NY AG Schneiderman dials up the pressure in Manhattan Club fraud case

[T. R. Oglodyte Moderator Find all posts View Profile Close T. R. Oglodyte]

And NY AG Schneiderman dials up the pressure. Including asking the court to send one of the perps to the slammer for 6 months for contempt of court.

July 2, 2015 filing - MEMORANDUM OF LAW IN OPPOSITION TO RESPONDENTS’ MOTIONS (MOTION SEQUENCE #1 AND #2) AND IN SUPPORT OF PETITIONER NEW YORK STATE ATTORNEY GENERAL’S CROSS-MOTION (MOTION SEQUENCE #3)

70 pages of goodness - AGs office appears to be really pissed. Here's the Table of Contents for the AG's filing. Click on the link if you want more.

Table of Contents - Part 1

Page
TABLE OF AUTHORITIES .................................................. .................................................. ... vi
PRELIMINARY STATEMENT .................................................. .................................................. 1
STATUTORY AND REGULATORY FRAMEWORK .................................................. .............5

A. The Martin Act Prohibits Fraud in the Sale of Real Estate Securities ...........................5
B. The Martin Act Requires that the Offering or Sale of Real Estate Securities Be Made
Only on the Basis of the Representations Contained in the Offering Plan ..................6
C. GBL § 354 Authorizes Ex Parte Court-Ordered Discovery, and Injunctive Relief that
Is Expedient and Proper .................................................. .............................................7
D. Sponsor Control and the Essence of Timeshare Ownership ........................................8

STATEMENT OF THE FACTS .................................................. ...............................................10

A. The Manhattan Club .................................................. .................................................1 0
B. All Respondents are Involved in the Offering of Real Estate Securities at the
Manhattan Club .................................................. .................................................. ......12
C. Sponsor and the Eichners Certified the Offering Plan .................................................1 3
D. In 2014, NYAG Opened an Investigation and Uncovered Fraud in the Offering of
Real Estate Securities at the Manhattan Club .................................................. ..........14

1. Sponsor’s Sales Staff Directly Contradicted the Offering Plan’s
Representations Concerning the Product Being Offered ...............................14
a. Sponsor’s Selling Agents Made Material Misrepresentations
Concerning the “Equity Component” of the Ownership Interest
Being Offered........................................... ............................................14
b. Sponsor’s Selling Agents Made Material Representations
Concerning the Manhattan Club’s Rental of Rooms to the General
Public .................................................. .................................................1 6
c. Sponsor’s Selling Agents Misrepresented the Reservation Policies
Applicable to Owners of “Flexible” Interests ....................................16
d. Sponsor’s Selling Agents Required NYAG’s Undercover
ii
Investigators to Make their Investment Decision Based on Oral
Representations Only .................................................. .........................17
2. Sponsor Failed to Disclose an Arrangement for the Hypothecation or Sale of
Notes Executed by Purchasers in Conjunction with the Sale of Ownership
Interests .................................................. .................................................. ...18
3. Sponsor Has Been Selling Securities for Years Without a Valid Broker-
Dealer Registration; the Offering Plan Expired Last Year ............................18

E. The Order .................................................. .................................................. .................19
F. New Evidence of Fraud Attained During the Public Investigation ............................19

1. Respondents Misrepresented the Number of Available Units in the Club ......19
a. From at Least May 1, 2009 to May 24, 2012, Rooms Were Rented to
the General Public in a Manner that Violated the Seventh Restated
Offering Plan .................................................. ....................................19
b. The Offering Plan Continues to Misrepresent the Manhattan Club’s
Reservation System .................................................. ..........................20
c. The Offering Plan Misrepresents the Amount of Units Available to
Manhattan Club Owners .................................................. ...................21
2. Sponsor Fails to Pay Maintenance Fees on Time and Nevertheless
Earns Millions of Dollars in Rental Income on its Inventory, While
Reducing Inventory that Would Otherwise Be Available to Manhattan
Club Owners .................................................. ................................................21
3. In Violation of the Offering Plan’s Representations, the Manhattan Club
Charged Owners for Yearly Maintenance Fees and Real Estate Taxes Before
Owners’ Anniversary Dates .................................................. .........................22
4. The Offering Plan’s Representations Concerning the Relationship Between
the Timeshare Association and Urban Are Misleading ...................................22
a. The Plan Represents that the Sponsor-Controlled Board of Directors of
the Timeshare Association Delegated All of its Powers to Urban, and
Paid Urban for Providing Services . .................................................. ..22
b. Urban Had No Employees Until August 2014, When It Added 12
Employees from the Marketing Group and/or The Continuum
Company .................................................. ............................................23
iii
c. Urban Was Set Up as a Pass-Through Entity by which Distributions
Were Made to Sponsor and the Respondent-Individuals, Using the
Timeshare Association’s Monies .................................................. .....24
5. Lager Sent Owners Forbearance and Deed-in-Lieu of Foreclosure
Agreements in Violation of the Order .................................................. ...........26

G. Sponsor’s Broker-Dealer Registration Statements Still Have Not Been Filed with
NYAG, and There is No Evidence that Sponsor Served the 89th Amendment to
the Offering Plan on Purchasers in Contract .................................................. ..............26
H. NYAG Routinely Contacts Victims of Fraud under Investigation .............................27
I. Respondents Have Withheld Material Information about Their Business Practices and
Have Prolonged NYAG’s Investigation with Dilatory Conduct .................................27

1. The Respondent-Entities Delayed Production of E-mails and Have Yet to
Complete Production .................................................. .....................................28
2. The Respondent-Entities’ Document Productions Relating to the
Transfer of All Inventory in the Manhattan Club Raise New Questions .........28
3. Respondents Failed to Comply with Additional Discovery Demands ...........29

J. The Respondent-Individuals Have Not Testified Yet .................................................. 30
K. T. Park Central LLC, Park Central Management LLC, the Marketing Group and
Lager Repeatedly Violated Court Orders During this Investigation by
Withdrawing Funds from Frozen Accounts .................................................. .............30

[T. R. Oglodyte Moderator Find all posts View Profile Close T. R. Oglodyte]

Table of Contents - Part 2

ARGUMENT .................................................. .................................................. ...........................33
RESPONDENTS’ MOTIONS SHOULD BE DENIED .................................................. ..............33
I. THE INJUNCTIVE RELIEF GRANTED BY JUSTICE ENGORON WAS
PROPER AND EXPEDIENT AS TO THE EICHNERS, LAGER AND
URBAN. .................................................. .................................................. ...........33

A. The Proper Standard is Proper and Expedient. ..............................................33
B. NYAG Is Not Obligated to Establish Liability to Secure a Preliminary
Injunction Against a Party under § 354. .................................................. ......35
C. The Respondent-Individuals Are Properly Subject of the Order. ..................35
iv

1. As a Matter of Law, the Eichners are Properly Named in the Order, Based
on their Active Involvement in the Offering, and Responsibility for
Compliance with the Martin Act. .................................................. .......... 36
2. Lager is Properly Named in the Order, Based on His Active Involvement
in the Offering, Including Managing the Sales Staff. ............................. 39

D. Urban is Properly Named in the Order, Based on its Purported Role as the
Management Company for the Timeshare Association.

................................41
II. RESPONDENTS’ REQUESTS THAT THE INJUNCTIVE RELIEF
PROHIBITING SPONSOR FROM FINALIZING 21 SALES AND FROM
WITHDRAWING FUNDS FROM ACCOUNTS BE MODIFIED SHOULD BE
REJECTED. .................................................. .................................................. .....43

A. Sponsor Cannot Finalize the 21 Sales Because the Offering Plan
Expired, and Sponsor is Not Registered as a Broker-Dealer of Securities,
Which are Prerequisites to the Sale of Timeshare Interests in
New York. .................................................. .................................................. ...43
B. Respondents Provide No Evidence that They Notified Purchasers
in Contract of Their Right to Rescind, or that Any Purchasers Actually Seek
to Immediately Close. .................................................. ..................................44
C. The Proceeds from the Sales Would Not Benefit the Timeshare Hotel. .........45

III. RESPONDENTS’ REQUEST TO SET A CUT-OFF DATE FOR NYAG’S
INVESTIGATION AND TO BAR NYAG FROM CONTACTING THEIR
CUSTOMERS AND VICTIMS SHOULD BE DENIED. ...................................45

A. There Is No Basis to Curtail the Duration or Scope of this Investigation. .....46
B. Respondents Have Not Satisfied the Order. .................................................. 47
NYAG’S CROSS-MOTION SHOULD BE GRANTED .................................................. ............48

IV. THE COURT SHOULD ORDER THE PRODUCTION OF THE EICHNERS’
E-MAILS. .................................................. .................................................. ........48
V. IT IS PROPER AND EXPEDIENT FOR THE COURT TO GRANT
FURTHER PRELIMINARY INJUNCTIVE RELIEF REQUIRING THAT
URBAN ESCROW THE MONTHLY FEE PAID BY THE TIMESHARE
ASSOCIATION. .................................................. ................................................50
v
VI. THIS COURT SHOULD FIND T. PARK CENTRAL LLC, PARK CENTRAL
MANAGEMENT LLC, THE MARKETING GROUP AND LAGER IN
CRIMINAL CONTEMPT. .................................................. ................................52

A. T. Park Central LLC, Park Central Management LLC, the Marketing Group
and Lager Willfully Disobeyed the Requirements of this Court's Order, as
Amended, and Therefore, Should Be Held in Criminal Contempt. ................52
B. The Court Should Punish T. Park Central LLC, Park Central Management
LLC, and the Marketing Group, and for Criminal Contempt by a Fine in the
Amount of $1,000 Per Violative Act, and Lager by a Fine in the Amount of
$1,000 Per Violative Act and Imprisonment for a Period of 30 Days. ............55

VII. THIS COURT SHOULD HOLD T. PARK CENTRAL LLC, PARK CENTRAL
MANAGEMENT LLC, THE MARKETING GROUP, AND LAGER IN CIVIL
CONTEMPT OF COURT, AND PUNISH THEM BY A FINE IN THE
AMOUNT OF $694,996.62 AND BY IMPRISONING LAGER FOR SIX
MONTHS, AND UNTIL THE FINE IS PAID. .................................................. 57

A. Respondents Refused to Comply With the Requirements of this Court’s
Orders, Prejudicing Petitioner’s Rights, and Therefore, Should Be Held in
Civil Contempt. .................................................. ............................................57
B. The Court Should Punish Respondents for Civil Contempt by Imprisoning
Lager, and Until Respondents Pay a Fine for Civil Contempt in the
Amount of $694,996.62. . .................................................. .............................58

CONCLUSION .................................................. .................................................. ........................59

[Glitter Brunello Super Moderator Find all posts View Profile Close Glitter Brunello]

Oooh, thank you!!!

[happymum Senior Member Find all posts View Profile Close happymum]

What a perfect use of that emoticon!

[chriskre Super Moderator Find all posts View Profile Close chriskre]

Oooh, thank you!!!

Only an attorney would enjoy reading 70 pages of legal stuff.

[T. R. Oglodyte Moderator Find all posts View Profile Close T. R. Oglodyte]

I'm not an attorney, but I'm often involved with regulatory compliance issues with my clients. So it was interesting scanning the filing (and I scanned, not read, the filing). My take is that the AG is lowering the guns on these guys. Commenting with crudeness, this is the filing that happens when an AG knows they are dealing with alpha males, but they have the guy's nuts in the vise and they are turning the handle. The goal here is to get them to settle before they're rendered impotent. And, you know, that's the only "language" some of these guys can understand.

[Glitter Brunello Super Moderator Find all posts View Profile Close Glitter Brunello]

Only an attorney would enjoy reading 70 pages of legal stuff.

Oh, come ON. The list of allegations is rich with entertainment value, even for lay folk. Maybe the problem is that there are so MANY. But I tried to highlight the best and realized that parsing them doesn't do the matter justice. There are a few technical ones, but for the most part they are what timeshare scum are in the business of, and it is ILLEGAL AND FRAUDULENT. The arguments for Contempt of Court and civil penalties are just icing on the cake.

Thank you, NY AG Schneiderman. This is not nearly as politically opportunistic as so many other things going on in NY, but it really does need to be addressed for the public good.

[StressCadet Senior Member Find all posts View Profile Close StressCadet]

Only an attorney would enjoy reading 70 pages of legal stuff.

Oh, come ON. The list of allegations is rich with entertainment value, even for lay folk. Maybe the problem is that there are so MANY. But I tried to highlight the best and realized that parsing them doesn't do the matter justice. There are a few technical ones, but for the most part they are what timeshare scum are in the business of, and it is ILLEGAL AND FRAUDULENT. The arguments for Contempt of Court and civil penalties are just icing on the cake.

Thank you, NY AG Schneiderman. This is not nearly as politically opportunistic as so many other things going on in NY, but it really does need to be addressed for the public good.

I've been known to read the entire back of the cereal box while I'm eating. I LOVE fine print. And, if there is an added entertainment value, I'm all in. I have family that owns there...but I'm pretty sure they are oblivious....especially when I told them they could pick one up on ebay for next to nothing and they bought direct instead. I tried

[CarolF Senior Member Find all posts View Profile Close CarolF]

Perhaps this will help new readers understand some of the issues which, after-all, are quite common in the timeshare business.

After receiving nearly 100 complaints, NYAG commenced an undercover investigation.
On three separate occasions, NYAG sent undercover investigators to the Manhattan Club to
observe and video record Sponsor’s sales practices .....

Sponsor’s Selling Agents Made Material Representations Concerning
the “Equity Component” of the Ownership Interests Being Offered .....
For example, touting the location of the Manhattan Club in Midtown
Manhattan, a sales agent “Jeanine” told Investigators Richardson and Carter that:

"Our address is 200 West 56th Street. At 157 West 57th Street, what
they’ve built is called Billionaires’ Haven. And they are selling
individual apartments for between 50 and 90 million. . . . So there
has been a significant equity component here that you would not
have – normal timeshare has zero resale value . . . So what you
own is Manhattan. . . . The only reason people buy this here is
because it’s the last chance to own a tiny piece of Manhattan."

Similar representations about equity were also made to Investigator Friedman. “Arnie,”
who identified himself as a broker, asserted that ownership in the Manhattan Club is “better than
your money in the bank. . . . [I]t is going up about 15-20% a year . . . There is equity.” Id. ¶ 58.
Besides equity, Sponsor’s selling agents also repeatedly used the words “market value” to
describe the nature of the ownership interests in the Manhattan Club. For example, the
undercover investigators were told that Sponsor retains a 30-day right of first refusal, allowing it
to buy back the ownership interest at the owner’s offering price, and that “this is really important
because . . . that’s how we maintain the market value.” Id. ¶ 54 n.8. Jeanine explained that
“you’re building equity and after it pays for itself, you have it forever. You sell it, you sell it . . .”
Id. ¶ 56; see also id. ¶ 56 n.9.
But, in reality, the resale value of an ownership interest is uncertain, and likely extremely
limited. Id. ¶ 60; see also 2d Farooq Aff., Ex. A at 3. Reportedly, because there is no resale
market for ownership interests in the Manhattan Club, Sponsor has compiled a waitlist of
Manhattan Club owners who are trying to sell their interests back to Sponsor, but there is no
guarantee that Sponsor will buy back an ownership interest from anyone on that waitlist.2

Indeed, in the last several years, Sponsor almost always paid less than $1,000, usually paid $100,
and on a few occasions paid only $1 to reacquire an ownership interest.

The selling agents’ oral misrepresentations that they do not rent to the general public are
not only false, they are also particularly troubling in light of the volume of complaints NYAG
has received from Manhattan Club owners who allege that it is very difficult if not impossible to
reserve a room. See, e.g., Farooq Aff., Ex. F. If these purchasers had known that the inventory
was decreased by rentals to the general public, they might not have purchased ownership
interests in the Manhattan Club.

[Glitter Brunello Super Moderator Find all posts View Profile Close Glitter Brunello]

Perhaps this will help new readers understand some of the issues which, after-all, are quite common in the timeshare business.

Yes, it's really pretty easy to read, or at least skim. I find it most interesting that the nature of the original complaints (more than 100) was that owners were unable to reserve their promised time, but in the process of investigation the AGs office discovered the fraudulent sales and business practices so common in the industry. Some of the allegations remind me of the Morritt's issues -- like the developer/sponsor failing to pay it's share of maintenance but being allowed to rent out units at a profit. The case also highlights the inherent conflicts of interest in a developer/sponsor run Board.

I do hope other developers are following this case.

Btw, I went on a sales "tour" at the TMC many years ago and was given exactly the kind of sales pitch claimed in this memo.

[Bobsely Junior Member Find all posts View Profile Close Bobsely]

And NY AG Schneiderman dials up the pressure. Including asking the court to send one of the perps to the slammer for 6 months for contempt of court.

July 2, 2015 filing - MEMORANDUM OF LAW IN OPPOSITION TO RESPONDENTS’ MOTIONS (MOTION SEQUENCE #1 AND #2) AND IN SUPPORT OF PETITIONER NEW YORK STATE ATTORNEY GENERAL’S CROSS-MOTION (MOTION SEQUENCE #3)

70 pages of goodness - AGs office appears to be really pissed. Here's the Table of Contents for the AG's filing. Click on the link if you want more.

Table of Contents - Part 1

Thanks for such detailed post here.

[Hoc Super Moderator Find all posts View Profile Close Hoc]

Only an attorney would enjoy reading 70 pages of legal stuff.

Yes, sometimes attorneys do enjoy reading that kind of stuff. But, you do have to admit, it is entertaining.

[SallyHoover Senior Member Find all posts View Profile Close SallyHoover]

I guess no first hand accounts from members here. Redweek was one of the sponsors of an owners meeting earlier this month. Here are Redweek's links:
http://www.redweek.com/resources/ask-redweek

[Glitter Brunello Super Moderator Find all posts View Profile Close Glitter Brunello]

Thanks for posting that, Sally.

[Bobsely Junior Member Find all posts View Profile Close Bobsely]

I am really looking forward for more discussion here. Keep sharing.

SPAM LINKS REMOVED INFRACTION GIVEN