Ponzi Scheme Series: Court Dismissed Investor’s Lawsuit Against Another Investor

Judge Ryskamp of the United States District Court, Southern District of Florida, dismissed a lawsuit by an investor, Dr. Salmon Melgen, in a Ponzi scheme (operated by KL Group’s Jung Bae Kim, the scheme’s ringleader, who is currently serving an 18-year prison term) against another investor in that same Ponzi scheme named Jerome Fisher. In part, Melgen alleged that Fisher convinced him to invest in the Ponzi scheme. Melgen claimed that Fisher should be held liable for fraud, conversion, conspiracy and negligent misrepresentation.

The Judge stated that, “The lynchpin of [Melgen's] case has always been, as this Court noted in its Order Denying Motion to Remand, that ‘Fisher convinced [him] to invest with Kim.’” This supposition was based on [Melgen's] pleadings, which gave this Court, and Fisher, the impression that [Melgen was] suing Fisher because he was supposedly the reason [Melgen] invested with Kim. [Melgen] now claim[s] that Fisher only introduced [him] to Kim in relation to the [ ] investment.”

After reciting various inconsistencies in Melgen’s factual allegations, Judge Ryskand admonished Melgen by stating that, “[Melgen has] no problem changing [his] position – even positions made under penalty of perjury – when it suits [him]. Accordingly, the premise on which [Melgen has] based this action – i.e., “that Fisher convinced them to invest with Kim” – is implausible and is therefore dismissed.”

The Court then expressley dismissed the claims against Fisher as follows:

1. Fraud-”This Court dismissed Plaintiffs’ fraud claim, because Plaintiffs did not allege any details of the supposed fraud [DE 169 at 9-10]. The fraud claim in the Amended Complaint fares no better. As stated above, Plaintiffs cannot be permitted to now allege that Fisher had knowledge when they previously admitted the opposite. Moreover, despite this Court’s instructions, Plaintiffs have still failed to allege all of the particulars of the supposed fraud, including whether Fisher defrauded investors in addition to Plaintiffs, the nature of the agreement between Fisher and Kim and Won Lee, where the agreement occurred, who was present when the agreement occurred, and the like.”
2. Conversion-”This Court previously dismissed Plaintiffs’ conversion claim because Plaintiffs failed to allege that (1) Fisher had knowledge of the alleged allocation of covers and calls; (2) Fisher stole Plaintiffs’ money; and/or (3) Fisher now has dominion over their property [DE 169 at 10]. As with the knowledge element, Plaintiffs cannot now allege that Fisher had dominion over Plaintiffs’ property when they previously admitted that Kim, Won Lee, and/or Shoreland stole their property.”
3. Conspiracy-”This Court dismissed Plaintiffs’ conspiracy claim because Plaintiffs failed to allege that (1) Fisher knew of the alleged allocation of covers and calls, and (2) Fisher entered into an agreement with John Kim to commit an unlawful act [DE 169 at 10]. Again, as stated above, Plaintiffs cannot be permitted to now allege the exact opposite of what they previously alleged.”
4. Negligent Misrepresentation-”This Court dismissed Plaintiffs’ negligent misrepresentation claim, because Plaintiffs failed to allege that (1) Fisher had knowledge of the fraud, (2) Fisher had a financial interest in the supposed recommendation to invest with Kim, and (3) Fisher was in the business of providing investment advice [DE 169 at 7-8]. Importantly, this Court concluded that the alleged endorsements from Fisher were, if anything, purely gratuitous and personal opinions, and thus not actionable [id. at 8]. Again, as set forth above, Plaintiffs cannot be permitted to now allege that Fisher had knowledge of the fraud. Also, Plaintiffs now attempt to allege that “FISHER [] had a pecuniary interest,” but that allegation fails because it is based on pure speculation:

[I]t is reasonable to believe that either because FISHER was a sophisticated investor or based upon the advice given to him FISHER was aware that Kim would be able to allocate assets between the accounts of SFM and FISHER to benefit FISHER. FISHER therefore had a pecuniary interest in persuading DR. MELGEN to open an account . . . . [DE 174 at ¶ 17; emphasis added].”

This case can serve as precedent for the premise that one innocent investor in a Ponzi scheme should not be held liable for telling another innocent investor to invest in that Ponzi scheme where the alleged endorsements of the Ponzi scheme were, as found by the Court, “purely gratuitous and personal opinions, and thus not actionable.”

Call Jeffrey Wittenberg at 877-352-2010 if you have questions about this case or about any of your investments.