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Gordon v. Royal Palm Real Estate Investment Fund I, LLLP

United States District Court, E.D. Michigan, Southern Division

May 25, 2018

Robert D. Gordon, Receiver of Legisi Marketing, Inc., Gregory N. McKnight and Legisi Holdings, LLC, Plaintiff,
v.
Royal Palm Real Estate Investment Fund I, LLLP, et al., Defendants.

          ORDER GRANTING IN PART AND DENYING IN PART DEFENDANTS' MOTION TO DISMISS [106]

          Arthur J. Tarnow, Senior United States District Judge

         This case concerns a receiver, appointed on behalf of a convicted Ponzi-schemer, who seeks to recover funds invested in an allegedly fraudulent investment scheme. From 2006 to 2008, Gregory McKnight operated a $72 million Ponzi scheme through his companies Legisi Marketing and Legisi Holdings. In 2007, McKnight and Legisi invested nearly $10 million in Defendant Royal Palm Real Estate Investment Fund, LLLP (the “Fund”). The entire investment was derived from funds obtained through the Legisi Ponzi scheme.

         In May 2008, the SEC commenced an action against McKnight and Legisi in this District. Plaintiff Robert Gordon was appointed as the receiver of the estates of McKnight and Legisi.

         Plaintiff maintains that Defendants, persons and entities involved in the management and formation of the Fund, engaged in a fraudulent scheme and made material misrepresentations in connection with the sale of securities to McKnight and Legisi. Plaintiff filed this action alleging federal securities claims and claims under Michigan and Florida law.

         Before the Court is Defendants' Motion to Dismiss Second Amended Complaint [106] filed on December 11, 2017. The Motion is fully briefed. The Court held a hearing on the Motion on April 19, 2018. For the reasons explained below, the Motion is GRANTED in part and DENIED in part.

         Factual Background

         I. Legisi Ponzi Scheme

         In December 2005, Gregory McKnight began offering and selling unregistered investment contracts in a pooled investment program called Legisi.com (“Legisi Program”). In February 2006, McKnight formed Legisi Holdings, LLC.[1] In January 2007, McKnight formed Legisi Marketing, Inc., a company used to hold and invest funds he received from investors.

         Legisi was a Ponzi scheme which reported fictitious profits and used principal investments to pay other investors. Legisi promised returns ranging from 7.5% to 15% per month or 90% to 180% per year. By November 2007, Legisi had raised over $72 million from 3, 000-5, 000 investors.

         II. Royal Palm entities and Sierra

         Defendants Bruce, Robert, and Roxanne Rosetto[2] are Florida residents involved in the formation and management of various business entities. The entities include the following Defendants: The Fund; Royal Palm Investment Management Company, LLC (“Management Company”); and Royal Marketing Services, LLC (“Royal Marketing”).[3]

         Bruce Rosetto was corporate and securities counsel for a separate entity, the Sierra Equity Group, LLC (“Sierra”). Former defendants in this action, Alan Goddard, Michael Lichtenstein, and Eric Bloom, were members of Sierra.

         Beginning in late 2006, the Rosettos, along with Goddard, Lichtenstein, and Bloom, formed Royal Marketing. Bruce and Roxanne Rosetto are 50-50 members of Royal Marketing.

         The Rosettos also formed the Management Company with Goddard, Lichtenstein, and Bloom, who are the Company's members. It is alleged that Bruce and Roxanne Rosetto are 25% members of the Management Company.

         Plaintiff alleges, in detail, that the Rosetto Defendants, along with Goddard, Lichtenstein, and Bloom, carried out several interconnected investment schemes to defraud investors and operated a Ponzi scheme through the Royal Palm entities.

         III. The Fund

         In January 2007, the Rosettos and Goddard began to form the Fund, a limited liability limited partnership. The Fund's stated purpose was to contract for the purchase of homes and condominiums and to buy and sell real estate properties in Florida. The Management Company, a separate entity managed by Bruce Rosetto, was the General Partner of the Fund. Bruce Rosetto was responsible for creating the Fund and for day-to-day business decisions.

         On March 14, 2007, Lichtenstein, on behalf of the Fund and other Royal Palm entities, called McKnight to offer and sell securities to him by phone. Plaintiff alleges that Lichtenstein promised high gains within a short period of time and made material omissions in connection with the offer and sale. By March 22, 2007, McKnight and Legisi committed to invest $5-10 million in the Fund. Between April and June 2007, Legisi invested a total of $9, 440, 068.55 in the Fund. All of the funds invested were derived from the Legisi Ponzi scheme.

         On May 9, 2007, Sierra and the Fund entered into a Selling Agreement according to which Sierra became the Fund's selling agent.

         On May 11, 2007, McKnight, on behalf of Legisi, signed the Partnership Agreement making Legisi Marketing the Fund's only limited partner.

         On May 15, 2007, McKnight told Goddard, Lichtenstein, and Bloom that he and Legisi had been subpoenaed by Michigan's Office of Financial and Insurance Services. On May 25, 2007, the SEC subpoenaed McKnight and Legisi. Goddard, Lichtenstein, and Bloom referred McKnight to Sierra's attorney who agreed to represent McKnight. After he was subpoenaed, McKnight transferred nearly $7 million to the Fund.

         In the months that followed, the Rosettos, and Goddard, Lichtenstein, and Bloom changed the terms of the Fund's Offering. Such changes were neither disclosed to McKnight nor Legisi. In October 2007, the final transaction documents were delivered to McKnight and Legisi.

         Procedural History

         I. Related Proceedings

         A. SEC action and FINRA arbitration

         On May 5, 2008, the SEC commenced an action alleging violations of various securities laws against McKnight and Legisi. United States Securities and Exchange Commission v. McKnight, et al., No. 08-11887 (E.D. Mich. 2008) (“SEC Action”). The Court appointed Robert Gordon as the receiver for the estates of McKnight and Legisi Holdings.

         On March 23, 2009, Plaintiff commenced a FINRA Action (No. 09-01690) against Goddard, Lichtenstein, and Bloom (“FINRA Respondents”).[4] “The FINRA claims were premised on the FINRA Defendants' alleged misconduct in recommending certain investments to Legisi Marketing through McKnight, including the approximately $9.4 million that Legisi Marketing had invested in [the Fund].” [Dkt. #64 at 4]. The parties entered into arbitration. On March 20, 2015, Plaintiff and the FINRA Respondents reached a settlement.

         On July 14, 2015, the Court, in the SEC Action, granted Plaintiff's Motion for Order Approving Settlement Resolving Claims Asserted in FINRA Arbitration. [Dkt. #627]. On January 9, 2016, the FINRA arbitration award became final. The SEC Action remains pending.

         B. Criminal proceedings against McKnight

         On February 14, 2012, the Government filed an Information charging McKnight with Wire Fraud. United States v. McKnight, No. 12-20101 (E.D. Mich. 2012). Pursuant to a Rule 11 Plea Agreement, McKnight pleaded guilty to Wire Fraud on February 16, 2012. On August 7, 2013, the Court sentenced McKnight to 15 years and 8 months of imprisonment and ordered him to pay $48.9 million in restitution. The Sixth Circuit affirmed McKnight's conviction on June 18, 2014. Neither party has provided the amount of restitution still owed to Legisi's victims.

         II. The Instant Action

         Plaintiff commenced this action on May 7, 2009. In the original complaint, Plaintiff named as Defendants: the Fund; the Management Company; Royal Marketing; Bruce, Robert, and Roxanne Rosetto; and the FINRA Respondents.

         On March 8, 2011, the Court dismissed without prejudice the FINRA Respondents on the basis that the claims Plaintiff asserted against them were within the scope of the FINRA arbitration agreement. The Court stayed the action against the remaining Defendants pending resolution of the FINRA arbitration.

         On December 9, 2016, the Court lifted the stay. On November 7, 2017, Plaintiff filed the Second Amended Complaint [101] (“Complaint”) alleging: Violation of § 10(b) of the Securities Exchange Act and SEC Rule 10b-5 (Count I); Violation of § 78t of the Exchange Act (Count II); Violation of the Michigan Uniform Securities Act (Count III); Violation of the Florida Securities Transaction Act (Count IV); Breach of Partnership Agreement (Count V); Violation of Florida Revised Uniform Limited Partnership Act (Count VI); Common Law Breach of Fiduciary Duty (Count VII); Common Law Fraud (Count VIII); Innocent Misrepresentation (Count IX); Avoidance of Fraudulent Transfers Pursuant to M.C.L. § 566.35(1) (Count X); Avoidance of Fraudulent Transfers Pursuant to M.C.L. § 566.34(1) (Count XI); Aiding/Abetting Tortious Conduct (Count XII); Tortious Interference with Contract (Count XIII); Silent Fraud (Count XIV); and Fraudulent Inducement (Count XV).

         Legal Standards

         Defendants move to dismiss the Complaint for failure to state a claim pursuant to Fed.R.Civ.P. 12(b)(6). “To survive a motion to dismiss, [plaintiff] must allege ‘enough facts to state a claim to relief that is plausible on its face.'” Traverse Bay Area Intermediate Sch. Dist. v. Mich. Dep't of Educ., 615 F.3d 622, 627 (6th Cir. 2010) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)). On a Rule 12(b)(6) motion to dismiss, the Court must “assume the veracity of [the plaintiff's] well-pleaded factual allegations and determine whether the plaintiff is entitled to legal relief as a matter of law.” McCormick v. Miami Univ., 693 F.3d 654, 658 (6th Cir. 2012) (citing Ashcroft v. Iqbal, 556 U.S. 662, 679 (2009)). The Court must construe the complaint in the light most favorable to Plaintiff and draw all reasonable inferences in Plaintiff's favor. Ohio Police & Fire Pension Fund v. Standard & Poor's Fin. Servs. LLC, 700 F.3d 829, 835 (6th Cir. 2012).

         Defendants also move to dismiss the Complaint for lack of standing pursuant to Fed.R.Civ.P. 12(b)(1). See Kepley v. Lanz, 715 F.3d 969, 972 (6th Cir. 2013) (internal citation and quotation marks omitted) (“Standing goes to [a c]ourt's subject matter jurisdiction[.]”). “[P]laintiff has the burden of proving jurisdiction in order to survive the motion.” Mich. S. ...


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