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STENGER v. LEADENHALL BANK & TRUST COMPANY LIMITED

March 19, 2004.

PHILLIP S. STENGER, et al., Plaintiffs, -v- LEADENHALL BANK & TRUST COMPANY LIMITED; a Bahamian limited partnership; AXXESS INTERNATIONAL LIMITED, a Bahamian limited partnership; and AXXESS INTERNATIONAL BAHAMAS LIMITED, a Bahamian limited partnership; Defendants


The opinion of the court was delivered by: JOHN W. DARRAH, District Judge

MEMORANDUM OPINION AND ORDER

Plaintiffs filed suit alleging claims for aiding and abetting fraudulent conveyances, breach of fiduciary duty to warn, negligence, breach of contract, and conspiracy. Currently before the Court are Defendants' Motion to Strike and Defendants' Renewed Motion for Dismissal for Lack of Personal Jurisdiction or, in the Alternative, Under the Doctrine of Forum Non Conveniens.

BACKGROUND

  Phillip S. Stenger and G. James Cleaver were appointed by the Grand Court of the Cayman Islands, as the joint official liquidators of various related entities known as Cash 4 Titles ("C4T"), including Morningstar Ltd., which is an entity incorporated in the Cayman Islands and doing business in the United States. Stenger is also the receiver, appointed at the request of the United States Securities & Exchange Commission, over the beneficial interests of Charles R. Homa, D. Dean Pearson, and Michael Gause, and their related C4T entities. Stenger's mandate as receiver is to marshal, conserve, protect, hold funds, and operate and dispose of any assets constituting Page 2 receivership property for the benefit of investors.

  Leadenhall Bank & Trust, Ltd is a Bahamian limited partnership that operates a financial institution in the Bahamian Islands. Leadenhall provides credit card and other financial services to residents of the United States, including at least six Illinois residents. Axxess International Ltd. and Axxess International Bahamas Ltd. (collectively "Axxess") are limited partnerships formed in the Bahamas and are partners of Leadenhall, providing credit/debit card services around the world, including the United States and Illinois.

  Homa was a resident of Atlanta, Georgia, and the founder and owner of a business enterprise called "Cash 4 Titles." Cash 4 Titles operated exclusively in the United States through C4T Management, Inc. and other related entities (collectively "C4T US"). Cash 4 Titles provided short-term, high-interest loans to borrowers who pledged their motor vehicles as collateral. In 1993, Gause contacted Homa based on a C4T US advertisement in an Atlanta newspaper and became both an investor in and a marketing representative of C4T US. After 1993, Homa remained generally in charge of the C4T US operations, and Gause remained generally in charge of the investor relations and marketing aspects of C4T US.

  Shortly after becoming responsible for C4T US investor relations and marketing, Gause developed a multiple-tier marketing enterprise, which eventually used Cayman Island, Bahamian, and United States entities and individuals in a joint venture to defraud investors in C4T US. The instruments used to facilitate investor transactions were promissory notes or bonds issued by second-and third-tier marketing companies owned by individuals other than Homa and Gause.

  Joseph Denson was a second-tier marketer, working directly below Gause. Denson's marketing and note-issuing companies were Morning Star and Rolls Royce Ltd., a Bahamian Page 3 company. Both Morningstar and Rolls Royce had accounts at Leadenhall. Morningstar was used to receive investor funds into the scheme and, as such, was the conduit company for the flow of investments into the scheme — a so called "in" company. Rolls Royce was used to pay interest out to investors and, as such, was the "out" company.

  Homa, Cause, and Denson created a complicated maze of Cayman Islands and Bahamian companies and corresponding Leadenhall bank accounts, including Morningstar, to be used in receiving investor funds and facilitating inter-bank transfers to assist Cause, Homa, and downline marketers in avoiding the scrutiny of United States regulators while at the same assisting in the perpetuation of a Ponzi scheme. Despite the fact that it knew or should have known that these Cayman Islands and Bahamian companies were being established for fraudulent purposes, including tax fraud, Leadenhall and Axxess nonetheless established bank accounts for these entities and assisted many marketers working below Denson in opening Leadenhall bank accounts and Axxess credit/debit cards for their offshore "entities."

  Leadenhall and Axxess understood the functioning of the multiple-tiered marketing scheme and assisted Denson in marketing the scheme by vouching to potential investors regarding the legitimacy of C4T and the Gause/Denson multiple-tiered marketing scheme and actively encouraging individuals to invest in C4T US. Leadenhall and Axxess met with Homa and Cause and fully understood the multi-level marketing scheme. Leadenhall and Axxess also assisted the Ponzi scheme by directly paying interest on many of the notes to which Morningstar and C4T US were obligated by writing checks and making wire-transfer payments to investors from its corporate account in BAC Florida Bank/Popular Bank ("BAC Bank") in Miami, Florida. Page 4

  In October 1999, the SEC initiated a civil securities fraud action against Gause, Homa, and other marketers involved in the Ponzi scheme. At the SEC's request, Stenger was appointed as receiver in the SEC action. Thereafter, the Grand Court of the Cayman Islands appointed Cleaver and Stenger as joint official liquidators of several Cayman Island companies involved in the fraud, including Morningstar. The liquidators and the receiver are pursuing recovery and accountability actions in order to pay innocent investors and creditors who are owed in excess of one-hundred million dollars through the notes and bonds issued by the various companies in the multi-tiered marketing scheme. This action was filed against Leadenhall and Axxess on behalf of the stockholders in the Gause, Homa, and Denson companies, for the benefit of the investors to whom Gause and Homa companies owe promissory notes or bonds that have not been paid, to hold Leadenhall and Axxess accountable for the damages that resulted to those companies from Leadenhall's and Axxess's actions and omissions.

  Plaintiffs allege that this Court has personal jurisdiction over the Defendants based on: (1) Defendants purposefully marketed their financial services to citizens of the United States and to residents of the state of Illinois by providing Leadenhall and Axxess application forms and marketing materials to Denson, knowing Denson would circulate the materials to potential investors in Illinois; (2) Defendants purposely and systematically paid interest on behalf of Morningstar and C4T US companies to investors in Illinois from Leadenhall's corporate account in Florida in the form of checks and wire transfers; (3) Defendants distributed bank credit and debit cards to residents of Illinois, knowing that such cards would be utilized in banking and other financial institutions in Illinois; (4) Defendants are part of a conspiracy to defraud and are, thus, subjected to the personal Page 5 jurisdiction of this Court due to the contacts that Denson, Homa, and Cause had with investors in Illinois; and (5) the receivership statutes of 28 U.S.C. § 754, 1692.

  ANALYSIS

  Initially, Defendants move to strike, pursuant to Federal Rule of Civil Procedure 37, Plaintiffs' Exhibit No. 5 (the "Gause Transcript") that was submitted in support of ...


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