UNITED STATES DISTRICT COURT DISTRICT OF NEW JERSEY McKenna McIlwain, LLP 96 Park Street Montclair, New Jersey

07042 Tel: 973-509-0050; Fax: 973-509-3580 Attorneys for Plaintiff: First State Bank

FIRST STATE BANK, Plaintiff, v. ALBERT GASPARRO, PRIMANAGEMENT, INC. PRIMANAGEMENT, LLC, and ULTRAVEST CAPITAL CORP., Defendants

CIVIL ACTION NO.:(SDW)(MCA)

BRIEF IN OPPOSITION TO APPEAL OF ORDER GRANTING LEAVE TO FILE AMENDED COMPLAINT ________________________________________________________________________

Keith McKenna, Esq. Of Counsel and on the Brief kmckenna@mckennamcilwain.com Attorneys for Plaintiff

STATEMENT OF FACTS AND PROCEDURAL HISTORY

This litigation commenced on November 18, 2010,with the filing of a Complaint by plaintiff, First State Bank (hereinafter FSB), against its investment advisor, Albert Gasparro, Primemanagement LLC and Primemanagement Inc. The original complaint alleged that Gasparro made material misrepresentations to the Banks board members and general counsel, causing FSB to rely on Gasparro and the Prime defendants, and resulting in fraud on the Bank. As set forth

in the Complaint, rather than performing investment advisory services that were appropriate for the Bank, Gasparro took $12 million dollars from the Bank, and reinvested it in the Banks own stock. Gasparro then established a fictitious capital Gasparro further charged

raise by entities under his control.

the Bank a $750,000 consulting fee for using the Banks own money to invest in its stock, and now illegally retains $8,000,000 of the Banks as well as 1.4 million shares of the Banks stock. While plaintiff maintained that the original Complaint filed in this action set forth a cause of action for fraud with the requisite specificity contemplated by Rule 9, plaintiff then filed a motion for leave to file an amended complaint, further detailing the fraud perpetrated by defendants, Gasparro, Primemanagement LLC and Primemanagement, Inc.

In response, defendants filed a motion to dismiss the proposed amended complaint with United States Magistrate Judge Madeline Cox-Arleo. Judge Arleo ruled that the Amended

Complaint satisfied the pleading requirements of the federal rules and denied defendants motion to dismiss. This appeal of Judge Cox-Arleos ruling follows.

LEGAL ARGUMENT

THE APPEAL OF THE ORDER GRANTING PLAINTIFFS MOTION TO AMEND SHOULD BE DENIED. PLAINTIFFS PLEADING SATISFIES THE REQUIREMENTS OF F.R.C.P. 15(a),8(a) and 9(b). On this appeal, defendants seek reversal of the Order of Magistrate Judge Cox-Arleo that granted plaintiffs Motion to file an Amended Complaint.Plaintiff submits that the Order was proper, and that the amended pleading satisfies the requirements of Federal Rules of Civil Procedure 15(a), 8(a) and 9(b). In denying defendants motion to dismiss the fraud count of plaintiffs complaint, Judge Arleo properly applied law of the United States Supreme Court in Twombly and the more recent decision in Ashcroft v. Iqbal, 129 S.Ct. 1937 (2009). On this appeal, defendants do not even mention Ashcroft or Twombly, the two most important decisions of the United States Supreme Court in the last decade dealing with pleading in federal actions, nor do defendants mention or cite the leading decisions of the United States Court of Appeals for the Third Circuit that apply Ashcroft and Twombly or address pleading in the fraud context. Instead,

defendants continue to cite dicta from older, irrelevant cases, in a futile attempt to take another bite at the apple. Accordingly,plaintiff again addresses the law, and submits that the Amended Complaint satisfies the federal

rules and decisions of this Circuit as well as Twombly and Iqbal. Judge Arleo properly framed the issue before the Court as follows:

[U]nder Rule 15(a), once a response to a partys pleading is served, the pleading may be amended only by seeking leave of Court or by obtaining permission of the opposing party. Leave to amend can be denied for numerous reasons, including futility of amendment. Guided by the Third Circuits approach and liberal standard under 15(a), this Court finds that the amendments would not be futile at this stage. Futility which recognizes standards similar to that of a motion under 12(b)(6) considers whether relief can be granted under any set of facts within the allegations. The Court must accept as true all factual allegations, construe the complaint in the light most favorable to the plaintiff, and determine whether under any reasonable reading of the complaint, the plaintiff may be entitled to relief....The Supreme Court has directed that factual allegations must be enough to raise a right to relief above the speculative level, the claim has plausibility when the plaintiff pleads factual content that allows a Court to draw a reasonable inference that the defendant is liable for the misconduct. That, of course, is Ashcroft v. Iqbal, 129 S.Ct. 1937 (2009).(T15, reproduced as D13 in Defendants Appendix). Applying the analysis in Ashcroft to the proposed pleading, Judge Cox-Arleo observed:

Lets talk first about fraud and the heightened requirement under Rule 8(a). Rule 9(b) states that in alleging fraud and mistake, a party must state with particularity the circumstances constituting fraud or mistake. And the plaintiff may satisfy this requirement by putting the date, place, or time of the fraud or through alternative means of injecting precision and some measure of substantiation into the allegations of fraud. Lum v. Bank of America, 361 F.3d 217 (3d Cir. 2004). Plaintiff must also allege who made a representation to whom and the general content of the misrepresentation. Because certain aspects of an alleged fraud may have been concealed by a defendant, courts apply Rule 9 for some flexibility. Rolo v. City Investing Co., Liquidating Trusts, 155 F.3d 644 (3d Cir. 1998). Based on this Courts review of the proposed amended fraud claims and the liberal standards under 15(a), the Court is satisfied that at this initial pleading stage, although its a close call, plaintiff has adequately pled allegations in support of its fraud claims to satisfy Rule 8(a), Twombly, as well as Iqbal. Thus the amendment is not futile. (Id. at 13-14)

The decision of Judge Cox-Arleo is correct in light of Twombly, 550 U.S. 544 (2007) and Ashcroft v. Iqbal, 129 S.Ct. 1937 (2009), as well as the more recent pronouncements of the Court of Appeals for the Third Circuit.

In

Twombly,

the

United States Supreme Court held in

an

antitrust case that "[f]actual allegations must be enough to raise a right to relief above the speculative level...on the assumption that all the allegations in the complaint are true (even if doubtful in fact)." (550 U.S. at 555). In sum, in opposition to a motion to dismiss, a complaint must do no more than "state a claim to relief that is plausible on its face." (550 U.S. at 570). Subsequently, the Supreme Court applied the Twombly In Iqbal,

standard in Ashcroft v. Iqbal,129 S. Ct. 1937 (2009).

Attorney General Ashcroft was sued by a Muslim who alleged that Robert Mueller, FBI Director and Ashcroft had developed a policy for detaining persons of high interest following September 11, in violation of the First and Fifth Amendments of the

Constitution. Iqbal's complaint alleged that Ashcroft was the "principal architect" in of [its] the policy adoption, and that Mueller was and

"instrumental implementation."

promulgation,

In Iqbal, the Court stated that courts considering motions to dismiss adopt a "two-pronged approach" in applying these

principles: 1) eliminate any allegations in the complaint that are merely legal conclusions; and 2) where there are and wellthen

pleaded

factual

allegations,

"assume

their

veracity

determine whether they plausibly give rise to an entitlement to

relief.""

The

Iqbal

Court

explicitly

held

that

the

Twombly

plausibility standard applies to all civil actions, not merely antitrust actions, because it is an interpretation of Rule 8. Id. Two Third Circuit decisions interpret Twombly and Iqbal: Phillips v. County of Allegheny, 515 F.3d 224 (3d Cir. 2008) and Fowler v. UPMC Shadyside, 578 F.3d 303 (3d Cir. 2009). In Phillips In Fowler, the Third Circuit Court of Appeals adopted Iqbal, the Court developed a two-part analysis for

determining whether a Complaint should be dismissed under 12(b) (6). First, the Court must accept all facts in the Complaint as true, but may disregard legal conclusions. Second, the Court must determine whether the facts alleged are sufficient to show a plausible claim for relief. It is clear based on a review of the Amended Complaint that plaintiff has alleged fraud with the requisite particularity to satisfy Federal Rule 9(b) and the law of the Third Circuit, as Judge Arleo Cox concluded. The Amended Complaint details with specificity the nature of the fraud perpetrated on FSB. Each of the allegations of the

Amended Complaint are supported by specific facts in the record. Moreover, at this juncture in the litigation, the Court is required to accept as true all allegations of the Complaint.

Viewed against this standard, plaintiff has pled an Amended Complaint that far exceeds the specificity required by Rule 9. Specifically, and as set forth in the Amended Complaint, the specific facts are that commencing in June of 2009, defendant Albert Gasparro sought to perform investment advisory services for the Bank, and made representations to certain individuals on the Board of plaintiff, FSB, and to its General Counsel, Mark

Breitman, to the effect that Mr. Gasparro, individually, and on behalf of PM Inc. and PM LLC, was an experienced investment manager and advisor, fully familiar with the investment of bank funds in secure investments appropriate for plaintiff, FSB. In furtherance of the scheme to induce the reliance of plaintiff, FSB, defendant Gasparro, individually, and on behalf of PM Inc. and PM LLC, made material representations known to defendant Gasparro, PM Inc. and PM LLC to be material and false when made, to the effect that he could maximize shareholder value in the Bank, and that he had access to individuals with substantial net worth for purposes of investing in the Bank. (Investment Advisor Letter of Engagement (Exhibit 2 to the Declaration of Keith McKenna, Esq.). He further represented

that he would assist the Bank in conducting due diligence investigations on each prospective customer and/or potential investor if and when appropriate. (Id., at paragraph f).

In addition to the false representations made in written communications with the Bank, defendant Gasparro continued to make false representations to Mark Breitman and to Boardmembers including Gail Hoffman, at a dinner on or about October 1, 2009. As set forth explicitly in the Amended Complaint, at such meetings, defendant Gasparro represented individually and on behalf of PM Inc. and PM LLC that:
a. He possessed substantial experience as an Investment

b.

c.

d.

e.

f.

g.

Advisor and that he had extensive investment experience including having been the manager of certain hedgefunds, and related experience. He was experienced in making investments for banks, specifically prime investments, and not speculative investments. As part of this fraudulent scheme on or about August of 2009, Gasparro represented that he would invest FSBs Investment Funds in a manner that was not speculative, but that was secure and consistent with regulations governing banks. In reliance upon the material misrepresentations made by defendant Gasparro individually and on behalf of PM Inc. and PM LLC, plaintiff, FSB, entered into a written Investment Advisory Agreement dated September 8, 2009, pursuant to which defendant Gasparro and PM LLC was appointed Investment Adviser for plaintiff FSB. As part of a scheme to defraud the Bank of its funds and shares of stock, Gasparro misrepresented that he would not place the Banks funds in a margin account. However, in furtherance of a scheme to defraud the Bank, Defendants Gasparro and PM Inc. and PM LLC did place the Investment Funds in a margin account. Furthermore, he made material misrepresentations that he would invest the Investment Funds, and instead he misappropriated the Banks funds to his own use, violating both his affirmative representations to the Bank, and the terms of the written Advisory Agreement between FSB and defendants Gasparro and PM LLC. Gasparro misrepresented to the Bank that he would invest the Investment Funds in a manner that was

conservative, and not in a speculative manner, when in fact he did not invest in securities that were secure. h. In violation of his representations to conservatively invest the money of FSB as an Investment Advisor, defendant Gasparro instead: i. obtained $12,000,000.00 (Twelve Million Dollars) of the Banks money on September 9, 2009, and converted same to his own use by placing such funds in a Royal Bank of Canada Account under the control of PM, Inc. ii. This conversion was fraudulent and in violation of Gasparro and PM LLCs agreement to provide investment advisory services to the Bank.
a. Thereafter, on September 30, 2009, in furtherance of a

b.

c.

d.

e.

scheme to defraud the Bank, defendant Gasparro and PM LLC used the FSB Investment Funds in the form of the Capital Raise from three (3) entities under the control of defendant Gasparro. Pursuant to the fraudulent Capital Raise, the sum of $2,150,000.00 (Two million one hundred fifty thousand dollars) was invested by an entity named Silcap, $2,390,000.00 (Two million three hundred ninety thousand dollars) was invested by an entity named PG Capital; and $2,460,000.00 (Two million four hundred sixty thousand dollars) was invested by an entity named Ultravest. These entities did not have independent funds to make such an investment. In fact, none of the entities named in the above paragraph received shares of FSB stock as required by the subscription agreements for such stock. Rather, and in furtherance of the fraudulent scheme of defendants Gasparro, PM Inc. and PM LLC, the total amount of 1.4 million shares of FSB stock was issued to Royal Bank of Canada Dominion Securities, Inc., and remained under the control of defendant Gasparro and PM, Inc. Following the fraudulent reinvestment of the FSB Investment Funds, defendants Gasparro and PM, Inc. received the sum of $715,000.00 for an alleged consulting fee of $250,000.00, and success fee of $450,000.00, and expense reimbursement of $15,000.00, per the written Advisory Agreement with FSB. Receipt of these funds as set forth in paragraph j above, was an action taken in furtherance of a fraudulent scheme, as the Capital Raise was not an investment by third parties or an arms length

transaction, but was in fact use of the Banks own funds. f. Thereafter, to create the appearance of a valid arms length transaction, and as an action in furtherance of the fraudulent scheme, Gasparro caused three (3) fictitious loans to be funded by FSB to Ultravest, Silcap and PG Capital in the net amount of $8,000,000.00. None of these funds actually went to any of these entities. Instead, the funds were deposited into the account of RBC Dominion Securities, Royal Bank of Canada (an account under the control of defendant Gasparro and PM Inc.) 1. As a result of the fraudulent scheme perpetrated upon FSB, Defendants Gasparro and PM LLC have been unjustly enriched in the amount of 1.4 million shares of stock in FSB, and $715,000.00 in alleged consulting fees, which were fraudulently obtained by defendant Gasparro, PM Inc. and PM LLC. (Amended Complaint). Plaintiff, FSB, submits that these allegations more than satisfy the Rule 9 specificity requirement as enunciated in this Circuit. As expressed in the case of NN&R,Inc. v. One Beacon

Insurance Group, 362 F.Supp.2d 514 (2005), what is required by the specificity requirement of Rule 9(b) is that: [I]n all averments of fraud or mistake, the circumstancesconstituting fraud or mistake shall be stated with particularity. Fed. R. Civ.P. 9(b). To be sure, Rule 9(b) does not require that a plaintiff claiming fraud plead the date, place or time of the fraud so long as she uses alternative means of injecting precision and some measure of substantiation into their allegations of fraud.....[I]n order to satisfy the required level of specificity articulated in Rule 9(b), a plaintiff may not rely merely on conclusory statements.....Instead, the plaintiff must indicate at the very least who made the material representation giving rise to the claim and what specific representations were made. Id. at 515.

In full compliance with the law of this Circuit, and the requirements of Rule 9, plaintiff has outlined each of the specific facts and actions undertaken by defendants to support its fraud allegation. Rather than perform investment advisory services and provide plaintiff with secure and conservative investments, defendants defrauded the bank of $8 million dollars in funds, now refusing to return those funds. As well, defendants profited in the amount of $715,000.00 in consulting and success fees under the written Investment Advisory agreement for created the appearance of a valid capital raise in the bank. Instead of actually securing investors in the Bank, defendants used FSBs own funds to create the appearance of a capital raise. FSB. In sum, plaintiff has provided specific and detailed facts supporting its fraud claim, and at this juncture, plaintiff should be permitted to proceed in its fraud case against defendants. Finally, defendant Primemanagement still holds 1.4 million shares of FSB stock, refusing to return that stock to