Lowenstein Sandler’s Capital Markets Litigation team recently defeated a fund administrator’s renewed motion to dismiss on jurisdictional grounds, a second key victory in an action for common law fraud, securities fraud, and Racketeer Influenced and Corrupt Organizations Act violations, among other claims. The plaintiffs, investors in a tax lien fund, seek to recoup millions of dollars in losses resulting from the fund’s operation as a Ponzi scheme. The defendants include the fund’s now-dissolved New Jersey-based administrator, Apex Fund Services (US), Inc., as well as its Bermuda-based parent and several other affiliated entities (collectively, the “Apex Defendants”).

New Jersey Superior Court Judge Peter Bogaard of the Law Division, Morris County, denied the Apex Defendants’ entire renewed motion to dismiss on jurisdictional grounds. In their motion, the Apex Defendants claimed that the Court lacked personal jurisdiction over the Apex Defendant entities based outside of New Jersey.

The Lowenstein team persuaded the Court to deny the motion based on theories of agency, alter ego, and successor liability. “Apex is playing a shell game, trying to hide behind layers of phantom entities to evade liability for the fraud it actively committed in New Jersey,” the team argued.

Following jurisdictional discovery, the Lowenstein team submitted extensive evidence convincing the Court to look beyond–or pierce the veil of–the corporate form of the now-dissolved Apex New Jersey entity in order to exercise jurisdiction over its parent. The team successfully argued that the New Jersey Apex subsidiary was the alter ego of its parent entity, functioning as a mere conduit in New Jersey for the Apex parent’s self-described “global” fund administration business. The evidence demonstrated that the Apex subsidiary was not capitalized at inception, that it was financially dependent on its parent, and that it disregarded corporate formalities with respect to intercompany transactions, as well as transfers of employees and clients among the various Apex entities, without compensation. In addition, and consistent with similar Ponzi scheme cases, the team showed that the Apex New Jersey entity acted as its parent’s New Jersey-based agent, providing another basis for the court to exercise personal jurisdiction over the parent. See Anwar v. Fairfield Greenwich Ltd., 728 F. Supp. 2d 372 (S.D.N.Y. 2010).

Additionally, the team showed that the evidence supported a finding of successor liability as to Apex Charlotte because of a de facto merger that occurred between it and Apex New Jersey, and because Apex Charlotte thereafter continued the business of Apex New Jersey, simply “becoming a ‘new hat’ for the predecessor.” Woodrick v. Jack J. Burke Real Estate, Inc., 306 N.J. Super. 73, 74 (App. Div. 1997). The evidence demonstrated that, just as the fraudulent scheme was being revealed, the Apex parent stripped the New Jersey entity of its assets and transferred its ongoing business to a Charlotte, North Carolina-based entity also bearing the Apex name, again for no consideration, ultimately dissolving the New Jersey entity.

Having defeated the jurisdictional challenge, the Lowenstein team will continue to pursue claims on behalf of the investors, who seek more than $40 million in damages based on the defendants’ false representations to them concerning Apex’s control of the money invested in the fund, as well as its active concealment of the theft by providing investors with false monthly net asset value statements. Rather, and remarkably, Apex had been permitting the fund’s manager, Vincent Falci, to access the accounts and embezzle millions of dollars; Falci has since been sentenced to 15 years in federal prison for securities and wire fraud.[1]

As reported by Law360, Judge Bogaard stated at the motion to dismiss hearing: “Justice, while to be blind, is not to be blissfully ignorant of things, and I certainly find based on the materials submitted that plaintiffs have established on a prima facie basis that exercising jurisdiction over the named defendants is appropriate at this time.”[2]

This decision marks the second time the team defeated a motion to dismiss in this action.[3]

The case is Maffei et al. v. Apex Fund Services (US) Inc. et al., case number L-63-18, pending in the Superior Court of New Jersey, Morris County.

[1] https://www.law360.com/articles/1162422/former-nj-fire-chief-gets-15-years-for-10m-ponzi-scheme

[2] https://www.law360.com/articles/1215974/fund-admin-s-parent-can-t-escape-40m-ponzi-scheme-suit

[3] https://www.law360.com/articles/1076984/investors-beat-bid-to-toss-40m-nj-ponzi-scheme-row