United States District Court, E.D. Michigan, Southern Division
Robert D. Gordon, Receiver of Legisi Marketing, Inc., Gregory N. McKnight and Legisi Holdings, LLC, Plaintiff,
Royal Palm Real Estate Investment Fund I, LLLP, et al., Defendants.
ORDER GRANTING IN PART AND DENYING IN PART
DEFENDANTS' MOTION TO DISMISS 
J. Tarnow, Senior United States District Judge
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.
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.
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.
the Court is Defendants' Motion to Dismiss Second Amended
Complaint  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.
Legisi Ponzi Scheme
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,
In January 2007, McKnight formed Legisi Marketing, Inc., a
company used to hold and invest funds he received from
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.
Royal Palm entities and Sierra
Bruce, Robert, and Roxanne Rosetto 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”).
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.
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.
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.
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.
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.
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
9, 2007, Sierra and the Fund entered into a Selling Agreement
according to which Sierra became the Fund's selling
11, 2007, McKnight, on behalf of Legisi, signed the
Partnership Agreement making Legisi Marketing the Fund's
only limited partner.
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.
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.
SEC action and FINRA arbitration
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
March 23, 2009, Plaintiff commenced a FINRA Action (No.
09-01690) against Goddard, Lichtenstein, and Bloom
(“FINRA Respondents”). “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
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.
Criminal proceedings against McKnight
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
The Instant Action
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.
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
December 9, 2016, the Court lifted the stay. On November 7,
2017, Plaintiff filed the Second Amended Complaint 
(“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).
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).
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. ...