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Cardis Aaron Fischman Lawrence Katz Steven Hoffman Stephen Brown Seth Rosenblatt Nina Fischman Rafaela Fischman Nina Fischman Alexander Fischman Stuart Fischman Ethel Weissman Cardis is a ponzi scheme and the NYS Attorney General is suing them Woodmere New York
SUPREME COURT OF THE STATE OF NEW YORK
COUNTY OF NEW YORK
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THE PEOPLE OF THE STATE OF NEW YORK,
by BARBARA D. UNDERWOOD,
Attorney General of the State of New York,
Plaintiff, COMPLAINT
-against- Index No. 452353/2018
AARON D. FISCHMAN, STEPHEN BROWN,
STEVEN HOFFMAN, LAWRENCE KATZ,
SETH ROSENBLATT, CARDIS ENTERPRISES INTERNATIONAL N.V., CARDIS ENTERPRISES INTERNATIONAL (U.S.A.) INC.,
CARDIS ENTERPRISES INTERNATIONAL B.V.,
CHOSHEN ISRAEL LLC, LAW OFFICES OF
LAWRENCE KATZ, ESQ. PLLC, LAW OFFICES OF LAWRENCE KATZ P.C., and ZERP LLC,
Defendants,
-and-
NINA FISCHMAN, RAFAELA FISCHMAN,
ALEXANDER FISCHMAN, STUART FISCHMAN, ANNE SHIMANOVICH, and ETHEL WEISSMAN,
Relief Defendants.
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1. Plaintiff, the People of the State of New York, by Barbara D. Underwood, Attorney General of the State of New York, alleges the following against: (a) Defendants Aaron D. Fischman, Stephen Brown, Steven Hoffman, Lawrence Katz, Seth Rosenblatt, Cardis Enterprises International N.V., Cardis Enterprises International (U.S.A.) Inc., Cardis Enterprises International B.V., Choshen Israel LLC, Law Offices of Lawrence Katz, Esq. PLLC, Law Offices of Lawrence Katz P.C., and Zerp LLC (the “Defendants”); and (b) Relief Defendants
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Nina Fischman, Rafaela Fischman, Alexander Fischman, Stuart Fischman, Anne Shimanovich, and Ethel Weissman (the “Relief Defendants”).
NATURE OF THE ACTION
2. From 1998 to present, Defendant Aaron D. Fischman operated the Cardis entities – Defendant Cardis Enterprises International N.V. (“Cardis NV”), Defendant Cardis Enterprises International B.V. (“Cardis BV”), and Defendant Cardis Enterprises International (U.S.A.) Inc. (“Cardis USA”) (together, “Cardis” or the “Company”).
3. Cardis claimed to possess patented and proprietary technology to make low-value credit card transactions less expensive for merchants. Credit card transactions include a fixed fee, regardless of the size of the transaction, which has the effect of severely depressing margins on low-value transactions. For example, a $1 credit card purchase at a convenience store might incur a fixed processing cost of $0.10 for the store. Cardis claimed that its technology allowed merchants to aggregate low-value transactions, so that this fixed fee would be incurred less frequently.
4. Cardis solicited tens of millions of dollars from investors by selling stock in Cardis NV. Although Cardis did not maintain full shareholder records, Defendant Fischman has represented that Cardis raised over $70 million, and a Cardis-maintained share registry reflects at least $30 million in stock sales since 2011. Cardis also raised significant funds through loans.
5. Cardis was a fraud. It raised money through a steady drumbeat of false representations that: (1) it was on the verge of monetizing its technology through agreements with prominent companies; and (2) an initial public offering (“IPO”) or buyout of Cardis was on the horizon. All the while, Defendant Fischman diverted investor moneys to enrich himself, family members, and favored charities. While the particulars of the fraud varied, these acts and FILED: NEW YORK COUNTY CLERK 12/21/2018 02:37 PM INDEX NO. 452353/2018
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practices were part of a single, continuing scheme to deceive investors and enrich Defendant Fischman. Defendant Fischman was aided in these efforts by the other Defendants.
6. Many Cardis investors were particularly vulnerable to Defendants’ fraud because they were members of a close-knit religious community, to which many of the Defendants also belonged, located in the New York metropolitan area.
7. Although centered in New York, Cardis’ fraud was far-reaching. It ensnared investors with relatively modest means, as well as individuals with substantial fortunes. Cardis deceived investors of all levels of sophistication, including highly sophisticated business people and attorneys. And it lured many investors to make repeat investments in the Company.
PARTIES
8. Plaintiff brings this action by and through Attorney General Barbara D. Underwood.
9. The Attorney General is the chief law enforcement officer of the State of New York and is charged by law with protecting the integrity of the business and securities markets within New York, as well as the economic health and well-being of investors who reside or transact business in the State.
10. The Attorney General is authorized to bring this action and to assert the causes of action set forth below pursuant to General Business Law § 352 et seq. (the “Martin Act”) and Executive Law § 63(12), and under the common law pursuant to the Attorney General’s parens patriae authority.
11. Defendant Cardis BV was incorporated in the Netherlands in 1996.
12. Defendant Cardis NV was incorporated in Curaçao under the former laws of the Netherlands Antilles in or around 2006. The principal place of business of Cardis NV is the FILED: NEW YORK COUNTY CLERK 12/21/2018 02:37 PM INDEX NO. 452353/2018
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Country of Curaçao, a Lesser Antilles island that is a constituent country of the Kingdom of the Netherlands.
13. Defendant Cardis USA was incorporated in Delaware on June 20, 2013 and registered to do business in New York State on June 27, 2013. At all relevant times, its principal place of business was located at 445 Central Avenue, Cedarhurst, New York, 11516, and it was a wholly owned subsidiary of Cardis NV. The current entity status of Cardis USA for the conduct of business in New York State is “suspended,” according to the website of the Division of Corporations of the New York State Department of State.
14. The Cardis entities did not observe customary corporate formalities. Instead, they: (1) had no independent capitalization; (2) shared personnel; (3) were dominated by Defendant Fischman, who controlled the terms of deals with investors, the use of the proceeds, and Cardis’ third-party relationships; and (4) were employed to further the fraud conceived by Defendant Fischman. For that reason, the Cardis entities are simply referred to as “Cardis” throughout this Complaint.
15. Defendant Choshen Israel LLC (“Choshen”) is a New York limited liability company formed on January 4, 1999, with its principal place of business at relevant times at 445 Central Avenue, Cedarhurst, New York, 11516. Choshen is controlled by Defendant Fischman, and Defendant Fischman received payments from Cardis through Choshen. Many investors’ investments in Cardis were through subscription agreements with Choshen.
16. Defendant Law Offices of Lawrence Katz, Esq. PLLC is a New York professional service limited liability company formed on February 29, 2012 by Defendant Katz for his practice of law. Prior to becoming inactive on January 25, 2012, Law Offices of Lawrence Katz FILED: NEW YORK COUNTY CLERK 12/21/2018 02:37 PM INDEX NO. 452353/2018
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P.C. was the law firm through which Defendant Katz engaged in the fraudulent and illegal acts and practices described herein.
17. Defendant Zerp LLC is a New York limited liability company, formed by Defendant Steven Hoffman and registered to his home in Lawrence, New York. It received payments on Defendant Hoffman’s behalf.
18. Defendant Aaron D. Fischman was, at all relevant times, a principal, officer, director, and/or control person of Cardis NV, Cardis USA, and Cardis BV. Defendant Fischman formally served as Cardis’ Chief Executive Officer until 2016 but continued to exercise control over Cardis thereafter.
19. Defendant Stephen Brown was, at relevant times, the most senior financial executive at Cardis and was variously described as its Chief Financial Officer, Vice President of Finance, and/or Senior Financial Executive.
20. Defendant Seth Rosenblatt was, at relevant times, a director of a Cardis subsidiary, Cardis R&D Ltd., and a director of Choshen.
21. Defendant Steven Hoffman was, at relevant times, an agent of Cardis NV authorized by that company to offer and sell its securities to the public in and from New York State.
22. Defendant Lawrence Katz, Esq. is, and was at relevant times, a member of the bar of the State of New York. At relevant times, Defendant Katz maintained Interest on Lawyer Account (“IOLA”) bank accounts for the benefit of Defendants Cardis NV and Cardis USA. Defendant Katz deposited investor moneys into his firms’ bank accounts in connection with his participation in the fraudulent investment schemes described herein.
23. Relief Defendant Nina Fischman is the spouse of Defendant Fischman.
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24. Upon information and belief, the other Relief Defendants – Rafaela Fischman, Alexander Fischman, Stuart Fischman, Anne Shimanovich, and Ethel Weissman – are all family members of Defendant Fischman.
JURISDICTION AND VENUE
25. This Court has jurisdiction over the subject matter of this action, personal jurisdiction over the Defendants and Relief Defendants, and authority to grant the relief requested pursuant to General Business Law § 352 et seq., Executive Law § 63(12), and the common law.
26. Pursuant to C.P.L.R. § 503, venue is proper in New York County, because Plaintiff resides in that county, and because a substantial part of the events and omissions giving rise to the claims occurred in that county.
FACTUAL ALLEGATIONS
27. Since 1998, Cardis obtained tens of millions of dollars from investors through sales of stock, warrants, and convertible notes – all of which are securities under GBL § 352(1). Cardis offered and sold these securities to more than one hundred investors.
28. Cardis was tightly controlled by Defendants Fischman, Brown, Katz, Hoffman, and Rosenblatt, who worked together in a small office space, on a single floor, in Cedarhurst, New York.
29. Defendant Fischman was a founder of Cardis and ran it through his own company, Defendant Choshen. Defendant Fischman personally raised significant funds for Cardis based on false representations and omissions, prepared key investor marketing materials that were also false, and was the primary decision maker in Cardis’ pursuit of revenue generating third-party relationships.
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30. Defendant Katz was Cardis’ in-house counsel and controlled a number of Cardis bank accounts, including Cardis’ principal bank account, which was in the name of his law firm. Defendant Katz abused this role by aiding in Defendant Fischman’s theft from the Company and by diverting Company moneys to himself.
31. Defendant Brown was Cardis’ senior financial officer. His principal role at Cardis was to draft and send investor update letters, which contained a host of false statements and omissions, based on information provided by Defendant Fischman. Many Cardis investors made additional investments in Cardis in reliance on these letters.
32. Defendant Hoffman was one of Cardis’ principal fundraisers raising, upon information and belief, over $20 million from investors. Defendant Hoffman operated on a commission basis with investment-based commissions directed to him or his company, Defendant Zerp LLC. Defendant Hoffman relied on the investor updates prepared by Defendant Brown and information from Defendant Fischman – both of which contained material misstatements and omissions – in making his pitches to investors.
33. Defendant Rosenblatt operated under the direction of Defendant Fischman and had significant responsibilities in interacting with investors. Defendant Rosenblatt distributed false investor update letters prepared by Defendant Brown, which Defendant Rosenblatt was also on the distribution list to receive. Defendant Rosenblatt also frequently interacted with investors via email and telephone.
34. Cardis induced investors to purchase shares of stock in Defendant Cardis NV by means of material misstatements and omissions of material facts in both oral and written communications, including, but not limited to, emails, text messages, telephone calls, PowerPoint presentations, investor update letters, subscription agreements, and private FILED: NEW YORK COUNTY CLERK 12/21/2018 02:37 PM INDEX NO. 452353/2018
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placement memoranda.
35. These misrepresentations and omissions centered on: (1) Cardis’ business prospects; (2) Defendant Fischman’s exploitation of Cardis for personal benefit; and (3) Cardis’ key personnel.
36. The Defendants were obligated, and failed, to correct or update these misleading statements and omissions. Instead, since at least 2012 and continuing to the present, Defendants reaffirmed their false statements and omissions and covered up their malfeasance, even when confronted by concerned investors.
I. Defendants’ Misrepresentations and Omissions Concerning Cardis’ Business Prospects
37. As detailed below, Cardis misrepresented its business prospects in two principal respects: (1) Cardis falsely claimed it was on the verge of revenue-generating relationships; and (2) Cardis falsely claimed that an IPO or buyout was on the horizon.
A. Cardis’ Third-Party Relationships
38. As discussed above, Cardis claimed to possess proprietary technology to aggregate low-value credit card transactions.
39. Cardis’ business plan generally centered on generating revenue from third parties who participated in low-value transactions – either in the financial services industry (like banks and credit card companies) or as merchants (like convenience stores).
40. These parties could potentially benefit from the ability of Cardis’ technology to lower the costs of low-value transactions in two principal ways: (a) through increased acceptance and use of credit cards, resulting in a net benefit to the financial services industry; and (b) through benefits to merchants by lowering their direct costs.