins directly through Adamo, Adamo also
admitted that he sold Marini coins through
his two corporations, Bolton and H. Edward.
(See id. at 1195-96.)
D. Coin Statements and False Valuations
In late 2002, after Marini purchased the
first three coins, Marini requested
documentation memorializing which coins
he owned and their value. (Tr. at 408.)
Adamo testified that the reason he prepared
these coin statements, and did not provide
invoices after each coin purchase, was
because Marini told him that he did not want
invoices. (Id. at 1238 (Adamo: “[Marini]
said he didn’t want any kind of paper
trail.”).)
In September 2002, Marini purchased
his first coin from Adamo, an 1879 Flowing
Hair Stella, grade PR-64 Cameo. (Id. at 39798.) Two weeks later, Marini purchased
another Stella and a 1776 Silver dollar. (Id.
at 402.) Adamo advised Marini that he
purchased himself a Stella at the same time.
(Id.) Approximately a week later, Marini
purchased more coins from Adamo. (Id. at
403.) In the first two months of this
relationship, Marini spent $1,665,000 on
coins. (PX9 at 1.)
In any event, it is undisputed that Adamo
created coin statements for Marini. These
statements were rudimentary lists that
contained the type of coin, its grade, and its
value. (See PX2.) The value was expressed
in a basic code, represented by the term
“POINT BREAK.” In this code, P=1, O=2,
I=3, N=4, T=5, B=6, R=7, E=8, A=9, and
6
Although plaintiffs also claim that Adamo promised
Marini “20 to 40 percent returns plus” if he invested
(Pls.’ Mem. at 9), such testimony was from a 2009
deposition and was contradicted by Marini’s
representation at trial that the investment “potential”
was “20 to 30 percent” (Tr. at 407).
5
PL1062 (Adamo states that Marini paid
“$830,000” in “cash” for the 1933 $10
MS65 coin), with PX2 at PL562 (coin
statement lists that code as EIK, i.e., 830).)
Although defendants attempt to explain this
evidence away due to the nature of their
argument, i.e., that PKK could equal
$100,000 but did not have to equal
$100,000, the numerous corroborations of
the consistent code conversion, combined
with all of the evidence at trial (including
Marini’s credible testimony), support
plaintiffs’ assertions regarding the code.
K=0. (See, e.g., Tr. at 411-12, 1253-54,
1475.) For example, PTK next to a coin
meant that the coin was worth 150. During
the trial, the parties strongly contested how
to translate the code into a dollar value, i.e.,
whether PTK represented $150, $1,500,
$15,000, or $150,000. Marini testified that
the code always represented a price in
thousands (id. at 414), while Adamo stated
that the value varied depending on the coin,
and that only he knew how many zeros to
add that represented an accurate value for
the coin (id. at 1254-55). At trial, defendants
introduced testimony from Adamo that
attempted to demonstrate that this variability
in what the code represented meant that
Marini did not purchase nearly the dollar
value in coins that he claimed he did. (See
id. at 1255-59, 1281-82. Compare id. at
1254 (Adamo testified that for some coins
he added double letters or omitted Ks), with
id. at 1335 (Adamo testified that for some
coins the code was as Marini represented
it).) For example, Adamo stated that a coin
listed on the coin statement for ONK
(representing $240,000 according to Marini)
was actually bought by Marini for just
$24,000. (Id. at 1256.)
At trial, in an attempt to prove that
Marini did not pay as much for the coins as
he claimed, defendants introduced an exhibit
in which Adamo “corrected” the prices that
Marini paid. (See DX69.) This exhibit was
created for purposes of the trial. For some
coins, Adamo admitted that the prices paid
were what Marini claimed, while for others
the price of the coin was reduced by a factor
of 10 or 100 to coincide with Adamo’s
explanation regarding the code. For other
coins, Adamo stated that Marini did not
actually pay him for the coins, but that they
were part of a trade. However, this exhibit is
merely a summary of testimony that Adamo
gave, which was not credible and not
supported by any documentary evidence.
However, the documentary evidence
overwhelmingly corroborates Marini’s
credible testimony. For example, the code
on the coin statement for the first coin
purchased (the 1879 Stella) is PKK. (PX2 at
PL508.) Plaintiffs introduced evidence
demonstrating that Marini paid for the coin
with a check for $100,000. (PX8 at PL918.)
In addition, e-mails between the parties
confirm some of plaintiffs’ code to price
conversions. (Compare PX1 at PL3676 (email from Adamo to Marini stating that the
cost of the 1793 S-1 Chain Cent Ameri. was
“150”), with PX2 at PL516 (coin statement
listing the price of that coin as PTK, i.e.
150).) A secretly recorded conversation
between Marini and Adamo also confirms
Marini’s interpretation. (Compare PX48 at
The lack of credibility in Adamo’s
testimony is further demonstrated by
inconsistencies within his sworn statements.
For example, at one deposition, Adamo
stated that he changed the code frequently.
(PX54, Dep. of Harry Adamo, Nov. 11,
2009 at 92.) However, at another deposition,
Adamo testified that he had been using the
same system for twenty years. (PX54, Dep.
of Harry Adamo, June 23, 2009 at 249.)
After reviewing all of the evidence and
the demeanor of the witnesses, the Court
finds Marini’s testimony credible and
Adamo’s testimony not credible, and that
6
the code always represented a value in the
thousands, and represented the amounts to
which Marini testified.
was worth $50,000 in 2002. (PX29 at 10.) In
February 2003, Marini purchased a 1918/7-S
Standing Liberty 25 cent coin for $110,000
from Adamo (PX2 at PL517), while Adamo
purchased the same coin in the same grade
that month for just $13,000 (PX41 at
DEF433). One of plaintiffs’ experts credibly
testified that this coin was worth only
$18,500 in 2003. (PX29 at 15.) In addition,
the highest markup of all occurred when
Adamo purchased a 1888 $1 Morgan Silver
Dollar in April 2003 for $200 (PX40 at
WEIN3), and then sold that same exact coin
to Marini in December 2003 for $100,000
(PX2 at PL536-7). Through discovery,
plaintiffs were able to ascertain Adamo’s
purchase price for 36 coins that he later sold
to Marini; 35 of the 36 coins had a markup
of at least 50%, 32 of the 36 coins had a
markup of at least 100%, and 12 of the 36
coins had a markup of at least 1000%. (See
PX5.) The coin statements reflect the
inflated value of all the coins. (See, e.g.,
PX2 at PL516 (listing coin as costing
$375,000 when plaintiffs’ expert places the
value at the time of purchase at $62,200).).
The coin statements that Adamo created
for Marini consistently showed an increase
in the value of plaintiffs’ collection. As of
the November 2005 statements, plaintiffs
had invested approximately $13,054,000 in
coins and Adamo had valued the collection
at $19,133,000. (PX2 PL536-10 – PL53618; see also PX9 (plaintiffs’ summary
exhibit listing all payments made to
defendants).) As of March 2006, Adamo
valued Marini’s coin collection at
$21,764,000, an average increase of 32%
over the purchase price. (PX2 at PL537 –
PL545.) By September 2006, it was valued
at $25,865,000. (PX2 at PL546 – PL554.)
The Court finds that Adamo overcharged
Marini for many coins and affirmatively
misrepresented the value of the coins on
these coin statements.7 There are many
examples of excessive markups, including
the following: In December 2002, Marini
purchased an 1880-S Morgan Dollar with a
grade of MS-69 from Adamo for $250,000.
(PX2 at PL516.) Just one month later,
Adamo purchased the same coin in the same
grade from a dealer for just $33,500. (PX41
at DEF435.) The unrebutted, credible
testimony of one of plaintiffs’ experts,
discussed more fully infra, is that this coin
Adamo also made oral statements to
corroborate the misrepresentations on the
coin statements. For example, Marini paid
$575,000 for a 15-piece Indian set. (Tr. at
495-96; PX2 at PL530.) Adamo later valued
the set at $700,000 (PX2 at PL530), then
$750,000 (id. at PL536-7), and then
$800,000 (id. at PL536-16). Adamo told
Marini when he bought it “this is a great set.
It is already moving in value.” (Tr. at 495.)
However, Adamo bought this set for just
$61,500 (PX41 at DEF 429-30), and
plaintiffs’ expert credibly valued the set at
$62,400 (PX29 at 18-19).
7
As discussed more fully in the Conclusions of Law,
that an individual is charged an excessive markup for
a coin does not, by itself, result in a finding of
securities fraud and common law fraud. However, the
Court finds that the markup in this case constitutes
fraud because, inter alia: (1) defendants stipulated
that the coins were securities and Adamo, as a dealer
of securities, could not charge an excessive markup
absent adequate disclosures, (2) Adamo made
affirmative representations that he would only charge
Marini a small commission; and (3) Adamo’s
misrepresentations regarding the value of the coins,
and not simply the price paid, induced further
purchases.
Plaintiffs’ allegations are also confirmed
by e-mails between the parties. For example,
in March 2003, Marini paid $150,000 for a
1793 Chain Cent Ameri. Coin. (PX2 at
PL516.) In a September 28, 2006 e-mail,
7
Adamo told Marini that the cost of this coin
was “150” and that the current value was
“200,” clearly representing $150,000 and
$200,000 respectively. (PX1 at PL3676.)
Plaintiffs’ expert credibly estimated that the
2003 value was just $30,500. (PX29 at 3.)
One of the critical factual disputes at
trial centered on how much cash was used to
fund coin purchases. Marini testified that he
paid Adamo approximately $4.7 million in
cash for rare coins. (Tr. at 667.) According
to Marini, Adamo asked Marini to pay for
some older coins in cash in order to motivate
collectors to sell. (Id. at 731.) Marini stored
the cash in a safe at his parents’ home. (Id.
at 724-25.) Marini testified that on one
occasion, he delivered a large amount of
cash (approximately $1.34 million) to
Adamo in “glossy shopping bags.” (Id. at
729.) Marini stated that he brought the
shopping bags into the garage and that he
and Mrs. Adamo made small talk while
Adamo counted the money. (Id. at 730.)
These are just some of the many
examples that demonstrate that Adamo
made
affirmative
misrepresentations
regarding the valuation of coins, not simply
that he charged Marini a higher price than
other dealers would have. Adamo used the
coin statements, as well as e-mails and oral
statements, to reinforce to Marini the
falsehood that these coins were worth a
market price far above their true value.
E. Amount Paid for Coins
Defendants spent a considerable portion
of the trial attempting to discredit plaintiffs’
assertions regarding the amount of cash
Marini used to purchase coins. They argued
that: (1) Marini could not possibly have
accumulated $5 million in cash from the flea
market wholesale business; (2) Marini could
not and would not have kept $5 million in
cash in his parents’ house; (3) even if Marini
had such a large amount of cash, no one
could possibly fit and carry $1.34 million of
U.S. currency into shopping bags.9 To
The parties stipulated that plaintiffs paid
$11,633,404.39 for coins, supported by
wires and checks from plaintiffs to
defendants that were produced during
discovery.8 (PTO ¶ 7.) Plaintiffs allege that
they actually paid defendants $12,123,404
for coins through wires and checks. The
difference in the figures is that plaintiffs
claim that Marini’s mother wrote Adamo a
check for $415,000 in 2006, although no
record of this check could be produced
during discovery. (Tr. at 1008.) Plaintiffs
also claim that in early 2005 Marini took a
principal check that Jay Yackow brought
back to him for $75,000 and signed it over
to Adamo. (Id. at 732-33.) After weighing
the credibility of the testimony, as well as
the fact that these payments are supported
by the total amount paid as detailed in the
coin statements, the Court finds that
plaintiffs paid defendants $12,123,404 in
checks and wires for coins.
9
With respect to the last point, defendants argued at
trial that Marini could not possibly carry $1.34
million in U.S. currency in shopping bags given the
weight of such money. The Court rejects that
argument based upon the credible evidence, including
Marini’s testimony, regarding the amount of cash
given to Mr. Adamo. Specifically, Marini testified
during the trial that the cash he brought to Adamo
was primarily composed of $100 bills, although the
bags contained other denominations as well. (See Tr.
at 729.) Although defendants read portions of
Marini’s depositions in which he stated that he could
not recall the exact denominations of currency that he
brought to Adamo on this important occasion (Tr. at
864), the Court credits the trial testimony in light of
Marini’s demeanor and the other evidence in the
record, including the recorded conversation with
Adamo. If the $1.34 million dollars was comprised
of $100 bills, the cash would weigh approximately
8
Discovery actually produced $11,658,404.39 in
checks and wires paid to defendants, but plaintiffs
admitted that $25,000 of that money was for the
purchase of watches. (PTO ¶ 7; Tr. at 734-35.)
8
support their accusations, Adamo testified
that he only received $55,000 in cash from
Marini. (Id. at 1200.) In addition, Mrs
Adamo rejected Marini’s version of the
events regarding the cash delivery, and
stated that she never saw Marini giving her
husband cash in their garage. (Id. at 158889.)
Adamo: No I just move it from
widget to widget, from me to you to
somebody else. That’s not something
I would hold. First of all, where are
you going to put it? You know
Zurich’s out again.
(PX 48 at PL1083.)
Additional support for plaintiffs’
argument is that the purchase price for the
coins as totaled by the coins statements
exceeds the amount of checks and wires that
were produced during discovery. For
example, in just the first five months of the
parties’ transactions, the coin statements
show that Adamo sold Marini approximately
$5.3 million in coins (see PX2 at PL510511), while discovery only produced
approximately $2.25 million in checks and
wires being paid from plaintiffs to
defendants (see PX9).
To corroborate their assertion regarding
the amount of cash used, plaintiffs
introduced
a
conversation
Marini
surreptitiously recorded with Adamo after
Marini had discovered the fraud, but had not
yet told Adamo of his knowledge. During
the conversation, Marini asked Adamo to
repurchase some of the coins with cash:
Marini: Even if it’s still, I don’t
know if you still have some of the
cash that we did, I could sell back in
cash, because I can do that in cash,
as well.
Defendants tried to demonstrate that the
documentation regarding coin prices is not
an accurate reflections of how much Marini
paid per coin because some prices were for
sets of coins. For example, Adamo testified
that when he wrote that the price for the
1937 D three legs MS 63 coin was $100,000
“each”, the understanding was that $100,000
was for each set of 10 coins. (Tr. at 1384-85;
see also PX1 at PL3797.) Other times, when
plaintiffs introduced a document that Adamo
himself created to support their assertions of
how much they paid, Adamo would simply
say that the handwritten prices that
contradicted his testimony were not his.
(See, e.g., Tr. at 1473-74.)
However,
Adamo has no documentary evidence to
support this assertion, and the Court finds
his testimony and evidence on this issue to
be completely lacking in credibility. In
contrast, the Court finds Marini’s testimony
on this issue to be credible.
Adamo: No, that all went. I don’t
keep that. I have no use for it.
Marini: You burned through five
million dollars?
Adamo: Whatever it was it’s gone.
That was gone years ago.
Marini: Oh s***. I thought the . . .
29.5 pounds, which certainly could be placed in
several shopping bags. (See Tr. at 844 (parties
stipulate that the Court may take judicial notice of the
fact that 454 bills of U.S. currency equals one
pound).) Even with some portion of the currency in
lower denominations, the Court does not conclude
that Marini’s testimony is lacking in credibility
because of the weight of the money. In short, after
considering this issue, the credibility of the witnesses,
and the other evidence demonstrating that Adamo
received over $4.6 million in cash, the Court finds
Marini’s testimony regarding the amount of the cash
given to Adamo to be credible.
9
Further supporting plaintiffs’ version is
that Adamo’s testimony at trial regarding the
price paid for some coins contradicted his
deposition testimony. (See Tr. 1420-39
(plaintiffs’ counsel cross-examining Adamo
on the inconsistencies between the
testimonies).) Although a number of
Adamo’s modifications of the price paid
actually support plaintiffs’ position, i.e.,
result in a higher price paid for each coin,
these prior inconsistent statements support
the Court’s finding that Adamo’s testimony
is not credible.
of the witnesses, the demeanor of Marini
and Adamo, the secretly recorded
conversation, and the coin statements—the
Court finds that Marini paid Adamo
$4,690,000 in cash for coins.11
F. Money From T&R/Children’s Trust
Steven Prince, Marini and T&R’s
accountant, testified that Marini would loan
his business money because the corporation
did not have “an actual credit line.” (Tr. at
1022.) Prince confirmed that the amount of
money T&R owed Marini fluctuated
between 2000 and 2007 (id. at 1023), and
that Marini could repay himself either
through payments directly from the
corporation to his personal account or with a
payment to a third-party whom Marini
personally owed money (id. at 1022-23).
Plaintiffs also read into the record a
portion of a cash ledger, written by Marini,
that contemporaneously tracked how much
cash was being used for coin purchases.10
(Id. at 723-28.)
After weighing all of the evidence—
including among other things, the testimony
Marini also admitted during the trial that
he used approximately $1.2 million from his
children’s trust accounts to pay for coin
purchases.12 (Id. at 880.)
10
The ledger primarily contained Marini’s father’s
handwriting, although two entries were written by
Marini. (See Tr. 724-27.) The Court allowed Marini
to read the portion of the exhibit containing his
handwriting as a past recollection recorded under
Fed. R. Evid. 803(5). (See id. at 769.) However, the
Court did not admit, and has not considered, the
remainder of the exhibit written by Marini’s father.
In particular, the entire document could not be
offered as a business record because (1) Marini’s
father did not testify as to how the record was
regularly maintained in the course of a business, and
(2) the “business record” was simply a handwritten
list of cash that was kept in an individual’s safe. (See
id. at 765-69.) Plaintiffs did not call Marini’s father
in an attempt to have the ledger admitted through
him, either as a business record or through past
recollection recorded. Thus, other than Marini’s past
recollection recorded of the entries he authored and
read into the record, the Court has not considered the
other information on the exhibit. In any event, even
if the Court did not consider Marini’s past
recollection recorded from that exhibit or any
testimony regarding the exhibit, the Court would still
conclude that Marini’s testimony regarding the
amount of cash given to Adamo is credible based
upon his demeanor and the other evidence in the
case.
G. Trades
On eleven occasions, Marini and Adamo
engaged in trades instead of straight coin
purchases. Sometimes, these trades were
simply coins for coins, while on other
occasions either Marini or Adamo would
receive money along with coins. Plaintiffs
have demonstrated that, based on the
11
Mrs. Marini agreed to use her and her husband’s
money to purchase coins from Adamo, but stated that
her husband made all of the decisions regarding coin
purchases. (Tr. at 1004.) She confirmed that they
spent over $16 million on coins through Adamo. (Id.
at 1005.)
12
As discussed infra, to the extent that defendants
argued in a pretrial memorandum that there was a
trust funds misusage, that argument fails for
numerous reasons, including that defendants
withdrew their defense of unclean hands and culpable
conduct, and that defendants lack standing to make
such a claim.
10
On September 17, 2008, Adamo
proposed another trade: Marini would give
Adamo certain coins while Adamo would
give Marini the same coins in lower grades
and a $450,000 check. (Tr. at 668.) Marini
angrily responded to Adamo:
approximate retail value of the coins that
were traded, Marini lost money on each and
every trade, sometimes as much as
$461,000. (See PS3.) Adamo would make
similar misrepresentations regarding the
value of coins given to Marini in trades as
he did when Marini purchased coins. For
example, in April 2007, Marini gave Adamo
two coins that were actually worth $480,000
(although Adamo represented they were
worth $1.225 million) in exchange for a coin
(1779 Continental Dollar Brass) that was
only worth $190,000 but Adamo said was
worth $1.3 million. (See PS3 at 24.) During
one of the secretly recorded conversations,
Marini got Adamo to confirm that this trade
occurred as plaintiffs describe, and Adamo
falsely stated that the 1776 Continental
Dollar was worth “over a million.” (PX48 at
PL1065.)
Need to clear the air Harry. What the
hell happened to 24 to 48 hour out??
I’m even willing to get out of a few
coins at COST that I have owned for
more than 5 year[s]. Surely buying
coins today for the same value as 5
years ago must be attractive to you.
You said there is nothing available to
buy . . . well here you go, I am
offering you 2 million dollars worth
of value at cost, a savings of
700,000. Why do you make
statements that you have heavy
hitters coming this week that only
buy once a year, how hard is it to sell
them a great deal. When you needed
an abundance of cash to get us []
good deals I provided it in days.
During the trial, Adamo testified that
some of the trades did not occur as plaintiffs
represent. (See, e.g., Tr. at 1351.) To the
extent Marini’s version of events regarding
the trades contradicts with Adamo’s version,
the Court finds Adamo’s testimony not
credible.
(PX1 at PL3894.) The next day, the parties
e-mailed multiple times but Adamo never
contradicted Marini’s assertion that he had
been promised 24 to 48 hour liquidity. (See
id. at PL3895-3902.) These e-mails are
strong circumstantial evidence corroborating
Marini’s credible testimony that Adamo
falsely promised him he could sell back his
coins within 24 to 48 hours, and they
provide direct evidence that Marini was not
able to do so. Based on all of the evidence
presented at trial, including these e-mails,
the Court finds that plaintiffs could not sell
their coins back to Adamo within 24 to 48
hours as Adamo represented, and that
Adamo’s statement regarding liquidity was
intentionally false.
H. Liquidity
As discussed supra, Adamo initially told
Marini that Marini could sell any coin
within 24 to 48 hours. (Id. at 397.) However,
when Marini attempted to sell his coins in
2008, Adamo proposed trades instead. On
June 17, 2008, Marini e-mailed Adamo that
he was “not looking to take in more coins at
this time; I would be looking to cash out the
1907 [$10 Indian] for its full cash value of
$550,000.” (PX1 at PL3811.) Adamo
responded that he could not change the deal.
(Id. at PL3812.) In response, Marini asked
Adamo to “confirm that this is cash out deal
for $550,000 and how long I most [sic] wait
for funds.” (Id. at PL3814; see also Tr. at
605.)
11
I. The Fraud is Discovered
valued each error coin Marini purchased at a
fraction of what Adamo charged. For
example, Weinberg valued the 1879-S Silver
Dollar 15% off-center at $7,500-$10,000 on
the approximate date of purchase. (PX28 at
2.) However, Adamo charged Marini
$240,000 for that coin. (PX2 at PL516.)
After growing frustrated with his
professional relationship with Adamo due to
not being able to sell back his coins, Marini
grew concerned and decided to have some
coins appraised with another dealer. (Tr. at
611.) Marini hired Joseph Parrella
(“Parrella”), whom plaintiffs later retained
as an expert in this case, to appraise five or
six Buffalo nickels. (Id. at 612.) Parella told
Marini that they were worth “a couple of
thousand dollars each,” which was a
“fraction” of what Marini paid for them. (Id.
at 612-13.) A week later, Marini gave
Parrella his entire collection to appraise;
Parrella told him that the coins were not
worth nearly what Adamo told him they
were. (Id. at 620.)
Weinberg also had unique insight into
the markup Adamo charged Marini because
Weinberg actually sold Adamo some of the
exact coins that were later sold to Marini.
For example, on November 14, 2002,
Weinberg sold Adamo a 1965 era two-tailed
dime for $35,000. (PX40 at WEIN26.)
Weinberg values that coin at between
$60,000-80,000. (PX28 at 5.) In November
2002, Adamo sold Marini that exact coin for
$250,000. (PX2 at PL516.)
J. Plaintiffs’ Experts
The Court notes that this coin
demonstrates the difficulty in determining
the market value for coins, as Weinberg
charged Adamo only $35,000 for the coin,
but believes its true retail value to be
between $60,000-$80,000. Part of the
markup is due to the difference in retail and
wholesale pricing. However, that cannot
explain the entire difference. The Court, as
the trier of fact, finds these estimates of coin
values to be credible and reasonable, and
uses them as a basis for determining both
liability and damages. Although coin experts
may disagree on the price of a coin, the
Court finds both of plaintiffs’ experts to be
credible, and that plaintiffs’ estimates drew
some reasonable inferences in defendants’
favor which buttress their credibility. In
addition, defendants chose not to call any
expert witnesses to refute the credible
estimates of plaintiffs’ experts. Accordingly,
it is clear from all of the testimony presented
In support of their argument that Adamo
misrepresented the value of the coins and
charged Marini an excessive commission,
plaintiffs presented the testimony of two
coin experts, Parrella and Fred Weinberg
(“Weinberg”). As discussed infra, the expert
testimony of Weinberg and Parrella was
admissible under Daubert v. Merrell Dow
Pharmaceuticals, Inc., 509 U.S. 579 (1993),
and was completely credible.
Weinberg testified regarding the value of
error coins, which are coins produced as a
result of a mistake in the manufacturing
process. (Tr. at 58.) Weinberg produced a
report on all coins currently or formerly
owned by plaintiffs. (See PX 28.) As
discussed more fully infra, Weinberg used
auction records to determine the wholesale
value of the exact coins or similar coins, and
then applied a markup to determine the retail
value.13 As detailed in PX2, Weinberg
example, Weinberg gave his valuation for each coin
in a range due to the difficult nature of detailing an
exact price for each coin. In calculating Marini’s loss
on each coin, plaintiffs used Weinberg’s highest
valuation for each coin.
13
In calculating the difference between the price
Marini paid and the estimated retail value, plaintiffs
drew reasonable inferences in defendants favor. For
12
different coin. (Id. at 1105-06; PX 13 at
FRANK842.)
Adamo
made
similar
representations to Frank Brancato as he did
to Marini: that he would only buy the same
coins as he bought himself and that he could
cash out in 24 to 48 hours. (Tr. at 1088-89.)
Unlike with Marini, who Adamo told that he
would only take a small commission,
Adamo told Frank Brancato that “he
wouldn’t make money from selling the
coins.” (Id. at 1088.) This preferential
treatment was allegedly in exchange for
repairs performed for Adamo’s office. (Id. at
1086-87.) Adamo also requested that Frank
Brancato only sell the coins back to him. (Id.
at 1099.)
that the price Adamo charged far exceeded
the value of the coins, in the amount
credibly testified to by plaintiffs’ experts.
Parrella testified regarding the value of
non-error coins. Like Weinberg, and as
discussed more fully infra, Parrella used
auction records for comparable coins, and
then used his expertise regarding the state of
the coin market, to estimate the value of the
coins in Marini’s collection. (See, e.g., Tr. at
198-201.) However, unlike Weinberg,
Parrella occasionally incorporated the
valuation of a coin as listed in numismatic
publications. Parrella’s expert report details
the value of each coin that Marini owns or
used to own as of different dates. (See
PX29.)
E-mails between Frank Brancato and
Adamo confirm that Adamo had a pattern of
receiving significant amounts of cash, along
with checks, as payments for coins. (See PX
13 at FRANK842 (e-mail from Adamo to
Frank Brancato indicating that Frank
Brancato paid $50,000 cash and a $50,000
check for the first coin purchased); Tr. at
1105.)
As with Weinberg’s testimony, the Court
fully credits the testimony of Parrella. The
Court finds Parrella’s estimates reasonable
and relies on his valuations of non-error
coins.
K. The Brancatos
To corroborate their allegations,
plaintiffs called Frank and Giacomo
Brancato to testify. The Court found the
testimony of both of the witnesses to be
credible.
In January 2008, Frank Brancato tried to
cash out his coins with Adamo, but ran into
a similar difficulty as Marini. Adamo told
Brancato that Adamo could get him over
$275,000 in a couple of months (PX 13 at
FRANK843), but at that time he could only
trade him $90,000 and another coin for his
collection. (Id. at FRANK842.) Frank
Brancato rejected the trade. (Id. at
FRANK852.) Adamo kept telling him that a
purchase would come through, but it was not
until July 2008 that Adamo finally
purchased back the most valuable coin, but
at a price lower than what Adamo had
previously represented. (Tr. at 1128-29; PX
13 at FRANK868.) However, unlike Marini,
Frank Brancato made a profit on his coin
dealings with Adamo. (Tr. at 1151.)
Giacomo Brancato corroborated that
Adamo used cash to make large purchases,
including once using over $10,000 in cash to
pay part of a hotel bill. (Id. at 1042-43.)
Giacomo Brancato also corroborated that
Adamo used vacations to pitch friends on
investing in coins (id. at 1045); however, he
never invested with Adamo (id. at 1047).
Frank Brancato purchased three coins
from Adamo for a total of $126,000. (Id. at
1099.) Frank Brancato then traded one coin
that was allegedly worth $100,000, along
with an additional $25,000 in cash, for a
13
The Court finds that Frank Brancato’s
credible testimony, which is substantiated by
e-mails between Frank Brancato and
Adamo, reveals Adamo’s common scheme
and business practices in coin transactions,
and is circumstantial evidence that further
confirms some of Marini’s testimony
regarding his transactions with Adamo.14
trial, Adamo testified that this coin was
worth only $55,000 (Tr. at 1458), and that
he was “very confused” during the
conversation with Marini because he
thought they were discussing a different coin
(Id. at 1460).
Some of Adamo’s other testimony was
nonsensical, and reinforces the Court’s
finding, based upon his demeanor and all the
evidence at trial, that Adamo’s testimony as
a whole was not credible. For example, he
stated that “[a]lmost all coin dealers use
some kind of code” to disguise their prices
and valuations. (Id. at 1249.) However,
Adamo also testified that it was Marini who
asked Adamo to devise a code to hide the
cost of the coins. (Id. at 1250.) Adamo’s
“blaming” Marini for devising a code for the
coin statements lacks credibility on its face.
L. Adamo’s Testimony
During the trial, Adamo denied
plaintiffs’ allegations and attempted to
refute much of Marini’s testimony. Most
significantly, Adamo denied making the
representations Marini claimed he made
during their first meeting regarding coins.
(Tr. at 1224-25.) In addition, as discussed
more fully supra, Adamo denied that the
coin code had a consistent interpretation and
that Marini paid approximately $4.6 million
in cash for coins. As has been discussed
throughout the Findings of Fact, after
evaluating all of the documentary evidence
and the demeanor of the witnesses, the Court
does not find Adamo’s testimony to be
credible, and finds Marini’s testimony fully
credible.15
During the trial, plaintiffs introduced a
video of one of Adamo’s depositions. To
support their argument that Adamo
represented to Marini that they would be
buying the same coins, plaintiffs’ counsel
referenced a conversation between the
parties in which Adamo said: “It’s pretty
much the same as yours. I may have two of
somewhere where you have one. I may have
four of something and you have three. You
know, a few odds and ends that I have
because I like that I wouldn’t recommend to
you for investment . . . .” (Dep. of Harry
Adamo, June 23, 2009, at 361.) At first,
Adamo did not deny that they were talking
about coins. But then, his story continually
and rapidly changed. He said, “I don’t think
we’re even talking about coins in that
conversation,” elaborating that he and
Marini were talking about “cars.” (Id. at
363.) Then, Adamo stated that “maybe we
were talking about houses.” (Id. at 364.)
After that, Adamo changed his story yet
again, stating that they could have been
talking about “snowmobiles.” (Id. at 364.)
Finally, Adamo concluded that he did not
Adamo’s
inconsistent
testimony
supports the Court’s determination that he
was not a credible witness. For example, in
one of the recorded conversations between
Marini and Adamo, Adamo told Marini that
the 1892-S Morgan dollar was worth
$550,000. (PX48 at PL1062.) However, at
14
The Court notes that its findings and conclusions
would be the same even without the testimony of the
Brancatos.
15
In plaintiffs’ rebuttal case, plaintiffs offered the
deposition testimony of one of defendants’ retained
experts, who was not called during the trial, to
impeach Adamo’s testimony. Defendants objected to
this testimony, and the Court declined to rule on the
objection until the parties submitted letter motions.
Defendants’ objections are moot because the Court
has not considered this testimony in concluding that
Adamo’s testimony is not credible.
14
N. Should Marini Have Discovered the
Fraud?
know what they were talking about, but that
they were not talking about coins. (Id. at
364-66.) Such nonsensical testimony is
simply one example supporting the Court’s
conclusion that Adamo was not a credible
witness. There were also numerous other
instances where he contradicted his own
testimony or contradicted other credible and
overwhelming evidence in the trial.
As discussed infra in the Conclusions of
Law, the trier of fact must determine: (1)
when a reasonable plaintiff would have
discovered the fraud, and (2) whether it was
reasonable for Marini to rely on Adamo’s
representations.
1. When Would a Reasonable Plaintiff
Have Discovered Fraud?
M. Material Misrepresentations and Puffery
As discussed more fully infra, the Court
must determine which of Adamo’s
representations were material, i.e., there is a
substantial likelihood that a reasonable
investor would find that the information
would have significantly altered the total
mix of information made available to her,
and which were mere puffery that no
rational investor could rely upon.
In order to significantly limit plaintiffs’
potential recovery on the Exchange Act
claim, defendants argue that Marini should
have discovered the fraud prior to
September 30, 2006. For the reasons set
forth below, the Court disagrees.
The parties dispute when Marini first
possessed “The Red Book” and other
numismatic
publications
that
list
approximate values for coins. (Compare Tr.
at 936 (Marini stating that he obtained the
Red Book in 2005 or 2006), with id. at 1589
(Mrs. Adamo testifying that she saw Marini
with the Red Book in the fall of 2002).)
However, even if Marini had access to these
materials during the beginning of the
parties’
business
relationship,
those
materials would not have assisted Marini or
a reasonable plaintiff in discovering the
fraud. Marini credibly testified that, when he
would ask Adamo about these publications,
Adamo would quickly discard the question
and state that the coins they were buying
were not comparable to the coins listed in
the publications. (Id. at 972.) One of
plaintiffs’ experts confirmed that, for error
coins, these publications are not helpful for
determining the value of a coin. (Id. at 10102.) Even Adamo himself, on his direct
examination, stated that the values of the
coins listed in these publications are not
accurate and “usually [] a year or two out of
date.” (Id. at 1207; see also id. at 1226
After considering all of the evidence at
trial, and the relevant law that is set forth in
the Conclusions of Law, the Court finds the
following representations to be material
misrepresentations: (1) Adamo would be
buying the same coins as Marini; (2) the
coins were liquid and Marini could sell his
coins within 24 to 48 hours; (3) Adamo
would only charge a small commission on
each coin; (4) the inflated values on the
written coin statements; and (5) oral
statements by Adamo and in emails
regarding the specific value of particular
coins.
However, the following statements by
Adamo were mere puffery: (1) Marini was
purchasing coins at the dirt bottom and the
coins were poised to rise in value; (2)
Adamo had never seen these kinds of coins
lose value; (3) Adamo had seen these coins
go up 300 percent in the past and they could
bring Marini a 20 to 30 percent return; and
(4) Marini was purchasing the top 1 percent
of the 1 percent of coins.
15
(Adamo states that the “Red Book” is the
“bible of US coins” but that “it’s not good
for price”).)
discovered the fraud prior to September 30,
2006.
2. Was It Reasonable For Marini to Rely
on Adamo’s Representations?
Defendants also argue that Marini
should have discovered the fraud through
auction records available on the internet.
However, one of plaintiffs’ experts credibly
testified that at least one of the main auction
records websites was not publically
available until after 2008. (Id. at 274.)16
A distinct but related inquiry is whether
it was reasonable for Marini to rely on
Adamo’s representations. As discussed in
the Conclusions of Law, if Marini
unreasonably
relied
on
these
misrepresentations, plaintiffs cannot recover
on their Exchange Act claim and their
common law fraud claim.
A reasonable plaintiff also would not
have discovered the fraud prior to
September 30, 2006 because, among other
things, Adamo was producing false returns
for Marini. These false profits not only
induced
additional
purchases,
but
discouraged
Marini
from
further
investigating the true value of his coins.
Defendants argue that plaintiffs are
sophisticated investors. However, as
discussed in the Conclusions of Law, the
relevant inquiry is not whether a plaintiff
has money or has made investments
generally, but whether a plaintiff is
sophisticated regarding this specific
investment. It is clear from the testimony at
trial
that
Marini
was
extremely
unsophisticated regarding coins. (See, e.g.,
Tr. at 400-02.)
In addition, there were some other
misrepresentations that Marini could not
have discovered prior to September 30,
2006—most notably that the coins could be
liquidated in 24 to 48 hours. Because Marini
did not try to quickly sell any coins prior to
that date, neither he nor any reasonable
plaintiff could have discovered that this was
a material misrepresentation.
Second, as discussed supra, Marini did
not ignore readily available information
regarding coin values. Adamo told Marini
that the numismatic publications did not
have accurate values, and this representation
was confirmed not only by plaintiffs’
experts but by Adamo himself during the
trial. In addition, defendants introduced no
credible evidence that auction records were
widely and publicly available during most of
the relevant time period.
Accordingly, the Court finds that a
reasonable plaintiff would not have
16
Defendants now argue in their post-trial
submission that a September 27, 2002 press release
from a different auction house demonstrates that
some auctions results were publically available for
free during the beginning of the relationship. (See
Defs.’ Mem. at 85 n.14.) However, defendants did
not introduce this exhibit into evidence during the
trial or use it to impeach plaintiffs’ expert’s
testimony. Obviously, this Court cannot consider
evidence not introduced during the trial. In any event,
even if the auction records for one auction house
were available online in 2002, the Court still
concludes that a reasonable plaintiff would not have
discovered the fraud prior to September 30, 2006.
Marini first discovered one of the
auction websites that contain historical
auction prices in June 2007. (Id. at 968.)
Marini noticed that a coin Adamo had paid
Marini $300,000 for had been auctioned off
for approximately $170,000. (Id. at 968-69.)
When Marini asked Adamo whether Adamo
was giving him more for the coins than their
16
Plaintiffs have also demonstrated that
Adamo intentionally misrepresented that the
coins were fully liquid assets and that
Marini could cash out within 24 to 48 hours.
When Marini demanded that Adamo buy
back his coins for what Marini believed to
be a substantial discount over their true
value, Adamo refused. Adamo also made
this same representation to Frank Brancato,
but again refused to cash him out within 48
hours. The Court finds, based upon the
evidence, that not only was this statement
false, but that Adamo knew it was false at
the time it was made.
market value, Adamo told Marini that the
coins they bought had a “higher purity of
gold” and, therefore, were not comparable to
the coins listed on the auction websites. (Id.
at 970.) Marini did not investigate further.
(Id.)
Of course, with hindsight, it is obvious
that Marini should not have relied on these
statements, and should have investigated
every representation that Adamo made on
the value of the coins. However, the Court is
not tasked with determining what Marini
should have done in hindsight, but whether
it was reasonable for Marini to rely on these
representations. Because of the difficulty in
finding accurate prices for these coins
(especially during the formative years of this
business relationship), Marini’s lack of
sophistication regarding coins, the nature of
the relationship, and Adamo’s continued
representations that the coins Marini was
purchasing were not comparable to other
coins, the Court finds that it was reasonable
for Marini to rely on Adamo’s statements.
The Court also finds that Adamo acted
with fraudulent intent when he represented
to Marini that they would be buying the
same coins, and that they had similar
collections.
In addition, the values listed on the coin
statements were clearly inflated, and Adamo
intentionally used those false coin
statements, as well as the purchasing back of
some coins at a substantial profit to Marini,
in order to induce further purchases.
O. Scienter
For all of the foregoing reasons,
plaintiffs have demonstrated that Adamo
acted with the requisite intent.17
As discussed infra in the Conclusions of
Law, to find defendants liable under Section
10(b) of the Exchange Act, plaintiffs must
prove by a preponderance of the evidence
that defendants acted with scienter, also
known as intent. The Court finds, after
weighing all of the evidence and the
demeanor of the witnesses, that Adamo
acted with scienter because he intentionally
deceived plaintiffs. Because Adamo directly
bought the coins that he later resold, he
knew how much each coin cost. (See PX5.)
Adamo then sold those coins at an excessive
markup, despite the representation that
Adamo would only charge a small
commission. Thus, it is clear that Adamo
intentionally charged an excessive markup.
17
The Court notes that even if it did not find that
Adamo knowingly and intentionally made
misrepresentations, plaintiffs have alternatively
demonstrated scienter by proving that Adamo had
acted with conscious recklessness. See SEC v.
Stanard, 06 Civ. 7736, 2009 WL 196023, at *27
(S.D.N.Y. Jan. 27, 2009) (“An egregious refusal to
see the obvious, or to investigate the doubtful, may
also give rise to an inference of recklessness.
Accordingly, a defendant cannot plead ignorance of
facts where there are warning signs or information
that should have put him on notice of either
misrepresented or undisclosed facts.” (citations
omitted)). It is clear from the testimony at trial and
the evidence presented that even if Adamo did not
knowingly make these material misrepresentations,
17
III.
BURDEN OF PROOF
Dow Pharmaceuticals, Inc., 509 U.S. 579
(1993). As discussed below, their
methodology was reliable and their
testimony was helpful to the trier of fact.
Plaintiffs bear the burden of proof in this
case on each and every claim, as well as on
the issue of damages. They must prove by a
preponderance of the evidence that
defendants violated the Exchange Act. See
In re Vivendi Universal, S.A. Sec. Litig., 765
F. Supp. 2d 512, 534 (S.D.N.Y. 2011).
Plaintiffs must also prove their breach of
fiduciary duty, unjust enrichment, and
money had and received claims by a
preponderance of the evidence. See Newman
v. Herbst, No. 09-CV-4313, 2011 WL
684165, at *7 (E.D.N.Y. Feb 15, 2011)
(unjust enrichment and breach of fiduciary
duty); Lum v. New Century Mortg. Corp., 19
A.D.3d 558, 559-60 (2d Dep’t 2005) (stating
that unjust enrichment and money had and
received claims are “quasi-contract” claims);
see also Mercury Partners LLC v. Pac. Med.
Bldgs., L.P., No. 02 Civ. 6005, 2007 WL
2197830, at *8 (S.D.N.Y. July 31, 2007)
(“Under New York law, the burden of proof
in an action for breach of contract is on the
plaintiff to prove the elements of its
complaint by a preponderance of the
evidence.” (citing Enercomp, Inc. v.
McCorhill Publ’g, Inc., 873 F.2d 536, 542
(2d Cir. 1989) (addition citations omitted))).
However, to recover under a theory of
common law fraud in New York, plaintiffs
must demonstrate liability by clear and
convincing evidence. Katara v. D.E. Jones
Commodities, Inc., 835 F.2d 966, 971 (2d
Cir. 1987).
IV.
1. Legal Standard
The admissibility of expert testimony is
analyzed under Rule 702 of the Federal
Rules of Evidence, which provides:
A witness who is qualified as an
expert
by
knowledge,
skill,
experience, training, or education
may testify in the form of an opinion
or otherwise if: (a) the expert's
scientific, technical, or other
specialized knowledge will help the
trier of fact to understand the
evidence or to determine a fact in
issue; (b) the testimony is based on
sufficient facts or data; (c) the
testimony is the product of reliable
principles and methods; and (d) the
expert has reliably applied the
principles and methods to the facts of
the case.
Fed. R. Evid. 702. The proponent of the
expert testimony bears the burden of
establishing the admissibility of such
testimony under the Daubert framework by
a preponderance of the evidence standard.
See Daubert, 509 U.S. at 592 n.10 (“These
matters should be established by a
preponderance of proof.” (citing Bourjaily v.
United States, 483 U.S. 171, 175-76
(1987))); see also Barrett v. Rhodia, Inc.,
606 F.3d 975, 980 (8th Cir. 2010) (“[T]he
party offering the expert testimony must
show by a preponderance of the evidence
both that the expert is qualified to render the
opinion and that the methodology
underlying his conclusions is scientifically
valid.” (citations and internal quotation
marks omitted)); accord Baker v. Urban
Outfitters, Inc., 254 F. Supp. 2d 346, 353
CONCLUSIONS OF LAW
A. Daubert
During the trial, the Court ruled that the
expert testimony of Weinberg and Parrella
was admissible under Daubert v. Merrell
he acted with conscious recklessness as to the value
of the coins, their liquidity, and the markup.
18
danger of unfair prejudice, confusion of the
issues, or misleading the jury.” Fed. R. Evid.
403; accord Nimely, 414 F.3d at 397.
(S.D.N.Y. 2003); Fed. R. Evid. 702 advisory
committee’s note (“[T]he admissibility of all
expert testimony is governed by the
principles of Rule 104(a). Under that Rule,
the proponent has the burden of establishing
that the pertinent admissibility requirements
are met by a preponderance of the
evidence.”).
Under the Daubert standards, the Court
must first determine whether the expert has
sufficient qualifications to testify. See
Zaremba v. Gen. Motors Corp., 360 F.3d
355, 360 (2d Cir. 2004) (stating that, where
the witness lacked qualifications, an analysis
of the remaining Daubert factors “seems
almost superfluous”). Specifically, under
Rule 702, the Court must determine whether
the expert is qualified “by knowledge, skill,
experience, training, or education.” Fed. R.
Evid. 702. A court should look at the totality
of the witness’ qualifications in making this
assessment. See, e.g., Rosco, Inc. v. Mirror
Lite Co., 506 F. Supp. 2d 137, 144-45
(E.D.N.Y. 2007) (“A court must consider
the ‘totality of a witness’s background when
evaluating the witness’s qualifications to
testify as an expert.’” (quoting 29 Wright &
Gold, Fed. Prac. & Proc. § 6265, at 246
(1997))); accord Arista Records LLC v.
Lime Group LLC, 06 CV 5936, 2011 WL
1674796, at *2 (S.D.N.Y. May 2, 2011). In
addition, the Court must ensure that the
expert will be proffering opinions on issues
or subject matters that are within his or her
area of expertise. See Stagl v. Delta Air
Lines, Inc., 117 F.3d 76, 81 (2d Cir. 1997).
“The district court is the ultimate
‘gatekeeper,’” United States v. Williams,
506 F.3d 151, 160 (2d Cir. 2007), and must
ensure that “any and all scientific testimony
or evidence admitted is not only relevant,
but reliable,” Daubert, 509 U.S. at 589; see
also Kumho Tire Co. v. Carmichael, 526
U.S. 137, 152 (1999) (holding that whether
the witness’ area of expertise is technical,
scientific, or more generally “experiencebased,” the district court, in its
“gatekeeping” function, must “make certain
that an expert, whether basing testimony
upon professional studies or personal
experience, employs in the courtroom the
same level of intellectual rigor that
characterizes the practice of an expert in the
relevant field”); Nimely v. City of New York,
414 F.3d 381, 396 (2d Cir. 2005) (“The shift
under the Federal Rules to a more
permissive approach to expert testimony []
did not represent an abdication of the
screening function traditionally played by
trial judges.”).
With respect to reliability, “the district
court should consider the indicia of
reliability identified in Rule 702, namely, (1)
that the testimony is grounded on sufficient
facts or data; (2) that the testimony is the
product of reliable principles and methods;
and (3) that the witness has applied the
principles and methods reliably to the facts
of the case.” Williams, 506 F.3d at 160
(citation and internal quotation marks
omitted). As the Second Circuit has
explained, the Daubert Court “has identified
a number of factors bearing on reliability
that district courts may consider, such as (1)
Thus, under Rule 702, the district court
must make several determinations before
allowing expert testimony: (1) whether the
witness is qualified to be an expert; (2)
whether the opinion is based upon reliable
data and methodology; and (3) whether the
expert’s testimony on a particular issue will
assist the trier of fact. See Nimely, 414 F.3d
at 396-97. Moreover, if the requirements of
Rule 702 are met, the district court must also
analyze the testimony under Rule 403 and
may exclude the testimony “if its probative
value is substantially outweighed by the
19
making a decision; rather, it undertakes to
tell the jury what result to reach, and thus
attempts to substitute the expert’s judgment
for the jury’s.” Nimely, 414 F.3d at 397
(internal alterations, citations, and quotation
marks omitted).
whether a theory or technique can be (and
has been) tested; (2) whether the theory or
technique has been subjected to peer review
and publication; (3) a technique’s known or
potential rate of error, and the existence and
maintenance of standards controlling the
technique’s operation; and (4) whether a
particular technique or theory has gained
general acceptance in the relevant scientific
community.” Amorgianos v. Nat’l R.R.
Passenger Corp., 303 F.3d 256, 266 (2d Cir.
2002) (internal citations and quotation
marks omitted); accord Nimely, 414 F.3d at
396. These criteria are designed to be
instructive, but do not constitute a definitive
test in every case. See Kumho, 526 U.S. at
151; Nimely, 414 F.3d at 396. Moreover, in
addition to these criteria for determining
whether the methodology is reliable, Rule
702 also requires that there be a sufficiently
reliable
connection
between
the
methodology and the expert’s conclusions
for such conclusions to be admissible. See
Gen. Elec. Co. v. Joiner, 522 U.S. 136, 146
(1997) (“[N]othing in either Daubert or the
Federal Rules of Evidence requires a district
court to admit opinion evidence which is
connected to existing data only by the ipse
dixit of the expert. A court may conclude
that there is simply too great an analytical
gap between the data and the opinion
proffered.”); see also Amorgianos, 303 F.3d
at 266 (“[W]hen an expert opinion is based
on data, a methodology, or studies that are
simply inadequate to support the
conclusions reached, Daubert and Rule 702
mandate the exclusion of that unreliable
opinion testimony.”).
2. Analysis
a. Weinberg
Plaintiffs offered Weinberg as an expert
in the valuation of error coins to
demonstrate that Adamo charged Marini far
above the market rate for rare coins. At trial,
and again in their post-trial motion,
defendants
argued
that
Weinberg’s
methodology is not reliable and his
testimony should not be credited. For the
reasons set forth below, the Court disagrees.
The Court notes that, although
defendants do not challenge Weinberg’s
qualifications, Weinberg is clearly qualified
to be an expert in rare coins. He has been a
full-time coin dealer since 1972 and has
been buying and selling error coins
professionally for 41 years. (Tr. at 56, 62.)
Weinberg grades coins for a certification
service (id. at 67), and appraises coins for
insurance valuations (id. at 77).
Weinberg’s methodology is also reliable.
In preparing his expert report, Weinberg
primarily determined a coin’s value by
looking at auction records for similar coins
and then using his expertise to determine if
the coin should be valued higher or lower
depending on the strength of the market at
the time of the sale versus the time of
appraisal. (Id. at 73-76.) Because the coins
sold at auctions were often at wholesale
prices (because they were being sold to a
dealer), Weinberg would then add a markup
to determine a retail value. (Id. at 80-83.)
With respect to whether the expert’s
testimony will assist the trier of fact, the
Second Circuit has repeatedly emphasized
that “expert testimony that usurps either the
role of the trial judge in instructing the jury
as to the applicable law or the role of the
jury in applying that law to the facts before
it, by definition does not aid the jury in
20
(“Admissibility under Rule 702 does not
require perfect methodology.”).
Defendants argue that Weinberg’s
methodology is unreliable for two reasons.
First, Weinberg stated that he did not have a
standard markup that he used, that it ranged
from “10 to 25, possibly 30 percent”
depending on the coin. (Id. at 83.) Second,
defendants argue that such a methodology is
not feasible in a market for the truly rare
coins at issue here because there is an
extremely limited supply of these items.
(Defs.’ Mem. at 43-45.) Both arguments are
without merit. The Court finds that this
system for valuing coins rests on wellestablished industry standards, publications
and market trends, which are sufficiently
reliable to form the basis of expert
testimony. Although it is uncontroverted that
there is a subjective component to valuing
coins, that subjective component does not
render the expert testimony unreliable given
the widely-accepted valuation publications
and other methods (such as auction records)
that are utilized in the industry to determine
the current market value of coins. See
United States v. Kayne, 90 F.3d 7, 12 (1st
Cir. 1996) (holding that expert testimony on
the valuation of coins was admissible
despite defendants contention “that the
opinions were not based on consistent
standards, and were subject to factors of
taste and assessment of the market, and that
the experts often disagreed among
themselves”).
Defendants’
arguments
regarding the inconsistent markup and the
difficulty of pricing coins with such a
limited supply is a proper avenue for crossexamination, and goes to the weight of the
testimony and not its admissibility. See
McCullock v. H.B. Fuller Co., 61 F.3d 1038,
1044 (2d Cir. 1995) (“Disputes as to . . .
faults in [the expert’s] use of differential
etiology as a methodology, or lack of textual
authority for his opinion, go to the weight,
not the admissibility, of his testimony.”); see
also Best v. Lowe’s Home Ctrs., Inc., 563
F.3d 171, 181 (6th Cir. 2009)
In addition, because “[o]ne could hardly
expect a lay jury to form conclusions about
such an esoteric subject as the value of rare
coins without the help of experts,” the Court
finds that this testimony assists the trier of
fact. Kayne, 90 F.3d at 12.
Therefore, plaintiffs have demonstrated
by a preponderance of the evidence that
Weinberg’s opinions are admissible under
Daubert.
b. Parrella
Plaintiffs offered Parrella as an expert in
the valuation of non-error coins to
demonstrate that Adamo charged Marini far
above the market rate for rare coins. At trial,
and again in their post-trial motion,
defendants
argue
that
Parrella’s
methodology is not reliable and his
testimony should not be credited. For the
reasons set forth below, the Court disagrees.
The Court notes that Parrella is clearly
qualified to testify as an expert in rare coins.
Parrella has been working in the coin
industry since college and formed a business
buying and selling rare coins in 1974. (Tr. at
151.) Parrella has appraised rare coins for
private collectors and insurance companies,
as well as testified as an expert on coin
valuation in court. (Id. at 153.)
Parrella’s methodology is also reliable.
To determine a coin’s value, Parrella would
find what a comparable coin sold for at an
auction and then add a markup to arrive at a
retail price for the coin. (Id. at 157.) The
markup was done on a sliding scale
depending on the wholesale price of the
coin: 20% for coins priced up to $25,000,
15% for coins from $25,000 to $75,000, and
10% for coins above $75,000. (Id.)
21
to provide a broad federal remedy for all
fraud.” Id. at 61 (citations and internal
quotation marks omitted).
Defendants’
challenge
to
Parrella’s
methodology is similar to their challenge to
Weinberg’s; they argue that the markup he
applied “was completely arbitrary.” (Defs.’
Mem. at 46.)
1. Statute of Repose and Statute of
Limitations
For the same reasons the Court found
Weinberg’s methodology reliable, the Court
also found Parrella’s methodology reliable.
Although there may be disagreement within
the numismatic community on the value of
certain coins and the best methodology to
arrive at that value, such inconsistencies do
not render Parrella’s testimony inadmissible.
Defendants’ arguments are better suited for
cross-examination, which they availed
themselves of at trial and which the Court
fully considered in determining the
appropriate weight of this expert testimony.
The Exchange Act contains both a
statute of repose and a statute of limitations.
The statute reads in relevant part:
[A] private right of action that
involves a claim of fraud, deceit,
manipulation, or contrivance in
contravention of a regulatory
requirement
concerning
the
securities laws . . . may be brought
not later than the earlier of –
(1) 2 years after the discovery of the
facts constituting the violation; or
B. Exchange Act
(2) 5 years after such violation.
Plaintiffs
assert
that
Adamo’s
misrepresentations violated Section 10(b)(5)
of the Exchange Act, 15 U.S.C. § 78j(b).
Section 10(b) of the Exchange Act makes it
unlawful “[t]o use or employ, in connection
with the purchase or sale of any security . . .
any manipulative or deceptive device or
contrivance in contravention of such rules
and regulations as the [Securities and
Exchange] Commission may prescribe as
necessary or appropriate in the public
interest or for the protection of investors.”
15 U.S.C. § 78j(b). “The fundamental
purpose undergirding the Securities Acts is
to eliminate serious abuses in a largely
unregulated securities market [and] [i]n
defining the scope of the market that it
wished to regulate, Congress painted with a
broad brush.” Reves v. Ernst & Young, 494
U.S. 56, 60 (1990) (citation and internal
quotation marks omitted). Although
Congress “enacted a definition of ‘security’
sufficiently broad to encompass virtually
any instrument that might be sold as an
investment . . . [it] did not, however, intend
28 U.S.C. § 1658(b). Defendants argue that
both the statute of repose of five years and
the statute of limitations of two years limits
plaintiffs’ recovery.
a. Statute of Repose
Defendants argue that the statute of
repose bars any securities claim for
transactions that occurred prior to
September 30, 2003, five years before the
complaint was filed in this action. Plaintiffs
counter that the statute of repose is
inapplicable because Adamo continued to
make misrepresentations through 2008, and,
thus, the “continuing violations” doctrine
applies. For the reasons set forth below, the
Court finds that plaintiffs cannot recover
under the Exchange Act for any transactions
that occurred prior to September 30, 2003.
“Unlike a statute of limitations, a statute
of repose is not a limitation of a plaintiff’s
remedy, but rather defines the right involved
22
(E.D. Va. 2012) (“District courts in the First
Circuit have applied the continuing fraud
exception to Section 10(b)’s statute of
repose, while district courts in the Fifth and
Ninth Circuits have rejected it.”).
in terms of the time allowed to bring suit.”
P. Stolz Family P’ship L.P. v. Daum, 355
F.3d 92, 102 (2d Cir. 2004). “Therefore, a
statute of repose begins to run without
interruption once the necessary triggering
event has occurred, even if equitable
considerations would warrant tolling or even
if the plaintiff has not yet, or could not yet
have, discovered that she has a cause of
action.” Id. at 102-03.
Although the Supreme Court and the
Second Circuit have not directly ruled on
this issue, those courts have reaffirmed the
essential role of the statute of repose in
limiting securities claims. See Merck & Co.,
Inc. v. Reynolds, 130 S. Ct. 1784, 1797
(2010) (holding that the statute of limitations
does not begin to run until a reasonable
plaintiff would have discovered defendant’s
intent, and, in response to defendant’s “fears
that this requirement will give life to stale
claims or subject defendants to liability for
acts taken long ago,” stating that the statute
of repose is an “unqualified bar on actions . .
. giving defendants total repose after five
years”); P. Stolz, 355 F.3d at 103 (“[A]
repose period can run to completion even
before injury has occurred to a potential
plaintiff, extinguishing a cause of action
before it even accrues.”).
The continuing violations doctrine
(sometimes called the continuing wrong
doctrine) allows a plaintiff to bring an action
for a violation that occurs outside the repose
period when a series of misrepresentations
have
been
made
and
the
last
misrepresentation occurred during the
repose period. Courts that have discussed
whether the doctrine applies in this Circuit
have noted that this is “an uncertain area of
the law.” In re Comverse Tech., Inc. Sec.
Litig., 543 F. Supp. 2d 134, 155 (E.D.N.Y.
2008); see also Plymouth Cnty. Ret. Ass’n v.
Schroeder, 576 F. Supp. 2d 360, 378
(E.D.N.Y. 2008) (stating that “the law in
this area is somewhat unresolved”). District
courts within this Circuit that have examined
this issue and reviewed case law have
reached diametrically opposite conclusions.
Compare Comverse, 543 F. Supp. 2d at 155
(“The weight of authority in this circuit is
skeptical of the application of the continuing
violations doctrine in securities fraud
cases.”) with Plymouth Cnty., 576 F. Supp.
2d at 378 (“[T]he weight of authority,
including in this Circuit, dictates that the
five year statute of repose first runs from the
date of the last alleged misrepresentation
regarding related subject matter.”) and In re
Beacon Assocs. Litig., 282 F.R.D. 315, 324
(S.D.N.Y. 2012) (citing Plymouth and
stating that this rule has been “adopted by
the majority of courts in this Circuit”). The
case law in other circuits is also split. See
Carlucci v. Han, 886 F. Supp. 2d 497, 514
Therefore, because the Supreme Court
has emphasized that the statute of repose is
“an unqualified bar” on 10(b) claims, and
because the Court agrees with the persuasive
analysis of a majority of district courts
throughout the country that have rejected the
continuing violations doctrine in this
context, the Court holds that plaintiffs
cannot recover under the Exchange Act for
any purchases that occurred prior to
September 30, 2003. See Carlucci, 886 F.
Supp. 2d at 514 (reviewing the state of the
law throughout the country and rejecting the
continuing violations doctrine).
b. Statute of Limitations
Defendants also argue that not only does
the statute of repose bar recovery for any
23
is
because
Adamo
targeted
an
unsophisticated coin purchaser. See id. at
376 (“The sophistication of the investor . . .
is thus extremely relevant, because the
investor’s sophistication affects the extent to
which a court may properly conclude that a
particular event should have influenced the
investor to undertake an inquiry.”). This lack
of sophistication, along with Adamo’s
creation of false profits and the difficulty of
determining coin values for such rare coins
by an unsophisticated investor, demonstrates
that a reasonably diligent plaintiff would not
have discovered the fraud prior to
September 30, 2006.18
transactions occurring prior to September
30, 2003, but that the statute of limitations
bars plaintiffs from bringing an action
regarding any coin purchases that occurred
prior to September 30, 2006.
The Exchange Act establishes a statute
of limitations of “2 years after the discovery
of the facts constituting the violation.” 28
U.S.C. § 1658(b)(1). The Supreme Court
recently held that the “word ‘discovery’
refers not only to a plaintiff's actual
discovery of certain facts, but also to the
facts that a reasonably diligent plaintiff
would have discovered.” Merck, 130 S. Ct.
at 1793. However, the Court clarified that a
plaintiff must have been able to discover
facts necessary to prove each element of a
10(b) violation, including the intent of the
defendant. Id. at 1796; see also City of
Pontiac Gen. Emps. Ret. Sys. v. MBIA, Inc.,
637 F.3d 169, 175 (2d Cir. 2011) (“[T]he
reasonably diligent plaintiff has not
‘discovered’ one of the facts constituting a
securities fraud violation until he can plead
that fact with sufficient detail and
particularity to survive a 12(b)(6) motion to
dismiss.”). Facts sufficient to demonstrate a
materially false statement may not be
sufficient to demonstrate intent, and, thus,
may not automatically cause the statute of
limitations to commence. Merck, 130 S.Ct.
at 1796-97. “[T]he question of whether a
plaintiff exercised reasonable diligence is
usually a question of fact for the jury to
decide.” Lenz v. Associated Inns & Rests.
Co. of Am., 833 F. Supp. 362, 371 (S.D.N.Y.
1993).
2. Elements of a 10(b) Claim
“In a typical § 10(b) private action a
plaintiff must prove (1) a material
misrepresentation or omission by the
defendant; (2) scienter; (3) a connection
between the misrepresentation or omission
and the purchase or sale of a security; (4)
reliance upon the misrepresentation or
omission; (5) economic loss; and (6) loss
causation.” Stoneridge Inv. Partners, LLC v.
Scientific-Atlanta, 552 U.S. 148, 157 (2008).
A plaintiff must of course also demonstrate
that the transaction at issue concerns a
security as defined by the Exchange Act. See
15 U.S.C. § 78c(a)(10).
a. Defendants Stipulated That These Coins
Were Securities
In denying defendants’ motion for
summary judgment, the Court determined
that questions of material fact existed on
whether defendants’ sale of rare coins
constituted a security, and therefore,
As discussed in the Findings of Fact, the
Court concludes that a reasonably diligent
plaintiff could not have discovered the fraud
by September 30, 2006. Underlying much of
the Court’s reasoning regarding why a
reasonably diligent plaintiff could not have
discovered this fraud by September 30, 2006
18
The Court also notes that, even if Marini had
discovered the disparity in the coin prices, he could
not have discovered prior to September 30, 2006 that
(1) Adamo was not purchasing the same coins as
Marini, and (2) that Marini would not be able to cash
out his coins in 24 to 48 hours.
24
the transactions in this case were securities,
the Court finds that plaintiffs did not need to
prove at trial the “vertical commonality”
highlighted in the summary judgment
decision, or otherwise present any additional
evidence at trial to demonstrate that the
transactions met the definition of a security
as defined by the Exchange Act.19 See
Mental Disability Law Clinic, Touro Law
Ctr. v. Carpinello, 189 F. App’x 5, 7 (2d
Cir. 2006). In any event, there is evidence
in the trial record to support the Court’s
independent conclusion that the coin
transactions were securities and that the
jurisdictional requirement was met.20
whether defendants could have violated the
Exchange Act. Specifically, the Court noted
that the test defining investment contracts as
“securities” under the Act, as set forth in
SEC v. Howey, Co., 328 U.S. 293 (1946),
would require a factual showing of “vertical
commonality” between Marini and Adamo,
meaning that Adamo would earn a
commission for selling Marini’s coins, and
that there was a factual dispute in the record
on that issue. Then, several months after the
summary judgment decision, on April 11,
2012, defendants stipulated that the
transactions at issue in this case “constitute
securities transactions” and that “this
agreement does not require or depend on
Plaintiffs presenting evidence at trial that the
above constitute securities transactions.”
(Stipulation, Apr. 11, 2012, ECF No. 156.)
19
To be clear, although the stipulation resolved the
question whether the arrangement was a “security”
under the Exchange Act, it was not an impermissible
attempt to confer subject-matter jurisdiction. See
generally United Housing Found., Inc. v. Forman,
421 U.S. 837, 859 (1975) (finding no jurisdiction
where definition of a “security” not met). As noted
in the summary judgment decision, there were
undisputed facts to support four of the elements of
jurisdiction under the Howey test and, as to the
“common enterprise” element, plaintiff had presented
evidence which, if credited and all reasonable
inferences were drawn in his favor, would establish
strict vertical commonality by demonstrating that
Adamo was earning a commission on the sale of
Marini’s coins and, thus, Adamo’s fortunes would
rise and fall on plaintiff’s fortunes. See 812 F. Supp.
2d 243, 255-57 (E.D.N.Y. 2011). However, because
defendants disputed that fact, the Court concluded it
could not be resolved on summary judgment. Id. at
260-61. By entering the stipulation and agreeing that
they were not challenging plaintiff’s evidence for
purposes of jurisdiction, defendants were allowing
the Court to accept plaintiff’s factual basis to support
the conclusion that the transactions were “securities”
under the Exchange Act. In any event, as noted
below, even apart from the summary judgment
evidence and stipulation, the Court independently
concludes from the credible evidence at trial that
there is a factual basis for all of the elements of the
Howey test, including the fourth element. See infra
note 20.
20
In particular, the Court credits Marini’s trial
testimony that Adamo said he would take a
commission on the coins both when he sold them to
Marini, and when he would re-sell them on the open
market. (Tr. 395-96.) That testimony shows that
During closing arguments, defendants
tried to indirectly argue that rare coins could
not constitute a security under the Exchange
Act. Any such argument, whether directly or
indirectly made, must be rejected. “Courts
generally enforce stipulations that narrow
the issues in a case” as long as the
stipulations do not require the Court to
“apply an improper standard of law,” or it
would be “manifestly unjust” for the Court
to enforce the stipulation. Sinicropi v.
Milone, 915 F.2d 66, 68 (2d Cir. 1990).
Neither circumstance is present here. Not
only does the stipulation not require this
Court to apply an improper standard of law,
but it would not be manifestly unjust to
enforce the stipulation because defendants
“knowingly and voluntarily” entered into
this agreement in order to secure the
dismissal of plaintiffs’ RICO claim. Id. In
addition, defendants have not even made a
formal application for the stipulation to be
withdrawn.
Because there was a factual basis for
jurisdiction and defendants stipulated that
25
b. Material Misrepresentation or Omission
i.
What
constitutes
a
material
misrepresentation is now well-settled. “[A]
statement or omission [is material if] a
reasonable investor would have considered
[the statement or omission] significant in
making investment decisions.” Ganino v.
Citizens Utils. Co., 228 F.3d 154, 161 (2d
Cir. 2000) (citing Basic, 485 U.S. at 231-32
(holding that an omission is material if there
is a “substantial likelihood that the
disclosure of the omitted fact would have
been viewed by the reasonable investor as
having significantly altered the ‘total mix’ of
information made available” (citation and
internal quotation marks omitted))). “It is
not sufficient to allege that the investor
might have considered the misrepresentation
or omission important. On the other hand, it
is not necessary to assert that the investor
would have acted differently if an accurate
disclosure was made.” Id. at 162.
“Therefore,
whether
an
alleged
misrepresentation or omission is material
necessarily depends on all relevant
circumstances of the particular case.” Id.
The materiality element is a mixed question
of law and fact. In re Wachovia Equity Secs.
Litig., 753 F. Supp. 2d 326, 376 (S.D.N.Y.
2011).
Applicable Law
Disclosure is a key aspect of securities
regulation because Congress enacted these
laws to ensure that all investors could make
informed and rational investment decisions
through equal access of important
information. However, the law does not
require corporations or other entities to
speak in all circumstances. “An omission is
actionable only if: (a) the omitted fact is
material; and (b) the speaker had a duty to
disclose the omitted fact.” In re SanofiAventis Sec. Litig., 774 F. Supp. 2d 549, 560
(S.D.N.Y. 2011) (citing Basic v. Levinson,
485 U.S. 224, 231-32 (1988)). However, if
an entity does choose to speak, it will be
held liable if it “make[s] any untrue
statement of a material fact.” 17 C.F.R.
§ 240.10b–5(b); see also Panter v. Marshall
Field & Co., 646 F.2d 271, 292 (7th Cir.
1981) (“[O]nce a company undertakes
partial disclosure of [] information there is a
duty to make the full disclosure of known
facts necessary to avoid making such
statements misleading.”).
The SEC has promulgated internal
guidance on assessing materiality that looks
at both quantitative and qualitative factors.
See SEC Staff Accounting Bulletin No. 99,
64 Fed. Reg. 45150, 45150–52 (1999). The
bulletin “suggests that there exists a
preliminary assumption, or ‘rule of thumb,’
that changes of less than 5% to financial
statements are immaterial, although there are
various “qualitative factors” that could make
even a small change material. City of
Pontiac Gen. Emps. Ret. Sys. v. Lockheed
Martin Corp., 875 F. Supp. 2d 359, 368
(S.D.N.Y. 2012). The qualitative factors that
may make a small misstatement material
include, inter alia, (1) “whether the
“the fortunes of plaintiff and defendants are linked so
that they rise and fall together.” In re J.P. Jeanneret
Assoc.. Inc., 769 F. Supp. 2d 340, 359 (S.D.N.Y.
2011) (internal quotation marks and citation omitted).
Thus, plaintiff proved that the transactions were a
“common enterprise” under the Howey test, which
this Court had previously noted was the primary fact
in dispute. See 812 F. Supp. 2d at 257-61. Although
there is not clear evidence that Adamo ever actually
took a commission, “the fact that an investment
company’s operations are a sham and thus might not
actually satisfy the common enterprise prong of the
Howey test does not mean that the investment
company can avoid the Securities Act.” SEC v.
Unique Financial Concepts, Inc., 196 F.3d 1195,
1200 (11th Cir. 1999); see also SEC v. Lauer, 52
F.3d 667, 670 (7th Cir. 1995) (“It would be a
considerable paradox if the worse the securities
fraud, the less applicable the securities laws.”).
26
CIV. 9703, 1996 WL 48586, at *1
(S.D.N.Y. Feb. 7, 1996). The same is true
for knowingly advising someone to buy a
security at an inflated price. In DeMarco v.
Robertson Stephens Inc., 318 F. Supp. 2d
110 (S.D.N.Y. 2004), the defendants
allegedly manipulated the price of a stock
“by disseminating research analyst reports
advising investors to purchase the stock at a
time when defendants actually believed the
stock to be greatly overvalued.” Id. at 114.
The Court held that the statements
significantly overvaluing the stock, if true,
were “amply sufficient to permit a
reasonable factfinder to conclude that the
misrepresentations were material.” Id. at
118.
misstatement arises from an item capable of
precise measurement or whether it arises
from an estimate and, if so, the degree of
imprecision inherent in the estimate”; (2)
“whether the misstatement changes a loss
into income or vice versa”; (3) whether
management expects that “a known
misstatement may result in a significant
positive or negative market reaction.” SEC
Staff Accounting Bulletin No. 99, 64
Fed.Reg. at 45152. The Second Circuit
considers this “persuasive authority.” ECA,
Local 134 IBEW Joint Pension Trust of Chi.
v. JP Morgan Chase Co., 553 F.3d 187, 198
(2d Cir. 2009).
“While opinion or puffery will often not
be actionable, in particular contexts when it
is both factual and material, it may be
actionable.” Longman v. Food Lion, Inc.,
197 F.3d 675, 683 (4th Cir. 1999). For
example, in Virginia Bankshares, Inc. v.
Sandberg, 501 U.S. 1083 (1991), the
Supreme Court held that a board of
directors’ statement of opinion that a
proposal to purchase investors’ shares was
“fair” and represented a “high value” was a
material misrepresentation if the defendants
knew the statement was false. Id. at 109094; see also Novak v. Kasaks, 216 F.3d 300,
315 (2d Cir. 2000) (holding that statements
that inventory situation was “in good shape”
and “under control” even though defendants
“allegedly knew that the contrary was true”
were actionable and stating that “[w]hile
statements containing simple economic
projections, expressions of optimism, and
other puffery are insufficient, defendants
may be liable for misrepresentations of
existing facts” (internal citation omitted)).
Although most cases involve a
misrepresentation regarding a security, a
broker-dealer who simply sells securities
with an excessive markup is liable under the
securities laws absent proper disclosure. See
Grandon v. Merrill Lynch & Co., Inc., 147
F.3d 184, 190 (2d Cir. 1998) (“A brokerdealer commits fraud (in violation of § 10(b)
and Rule 10b–5) by charging customers
excessive
markups
without
proper
disclosure.” (collecting cases)). “The
markup on a security is the difference
between the price charged to the customer
and the prevailing market price.” Id. at 189.
“The key issue in these cases has always
been how to determine the ‘prevailing
market price,’ which is the basis on which
retail markups are computed,” and, when a
dealer is not a marketmaker, “a dealer’s
contemporaneous cost is the best evidence
of the current market.” Id. (citations and
additional quotation marks omitted). “While
a broker-dealer may add a markup to the
wholesale price it pays for securities, the
markup must be reasonable. Whether a
markup is excessive must be determined on
a case-by-case basis.” Id. at 190. However,
“[a]n undisclosed markup of more than 10%
“[I]t is well settled in this Circuit that a
10b-5 action can be maintained by the seller
of a security who has been induced to sell by
a misrepresentation as to the consideration
to be paid for that security.” Pages, Inc. v.
Gruner & Jahr Printing & Publ’g Co., 95
27
many times over 100% or 1000%. In
addition, for some coins, the Court has
documentary evidence of the price that
Adamo paid for the exact coin he turned
around and sold to Marini for a significantly
higher price. See First Jersey, 101 F.3d at
1469 (stating that when a market for a
security is not competitive, “the best
evidence of the security’s prevailing market
price is the price the controlling or
dominating dealer actually paid”).21
above the prevailing market price has been
held to constitute fraud per se.” S.E.C. v.
First Jersey Sec., Inc., 101 F.3d 1450, 1469
(2d Cir. 1996); but see Press v. Chem. Inv.
Servs. Corp., 166 F.3d 529, 535 (2d Cir.
1999) (“A ten percent mark-up on an
instrument that is difficult to obtain and
priced accordingly might not [always be
excessive].”).
ii.
Analysis
First, the Court notes that Adamo is
unquestionably a dealer of securities. See 15
U.S.C § 78c(a)(5)(A) (“The term ‘dealer’
means any person engaged in the business of
buying and selling securities . . . for such
person’s own account through a broker or
otherwise.”). Although the statute includes
an exception for individuals that buy or sell
securities “not as a part of regular business,”
id. at 78(c)(a)(5)(B), such an exception is
not applicable here because Adamo’s
business was buying and selling coins for
profit. Accordingly, Adamo is a dealer of
securities as defined by the Exchange Act.
See Couldock & Bohan, Inc. v. Societe
Generale Sec. Corp., 93 F. Supp. 2d 220,
229 (D. Conn. 2000) (“It is clear that
Plaintiff was not merely matching buyers
and sellers, but rather was placing itself
squarely in the middle of each transaction in
order to reap the profits from the spread, i.e.,
the price difference between the buy and sell
sides of the transactions, for its own
account. The Court thus has no difficulty
discerning from the undisputed facts that
Plaintiff was a buyer and seller of securities
for its own account as a part of its regular
business, and thus was a dealer of securities
as defined in the Exchange Act.”).
Because it is sometimes difficult to price
rare coins, simply because Adamo charged a
high markup does not necessarily indicate
that such a markup is excessive. The
Second Circuit has stated that the following
factors are relevant to determine whether a
markup is excessive:
the
expense
associated
with
effectuating the transaction, the
reasonable profit fairly earned by the
broker or dealer, the expertise
provided by the broker or dealer, the
total dollar amount of the
transaction, the availability of the
financial product in the market, the
price or yield of the instrument, the
resulting yield after the subtraction
of the markup compared to the yield
on other securities of comparable
quality, maturity, availability, and
risk, and the role played by the
broker or dealer.
Press, 166 F.3d at 535. Weighing all these
factors, the Court easily concludes that the
markup was excessive. Even construing all
of the relevant factors in defendants’ favor,
and assuming that the reasonable profit to be
Based on the representations of
plaintiffs’ experts (which, again, the Court
finds credible) and the prices that Adamo
charged Marini, Adamo marked up the price
on these coins by extremely large amounts,
21
The Court notes that, even if Adamo paid an
extremely low price for these coins (below market
value), and even if plaintiffs’ experts underestimated
the value of the coins, Adamo still charged Marini an
extremely high markup on the coins.
28
earned was high and that it was extremely
difficult and time-consuming for Adamo to
find and purchase these coins, the fact that
the markups were often over 100% and
sometimes were over 1000% demonstrates
that the markup was excessive.
misrepresentations: (1) Adamo would be
buying the same coins as Marini; (2) the
coins were liquid and Marini could sell his
coins within 24 to 48 hours; (3) Adamo
would only charge a small commission on
each coin; (4) the inflated values on the
written coin statements; and (5) oral
statements by Adamo and in emails
regarding the specific value of particular
coins.
Accordingly, case law is clear that even
absent any of the other material
misrepresentations, Adamo is liable under §
10(b) because he is a securities dealer who
charged an excessive markup. See First
Jersey, 101 F.3d at 1469-71 (upholding
district court’s finding that defendant
violated Section 10(b) when it charged an
excessive markup for over-the-counter
equity securities); see also Grandon, 147
F.3d at 192-94 (extending First Jersey to
prohibit excessive markups on municipal
securities even though such a disclosure is
not mandated by the plain text of the
Exchange Act).22
Although related to the excessive
markup claim, the Court finds that Marini
would be liable under the Exchange Act
even if he were not a dealer because he
affirmatively represented that he would only
charge Marini a minimal markup on each
coin. Because it is apparent from the
evidence at trial that Adamo charged a
markup that often exceeded 100%, the
representation that he would only charge
Marini a small markup is an actionable
misrepresentation under § 10(b).
In addition, even if Adamo were not a
dealer, or the case law regarding excessive
markups did not apply to these securities,
Adamo made several other material
misrepresentations that render him liable
under the Exchange Act.
Adamo’s representation that Marini’s
assets were liquid because he could sell back
the coins within 24 to 48 hours also
constitutes a material misrepresentation. See
S.E.C. v. Gottlieb, 88 F. App’x 476, 477 (2d
Cir. 2004); see also Luce v. Edelstein, 802
F.2d 49, 55 (2d Cir. 1986) (“[M]aking a
specific promise to perform a particular act
in the future while secretly intending not to
perform that act may violate Section 10(b)
where the promise is part of the
consideration for the transfer of securities.”).
As discussed in the Findings of Fact,
Adamo made the following material
22
Because defendants did not introduce any
testimony rebutting the valuations of these coins,
defendants’ main theory throughout the trial was that
charging a large markup for coins is not illegal. That
may be true in a typical commercial transaction.
However, because defendants stipulated that these
transactions were securities, and because the Court
finds that all of the other elements of a § 10(b) claim
have been met, plaintiffs have demonstrated that this
excessive markup constitutes a misrepresentation or
omission that creates liability under the Exchange
Act. However, assuming arguendo that the markup
was not excessive, Adamo is still liable under Section
10(b) for failing to disclose the markup because there
was a “fiduciary relationship with the complaining
party.” Press, 166 F.3d at 534.
In addition, the inflated values of the
coins contained on the written coin
statements
constitute
material
misrepresentations that induced Marini to
purchase additional coins. In connection
with that aspect of fraud, Adamo would buy
back some coins at inflated prices to induce
more purchases, and then once Marini made
those purchases, by misrepresenting the
29
However, as stated in the Findings of
Fact, certain other representations made by
Adamo were mere puffery, and thus not
actionable under the Exchange Act.
Adamo’s broad statements informing Marini
that these prices were at the “dirt bottom,”
that the coins never went down and would
certainly rise in value, that the coins had
potential returns of over 20 percent, and that
Marini was purchasing the top 1 percent of 1
percent of coins could not have misled a
reasonable investor. See San Leandro
Emergency Med. Grp. Profit Sharing Plan v.
Philip Morris Cos., 75 F.3d 801, 811 (2d
Cir. 1996) (statement that company was
“optimistic” about its earnings was mere
puffery); Zerman v. Ball, 735 F.2d 15, 21
(2d Cir. 1984) (characterizing a bond as
“marvelous” not actionable); Rotstein v.
Reynolds & Co., 359 F. Supp. 109, 113
(N.D. Ill. 1973) (saying it is “impossible to
lose money in an investment” is puffery). A
reasonable investor would have known that
these statements, as opposed to the specific
material
misrepresentations
that
are
actionable, were “nothing more than the
common puff of a salesman.”23 Newman v.
value of those coins on the coin statements.
While a “post-purchase fraud inducing
plaintiff[s] not to pull out of the [coin
transactions] would be inadequate in this
circuit as a basis for establishing 10b–5
liability,” fraudulent documents created after
the initial purchase that induce additional
purchases can form the basis of liability as
long as the new purchase has some “causal
relationship to the alleged fraudulent act.”
Connors v. Lexington Ins. Co., 666 F. Supp.
434, 443-44 (E.D.N.Y. 1987).
Some of these misrepresentations that
the Court finds constitute a violation of §
10(b) occurred outside of the period of
repose, i.e., they were made in connection
with the first coin purchases that the Court
has now found are not actionable because
they occurred more than five years before
the complaint was filed. However, in
making the purchases after September 30,
2003, these oral representations made prior
to September 30, 2003 were inherent in the
parties’ dealings based on the nature of these
transactions, and the Court finds that those
representations constitute a § 10(b) violation
for transactions that occurred after
September 30, 2003. In other words, when
Marini purchased coins after September 30,
2003,
he
relied
on
material
misrepresentations that occurred prior to
September 30, 2003 because the course of
the parties’ dealings remained the same
throughout the six-year period of these
transactions. In any event, assuming
arguendo that the Court found that those
oral representations were no longer
actionable, Adamo would still be liable
under the Exchange Act because: (1) he was
a securities dealer who charged an excessive
markup without full disclosure; and (2) he
created coin statements with false values for
coins in order to induce further purchases.
23
The parties spent a considerable portion of the trial
disputing whether Adamo ever described the coin
purchases as “investments.” (Compare Tr. at 434
(Marini testifying that Adamo stated the coins would
be “incredible investment purchases”) and PX48 at
PL1123 (Adamo stating in surreptitiously recorded
conversation that he owned some coins that he would
not “recommend to [Marini] for investment”), with
Tr. at 1480 (Adamo testifying that he “never
represented them as investment”).) As a threshold
matter, the Court notes that it credits Marini’s
testimony that Adamo explicitly referred to the coin
purchases as investments and there is absolutely no
question based upon the overwhelming credible
evidence in the record submitted by plaintiff that both
parties understood these purchases to be for
investment. In any event, the Court finds that the
label is not dispositive for purposes of determining
liability. The mere reference to a purchase as an
“investment,” without more, is not a material
misstatement and would not establish liability under
the Exchange Act. To the extent plaintiffs’ suggest
30
L.F. Rothschild, Unterberg, Towbin, 651 F.
Supp. 160, 163 (S.D.N.Y. 1986) (citation
and internal quotation marks omitted).
(2d Cir. 2000) (alteration, citation, and
internal quotation marks omitted). Proof of
scienter “can be and customarily is
presented through circumstantial evidence.”
In re WorldCom, Inc. Sec. Litig., 352 F.
Supp. 2d 472, 495-96 (S.D.N.Y. 2005).
“Whether or not a given intent existed, is, of
course, a question of fact.” First Jersey, 101
F.3d at 1467.
c. Scienter
“To establish liability under § 10(b) and
Rule 10b–5, a private plaintiff must prove
that the defendant acted with scienter, a
mental state embracing intent to deceive,
manipulate, or defraud.” Tellabs, Inc. v.
Makor Issues & Rights, Ltd., 551 U.S. 308,
319 (2007) (citation and internal quotation
marks omitted). “A plaintiff can establish
this intent either (a) by alleging facts to
show that defendants had both motive and
opportunity to commit fraud, or (b) by
alleging facts that constitute strong
circumstantial evidence of conscious
misbehavior or recklessness.” Kalnit v.
Eichler, 264 F.3d 131, 138 (2d Cir. 2001)
(citation and internal quotation marks
omitted); see also Novak, 216 F.3d at 312
(stating that conscious recklessness is a
“state of mind approximating actual intent,
and not merely a heightened form of
negligence” (citation and internal quotation
marks omitted)). The Second Circuit has
stated that the “requisite intent exists when it
is clear that a scheme, viewed broadly, is
necessarily going to injure.” AUSA Life Ins.
Co. v. Ernst & Young, 206 F.3d 202, 220
As discussed in the Findings of Fact, the
Court concludes—as the trier of fact in this
matter—that Adamo intentionally made
material misstatements or omissions.
Because
Adamo
“knowingly
and
intentionally” deceived plaintiffs and made
material misrepresentations, he acted with
the requisite scienter to establish liability
under § 10(b)(5). S.E.C. v. Enters. Solutions,
Inc., 142 F. Supp. 2d 561, 574 (S.D.N.Y.
2001); see also S.E.C. v. Constantin, 11 CV
4642, 2013 WL 1453792, a *16-17
(S.D.N.Y. Apr. 2, 2013) (defendants acted
with requisite scienter when they, inter alia,
lied to clients, manufactured false
documents, and sent clients account
statements they knew to be false).
d. Connection
Plaintiffs must also demonstrate a
connection between the misrepresentation or
omission and the purchase or sale of a
security. “[D]istrict courts have found that
when an alleged misrepresentation concerns
the
value,
nature
or
investment
characteristics of the securities at issue, it
satisfies
the
in
connection
with
requirement.” Louros v. Kreicas, 367 F.
Supp. 2d 572, 588 (S.D.N.Y. 2005)
(citations and internal quotation marks
omitted); cf. Wharf (Holdings) Ltd. v. United
Int’l Holdings, Inc., 532 U.S. 588, 596-97
(2001) (in connection with requirement
satisfied when defendant sold an option
“while secretly intending from the very
beginning not to honor the option”).
that Adamo’s statements regarding the term
“investment” were material misstatements because of
Adamo’s statements regarding the strength of the
investment, (i.e., the coins were “incredible
investments”), such a statement is mere puffery. See
Dafofin Holdings S.A. v. Hotelworks.com, Inc., 00
CIV. 7861, 2001 WL 940632, at *4 n.6 (S.D.N.Y.
Aug. 17, 2001) (statement that a hotel was a “great
investment” which would make “quick money” is
“mere puffery” (internal quotation marks omitted)).
As discussed supra, other statements of this nature by
Adamo are not actionable. However, the more
specific statements that Adamo made regarding the
nature of this securities purchase, whether or not it
was explicitly labelled as an “investment,” are
actionable and give rise to liability under the
Exchange Act for all the reasons stated herein.
31
In this case, it is clear that the in
connection with requirement is satisfied.
Adamo made material misrepresentations in
order to induce plaintiffs to purchase
securities. Thus, plaintiffs have satisfied the
burden of proof as to this element. See
United Int’l Holdings, Inc. v. Wharf
(Holdings) Ltd., 210 F.3d 1207, 1221 (10th
Cir. 2000) (“The representations allegedly
were made to induce UIH to purchase the
option. As such, the misrepresentations were
made to influence UIH’s investment
decision and were made in connection with
the purchase or sale of a security.”), aff’d,
532 U.S. 588 (2001); Troyer v. Karcagi, 476
F. Supp. 1142, 1147 (S.D.N.Y. 1979)
(element
satisfied
“because
the
misrepresentations and omissions allegedly
induced” plaintiffs’ actions.).
Commc’ns Corp. Sec. & Derivative Litig.,
542 F. Supp. 2d 266, 267 (S.D.N.Y. 2008).
The Second Circuit has succinctly explained
the standard that courts must apply:
e. Transaction Causation
Royal Am. Managers, Inc. v. IRC Holding
Corp., 885 F.2d 1011, 1016 (2d Cir. 1989)
(internal citations and quotation marks
omitted); see also Emergent Capital Inv.
Mgmt., LLC v. Stonepath Grp., Inc., 343
F.3d 189, 195 (2d Cir. 2003) (“In assessing
the reasonableness of a plaintiff’s alleged
reliance, we consider the entire context of
the transaction, including factors such as its
complexity
and
magnitude,
the
sophistication of the parties, and the content
of any agreements between them.”).
i.
A showing of reliance may be
defeated, however, where defendant
establishes that plaintiff should have
discovered the true facts. This has
been called the due diligence test, to
which, traditionally, a negligence
standard has applied. . . . [T]he
degree of diligence to which
plaintiffs are held has been
diminished to minimal diligence.
More specifically, a plaintiff bears
only the burden of negating its own
recklessness, once the issue of
diligence is raised by defendant.
Applicable Law
In order to prove liability under §
10(b)(5), a plaintiff must demonstrate
reliance, also known as transaction
causation. To satisfy this element, a plaintiff
must show “that but for the fraudulent
statement or omission, the plaintiff would
not have entered into the transaction.”
Castellano v. Young & Rubicam, Inc., 257
F.3d 171, 186 (2d Cir. 2001). However, a
plaintiff need not specifically demonstrate
reliance when there is a duty to disclose,
such as when a defendant is a dealer or a
fiduciary. Instead, there is “a rebuttable
presumption of reliance . . . if there is an
omission of a material fact by one with a
duty to disclose.” Stoneridge Inv. Partners,
LLC v. Scientific-Atlanta, 552 U.S. 148, 159
(2008).
The Second Circuit has stated that
although district courts need not “recite its
factor-by-factor balancing of the relevant
considerations,” that many courts have been
guided by the following factors:
(1) The sophistication and expertise
of the plaintiff in financial and
securities matters; (2) the existence
of longstanding business or personal
relationships; (3) access to the
relevant information; (4) the
existence of a fiduciary relationship;
(5) concealment of the fraud; (6) the
Not all reliance is sufficient to
demonstrate liability under the Exchange
Act. Instead, the reliance must be
“reasonable” or “justifiable.” In re Adelphia
32
opportunity to detect the fraud;
whether the plaintiff initiated
stock transaction or sought
expedite the transaction; and (8)
generality or specificity of
misrepresentations.
to research coin values. (Tr. at 947-48.)
Although the parties dispute when Marini
acquired a coin pricing guide, it is
undisputed that he did not use it to
thoroughly investigate the price of coins.
(7)
the
to
the
the
First, in balancing the factors laid out
by the Second Circuit to assist this Court in
determining the reasonableness of a
plaintiff’s reliance, defendants incorrectly
state that Marini is a sophisticated investor
in coins due to his wealth, board
membership at a bank, and his experience
owning a successful small business. In
evaluating the sophistication of a plaintiff,
courts must determine whether the
individual is sophisticated in the security at
issue, not whether he is generally
knowledgeable
about
finances.
See
McAnally v. Gildersleeve, 16 F.3d 1493,
1500 (8th Cir. 1994) (holding that there was
sufficient evidence to conclude that
plaintiffs were not sophisticated about
commodities futures options even though
plaintiffs had “significant experience and
success with stocks and bonds”); Nathel v.
Siegal, 592 F. Supp. 2d 452, 466 (S.D.N.Y.
2008) (holding that plaintiffs were not
sophisticated in oil and gas investments
despite their ownership of a fruit wholesale
business); Babaev v. Grossman, 03-CV5076, 2007 WL 633990, at *7 (E.D.N.Y.
Feb. 26, 2007) (“Although plaintiffs are
sophisticated business persons in the
catering or wait-service industry, there is no
indication that they are sophisticated and
possess expertise in finance or investment
matters.”).
The
trial
testimony
overwhelmingly demonstrated that Marini
was unsophisticated regarding rare coins.
Brown v. E.F. Hutton Grp., Inc., 991 F.2d
1020, 1032 (2d Cir. 1993).
ii.
Analysis
As stated in the Findings of Fact, the
Court concludes that plaintiffs reasonably
relied on Adamo’s misrepresentations, and
that a reasonable plaintiff would find that
these representations were important in
making an investment decision. The Court
now sets forth the details of that reasoning
as applied specifically to this element (as
opposed to the other elements of this case in
which reliance must be determined) and the
case law that supports such a determination.
Defendants do not dispute that a
reasonable investor would find these
representations important in making an
investment decision. Affiliated Ute, 406 U.S.
128 at 153-54. Instead, defendants argue that
Marini could not have reasonably relied on
Adamo’s statements because he did not
perform any due diligence before purchasing
the initial coins and throughout the relevant
period, i.e., that he should have discovered
the markups. They claim that because
Marini was a sophisticated investor with
ample resources, it was unreasonable for
him to rely on any representations without
verifying the market price of the coins,
something that could have been easily
performed. However, the Court finds that
plaintiffs have satisfied their burden on this
issue.
Additional support for the Court’s
conclusion is that Marini and Adamo shared
a longstanding personal relationship. As
detailed supra, the Marinis met the Adamos
in 1992 and became close friends, which
included spending vacations together and
Marini admits that he did not perform
due diligence on the coins. He admitted that
he “never thought about” using the internet
33
sacrificed some of his own ill-gotten profits
early in the relationship in order to conceal
the fraud from Marini and discourage him
from conducting an investigation into the
true value of the coins. This is buttressed by
the fact that when Marini did try to do some
research in the latter half of the relationship,
Adamo always had convincing excuses for
why Marini could not rely upon outside
sources for information. (See, e.g., Tr. at
970, 972.) Accordingly, the concealment of
the fraud factor also weighs in plaintiffs
favor.
becoming godparents to their kids. The
families were friends for ten years before
any business relationship formed. See
Holdsworth v. Strong, 545 F.2d 687, 697
(10th Cir. 1976) (en banc) (affirming district
court’s conclusion following a bench trial
that plaintiff reasonably relied on
defendant’s
misrepresentations
when
plaintiff and defendant were not only
“business friends, [but] their friendship
extended as well to their families” and
stating that the friendship “explains why
[plaintiff] failed to challenge [defendant’s]
representations every step of the way”).
Some testimony was introduced at trial
that Marini could have looked up coin
values in books. However, Adamo stated
that those coin values were outdated by at
least a year, inaccurate, and did not
represent the type of coins that Marini was
buying. In addition, the experts that testified
primarily used prices of similar coins sold at
auction to triangulate the value of the coin.
This data would not have been available to
Marini because even if Marini had the
sophistication to determine which similar
coins could have been used as comparators,
which he did not, there is no indication of
how he would get this information. Despite
defense counsel’s suggestion that search
engines existed in 2002 and defense
counsel’s attempt to introduce a 2002 press
release in a post-trial submission, there was
no evidence introduced at trial that this
specific information was readily available
online during the first few years of the
parties’ dealings. In fact, Parrella testified
that one of the main sources of auction
records was not publically available online
until after 2008.24
In Abbey v. 3F Therapeutics, Inc., 06
CV 409, 2011 WL 651416 (S.D.N.Y. Feb.
22, 2011), aff’d sub nom. Abbey v. Skokos,
509 F. App’x 92 (2d Cir. 2013), the Court
found that a personal relationship between
the parties did not lead to a finding of
reasonable reliance. However, the facts of
Abbey are entirely distinguishable from this
case. First, in Abbey, the parties talked
“sporadically at best” and communicated
only “once or twice per year.” Id. at *12.
Here, in contrast, the Marinis and Adamos
were close personal friends who went on
vacation together and were the godparents to
each other’s kids. In addition, in Abbey,
plaintiff was a “very sophisticated investor
with expertise concerning federal securities
transactions” who had been given materials
to review, id. at *8, while Marini was
unsophisticated regarding coins and was not
given
materials
that
would
have
demonstrated that he was being charged an
excessive markup.
Also supporting a finding of reasonable
reliance is that Adamo fraudulently returned
sizeable profits for plaintiffs in order to
induce future purchases and conceal the
fraud. The Court concludes, after hearing all
of the testimony and reviewing the
documentary
evidence,
that
Adamo
24
Even assuming arguendo that defendants had
properly submitted evidence indicating that at least
one auction website had information on coins
available, this evidence alone would not alter the
Court’s decision because, as noted supra, the Second
Circuit has held that whether reliance is reasonable
34
were worth far less. Accordingly, plaintiffs
are entitled to “the excess of what [they]
paid over the value of what [they] got.”
Gurary v. Winehouse, 235 F.3d 792, 799 (2d
Cir. 2000) (citation and internal quotation
marks omitted).
In addition, this is not a case where the
misstatements “contained a high level of
generality, severely weakening [plaintiffs’]
claim of reasonable reliance.” In re Merrill
Lynch Auction Rate Sec. Litig., 851 F. Supp.
2d 512, 537 (S.D.N.Y. 2012). Although
there were some general statements that the
Court finds to be puffery, Adamo made
specific statements regarding the liquidity of
the investments, the value of the coins, and
the markup to be charged.
g. Loss Causation
Plaintiffs have established an economic
loss as a result of the fraud. The testimony at
trial demonstrated that plaintiffs paid
$16,797,404 for coins, that $2,540,000 was
returned to Marini in various deals, and that
plaintiffs’ current holdings are worth
approximately $2,953,325. (See PX52.)
Plaintiff suffered an economic loss by
paying over $16 million for securities that
Loss causation “is the causal link
between the alleged misconduct and the
economic harm ultimately suffered by the
plaintiff.” Lentell v. Merrill Lynch & Co.,
Inc., 396 F.3d 161, 172 (2d Cir. 2005)
(citation and internal quotation marks
omitted). “Thus to establish loss causation, a
plaintiff must allege that the subject of the
fraudulent statement or omission was the
cause of the actual loss suffered, i.e., that the
misstatement or omission concealed
something from the market that, when
disclosed, negatively affected the value of
the security. Otherwise, the loss in question
was not foreseeable.” Id. at 173 (alteration,
citation, and internal quotation marks
omitted). It is not sufficient for an investor
to allege only that she paid an inflated
purchase price for a security. See Dura
Pharms., Inc. v. Broudo, 544 U.S. 336, 34147 (2005). Instead, plaintiffs must
demonstrate that “(1) defendants concealed
a foreseeable risk associated with a
securities transaction between plaintiffs and
defendants; and (2) the foreseeable risk
occurred causing plaintiffs’ loss.” In re
Initial Pub. Offering Sec. Litig., 399 F.
Supp. 2d 298, 305 (S.D.N.Y. 2005) (citing
Mfrs. Hanover Trust Co. v. Drysdale Sec.
Corp., 801 F.2d 13, 22 (2d Cir. 1986) and
Weiss v. Wittcoff, 966 F.2d 109, 112 (2d Cir.
1992), aff’d sub nom. Tenney v. Credit
Suisse First Boston Corp., Inc., Nos. 053430-CV, 05-4759-CV, 05-4760-CV, 2006
WL 1423785 (2d Cir. May 19, 2006).
requires a balancing of numerous factors, and nearly
all of the factors weigh in plaintiffs’ favor.
In a typical § 10(b) action, a plaintiff
demonstrates loss causation through a fraud-
Therefore, after having considered all of
the evidence, and especially the factors
highlighted by the Second Circuit in Brown,
the Court finds that it was reasonable for
Marini to rely on Adamo’s representations,
and that plaintiffs have satisfied their burden
on this issue. The law in this Circuit does
not require a plaintiff to perform adequate
due diligence; instead, a plaintiff must
merely show that he did “not act recklessly.”
Valentini v. Citigroup, Inc., 837 F. Supp. 2d
304, 319 (S.D.N.Y. 2011). In this case,
plaintiffs did not act recklessly (and did not
even
act
negligently
under
the
circumstances), and because plaintiffs would
not have entered into these transactions
without the fraudulent statements or
omissions, plaintiffs have demonstrated
transaction causation.
f. Economic Loss
35
v. Kohn, 629 F.2d 705, 708-09 (2d Cir.
1980)
(upholding
district
court’s
determination following a bench trial that
loss causation was established when
defendant misrepresented that he was
licensed to sell securities because liability
should attach “for the damages flowing
from” the misrepresentation).
on-the-market theory. A plaintiff will
identify a “‘corrective disclosure’ (a release
of information that reveals to the market the
pertinent truth that was previously concealed
or obscured by the company’s fraud)” and
then show that “the stock price dropped
soon after the corrective disclosure.”
FindWhat Investor Grp. v. FindWhat.com,
658 F.3d 1282, 1311 (11th Cir. 2011). A
plaintiff must also eliminate “other possible
explanations for this price drop, so that the
factfinder can infer that it is more probable
than not that it was the corrective disclosure
– as opposed to other possible depressive
factors – that caused at least a substantial
amount of the price drop.” Id. at 1312
(citation and internal quotation marks
omitted). Therefore, in those cases, a court
must determine whether the drop in a
stock’s price is attributable to a
misrepresentation or to unrelated intervening
factors that would have caused the drop in
price even in the absence of a
misrepresentation.
Plaintiffs have demonstrated by a
preponderance of the evidence that
defendants’ misrepresentation was the cause
of the actual loss suffered. Judge
Scheindlin’s decision in Fogarazzo v.
Lehman Brothers, Inc., 341 F. Supp. 2d 274
(S.D.N.Y. 2004), while not directly on point,
is instructive. In that case, plaintiffs alleged
that investment banks lied about the
financial health of the security by stating
that the security was drastically underpriced
even though the banks knew that there were
warning signs of its decline. Judge
Scheindlin held that plaintiffs adequately
alleged loss causation by stating that the
banks inflated the price of the shares. See id.
at 289-92.
The case before this Court, however, is
far simpler. The Court need not review
expert reports to determine if the value of
the security would have dropped in the
absence of the disclosures because Adamo
did not inject misrepresentations into the
market to boost the value of the security.
Instead, the value of the security was always
lower than Adamo claimed, and his
misrepresentations inflated how much
plaintiffs should have paid for that security.
Therefore, the value of plaintiffs’
investments did not drop after a corrective
disclosure; it dropped immediately upon
purchase. See Suez Equity Investors, L.P. v.
Toronto-Dominion Bank, 250 F.3d 87, 97-98
(2d Cir. 2001) (stating that loss causation is
demonstrated
if
“defendants’
misrepresentations induced a disparity
between the transaction price and the true
‘investment quality’ of the securities at the
time of transaction”); Marbury Mgmt., Inc.
The situation in this case is slightly
different, but far simpler and leads to the
same conclusion. Had Adamo not made
misrepresentations regarding the markup he
charged, plaintiffs would have paid far less
for the security. Thus, the evidence showed
that the losses plaintiffs suffered directly
resulted from Adamo’s misrepresentations
because those misrepresentations induced
plaintiffs into paying for a security at a far
higher cost than it was ever worth. Cf.
Lentell, 396 F.3d at 175 (stating that
plaintiffs had not adequately pled loss
causation because, inter alia, “plaintiffs [did
not] allege that [defendant] concealed or
misstated any risks associated with an
investment in [the security], some of which
presumably caused plaintiffs’ loss”).
36
Defendants argue that “the alleged
misrepresentations . . . have no logical or
factual connection to the reasons why
Marini’s coin transactions may ultimately
turn out to be losing propositions . . . . If
Marini loses money on his coin transactions,
the reason is that today’s buyers are
unwilling to pay what Marini (and others)
were paying for those or similar coins prior
to the financial crash.” (Defs.’ Mem. at 97.)
This argument is without merit. Plaintiffs’
purchase turned out to be a losing
proposition because Adamo lied, inter alia,
about the value of the securities and about
the markup he would charge. The loss did
not occur because of the intervening force of
the financial crash; it occurred as soon as
Adamo sold him coins with an excessive
markup while falsely claiming he only
charged a small commission.25
801 F.2d at 21. For the reasons set forth
above, the Court finds that plaintiffs’ loss
was a direct result of Adamo’s false and
misleading statements, and, therefore, that
plaintiffs have satisfied their burden of proof
on this claim.
h. Parties Liable
Plaintiffs request relief against not only
Adamo himself but the corporations he
owns, H. Edward and Bolton. “To prove
liability against a corporation, of course, a
plaintiff must prove that an agent of the
corporation committed a culpable act with
the requisite scienter, and that the act (and
accompanying mental state) are attributable
to the corporation.” Teamsters Local 445
Freight Div. Pension Fund v. Dynex Capital
Inc., 531 F.3d 190, 195 (2d Cir. 2008).
Adamo’s
actions
are
indisputably
attributable to the corporate entities of
Bolton and H. Edward because Adamo was
the owner and president of both
corporations. See Constantin, 2013 WL
1453792, at *17 (because the two
defendants
were
“essentially”
the
corporation’s only two employees, their
conduct was “clearly attributable” to the
corporate defendant). Because Adamo’s
actions are attributable to the corporations
he owns, the Court finds that Adamo, H.
Edward, and Bolton are all liable under the
Exchange Act.
The 1980 Canadian Penny, Grade
PMS64 is an instructive example. In
February 2003, records indicate that Adamo
bought that coin from Fred Weinberg & Co
for $15,000. One month later, Adamo sold
Marini that coin for $250,000. Accordingly,
Adamo’s fraudulent statement about the
markup he would charge and the value of
that coin was the cause of the actual loss
suffered in 2003, long before any
intervening force could have caused the drop
in value.
The Second Circuit has held that loss
causation occurs when “the damage was
either a direct result of the misleading
statement or one which could reasonably
have been foreseen.” Mfrs. Hanover Trust,
C. Common Law Fraud
“Under New York law, the elements of
common law fraud are a material, false
representation, an intent to defraud thereby,
and
reasonable
reliance
on
the
representation, causing damage to the
plaintiff.” Chanayil v. Gulati, 169 F.3d 168,
171 (2d Cir. 1999) (citation and internal
quotation marks omitted). Courts have found
that the elements necessary to establish a
claim under 10(b) “are essentially the same
25
The Court notes that this argument is also clearly
erroneous because the undisputed and credible
evidence at trial was that only Marini paid such high
prices for coins, and that other coin purchasers would
not have paid such high prices. Defendants did not
attempt to introduce any evidence that other coin
purchasers bought these coins at the same or a similar
price as Marini.
37
as those for common law fraud in New
York.” Meridian Horizon Fund, LP v.
Tremont Grp. Holdings, Inc., 747 F. Supp.
2d 406, 414 (S.D.N.Y. 2010), aff’d sub nom.
Meridian Horizon Fund, LP v. KPMG
(Cayman), 487 F. App’x 636 (2d Cir. 2012);
see also Sawabeh Info. Servs. Co. v. Brody,
832 F. Supp. 2d 280, 298 (S.D.N.Y. 2011)
(“Because the elements of common law
fraud under New York law are substantially
identical to those governing Section 10(b),
an identical analysis applies.” (citation and
internal quotation marks omitted)).
damage has been caused by defendants’
actions, the Court’s analysis under § 10(b)
applies with equal force to the common law
fraud claim.
One major difference between a claim
under § 10(b) and New York common law is
that, as discussed supra, plaintiffs must
prove each element of common law fraud by
clear and convincing evidence, as opposed
to a preponderance of the evidence. The
“independent duty to conduct due diligence when
investing their children’s [trust] funds.” (Id. at 94.)
Defendants also argue that plaintiffs cannot recover
for the coins they purchased with funds from their
children’s trust accounts because they lack standing
to recover for those funds. (Id.) With regard to
plaintiffs’ standing, plaintiffs as custodian of the trust
have standing to bring this action. See N.Y. E.P.T.L.
§ 7-6.11(b). As for the due diligence argument,
defendants indirectly appear to be making an
“unclean hands” or “culpable conduct” defense,
which they specifically withdrew. (JPTO at ¶ 3.)
Therefore, plaintiffs need only demonstrate that the
reliance on Adamo’s representations was reasonable,
which the Court has determined it was. In addition,
defendants lack standing to challenge the use of the
trust funds. See N.Y. E.P.T.L. § 7-6.19. Therefore,
any argument that plaintiffs cannot recover the
money they took from their children’s trust funds to
purchase coins is without merit.
28
After post-trial briefing in this matter was
complete, defendants submitted a letter directing the
Court’s attention to a recent opinion in which the
Supreme Court in Kings County dismissed a lawsuit
by law school graduates claiming that the law
school’s publication of misleading statistics was an
act of fraud because, inter alia, reliance on such
statistics was “not justifiable as a matter of law, given
the other sources of information that were available
to plaintiffs.” Bevelacqua v. Brooklyn Law Sch., 39
Misc. 3d 1216(A) (Kings Cnty. Sup. Ct. 2013).
However, as the Court has noted, plaintiffs
reasonably relied on Adamo’s misrepresentations
because valuations for these coins was not readily
available to an unsophisticated investor such as
Marini; this information was certainly far more
difficult to find than statistics on employment
following law school. In any event, even if coin
valuations were more widely available, Adamo is still
liable under New York common law because, as
discussed infra, he had a broader duty to speak
because of his fiduciary relationship with Marini.
However, as plaintiffs note in their posttrial submission, there are some elements of
New York common law that are more
favorable to their case. Those differences are
addressed below. To the extent that the law
is identical, such as whether: (1) a
representation is material; (2) defendants
acted with intent; (3) there is reasonable
reliance on the representations26,27,28; and (4)
26
Often, the reliance inquiry is different when
analyzing claims for common law fraud as compared
to the federal securities laws. See Turtur v.
Rothschild Registry Int’l, Inc., 92 CIV. 8710, 1993
WL 338205, at *7 (S.D.N.Y. Aug. 27, 1993)
(“Because common law fraud claims must be
supported by a showing of direct reliance on the
misrepresentation or omission, they are distinct from
actions brought under the federal securities laws,
which permit a rebuttable presumption of reliance
where a plaintiff purchases his shares on the open
market.” (citation and internal quotation marks
omitted)). Here, the analysis is identical because
plaintiffs did not purchase these coins on the open
market, as in most securities cases, but instead
engaged in a face-to-face transaction. In any event,
the Court finds, based upon the evidence summarized
in connection with the Exchange Act claim, that
plaintiffs have demonstrated by clear and convincing
evidence that Marini reasonably relied on Adamo’s
representations.
27
Defendants argue that plaintiffs cannot prove a
common law fraud claim because they purchased
some coins with money from their children’s trust
accounts and co-mingled that money with other
funds. (Defs.’ Mem. at 93.) Defendants make two
distinct but related arguments. First, plaintiffs had an
38
Court finds that plaintiffs’ have satisfied
their burden, and that they have shown by
clear and convincing evidence that
defendants committed fraud under New
York law.29
a. Fiduciary or Confidential Relationship
First, Adamo had a broader duty to
speak due to the relationship between him
and Marini. The parties were close friends
for ten years before they began conducting
business. They were godparents to each
other’s children and they took vacations
together. Under New York law, “a fiduciary
relationship embraces not only those the law
has long adopted – such as trustee and
beneficiary – but also more informal
relationships where it can be readily seen
that one party reasonably trusted another
[such as] . . . close friends or family
members.” Id. at 150-51. As set forth in
greater detail infra in connection with
whether Adamo is liable for breach of
fiduciary duty, the Court finds that this
relationship rose to a level in which Adamo
stood as a fiduciary to Marini. Accordingly,
because of this relationship, the Court finds
that Adamo breached his duty to disclose.
See Bickhardt v. Ratner, 871 F. Supp. 613,
619 (S.D.N.Y. 1994) (denying summary
judgment on fraud claim because, inter alia,
jury could find that defendant had breached
duty to disclose when parties had been
friends for twenty-five years).
1. Material False Representation
New York common law imposes a
broader duty of truthfulness in a business
transaction than § 10(b). As discussed supra,
under the Exchange Act, an individual only
has a duty of full disclosure if she is a dealer
of securities, is an agent, or if she has made
partial disclosures that leaves a statement
misleading in the absence of additional
disclosures.
However,
“New
York
recognizes a duty by a party to a business
transaction to speak in three situations: first,
where the party has made a partial or
ambiguous statement, on the theory that
once a party has undertaken to mention a
relevant fact to the other party it cannot give
only half of the truth, second, when the
parties stand in a fiduciary or confidential
relationship with each other, and third,
where one party possesses superior
knowledge, not readily available to the
other, and knows that the other is acting on
the basis of mistaken knowledge.” Brass v.
Am. Film Techs., Inc., 987 F.2d 142, 150 (2d
Cir. 1993) (internal citations and quotation
marks omitted).
b. Superior Knowledge
Adamo also had a duty to disclose
because Adamo had superior knowledge that
was not readily available to Marini, and
Adamo knew that Marini was acting on the
basis of that knowledge. It is undisputed that
Adamo had superior knowledge of rare
coins, and it is clear from the trial testimony
that Marini fully relied on Adamo’s
recommendations regarding which coins to
buy and sell. However, defendants spent a
significant amount of time at trial advancing
the notion that information regarding the
market price of these coins was readily
Because the Court finds that Adamo
made material misrepresentations that are
liable under the Exchange Act, Adamo also
made material misrepresentations that
satisfy the element under New York
common law. However, Adamo is
additionally liable because of the broader
duty to speak under New York law.
29
Thus, to be clear, to the extent that an element is
identical under New York law and federal law,
plaintiffs have proven that element by clear and
convincing evidence, and not simply by a
preponderance of the evidence.
39
available online now, those records were not
easily available to a non-expert in 2002 and
2003. (Id. at 274.)
available through coin books or auction
records.
“In general where a buyer has an
opportunity equal to that of a seller to obtain
information, such information is ‘readily
available,’ and the buyer is expected to
protect himself in a business transaction.
Yet, in an increasing number of situations, a
buyer is not required to conduct
investigations to unearth facts and defects
that are present, but not manifest.” Brass,
987 F.2d at 151 (internal citation omitted).
However, courts have held that a plaintiff
cannot establish a “duty to disclose where
the information at issue was a matter of
public record that could have been
discovered through the exercise of ordinary
diligence.” 246 Sears Rd. Realty Corp. v.
Exxon Mobil Corp., 09-CV-889, 2012 WL
4174862, at *14 (E.D.N.Y. Sept. 18, 2012)
(collecting cases under New York law).
Case law is clear that plaintiffs are not
required to undertake an extensive
investigation to demonstrate common law
fraud. See Brass, 987 F.2d at 151 (stating
that “the rule of ‘superior knowledge’ [now
applies] in an array of contexts in which
silence would at one time have escaped
criticism” and that, for example, “a buyer is
not expected to discover that a house is
infested with termites”).
It is also clear that Adamo knew Marini
was acting on the basis of mistaken
knowledge. To contrast this situation, in
Banque
Arabe
Et
Internationale
D’Investissement v. Maryland National
Bank, 57 F.3d 146 (2d Cir. 1995), the
Second Circuit held that no duty to disclose
existed because a plaintiff must establish
that they were “either relying on [defendant]
for that information or acting on the basis of
mistaken information.” 57 F.3d at 156. In
this case, the testimony overwhelmingly
demonstrated that Adamo knew that Marini
was relying on his disclosures regarding the
value of the coins and that Marini acted on
the basis of the misrepresentations. See
Stevenson Equip., Inc. v. Chemig Const.
Corp., 170 A.D.2d 769, 771 (3d Dep’t 1991)
aff’d, 79 N.Y.2d 989 (1992) (upholding jury
verdict of fraud when “[t]here is also
evidence that defendants were aware that
plaintiff was acting on the basis of a
mistaken belief . . . [and] [t]his situation
imposed an obligation to disclose on
defendants’ part”).
As set forth in the Findings of Fact, the
Court finds that this information was not
readily available to Marini. This is not a
simple case where a duty to disclose clearly
exists because the information is solely
within the defendants’ possession. See, e.g.,
Century Pac., Inc. v. Hilton Hotels Corp., 03
CIV. 8258, 2004 WL 868211, at *9
(S.D.N.Y. Apr. 21, 2004). The situation
between these parties is more difficult
because the market value of the coins could
have been discovered, but it would have
required plaintiffs to engage in an extensive
investigation,
demanding
additional
expertise. Although there are numismatic
publications that list approximate values for
coins, Adamo himself admitted that those
books were outdated and often did not
contain prices for high grade coins. (Tr. at
1226.) Instead, as plaintiffs’ experts
testified, the best way to determine the
market value for a coin is by using auction
records. While those records are readily
2. Proximate Causation
Under New York common law, a
plaintiff need not demonstrate loss causation
as required under the federal securities law.
40
D. Breach of Fiduciary Duty
See Merrill Lynch & Co. Inc. v. Allegheny
Energy, Inc., 500 F.3d 171, 183 (2d Cir.
2007). Instead, “a fraud plaintiff must show
that he acted on the basis of the fraud and
suffered pecuniary loss as a result of so
acting.” Id.; see also Friedman v. Anderson,
23 A.D.3d 163, 167 (1st Dep’t 2005) (“To
establish a fraud claim, a plaintiff must
demonstrate
that
a
defendant’s
misrepresentations were the direct and
proximate cause of the claimed losses.”).
Plaintiffs also argue that Adamo
breached a fiduciary duty he owed to
Marini. “In order to sustain a claim of
breach of fiduciary duty under New York
law, [plaintiffs] must prove the existence of
a fiduciary relationship, misconduct by
[defendants], and damages directly caused
by [defendants’] misconduct.” Margrabe v.
Sexter & Warmflash, P.C., 353 F. App’x
547, 549 (2d Cir. 2009) (citation and
internal quotation marks omitted); see also
Rut v. Young Adult Inst., Inc., 74 A.D.3d
776, 777 (2d Dep’t 2010).
Plaintiffs have demonstrated by clear
and convincing evidence that defendants’
actions were the proximate cause of their
loss. As discussed supra, Adamo made
material misrepresentations regarding the
value of the coins and how much markup he
would charge, the type of coins he bought,
and the liquidity of the investment. As soon
as plaintiffs purchased those coins in direct
reliance of those misrepresentations,
Adamo’s actions proximately caused
plaintiffs’ loss because plaintiffs now owned
coins worth far less than they paid for them.
1. Fiduciary Relationship
The determination of whether a fiduciary
duty exists cannot be determined “by
recourse to rigid formulas.” Scott v. Dime
Sav. Bank of N.Y., FSB, 886 F. Supp. 1073,
1078 (S.D.N.Y. 1995). In determining
whether a fiduciary relationship exists under
New York law, a court must examine
“whether one person has reposed trust or
confidence in the integrity and fidelity of
another who thereby gains a resulting
superiority or influence over the first.”
Teachers Ins. & Annuity Ass’n of Am. v.
Wometco Enters., Inc., 833 F. Supp. 344,
349–50 (S.D.N.Y. 1993); see also
Mandelblatt v. Devon Stores, 132 A.D.2d
162, 168 (1st Dep’t 1987) (“‘A fiduciary
relation exists between two persons when
one of them is under a duty to act for or to
give advice for the benefit of another upon
matters within the scope of the relation.’”
(quoting Restatement (Second) of Torts
§ 874, cmt. a)). “[D]etermining the existence
of a fiduciary relationship requires a factspecific inquiry . . . .” St. John’s Univ., N.Y.
v. Bolton, 757 F. Supp. 2d 144, 166
(E.D.N.Y. 2010).
***
Accordingly, because Adamo not only
made material misrepresentations but also
violated his broader duty to speak, plaintiffs
have proven by clear and convincing
evidence that Adamo is liable for fraud
under New York common law. H. Edward
and Bolton are also liable because Adamo
owned those corporations and used them to
commit the fraud. See Connell v. Hayden, 83
A.D.2d 30, 46 (2d Dep’t 1981) (“Business
corporations are liable under the doctrine of
respondeat superior for the torts of their
employees committed within the scope of
the corporate business.”).
41
obligation to act in the best interests of the
principal.”).
Although plaintiffs strenuously argue to
the contrary, New York law requires that a
fiduciary relationship “must exhibit the
characteristics of ‘de facto control and
dominance.’” Doe v. Roman Catholic
Diocese of Rochester, 12 N.Y.3d 764, 765,
(2009) (citation omitted); see also People ex
rel. Cuomo v. Coventry First LLC, 13
N.Y.3d 108, 115 (2009) (stating that a
fiduciary relationship “exists only when a
person reposes a high level of confidence
and reliance in another, who thereby
exercises control and dominance over him”).
However, such control and dominance can
be asserted in informal relationships,
including those between friends. See
Marmelstein v. Kehillat New Hempstead, 45
A.D.3d 33, 37 (1st Dep’t 2007), aff’d, 11
N.Y.3d 15 (2008). Based on the unique
circumstances of this case, the Court finds
that Marini’s complete “confidence and
reliance” in Adamo allowed Adamo to
“exercise[] control and dominance over
him.” Coventry First, 13 N.Y.3d at 115. (See
PX1 at PL3596-97 (after Adamo tells Marini
that “COINS, gold, silver & platinum are on
the move fasten your seatbelt,” Marini asks
Adamo “should I be buying metals?” and
Adamo advises him “not yet, wait for the
dips in metals and [I] will advise you”); id.
at PL3599 (Marini e-mails Adamo: I want to
express my gratitude for exposing me to
your world giving me the opportunity to
generate security for my family”); id. at
PL3637 (Adamo e-mails: “Here is the deal
that will make you and me the best money
yet”).)
It is true that “[b]y their nature, armslength commercial transactions ordinarily do
not involve relationships defined by the New
York courts as fiduciary. However, a
fiduciary duty may arise in the context of a
commercial transaction upon a requisite
showing of trust and confidence.” MullerPaisner v. TIAA, 289 F. App’x 461, 466 (2d
Cir. 2008) (internal citation omitted). In this
case, is it clear that this was not an armslength commercial transaction because
Marini believed that Adamo was acting in
his best interest by selecting coins, getting
beneficial prices, and buying the same coins
as Marini. Even if this was such a
transaction, plaintiffs have demonstrated
that there was sufficient trust and confidence
to elevate these coin deals into a fiduciary
relationship.
After considering all of the testimony
and case-law, the Court finds that Adamo
had a fiduciary relationship with Marini. No
one single factor informs the Court’s
decision on this highly fact-specific issue.
Upon consideration of the extremely close
friendship between these two individuals
and their families, Adamo’s superior
knowledge of rare coins, Adamo’s
representation that he was buying the same
coins as Marini was, Marini’s belief that
Adamo was facilitating these coin purchases
for Marini’s best interest, and Marini’s
complete trust and confidence in Adamo’s
selections and pricing, it is clear that Adamo
acted as Marini’s fiduciary. See St. John's
Univ., 757 F. Supp. 2d at 167 (stating that a
fiduciary relationship exists when “a party
reposed confidence in another and
reasonably relied on the other’s superior
expertise or knowledge” (citation and
internal quotation marks omitted)).
Courts have held that relationships
between individuals in which there should
be less confidence and reliance than this one
constitute a fiduciary relationship. See
Precision Glass Tinting, Inc. v. Long, 293
A.D.2d 594, 594 (2d Dep’t 2002) (“It is well
established that a real estate broker is a
fiduciary with a duty of loyalty and an
42
Adamo could not charge Marini such prices
because he was Marini’s fiduciary and made
explicit representations regarding the
commission he would charge. Thus, Adamo
violated Justice Cardozo’s often repeated
rule that “[if] dual interests are to be served,
the disclosure to be effective must lay bare
the truth, without ambiguity or reservation,
in all its stark significance.”30 Wendt v.
Fischer, 243 N.Y. 439, 443 (1926).
2. Misconduct
Plaintiffs must also demonstrate that
Adamo breached his fiduciary duty, i.e., that
he committed misconduct in the course of
his relationship with Marini. A fiduciary’s
undisclosed financial benefit in a transaction
has been held to constitute a breach of that
duty. For example, in EBC I, Inc. v.
Goldman Sachs & Co., 5 N.Y.3d 11 (2005),
the New York Court of Appeals held that
plaintiff had sufficiently alleged that
Goldman Sachs breached its fiduciary duty
by failing to disclose that it had a financial
incentive to set a lower price for its client’s
IPO. See id. at 18-20; see also Sheehy v.
New Century Mortg. Corp., 690 F. Supp. 2d
51, 71 (E.D.N.Y. 2010) (finding that a
rational jury could conclude that individual
breached fiduciary duty when he did not
provide “full disclosure about the payments
he was receiving”).
3. Damages
Plaintiffs must establish that their
damages were directly caused by Adamo’s
misconduct. As repeatedly stated supra,
plaintiffs have demonstrated that Adamo’s
misconduct and misrepresentations caused
plaintiffs to invest in rare coins at a dollar
amount far above what they were actually
worth, causing plaintiffs to lose over $11
million.
***
Adamo breached his fiduciary duty to
Marini during the course of these coin
transactions. Adamo represented to Marini
that he was charging him a small
commission. However, he was charging
commissions that far exceeded his
representations. In other words, he failed to
disclose to Marini that he had a conflict of
interest and was engaging in self-dealing,
actions that are forbidden under the wellestablished law of fiduciaries. See Birnbaum
v. Birnbaum, 73 N.Y.2d 461, 466 (1989)
(stating that the law of fiduciaries “bar[s]
not only blatant self-dealing, but also
require[es] avoidance of situations in which
a fiduciary’s personal interest possibly
conflicts with the interest of those owed a
fiduciary duty”).
Accordingly,
plaintiffs
have
demonstrated by a preponderance of the
evidence that Adamo is liable for breach of
fiduciary duty.31
E. Unjust Enrichment
In order to prove unjust enrichment
under New York law, a plaintiff must
demonstrate: “(1) that the defendant
benefitted; (2) at the plaintiffs’ expense; and
(3) that equity and good conscience require
restitution.” Beth Israel Med. Ctr. v. Horizon
30
In any event, Adamo also breached that duty by
making the other false, material representations
discussed supra.
31
Although plaintiffs cite general propositions of tort
law for the proposition that H. Edward and Bolton
are also liable for a breach of fiduciary duty,
plaintiffs did not assert this cause of action against
any defendant except Adamo. (See Second Am.
Compl., ECF No. 94, ¶¶ 234-39.)
Defendants continuously argued at trial
that a businessman can charge whatever
someone will pay for an item. This is true in
a typical commercial transaction. However,
43
Blue Cross & Blue Shield of N.J., Inc., 448
F.3d 573, 586 (2d Cir. 2006) (citations and
internal quotation marks omitted). “It is
important to note, however, the nature of an
unjust enrichment claim in New York: ‘The
theory of unjust enrichment lies as a quasicontractual claim. It is an obligation the law
creates in the absence of any agreement.’”
Id. at 586-87 (quoting Goldman v. Metro.
Life Ins. Co., 5 N.Y.3d 561, 572 (2005)
(emphasis omitted)).
custody of fraud proceeds, because
substantial funds from Plaintiffs went to her
joint account.” (Pls.’ Mem. at 101.)
However, as set forth below, the Court
concludes that the existence of a joint bank
account (through which some of the
proceeds passed as a result of her husband’s
wrongful conduct) is, by itself, insufficient
to demonstrate that Mrs. Adamo personally
benefitted from the fraud proceeds for
purposes of an unjust enrichment claim.
Thus, the Court requires supplemental
briefing as to any evidence in the record that
Mrs. Adamo personally benefited from
money in the joint account that can be traced
to fraudulent proceeds from the coin
transactions at issue in this case.
1. Adamo and Corporate Defendants
The Court finds that plaintiffs have
satisfied their burden in demonstrating that
Adamo and the two corporate defendants
were unjustly enriched. Adamo’s fraudulent
actions caused Marini to “pay artificially
inflated prices” for the coins. Cox v.
Microsoft Corp., 8 A.D.3d 39, 40 (1st Dep’t
2004). Because plaintiffs “did not receive
what they believed they had paid for,”
Hughes v. Ester C Co., No. 12-CV-41, 2013
WL 1080533, at *25 (E.D.N.Y. Mar. 15,
2013), equity and good conscience require
restitution of plaintiffs’ losses. See Waldman
v. New Chapter, Inc., 714 F. Supp. 2d 398,
404 (E.D.N.Y. 2010) (“Under New York
law, it is contrary to equity and good
conscience to enable a party to benefit from
misleading representations.” (citation and
internal quotation marks omitted)).32
The New York Court of Appeals has
held that “[i]nnocent parties may frequently
be unjustly enriched. What is required,
generally, is that a party hold property under
such circumstances that in equity and good
conscience he ought not to retain it.”
Simonds v. Simonds, 45 N.Y.2d 233, 242,
(1978) (citations and internal quotation
marks omitted). While “[a] bona fide
purchaser of property upon which a
constructive trust would otherwise be
imposed takes free of the constructive trust,
[] a gratuitous donee, however innocent,
does not.” Id. For example, in Simonds, the
decedent’s second wife received $7,000 in
life insurance that he had promised to his
first wife. No allegation of wrongdoing was
directed towards the second wife. However,
the Court of Appeals found that the second
wife was unjustly enriched and was liable
for the $7,000. Id. at 242-43. Accordingly,
plaintiffs do not need to demonstrate that
Mrs. Adamo committed a wrongful act to
find her liable on an unjust enrichment
claim. Id.; see also United States v.
Nagelberg, 772 F. Supp. 120, 122-23
(E.D.N.Y. 1991).
2. Mrs. Adamo
Plaintiffs also assert that Mrs. Adamo is
“liable for unjust enrichment because,
though committing no fraud, she took
32
Defendants’ only argument that Adamo and the
corporate defendants are not liable for unjust
enrichment is that an unjust enrichment claim cannot
proceed when “Plaintiffs have previously sworn that
there was a contract between the parties regarding the
terms on which Plaintiffs purchased the coins at
issue.” (Defs.’ Mem. at 134.) As discussed infra,
such a claim is without merit.
44
wrongfully acquired funds, and therefore,
she can be held liable on an unjust
enrichment claim even though she was an
innocent party.
As a threshold matter, there is no
evidence, or even an allegation, that Mrs.
Adamo was aware of any wrongful conduct
by her husband. Moreover, although she
was an officer of H. Edward and Bolton,
there is no evidence or allegation that she
had any personal involvement in coin
transactions at issue in this case. However,
contrary to defendants’ suggestion, the
Court concludes that Mrs. Adamo could be
liable for unjust enrichment as a gratuitous
donee of some of the wrongfully acquired
funds. In particular, defendants stipulated
that Mrs. Adamo’s joint bank account that
she shared with her husband received some
of the proceeds (JPTO ¶ 7.3). Thus, if it
could be proven that she personally
benefitted from the specific funds in the
joint account that represented the fraudulent
proceeds from her husband’s coin
transactions with plaintiffs, equity and good
conscience would require restitution by Mrs.
Adamo for that particular amount of money.
Defendants also cite to MGR Meats, Inc.
v. Schweid, 10-CV-3068, 2012 WL 6675123
(E.D.N.Y. Dec. 21, 2012), for the
proposition that there must be “a connection
or relationship between the parties that could
have caused reliance or inducement on the
plaintiff’s part.” Id. at *7 (citation and
internal quotation marks omitted). However,
in MGR itself, the Court allowed an unjust
enrichment claim to proceed despite the lack
of relationship between the parties because
the “‘property of one person [was] used in
discharging an obligation owed by
another.’” Id. (quoting In re Chateaugay
Corp., 89 F.3d 942, 947 (2d Cir. 1996)).
Thus, although there is no allegation that
Mrs. Adamo was involved in, or had
knowledge of, the wrongful conduct by her
husband, an unjust enrichment claim could
still be proven against her. However, the
Court disagrees with plaintiffs’ contention
that she has been unjustly enriched simply
by virtue of the fact that proceeds from the
coin transactions at issue were placed in a
bank account that Mrs. Adamo held jointly
with her husband. That precise argument
was rejected by the Second Department in
Zell & Ettinger v. Berglas, 261 A.D.2d 613,
613-14 (2d Dep’t 1999). In Zell, the
plaintiff argued that the husband was liable
for unjust enrichment because the funds that
were misappropriated by his wife were
deposited in a bank account that they shared.
The Second Department held that summary
judgment should have been granted for the
husband because “plaintiffs did not show
that any of the stolen funds were traceable to
the [defendant husband] and the plaintiffs’
unsubstantiated allegations that [the
husband] benefited from and had knowledge
The cases defendants cite are not to the
contrary. In Georgia Malone & Co. v.
Rieder, 19 N.Y.3d 511 (2012), the defendant
paid $150,000 for due diligence materials
from a third-party, and then used those
materials to sell a property and receive a
$500,000 commission. However, those
materials were not created by the thirdparty, but were actually developed by
plaintiff. The Court held that an unjust
enrichment claim could not stand because
there was no business relationship between
the parties. Id. at 515-16. The Court
distinguished its decision in Simonds
because the defendant in Georgia Malone
paid for the due diligence materials and was
not aware of the wrongfulness by the party
they bought them from, while the second
wife in Simonds was a “gratuitous donee.”
Id. at 518-19. The same rationale applies
here. Mrs. Adamo (like the second wife in
Simonds) was a gratuitous donee of the
45
of his wife’s theft, made in the affirmation
of their attorney, who had no personal
knowledge of the facts, was insufficient to
defeat [the husband’s summary judgment]
motion.” Id. at 614.
v. State, 64 N.Y.2d 143, 148 (1984) (internal
citations and quotation marks omitted).
While “[t]he remedy is available if one man
has obtained money from another, through
the medium of oppression, imposition,
extortion, or deceit, or by the commission of
a trespass,” id. (citation and internal
quotation marks omitted), “[i]t is immaterial
[] whether the original possession of the
money by the defendant was rightful or
wrongful,” Roberts v. Ely, 113 N.Y. 128,
132 (1889).
This Court similarly concludes that the
fact that Mrs. Adamo shared a joint account
with her husband, and funds wrongfully
obtained by her husband from plaintiffs
were deposited into that account, is
insufficient to demonstrate that Mrs. Adamo
is liable for unjust enrichment. Although the
Court is doubtful, based upon the evidence
in the record, that plaintiffs can meet the
requisite standard, the Court will allow
plaintiffs to provide supplemental briefing
regarding any evidence already in the
record33 that Mrs. Adamo personally
benefitted from the specific funds in the
joint account attributable to the fraudulent
proceeds from her husband’s coin
transactions with plaintiffs.
For the same reasons that plaintiffs have
proved that defendants Adamo and the two
corporate defendants were unjustly enriched,
plaintiffs have also satisfied the elements for
a money had and received claim against
those defendants. See Maxus Leasing Grp.,
Inc. v. Kobelco Am., Inc., 04-CV-518, 2007
WL 655779, at *5 n.15 (N.D.N.Y. Feb. 26,
2007) (“The causes of action for unjust
enrichment and money had and received are
identical.”); Freedman v. Freedman, 116 F.
Supp. 2d 379, 381 (E.D.N.Y. 2000) (stating
that a claim for money had and received is
“similar in nature to unjust enrichment”);
but see Robert Smalls Inc. v. Hamilton, 09
CIV. 7171, 2010 WL 3238955, at *6
(S.D.N.Y. July 19, 2010) (Report and
Recommendation) (stating that “New York
courts appear to disagree about the
relationship between unjust enrichment and
money had and received” and that while
some courts have allowed both theories to
proceed in a single case, “[o]thers consider a
claim for money had and received to be an
equitable cause of action premised upon
unjust enrichment” (citation and internal
quotation marks omitted)). Defendants
received plaintiffs’ money, they benefited
from it, and principles of equity and good
conscience require defendants to return that
money to plaintiffs.34 Similarly, for the
F. Money Had and Received
“The essential elements in a claim for
money had and received under New York
law are that (1) defendant received money
belonging to plaintiff; (2) defendant
benefitted from the receipt of money; and
(3) under principles of equity and good
conscience, defendant should not be
permitted to keep the money.” Aaron Ferer
& Sons Ltd. v. Chase Manhattan Bank, Nat’l
Ass’n, 731 F.2d 112, 125 (2d Cir. 1984).
This cause of action “allows plaintiff to
recover money which has come into the
hands of the defendant impressed with a
species of trust because under the
circumstances it is against good conscience
for the defendant to keep the money.” Parsa
33
The Court does not intend to allow plaintiffs to
reopen the trial record and submit additional
evidence. Instead, plaintiffs’ supplemental brief must
refer to evidence already in the trial record.
34
Even if the Court considered the money had and
received claim an equitable claim that is “premised
46
same reasons that the Court has concluded
that supplemental briefing is necessary to
determine whether there is any evidence in
the record to support an unjust enrichment
claim
against
Mrs.
Adamo,
such
supplemental briefing is also necessary on
this claim.
rationale for striking duplicative fraud
claims is that there is ordinarily no
difference between contract damages for
nonperformance and fraud damages.” VTech
Holdings Ltd. v. Lucent Techs., Inc., 172 F.
Supp. 2d 435, 440-41 (S.D.N.Y. 2001). The
Second Circuit has detailed three narrow
exceptions for allowing both a fraud claim
and a breach of contract claim to stand: “a
plaintiff must either: (i) demonstrate a legal
duty separate from the duty to perform
under the contract; or (ii) demonstrate a
fraudulent misrepresentation collateral or
extraneous to the contract; or (iii) seek
special damages that are caused by the
misrepresentation and unrecoverable as
contract damages.” Bridgestone/Firestone,
Inc. v. Recovery Credit Servs., Inc., 98 F.3d
13, 20 (2d Cir. 1996) (internal citations
omitted). However, the Court need not even
examine the Bridgestone/Firestone factors
because plaintiffs are not currently asserting
a breach of contract claim, thus, there is no
duplicative claim. Defendants cite to no case
law to support their assertion that once a
plaintiff asserts a breach of contract action,
they can never bring a fraud claim once they
determine that the contract action, for
whatever reason, should be dismissed.
G. Duplicative Claims
Defendants argue that although plaintiffs
dismissed their breach of contract claim, all
of plaintiffs’ state law claims must be
dismissed because plaintiffs have asserted
during the course of this litigation that
Marini and Adamo had entered into a
contract. (Defs.’ Mem. at 108-109, 134-35.)
According to defendants, “Plaintiffs cannot
predicate a claim of fraud on any act or
omission that would have constituted a
breach of an agreement between the
parties.” (Id. at 108; see also id. at 134-35
(arguing that unjust enrichment cannot exist
when there is a contract between parties).)
Defendants further assert that because
plaintiffs had previously asserted a breach of
contract claim, their claims must be
dismissed. (Id. at 108 (“Yet [plaintiffs]
dismissed their breach of contract claim with
prejudice, a fact that precludes them from
recovering on a fraud claim now.”).) It
appears that defendants are conflating two
premises of the law, and neither premise
bars plaintiffs’ fraud claim in this action.
Defendants’ related argument that
plaintiffs cannot bring any tort claim when
they allude that there was a contract is also
not supported by the case law. The New
York Court of Appeals has held that if a
“plaintiff is essentially seeking enforcement
of the bargain, the action should proceed
under a contract theory.” Sommer v. Fed.
Signal Corp., 79 N.Y.2d 540, 552 (1992).
However, plaintiffs are not making such an
assertion here. Plaintiffs are not trying to
enforce a contract that was not performed;
they are claiming that they were defrauded.
Even though the transactions at issue may be
labeled “investment contracts” under federal
securities law, because plaintiffs are not
First, with regard to the fraud claim,
under well-settled New York law, a claim
for fraud will be dismissed unless it alleges
facts that are “sufficiently distinct from the
breach of contract claim.” Papa’s-June
Music, Inc. v. McLean, 921 F. Supp. 1154,
1162 (S.D.N.Y. 1996). “[P]art of the
upon” unjust enrichment, plaintiffs have proven a
money had and received claim because they have
also demonstrated that defendants were unjustly
enriched.
47
the expert reports. Defendants have not
introduced any expert testimony to rebut the
valuations, and as stated in the Findings of
Fact, the Court finds plaintiffs’ experts
credible.
seeking enforcement of a bargain, they are
not required to bring this action as a breach
of contract.
Accordingly, plaintiffs’ state law claims
may proceed.
V.
Accordingly,
the
Court
awards
compensatory damages of $11,304,079 on
plaintiffs’ state law claims. However,
because the Court limits plaintiffs’ recovery
on the Exchange Act claim to transactions
that occurred after September 30, 2003, the
Court will need supplemental briefing from
the parties to identify evidence in the record
that will assist in the calculation of damges
for this particular claim.
Damages
A. Compensatory Damages
For all of their claims, plaintiffs seek
compensatory damages of $11,304,079,
representing the total charged to plaintiffs
minus the total value plaintiffs received.
The Court agrees with plaintiffs’
damages calculations, and concludes that
they have met their burden of proving
damages in the amount of $11,304,079. (See
PX52.) Plaintiffs introduced credible
evidence that they paid $12,148,404 to
Adamo in checks and wires, and $4,690,000
in cash, but that $41,000 of the checks,
wires, and cash were for items other than
coins. Defendants even stipulated that they
received
$11,633,404.40
for
coins,
supported by wires and checks from
plaintiffs to defendants that were produced
during discovery. (JPTO ¶ 7.) The parties
dispute almost the entire amount of the cash,
plus two checks that plaintiffs do not have
records for. However, as stated in the
Findings of Fact, the Court finds that
plaintiffs have proven by clear and
convincing
evidence
that
these
representations regarding the amount paid
are accurate. Accordingly, the Court finds
that plaintiffs were charged $16,797,404.
B. Punitive Damages
Plaintiffs seek punitive damages for the
fraud and breach of fiduciary duty claims in
an amount equal to the compensatory
damages, $11,304,079. Punitive damages
are discretionary and may be awarded “to
punish the defendant for his outrageous
conduct and to deter him and others like him
from similar conduct in the future.” Smith v.
Wade, 461 U.S. 30, 54 (1983) (alteration,
citations and internal quotation marks
omitted); see also Whitney v. Citibank, N.A.,
782 F.2d 1106, 1118 (2d Cir. 1986) (“Under
New York law . . . punitive or exemplary
damages may be awarded where the
defendant’s conduct amounts to such gross,
wanton or willful fraud, dishonesty, or
malicious wrongdoing as to involve a high
degree of moral culpability, making it
appropriate to deter the defendants from
engaging in similar conduct in the future and
to induce the victim to take action against
the wrongdoer.”). “That the harm alleged
might not have been aimed at the general
public does not alter this result.” Swersky v.
Dreyer & Traub, 219 A.D.2d 321, 328 (1st
Dep’t 1996).
Plaintiffs argue that the total value they
received is $5,493,325. The parties
stipulated that plaintiffs received $2,540,000
from Adamo for the sale of coins. (JPTO
¶ 21.) Plaintiffs also contend that the current
value of their coins is $2,953,325 based on
48
C. Interest
Plaintiffs
propose
a
“reasonable
intermediate date” of January 1, 2005. (Pls.’
Mem. at 117.) Because the Court has
“substantial discretion” in this selection,
Pac. Westeel, Inc. v. D & R Installation, 01CIV-0293, 2003 WL 22359512, at *3
(S.D.N.Y. Oct. 17, 2003), and because
plaintiffs made the vast majority of their
payments prior to this date, the Court selects
January 1, 2005 as a reasonable intermediate
date.
On plaintiffs’ state law claims, the Court
must apply New York’s statutory rate of
pre-judgment interest of 9%. See Action S.A.
v. Marc Rich & Co., 951 F.2d 504, 508 (2d
Cir. 1991) (citing N.Y. C.P.L.R. § 5001 and
reversing district court for failing to apply
New York’s statutory rate of pre-judgment
interest on claims of breach of fiduciary
duty and unjust enrichment); see also Huang
v. Sy, 18 Misc. 3d 1141(A), (Sup. Ct.
Queens Cnty. 2008) (“Causes of action such
as fraud, breach of fiduciary duty[,]
conversion and unjust enrichment qualify
for the recovery of prejudgment interest
under [N.Y. C.P.L.R. § 5001].”), aff’d, 62
A.D.3d 660 (2d Dep’t 2009).
In calculating the pre-judgment interest
on plaintiffs’ federal claim, this Court has
“broad discretion” in determining “whether
to grant prejudgment interest and the rate
used if such interest is granted.” First
Jersey, 101 F.3d at 1476 (citation and
internal quotation marks omitted); see also
Mfrs. Hanover Trust, 801 F.2d at 28 (“Prejudgment interest on federal securities
claims, unlike on New York state law
claims, is not mandatory.”). The Court elects
to award pre-judgment interest on the
Exchange Act claim at 9% from April 5,
2006, the “last significant payment” after
September 30, 2003. See Pac. Westeel, 2003
WL 22359512, at *4.
The Court declines in its discretion to
award punitive damages in this matter.
Although Adamo engaged in illegal acts that
resulted in the fraudulent receipt of over $11
million from his close friend, the Court does
not believe, in light of the substantial
compensatory award, that the fraud warrants
the imposition of further sanctions to
achieve punishment or deterrence.
Plaintiffs are also entitled to postjudgment interest of 9% from the date of the
entry of judgment until the date of payment
for their state law claims. See N.Y. C.P.L.R.
§§ 5003, 5004; Denio v. State, 7 N.Y.3d
159, 164 (2006). Plaintiffs are also entitled
to post-judgment interest for their Exchange
Act claim. See 28 U.S.C. § 1961.
The statute provides:
Interest shall be computed from the
earliest ascertainable date the cause
of action existed, except that
interest upon damages incurred
thereafter shall be computed from
the date incurred. Where such
damages were incurred at various
times, interest shall be computed
upon each item from the date it was
incurred or upon all of the damages
from
a
single
reasonable
intermediate date.
VI.
CONCLUSION
For the foregoing reasons, the Court
concludes, after carefully considering the
evidence introduced at trial, the arguments
of counsel, and the controlling law on the
issues presented, that plaintiffs have shown
by a preponderance of the evidence that
Adamo, H. Edward, and Bolton violated
N.Y. C.P.L.R. § 5001(b).
49
***
Section 10(b) of the Exchange Act, as well
as New York common law for claims of
unjust enrichment, and money had and
received. Plaintiffs have also demonstrated
that Adamo breached his fiduciary duty to
Marini. The Court also finds that plaintiffs
have proven by clear and convincing
evidence that Adamo, H. Edward, and
Bolton committed fraud in violation of New
York common law. On the state law claims,
once the damages issue on the Exchange Act
claim is resolved, the Court will enter
judgment in the amount of $11,304,079,
plus pre-judgment interest calculated at a
rate of 9% from January 1, 2005 to the
present, as well as post-judgment interest.
With respect to the claims against Mrs.
Adamo for unjust enrichment, as well as
money had and received, the Court
concludes that supplemental briefing is
necessary to assist the Court in determining
whether liability exists and, if so, the
amount of such liability. The Court will set
a schedule for additional briefing on the
amount of damages for the Exchange Act
claim, as well as the claims against Mrs.
Adamo, in light of this Memorandum and
Order.
Plaintiffs are represented by Michael H.
Schaalman, Quarles & Brady LLP, 411 E.
Wisconsin Ave, Milwaukee, WI 53202,
Scott A. Moss and Marianna Moss, Moss
Law Practice, 8053 East 24th Drive, Denver,
CO 80238, and Paul A. Brancato, 106-43
157th Street, Jamaica, NY 11433.
Defendants are represented by Richard
Dolan, Robert Begleiter, and Andrew Harris,
Schlam Stone & Dolan LLP, 26 Broadway,
New York, NY 10004.
SO ORDERED.
_______________________
JOSEPH F. BIANCO
United States District Judge
Dated: February 6, 2014
Central Islip, NY
50
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