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Tedeschi v. Smith

January 12, 2010

RALPH E. TEDESCHI AND ELEANOR TEDESCHI, PLAINTIFFS,
v.
MAXWELL B. SMITH III, HOLLY H. SMITH, DEBORAH EVARTS, CANTONE RESEARCH, INC., MERRILL LYNCH & CO., INC. AND MERRILL LYNCH, PIERCE, FENNER & SMITH INC., DEFENDANTS.



The opinion of the court was delivered by: Pisano, District Judge.

OPINION

Plaintiffs Ralph and Eleanor Tedeschi have brought this action against Defendants Maxwell Smith, Holly Smith, Cantone Research Inc., Merrill Lynch & Co. and Merrill Lynch, Pierce, Fenner & Smith Inc. for fraudulently inducing them to invest $360,000 in a non-existent investment product. On August 31, 2009, Plaintiffs filed a Notice of Voluntary Dismissal removing all claims against defendant Merrill Lynch & Co. without prejudice. On November 11, 2009, Plaintiffs entered a stipulated dismissal of all claims against Maxwell and Holly Smith with prejudice and against Deborah Evarts without prejudice. Presently before the Court is a motion to dismiss submitted by Merrill Lynch, Pierce, Fenner & Smith Inc. ("Moving Defendant") and a cross-motion by Plaintiffs for leave to amend their complaint. As to the Moving Defendant, Plaintiffs allege claims for violations of the federal Racketeer Influenced and Corrupt Organizations Act ("RICO"), the New Jersey Racketeer Influenced and Corrupt Organizations Act ("NJ RICO"), and a breach of supervisory duty. This Court has original jurisdiction to hear this dispute pursuant to 28 U.S.C. § 1331. The Court heard oral arguments on January 5, 2010. For the reasons set forth herein, the Court grants Moving Defendant's motion to dismiss and denies Plaintiffs' cross-motion to amend.

I. Background

Plaintiffs Ralph and Eleanor Tedeschi are an elderly couple from Ohio who had accumulated a considerable amount for retirement from various investments. First Amended Compl., ¶ 13-14. In 1999, Plaintiffs' son introduced them to Maxwell Smith, a licensed broker and financial advisor, to discuss financial planning. Id. ¶ 15. In 2003, Ralph and Eleanor transferred their existing investment accounts to Smith's brokerage firm to be managed by Smith. Id. ¶ 16. In 2005, Smith changed employment and began working at Cantone, a securities and brokerage firm located in Tinton Falls, New Jersey. Id. ¶ 18. Plaintiffs subsequently transferred their investment account to Cantone. Id. ¶ 19.

In 2007, while still employed by Cantone, Smith marketed and sold to the Plaintiffs an investment called the Health Care Financial Partnership ("HCF Investment"). Id. ¶ 20. Smith represented to Eleanor and Ralph that the HCF Investment was a secure, tax-free investment which paid a high level of interest income by investing in a diversified portfolio or high yielding income projects sold to finance or refinance health care facilities. Id. ¶ 23. Smith claimed that such an investment would be consistent with Plaintiffs' conservative investment goals. Id. ¶ 24. Despite having a prospectus, the HCF Investment was at all times a "phony, non-existent company and a sham investment product." Id. ¶ 21. Unaware of this fact, Plaintiffs between October 2007 and April 2008 invested $360,000 in the HCF Investment. Id. ¶ 26.

In order to invest in HCF, Plaintiffs at the direction of Smith made their four checks payable directly to Merrill Lynch, but mailed the checks to the HCF Investment mailbox at 331 West 57th St., Dept. PMB-451, New York, NY 10019. Id. ¶ 31. Such checks were deposited into a Merrill Lynch account numbered 891-36641 held by Maxwell and Holly Smith. Id. ¶ 32. The Merrill Lynch account "was opened, maintained and utilized by Maxwell and Holly Smith for the sole purpose of facilitating a fraudulent scheme." Id. ¶ 33. In total, Smith induced multiple victims including Plaintiffs to deposit over $8 million into the Merrill Lynch account; the victims believed the account was for the HCF investment when in fact it was "maintained for the sole benefit and use of Maxwell and Holly Smith." Id. ¶ 35. After funds were deposited, Maxwell and Holly Smith withdrew the funds for their own personal use and benefit. Id. ¶ 36. In order to effectuate this Ponzi scheme, Smith periodically issued interest income checks to victims as returns on the HCF investment. Id. ¶ 36.

On June 26, 2009, Plaintiffs filed their original complaint against Defendants which was amended on July 17, 2009. As to Moving Defendant Merrill Lynch, Plaintiffs allege claims for violations of the federal Racketeer Influenced and Corrupt Organizations Act, the New Jersey Racketeer Influenced and Corrupt Organizations Act and a claim for breach of supervisory duty.

II. Discussion

a. Motion to Dismiss Standard of Review

Under Federal Rule of Civil Procedure 12(b)(6), a court may grant a motion to dismiss if the complaint fails to state a claim upon which relief can be granted. Refashioning the appropriate standard, the United States Supreme Court found that, "[w]hile a complaint attacked by a Rule 12(b)(6) motion to dismiss does not need detailed factual allegations,... a plaintiff's obligation to provide the 'grounds' of his 'entitle[ment] to relief' requires more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do[.]" Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555 (2007) (internal citations omitted); see also Baraka v. McGreevey, 481 F.3d 187, 195 (3d Cir. 2007) (stating that standard of review for motion to dismiss does not require courts to accept as true "unsupported conclusions and unwarranted inferences" or "legal conclusion[s] couched as factual allegation[s]" (internal quotation marks omitted)). Therefore, for a complaint to withstand a motion to dismiss under Federal Rule of Civil Procedure 12(b)(6), the "[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)...." Twombly, 550 U.S. at 555 (internal citations and footnote omitted).

b. Legal Analysis

i. RICO Claims

1. Count VIII: Violation of Section 1962(c)

In Count VIII, Plaintiffs claim that Defendants violated section 1962(c) of the federal RICO Act. ...


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