Examiner`s Report

Transcription

Examiner`s Report

The Statements and Conclusions in this Report have not been adopted or accepted by the Court, and constitute
only the opinions of the Examiner. No portion of this Report has been admitted into evidence. The publication
of this Report is without prejudice to the right of any party to challenge the statements contained herein.
Susan Power Johnston (SJ 9386)
COVINGTON & BURLING LLP
The New York Times Building
620 Eighth Avenue
New York, New York 10018
212-841-1000
UNITED STATES BANKRUPTCY COURT
SOUTHERN DISTRICT OF NEW YORK
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In re:
:
:
Case No. 07-12628 (RDD)
GLOBAL VISION PRODUCTS, INC.
:
:
Chapter 11
:
Debtor.
:
:
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REPORT OF DIANNE F. COFFINO, AS EXAMINER
Dated: New York, New York
April 25, 2008
TABLE OF CONTENTS
I.
INTRODUCTION .................................................................................................................. 1
II.
SUMMARY OF CONCLUSIONS......................................................................................... 2
A.
B.
THE PRODUCT INQUIRY ....................................................................................................... 2
THE CLAIMS INQUIRY .......................................................................................................... 3
III. CONDUCT OF THE INVESTIGATION .............................................................................. 7
A. DISCOVERY .......................................................................................................................... 7
1. California Action Discovery ........................................................................................... 8
2. Document Requests......................................................................................................... 8
3. Interrogatories .............................................................................................................. 13
4. Depositions and Interviews........................................................................................... 13
B. ADDITIONAL RELEVANT INFORMATION ............................................................................. 15
IV. GLOBAL VISION PRODUCTS, INC. ................................................................................ 16
A.
B.
C.
D.
E.
F.
V.
THE COMPANY ................................................................................................................... 16
THE UPJOHN LITIGATION ................................................................................................... 18
GLOBAL VISION’S EARLY FDA PROBLEMS ....................................................................... 21
THE CLASS ACTIONS.......................................................................................................... 23
GLOBAL VISION’S FINANCIAL COLLAPSE .......................................................................... 24
THE PEOPLE ....................................................................................................................... 27
FORMATION, CAPITALIZATION AND CORPORATE GOVERNANCE..................... 32
A.
B.
C.
D.
FORMATION ....................................................................................................................... 32
CORPORATE GOVERNANCE ................................................................................................ 36
INITIAL CAPITAL CONTRIBUTIONS ..................................................................................... 39
ELECTION OF OFFICERS AND DIRECTORS ........................................................................... 39
VI. THE PRODUCT INQUIRY ................................................................................................. 41
A. REQUISITE REGULATORY APPROVALS ............................................................................... 42
1. Avacor 5% Minoxidil Solution...................................................................................... 44
B. PROMOTIONAL LABELING AND ADVERTISING OF AVACOR PRODUCTS .............................. 50
2. 2% Minoxidil Topical Solution ..................................................................................... 55
3. Shampoo “Improving Absorbency”.............................................................................. 56
4. Nutricap as DHT Blocker ............................................................................................. 58
5. Boost ............................................................................................................................. 59
6. “Synergistic” Selling .................................................................................................... 60
C. HEALTH AND SAFETY CONCERNS/ADVERSE EVENT REPORTING/INTERNAL CONTROLS .... 61
i
1.
2.
3.
Health and Safety Issues ............................................................................................... 61
Adverse Event Reporting............................................................................................... 63
Lack of Internal Controls .............................................................................................. 66
VII. THE CLAIMS INQUIRY..................................................................................................... 68
A. THE FACTS ......................................................................................................................... 68
1. Malta Loans .................................................................................................................. 71
2. Transfers to Imbriolo .................................................................................................... 73
3. DeBenedictis ................................................................................................................. 84
4. Madden Loans............................................................................................................... 86
5. Purported Forgiveness Of Shareholder Loans Through The Mechanism Of
Deferred Salary Charges.............................................................................................. 87
6. More Forgiveness Of Shareholder Loans..................................................................... 88
7. Millbrook Equities ........................................................................................................ 89
8. Stonewall Solutions....................................................................................................... 95
9. Rexon transaction ......................................................................................................... 97
10. Triton Technologies .................................................................................................... 101
11. The “Elevator Charges”............................................................................................. 106
12. The Global Vision Directors Have Failed to Make Adequate Efforts to Recover
the Transfers Made to Shareholders .......................................................................... 108
B. LEGAL STANDARDS ......................................................................................................... 111
1. Illegal Loans to Directors........................................................................................... 111
2. Unlawful Dividends .................................................................................................... 113
3. Fraudulent Conveyances ............................................................................................ 115
4. Breaches of Fiduciary Duty, Mismanagement, Conversion, and Corporate
Waste .......................................................................................................................... 120
5. Usurpation of Corporate Opportunity: Triton Technologies. ................................... 131
6. Piercing The Corporate Veil....................................................................................... 135
7. Recovery of Officers’ Compensation: The “Faithless Servant” Doctrine ................. 142
8. Potential Preference Claims ....................................................................................... 143
9. Statute of Limitations .................................................................................................. 147
ii
I.
Introduction
On August 17, 2007 (the “Petition Date”), Global Vision Products, Inc. (“Global
Vision” or the “Debtor”) filed a petition for relief under Chapter 11 of Title 11 of the United
States Code (the “Bankruptcy Code”). The Debtor continues to operate its business and manage
its properties as a debtor in possession pursuant to sections 1107 and 1108 of the Bankruptcy
Code.
On November 29, 2007, the Court entered an order (the “Examiner Order”)
authorizing and directing the appointment of an examiner pursuant to sections 1104(c) and
1106(b) of the Bankruptcy Code. On December 10, 2007, the Court entered an order granting
the United States Trustee’s application to appoint Dianne F. Coffino as the Examiner. On
January 3, 2008, the Court entered an order granting the Examiner’s application to retain
Covington & Burling LLP as her counsel, nunc pro tunc to December 10, 2007.
The Examiner Order directed the Examiner to conduct a twofold investigation.
First, the Examiner is required to determine whether the Debtor has a legally viable business –
i.e., whether the Debtor’s sales of its products are reasonably in compliance with applicable legal
requirements (the “Product Inquiry”). Second, the Examiner is required to investigate whether
the Debtor’s estate potentially holds claims against insiders, including: Robert DeBenedictis,
Henry Edelson, Anthony Imbriolo, Melissa Madden, Enrico Malta, Robert Malta, and/or any
related companies or business entities (each such individual an “Insider,” and collectively the
“Insiders”) (the “Claims Inquiry”).
Having completed her examination, the Examiner submits this report.
II.
Summary of Conclusions
A.
The Product Inquiry
After a long and difficult discovery process in which the Examiner was required
to seek information from numerous sources (because it was not forthcoming from the Debtor),
the Examiner was able to obtain sufficient documentary and testimonial evidence to conclude
that Global Vision has the requisite regulatory approvals to market and distribute its products.
Global Vision’s conduct of its business – in particular, the manner in which it markets and
advertises its regulated products – continues to run afoul, in certain limited respects, of federal
regulatory law. These violations – which relate primarily to making certain unauthorized claims
regarding Global Vision’s products, and its apparent (and most serious) failure to make periodic
adverse events reports to the Federal Food and Drug Agency (the “FDA”) or to the
manufacturers of Global Vision’s minoxidil topical solutions so that they can make the requisite
reports to the FDA – can be corrected and, if properly corrected, should not be an obstacle to the
continued operation of Global Vision’s business.
The Examiner saw no evidence of serious health and safety issues related to
Global Vision’s products.
This conclusion is based on a review of numerous consumer
complaints made with state and federal authorities during the prior two years and produced by
the Debtor and its regulatory counsel and obtained through FOIA requests made of federal
agencies as well as witness testimony. In this regard, however, the investigation was hampered
by the spotty and incomplete production by the Debtor and the Debtor’s failure to produce
adverse event reports (required to be filed with the FDA by federal regulations). Accordingly,
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the Examiner cannot say with complete confidence that absolutely no health and safety issues
exist, but believes that it is unlikely.
To ensure future compliance with applicable federal law and regulations, Global
Vision – which lacks any internal controls – should create and implement a robust internal
control system, including, without limitation, written protocols and guidelines for gathering
information regarding and reporting adverse events, training and monitoring sales representatives
and customer service personnel, and monitoring third-party distributors to ensure that they are
not making improper claims regarding Global Vision’s products. In addition, Global Vision’s
written protocols should include a requirement for pre-publication legal review of all advertising
and marketing materials.
B.
The Claims Inquiry
The Examiner has concluded that the Global Vision estate holds valid prima facie
claims aggregating approximately $14 million against certain insiders and entities controlled by
them. In particular, Mr. Imbriolo, Robert and Enrico Malta, Ms. Madden and Mr. DeBenedictis
received approximately $12 million in loans or other transfers from Global Vision between 2000
and 2004. They have failed to repay, and thus owe to the estate, approximately $6 million of
these loans.
The recipients of these loans were all officers, directors and/or shareholders of
Global Vision. In breach of their fiduciary duties, the directors of Global Vision permitted the
Insiders to cause Global Vision to advance loans to the Insiders without any formal board
consideration and determination of whether the loans were in the best interests of the company,
and without any formal loan documentation. Moreover, these fiduciaries have failed to act
3
responsibly to collect the money that remains unpaid. To the extent that the loan amounts cannot
be recovered directly from the recipients, Global Vision’s officers and directors are liable for
damages equal to at least the amount of the unpaid loans under several legal theories including,
among others, permitting illegal loans to or on behalf of directors, mismanagement, corporate
waste, and breach of fiduciary duty.
Furthermore, none of the loan advances were used for legitimate business
purposes of Global Vision. Indeed, more than $2.3 million of the loans made to or for the
benefit of the Maltas were used to (a) pay third party vendors of unrelated businesses in which
they held interests, (b) purchase, among other things, a computer system for an unrelated
business and food and other supplies for restaurants they owned, (c) purchase real and other
property for their own personal use, and (d) to pay debts they personally owed to others.
For
example, Robert Malta (who was not a shareholder, director, or employee) used Global Vision
money to purchase an apartment in Miami, to acquire a luxury vehicle, to repay Robert
DeBenedictis money he owed him on unrelated business ventures, and to pay his personal health
insurance. More than $1.3 million of the transfers made for the benefit of Mr. Imbriolo were
used to buy a house and furnishings for his sole personal use. Global Vision also paid for the
house’s upkeep, including a live-in housekeeper. In addition, Mr. Imbriolo also used Global
Vision money to pay his personal credit card charges and to obtain and operate a luxury car, and
he also commissioned a driver on the Global Vision payroll. All of the money lent to Ms.
Madden was used for her personal expenses, including her apartment rent, her luxury car leases,
her parking garage expenses, and her personal American Express charges. Transfers to Mr.
DeBenedictis appear to have been made directly to him (and not to third parties on his behalf).
4
The transfers also constituted fraudulent conveyances under applicable fraudulent
conveyance statutes. Many of the traditional badges of actual fraud are present: all of the
transferees were insiders; Global Vision received no value for any of the transfers; most of the
transfers occurred before Global Vision paid any federal income taxes, and others were made
after the first class action was filed. None of the transfers were made in the ordinary course of
business of Global Vision. It may also be possible for the estate to prove constructive fraud:
Global Vision never received reasonably equivalent value in exchange for the transfers, appears
to have had insufficient capital for its needs, and may also have been insolvent as early as 2003.
Accordingly, the estate should be able to recover the transfers under fraudulent conveyance
theories.
To the extent that recoveries on the loans, or other claims on which director or
officer liability can be predicated, are insufficient to satisfy all allowed claims against the estate,
grounds also exist to pierce the corporate veil to enable the estate to collect funds from the
Insiders. Each of the Insiders ignored corporate formalities altogether, but particularly in their
financial dealings with Global Vision. On multiple occasions, they directed or accepted Global
Vision funds in payment of personal obligations or unrelated obligations to third parties. As a
result of this conduct, the Insiders used their control of Global Vision to divert more than $12
million for their personal benefit, without legitimate business purpose and without any benefit to
Global Vision. The Examiner believes that these facts give rise to valid claims against the
Insiders on an alter ego theory, if funds are necessary to satisfy the allowed claims of creditors.
In addition, Mr. DeBenedictis, Mr. Dix, and Ms. Madden purchased 51% of the
stock in a call center, known as Triton Technologies Inc. (“Triton”), whose services Global
5
Vision used in selling its Avacor products. Those Insiders did not offer this opportunity to
Global Vision, nor did they seek approval of the disinterested members of the board of directors
before they purchased their interest in Triton. They initially used Global Vision funds to pay for
their Triton stock, although they ultimately repaid those amounts. As part of their acquisition of
an interest in Triton, they were obligated to provide a $50,000 credit line to Triton. Instead of
using their own funds for that purpose, they arranged for Global Vision to prepay certain
charges, with no benefit to Global Vision.
When Triton was sold in late 2007, the 51%
shareholders received a profit of $6,800,000 on their investment of $100,000. This transaction
constitutes the usurpation of a corporate opportunity for the personal gain of the group of
Insiders.
Mr. DeBenedictis, a founding shareholder, also owns a 60% interest in Global
Vision’s landlord, rendering that entity an insider. During the year before the Petition Date,
Global Vision paid rent totaling $564,701, some or all of which may be recoverable as a
preference if the lease is not ultimately assumed.
Mr. Dix advanced $20,000 during the
preference period to enable Global Vision to make its weekly payroll.
The subsequent
repayment of these advances, which were not made in the ordinary course of business, may also
be recoverable as a preference. Finally, Mr. DeBenedictis owned 36% of the stock in Triton
between August 17, 2006 and January 2007, when he gave half of his shares to Mr. Imbriolo,
rendering Triton an insider. Triton received $363,548 during that time, some or all of which may
also be recoverable as preferential transfers.
Finally, under New York law, disloyal employees may be liable to their employer
for all compensation received during the period of disloyalty. Global Vision may be able to
6
assert claims against Mr. Imbriolo on this theory to recover all compensation he received
between 2000 and 2003. Further investigation is warranted to determine whether a cause of
action under this theory would lie against Ms. Madden. While Dr. Edelson’s conduct gives rise
to concerns as to whether he is more interested in serving the needs of Mr. Imbriolo than those of
Global Vision, he apparently has no assets and there is no evidence to date that he received any
of the transfers. The Examiner consequently believes that pursuing a claim against him will cost
more than it will recover.
The Examiner has not investigated whether the Insiders have valid defenses to
these claims, nor whether they would have assets sufficient to satisfy any judgments against
them.
III.
Conduct of the Investigation
A.
Discovery
Soon after the Examiner’s appointment, in an effort to limit the costs of the
investigation and in anticipation of full cooperation from the parties pursuant to the Examiner
Order, the Examiner made informal information and document requests of counsel to the Debtor
and counsel to the plaintiff in the class action pending in California against Global Vision,
certain of its present and former officers and directors and others (the “California Action”).1
1
As discussed below in Section IV.D., the California Action was brought against companies and
individuals involved in the marketing of Avacor hair regrowth products, including Global Vision,
Anthony Imbriolo, Derrike Cope, David L. Gordon, Powertel Technologies, Inc. (“Powertel”), Craig Dix,
Henry Edelson, and Robert DeBenedictis. In the California Action, the plaintiffs allege that the marketers
of Avacor violated California law by making unsubstantiated, false, and misleading statements in
connection with the advertising and sale of Avacor. The plaintiffs also allege misbranding and illegal
(continued…)
7
When this endeavor did not prove as fruitful as expected, the Examiner subsequently propounded
formal interrogatories and document requests, conducted several interviews, and deposed six
witnesses over a period of nine days.
1.
California Action Discovery
In January and February 2008, counsel to the class representative in the California
Action provided the Examiner with documents and deposition and trial transcripts from the
California Action, which assisted the Examiner and her counsel in understanding the Debtor’s
business, the issues raised in the California Action, the roles of the individuals involved, and the
relationships among the parties. Those materials, however, did not answer the questions the
Court posed to the Examiner in the Examiner Order. First, the Examiner was asked to determine
whether Global Vision may legally sell its products today, not whether Global Vision violated
applicable regulations in the past, which is the focus of the California Action. Second, although
there is discovery material in the California Action that bears on the Claims Inquiry,
investigating transfers to Insiders was outside the parameters of the California Action. As a
result, the Examiner concluded that it would be necessary to conduct independent discovery.
2.
Document Requests
To expedite the investigation, on December 19, 2007, the Examiner provided
Global Vision with a list of information and document requests. The Examiner requested that
Global Vision provide her with responsive material as soon as the materials could be made
distribution of Avacor in violation of law. See Thomas v. Global Vision Products, Inc., Case No. RG0303091195, Fourth Amended Complaint, dated March 23, 2007 (Cal. Super. Ct.).
8
available, on a rolling basis, so that production would be expedited.
The Debtor’s initial
response to the informal request, which did not arrive until almost three weeks later and
consisted of two small packages of documents delivered on January 8 and 11, 2008, was both
untimely and deficient.
Concluding that formal discovery was necessary to obtain the
information required for the report, on January 17, 2008, the Examiner filed an application
pursuant to section 105(a) of the Bankruptcy Code and Rule 2004 of the Federal Rules of
Bankruptcy Procedure for an order authorizing the issuance of document and deposition
subpoenas and written discovery requests (the “2004 Discovery Application”).
The Court
granted the application on February 11, 2008 (the “2004 Discovery Order”).2
Prior to the February 11, 2008, hearing on the 2004 Discovery Application, the
Examiner and her counsel met with Global Vision’s counsel and Dr. Henry Edelson (Global
Vision’s President, Chief Executive Officer, and Chairman of its Board of Directors), to discuss
the document requests and interrogatories. Dr. Edelson agreed that he could provide all of the
material by February 14, 2008, and the 2004 Discovery Order incorporated that agreed date for
the Debtor’s production and interrogatory responses.
2
During the preliminary stage of the investigation, the Examiner learned that Global Vision’s
regulatory counsel, the Lustigman Firm, and Craig Dix, a former director and officer (president) of the
Debtor, were in possession of documents and other information relevant to the investigation.
Accordingly, on February 19, 2008, the Examiner filed a second application for an order authorizing the
issuance of deposition and document subpoenas to the Lustigman Firm and Mr. Dix, which the Court
granted on February 25, 2008. Both the Lustigman Firm and Mr. Dix timely produced documents in
response to the Examiner’s requests and made themselves available for interviews by the Examiner and
her counsel. Mr. Dix also appeared for a two-day deposition.
9
As did her earlier requests, the documents requested and interrogatories
interposed by the Examiner in the 2004 Discovery Application, sought information that should
have been relatively easy to produce and which went to the heart of the inquiries mandated by
the Examiner Order.
The information requests included, among others, (a) documents
evidencing requisite approvals by the FDA for the manufacture and sale of any drug products by
Global Vision, applications therefore and related correspondence and other materials, (b) a list of
manufacturers and suppliers, (c) product labeling, inserts, and brochures, (d) advertising
materials, (e) documents reflecting consumer complaints and adverse event reports, (f) call
center tapes and training materials for customer service employees or third party call centers,
(g) board meeting minutes and corporate resolutions, (h) documents relating to transfers,
distributions or other payments made to or on behalf of insiders or entities in which they hold or
held interests, and (i) documents relating to any agreements between or among any of the
insiders.
Despite repeated requests from the Examiner and her counsel for compliance with
the 2004 Discovery Order, the Debtor repeatedly sought extensions and failed to meet agreed
deadlines for production. The Examiner’s efforts to expedite production by providing the Debtor
with a list of priority items to be produced proved to be futile. The Debtor ultimately failed to
produce key documents before the relevant depositions. Frequently, the existence of additional
documents, previously requested but not yet produced, were discussed during depositions and
requests were made again for the same documents. More than once, the Examiner followed up
with written requests to Global Vision at the end of a day’s deposition testimony. These delays
in producing documents required the Examiner to reconvene several of the depositions on
10
subsequent days, to allow time for the Debtor to supply the missing materials. Ultimately, the
Debtor failed to produce key documents – among them, stock certificates in subsidiaries and an
FDA approval letter – until after the deposition discovery was completed, which precluded
examination of the witnesses about these documents.
As a result, the Examiner was forced to seek information from other sources,
including Mr. Dix, Ms. Martino (Global Vision’s outside accountant), Edmund Mendrala
(Global Vision’s outside tax attorney), the Lustigman Firm (Global Vision’s regulatory counsel),
Hi-Tech Pharmacal, Inc. (“Hi-Tech”), Global Vision’s supplier of the Avacor topical solutions,
and from FDA and FTC.
In some cases, the Examiner only learned of the existence of
responsive documents in the possession and/or control of Global Vision from third parties during
deposition testimony and interviews – documents that should have been obtained and/or supplied
by Global Vision.3
3
Because neither Global Vision nor Hi-Tech were listed on the FDA website (commonly referred
to as the “Orange Book”) as having approval for either the 5% minoxidil topical solution (for men) or the
2% minoxidil topical solution (for women), Global Vision should have provided the Examiner with
documentary support demonstrating that its sale of such products was in accordance with applicable FDA
regulations. The Examiner made repeated requests for copies of FDA approval letters, but neither Global
Vision nor Hi-Tech produced such letters by the close of deposition discovery. The Lustigman Firm,
Global Vision’s regulatory counsel, could not assist the Examiner because it was not even aware that
Global Vision purchased its 5% minoxidil solution (for men) product from Hi-Tech and, thus, was not in
possession of any FDA approval documents. As a result, the Examiner’s counsel contacted the FDA
directly. The FDA confirmed that it had approved Hi-Tech’s manufacture and labeling of the Avacor 5%
minoxidil solution (for men), but initially stated that Hi-Tech did not have approval to manufacture 2%
minoxidil (for women). It was not until April 8, 2008 (after the Examiner reported to the Court that
Global Vision did not have approval to sell Avacor 2% minoxidil solution for women), that Global Vision
provided the Examiner with a letter indicating FDA approval of Hi-Tech’s 2% minoxidil solution for
women. The Examiner has confirmed with the FDA that the approval is genuine, and the FDA has
modified the Orange Book to reflect approval of Hi-Tech’s 2% minoxidil solution (for women). Had
Global Vision provided this letter much earlier in the process, as repeatedly requested, the Examiner
(continued…)
11
Even at this juncture, documents that were necessary to the investigation – e.g.,
adverse event reports,4 supporting documentation relating to transfers by Global Vision to or on
behalf of insiders (such as bank statements, check ledgers and checks), Hi-Tech product samples,
tapes of consumer calls, and materials and testimony relating to transfers that were produced or
provided in an action commenced by The Upjohn Company (“Upjohn”) to recover on a
judgment it had procured against Anthony Imbriolo and others for infringement of Upjohn’s
minoxidil patent – were not provided at all.
In short, the Examiner’s ability to commence deposition discovery in a timely
fashion, and to conduct the depositions and overall investigation efficiently, was materially
hindered by Global Vision’s seriously deficient document production.5
could have avoided the time and expense she and her counsel spent in attempting to track down this
information through third parties, adjourned depositions, and inquiries to the FDA.
4
Testimony with respect to the existence of these documents has been inconsistent. For example,
Dr. Edelson testified in the California Action that Global Vision had no adverse reports. Boyd v. Global
Vision Products, Inc., Case No. RG 03-091195: Edelson Dep. Tr. at 60-61. During his deposition taken
pursuant to the Examiner’s investigation, however, Dr. Edelson testified that he submitted adverse reports
to the FDA and that Global Vision had such reports in its possession. Edelson Dep. Tr. at 71, 80-81.
Despite repeated requests, however, Global Vision never provided any adverse reports to the Examiner.
5
Global Vision has had a history of failing to make adequate and timely responses to discovery.
See, e.g., The Upjohn Co. v. Medtron Labs., Inc., Order Adopting Report and Recommendation dated
September 7, 2005 (87 Civ. 5773 (SWK) (the “Upjohn Decision”), in which Judge Kram adopted the July
29, 2005 Report and Recommendation of Magistrate Judge Katz (the “Magistrate’s Report”) that Global
Vision and Dr. Edelson be held in civil contempt for their evasion of discovery orders entered in support
of a judgment Upjohn had obtained years previously against Imbriolo for violation of its minoxidil patent.
The Magistrate’s Report, which is not available on Westlaw, is attached as Appendix A hereto and the
Upjohn Decision is attached as Appendix B hereto.
12
3.
Interrogatories
The Debtor’s initial response to the Examiner’s interrogatories was also grossly
deficient. Pursuant to the 2004 Order, the Debtor was directed to respond to the Interrogatories
on or before February 14, 2008. The Debtor’s response was, however, not delivered until
February 29, 2008, and even then contained little substantive information. On March 7, 2008,
after discussions with the Examiner, the Debtor amended its responses to add more useful
information regarding the Product Inquiry, but the Interrogatory relating to the Claims Inquiry
remained deficient, which required the Examiner to expand the topics on which deposition
discovery was required.
4.
Depositions and Interviews
The Examiner issued deposition subpoenas to Global Vision (under Federal Rule
of Civil Procedure 30(b)(6)), Henry Edelson, Craig Dix, Julie Martino, Edmund Mendrala,
Anthony Imbriolo, and Robert DeBenedictis. The Examiner restricted the deponent list to those
whom she believed had the most relevant information.6
6
The Examiner did not subpoena Robert Malta, Enrico Malta or Melissa Madden for several
reasons. First, Melissa Madden now lives in Arizona and the Examiner did not believe the costs
associated with retaining local counsel, serving her with a subpoena, and traveling to Arizona to take her
deposition would be justified by the additional information she might be able to provide – particularly in
light of the availability of Ms. Martino, Global Vision’s outside accountant (and the individual who
reconciled the loans to shareholders). Second, the Maltas have declined service of all mail that the
Examiner had addressed to their homes and office; thus, it was reasonable to assume that they would
attempt to evade service of the subpoenas, which would impose additional costs on the estate. Third, the
Examiner doubted that the Maltas and Ms. Madden would cooperate with her inquiries given the lawsuits
that Global Vision had filed against them. In any event, based on documents and testimony provided by
Global Vision and others, the Examiner was able to conclude that substantial claims against the Maltas
and Ms. Madden do exist. Follow-up discovery with respect to these individuals will be necessary in
connection with any prosecution of such claims.
13
Each subpoenaed deponent appeared for his or her scheduled depositions with
two exceptions. First, Mr. Imbriolo (who was served individually and was designated by Global
Vision as a Rule 30(b)(6) witness) initially informed the Examiner that because of his fear of
heights and elevators he would not attend his deposition, which was scheduled to be held on the
43rd floor of the Examiner’s offices. After the Examiner offered to take the deposition at the
offices of Global Vision’s attorney, located on the eighth floor, Mr. Imbriolo provided a letter
from a psychiatrist, stating that Mr. Imbriolo was “in a severely compromised and disabled
state,” and concluding that he was not “in any proper state of mind so as to be able to give
testimony in any legal proceeding at this time.”7 Mr. Imbriolo has not since that time provided
the Examiner with an update on his medical condition, nor has he made himself available for a
deposition.
Second, Dr. Edelson did not appear at the time originally scheduled for the third
day of his deposition. When Global Vision’s attorney reached him by telephone, Dr. Edelson
said that he was sick and would not be able to attend the deposition. His failure to appear
without prior notice caused the Examiner to incur unnecessary expenses, including a fee for the
court reporter.
In total, the Examiner deposed six witnesses over the course of nine days. The
Examiner also conducted informal interviews of Mr. Dix, Dr. Edelson, and the Lustigman Firm
(through Andrew Lustigman), in person and by telephone. The Examiner and/or her counsel also
spoke with Ms. Martino on several occasions to obtain additional information following her
7
Letter from Harold W. Selman, M.D., to Dianne Coffino re: Anthony Imbriolo, dated March 14,
2008 (on file with Covington & Burling LLP).
14
deposition. The Examiner has attempted to speak with members of the law firm Gallion &
Spielvogel, who advised Global Vision in 2004 in connection with certain disputes with Mr.
Imbriolo, to learn if they could provide information about Global Vision’s claims against Mr.
Imbriolo, but to date has been unsuccessful in obtaining the information.
B.
Additional Relevant Information
The Examiner believes that further avenues for discovery exist, particularly with
respect to the Claims Inquiry, that may yield additional relevant information. As noted above,
the Examiner was not able to depose Mr. Imbriolo because of his medical condition. Mr.
Imbriolo is a key witness, who alone possesses information regarding a number of areas
important to the Claims Inquiry. Moreover, because of considerations of time and expense the
Examiner did not take discovery from Ms. Madden, Robert and Enrico Malta, and Chris Skevas,
the outside accountant who prepared the tax returns for 2000-2003, all of whom the Examiner
believes are in possession of relevant information.
In addition, despite submitting exhaustive formal and informal discovery requests
to Global Vision, and despite repeated follow-up queries, the Debtor’s document production and
interrogatory responses are not yet complete with respect to the Claims Inquiry. For example,
•
Global Vision produced no documents whatsoever relating to the
Upjohn litigation, in which Upjohn sought contempt sanctions
against Global Vision and Dr. Edelson relating to fund transfers
from Global Vision to entities owned or controlled by Mr.
Imbriolo. On April 17, 2008, the Examiner finally obtained from
archived court records a copy of the Magistrate’s Report. The
report contains information that is highly relevant to the Claims
Inquiry, some of which is contradictory to testimony provided by
the witnesses during the Examiner’s investigation. It would have
greatly facilitated, expedited, and streamlined the Examiner’s
discovery to have had access to this material before commencing
15
her depositions. Further review of the underlying materials,
particularly including the deposition and trial transcripts and the
documents produced by Global Vision to Upjohn (including bank
statements for entities owned or controlled by Mr. Imbriolo and
Global Vision bank statements, check ledgers and checks to these
entities reflecting the transfers),8 is likely to be highly material and
relevant to the Claims Inquiry.
IV.
•
Although Global Vision stated in its responses to the Examiner’s
interrogatories that it was in the process of eliciting information
about the transfers to Insiders from the general ledgers, it produced
no responsive information other than the general ledgers and a
highly misleading summary of loans. The Examiner has
accordingly been required to generate, at great expense, her own
summaries of the transfers to the insiders (which is materially
different from the summary Global Vision provided). Given the
sketchy and haphazard production of documents, the Examiner
fully expects that the Debtor is in possession of other documents
relevant to the Claims Inquiry, such as checks, bank statements,
invoices, transaction details, and other back-up information for the
general ledger entries.
•
Only a handful of emails were produced on any topic, and the
Examiner is skeptical that Global Vision engaged in a systematic
effort to locate responsive emails.
•
The Examiner sought but did not receive documents in the
possession of Mr. Mendrala, Global Vision’s outside tax attorney.
Global Vision Products, Inc.
A.
The Company
Global Vision was incorporated as a New York corporation on or about December
30, 1999, to carry on a direct marketing business selling hair restoration products. Global Vision
8
Magistrate Judge Katz lists certain documents produced by Global Vision to Upjohn that are
directly responsive to the Examiner’s document requests, but that were not produced to the Examiner.
See Magistrate’s Report at 10-11.
16
currently sells several products under the trade name “Avacor.” Its primary product is a 5%
Minoxidil Topical Solution for Men (“5% Minoxidil Solution”). Until very recently, Global
Vision also distributed a 2% Minoxidil Topical Solution for Women (“2% Minoxidil Solution”).9
Both the 5% Minoxidil Solution and the 2% Minoxidil Solution are over-the-counter (“OTC”)
drugs designed to cause hair re-growth in individuals suffering from what is commonly known as
male pattern baldness. In addition, Global Vision distributes several cosmetic hair products
(including, without limitation, a “Detoxifying Shampoo” and a hair thickening gel called
“Boost”), and a dietary supplement called “Nutricap,” containing (among other things) the saw
palmetto herb, which is said to promote a healthy hair follicle.
Global Vision employs direct marketing to sell its products, using print, radio, and
other media advertising to attract customers who are directed to an internet website and call
centers (which use different 800 numbers for tracking purposes) to inquire about the products
and place orders.10
Its advertising expenses constitute a large percentage of its operating
expenses, ranging from $2.6 million in 2000, the first year of operations, to $20 million in 2002,
the year in which it attained its highest sales.11
Global Vision rents office space from which its operations are directed on the
third floor of 227 East 56th Street, New York, New York. At one time, it also rented space on
9
At this juncture, Global Vision does not distribute 2% Minoxidil Solution for Men.
10
Although Global Vision now handles call center functions in house, historically it used three
different call centers (during overlapping periods): Powertel, Triton, and West. Global Vision maintains
that its contract with Triton was more favorable to Global Vision than its contracts with Power-Tel and
West. As discussed below, in 2003, Mr. Dix, Ms. Madden and Mr. DeBenedictis acquired a 51% interest
in Triton.
11
Edelson Exs. 37-43.
17
the second floor, but it has now relinquished that space to reduce expenses. Its landlord is 227
East 56th Company. Robert DeBenedictis, who currently owns 49% of Global Vision and who
was one of the founding shareholders, also owns 60% of 227 East 56th Company.12 Global
Vision also leases warehouse space in New Jersey from which its products are shipped.
B.
The Upjohn Litigation13
Although minoxidil, the key ingredient in Avacor, is now in the public domain, it
was originally subject to a patent held by Upjohn, and litigation by Upjohn to enforce its patent
has had a substantial impact on Global Vision.
In the 1980’s, Mr. Imbriolo operated a business under the names The New York
Hair Clinic and the Hair and Skin Treatment Center, which manufactured and sold minoxidil hair
care products in violation of Upjohn’s patent. He also formed a company called Medtron
Laboratories, Inc. (“Medtron”), which was intended to open similar clinics around the country.
On August 10, 1987, Upjohn brought a patent infringement lawsuit in the Southern District of
New York (the “District Court”) against Medtron, Mr. Imbriolo, and Dominick J. Carlisi
claiming that Medtron and its principals, Mr. Imbriolo and Mr. Carlisi, infringed Upjohn’s
patents by manufacturing and selling their own topical minoxidil product under the brand name
“Minoxidil Plus.” On September 1, 1992, the Court granted Upjohn’s motion for summary
judgment on its patent infringement claim, and on November 10, 1992, the Court permanently
12
Deposition of Robert DeBenedictis taken in the California Action, dated November 14, 2007 (the
“California DeBenedictis Dep. Tr.”), at 12-13.
13
The facts set forth in this section are drawn from the Upjohn Decision and the Magistrate’s
Report.
18
enjoined defendants from manufacturing, sale, distribution, advertisement, and promotion of
products infringing Upjohn’s patents.14 In 1994, judgment was entered against the defendants for
patent infringement in the amount of $4,535,043.50.
On July 19, 1995, the District Court found Mr. Imbriolo in contempt of the
preliminary and permanent injunctions previously issued by the Court and awarded damages in
the amount of $290,487 to Upjohn. On March 17, 2004, in connection with Upjohn’s efforts to
collect the judgment, Mr. Imbriolo was adjudged in contempt for failure to provide testimony
and documentation concerning any accounts for which he had an ownership interest or otherwise
controlled. After spending a six week period in jail in late 2004 pursuant to the contempt order,
Mr. Imbriolo purged his contempt by giving a deposition. After filing a personal bankruptcy
petition, Mr. Imbriolo settled the judgment – which totaled approximately $10 million (with
interest) at that time – for $300,000.15
In 2003, as part of its efforts to locate Mr. Imbriolo’s assets for collection
purposes, Upjohn served Global Vision, Dr. Edelson, Mr. Dix, and Ms. Madden with document
and deposition subpoenas, seeking information about transfers from Global Vision to Mr.
Imbriolo.
Global Vision produced certain documents (and Dr. Edelson appeared for a
deposition), but otherwise moved to quash the remaining discovery requests. The District Court
denied the motion to quash (with limited exceptions). When Global Vision still failed to comply
14
Upjohn’s patent for Rogaine did not expire until February 13, 1996.
15
According to Mr. Imbriolo’s testimony in the California Action, Videotape Deposition of
Anthony Imbriolo, dated July 7, 2006 and August 20, 2007 (the “California Imbriolo Dep. Tr.”),
$100,000 of the settlement was funded by his sister and $200,000 was funded by Mr. DeBenedictis.
California Imbriolo Dep. Tr. at 98-101, 186.
19
in a timely fashion with the subpoenas, Upjohn moved to hold Dr. Edelson and Global Vision in
contempt. The District Court referred the matter to Magistrate Judge Katz, who took testimony
and, on July 29, 2005, issued a 45 page report recommending that the District Court hold Dr.
Edelson and Global Vision in civil contempt for willful failure to comply with Upjohn’s
discovery requests and court orders.
Among the conclusions Magistrate Judge Katz reached was that Global Vision
was mismanaged and showed signs of corruption:
The freedom which Imbriolo was given in accessing, moving, and
spending Global’s assets surely suggests mismanagement, if not
outright corruption, at Global. Moreover, the Court does not find it
unthinkable that Global and Imbriolo worked together to defeat
Plaintiff’s collection efforts. Global’s failure to disclose the
[Global checks transferring funds to Chicago Equities and Dublin
Press], Imbriolo’s secretive deposits into the Dublin Press and
Chicago Equities accounts, Imbriolo’s opening of the Ireland
Account as a personal account in his own name, Global’s purchase
of the Millbrook Property for Imbriolo’s use, and the missing
money in the Ireland Account, all suggest efforts to keep Plaintiff
unaware of Global and Imbriolo’s financial connections.
However, what the evidence more clearly establishes is that
Imbriolo may have violated his duties as a Global officer through
his possible mishandling of the Dublin Press, Chicago Equities and
Ireland Account assets.16
On September 7, 2005, the District Court adopted the Magistrate’s Report.
District Judge Kram held Global Vision and Dr. Edelson in civil contempt and awarded plaintiff
the costs and attorney’s fees incurred in the course of securing their compliance with the Court’s
subpoenas and orders with respect to discovery. On December 8, 2005, the Court entered
16
See Magistrate’s Report at 39.
20
judgment against Dr. Edelson and Global Vision in the amount of $216,169.84. The judgment
was satisfied in March 2006.
C.
Global Vision’s Early FDA Problems
During this same period, Global Vision began to have problems with the FDA.
(Initially and for a period of at least two years, Global Vision’s minoxidil products did not have
requisite regulatory approvals). In response to a consumer complaint in April 2002, the FDA
asked Global Vision for a list of the ingredients in the products Global Vision was marketing as
“Avacor system . . . developed by doctors and physicians at the New York Hair and Skin
Clinic.”17 On or around that time, Global Vision hired the Lustigman Firm to respond to the
inquiry. By letter dated April 29, 2002, the Lustigman Firm responded, listing the three items in
the “system” and their respective ingredients: the topical solution containing 2% minoxidil, an
oral herbal formulation containing the active ingredient saw palmetto described as “effective as a
DHT blocker” and the shampoo containing Polysorbate 80.18 Shortly thereafter, in June and July
2002, FDA investigators inspected Global Vision’s offices, met with Dr. Edelson and Mr.
Imbriolo and took samples of, and accompanying package inserts for, the products being sold as
the “Avacor system.”19
17
Dix Ex. 65.
18
Id.
19
Dix Ex. 66.
21
Following the inspection, in August 2002, the Lustigman Firm sent proposed
labeling changes to the FDA to support the continued sale of the product.20 On April 3, 2003, the
FDA, acknowledging the letter from the Lustigman Firm, sent Anthony Imbriolo as President of
Global Vision, a Warning Letter (the “2003 FDA Warning Letter”), stating that the claims then
being made about the products were in violation of the Food, Drug and Cosmetic Act, 21 U.S.C.
§§ 301, et seq. (“FDCA”), and that the proposed revisions by the Lustigman Firm did not cure
the problem. Specifically, FDA found the following violations: (a) the Avacor products were
being sold to treat hair loss and regrow hair without an ANDA; (b) the shampoo and the nutricap
were being sold as steps 1 and 3, the topical solution being step 2, that is, synergistically to
effectuate hair regrowth and thus being sold as drugs without FDA approval; (c) Global Vision’s
claim that the shampoo “improved the absorbency of the topical solution” turned the shampoo
into a drug requiring FDA approval which it did not have; and (d) the DHT blocking claims
attributed to the “special herbal formulations” by Global Vision was not an approved claim for a
dietary supplement.21
Between the June 2002 inspection and the month following the 2003 FDA
Warning Letter, the Lustigman Firm assisted Global Vision in contracting with Perrigo, an
ANDA holder for the 5% Minoxidil Solution, and in revising their product labels to bring them
in conformance with the 2003 FDA Warning Letter by removing the synergistic and hair loss
claims from the products’ labels and removing the absorbency claim and the DHT blocking
20
Edelson Ex. 23.
21
Edelson Ex. 23.
22
claim from the shampoo and nutricap product labels, respectively.22 Nevertheless, as discussed
below, certain of these claims continue to be made on some marketing materials.
D.
The Class Actions
In February 2003, the first consumer class action was filed against Global Vision
in New York state court, alleging that false and misleading statements were made by Global
Vision in connection with the marketing and sale of its products, and that the Avacor products
were misbranded and illegally distributed. The New York action was followed by five more
suits in Arizona, Florida, California, New Jersey, and Maryland.23 In addition to Global Vision,
the complaints named various insiders and others associated with the marketing of Avacor
products. The suits, which were all brought by the same counsel, alleged essentially the same
facts, although under the various consumer protection laws of the different states. The California
Action was the last surviving class action brought by the Bursor firm on behalf of different
putative class representatives. The ledgers indicate that by the end of 2007, Global Vision had
spent more than $2 million in defending against these actions.24
22
Dix Exs. 68 and 69.
23
According to information provided by the California Action plaintiff’s counsel, the Bursor firm,
the New York, Maryland and Florida cases were dismissed before the Petition Date. The Arizona and
California cases were stayed by the bankruptcy petition.
24
In August 2005, Mr. Dix and Dr. Edelson prepared a set of board minutes pursuant to which the
board, comprised of Mr. Dix, Mr. DeBenedictis, and Dr. Edelson, authorized Global Vision to enter into
indemnification agreements with Mr. Dix and Dr. Edelson with respect to litigation expenses. Dix Dep.
Tr. at 274-76 and Dix Ex. 62. Mr. Dix testified that Dr. Edelson was worried about the Upjohn contempt
sanctions and Mr. Dix was concerned about the class action litigation. Dix Dep. Tr. at 276. Mr.
DeBenedictis was not at the board meeting at which this occurred and he was not previously aware of it,
but Mr. Dix testified that they discussed it with him after the fact and he had no objection. Dix Dep. Tr.
at 276-77. Global Vision did not produce the indemnification agreements to the Examiner.
23
E.
Global Vision’s Financial Collapse
During the first three years of Global Vision’s operations it grew rapidly,
achieving gross sales of $48 million by 2002. In 2003, however, its gross sales began to decline
at the same time that it began to experience financial and litigation pressure from several sources.
According to Mr. Dix, Global Vision’s president from July 2003 to mid-2007,
Global Vision never had large reserves of cash and often engaged in writing checks to pay
operating expenses without adequate funds to cover those checks in the bank, in anticipation that
Avacor sales proceeds to cover the checks would arrive in the account before the checks were
presented for payment.25 The general ledgers reveal that this calculation was not always accurate
– between 2005 and 2007, the company frequently incurred bank charges for checks returned for
insufficient funds.26
A significant source of financial distress was Global Vision’s practice of lending
or otherwise transferring large sums of money to the Insiders for no consideration. Between
2000 and 2003, it transferred more than $12 million to the Insiders – sums it carried as loans on
its books and records. It made no effort to recover the loans to the Maltas and Ms. Madden until
after it filed its bankruptcy petition. It made no effort to recover approximately $6 million Mr.
Imbriolo transferred to his own bank accounts or accounts under his sole control until mid-2003,
when Upjohn was attempting to locate Mr. Imbriolo’s assets. Although the Examiner has heard
several different stories about why Global Vision attempted to recover those funds at that
25
Dix Dep. Tr. at 66-70; Dix Ex. 7.
26
Dix Ex. 30 at 349-50 (2005); Dix Ex. 5 at 360-62 (2006); Edelson Ex. 99 at 298-99 (2007).
24
particular time, the most reasonable inference and credible explanation – not offered by any
witness – is that the parties were concerned that Upjohn would seize the money because it was
held in accounts Imbriolo held personally. Mr. DeBenedictis has returned $1,184,900 of the
money he received voluntarily, but an additional $503,521 is outstanding, and Global Vision has
not made any effort to recover those funds. Indeed, Global Vision does not show on its ledger
that Mr. DeBenedictis has remaining obligations to the Company.
Global Vision’s finances have also been complicated by its generous return
policy. Initially, its guarantee enabled customers to return the product within three months of
purchase; in later years that period was extended to a full year. This return policy generated over
$7 million in returns in 2002, nearly 15% of the gross sales.27 In 2003, it had returns of nearly $8
million, which was over 20% of the gross sales of $36.2 million.28
An additional source of difficulty arose from Global Vision’s failure to file tax
returns during its first three years of operation. By the time the returns were filed in 2004, it
owed more than $2,500,000 in taxes for those years.29
Global Vision also claims that its business suffered as a result of Upjohn’s efforts
to enforce its judgment against Mr. Imbriolo. Between 2003, when Upjohn served its first
subpoenas on Global Vision and Dr. Edelson, and December 2005, when the order holding Dr.
27
Edelson Ex. 39.
28
Edelson Exs. 37-40. This trend improved slightly in subsequent years: in 2004, the returns were
$3 million on sales of $19.7 million (15%); in 2005, the returns were $2.6 million on sales of $19.2
million (13%); and in 2006, the returns were $1.7 million on sales of $13.6 million (12.5%). Edelson
Exs. 41-43.
29
Edelson Exs. 37-39. A chart summarizing the state and federal taxes, derived from the federal tax
returns for 2000-2003, is attached as Appendix C hereto.
25
Edelson and Global Vision in contempt was entered, Global Vision was embroiled in discovery
and sanctions disputes with Upjohn. The Upjohn disputes were complicated by Mr. Imbriolo’s
transfer of $5.7 million from Global Vision to accounts which he either owned personally or over
which he had sole control. Upjohn believed that the money so transferred belonged to Mr.
Imbriolo and was therefore subject to its judgment. Global Vision caused $3.5 million of the
money to be returned from Mr. Imbriolo’s personal accounts, and managed to persuade the
District Court that it retained title to the money at all times, even when it was in Mr. Imbriolo’s
bank accounts.30 As discussed in greater detail above in Section IV.B., the District Court
nevertheless held Global Vision and Dr. Edelson in contempt of the discovery orders, based on
their willful failure to comply with Upjohn’s discovery requests.
Global Vision filed its Chapter 11 petition on August 17, 2007. The class actions
were stayed against Global Vision by its bankruptcy petition, and on December 5, 2007, the
Court extended the stay with respect to the California Action to Dr. Edelson and Mr.
DeBenedictis. The plaintiff went to trial against other defendants (including Mr. Imbriolo) in
December 2007. In January 2008, a jury verdict was entered against certain of the remaining
defendants in the amount of $37 million. The Examiner understands that the verdict is not yet
final, and that the time for appeal has not yet commenced to run.
30
Notwithstanding representations made by Global Vision in this case, not all of the monies that
were transferred to entities owned or controlled by Mr. Imbriolo (at least $5.7 million) or held in the
account in the Bank of Ireland were returned to Global Vision. According to the Magistrate’s Report, an
additional $630,000 (over and above the returned $3.5 million) was not returned from the Bank of Ireland
account. See Magistrate’s Report at 24.
26
F.
The People
Anthony Imbriolo previously had been a principal in The New York Hair Clinic,
the Hair and Skin Treatment Center, and Medtron, all of which, like Global Vision, engaged in
the business of selling minoxidil hair restoration products.31 Mr. Imbriolo, Dr. Edelson, and the
Maltas discussed the formation of Global Vision in late 1999.32 By unanimous written consents
of the Global Vision directors, Mr. Imbriolo was appointed Vice President of the company in
February 2002, and President in November 2002. He was responsible for advertising and
marketing,33 and along with Ms. Madden and Mr. DeBenedictis, he had check signing
authority.34
On July 15, 2003, Global Vision terminated Mr. Imbriolo.35 Upjohn had been
attempting to collect its multimillion dollar judgment against him for several years. According
to the Magistrate’s Report, Dr. Edelson testified that Mr. Imbriolo had not disclosed the
existence of the Upjohn judgment to the shareholders before Upjohn served its discovery
subpoena on Global Vision.36 Mr. Imbriolo testified in the California litigation that Global
Vision fired him because of the Upjohn litigation.37
31
California Imbriolo Dep. Tr. at 68.
32
California Imbriolo Dep. Tr. at 82-86.
33
34
Edelson Ex. 36.
35
Edelson Ex. 90.
36
See Magistrate’s Report at 6. Dr. Edelson’s testimony that he had not been aware of the Upjohn
judgment before 2003 does not appear credible, since Dr. Edelson had worked with Mr. Imbriolo at
Medtron, where the fact of the judgment was open and notorious. See Magistrate Report at 24.
37
27
Following his termination, Mr. Imbriolo continued to act as a consultant for
Global Vision from July 2003 through January 2004, with a weekly salary of approximately
$2,000.38 Global Vision rehired him as a consultant through his wholly-owned company Imbris
International from March 2006 to present, again with a weekly salary of $2,000.39
Craig Dix was brought to Global Vision by Robert DeBenedictis, one of the
founding shareholders with whom he had been acquainted for 13 years and for whom he had
previously worked on unrelated matters. He commenced work at Global Vision in January 2002
as an assistant to Mr. Imbriolo, focusing principally on marketing the company’s products. In
July 2003, upon Mr. Imbriolo’s termination, he became President of Global Vision. Mr. Dix
became a director in July 2004. He was removed as President and director in March 2007, and
was terminated on August 20, 2007.
Dr. Henry Edelson’s fiancée introduced him to Mr. Imbriolo in the mid 1980’s.40
Shortly after they first met, Mr. Imbriolo hired Dr. Edelson to work at the New York Hair
Clinic.41 Dr. Edelson testified in the Upjohn litigation that he was and had been at all times the
Chairman of the Board and the controlling shareholder of Global Vision.42 He initially provided
IT support to the company, and for the first year its operations he worked from home and was
38
Dix Ex. 57.
39
Dix Ex. 40; Edelson Ex. 53.
40
41
See Magistrate’s Report at 24; California Imbriolo Dep. Tr. at 42-44.
42
28
rarely on the premises.43 Dr. Edelson’s role became more active in 2001, although he still had
little to do with marketing and advertising.44 When Mr. Dix was terminated as President in 2007,
Dr. Edelson became President, a role in which he continues at present.
He is currently
responsible for the overall operations of the company.
Diego Enrico Malta initially held 26% of the stock of the company, but
relinquished his shares in 2004. He was never employed by Global Vision, nor did he play any
role in its business.45 He and his brother Robert Malta had a number of restaurant and real estate
investments with Robert DeBenedictis that were unrelated to Global Vision. Mr. Imbriolo, who
knew Enrico Malta socially, asked him to invest in Global Vision. Enrico Malta introduced Mr.
Imbriolo to Robert DeBenedictis as an additional investor.46 He also invited Melissa Madden to
be a shareholder.47
Robert Malta, Enrico Malta’s brother, held no equity interest in the company,
was never employed by Global Vision, and never played any role in the company’s business. He
was involved with his brother Enrico in the real estate and restaurant investments with Mr.
DeBenedictis. Despite the fact that he had no role whatsoever at Global Vision, and no written
authority from his brother,48 he directed payments of Global Vision funds to himself, to other
family members, to his restaurants and other investment vehicles, to third-party vendors, and to
43
Edelson Dep. Tr. at 82-83.
44
45
46
California DeBenedictis Dep. Tr. at 17-19.
47
48
Martino Dep. Tr. at 33.
29
cover personal obligations he and others had incurred.49 Although he was not a shareholder, the
Malta loans are carried in Robert Malta’s name in Global Vision’s books and records as
shareholder loans.
Melissa Madden was the bookkeeper at Global Vision from 2000 until July
2004, as well as a 10% shareholder. According to the Magistrate’s Report she was absent on
sick leave from July 2003 through December 2003, although she worked part time from home
between September and December.50 At one time she had a personal relationship with Robert
Malta;51 that relationship appears to have ended before she began her tenure at Global Vision,
although they apparently remained on good terms. She had worked as a bookkeeper for the
Maltas before they recommended her to Mr. Imbriolo as the bookkeeper for Global Vision, 52 and
she continued to do accounting and bookkeeping for the Maltas as well as for Global Vision
thereafter.53 She left Global Vision in mid-2004 and now lives in Arizona.54
Robert DeBenedictis is an entrepreneur with an accounting background who has
made a number of successful investments in real estate, restaurants, and other businesses in New
York and Florida. He received an initial 13% interest in Global Vision. In July 2004, he
acquired the shares previously owned by Enrico Malta and Ms. Madden for nominal
49
See Martino Dep. Tr. at 33; Martino Exs. 15-18; Dix Exs. 54-56.
50
51
DeBenedictis Dep. Tr. at 31.
52
Martino Dep. Tr. at 211-12.
53
Edelson Dep. Tr. at 204-05, 239-40.
54
Edelson Dep. Tr. at 217.
30
consideration, and now owns 49% of the company.55 He played no role in managing the
company until mid-2004, when he became more active. Mr. DeBenedictis also owns a 60%
interest in the building located at 227 E. 56th Street, where Global Vision has its offices on the
second and third floors, and he is the sole owner of Hanford & Henderson, the managing agent
of the building. Mr. DeBenedictis’ own offices are on the fourth floor of the building.
Julie Martino is an accountant whom Mr. DeBenedictis employs through her
company, The Accounting Group, to do his personal accounting.56 Global Vision employed Ms.
Martino to prepare its tax returns beginning with the 2003 tax return. In 2003-2004, Mr.
DeBenedictis requested that Ms. Martino to analyze Global Vision’s books and records to
determine what transfers had been made to the shareholders, for the purpose of determining
whether those transfers exceeded the shareholders’ proportionate interest in any profits.57 She
did not do general accounting work for Global Vision, but worked closely with Melissa Madden
to understand the ledger entries in the course of performing her shareholder loan analysis and in
preparing the tax returns. 58
Edmund Mendrala is a CPA and a tax attorney who advised Global Vision on
filing its tax returns for 2000-2003, and negotiated on its behalf with the taxing authorities to
55
Mr. DeBenedictis never took possession of physical stock certificates representing the Malta and
Madden shares, and testifed that he believed he did not “formally” own 49% of the company,
DeBenedictis Dep. Tr. at 34, although he did acknowledge that he had signed agreements with both Ms.
Madden and Enrico Malta which state that he is buying their shares. Id. Both of those agreements refer
to a stock purchase agreement between the company and Mr. DeBenedictis. Dix. Ex. 2; DeBenedictis Ex.
4. Global Vision did not produce a copy of the stock purchase agreement to the Examiner.
56
57
58
31
coordinate its payment of back taxes owed for those years. Global Vision retained him in
connection with the IRS’s audit of the 2000 and 2001 tax years, which is ongoing. Mr. Mendrala
also is the principal of Stonewall Solutions LLC (“Stonewall Solutions”), which provided a
401(k) plan to certain of the Global Vision officers and shareholders. He has been acquainted
with Mr. Imbriolo since at least the mid-1980’s59 and are apparently close friends.60
V.
A.
Formation, Capitalization and Corporate Governance
Formation
Enrico Malta filed a certificate of incorporation for Global Vision, signed by
Anthony Imbriolo, Diego Enrico Malta, and Melissa Madden, with the Secretary of State of New
York on December 30, 1999. The aggregate number of shares authorized to be issued were 200,
at no par value.61 Formal bylaws were adopted.
On February 1, 2000, pursuant to a Unanimous Written Consent of the Board of
Directors of Global Vision Products, Inc., 100 shares of the 200 authorized shares were issued to
the following shareholders:
10 shares to Melissa Madden.
26 shares to Enrico Malta.
51 shares to Henry Edelson.
13 shares to Robert DeBenedictis.62
59
Mendrala Dep. Tr. at 6.
60
61
Edelson Ex. 34.
62
Edelson Ex. 35.
32
The Secretary of State of New York initiated dissolution proceedings against
Global Vision on June 25, 2003, for nonpayment of franchise taxes. The dissolution proceedings
were annulled and the existence of the corporation was revived and continued on July 21, 2003.
In June 2004, Ms. Madden and Enrico Malta transferred their shares to Mr.
DeBenedictis.63 The agreement transferring Mr. Malta’s shares to Mr. DeBenedictis is signed by
Robert Malta, who was not the record holder of the shares, instead of his brother Enrico who
technically held the Global Vision shares.64
Mr. Imbriolo denies having any ownership interest in Global Vision,65 but there is
considerable evidence that he either was the beneficial holder of Dr. Edelson’s shares, or that he
conducted himself as if he was the 51% owner of the company without any legal right to do so,
apparently with the express or implicit approval of Global Vision’s board of directors, including
Dr. Edelson.
For example, Enrico Malta testified in a deposition in the California Action that
Mr. Imbriolo was a 51% shareholder and that he held himself out to third parties as an owner of
Global Vision.66 Mr. DeBenedictis testified that he had thought, at least at the time of the
63
Dix Ex. 2; DeBenedictis Ex. 5.
64
Mr. DeBenedictis testified that when he dealt with the Maltas, Robert Malta often acted for his
brother Enrico, with Enrico’s consent, and he did not question Robert Malta’s right to act for his brother
Enrico in relinquishing the shares. DeBenedictis Dep. Tr. at 14-15; 17-18; 114-115. See also Martino
Dep. Tr. at 31, 33-34; 44-46.
65
Imbriolo Dep. Tr. at 83, 89, 105-06.
66
Deposition of Enrico Malta, taken on November 20, 2007, in the California Action at 5-6.
Aspects of Mr. Malta’s testimony are not credible, but he certainly had first hand knowledge of the
formation of Global Vision.
33
formation of the company in late 1999 or early 2000, that Mr. Imbriolo was a shareholder.67 Ms.
Martino testified that she understood that Mr. Imbriolo had a 51% ownership interest in the
company,68 and when she performed a reconciliation of shareholder loans in 2004 she attributed
a 51% percentage interest in Global Vision to Mr. Imbriolo.69
The 2000 general ledger reflects a capital contribution of $25,000 from “TI” on
September 1, 2000.70 Ms. Martino and Mr. DeBenedictis both testified that they understood the
“TI” to refer to Tony Imbriolo.71
Additional evidence that Mr. Imbriolo had an equity interest in Global Vision
may be found in the pattern of “distributions” made in 2000 to shareholders in proportion to their
ownership interests. On at least six occasions in 2000, the ledger reflects groups of payments to
Ms. Madden, Mr. DeBenedictis, and the Maltas (or their nominees) in percentages equal to their
ownership interests.72 On each of those occasions, a transfer was also was made to Chicago
Equities, an entity which Mr. Imbriolo owned, in proportion to 51%.73 In subsequent years
millions of dollars were transferred to Chicago Equities and Dublin Press LLC, another entity
67
DeBenedictis Dep. Tr. at 8, 10.
68
69
See Martino Exs. 15-19.
70
Martino Ex. 14 at 86; Martino Dep. Tr. at 234-45, 251-252; DeBenedictis Dep. Tr. at 19.
71
Martino Dep. Tr. at 251; DeBenedictis Dep. Tr. at 19. Dr. Edelson testified that he had no idea to
whom the “TI” referred. Edelson Dep. Tr. at 640-41.
72
E.g., Martino Ex. 14. at 20, 22, 25, 26, 27, and 43. The pages of the ledger on which these
payments are reflected are reproduced at Appendix D.
73
Martino Ex. 14 at 22, 25, 26, and 27.
34
over which Mr. Imbriolo had complete control, and thereafter to a bank account he owned
personally in Ireland. Most of those transfers were made in a variety of multiples of 51.74
Mr. DeBenedictis testified that Mr. Imbriolo returned the funds from the Bank of
Ireland bank account to Global Vision when it needed money to pay taxes for 2000-2003, and
that after returning the money Mr. Imbriolo demanded that Mr. DeBenedictis and the Maltas also
return funds they had received:
And at that point, everybody said, Okay, fine, we have to put
the money back for taxes. So I put some money back.
Maltas put money back to a degree. And the other money
came back from – what is it, Chicago Equities and wherever
that came from. Whether it came from Edelson, whether it
came from Imbriolo, I have no idea. That came back. . . .
Chicago Equities and Dublin Press, whoever that money –
wherever that money was, came back into the company, and
it was said that, Look, if this money is coming back into the
company, and you haven’t put your money back in yet, at
least let me take one of the properties that you own as
collateral. . . .
Q.
Who asked that the property be put up as collateral for the
loan?
A.
Imbriolo.75
....
And I recall a conversation saying that three million had
been put back, and that we had to put our share back, too,
which I proceeded to do.
....
74
Edelson Ex. 54 at 123-24 (2001); Dix Ex. 35 at 35, 42, 51, 56, 64, 72, 77, 81, 82, 85, 92, 96, 97,
105, 109, 115, 120, 126, 134, 139, 145, 151, 320 (2002); Dix. Ex. 15 at 236 (2003).
75
35
A.
And that was at the time when the property thing came up
that they wanted – it was Tony who said it. That if he had to
put back all of this money, $3 million, and the Maltas didn’t
put his back, then he’s going to have to bear the whole
burden of the taxes.76
Mr. Imbriolo’s demand that the Maltas and Mr. DeBenedictis return money
Global Vision had lent them, at a time when he was no longer an officer of the company or even
employed by the company,77 so that he would not be shouldering an undue portion of the tax
burden, strongly suggests that he considered himself to have an equity interest in Global Vision.
The Examiner has concluded, therefore, that Mr. Imbriolo either owns a beneficial
interest in 51% of the equity of Global Vision, or conducted himself, and was permitted by the
other shareholders and the board of directors to conduct himself, as if he was a majority
shareholder, completely without regard to corporate formalities.
B.
Corporate Governance
Global Vision had minimal or no formal corporate governance for most of its
existence. One of its founders, Mr. Imbriolo, testified that there was no board of directors.78 Mr.
DeBenedictis gave similar testimony in the California Action:
76
Q.
Do you remember having an organizational meeting to form
the company?
A.
No, there was no such thing. In fact, you mentioned board of
directors before. What board of directors? I mean I didn’t
even know who was on the board of directors. There
77
Mr. Imbriolo was fired on July 15, 2003. Edelson Ex. 90. The money was returned from Ireland
in late September 2003. DeBenedictis Ex. 2.
78
36
certainly was no board of directors meetings in those days.
Never was there one until after the company started to fall
apart a little bit.79
In fact, it appears that a board was appointed in February 2000,80 by unanimous
written consent of the incorporators, which was signed by Mr. DeBenedictis, as well as Mr.
Imbriolo, Enrico Malta, and Ms. Madden. This testimony. given by one of Global Vision’s
directors (and, in particular, a director that served as Chairman of the Board for a period of time),
reveals a strikingly cavalier attitude towards governance, which is borne out by the fact that
Global Vision directors rarely made informed decisions regarding Global Vision’s business,
much less held formal board meetings.81 Pursuant to a series of unanimous written consents of
the board of directors from 2000 to 2003, officers were appointed and all acts “heretofore” taken
by the board were purported to be ratified, but they did not identify any specific acts for
ratification.
Mr. DeBenedictis testified that he never attended board meetings until 2004, he
never saw bylaws of the corporation, and did not know whether the company had officers and
directors insurance.82
Minutes of only seven board meetings have been produced to the
Examiner, four in 2004, two in 2005, and one in 2006. There are no minutes of board meetings
reflecting deliberations by the directors concerning the transfers to insiders, nor any reflecting
79
California DeBenedictis Dep. Tr. at 24-25, 43, 44; see also DeBenedictis Dep. Tr. at 37.
80
Edelson Ex. 44 is a Unanimous Written Consent of the Incorporators of Global Vision, dated
February 1, 2000, signed by Mr. Imbriolo, Enrico Malta and Ms. Madden, as incorporators, electing Mr.
DeBenedictis, Ms. Madden, Enrico Malta, and Dr. Edelson as directors.
81
California DeBenedictis Dep. Tr. at 23, 24.
82
California DeBenedictis Dep. Tr. at 30, 44.
37
determinations by the board that the transfers and other corporate transactions entered into by
Global Vision were in the best interests of the company. There are no minutes of board meetings
reflecting deliberations by the directors concerning recovery of the transfers, at any point over
the last eight years.
Significantly, no member of the board was charged with the responsibility of
vetting potential conflicts of interest, nor did the board seek legal advice on such issues.83 Dr.
Edelson, the only board member who does not appear to have received transfers (at least
directly), testified that he was not aware that the transfers were being made,84 and that he
deferred to Mr. Imbriolo when it came to decisions regarding spending money.85
There was no formal periodic reporting of Global Vision’s financial condition to
the board of directors or the shareholders,86 and there was apparently no financial oversight by
anyone before 2004. Mr. Imbriolo testified that during his tenure as President he was not
responsible for the finances of Global Vision in any way87 (although he apparently conducted
himself as having authority to direct transfers of Global Vision funds),88 and no one reported to
him on accounting matters,89 although he also testified that everyone in the company reported to
83
Dix Interview at 7.
84
Edelson Dep. Tr. at 637-38. But see Magistrate’s Report at 31 (questioning the credibility of
similar testimony given by Edelson in the Upjohn proceedings).
85
86
California Martino Dep. Tr. at 111.
87
88
89
38
him one way or another.90 Mr. DeBenedictis testified that he had no involvement with the
company until 2004, and he appears to have been generally unaware of its finances before that
time.91 He was not aware that the company had achieved sales of $48 million in 2002.92
C.
Initial Capital Contributions
In 2000, the shareholders provided initial capital for Global Vision totaling
$135,267.74, but withdrew $65,134.74 before the end of the year, leaving a net initial
capitalization of $70,133, as summarized in Appendix E hereto.
Although Dr. Edelson was nominally a 51% shareholder, he made no cash capital
contributions to the company. He testified that his contribution was to be in the form of “sweat
equity.”93 In contrast, as noted above in Section V.C., according to the 2000 ledger,94 Mr.
Imbriolo provided capital in the amount of $18,000, for which he states he received no stock.
D.
Election of Officers and Directors
Directors. On February 1, 2000, Mr. DeBenedictis, Enrico Malta, Ms. Madden,
and Dr. Edelson were elected directors of Global Vision.95 Mr. DeBenedictis and Dr. Edelson
have remained directors ever since. Ms. Madden and Enrico Malta resigned as directors in
90
91
See DeBenedictis Dep. Tr. at 11, 14, 25. For example, Mr. DeBenedictis testified in the
California Action that he was not aware that the company had achieved sales of $48 million in 2002.
California DeBenedictis Dep. Tr. at 27.
92
93
Edelson Dep. Tr. Tr. at 344-45.
94
Martino Ex. 14 at 86.
95
Dr. Edelson testified in the Upjohn Litigation that he was and at all times had been the Chairman
of the Board. See Magistrate’s Report at 6.
39
2004, and Mr. Dix was elected in their place. Mr. DeBenedictis testified that, in July 2004,
Allison Weiss, an attorney who was on his staff, and Julie Martino joined the board for a short
time.96 No minutes that have been produced to the Examiner reflect their election, although the
ledger shows that they received meeting fees for meetings that occurred on July 30, 2004.97 Mr.
Dix remained a director until mid-2007, when he was terminated, leaving Dr. Edelson and Mr.
DeBenedictis as the sole directors. 98
Officers. On February 1, 2000, pursuant to a Unanimous Written Consent signed
by all of the directors, Mr. DeBenedictis was elected President, Mr. Imbriolo was elected Vice
President, and Ms. Madden was elected Secretary and Treasurer.99 Mr. Imbriolo was not elected
President until November 22, 2000, when Ms. Madden was also reelected as Secretary and
Treasurer. On July 15, 2003, Mr. Imbriolo was terminated as President,100 and Craig Dix was
appointed President.101 On July 14, 2004, the board reappointed Mr. Dix as President, Dr.
Edelson as CEO, and Mr. DeBenedictis as Treasurer.102 Mr. Dix was terminated as President and
Director in early 2007, and let go shortly after the Petition Date.
There seems to have been considerable confusion among Mr. Imbriolo, Mr.
DeBenedictis, and Dr. Edelson about which of them held which position and title with Global
96
97
Dix Ex. 8 at 292.
98
99
Edelson Ex. 35.
100
Edelson Ex. 90.
101
Dix Ex. 64.
102
Dix Ex. 3.
40
Vision. Dr. Edelson testified in the Upjohn litigation that he has at all times been the Chairman
of the Board,103 but the Examiner has not seen any documentary evidence supporting that claim.
Mr. DeBenedictis testified in the California Action that he had thought he was the Chairman of
the Board.104 Mr. Imbriolo testified that he was President and CEO at all times before he was
fired in July 2003, even though the February 2000 Unanimous Written Consent of Incorporators,
which he signed, named Mr. DeBenedictis as President.105
VI.
The Product Inquiry
As noted above, the first mandate in the Examiner Order required the Examiner
“to investigate whether Global Vision’s sales of its products are reasonably in compliance with
applicable legal requirements; provided, that the investigation shall focus on the overall legal
viability of [Global Vision’s] business, particularly in light of the Thomas’s allegations regarding
[Global Vision’s] primary product.”106
As of the Petition Date, Global Vision marketed and sold several different
products: (a) 5% Minoxidil Solution and 2% Minoxidil Solution, both OTC drugs designed to
regrow hair; (b) cosmetic products, such as Detoxifying Shampoo and Boost hair gel; and (c) a
dietary supplement known as Nutricap.
103
104
California DeBenedictis Dep. Tr. at 23-24.
105
106
See Examiner Order, ¶ 2.
41
Different provisions of the FDCA and the Federal Trade Commission Act, 15
U.S.C. §§ 45 and 52 (“FTCA”), govern the manufacture, marketing and sale of OTC drugs,
cosmetics (such as shampoos), and dietary supplements. In conducting the investigation, the
Examiner looked at whether Global Vision (a) had obtained the requisite regulatory approvals (in
particular, the OTC drugs), (b) advertised and marketed such products in accordance with federal
statutory requirements and regulations, (c) products appeared to present any health or safety
issues, and (d) had adequate internal controls to monitor and ensure compliance with applicable
regulatory requirements, including protocols for submitting periodic adverse event reports
required by the FDA.
A.
Requisite Regulatory Approvals
All “new drugs” must be approved by the FDA before they can be sold.107
Brand
new drugs known as innovator, or pioneer, drugs, cannot be sold without submission and
approval of a New Drug Application (“NDA”), while generic drugs – essentially copies of
already FDA-approved innovator drugs – require submission and approval of an Abbreviated
New Drug Application (“ANDA”).108
Neither cosmetics nor dietary supplements require
advance approval by the FDA before they can be marketed. They are, however, subject to the
FDCA and the FTCA in terms of appropriate and lawful advertising claims.
107
See 21 U.S.C. § 355(a).
108
See 21 U.S.C. § 355(b) and (j). Generic applications are “abbreviated” because they do not
contain clinical data demonstrating the safety and effectiveness of the proposed drug product. Instead, an
ANDA applicant must demonstrate that the proposed generic drug is bioequivalent to the innovator drug.
See 21 U.S.C. § 355(j)(2)(A)(ii)-(v).
42
A proper ANDA must contain samples of the generic product, the proposed
labeling that must mirror the pioneer labeling, and information about the chemistry,
manufacturing, and control of the drug, including a description of the product’s composition and
manufacturing methods and facilities.109 If the FDA does not approve an ANDA, the FDA must
provide the applicant notice of an opportunity for a hearing on the question of whether the
application was approvable.110 OTC drugs can be sold either under an approved ANDA or an
applicable OTC monograph (essentially a recipe for a product and its labeling approved by the
FDA). OTC drugs intended to regrow hair, however, can be sold only under an approved
ANDA, as the FDA has specifically not approved monographs for such products.111
On August 17, 1988, the FDA approved Upjohn’s NDA for prescription drug
Rogaine 2% Minoxidil Topical Solution (NDA #19-501) for use for men and women as a hair
regrowth treatment. On February 9, 1996, the FDA approved a supplement to the NDA for
Rogaine 2% Minoxidil Topical Solution to permit the marketing of Rogaine 2% on an OTC
basis. Within months, proposed manufacturers for OTC generic versions of the drug submitted
ANDAs.112 The FDA’s Orange Book lists approved ANDA holders for 2% Minoxidil Topical
Solution for Men as well as those approved for 2% Minoxidil Topical Solution for Women.
Although the formulation is the same for both products, the efficacy rates and health and safety
109
See 21 U.S.C. § 355(j)(2)(A)(vii).
110
See 21 U.S.C. § 355(j)(5)(E).
111
See 21 C.F.R. § 310.527(a), (b).
112
Approved Drug Products with Therapeutic Equivalence Evaluations, 28th Edition (2008) at
http://www.fda.gov/cder/orange/default.htm.
43
warnings are sufficiently different to require two different labels and, hence, two separate FDA
approvals.
Shortly after the FDA approved Rogaine 2% Minoxidil Topical Solution for OTC
sales, a new NDA was submitted by Upjohn for the approval of Rogaine Extra Strength 5%
Topical Solution for Men (NDA #20-834). The NDA was submitted immediately for approval
for OTC use, and did not seek to market the new product on a prescription basis. On November
14, 1997, the FDA approved the NDA for Rogaine Extra Strength for OTC use by men only.
The Orange Book also lists the holders of ANDAs for OTC 5% minoxidil solution for men.
1.
Avacor 5% Minoxidil Solution
As mentioned earlier,113 during the first two years of its existence, Global Vision
marketed an OTC minoxidil product that was not approved by the FDA under an ANDA.114
Sometime in 2002 or 2003, Global Vision began distributing Avacor 5% Minoxidil Solution,
under an approved ANDA held by Perrigo Company (“Perrigo”), an unrelated entity.115
113
See, supra, Section II.A.
114
115
Perrigo’s website states that is it a global healthcare supplier that develops, manufactures, and
distributes OTC and prescription pharmaceuticals, nutritional products, active pharmaceutical ingredients,
and consumer products. Perrigo’s manufacturing facility with respect to Avacor 5% Minoxidil Solution
is located in Canada. See http://www.perrigo.com. Perrigo is listed on the FDA’s Orange Book as
holding an approved ANDA for 5% Minoxidil Solution and 2% Minoxidil Solution. See
http://www.fda.gov/cder/orange/default.htm. Global Vision has provided the Examiner with copies of a
2004 executed supply agreement between it and Perrigo, effective 2002, Edelson Ex. 12, a sample
product from Perrigo Edelson Ex. 10, copies of sample labeling indicating Perrigo or “Canada,” Perrigo’s
manufacturing site, Dix Ex. 73; Edelson Ex. 65; Edelson Dep. Tr. at 510-13, and copies of Perrigo
invoices through 2007. See Edelson Ex. 9. These documents all support the conclusion that Global
Vision has been selling 5% Minoxidil Solution, manufactured by Perrigo, under an approved ANDA.
44
Global Vision also distributes Avacor 5% Minoxidil Solution manufactured by
Hi-Tech.116 Hi-Tech is not listed on the FDA’s Orange Book as one of the holders of an
approved ANDA for 5% minoxidil solution; however, as explained below, the Examiner has
determined that the FDA has, in fact, approved Hi-Tech’s manufacturing and labeling of Avacor
5% Minoxidil Solution under an ANDA held by Rexon NYC, Inc. (“Rexon”), which based on a
stock certificate provided to the Examiner appears to be a subsidiary of Global Vision.
On or about December 18, 2002, Rexon acquired an approved ANDA (ANDA
#75-619) from Teva Pharmaceuticals USA (“Teva”)117 for consideration of $100,000.118
Subsequently, Global Vision entered into a Manufacturing and Supply Agreement with Hi-Tech
(effective 2004), which provides for Hi-Tech to manufacture the Avacor 5% Minoxidil Solution
116
Edelson Dep. Tr. at 40, 51-52.
117
Dix Ex. 32: Bill of Sale dated December 18, 2002, related to Teva’s sale of its ANDA 75-619 for
5% Minoxidil Topical Solution to Rexon for $100,000; Dix Ex. 33: Letter, dated October 24, 2002, from
Anthony Imbriolo, President of Rexon to the FDA advising the FDA of the transfer of ownership of
ANDA 75-919 from Teva to Rexon; and the Lustigman Firm: 000045: Letter, dated December 10, 2002,
from the FDA to Rexon acknowledging the transfer of ownership from Teva to Rexon.) Although the
FDA Orange Book continues to list Teva as the holder of ANDA 75-619, the FDA confirmed that Rexon
is the holder of ANDA 75-619. See Declaration of Heather Banuelos, dated April 2, 2008 (“Banuelos
Decl.”), ¶ 3. The Banuelos Declaration is attached as Appendix F hereto.
118
As discussed in more detail below, Global Vision advanced the funds used by Rexon to acquire
the Teva ANDA. Dix Ex. 35; Edelson Dep. Tr. at 92. The Examiner received inconsistent explanations
for why Rexon, and not Global Vision, acquired the Teva ANDA; who funded the acquisition and who
owns Rexon (the value of which is not included on Global Vision balance sheets or in Global Vision’s
Statement of Financial Affairs filed with this Court). After repeated requests for a copy of Global
Vision’s Rexon stock certificate, Mr. Mendrala (Global Vision’s tax attorney) faxed to the Examiner a
stock certificate stating that Global Vision holds 200 shares of Rexon stock. Because the document did
not arrive until after deposition discovery closed, however, the Examiner was unable to depose a Global
Vision witness to determine if this stock certificate represents all of the issued and outstanding stock in
Rexon. Mr. Edelson testified, however, that Rexon was a wholly-owned subsidiary of Global Vision,
Edelson Dep. Tr. at 93, 110; however, as explained below, this testimony is inconsistent with information
he had given earlier to the Examiner, testimony provided by others and certain of Global Vision’s books
and records. See, infra, discussion in Section VII.A.9.
45
for Global Vision under an ANDA licensed to Global Vision and for Global Vision to provide
the raw minoxidil ingredient.119 The Hi-Tech Supply Agreement is silent as to the identity of the
licensor.120
Although Mr. Dix (Global Vision’s former President) testified that a license
agreement existed between Global Vision and Rexon, which he executed on Global Vision’s
behalf and Dr. Edelson executed on Rexon’s behalf,121 the Examiner was not provided this
agreement. Instead, the Examiner received only an unsigned 2004 draft license agreement
between Global Vision and Rexon from the Lustigman Firm (Global Vision’s regulatory
counsel).122 Dr. Edelson testified that neither this nor any other license agreement was ever
executed by the two entities, but that it was his intent that Rexon license to Global Vision the
right to market and distribute 5% Minoxidil Solution under ANDA #75-619.123 The Examiner
recommends that this legal loophole be closed either by transfer of the Rexon ANDA to Global
Vision or the execution of a proper license agreement between Rexon and Global Vision.
Under FDA regulations, Rexon was obligated to submit to the FDA, and in some
instances obtain its approval, for changes made in the manufacturing facility used under the Teva
ANDA (including the use of an alternate manufacturing and packaging site) or changes made to
119
Edelson Ex. 20.
120
Id.
121
Dix Dep. Tr. at 341-42.
122
Edelson Ex. 19.
123
Edelson Dep. Tr. at 92-93; 106.
46
the product label.124 Rexon’s path to approval was long and tortured. On September 30, 2004,
Rexon submitted an application to change the manufacturing site to Hi-Tech and to revise the
generic label to an Avacor label.125 That application was denied by the FDA and subsequently
withdrawn by Rexon.
On January 5, 2005, Rexon submitted a new application providing
documentation showing Hi-Tech as the new manufacturer, Global Vision as the purchaser of the
raw minoxidil from another company and the new proposed labeling, as identical to the label
used on the Perrigo manufactured 5% Minoxidil Solution.126
By letter dated August 19, 2005, the FDA advised Rexon that its January 5, 2005,
application was deficient in that certain chemical impurity information was missing, but it
indicated that the application would be approved if the deficiency was addressed.127 By letter
dated September 12, 2005, Dr. Edelson (on Rexon’s behalf) provided the FDA with the
information requested.128 Global Vision did not provide the Examiner with any subsequent
correspondence from the FDA, indicating final approval from the FDA for Hi-Tech to
manufacture the 5% Minoxidil Solution under the proposed labeling; however, counsel to the
Examiner contacted the FDA and obtained confirmation that final approval was granted for Hi-
124
See 21 C.F.R. § 314.70; see also December 10, 2002 Letter from the FDA to Rexon NYC, Inc.
(“the new owner shall advise FDA about any change in the conditions of the approved application”). The
product label includes both written material on the packaging as well as any written material, like a
brochure, accompanying the product. See, infra, discussion in Section IV.B.
125
Edelson Ex. 59.
126
Edelson Exs. 60 and 63.
127
Edelson Ex. 16.
128
Edelson Ex. 18.
47
Tech in November of 2005 to manufacture 5% Minoxidil Topical Solution under the Rexon
ANDA.129
2.
Neither Global Vision nor Rexon hold an approved ANDA to market Avacor 2%
Minoxidil Solution. According to Dr. Edelson’s letter to the Examiner, dated January 11, 2008,
and testimony from Dr. Edelson and Mr. Dix, Global Vision obtained the 2% Minoxidil Solution
it distributed from Hi-Tech. Global Vision’s regulatory counsel confirmed that this was his
understanding as well.130
As part of its investigation, the Examiner reviewed the FDA Orange Book, which
listed Hi-Tech as holding an approved ANDA for 2% minoxidil topical solution for men only.131
As noted earlier, the efficacy rates and safety issues are different for men and women and thus to
market either requires a separate approval from the FDA. The Examiner requested written
confirmation (in the form of an FDA approval letter) initially from Global Vision and then from
Hi-Tech. Repeated requests went unanswered throughout the course of the investigation. On the
last day of his three-day deposition, Dr. Edelson testified that Global Vision recently decided not
129
Banuelos Decl., ¶ 3-4.
130
There was inconsistent testimony regarding whether a supply agreement exists between Global
Vision and Hi-Tech related to the 2% Minoxidil Solution. Dix Dep. Tr. at 331-33; Edelson Dep. Tr. at
469-70. No executed agreement was produced by Global Vision or the Lustigman Firm. Invoices
covering the period 2005-06 confirm that Hi-Tech did, however, manufacture and supply Avacor 2%
Minoxidil Solution to Global Vision. Edelson Ex. 8; Edelson Dep. Tr. at 49-50.
131
Perrigo is listed as having an approved ANDA to market 2% Minoxidil Topical Solution for
Women, but Global Vision purchased its 2% Minoxidil Solution from Hi-Tech.
48
to distribute 2% Minoxidil Solution because Global Vision experienced lackluster sales for this
product.132
Because the requisite approval information was not forthcoming from either
Global Vision or Hi-Tech, the Examiner’s counsel contacted the FDA directly and was told that
Hi-Tech was not approved to manufacture or market 2% minoxidil solution for women, although
it would be fairly easy to get that approval.133 The Examiner reported this outcome to the Court
at the April 8, 2008, status conference. Later that day – almost four months after the first request
for all FDA regulatory filings, approvals, and correspondence – Global Vision sent to the
Examiner a March 2005 letter from the FDA to Hi-Tech, indicating FDA approval of a
supplemental request for approval for 2% minoxidil solution for women (the “March 2005 FDA
Letter”). Counsel for the Examiner provided a copy of the March 2005 FDA Letter to the FDA,
which confirmed that contrary to the information provided earlier, Hi-Tech did obtain the
requisite approval for the manufacture of 2% Minoxidil Solution (for Women and Men), and
FDA modified the Orange Book accordingly.134
132
Edelson Dep. Tr. at 39-40. The Avacor website no longer offers 2% Minoxidil Solution.
133
Banuelos Decl. ¶ 5.
134
When the FDA approved Hi-Tech’s supplemental application, it directed Hi-Tech to revise its
warnings on the label regarding the product risk for women who are pregnant or breast feeding. See
March 2005 FDA Letter. The package insert for the Avacor 2% Minoxidil Solution provided by Global
Vision to the Examiner does not have this language. Dix Ex. 73. Were Global Vision to decide to sell
the 2% product again, Hi-Tech would have to revise the label accordingly.
49
B.
Promotional Labeling and Advertising of Avacor Products
The FDCA specifically defines the terms “label” and “labeling.” A “label” is “a
display of written, printed, or graphic matter upon the immediate container of any article.”135
Under 21 U.S.C. § 201(m), “Labeling” means “all labels and other written, printed, or graphic
matter (1) upon any article or any of its containers or wrappers, or (2) accompanying such
article.”
The courts have refined the statutory definition, particularly the meaning of
“accompanying” printed materials. The Supreme Court has held that circulars and pamphlets
distributed to consumers of a health food product were “labeling” under the FDCA, despite the
fact that these materials did not physically accompany the health food product when it was
shipped in commerce.136 Thus, printed materials are “labeling” when the product and the printed
materials have been distributed to promote the sale of a product as part of an integrated
commercial transaction.
The FDA often refers to two separate categories of labeling: (a) the official
approved labeling, or package insert; and (b) promotional labeling. Approved labeling is the
labeling that the FDA approves through an NDA, ANDA, or other supplemental application
prior to dissemination.137 Promotional labeling is all other labeling, which FDA generally does
not approve prior to dissemination.138
135
See 21 U.S.C. § 321(k).
136
See Kordel v. United States, 335 U.S. 345 (1948).
137
See 21 C.F.R. § 314.50(3) (2)(ii); C.F.R. § 314.94(a)(8) (including the requirement that approved
generic drug labeling be shown to be the same as the approved labeling of the reference pioneer drug).
138
See 21 C.F.R. § 314.81(b)(3)(i); cf 21 C.F.R. 314.70(b)(2)(v).
50
Labeling for OTC drugs is specifically governed by FDA regulations in 21 C.F.R.
§§ 201.60 – 201.72. For OTC drugs, the FDA has adopted a specific format (generally called the
“Drug Facts” box) that must be used for the retail package.139 These requirements apply to “[t]he
outside container or wrapper of the retail package, or the immediate container label if there is no
outside container or wrapper.”140 Other OTC drug labeling must contain statutorily required
information (e.g., directions for use and warning),141 but need not be in the format specified in
the regulation.
Information required on the “label” must be repeated on any outer retail
container,142 but need not be repeated in broader “labeling,” such as detailing pieces, retail
brochures, and free-standing-inserts.
There are several ways in which failure to comply with statutory labeling
requirements causes a drug to be “misbranded” and, thus, subject to enforcement action by FDA.
A drug is considered misbranded if, among other things, its label:
(a)
is false or misleading “in any particular”;143
(b)
fails to bear the name and place of business of the manufacturer,
packer, or distributor and an accurate statement of the quantity of
its contents;144
(c)
fails to present required information so that such information can be
read and understood by an ordinary individual under customary
conditions of purchase and use;145
139
See 21 C.F.R. § 201.66.
140
See 21 C.F.R. § 201.66(c).
141
See 21 U.S.C. § 352(f).
142
See 21 U.S.C. § 321(k).
143
See 21 U.S.C. § 352(a).
144
See 21 U.S.C. § 352(b).
51
(d)
fails to comply with certain labeling requirements for use of
established drug names;146
(e)
fails to bear adequate directions for use or adequate warnings
against unsafe use;147
(f)
renders the drug dangerous to health when used in accordance with
directions;148 and
(g)
fails to reveal material facts.149
Unlike prescription drugs, the FDA shares responsibility for the regulation of
OTC drug promotion with the FTC. Under an FDA-FTC memorandum of understanding, the
FTC has primary jurisdiction over advertising for OTC drugs, and the FDA has primary
jurisdiction over promotional labeling, the latter being defined for this purpose as any written
material accompanying the drug.150 The FDA reserves the right to consider advertising to
determine whether a company is promoting an OTC drug outside its FDA approved uses,151 but
otherwise the FTC has oversight responsibility for the advertising. The same is true with respect
to cosmetics and dietary supplements.
145
See 21 U.S.C. § 352(c).
146
See 21 U.S.C. § 352(e).
147
See 21 U.S.C. § 352(f)(l)-(2).
148
See 21 U.S.C. § 352(j).
149
See 21 U.S.C. § 321(n).
150
See 36 Fed. Reg. 18539 (1971).
151
See McNeilab, Inc. v. Heckler, Food Drug Cosm. L. Rep. ¶ 38,317 at 39,787 (D.D.C. 1985).
52
The FTC regulates OTC advertising based on the FTCA, which prohibits “unfair
or deceptive acts and practices” and “false advertising.”152 False advertising is in turn defined as
advertising that “is misleading in a material respect.”153 The FTC standard for substantiating
claims is “competent and reliable scientific evidence.”
Competent and reliable scientific
evidence means:
tests, analyses, research, studies, or other evidence based on the expertise
of professionals in the relevant area that has been conducted and
evaluated in an objective manner by persons qualified to do so, using
procedures generally accepted by others in the profession to yield accurate
and reliable results.154
In the 2003 FDA Warning Letter, the FDA found various labeling and advertising
claims made by Global Vision to be in violation of the FDCA.155 Global Vision provided the
Examiner with copies of what Dr. Edelson testified were its current advertisements.156
In
addition, the Examiner reviewed the Avacor website and did an internet search for and reviewed
the websites of third-party distributors of Avacor products. Although it appears that Global
Vision has revised the labels and advertising of its Avacor products significantly following
receipt of the 2003 FDA Warning Letter, as of March 1, 2008, Global Vision continued to make
152
See 15 U.S.C. §§ 45 & 52.
153
See 15 U.S.C. § 55.
154
See, e.g., In the matter of Jordan, McGrath, Case & Taylor (FTC Docket No. C-3684) (Sept. 18,
1996).
155
Edelson Ex. 23.
156
Edelson Ex. 29; Edelson Dep. Tr. at 565, 568. The Examiner is not confident that all of the
current advertising has been provided to her, particularly given the piecemeal and incomplete production
by the Debtor and the testimony and statements of Dr. Edelson, which have been inconsistent in more
than one respect. In addition, Dr. Edelson is not responsible for marketing and advertising, Edelson Dep.
Tr. at 84; rather, Mr. Imbriolo was designated as Global Vision’s Rule 30(b)(6) witness on this subject,
but failed to present himself for his deposition (in any capacity).
53
or allow to be made certain claims that the FDA specifically found to be prohibited under the
FDCA. Furthermore, in recent print ads and a television spot Global Vision is planning on
running shortly, the company makes at least one new claim about Boost, a non-drug cosmetic
product, that potentially could be viewed as misleading under FTC rules.
1.
The labeling of and advertising for Global Vision’s 5% Minoxidil Solution is not
entirely in compliance with FDA regulations. In particular, although the language on the bottle
of the 5% Minoxidil Solution manufactured by Perrigo appears to comply with the FDCA, the
brochure accompanying the bottle does not.157 Specifically, the brochure identified by Dr.
Edelson as “current,” and which accompanies the product, states that the product is “Proven to
Fight Hair Loss” and is a “topical medication which retards further hair loss.”158 Similar claims
are made with respect to 5% Minoxidil Solution on the Global Vision website (which
incorporates the brochure language). The Avacor 5% Minoxidil Solution, however, is only
approved to regrow hair, not prevent hair loss.159 Notably, the product documentation provided
by Rexon to the FDA does not make this claim.160 Deletion of this claim from the brochure
157
A product brochure, like the package insert here, is deemed labeling not advertising, and thus,
falls under the strict FDA labeling rules.
158
Edelson Exs. 24 and 25; Edelson Dep. Tr. at 121-22; Dix Ex. 73.
159
Edelson Ex. 10 (Approved Label). Propecia (finasteride), approved by the FDA to treat hair loss,
does not contain minoxidil and is different from the solutions marketed by Global Vision. See
http://www.propecia.com.
160
Edelson Ex. 60. When confronted with this language Dr. Edelson defended it stating the
language was “taken right off the boxes approved by the FDA.” Edelson Dep. Tr. at 125. Dr. Edelson is,
however, mistaken. The box does not make this claim. Edelson Ex. 10.
54
accompanying the product and the website should be easily accomplished so that the label and
advertising are brought into compliance with applicable regulations.
The Examiner was not provided with samples of either the 5% Minoxidil Solution
or the 2% Minoxidil Solution manufactured by Hi-Tech, and therefore cannot determine whether
the labels and/or the brochures accompanying these products are in compliance with applicable
federal statutes and regulations, although the Hi-Tech label is purported to be modeled after the
Perrigo label approved by the FDA.161 The Examiner cannot, therefore, definitively state that the
product labeling for those products fully complies with federal law.
2.
2% Minoxidil Topical Solution
The package insert for the 2% Minoxidil Solution manufactured by Hi-Tech162
that Dr. Edelson identified in his deposition testimony as the current labeling163 does not contain
the language, specifically requested by the FDA in the March 2005 FDA Letter to Hi-Tech,
cautioning women that the drug “may be harmful if used when pregnant or breast feeding.”
Were Global Vision to revisit selling this product, the label would need to be corrected
accordingly.
161
Global Vision provided only samples of 5% Minoxidil Solution manufactured by Perrigo and a
copy of the packaging insert for 2% Minoxidil Solution manufactured by Hi-Tech, but no samples or
other packaging.
162
Dix Ex. 73.
163
55
3.
Shampoo “Improving Absorbency”
Certain labeling and advertising claims for Global Vision’s Avacor “Scalp
Detoxifying Shampoo” are also problematic because they suggest that the shampoo is intended
for use in the treatment of disease, or to affect the bodily structure or function, thus rendering an
otherwise cosmetic product a non-approved drug.
Section 201(g)(1) of the FDCA defines “drug” as follows:
(A)
articles recognized in the official United States Pharmacopoeia,
official Homeopathic Pharmacopoeia of the United States, or official National
Formulary, or any supplement to any of them; and
(B)
articles intended for use in the diagnosis, cure, mitigation,
treatment, or prevention of disease in man or other animals; and
(C)
articles (other than food) intended to affect the structure or any
function of the body of man or other animals; and
(D)
articles intended for use as a component of any article specified in
clause (A), (B), or (C). . . .164
The FDA takes the position that labeling or advertising claims that a product “[a]ugments a
particular therapy . . . that is intended to treat, cure, or prevent a disease” or otherwise “affect
the structure or any function of the body of man” renders the product a drug rather than a
cosmetic and, thus, requires the product to be approved pursuant to an NDA or ANDA before it
is marketed.
Indeed, the most important characteristic about the definition of a “drug” is the
reference to its “intended” use. If any product is “intended for use in the diagnosis, cure,
mitigation, treatment, or prevention” of disease or is “intended to affect the structure or function
164
See 21 U.S.C. §201(g)(1).
56
of the body,” it is a drug. In general, the intended use of a product is always derived from “the
objective intent of the persons legally responsible for the labeling of drugs.”
It is well
established that objective intent may be determined from the product’s “label, accompanying
labeling, promotional claims, advertising, and any other relevant source.”165
In a recent third party internet ad for “SpaLook” and in the product brochure,
claims are made that the Avacor “Detoxifying Shampoo” assists in the use of the minoxidil
topical solutions by increasing the absorbency of the drug.166
The absorbency claim was
identified as problematic in the 2003 FDA Warning Letter, in which the FDA complained that
the claim rendered the shampoo a “drug under section 201(g) of the Federal Food, Drug and
Cosmetic Act” because it purported, among other things, to act “as a synergistic agent for the
Physician’s Topical Formula.”167 Thus, by linking the use and effectiveness of the DeToxifying
Shampoo and the 5% Minoxidil Solution together, Global Vision’s claim brings the shampoo
within the definition of a drug, intended to help promote hair regrowth by enhancing or fostering
the action of the topical solution. To bring this product squarely back into the cosmetic category,
these claims should be deleted from the brochure and website.168
165
See 21 C.F.R. § 201.128.
166
Edelson Exs. 25 and 30; Dix Ex. 73.
167
Edelson Ex. 23.
168
Dr. Edelson admitted that the absorbency claim in the current brochure was a “glaring error” and
not in compliance with the FDA’s 2003 directive. Edelson Dep. Tr. at 577-78.
57
4.
Nutricap as DHT Blocker
As with cosmetics, the classification of a product as a dietary supplement under
the Act does not preclude its ultimate classification as a drug.169 Structure/function claims are
claims in food labeling that describe the effect of a substance on the normal structure or function
of the body. Such claims may not expressly or impliedly claim to diagnose, cure, mitigate, treat,
or prevent, or reduce the risk of, a disease or health-related condition or restore or repair bodily
structure or functions in humans, or they will render the product a drug. Notably, the FDCA
defines a structure/function claim for dietary supplements as a statement that:
describes the role of a nutrient or dietary ingredient intended to affect the
structure or function in humans, [or] characterizes the documented
mechanism by which a nutrient or dietary ingredient acts to maintain such
structure or function. 170
169
See, e.g., 21 C.F.R. § 101.93(g)(2)(vii) (in the dietary supplement context, FDA regulations
specifically find that claims that a product “[a]ugments a particular therapy or drug action that is intended
to . . . treat, cure, or prevent a disease” renders that product a drug); see also United States v.
Undetermined Quantities of An Article of Drug Labeled as “Exachol,” 716 F.Supp. 787, 791 (S.D.N.Y.
1989); 21 U.S.C. § 321(ff).
170
See 21 U.S.C. 343 (r)(6)(A); see also Regulations on Statements Made for Dietary Supplements
Concerning the effect of the Product on the Structure or Function of the Body; Final Rule; 65 Fed. Reg.
1000, 1008 and 1033 (Jan. 6, 2000). Manufacturers making structure/function claims for dietary
supplements are required to submit a notification to FDA within 30 days of marketing the product with
the claim. Manufacturers also are required to have scientific evidence to substantiate that the claim is
truthful and not misleading. Claim substantiation is a significant issue and can lead to regulatory
enforcement action if claims are not sufficiently proved. The FDA applies a substantiation standard for
structure/function claims that is consistent with the FTC’s standard of “competent and reliable scientific
evidence.” See Guidance for Industry: Substantiation for Dietary Supplement Claims Made Under
Section 403(r)(6) of the Federal Food, Drug, and Cosmetic Act, Draft Guidance (Nov. 2004). Finally, if
a dietary supplement label bears a structure/function claim, it must also bear a disclaimer, as follows:
“This statement has not been evaluated by the Food and Drug Administration. This product is not
intended to diagnose, treat, cure, or prevent any disease.” See 21 U.S.C. § 343(r)(6)(C).
58
The Examiner’s investigation revealed that a Global Vision third-party distributor
of Nutricap continues to market Nutricap with claims that would render the product a drug under
the FDCA and that Global Vision employees continue to refer to Nutricap as a DHT blocker:
(a)
a claim from the January 3, 2008 website run by Livemercial,171 an
authorized third-party vendor for Global Vision, states: “Our allnatural supplement . . . is designed to promote a healthy hair
follicle by helping to block the formation of DHT at the hair follicle
itself.”172
(b)
A June 12, 2007, response by Global Vision’s customer service to
the Attorney General for the State of Alabama regarding a refund
claim refers to Nutricap as “DHT-Nutricaps.” 173
When these claims were pointed out to Dr. Edelson during his deposition, he acknowledged that
claiming that Nutricap was a DHT blocker was prohibited by the FDA and advised that he would
correct the problem.174 A review of the Livemercial website on March 31, 2008, revealed that it
no longer advertises the Nutricap product.
5.
Boost
Global Vision markets a cosmetic product called “Boost,” which is a hair gel
designed to thicken hair. Print advertisements175 and a recent television commercial purport to
171
www.AsSeenOnTvNetwork.com.
172
Edelson Ex. 32 (emphasis added).
173
This is consistent with certain of Global Vision’s internal documents, which refer to Nutricap as
“Avacor-DHT.” Edelson Ex. 27.
174
Edelson Dep. Tr. at 143-44, 180-81.
175
The print advertisement is over a year old; Dr. Edelson testified Global Vision has not run print
advertisements during the last year. Edelson Dep. Tr. at 160.
59
show “before” and “after” pictures, demonstrating the effectiveness of Boost.176 The “before”
picture shows an almost entirely bald spot on a man’s head, which virtually disappears in the
after shot – one minute after the application of Boost. Although Dr. Edelson testified he saw this
occur to another person’s bald spot after application of the product, and provided the Examiner
with the names of that person and the photographer, he did not have any clinical data to support
the claim.177 Since the Examiner was not present during the application of the product or the
taking of the photographs, she cannot opine on the veracity of the claim, but the pictures strain
credulity.
6.
“Synergistic” Selling
As stated above, in the 2003 FDA Warning Letter, the FDA advised Global
Vision that it could not promote its cosmetic products and dietary supplements as working
synergistically with the drug products to enhance the minoxidil solution, without rendering the
non-drug products unapproved drugs.
Global Vision no longer markets its products as a
“system” or as “Step 1, Step 2, Step 3.” Global Vision also has produced evidence of individual
product sales.178 Nevertheless, in response to the Department of Justice Montana Office of
Consumer Protection inquiry regarding a consumer complaint that the topical solution did not
work, an employee of Global Vision attributed the ineffectiveness to the fact that the customer
176
Edelson Exs. 80, 84, 85 and 86.
177
Edelson Dep. Tr. at 555-60, 572.
178
Edelson Ex. 27.
60
was “only using one portion of the products needed for hair regrowth.”179 During his deposition,
Dr. Edelson acknowledged that this did not comply with the directives in the 2003 FDA Warning
Letter.180 Dr. Edelson further acknowledged that Global Vision lacked written guidelines in
place for customer service personnel.181
In conclusion, the Examiner believes that Global Vision’s labels and
advertisements can easily be brought into compliance with FDA and FTC regulations by deletion
of these claims; nevertheless, appropriate internal controls must be instituted – including the
creation (with the help of regulatory counsel) of written protocols and guidelines for marketing
Global Vision products and responding to consumer inquiries as well as implementation of a prepublication legal review process for advertisements and marketing materials.
C.
Health and Safety Concerns/Adverse Event Reporting/Internal Controls
1.
Health and Safety Issues
The Examiner has seen no evidence that the products currently marketed by
Global Vision products pose serious health and safety risks. Nevertheless, the Examiner’s
investigation was hampered in this area because Global Vision did not provide her with any
adverse event reports (required to be filed periodically with the FDA) or all internal documents
or tape recordings related to consumer complaints. Accordingly, the Examiner cannot state with
179
Edelson Ex. 26.
180
181
61
certainty that there are absolutely no unexpected health or safety concerns particular to Global
Vision’s products.
Global Vision did provide the Examiner with over 230 consumer complaints from
the period of 2005-2007 from Better Business Bureaus, States’ Offices for Consumer Protection,
and several States’ Attorney Generals’ Offices. The Lustigman Firm (Global Vision’s regulatory
counsel) also provided the Examiner with a few complaints that were made to the FDA by
consumers (obtained pursuant to a FOIA request), as well as correspondence from attorneys for
prospective plaintiffs claiming injury caused by a Global Vision product.182 In addition, the
Examiner made a FOIA request of the FTC for documents related to Global Vision and received
a handful of complaints filed by consumers.
The vast majority of all of these complaints involved failure to satisfy refund
demands, but approximately 20 of such complaints alleged adverse events. Most of the adverse
events dating from 2003 forward, when Global Vision started operating under an ANDA, were
skin rashes, an adverse event identified on the product label. A handful of the complaints
reported adverse events, such as loss of hair in clumps and a severe burning sensation, not listed
on the product label183 and more than one consumer complained that the sales representative
informed the consumer that the topical solution did not contain minoxidil.184
182
None of these appear to have resulted in any significant damages and were referred to Global
Vision’s liability insurer. Dix Dep. Tr. at 398; Lustigman Interview Memo at 5-6.
183
Edelson Exs. 75, 76, 77, 78.
184
Until recently, Global Vision utilized outside call centers (Triton, Powertel, and West) to take
customer orders. This function has been brought in-house. The failure to inform the consumer that the
topical solution contains minoxidil, however, presents more of a refund issue than a health and safety
issue because this ingredient is broadly disclosed on the packaging of the product.
62
2.
Adverse Event Reporting
Under the FDCA, OTC ANDA holders are required to report to the FDA serious
adverse events of which it learns within 15 days and “non-serious” adverse events annually.185
An adverse event is defined as “any adverse event associated with the use of a drug in humans,
whether or not considered drug related.”186 Serious adverse events are defined as those that are
life-threatening, incapacitating or requiring lengthy hospitalization.187 The Examiner has seen no
evidence of serious adverse events associated with the use of Global Vision products.
Adverse event reports are required so that the FDA can monitor whether
regulated products (or their manufacturing process) present health or safety issues. Should the
FDA determine that a health or safety issue exists, it can take action ranging from requiring that
the drug be withdrawn from the market to simply adding precautionary language on the
product’s label warning the consumer of the new potential side effect.188 Where the reported side
effects reported are also noted on the product label but the number of reported events is greater
than expected, the FDA can conduct a site visit of the manufacturing facility to see if the process
being used, or the facility itself, requires remedial action to ensure the safety of the product.189
Thus, it is not only unexpected side effects that must be reported; rather, reports of anticipated
185
See 21 C.F.R. § 314.80(a), 314.80(c)(2).
186
See 21 C.F.R. 314.80(a).
187
See 21 C.F.R. 314.80(c)(1)(i).
188
See 21 U.S.C. §§ 355(e), (k)(1); 21 C.F.R. § 314.150.
189
See 21 U.S.C. § 374(a)(1).
63
potential side effects also must be reported even though noted on the drug’s label.190 Similarly, it
is not up to the ANDA holder (or its licensee) to determine whether the reaction reported is
actually caused by the drug; that responsibility lies with the FDA.
All adverse events
occurrences that come to the attention of the ANDA holder (or licensee), whether believed to be
caused by the drug or not, must be reported.191
Rexon, as the ANDA holder for the 5% Minoxidil Solution manufactured by HiTech was, and continues to be, responsible for reporting adverse events regarding that product.
The supply agreements between Global Vision and Hi-Tech and Global Vision and Perrigo
suggest that the manufacturers were responsible for all filings with the FDA,192 but other
provisions within those agreements require Global Vision to notify Hi-Tech and Perrigo “in
writing” of any adverse events.193
Dr. Edelson is responsible for the adverse event reporting function. It is clear,
based on his testimony, that there is little to no adverse event reporting system in place at Global
Vision. When asked to describe the review and reporting system for adverse events at Global
Vision, Dr. Edelson stated that he was the system.194
There is no written protocol in place;
rather, Dr. Edelson relies upon his secretary and the sales representatives, most of whom are not
190
See 21 C.F.R. § 314.80(c)(2).
191
See 21 C.F.R. § 314.80 (a) (definition of “Adverse drug experience”).
192
Edelson Exs. 20 and 12, respectively.
193
Edelson Ex. 20, ¶ 4(g) and Ex. 12, ¶ 9. If, as in the case of Perrigo and Hi-Tech, the
manufacturing facility assumes the adverse event reporting responsibility with respect to the FDA,
Rexon/Global Vision’s responsibility is to submit reports of any adverse events of which it becomes
aware to that facility.
194
64
medically trained, to inform him of consumer complaints relating to health and safety. No
written instructions were provided to the call centers to provide him with this information;
instead, Global Vision relied on the call centers to tell him about any complaints they received,
assuming that the telemarketing personnel were trained by the call centers.195
Significantly, Dr. Edelson also testified that he would make the determination as
to whether a safety issue warranted being reported to the FDA as an adverse event.196 As a
result, adverse event occurrences do not appear to have been reported to the FDA. Indeed, Mr.
Dix recounted that it was Dr. Edelson’s position that hair loss complaints were related to the
“growth cycle” and not the product and, thus, there was no need to report the adverse event.197
Mr. Dix also testified that it was his belief that rashes would not be reported by Dr. Edelson.198
Dr. Edelson confirmed that he often spoke with the consumer, but did not report events, such as
those claiming an “itchy scalp,” believing that such claims did not necessarily indicate an
195
Edelson Dep. Tr. at 77-79. The Examiner was advised by the Debtor’s regulatory counsel,
however, that he had prepared a “Do’s and Don’ts” memorandum for Global Vision to provide to its call
center. See April 22, 2003 Letter from Andrew Lustigman to Craig Dix, noting that due to “recent
regulatory scrutiny . . . Global Vision needs to ensure that its marketing partner’s advertising is
scrutinized regarding the following types of claims.” Almost all of the references listed pertain to the
synergy issues raised in the 2003 FDA Warning Letter; neither the absorbency nor the DHT blocking
claims are addressed. Moreover, it is unclear whether this document was ever provided to any call
centers. According to Dr. Edelson, no written guidance was ever provided to the call center. Edelson Ex.
24; Edelson Dep. Tr. at 135-36.
196
Edelson Dep. Tr. at 45-48, 71-83, 133.
197
198
Id. at 402.
65
adverse reaction.199 As noted above, even anticipated adverse events listed on the product must
be reported to the FDA, albeit on an annual basis.
In spite of over 20 adverse reaction complaints admittedly received over the 20052007 period by Global Vision, all of which should have been reported to the FDA, Dr. Edelson
testified in the California Action that there have been no adverse events, and therefore Global
Vision has never reported any.200 When deposed by the Examiner’s counsel, Dr. Edelson’s
testimony differed: he testified that he made two such reports to the FDA.201 Mr. Lustigman
also recalled advising Dr. Edelson to report a consumer complaint as an adverse event. Global
Vision’s failure to produce any such reports, however, forces the Examiner to draw the inference
that no such reports exist.202
3.
Lack of Internal Controls
Global Vision lacks sufficient internal controls. As noted above, Global Vision
does not maintain a written adverse event reporting protocol to report potential health issues to
199
200
Boyd v. Global Vision Products, Inc., Case No. RG 03-091195; Edelson Dep. Tr. at 60-61.
201
Edelson Dep. at 80-81.
202
Document Request No. 6 of the 2004 Document Requests specifically requested that Global
Vision produce any such documentation. Although Dr. Edelson confirmed in his testimony that Global
Vision was obligated to supply adverse event information to Perrigo, Edelson Dep. Tr. at 70-71, no copies
of such reports were produced to the Examiner. In addition, although Dr. Edelson testified that consumer
calls to Global Vision were taped and that he, himself, would make notes of calls that relayed health or
safety issues, neither the tapes nor his notes were produced in spite of his promise to do so. Edelson Dep.
Tr. at 76-77, 148-49. Mr. Dix, however, testified that he thought some reports were made. Dix Dep. Tr.
at 398-99.
66
the FDA.203
Global Vision also does not have a systematic review process requiring pre-
publication legal review of all advertisements and marketing materials to ensure FDA and FTC
compliance.204 Although there is some review of proposed advertisements by legal counsel for
Global Vision, it appears that Global Vision does not ask counsel to review all advertising.
Global Vision also lacks sufficient controls to monitor the claims being made by authorized third
parties who advertise Avacor products on the web.205 Finally, Global Vision does not appear to
systematically train and monitor its sales and customer service representatives,206 nor do any
203
The failure to have a complaint handling procedure, to maintain complaint records, and to
investigate complaints are all violations of the cGMP regulations, 21 C.F.R. 211.198, and thus a violation
of 21 U.S.C.§351(a)(2)(B) (adulteration). The failure to maintain those records required by the new drug
regulations and make reports violates 21 U.S.C. §355(k).
204
Testimony and witness statements regarding pre-publication legal review of Global Vision’s
advertising and marketing efforts were inconsistent. Dr. Edelson testified that regulatory counsel for
Global Vision reviewed all ads pre-publication. Edelson Dep. Tr. at 162, 164, 169, 565-66. Mr. Dix,
however, testified that sometime after the Lustigman Firm was retained and corrected the “contentious
language” of which the FDA complained, Global Vision did not necessarily pre-clear subsequent
advertisements with counsel. Dix Dep. Tr. 386-87. Regulatory counsel, when interviewed, confirmed
that he was not provided everything to review, had not reviewed the Avacor website in some time, and
reviewed only the script for the currently proposed television advertisement, and thus, did not see the
actual film. The Examiner finds Mr. Dix’s testimony, confirmed by Mr. Lustigman’s statement, to be
more credible than Mr. Edelson’s testimony.
205
Both Dr. Edelson and regulatory counsel for Global Vision acknowledged that there is no
systematic review process in place for monitoring authorized third party websites or for determining
whether any third party was marketing Avacor products without authorization. Edelson Dep. Tr. at 57,
137, 173, 181-82. Indeed, Dr. Edelson was not aware of whether a third-party website currently listing
Avacor products was authorized to do so, Edelson Dep. Tr. 173-74 and was unaware of an inappropriate
claim made by a different authorized third-party website (Edelson Dep. Tr. at 180-81).
206
Before Global Vision moved its sales operations in-house, it primarily utilized outside call centers
to take customer orders and respond to inquiries. Mr. Dix described the training at the call center as
“basically they would read up on literature on the product and they would listen to other people selling the
product and that was the process of training,” although a script created with input from Mr. Imbriolo and
Dr. Edelson was provided. Dix Dep. Tr. at 381-83. Mr. Dix also testified that the customer service
representatives at Global Vision were trained by Latisha Urban, but he could not recall any instance of
training or documentation provided other than “listening to what other people were saying.” Dix Dep. Tr.
at 390-94. Dr. Edelson summarized the training as providing the call script discussed above, Edelson Ex.
(continued…)
67
written compliance guidelines exist to ensure that these employees do not run afoul of federal
statutes and regulations by making inappropriate product claims.207
In conclusion, to ensure compliance with federal statutes and regulations, Global
Vision must create (with the assistance of regulatory counsel) and implement robust internal
controls.
VII.
A.
The Claims Inquiry
The Facts
Global Vision’s response to the Examiner’s requests for information about the
loans to shareholders was deficient and misleading. In her investigation, therefore, the Examiner
relied principally on an analysis of Global Vision’s general ledgers and information provided by
Ms. Martino – whom the Examiner perceived to be a credible witness.208
Ms. Madden
maintained Global Vision’s books and records in general ledgers using QuickBooks software.
After her departure in mid-2004, the software failed and Ms. Martino substituted Peachtree
software, but the general structure of the ledgers remained largely unchanged.209 A separate
ledger was generated and maintained for each calendar year. Each ledger contained accounts
reflecting Global Vision’s bank accounts and which reflected the payments in and out of the
company. In addition, the ledgers contained separate accounts established to capture transactions
28, but admitted there was no system in place to monitor the calls other than his happening to overhear a
call. Edelson Dep. Tr. at 147-51. This limited training is insufficient when selling regulated products,
particularly where specific promotional claims can violate the law.
207
208
The Examiner gleaned additional facts relating to transfers from the Magistrate’s Report in the
Upjohn matter.
209
68
relating to specific areas of Global Vision’s business, including payroll, advertising, returns,
taxes, rent, and various operating expenses. They also included accounts in which transactions
related to loans to shareholders were collected. Ms. Martino testified that Ms. Madden attempted
to identify all transfers made to or for the benefit of the shareholders and to include them in the
loans to shareholder account. Although Ms. Martino expressed reservations about Ms. Madden’s
lack of accounting background, she believed that Ms. Madden allocated transfers between
business and personal accounts honestly and to the best of her ability.210
The Examiner had the ledgers converted to searchable PDF files to facilitate her
review. Not all of the text in the ledgers was successfully converted to searchable text, and it is
therefore possible that some transfers may have been missed, although the Examiner had crosschecks run to minimize this risk. The Examiner recommends that anyone prosecuting these
claims on behalf of the estate be supported by forensic accounting expertise, and that Global
Vision be ordered to provide access to all materials underlying the ledgers.
To verify the accuracy of the loans to shareholder accounts, the Examiner caused
searches to be run of each of the ledgers for the names of the insiders and of the entities
associated with them, and compared the results of those searches with the loans to shareholder
210
Martino Dep. Tr. at 40-41, 146-47. See also DeBenedictis Dep. Tr. at 191-192 (referring to the
sloppy accounting and payment practices that characterized Global Vision’s finances: “Nothing is done
according to the way it’s supposed to be done.”). Ms. Martino testified that Ms. Madden, who set up and
maintained the ledgers from 2000 through July 2004, “was not really even a bookkeeper,” “she never
used a balance sheet because she didn’t know how.” Martino Dep. Tr. at 24.
69
accounts. The Examiner determined that most, but not all, of the transfers to or for the benefit of
the insiders were collected in the loans to shareholder accounts in the general ledgers.211
Ms. Martino testified that not all of the transfers to shareholders made in 2003
may be captured in the 2003 ledger. For a period in 2003-2004, Ms. Madden was instructed by
counsel representing Global Vision either in the Upjohn litigation or the class action litigation
not to open the bank statements or to reconcile the ledger to the statements; as a result the ledger
211
There are several reasons why Examiner cannot be certain that all of the improper transfers to or
for the benefit of the insiders have been identified. First, the Examiner did not learn of the Magistrate’s
Report until after the deposition discovery was complete; accordingly, there was no opportunity to make
inquiries of Mr. DeBenedictis about the $330,000 which Mr. Imbriolo stated was “lent” to Mr.
DeBenedictis from Global Vision funds in the Bank of Ireland account or to ask Dr. Edelson about the
various aspects in which his testimony in the Upjohn case differed from his testimony to the Examiner.
Second, some of the vendors that Global Vision contracted with for legitimate business expenses were
also used by the Maltas for their unrelated businesses. For example, the Maltas own a construction
company called E&F Construction, which did work at Global Vision’s offices but also did work for the
Maltas’ restaurants and in Mr. DeBenedictis’s apartment. DeBenedictis Dep. Tr. at 71-72. Entries for
E&F Construction appear in the Malta loan accounts, but also additional entries appear elsewhere in the
ledgers. Similarly, Ms. Martino testified that Global Vision used City Air, an air conditioning service
provider, for its offices, but that the Maltas also used it for their restaurants. Martino Dep. Tr. at 60.
There are some City Air references in the Malta loan accounts, indicating that Robert Malta directed
Global Vision funds to pay air conditioning expenses of his other businesses, but again there are
additional entries in the general ledger that are not captured in the Malta loan account. These may all
have been legitimate business expenses of Global Vision, but without seeing the underlying invoices, it is
impossible to be sure. Although it appears that most of the large transfers were captured in the
shareholder accounts, there may be other instances in which what appears to be a legitimate Global
Vision business expense actually was an expense of an unrelated party paid by Global Vision on behalf of
one of the insiders. Third, a number of the insiders used American Express cards provided by the
company. It is not possible to be sure that all of the personal charges have been captured in the loan
accounts without seeing the underlying documentation. Finally, Ms. Martino testified that the 2003
ledger and possibly the 2004 ledger may be inaccurate in some respects because for a period of time the
ledger was not reconciled with the bank statements. She identified five checks which she knew Mr.
DeBenedictis had received but that did not show up on the ledgers. Martino Dep. Tr. at 316-19. Without
seeing the bank statements, check ledgers and the cancelled checks (none of which were provided to the
Examiner), it is impossible to determine whether there were additional transfers either not on the ledger or
not identified on the ledger in a way that revealed that they were transfers to insiders.
70
for some part of that year is incomplete.212 Moreover, as noted above at some point the ledger
software became corrupted,213 although it is not possible to tell whether that has damaged the
data in the hard copies produced to the Examiner.
The Examiner’s review of the ledgers reveals that from 2000 to 2004 at least
$12.5 million in transfers were made to the Maltas or their designees, Mr. DeBenedictis, Ms.
Madden, and to entities owned and/or controlled by Mr. Imbriolo. These transfers, which were
consistently characterized as loans in Global Vision’s books and records, are summarized in a
chart attached as Appendix G thereto.214 Approximately $4.8 million of these transfers have
been returned or repaid.
The Examiner understands from the Magistrate’s Report that
$1,378,000 of the $12 million was spent on the Millbrook house and furnishings, which leaves
approximately $6,300,000 unreturned.
1.
Malta Loans
212
213
214
This total does not include the $65,134.74 from the initial capital that was returned to the Maltas,
Ms. Madden, and Mr. Imbriolo as reflected in the Capital Contribution account in the 2000 general
ledger. Mr. DeBenedictis testified that Global Vision carried the funds transferred to shareholders as
loans because there was uncertainty as to whether Global Vision would elect subchapter S status. As Mr.
DeBenedictis understood it, if Global Vision elected subchapter S status, it would not need additional
funds to pay taxes, and the shareholders would be entitled to retain the funds they had received (which
they would presumably have used to pay their own taxes on Global Vision’s net income). But, if Global
Vision remained a C corporation, it might need to recall the funds to pay its own taxes, in which case it
would be more correct to carry the funds as loans. DeBenedictis Dep. Tr. at 27-30; 122-36. The random
manner in which the funds were transferred to Insiders or others (at their behest) and the use of such
funds belies the notion that the transfers were intended to be distributions for satisfaction of tax liabilities
of S corporation shareholders. In any event, Global Vision never made a subchapter S election, and as the
years passed without making the election, the funds transferred in the prior year could no longer properly
be recharacterized as distributions.
71
Enrico Malta was a shareholder and director of Global Vision. Robert Malta,
however, had no official role with Global Vision – he was never a director, an employee, an
officer or a shareholder.
During a three to four year period (and apparently with the
acquiescence of Global Vision directors),215 Robert Malta told Ms. Madden to transfer
$4,159,422 of Global Vision’s funds to:
•
Robert Malta and various of his family members;
•
Business enterprises that he and his brother owned that were wholly
unrelated to Global Vision, including a warehouse in Long Island
City, restaurants (in some of which Mr. DeBenedictis was also an
investor), a construction company, and an entity called Malta
Enterprises;
•
Vendors for supplies and equipment for the unrelated businesses,
including computer equipment, air conditioning services, and food
for use in the restaurants;
•
Third parties to satisfy his own personal obligations, including his
personal health insurance, to buy an apartment in Miami, to lease a
car, and to pay debts he owed to Mr. DeBenedictis on unrelated
transactions.216
As noted above, in all but a very few cases, the general ledgers reflect transfers to
or on behalf of Robert Malta instead of to Enrico Malta.217 When, in 2004, Mr. DeBenedictis
acquired the shares owned by Enrico Malta, the agreement he signed was with Robert Malta, not
215
See Declaration of Robert DeBenedictis, dated May 14, 2006, filed in the California Action, at 4,
in which Mr. DeBenedictis states that the directors of Global Vision approved the shareholder loans but
that he was unaware that the funds were transferred to third parties as opposed to the individual insider.
See also DeBenedictis Dep. Tr. at 104-05.
216
Martino Dep. Tr. at 32-34; 303-05; Martin Exs. 15-18; Dix Exs. 54-56; DeBenedictis Dep. Tr. at
110-114.
217
The Examiner has identified only four occasions on which the ledger reflects transfers directly to
Enrico Malta. Martino Ex. 14 at 38, 39, 80, 86.
72
with Enrico Malta. Mr. DeBenedictis and Ms. Martino testified that Robert and Enrico Malta
worked together, that Enrico Malta liked to stay in the background, and that they believed Robert
Malta was authorized by his brother to deal with Global Vision.218 Mr. DeBenedictis testified in
the California Action that “[t]he two Malta brothers are considered one. I consider them as one,
so if you talk to one, you are talking to the other. . . . They act jointly.”219
In sum, the Maltas received more than $4 million in direct and indirect transfers
between 2000 and 2004, comprised of almost $1.5 million of direct transfers to Robert and
Enrico Malta, and more than $2.9 million to third parties unrelated to Global Vision. They have
repaid only $221,000 in cash, leaving a net unpaid obligation of $4,051,422.220
2.
Transfers to Imbriolo
Transfers to Chicago Equities and Dublin Press. Global Vision’s ledgers
reflect that $5,757,332 in transfers were made between 2000 and 2003 to two entities referred to
as Chicago Equities and Dublin Press.221 Mr. Imbriolo had sole control over the bank accounts
held by these entities.222 Approximately $4 million of these funds was thereafter transferred
from one or both of these entities to a personal bank account in Ireland owned by Mr. Imbriolo
and over which he also had sole control.223
218
DeBenedictis Dep. Tr. at 14-15, 17; Martino Dep. Tr. at 31, 33-34.
219
220
A summary of the transfers to the Maltas is attached as Appendix H hereto. Mr. DeBenedictis
testified that the checks written to the Maltas’ restaurant vendors have disappeared from Global Vision
files. DeBenedictis Dep. Tr. at 216-19.
221
These transfers are summarized in Appendix I hereto.
222
See Magistrate’s Report at 10, 22.
223
See Magistrate’s Report at 8-9; 12-13.
73
Ownership of Chicago Equities and Dublin Press. Dr. Edelson testified in the
Upjohn litigation that he was not aware of the existence of Chicago Equities and Dublin Press
before the spring of 2004, when he was attempting to discern how Global Vision’s money was
transferred to Mr. Imbriolo’s personal bank account in Ireland.224 Dr. Edelson further testified in
the Upjohn litigation that those entities had not performed services for Global Vision and were
not Global Vision subsidiaries, that Global Vision had no legal or other authority over them, and
had no documents pertaining to them.225 This testimony is inconsistent with the testimony that
Dr. Edelson gave during his deposition by the Examiner, in which Dr. Edelson stated that Mr.
Imbriolo owned Chicago Equities, but that Dublin Press was a Global Vision subsidiary.
There should be no confusion over who owns Chicago Equities, however. Mr.
Imbriolo testified in the Upjohn litigation that he had formed Chicago Equities in the 1990’s,
before he was involved with Global Vision, and that he was its sole owner, and the only person
with authority to withdraw money from or write checks on its bank account.226 The same cannot
be said of Dublin Press, where the testimony is all over the map. Mr. Imbriolo claimed Dublin
Press was a wholly-owned subsidiary of Global Vision, but acknowledged that he was the sole
signatory on its Dublin Press bank account.227
224
225
As noted earlier, Dr. Edelson previously
226
See Magistrate’s Report at 10. In the California Action, however, Mr. Imbriolo testified that
Global Vision owned Chicago Equities, California Imbriolo Dep. Tr. at 101, 178, and he denied any
knowledge about transfers from Global Vision to Chicago Equities (California Imbriolo Dep. Tr. at 17980).
227
Mr. Imbriolo testified that he informed Dr. Edelson that he was depositing Global Vision funds in
a private account “to separate funds so that [Global Vision] would have money to do work in Europe and
(continued…)
74
disclaimed any ownership interest in Dublin Press by Global Vision but has since changed his
testimony and now takes the position that Dublin Press is a subsidiary of Global Vision.228 Ms.
Martino testified that she believed Mr. Imbriolo owned both Chicago Equities and Dublin Press,
based on information she had received from Ms. Madden.229 Ms. Madden testified in the Upjohn
litigation that Dr. Edelson told her in 2004 that Chicago Equities and Dublin Press were Global
Vision accounts, although she had never seen any evidence that Global Vision owned or
controlled those entities.230 Finally, during his deposition by the Examiner, Mr. DeBenedictis
testified that he did not know who held ownership interests in Dublin Press and Chicago
Equities.231
No evidence was provided to the Examiner that Global Vision holds any interest
in Dublin Press. Neither the entity, nor its value, was included in any balance sheet for Global
Vision;232 nor was it included in the Schedule of Assets and Liabilities or the Statement of
Financial Affairs Global Vision filed in this chapter 11 case.233
One thing is clear, however. Anthony Imbriolo, and only Anthony Imbriolo, had
sole control over Dublin Press, its bank accounts, and any funds transferred to it by Global
other ventures.” The Magistrate’s Report does not indicate why it was necessary to separate funds for this
purpose, nor why so much money was needed. Mr. Imbriolo also testified that Dr. Edelson responded
that he could do what he had to do but suggested that Mr. Imbriolo open a new account for the purpose,
and Mr. Imbriolo complied by forming Dublin Press. See Magistrate’s Report at 22.
228
229
230
231
DeBenedictis Dep. Tr. at 25-26.
232
Martino Exs. 8-10; Edelson Exs. 92-95.
233
Edelson Ex. 97.
75
Vision. Ms. Madden testified in the Upjohn litigation that she routinely wrote checks to Dublin
Press and Chicago Equities at Mr. Imbriolo’s direction.
When, on a few occasions, she
questioned Mr. Imbriolo about these transfers, “his ‘standard response’ was that his position as
President and CEO of Global authorized him to take the money, and that it was not Ms.
Madden’s ‘position to question what was going on at Global Vision in that regard.’”234 She
repeatedly told Mr. Malta, and possibly Mr. DeBenedictis, about the transfers, but never told Dr.
Edelson, although he was allegedly the Chairman of the Board and majority shareholder,
“because she felt more comfortable with Malta personally.”235
Transfers to Bank of Ireland Account. Both Mr. DeBenedictis and Dr. Edelson
defended the transfers of funds to Chicago Equities and Dublin Press as having been intended for
expansion in Europe.236 In the Upjohn litigation, Dr. Edelson gave similar testimony, stating that
Mr. Imbriolo set up the Bank of Ireland account as his personal account because he believed that
Irish law hindered Global Vision’s ability to open a corporate account, but that the funds
transferred there were Global Vision’s funds and were to be used for the European expansion.237
The Examiner does not find this testimony credible for the following reasons:
•
On other occasions, when Global Vision attempted to enter a
European market, the funds utilized were sent directly from
Global Vision. For example, Global Vision’s general ledgers
reflect that Global Vision spent approximately $150,000 on
234
235
236
DeBenedictis Dep. Tr. at 75; Edelson Dep. Tr. at 262.
237
76
business activities in Italy, also as part of a European expansion.238
Those funds appear to have been spent for a legitimate Global
Vision business purpose, albeit one that ultimately proved
unsuccessful.239 The amount of money utilized for this venture
was a fraction of the transfers made to Chicago Equities and
Dublin Press. It is not credible that it would take as much as $4.0
million, much less $5.7 million, to fund this proposed European
expansion.
•
The transfers to Chicago Equities and Dublin Press occurred over
a period of several years. Global Vision has not, however,
produced any evidence that any of the funds were actually used for
any legitimate business purpose during this period. Moreover, it
came to light (in the Magistrate’s Report) that over $1.3 million of
these funds were used to purchase and furnish a home in
Millbrook, New York, for the use of Mr. Imbriolo.
•
The funds repatriated from the Bank of Ireland account held in
Mr. Imbriolo’s personal name ($3.5 million) were returned only
after the Upjohn judgment enforcement proceedings were
commenced against Mr. Imbriolo making these funds vulnerable
to levy by Upjohn.
•
Following the return of $3.5 million from the Bank of Ireland,
Mr. Imbriolo demanded that the other shareholders also return
funds to Global Vision or provide collateral to secure the loans
made to them.240 This behavior reveals that Mr. Imbriolo
considered those funds as belonging to him.
•
The loan reconciliation performed by Ms. Martino treats the
transfers to Chicago Equities and Dublin Press as shareholder
loans to Mr. Imbriolo. But, perpetuating the fiction that the
money Mr. Imbriolo advanced to these entities (and then to a
personal account) were not advanced to him, and that he was not a
shareholder, Global Vision placed those amounts in the “Other
238
Edelson Ex. 54 at 103; Dix Ex. 35 at 78, 96, 151, 193, 257, 314, 346; Dix Ex. 15 at 57, 218, 237,
252. See Edelson Dep. Tr. at 340-41.
239
240
DeBenedictis Dep. Tr. at 32, 98.
77
Investment” line on its tax returns for 2000-2003.241 The amounts
on the tax returns, however, were equal to the amounts carried on
Global Vision’s ledgers as Mr. Imbriolo’s share of the loans to
shareholders and bore no relation to the actual value of Chicago
Equities and Dublin Press.242
•
As noted below, Global Vision commenced an action against Mr.
Imbriolo to recover some of these funds (a claim listed in Mr.
Imbriolo’s disclosure statement in the amount of 1.4 million),243
which it later failed to prosecute.
Accounting for the Transfers. Not all of the funds transferred to Chicago
Equities and Dublin Press (at least $5.7 million) have been returned to Global Vision. Contrary
to Global Vision’s representations that all of the money that went to Ireland was returned to it, of
the approximately $4 million that was transferred to Ireland, only $3.5 million was returned. Mr.
Imbriolo testified in the Upjohn litigation that there was an additional $630,000 remaining in the
Bank of Ireland account after approximately $3.5 million was returned to Global Vision in 2003.
Mr. Imbriolo stated that when the account was closed, Global Vision “lent” $330,000 of those
funds to Mr. DeBenedictis and Mr. Imbriolo kept the remaining $300,000, which he stated
belonged to him – Mr. Imbriolo claimed that after he created the account, he transferred between
$240,000 and $300,000 of his own money to it, before putting any of Global Vision’s money in
241
Edelson Exs. 37-40.
242
Edelson Exs. 37-43. Indeed, as he did with other shareholder loans, Chris Skevas, who was
Global Vision’s (and the Maltas’s) outside accountant until 2004 and who prepared the first three years of
Global Vision’s tax returns, deducted approximately $2,726,565.11 of the amount that was originally
carried on Global Vision’s books as a loan to Mr. Imbriolo (i.e., the amounts transferred to Chicago
Equities and Dublin Press), from his loan account as if it had been spent on legitimate business expenses
of Global Vision. See Appendix N. The Examiner, however, has seen no evidence in the general ledger
or otherwise that these funds represented legitimate Global Vision expenses.
243
78
the account, because he had considered moving to Ireland. He testified that since it was his
money, Global Vision permitted him to keep it, and he used it to pay back taxes.244
The Examiner does not find this testimony credible given the magnitude of the
transfers that were made to or for the benefit of Mr. Imbriolo (i.e., the transfer of at least $5.7
million to accounts only he controlled), and his modest salary during the relevant periods.
Further investigation is required to determine whether in fact Mr. DeBenedictis received
$330,000 (which is not recorded on Global Vision’s books and records)245 and whether Mr.
Imbriolo had any ownership interest in the remaining funds.
Mr. Imbriolo further testified that at some point in 2002 or 2003, he transferred
the entire balance in the Chicago Equities bank account to Dublin Press and brought the Dublin
Press account balance to zero by transferring the approximately $360,000 remaining in it to
Global Vision.246 The Examiner has not, however, succeeded in locating a deposit in this amount
on Global Vision’s 2003 general ledger. Nor does it explain what happened to the remaining
funds.
To this date, neither Global Vision nor Mr. Imbriolo have accounted for all of the
funds that were transferred to Chicago Equities and Dublin Press.247 As explained below, some
of these funds are believed to have been used to purchase and furnish the Millbrook Equities
244
245
If Mr. Imbriolo’s testimony in the Upjohn litigation is correct, Mr. Imbriolo and Mr.
DeBenedictis should both be held accountable for the $330,000 said to have been lent to Mr.
DeBenedictis.
246
247
A summary of the transfers to Mr. Imbriolo is attached as Appendix J hereto.
79
house for his benefit. Magistrate Judge Katz found that Mr. Imbriolo “refused to cooperate”
with Global’s efforts to determine what had happened to the discrepancy,248 and Mr. Imbriolo did
not present himself for deposition by the Examiner. Moreover, the Examiner has received no
information from Global Vision concerning the location or disposition of the funds that were
transferred to Chicago Equities and Dublin Press. In particular, Global Vision did not provide
the Examiner the Chicago Equities and Dublin Press bank statements and Global Vision checks
that Global Vision produced in the Upjohn litigation.249
Notably, Dr. Edelson testified during the Examiner’s deposition that he thought
there were only a few hundred thousand dollars that had not been returned by Mr. Imbriolo from
accounts he owned or controlled.250 He denied any knowledge that the discrepancy was greater
than that, even after being shown the disclosure statement from Mr. Imbriolo’s personal
bankruptcy in which Global Vision’s claim against Mr. Imbriolo was said to be $1.4 million.251
Although Global Vision filed a suit against Mr. Imbriolo on July 13, 2004 to ascertain the
location of the funds, retrieve them if possible and determine whether this was an issue of
embezzlement, the lawsuit was stayed by Mr. Imbriolo’s personal bankruptcy and ultimately was
not prosecuted.252 Dr. Edelson further testified that he has given no thought to bringing an action
248
See Magistrate Report at 15.
249
See Magistrate Report at 15 n. 3.
250
251
252
See Magistrate Report at 15; Edelson Dep. Tr. at 259-60; Dix Dep. Tr. at 205-06.
80
to recover the still outstanding amounts even after Global Vision sought chapter 11 relief
itself.253
Appendix I hereto sets forth what appears to be the disposition of the funds
transferred to Chicago Equities and Dublin Press, based on the Magistrate’s Report and Global
Visions’ general ledgers. Appendix J hereto is a chart which outlines all of the funds transferred
to or for the benefit of Mr. Imbriolo and the transfers believed to be outstanding, which
aggregate $1,883,065.
Conversion of $300,000 in Certified Checks. Ms. Martino testified that because
of various tax problems in 2003, Mr. Imbriolo became concerned that the taxing authorities
might levy on Global Vision’s bank accounts, thereby seizing funds with which the company
needed to operate.254 He instructed Ms. Madden to take money out of Global Vision’s bank
accounts by having certified checks issued with Global Vision as the payee.255 An account
captioned “Checks” in the 2003 and 2004 ledgers reflects that a total of $850,000 certified
checks were written in this manner.256
253
254
In fact this may have been motivated more by a fear of an Upjohn levy than an IRS levy, since
Upjohn already had a judgment it was trying to enforce against Mr. Imbriolo’s assets and believed Global
Vision might be holding such assets, and the company had not even filed tax returns on the basis of which
the IRS might levy.
255
256
Dix. Ex. 15 at 9 (2003); Dix Ex. 8 at 12 (2004).
81
Ms. Martino testified that Mr. Imbriolo told Ms. Madden to deposit the certified
checks when Global Vision needed funds.257 It is difficult to tell from the ledgers when and how
the certified checks were actually deposited, although it does appear that $300,000 was deposited
by the end of 2003.258 Ms. Martino testified that she learned that $300,000 of the checks had at
some point disappeared. Based on information she obtained from Ms. Madden, she concluded
that Mr. Imbriolo had taken the checks and attributed them to Mr. Imbriolo’s loan account in her
loan reconciliation for 2003.259
Other Imbriolo Payments. Mr. Imbriolo testified in the California litigation
that, before he was terminated, his compensation was $150,000 per year.260 It is not possible to
tell from the entries in the general ledgers what his formal compensation was. He received funds
denominated as pay in irregular amounts (ranging from $500 to thousands of dollars) at irregular
intervals, and except for 2002 they do not in any year approximate $150,000.261 In addition to
257
Martino Dep. Tr. at 345-47. Notably, the certified checks were issued and redeposited after Mr.
Imbriolo was fired and when he was not supposed to have access to Global Vision’s offices, as provided
in his consulting agreement with Global Vision. See Dix Ex. 57.
258
Dix Ex. 15 at 9. The account purports to zero out in the 2004 ledger, but a number of the entries
in the Check account in the 2004 ledger are inexplicable and make this zero balance suspect. For
example, there is an unexplained discrepancy between the closing balance in the 2003 ledger ($425,000),
and the opening balance in the 2004 ledger ($600,000). There is a deposit entry in the amount of
$475,000 on April 5, 2004 denominated “replacement taxes,” but it is not clear from the ledger what the
source of funds was.
The Examiner has not had an opportunity to review Global Vision’s check statements, which
presumably contain accurate information, but found Ms. Martino to be a credible witness.
259
260
261
See e.g., Martino Ex. 14 at 25, 27, 32, 34, 36, 39, 41, 42; Edelson Ex. 54 at 1, 29, 40, 55-56, 72,
127,; Dix Ex. 35 at 281; Dix Ex. 13 at 10, 71, 88, 96, 109, 128, 134, 241, 242, 244.
82
the payroll entries, it appears that Mr. Imbriolo also frequently withdrew sizable amounts of cash
that were characterized as petty cash. Between 2000 and 2003, these petty cash amounts totaled
at least $140,500.
The 2000 ledger, moreover, includes an account captioned “Tony’s
Expenses,” which appears to capture $17,406 in personal expenses attributed to Mr. Imbriolo,
including items that appear to relate to his consumption of wine in restaurants, as well as a Con
Edison bill.262
The irregularity with which Mr. Imbriolo received “pay” and his practice of
drawing thousands of dollars from petty cash that were recorded as pay on the ledger fuels the
Examiner’s suspicion that Mr. Imbriolo (and others) simply took cash from Global Vision
whenever he needed it for his personal use, and did not customarily draw a regular pay check.
This pattern also strongly suggests that he used at least some of the missing money he transferred
to Chicago Equities and Dublin Press for his personal expenses. The Examiner’s suspicion is
supported by the Magistrate’s Report, which refers to three Global Vision checks made out to
Mr. Imbriolo personally in the amounts of $145,000, $51,000 and $61,200, as well as other
checks paid to him outside his normal salary.263 The Examiner has not located entries on the
ledger for payments to Mr. Imbriolo in these amounts, although there are entries on the ledger for
transfers to Chicago Equities in the amount of $145,000 on February 23, 2001, and $61,200 on
262
Martino Ex. 14 at 105.
263
See Magistrate’s Report at 25. As noted above, Global Vision failed to produce these checks to
the Examiner.
83
March 20, 2001,264 and many entries throughout 2000-2003 for transfers in the amount of
$51,000 to Chicago Equities and Dublin Press.
While further inquiry into Mr. Imbriolo’s receipt and use of Global Vision’s funds
is indicated, the Examiner believes that Global Vision has a prima facie case against Mr.
Imbriolo for recovery of at least $1,883,065.
3.
DeBenedictis
Mr. DeBenedictis received cash transfers in the amount of $1,688,421.61, and has
repaid $1,294,900 in cash, leaving a net obligation to Global Vision of $503,521.61.265 In
addition to amounts carried as loans to him, he received a number of payments that were falsely
carried on the books as payment for rent of space he did not personally lease to Global Vision
and reimbursement of professional fees that he did not pay. As discussed in the next two
paragraphs, these payments were orchestrated by Robert Malta to pay Mr. DeBenedictis on
account of obligations Mr. Malta owed him in connection with unrelated businesses.
Beginning in 2001 and continuing throughout 2003, Robert Malta directed Ms.
Madden to issue checks each month in the amount of $16,360.22 to Mr. DeBenedictis, or in
several cases to Hanford & Henderson, the management company owned by Mr. DeBenedictis
264
Edelson Ex. 54 at 123.
265
A summary of the transfers to Mr. DeBenedictis is attached as Appendix K. He has paid
professional fees and other expenses of the class action litigation and the bankruptcy, totaling $303,215.
Martino Ex. 20. He also testified that he had paid some of Mr. Imbriolo’s litigation expenses.
DeBenedictis Dep. Tr. at 185, 211-12. Mr. DeBenedictis is, of course, a defendant in the class action
himself, and the bankruptcy stay protected Global Vision from the trial. Some of the expenses included
in the total legal fees he has paid are probably not fairly attributable to Global Vision. The bills need to
be analyzed to determine what amounts were attributable to Global Vision’s defense. Pending an
opportunity to review the bills and consider this issue further, the Examiner has not reduced the
outstanding amount of Mr. DeBenedictis’s obligations to the company for these payments.
84
and which manages Mr. DeBenedictis’s real estate investments, including the building located at
227 E. 56th Street, where Global Vision’s offices are located. These payments, which over time
totaled $572,605, were recorded on the general ledgers as “2nd floor rent.”266 Mr. DeBenedictis
testified that there was no lease between Mr. DeBenedictis and Global Vision for space on the
second floor, and that Robert Malta employed this mechanism to use Global Vision money to
repay Mr. DeBenedictis for obligations unrelated to Global Vision.267 Ms. Madden, however,
recorded the payments as an obligation of Mr. Malta in the shareholders’ loan balance in the
general ledger, rather than of Mr. DeBenedictis.268 The Examiner believes that the payments
should be attributed to Mr. DeBenedictis rather than to the Malta balance because the transfers
were made to him from Global Vision.
According to the Magistrate’s Report, Mr. Imbriolo testified in the Upjohn
litigation that Global Vision “lent” $330,000 of the money that had been transferred to Chicago
Equities to Mr. DeBenedictis.269 This transaction does not appear on the Global Vision ledgers
and so must have been made either from the Bank of Ireland account or from money in either
266
The 2003 ledger refers to only seven of these payments. Dix Ex. 15 at 15, 25, 53, 58, 63, 67, 71,
238. Ms. Martino testified, however, that according to Mr. DeBenedictis’s records of receipts, he
received 12 payments in the amount of $16,360 during 2003. Ms. Martino observed that the 2003 ledger
is not reliable. Martino Dep. Tr. at 316-319. The Examiner has adopted Ms. Martino’s numbers because
they are predicated on Mr. DeBenedictis’s receipts and are thus more likely to be reliable.
267
DeBenedictis Dep. Tr. at 54-61; see Martino Dep. Tr. at 88-94; Edelson Dep. Tr. at 431-436.
268
269
85
Chicago Equities or Dublin Press accounts. If this assertion is determined to be true,270 Mr.
DeBenedictis is obligated to return those funds as well.
The Examiner has included the
$330,000 in the total balance attributed to Mr. DeBenedictis.
Finally, in 2004, Mr. DeBenedictis received checks totaling $65,000 which were
denominated on the ledger as repayments of funds he advanced to pay invoices from Stonewall
Solutions, discussed below in Section VII.A.8. Edmund Mendrala, the owner of Stonewall
Solutions, testified that he never received payment directly from Mr. DeBenedictis.271 Mr.
DeBenedictis also was not aware that he had made such payments to Stonewall Solutions.272
These payments were not included in the general ledger as part of the loan accounts attributed to
Mr. DeBenedictis. Unless Global Vision provides evidence that these payments did in fact
constitute reimbursements of legitimate Global Vision expenses that Mr. DeBenedictis paid
personally, they should be included in his obligations to Global Vision.
4.
Madden Loans
Ms. Madden, a shareholder, director, and the CFO of Global Vision, paid herself a
total of $953,934, in the form of direct transfers, payments for her car leases, her parking garage
270
Because Global Vision did not produce any of the Upjohn material, and the Examiner received
the Magistrate’s Report which described the $330,000 payment only after Mr. DeBenedictis’s deposition,
she was not able to examine Mr. DeBenedictis about this payment.
271
Mendrala Dep. Tr. at 76.
272
DeBenedictis Dep. Tr. at 146-51. Mr. DeBenedictis speculated that these payments were also
directed by Robert Malta to reduce his unrelated obligations to Mr. DeBenedictis, DeBenedictis Dep. Tr.
at 151-52, but they were made in late 2004, after Ms. Madden had left the company and Mr. Malta had
resigned his shares.
86
expenses, her apartment rents, and her personal American Express bills.273 Ms. Martino testified
that on at least one occasion Ms. Madden prepaid her car lease for two years to ensure that her
use would not be disrupted if Global Vision experienced financial problems.274 Ms. Madden had
the use of an American Express card provided by Global Vision, and it appears that she
habitually used the company card for her personal expenses.
She has repaid $132,552 in cash, leaving a net loan obligation of $824,420.275
5.
Purported Forgiveness Of Shareholder Loans Through The
Mechanism Of Deferred Salary Charges
Global Vision did not file federal tax returns for the first three years of its
operations, by which time its federal and state tax liabilities aggregated more than $2.5 million.
Mr. DeBenedictis speculated that there may have been some concern that the IRS would be more
likely to audit the returns with such large loans outstanding, and with such material increases in
the loan amounts.276 Mr. Mendrala, the tax attorney, advised that it was appropriate and legal
from a tax perspective to reduce the loans by attributing sums to the insiders as deferred
compensation and paying the employer’s portion of the taxes due on such compensation.277
Accordingly, during 2003-2006, the loans to Ms. Madden, the Maltas, and Mr. DeBenedictis
273
See Martino Exs. 15-19.
274
275
A summary of the transfers to Ms. Madden is attached as Appendix L hereto. Like the Malta
loan, Global Vision reduced her loan by $194,826.42 of imputed “deferred salary” as well as $87,127.26
of other items that were improperly attributed to Global Vision as expenses and taken as deductions on
the Global Vision tax returns.
276
277
Mendrala Dep. Tr. at 104-05; DeBenedictis Dep. Tr. at 88-90.
87
were purportedly forgiven in the total amount of $954,116.89, as summarized in the chart
attached as Appendix M hereto.
In early 2005, after receiving their W-2s for 2004, the Maltas protested that they
did not want to pay the additional income taxes that their “deferred salary” required, and the
practice ended as to them.278 With Ms. Madden’s consent, Global Vision continued to reduce her
loan obligations by this attribution of deferred salary – and paid its share of the tax liabilities on
the reported income – through 2006.
The loans to shareholders currently reported on Global Vision’s books, and which
form the basis for the lawsuits Global Vision has filed against the Maltas and Ms. Madden,
reflect these reductions, and are therefore materially understated.
Moreover, assuming for the
sake of argument that this mechanism is ever appropriate to reduce loans to employees as a tax
matter, it was not appropriate with respect to Enrico Malta and Mr. DeBenedictis, who were
never employees of Global Vision, nor to Ms. Madden at any time after July 2004 when she
resigned.
6.
More Forgiveness Of Shareholder Loans
Chris Skevas, Global Vision’s outside accountant during 2000 to 2003, further
reduced the shareholders’ loan accounts by attributing funds that were transferred to or for the
benefit of the shareholders as “expenses” of Global Vision.279 As a result of this exercise,
278
DeBenedictis Dep. Tr. at 89-90; Martino Dep. Tr. at 326-30.
279
Martino Dep. Tr. at 65-68, 74.
88
$4,616,897.06 was deducted from the loan accounts and expensed, as tax deductions, on Global
Vision’s tax returns, as summarized in the chart attached as Appendix N hereto.
This practice had two effects: the shareholder loans, which were assets of the
company, were purportedly reduced, and Global Vision’s tax obligations were also reduced.
However, according to Ms. Martino, none of the items that were expensed were legitimate
expenses of Global Vision. 280 All of them were completely unrelated to the business of Global
Vision. The amounts now carried by Global Vision as loans due to shareholders reflect these
reductions, and are accordingly materially understated.
The Examiner has included the amounts of the deferred salary and expense
deductions in the outstanding amounts of the loans discussed above at Sections VII.A.5-6.
7.
Millbrook Equities
Ownership: Millbrook Equities, Inc. is an entity organized under the laws of
New York that, on November 18, 2002, purchased a private residence located in Millbrook, New
York with $878,998, paid in cash.281 The Examiner made repeated requests, both written and
oral, for documentation of Millbrook Equities’s ownership throughout the discovery. Only after
the conclusion of the depositions, on April 1, 2008, did Global Vision provide a copy of a stock
certificate, dated October 2, 2002, in the name of Global Vision for 200 shares of stock in
Millbrook Equities, apparently signed by Anthony Imbriolo as President and as Secretary of
Millbrook Equities.
280
Martino Dep. Tr. at 74-75; 90-91; 95; 98-99.
281
Martino Ex. 21.
89
The Examiner received conflicting testimony about whose decision it was to buy
the house and for what purpose it was bought. Dr. Edelson testified that the house was bought
because Mr. DeBenedictis and the Maltas, to whom Dr. Edelson deferred in real estate issues
because of their expertise, recommended it as a good investment, and that only later did Mr.
Imbriolo begin to use it:
Well, initially, it was going to be an investment. Whether it was
going to be rented out or not use it, there was no answer to. There
were renovations that needed to be done and Imbriolo spent a lot of
time up there with those renovations. So somehow that decision
worked its way in that he might as well take it on weekends. He
wanted to use it that way and supervise everything else. It just sort
of fell into place.282
Mr. DeBenedictis testified that he was not involved in the acquisition of the house.283
Mr. Mendrala testified that Mr. Imbriolo had told him that Global Vision acquired
the house as a form of additional compensation for Mr. Imbriolo, as a way of rewarding him for
his efforts on behalf of the company, in recognition that he had no equity in Global Vision
although it was his inspiration.284
Mr. Mendrala did not, however, have any first hand
knowledge of who owned the house.285
Ms. Martino testified that in her opinion, based on conversations with Ms.
Madden and Mr. Imbriolo, she understood that Mr. Imbriolo owned Millbrook Equities.286 Mr.
282
283
284
Mendrala Dep. Tr. at 124-26.
285
286
90
Imbriolo testified in the Upjohn litigation that he did not own Millbrook Equities and had no
ownership interest in the house. He further testified that he formed Millbrook Equities when he
complained to Dr. Edelson that he was not being paid enough for his work with Global Vision,
and Dr. Edelson responded that Global Vision could purchase a house and permit him to use it.
He also testified that the money used to purchase the house came from Global Vision via the
Dublin Press account, and that Dr. Edelson gave him permission to use the Dublin Press money
for this purpose. After purchasing the property, Mr. Imbriolo, exercising his sole discretion,
used approximately $500,000 from the Dublin Press account to furnish it.287
There are no minutes of the Global Vision board of directors reflecting that the
board approved the purchase of the house, the $500,000 of furnishings Mr. Imbriolo bought for
it, or Mr. Imbriolo’s use of it.288 Moreover, the general ledgers do not reveal that Global Vision
ever received any financial consideration from Mr. Imbriolo for his use of the house.289 Mr.
Imbriolo testified during his deposition in the California Action that $2,000 per month for use of
the house was imputed to him as additional consideration and that he was required to report it on
his tax returns and pay income taxes on it.290
287
See Magistrate’s Report at 23. Dr. Edelson testified that the house was empty when purchased,
and that he thought Millbrook Equities paid for furnishings Mr. Imbriolo selected. Edelson Dep. Tr. at
326-27. The 2003 ledger contains an entry for furnishings for the house in the total amount of $20,099.
288
289
Edelson Dep. Tr. 303-04.
290
91
The value of Millbrook Equities was never included on Global Visions’ balance
sheets.291 The witnesses testified that Mr. Imbriolo was the only person who used the Millbrook
house, apart from very occasional social visits from the Maltas, Mr. DeBenedictis, and Mr. Dix.
It was never used in connection with Global Vision’s business.292
Operating expenses: Global Vision paid all of the operating expenses of the
Millbrook house between the date on which it was acquired and the date on which it was sold to
Mr. DeBenedictis. Ms. Madden also attributed some expenses to the Millbrook house which do
not seem to relate to the house, including legal fees of the Lustigman Firm and a trip to Italy.
Apart from these apparently unrelated expenses, the costs of running the house appear to have
been about $45,000 -$50,000 per year, for a total of $205,775.00 for 2003-2007.293
Imbriolo’s use of the house when he was not employed by Global Vision: Dr.
Edelson and Mr. DeBenedictis both testified that Mr. Imbriolo was instructed by Gallion &
Spielvogel, whom Global Vision retained to represent it in connection with the Upjohn action
and in its claims against Mr. Imbriolo, not to use the house after he was fired in 2003, and Dr.
Edelson testified that he was told to return the keys to the house several months after he was
terminated.294 Dr. Edelson also provided, after the conclusion of his deposition, a letter from
Gallion & Spielvogal to Mr. Imbriolo dated July 15, 2004 – the same day that Mr. Imbriolo was
291
Dix Dep. Tr. at 202; DeBenedictis Dep. Tr. at 164; Edelson Dep. Tr. at 593-94; Martino Exs. 810 (balance sheets for 2000-2002); Edelson Exs. 92-95 (balance sheets for 2003-2006).
292
Dix Dep. Tr. 199; Edelson Dep. Tr. at 286, 291-294, 300; DeBenedictis Dep. Tr. at 158.
293
Dix Ex. 15 at 237-38 (2003); Dix Ex. 8 at 292-93 (2004); Dix Ex. 30 at 370-72 (2005); Dix Ex. 5
at 393-94 (2006); Edelson Ex. 99 at 328-29 (2007).
294
Edelson Dep. Tr. at 296-97; DeBenedictis Dep. Tr. at 161.
92
terminated as President – directing him to vacate the house within 30 days. The ledgers indicate
that someone did occupy the house between November 2003 and March 2006, when Mr.
Imbriolo was not working at Global Vision – expenses for trash collection, pest extermination,
and fuel were paid each month through out the period. Dr. Edelson and Mr. DeBenedictis both
testified that there was a live-in housekeeper, and the Millbrook account on the ledger reflects
payments of $1,000 per month to a Patricia Fiore beginning in November 2004. It is not
possible, therefore, to discern without additional discovery of Ms. Fiore and Mr. Imbriolo
whether Mr. Imbriolo was on the premises between August 2004 and the first quarter of 2006.
Mr. DeBenedictis testified that he visited Mr. Imbriolo in the house in the spring of 2006,295 so it
does appear that he resumed occupancy at least as early as that date. The March 2006 consulting
agreement, pursuant to which Global Vision formally resumed its relationship with Mr. Imbriolo
and which Dr. Edelson testified encompassed all compensation to which Mr. Imbriolo was
entitled, did not provide that he could resume use of the house.296
Sale to DeBenedictis: Global Vision does not appear to have considered selling
or leasing the house between January 2005 and March 2006, during the period of time Mr.
Imbriolo was not working at Global Vision (or at any other time, for that matter), although the
house was not used in connection with its business, and despite Global Vision’s cash flow
difficulties.297 Mr. DeBenedictis testified that there came a time in 2007 when Global Vision
needed funds with which to pay its bills, and he was no longer willing to advance funds on an
295
296
297
93
unsecured basis. Mr. Imbriolo then suggested that Mr. DeBenedictis buy the Millbrook house,
and Millbrook Equities could “loan” the sale proceeds to Global Vision. Mr. DeBenedictis was
willing to buy the house on these terms.298 The purchase price was $1,200,000, but Global
Vision received only net proceeds of $1,054,000.299 After the transaction closed, Global Vision
established an account on its ledger reflecting the obligation to repay Millbrook Equities the net
proceeds of the sale of the house.300
Mr. DeBenedictis testified that because of the pending class action he wanted to
be sure that his purchase of the Millbrook house would not be challenged as having been for less
than market value.301 Mr. DeBenedictis relied for fair market value on a single appraisal,
obtained several months before the sale, from an appraiser identified from the Yellow Pages of
the telephone book.302 He and Dr. Edelson testified that Dr. Edelson had obtained the appraisal
at a time when Global Vision was evaluating the possibility of obtaining a loan secured by the
house, but that they did not ultimately pursue that option because they did not believe a bank
would lend to Global Vision, much less to Millbrook Equities. They did not speak to any local
brokers about the fair market value of the house, did not obtain an update of the appraisal, and
did not obtain any additional appraisals to corroborate the fair market value of the house.303 The
298
DeBenedictis Dep. Tr. at 168-170. Mr. Imbriolo denied knowledge of why the house was sold
during his testimony in the California Action. California Imbriolo Dep. Tr. at 195.
299
Dex. Dept. Tr. at 212-13.
300
Edelson Ex. 99 at 117.
301
302
Edelson Dep. Tr. at 306-307; Edelson Ex. 47.
303
DeBenedictis Dep. Tr. at 170-71; Edelson Dep. Tr. at 306.
94
appraisal does not include any value for the furniture which Mr. Imbriolo had purchased with
$500,000 of Global Vision’s money, and there is no evidence of what, if anything, Mr.
DeBenedictis paid for the furnishings. It would appear that he either did not buy the furnishings,
which would thus remain an undisclosed asset of Global Vision’s estate,304 or he obtained them
for nothing, in which case the transfer to him was a fraudulent conveyance and he is liable to the
estate for their value.305 The Examiner has included the $500,000 spent on furnishings in Mr.
DeBenedictis’s obligations.
Cost to Global Vision: Dr. Edelson testified that the company bought the house
because it was a good investment, and touted the $1.2 million sale price to Mr. DeBenedictis as
evidence of the wisdom of the company’s business judgment.306 Global Vision never realized
any income from its ownership of the house,307 and if the cost of the furniture and the expenses
of maintaining the house are added to the original purchase price, the investment was a net loss
to the estate in the amount of $530,773, as summarized on Appendix O hereto.
8.
Stonewall Solutions
The Examiner investigated certain payments made to or with respect to an entity
called Stonewall Solutions. Edmund Mendrala, Global Vision’s tax attorney, testified that he
304
Global Vision’s Schedules of Assets and Liabilities filed in this case do not include any reference
to these furnishings. See Edelson Ex. 97.
305
Mr. Imbriolo continues to use the Milbrook house, but once Mr. DeBenedictis purchased it, he
agreed with Mr. Imbriolo that Mr. Imbriolo would be responsible for the expenses associated with the
house. DeBenedictis Tr. at 173. No expense for operating the house appear on the ledger for the period
after the sale.
306
307
95
formed Stonewall Solutions with his son to provide a “virtual board of directors” to his clients,
many of which have a narrow field of expertise and which need advice in areas unrelated to their
line of business:
We refer to ourselves as a virtual Board of Directors. We do highend consulting for clients. Just as – theory behind Stonewall
Solutions is small to medium size companies generally have
narrow expertise and great expertise, if they’re successful. They
may not have the expertise that other small or medium sized
companies have.
So if they’re unable to have a Board of Directors themselves to
provide guidance and broad stroke kind of planning, that’s what
Stonewall Solutions did.308
Global Vision purportedly retained Stonewall Solutions to provide these virtual
board of director services at a rate of $22,750 per month beginning in September 2003, which
subsequently was reduced to $12,000 per month. Between 2003 and 2006, when the last
payment was made, Global Vision paid Stonewall Solutions a total of $368,527.309
Global Vision has not produced any agreement between Global Vision and
Stonewall Solutions in its discovery responses. Although Mr. Dix testified that upon a few
occasions he asked for “virtual director” assistance from Stonewall Solutions,310 none of the
308
309
Dix Ex. 8 at 275 (2004); Dix Ex. 30 at 353 (2005); Dix Ex. 5 at 368 (2006). The 2003 ledger
does not collect the Stonewall Solutions’ payments in a single account. References to Stonewall in the
2003 ledger appear at 100, 106, 134, 163, 168, 182, 185, 186, 188, 189, 190, 238, 248, 249, 251 (Dix. Ex.
15). Interestingly, at least four of those ledger entries reference “payroll.” Global Vision lists Stonewall
Solutions in its schedules as a creditor in the amount of $50,000. Edelson Ex. 97. Mr. Mendrala testified
that Global Vision struggled to pay the bills, and that it was not current in its obligations at the time the
consulting relationship came to an end. It continued to pay the outstanding amounts over the ensuing
years. Mendrala Dep. Tr. at 75.
310
96
other Global Vision witnesses testified that they had obtained any advice of this sort from
Stonewall Solutions, nor were they aware of the virtual director services available to them. So
far as they knew, Stonewall Solutions’ sole connection with Global Vision related to a 401(k)
plan,311 which appears to have functioned as follows.
Mr. Mendrala testified that he hires people employed by his clients as
“employees” of Stonewall Solutions, whose expertise he may then tap for the needs of Stonewall
Solutions’ clients. He testified that he retained Ms. Madden, Mr. DeBenedictis, and Robert and
Enrico Malta for their various areas of expertise and paid them approximately $30,000 per
year.312 Each of them were then entitled to participate in a 401(k) set up by Stonewall Solutions
pursuant to which the individuals could take up to a 50% deduction from their “Stonewall”
salary, which was matched by Stonewall Solutions. Further inquiry is likely to reveal that
whatever nominal consulting services Stonewall Solutions provided to Global Vision were not a
fair exchange for the fees paid, and that the real purpose of the Stonewall Solutions relationship
was to use Global Vision funds to provide a 401(k) plan for the shareholders.
9.
Rexon transaction
As discussed above in Section VI.A.1, in late 2002, Global Vision acquired an
ANDA to sell 5% minoxidil through the vehicle of an entity called Rexon NYC Inc., using
$100,000 provided by Global Vision. Because Global Vision needed the ANDA to sell its 5%
311
DeBenedictis Dep. Tr. at 143-46; Edelson Dep. Tr. at 403-07.
312
Mendrala Dep. Tr. at 77-83. Mr. Mendrala made no mention of Mr. Imbriolo, but that omission
is suspicious. His relationship with Mr. Imbriolo goes back to the mid 1980’s when he worked with Mr.
Imbriolo on taking Medtron public, and Mr. Imbriolo introduced him to Global Vision. Further
investigation is warranted to learn whether Imbriolo was included in the 401(k) plan. Dr. Edelson
believed that he was. Edelson Dep. Tr. at 403-407.
97
minoxidil products legally, the Examiner asked Global Vision for evidence of, among other
things, the ownership of Rexon. Various conflicting accounts were received.
Dr. Edelson provided at least two different versions of the Rexon story. He first
stated in an interview on March 3, 2008 (and in correspondence to the Examiner), that Mr.
Mendrala is the sole shareholder of Rexon. Dr. Edelson said he did not know why Mr. Mendrala
formed Rexon, but believed it was for investment purposes. Dr. Edelson said that he believed
that Mendrala paid for the ANDA that Rexon purchased. He claimed to have no knowledge that
Global Vision may have paid for it. He said that “to the best of his knowledge” Rexon acquired
the ANDA instead of Global Vision because Global Vision did not have the cash needed for the
acquisition at the time. He did not know what Mr. Mendrala paid for the ANDA.313
Dr. Edelson also said that the sole business of Rexon was to own the ANDA for
5% minoxidil and to license the ANDA to Global Vision. Dr. Edelson was not aware of who
was on the board of directors of Rexon, although he acts as president when Rexon needs to make
submissions to the FDA. He was not aware of any board meetings Rexon has ever held, and
does not believe Rexon has any other officers or employees. He is not paid any compensation by
Rexon. He did not know how or by whom Rexon is funded, or how it pays its bills.314
313
Susan Power Johnston, Memorandum Regarding Dr. Henry Edelson Interview, dated March 3,
2008, at 3 (the “Edelson Interview”) (memorandum on file with Covington & Burling LLP). In fact, the
$100,000 with which the ANDA was purchased was transferred to the Lustigman Firm, Global Vision’s
regulatory counsel, who then paid for the ANDA with a check drawn on its escrow account. In any event,
in 2003, over $750,000 was transferred to the Maltas for their restaurants, and $740,000 was transferred
to Imbriolo’s entities, so the statement that Global Vision lacked the funds to purchase the ANDA that
was essential to its ability to do business is not credible and, in any event, is belied by the fact that Global
Vision advanced the funds used to acquire the ANDA.
314
Edelson Interview at 3.
98
Dr. Edelson stated that there is a license agreement between Rexon and Global
Vision, pursuant to which Global Vision pays royalties to Rexon for the rights to the ANDA. He
was not aware of how the license agreement between Rexon and GVPI is structured, apart from
an assumption that Global Vision pays a royalty to Rexon. Dr. Edelson was not aware of any
payments made by GVPI to Rexon other than what he believed to be the royalty payments
running from Global Vision to Rexon.
Dr. Edelson told a very different story in his deposition, when he testified that
Global Vision did own Rexon but that Mr. Mendrala held the stock as a nominee. He explained
that it was important that the ANDA be held under another name because Global Vision had
wanted to be able to sell the minoxidil to its competitors and was concerned that its competitors
would not buy it from Global Vision. He was not, however, aware of any sales of 5% minoxidil
by Rexon to any of Global Vision’s competitors at any time.315 Dr. Edelson also testified that no
license agreement was executed between Global Vision and Rexon.316
Mr. Dix testified in his deposition that Mr. Imbriolo was concerned that
Upjohn/Pfizer might interfere with obtaining FDA approval for the transfer of the ANDA to
Global Vision and thought it best that it be acquired through a company with a different name.317
Dr. Edelson also thought that would have been a good reason for Global Vision to acquire the
ANDA through a nominee.318
315
316
317
318
99
Mr. Mendrala testified that the Rexon stock certificate bears the name of Global
Vision, but that Global Vision endorsed it in blank and gave it to him for safekeeping so that he
could endorse it over to himself if the need ever arose to keep it away from Global Vision’s
creditors.319 Mr. DeBenedictis testified that he had the impression, based on conversations with
Mr. Imbriolo, that Mr. Imbriolo owned the ANDA, although he had never seen any documentary
evidence of that ownership.320 Notably, Rexon’s value, which should be at least the value of the
ANDA for which Global Vision paid $100,000, has never appeared on Global Vision’s balance
sheets.321 Neither Rexon nor the ANDA are included in Global Vision’s Schedules of Assets and
Liabilities or its Statement of Financial Affairs.322
The Examiner and her counsel requested that Global Vision produce the Rexon
stock certificate on many occasions. Only after the conclusion of the Edelson deposition, on
March 31, 2008, did Mr. Mendrala finally fax it to the Examiner. It bore the date of December 1,
2002, was signed by Mr. Imbriolo, as its president and secretary, and stated that Global Vision
was the owner of 200 shares of Rexon NYC Inc. Although the stock certificate demonstrates
that Global Vision holds 200 shares of Rexon stock, the facts create the suspicion (if not support
the inference) that Global Vision was caused to endorse the Rexon stock certificate in blank so
that it could be transferred to Mr. Imbriolo at some point after the Upjohn litigation was behind
him.
319
320
321
Martino Ex. 10 (balance sheet for 2002); Edelson Exs. 92-95 (balance sheets for 2003-2006).
322
Edelson Exs. 97 and 98.
100
10.
Triton Technologies
Triton was a call center to which Mr. Imbriolo directed some of Global Vision’s
business.323 As discussed above, Global Vision’s direct marketing business required that it have
the services of one or more call centers such as Triton, although there is no requirement that the
call center be an independent entity. In fact, Global Vision recently established an internal call
center and no longer outsources this service.
In 2002, Triton’s principals and Mr. Imbriolo, who were acquainted previously,
discussed the possibility of an investment in Triton in exchange for 51% of its stock. They did
not reach agreement at that time, because Mr. Imbriolo was not willing to invest as much as the
Triton principals thought appropriate for a majority of the stock. In 2003, at a time when Triton
was in some financial distress, Triton again approached Mr. Imbriolo, and was this time willing
to accept the proposed $100,000 investment in exchange for 51% of the stock.324
Mr. Dix testified that Mr. Imbriolo was not at that time interested in making the
investment,325 but that he and Ms. Madden were, although they could not afford to put up as
much as $100,000 themselves. Nor could they provide the $50,000 credit line that Triton also
required as part of the transaction. Accordingly, between August 28, 2003 and September 23,
2003, Global Vision advanced $100,000 to Triton, and the stock was issued to Mr. Dix and Ms.
323
Dix Dep. Tr. at 98-99. In the early years, Global Vision also used Powertel as another call center;
after Powertel went out of business, Triton was its only call center.
324
325
The agreement was dated September 26, 2003, several months after Mr. Imbriolo was fired and
while Upjohn was actively attempting to locate his assets. See Dix Ex. 10.
101
Madden.326 Mr. Dix testified that the parties did not know at the outset of the investment who
would hold what percentages of the stock, that he and Ms. Madden could not afford to pay
$50,000 each, and that it was eventually determined that Mr. DeBenedictis would pay for what
Mr. Dix and Ms. Madden could not afford.327
Neither Mr. Dix nor Ms. Madden provided the credit line required by the
acquisition agreement, although Mr. Dix did lend $5,000 to Triton at one point.328 On the other
hand, Mr. Dix testified that Global Vision made financial accommodations for Triton, in the
form of prepayments of Triton invoices.329 It thus appears that Global Vision was substituted for
Mr. Dix and Ms. Madden as the lender under the acquisition agreement.
Mr. DeBenedictis testified that when he became more involved with Global
Vision in 2004, he noticed that $100,000 was carried on the books as a loan to Triton and told
Mr. Dix it had to be collected. Mr. Dix told him that it was really an investment in Triton, not a
loan owed by Triton, and explained that it was necessary to figure out who was going to hold the
stock. Mr. DeBenedictis was willing to put $70,000 into Global Vision, which needed funding at
that time, if he received a proportionate share of the Triton stock (36%) in exchange.330 Ms.
Madden contributed approximately $10,000 and received a 5% interest, and Mr. Dix contributed
326
Dix Ex. 15 at 236; Dix Dep. Tr. at 111-126. See also Dix Ex. 10 at 1. The opportunity to invest
arose after Mr. Imbriolo had been terminated and when he was litigating the Upjohn contempt motion.
327
Id.
328
Dix Dep. Tr. 126-27; Dix Ex. 18.
329
Dix. Dep. Tr. at 127.
330
102
approximately $20,000 for which he received a 10% interest.331 Last year, on January 2, 2007,
Mr. DeBenedictis advised Triton that he had transferred half of his interest, or 18%, to Sea
Holdings LLC, of which Mr. Imbriolo is the sole member.332 Mr. DeBenedictis testified that he
gave Mr. Imbriolo 18% of the stock because he felt that Mr. Imbriolo had created the opportunity
for the Triton investment and that it was unfair for Mr. Imbriolo not to receive some of the
benefit.333
When asked why Global Vision did not receive the stock for which it initially
paid, Mr. Dix testified that Triton’s attorneys had advised that only individuals could hold the
Triton stock because of its subchapter S status.334 Mr. Dix and Ms. Madden therefore entered
into an agreement with Triton pursuant to which the two of them would hold the stock instead of
Global Vision.
Triton was sold in late 2007 for $15 million, of which $1.5 million was held in an
escrow.335 The stock purchase agreement required the 51% shareholders to pay the $750,000
broker fee from their share of the proceeds.
The 51% shareholders accordingly received
$6,885,000 at the closing, and should receive another $688,500 upon and assuming the release of
331
332
Dix Ex 19. Mr. Mendrala testified that he established this entity for Mr. Imbriolo as an estate
planning vehicle for Mr. Imbriolo’s children. Mendrala Dep. Tr. at 6-7. Eight months after Mr.
DeBenedictis made this gift, on August 20, 2007, Mr. Imbriolo testified in the California Action that he
had no ownership interest in anything other than Imbris International, his consulting business, and a nonoperating venture called Rex Media. California Imbriolo Dep. Tr. at 181.
333
334
335
Dix Ex. 23.
103
the escrow. As a result of this transaction, therefore, Mr. DeBenedictis, Mr. Imbriolo, Mr. Dix,
and Ms. Madden will receive a net payment of $6,900,000, as summarized on Appendix P
hereto.336 Global Vision did not receive any benefit from this transaction.
Triton was a subchapter S corporation. The Examiner has received advice from
tax counsel that under Section 1363(a) of the Internal Revenue Code of 1986, as amended (the
“IRC”), an S corporation (with certain exceptions not relevant here) is not subject to federal
income tax. Instead, under IRC § 1366, the S corporation’s shareholders are subject to federal
income tax on each shareholder’s pro rata share of the S corporation’s items of income, gain,
loss, deduction and credit as determined for federal income tax purposes. One of the principal
advantages of S corporation status, therefore, is that only a single level of tax is imposed on
income earned by the corporation and distributed to shareholders (unlike in a C corporation
where income is taxed both at the corporate level and then upon distribution as a dividend at the
shareholder level).
IRC § 1361 contains certain requirements that must be satisfied for a corporation
to be eligible to elect S corporation status.
One of those requirements (set forth in IRC
§ 1361(b)(1)(B)) is that every shareholder of the S corporation must be a natural person (or, in
certain cases, an estate or trust). As a result of this section, no entity (other than a single-member
LLC whose sole member is an eligible S corporation shareholder and that is disregarded as
separate from its owner for federal income tax purposes) may invest in an S corporation without
336
Dix Dep. Tr. at 151.
104
that S corporation having its status as an S corporation terminate (in which case it would become
a C corporation subject to the double layer of tax described above).
This does not mean, however, that C corporations cannot invest in S corporations.
In the event a C corporation (or other ineligible S corporation shareholder) wishes to invest in a
business operated by an S corporation, a common structure utilized is for the S corporation to
contribute its assets to a newly formed limited liability company (a LLC) and for the C
corporation to invest in that LLC. The LLC is treated as a partnership for federal income tax
purposes (another type of entity that is not itself subject to tax, thereby avoiding a double layer of
tax). This structure enables the shareholders of the S corporation to maintain the “flow-through”
treatment provided by the S corporation while simultaneously permitting an investor that cannot
be an investor in an S corporation to invest in the business – with no adverse federal income tax
consequences to the S corporation or its shareholders.
Mr. Dix, Ms. Madden, and Mr. DeBenedictis did not obtain independent legal
advice as to the propriety of Global Vision insiders making this kind of investment, nor did they
obtain independent legal advice as to whether there was any way to structure the investment so
that Global Vision could benefit economically from it. They did not obtain the consent of Dr.
Edelson, once again the only disinterested director, before making this investment. Indeed, Dr.
Edelson testified that he was not aware of the Triton investment at the time it was made.337 It
appears that the Global Vision board did not meet to discuss the investment, much less make an
informed decision one way or the other.
337
105
11.
The “Elevator Charges”
Some of Global Vision’s employees preferred to be paid their wages in cash,
presumably to avoid paying federal and state income taxes. Before Mr. DeBenedictis became
involved, Ms. Madden apparently had been writing checks payable to “cash,” cashing them, and
using the cash to pay certain employees. Mr. DeBenedictis testified that he put a stop to this
practice for most of the employees but that there were a few for whom it would be difficult to be
paid on the books and it would be detrimental to Global Vision to lose them. Because the
business is not a cash business it was difficult to devise a method by which the employees could
be paid in cash.
Mr. DeBenedictis and Mr. Dix devised the idea of having Hanford &
Henderson, the managing agent for the building and of which Mr. DeBenedictis was the sole
owner, prepare a monthly rent bill for Global Vision in the amount of $5,000 (in addition to the
bills submitted for rent due under the lease). Global Vision cut a check in that amount to
Hanford & Henderson, and received back from Hanford & Henderson $5,000 in cash. Mr. Dix
took possession of the money, and used it to pay the salaries of several employees. They were
clerical and administrative staff, some of whom worked only two mornings a week. Over time
some of them left and Mr. Dix had more cash than he needed. Mr. Dix testified that in the earlier
years, he kept the surplus and reduced his salary by the amount he kept. By 2006, when Global
Vision needed cash, he deposited the money back into Global Vision’s accounts. At the end of
each year he prepared a reconciliation of the funds he had received for Ms. Martino’s review.338
338
106
The charges show up as “Elevator charges” on the general ledgers.
Mr.
DeBenedictis testified that the reasoning for the elevator charge was that he has a business on the
sixth floor of the building, “a private men’s club:”
Now, this business was a private men’s club, they come there sometimes,
and lunchtime and so forth. They do not have time to wait and wait for
one elevator. It’s a big elevator, but only one elevator. So it was Craig
who came up with the idea, I thought it was a good idea, he said, Look,
why don’t we pay an extra – because of the business, because of the
business that you’re losing, they’re losing on the 6th floor, why don’t we
come to an agreement, because we’re holding up the elevator so much,
that we will – this is a little complicated, I’m trying to remember.
What we will do is up our rent by $5,000 a month and give us the
$5,000 in cash, and credit on the books as if it was going to the 6th floor.
It really wasn’t. That was really money that was owned by – basically – I
don’t know.
Somehow that’s how it came about. I don’t really remember the
whole thing. It was a way of getting cash.339
This practice continued mid-2004, when Mr. DeBenedictis became involved with
the company, until July 2007,340 during which period a total of $160,000 was recorded in the
ledgers in the Elevator Charge account.341 Mr. Dix testified that the shareholders decided to take
this approach, and that Mr. DeBenedictis communicated the decision to him.342
Mr.
DeBenedictis testified it was Mr. Dix’s idea, although he thought it was a good one.343
339
340
Dix Dep. Tr. at 88.
341
Dix. Ex. 8 p. 287 (2004); Dix Ex. 30 p. 354 (2005); Dix Ex. 5 p. 369 (2006); Edelson Ex. 99 at
309 (2007).
342
343
107
Mr. Dix provided the Examiner with his reconciliations for 2006 and 2007, but
not for the earlier years.344 The Examiner notes that Mr. Dix appeared honest and credible, that
he was cooperative throughout the discovery process, and was of material assistance to the
Examiner and her counsel in understanding what went on at Global Vision. It will be necessary,
however, to review the reconciliations for the earlier years to confirm that the funds were in fact
use to pay employees.
12.
The Global Vision Directors Have Failed to Make Adequate
Efforts to Recover the Transfers Made to Shareholders
The Global Vision board of directors made little effort to recover the transfers to
shareholders, and those efforts were not prosecuted diligently or with due care and, thus, met
with limited success. The directors made no recovery of the full amount of the transfers, and
they permitted Global Vision to carry the loans on the company’s books substantially reduced by
the improper expense reductions and the deferred salary deductions.
Moreover, repayment of the loans was apparently never even discussed until late
2003 or 2004, when it became apparent that Global Vision did not have the funds required to pay
the taxes for 2000-2003 unless the shareholders provided funds for the purpose. As discussed
above, Mr. Imbriolo returned $3,536,444 of the money he had transferred to Chicago Equities
and Dublin Press. In addition to the money returned from the Bank of Ireland, Mr. DeBenedictis
restored $353,500 of the funds he had received, Ms. Madden repaid $118,552 in cash, and the
344
Dix Exs. 25-28.
108
Maltas repaid $221,000 in cash. By the end of 2004, the Insiders had returned slightly more than
$4 million, leaving nearly $8 million still unpaid.
Mr. Imbriolo failed to return or account for approximately $2.2 million that had
been transferred to him via Chicago Equities and Dublin Press. In 2004, Global Vision filed a
complaint against Mr. Imbriolo seeking damages in an unstated amount for breaches of fiduciary
duty.345 Little effort was made to prosecute the complaint and after Mr. Imbriolo filed a personal
chapter 11 petition, Global Vision abandoned the lawsuit. Although his bankruptcy case was
ultimately dismissed, and he did not receive a discharge, Global Vision made no further efforts
to recover the missing funds. Dr. Edelson testified that he has given no thought to attempting to
recover the money Mr. Imbriolo has neither returned nor accounted for, even after Global Vision
filed its bankruptcy petition.346
Global Vision took no action before filing its own bankruptcy petition to recover
the unpaid funds transferred to the Maltas and Ms. Madden, and when it did file suit against
them after the Petition Date, the damages sought grossly understated the outstanding loan
amounts. Global Vision has taken no action to recover the funds taken by Mr. Imbriolo.
Mr. DeBenedictis appears to view the question of what the Maltas received as a
matter for reconciliation between them as shareholders, rather than a question of money owed to
Global Vision.
Ms. Martino and Mr. DeBenedictis testified that the Maltas took Mr.
345
According to Gilbert Lazarus, who represented Mr. Imbriolo in his Chapter 11 case, at some point
Global Vision’s attorneys, Gallion & Spielvogal, advised Lazarus that the amount of money at stake was
approximately $1.4 million, and that was the amount of the claim that Lazarus included in Mr. Imbriolo’s
disclosure statement. See Edelson Ex. 91 at 8.
346
109
DeBenedictis’s share of the Global Vision money.347 In 2003-2004, at Mr. DeBenedictis’s
request, Ms. Martino analyzed the transfers to the Global Vision shareholders, not to determine
what the shareholders owed to the company, but instead to determine what the Maltas owed to
Mr. DeBenedictis. At Mr. DeBenedictis’s request, Ms. Martino has been keeping track of their
mutual obligations for a number of years, and that tally includes the amount that the Maltas took
from Global Vision that Mr. DeBenedictis believes should have gone to him, according to their
respective ownership interests in Global Vision.348 When asked if Global Vision had given
thought (prior to the bankruptcy) to suing the Maltas to recover the missing funds, Mr.
DeBenedictis replied that his approach was to address what the Maltas owed him with regard to
other businesses as well as Global Vision.349
Dr. Edelson testified that Mr. DeBenedictis
preferred that efforts to collect money from the Maltas “take place personally through
discussions because he felt that would be more conducive to a solution rather than involve
attorneys and lawsuits.”350 Although Dr. Edelson was (nominally) the majority shareholder, he
deferred to Mr. DeBenedictis because “[Mr. DeBenedictis] had prior business relationships with
the individuals, and he felt that was the way to do business.”351 Mr. DeBenedictis also testified
that after he gave Mr. Imbriolo half of his Triton stock, which resulted in Mr. Imbriolo receiving
347
Martino Dep. Tr. at 88; DeBenedictis Dep. Tr. at 49-50.
348
Martino Ex. 22; DeBenedictis Dep. Tr. at 70-72.
349
DeBenedictis Dep. Tr. at 72; see also id. at 91: “Q. By 2004, you said the company was in
trouble, hadn’t paid its taxes, it needed money. Did anybody say, Let’s sue the Maltas and get back the
money? THE WITNESS: I am suing the Maltas. THE EXAMINER: Personally? THE WITNESS:
Personally.”
350
351
Id. at 640.
110
$2,489,325, when Triton was sold, he asked Mr. Imbriolo if he would consider repaying some of
what he owes to Global Vision. Mr. Imbriolo replied that he had used it all to pay back taxes,
and Mr. DeBenedictis accepted that response.352
B.
Legal Standards
1.
Illegal Loans to Directors
Pursuant to Global Vision’s books and records, Mr. DeBenedictis, the Maltas, and
Ms. Madden are liable to Global Vision in varying (but all significant amounts) for the loan
advances made them. To the extent, however, that these loans are not recoverable in full, Global
Vision has a prima facie claim under applicable New York law against each of the Global Vision
directors for having approved or acquiesced in the making of illegal loans.353
Under Section 714 of the New York Business Corporation Law (the “BCL”), a
corporation may not make loans to a director or to an entity under a director’s control unless:
(a) a majority of disinterested shareholders approves the loan; or (b) the board determines that
the loan benefits the corporation and either approves the specific loan or a general plan
authorizing loans to directors.354 A director who votes for or authorizes the “making of any loan
352
353
The “illegal loan” theory of recovery applies in the context of loan advances made to directors.
Because Mr. Imbriolo was not a director, the other directors cannot be held liable for loans made to him
under the New York statute. They are however subject to liability for the Imbriolo loan amounts under
other legal theories, such as corporate waste and breach of fiduciary duty.
354
Section 714 provides:
(a) A corporation may not lend money to or guarantee the obligation of a director of the
corporation unless:
(1) the particular loan or guarantee is approved by the shareholders, with the holders of a
majority of the votes of the shares entitled to vote thereon constituting a quorum, but
(continued…)
111
contrary to Section 714” may be jointly and severally liable to the corporation or shareholders
for damages related to the transaction at issue.355
In violation of these principles, the Global Vision board of directors took no
action to consider and determine whether the transfers to directors would benefit the company.356
The only director who received none of the money, and thus the only disinterested director, was
Dr. Edelson. He not only failed to approve the loans, he testified that he was completely
unaware of them until 2004, after all the transfers were complete.357 Mr. DeBenedictis testified
that although he was aware that money was being transferred to the Maltas, he did not know how
much money was being transferred, and he did not know that most of the Malta transfers were
made to unrelated third parties who were not accountable to Global Vision.358
shares held of record or beneficially by directors who are benefited by such loan or
guarantee shall not be entitled to vote or to be included in the determination of a
quorum; or
(2) with respect to any corporation in existence on the effective date of this subparagraph
(2) the certificate of incorporation of which expressly provides such and with respect to
any corporation incorporated after the effective date of this subparagraph (2), the board
determines that the loan or guarantee benefits the corporation and either approves the
specific loan or guarantee or a general plan authorizing loans and guarantees.
(b) The fact that a loan or guarantee is made in violation of this section does not affect
the borrower’s liability on the loan.
N.Y. Bus. Corp. Law § 714 (McKinney 2003).
355
N.Y. Bus. Corp. Law § 719(a)(4).
356
Edelson Dep. Tr. at 216. The annual unanimous written consents of board members from 20002003 ratify unspecified acts of the board. This kind of blanket ratification of unspecified acts is not
sufficient as a matter of law to ratify the loans and transfers to the shareholders. Ratification must be
made with a full and complete knowledge of all the material facts connected with the transaction to which
the ratification relates. 2A Fletcher Cyc. Corp. Law § 756 (2001).
357
358
112
Under the applicable legal principles, Global Vision has a prima facie case
against each director for repayment of the full outstanding amount of the loans made to all
directors.
2.
Unlawful Dividends
The shareholders may contend that the distributions they received were dividends
which they are entitled to keep rather than loans. This contention should fail for several reasons.
First, Global Vision’s books and records reflected these transfers as loans to
shareholders from the company’s inception. None of the transferees ever protested that these
payments were dividends instead of loans, and none of them protested at how the transfers were
carried on the company’s books. They should be estopped at this late stage from contending,
contrary to the documentary evidence, that these transfers were anything other than loans.
Second, even assuming for the sake of argument that they were dividends, as
such, they were unlawful and can be recovered by Global Vision’s estate on that ground as well.
BCL § 510(a) prohibits a board of directors from declaring or paying dividends, or making
“other distributions in cash or its bonds or its property,” if the corporation is currently insolvent
or would be made insolvent by the payment of such dividend or distribution.359 Dividends may
be declared or paid “out of surplus only, so that the net assets of the corporation remaining after
such declaration, payment or distribution shall at least equal the amount of its stated capital.”360
359
N.Y. Bus. Corp. Law § 510(a). A corporation is “insolvent,” for purposes of the unlawful
distribution statute if it is unable to pay its debts as they become due in the usual course of business. N.Y.
Bus. Corp. Law § 102(a)(8).
360
N.Y. Bus. Corp. Law § 510(b).
113
Under BCL § 719, directors “who vote for or concur” in the payment of unlawful
dividends are “jointly and severally liable to the corporation for the benefit of its creditors or
shareholders, to the extent of any injury suffered by such persons.”361 Liability is thus limited to
the amount that the illegal dividend or distribution “exceeds surplus profits or impairs capital,
plus interest.”362 Any director against whom a claim is successfully asserted is entitled to
contribution from the other directors who voted for or concurred in the dividend payment.363
On no occasion did Global Vision make a formal determination whether it had
surplus profits from which dividends could legally be paid to shareholders before making the
transfers. They were made at random moments, not at the end of fiscal accounting periods.
More than $12 million was transferred to the insiders before Global Vision filed its tax returns
for 2000-2003, when it did not know what its aggregate tax obligations would be. At least
$1,300,000 was transferred after the class action litigation began, when Global Vision did not
know what its liability, if any, would be to those plaintiffs, and when, according to its ledgers, it
had established no reserve for that litigation.364 The Examiner believes, therefore, that the
shareholders will not be able to establish that the transfers were legal dividends.
361
N.Y. Bus. Corp. Law § 719(a)(1).
362
14A N.Y. JUR. 2D BUS. REL. § 704 (1996).
363
N.Y. Bus. Corp. Law § 719(c).
364
The $1,300,000 includes the $300,000 of certified checks that went missing and the $630,000 that
Mr. Imbriolo acknowledged was not returned from the Bank of Ireland account.
114
3.
Fraudulent Conveyances
The Examiner has concluded that the transfers to shareholders should also be
recoverable as fraudulent conveyances.365
Section 544(b)(1) of the Bankruptcy Code permits a trustee or debtor in
possession to avoid prepetition transfers and obligations as a fraudulent transfers under
applicable nonbankruptcy law (i.e., state law).366 Article 10 of the New York Debtor and
Creditor Law the (“DCL”),367 which is New York’s version of the Uniform Fraudulent
Conveyance Act, would most likely apply to the potentially fraudulent transfers of the Debtor’s
property.368
365
The standards for relief under section 548 of the Bankruptcy Code are substantively similar to the
state law fraudulent conveyance claims discussed in the text, and so the Examiner will not address relief
under § 548 separately.
366
11 U.S.C. § 544(b)(1) (1998).
367
N.Y. Debt. & Cred. Law §§ 270-281 (McKinney 2008).
368
Federal common law choice of law rules apply because the court possesses federal question
jurisdiction over any claim based on §544(b) of the Bankruptcy Code. In re Best Prods. Co., Inc., 168
B.R. 35, 51 (S.D.N.Y. 1994), aff’d, 68 F.3d 26 (2d. Cir. 1995). The federal common law approach is to
employ the law of the jurisdiction with the most significant relationship. Id. at 52. Contacts to be taken
into account under this approach include: the place where the injury occurred; the place where the
conduct causing the injury occurred; the domicile, residence, nationality, place of incorporation and place
of business of the parties; and the place where the relationship, if any, between the parties is centered. Id.
Because of the similarity of the three main fraudulent transfer statutes – the Bankruptcy Code, the UFCA,
and the Uniform Fraudulent Transfer Act (the “UFTA” – cases of actual conflict are rare. See id. at 53
(“Few courts however, have considered the matter of choice of law for fraudulent transfers . . . where the
choice of law could be outcome-determinative.”) Thus, caselaw decided under any of the various
fraudulent transfer regimes may be relevant in a given case. See In re Pajardo Dunes Rental Agency,
Inc., 174 B.R. 557, 572-73 (Bankr. N.D. Cal. 1994) (“Unless otherwise specified, common-law
authorities and case-law dealing with the UFCA, UFTA . . . or the Bankruptcy Code may be crossreferenced whatever the statutory basis of the action at bar.”). In any event, New York contacts dominate
here.
115
(a)
Actual Fraud
A transfer or obligation is actually fraudulent if the debtor “made such transfer or
incurred such obligation with actual intent to hinder, delay or defraud any entity to which the
debtor was or became, on or after the date that such transfer was made or such obligation was
incurred, indebted[.]”369 While normally the “actual intent” that matters is the intent of the
debtor, not the intent of the transferee, the transferee’s intent will be considered where the
transferee is in a position of domination or control.370 Actual intent may be inferred through
circumstantial evidence or by the presence of objective indicia of intent commonly referred to as
“badges of fraud.”371 New badges of fraud are “circumstances that . . . commonly accompany
fraudulent transfers [and] their presence [leads to] and inference of intent to defraud.”372
Examples of badges of fraud that courts have relied upon to infer the requisite intent include:
(1) a close relationship among parties to the transaction, including the “insider” status of the
transferee; (2) a secret or hasty transfer not in the usual course of business; (3) the inadequacy of
369
11 U.S.C. § 548(a)(1)(A); see N.Y. D.C.L. § 276 (“Every conveyance made and every obligation
incurred with actual intent, as distinguished from intent presumed in law, to hinder, delay, or defraud
either present or future creditors, is fraudulent as to present and future creditors.”).
370
See Jackson v. Mishkin (In re Adler Coleman Clearing Corp.), 263 B.R. 406, 443 (S.D.N.Y.
2001) (the intent of fraudulent intent of a transferee may be imputed to the debtor where the “transferee
possesses the requisite intent to hinder, delay or defraud the debtor’s creditors [. . . ] the transferee ‘must
be in a position to dominate or control, . . . the pertinent domination and control relates to ‘the debtor’s
disposition of his property.’”) (emphasis in original); Pirrone v. Toboroff (In re Vaniman Int’l, Inc.), 22
B.R. 166, 182 (Bankr. E.D.N.Y. 1982) (where transferee is dominant or in position of control, the intent
of the transferee may be imputed to the debtor); see also Marcus v. Marcus (In re Marcus), 45 B.R. 338,
342 (Bankr. S.D.N.Y. 1984).
371
Enron Corp. v. Credit Suisse First Boston Int’l (In re Enron Corp.), 328 BR. 58, 73 (Bankr.
S.D.N.Y. 2005).
372
Id. (debtor pled evidence of actual intent sufficient to survive motion to dismiss) (internal
quotations and citations omitted).
116
consideration; (4) the transferor’s knowledge of other creditor’s claims and the debtor’s inability
to pay them; (5) the use of dummies or fictitious parties; (6) retention of control or reservation
of rights in the transferred property by the transferor after the conveyance;373 (7) actual or
threatened litigation against the debtor;374 and (8) the existence or cumulative effect of a pattern
or series of transactions or course of conduct after the debt is incurred, the onset of financial
difficulties, or the pendency of suits or threat of suits by creditors.375 Generally, no single badge
is dispositive, but the presence of several badges may create an overwhelming inference of an
improper motive.376
(b)
Constructive Fraud
A transfer is constructively fraudulent if (i) the debtor received less than
reasonably equivalent value in exchange for such transfer or obligation and (ii) the debtor
(a) was insolvent on the date of the transfer or obligation (or became insolvent as a result of such
transfer or obligation), (b) was engaged (or was about to engage) in business or a transaction for
which the debtor’s remaining property was an unreasonably small capital, or (c) intended to
373
Id.; see Goscienski v. Larosa (In re Montclair Homes), 200 B.R. 84, 97 (E.D.N.Y. 1996) (finding
that close relationship existed between debtor and transferees when transferees were insiders of debtor).
374
Max Sugarman Funeral Home, Inc. v. A.D.B. Investors, 926 F.2d 1248, 1254 (1st Cir. 1991).
375
Salomon v. Kaiser (In re Kaiser), 722 F.2d 1574, 1583 (2d Cir. 1983); Montclair Homes, 200
B.R. at 97 (transfers could be avoided as actually fraudulent under New York law when, among other
things, the transfers were made for less than fair consideration to insiders of the debtor in a series of
transactions arising after state court action was filed against debtor); c.f. Official Comm. of Asbestos
Claimants of G-I Holdings, Inc. v. Heyman, 277 B.R. 20, 35-37 (S.D.N.Y. 2002) (complaint alleged facts
sufficient to give rise to an inference of intentional fraud when corporate director and shareholder
received transfer of subsidiary stock for no consideration after he realized corporate reserves would be
insufficient to meet claims of litigants).
376
Max Sugarman Funeral Home., 926 F.2d at 1254-55; Enron Corp., 328 B.R. at 73 (“A court
may infer the requisite intent based upon a confluence of these factors.”).
117
incur (or believed that it would incur) debts that would be beyond the debtor’s ability to repay as
they matured.377
(c)
The Transfers to Insiders Were Fraudulent
The evidence has revealed a number of badges of actual fraud, and the Examiner
believes, therefore, that Global Vision may be able to demonstrate that some or all of the
transfers to shareholders were made with actual intent to defraud creditors. Moreover, assuming
it can be demonstrated that Global Vision either had unreasonably small capital for its business
or that it was insolvent at the relevant times, the transfers appear also to have been constructively
fraudulent.
The badges of fraud, and thus the evidence of actual intent to defraud, are
numerous. For example:
377
•
All of the transfers were made to insiders of Global Vision, to
directors, officers and shareholders of the company, relatives of, or
entities owned by the Insiders.
•
None of the transfers were made in the ordinary course of business
of Global Vision; indeed, none of them had anything whatsoever to
do with Global Vision’s business.
•
None of the transfers resulted in any benefit for Global Vision.
•
There appears to have been a practice of acquiring assets in
deceptive ways, or moving funds to deceive creditors. For
example, there is testimony that the ANDA was acquired in the
name of Rexon NYC Inc. for the specific purpose of hiding Global
Vision’s ownership of the asset from creditors. The funds Mr.
Imbriolo sent to Chicago Equities and Dublin Press and then to
Ireland were hidden from Global Vision’s creditors. Global
Vision’s ownership of the Millbrook house and furnishings and of
11 U.S.C. § 548(a)(1)(B)(i) & (ii)(I to III); N.Y. Debt. & Cred. §§ 273-275.
118
Rexon and the ANDA was never disclosed in its balance sheets or
its tax returns.
•
$12 million of the funds were transferred before Global Vision
filed tax returns and thus at a time when it did not know what its
tax liabilities for the first three years would be.
•
At least $1,300,000 of the cash transfers to the shareholders were
made after the first class action lawsuit was filed.
•
The “deferred salary” and expense reductions in the shareholder
loans were made after the first class action lawsuit was filed, and
resulted in concealing the true amount of the loan advances.
•
The transfers to Stonewall Solutions for the 401(k) program for the
shareholders were similarly made after the class action lawsuit was
filed, and potentially under the guise of payments for virtual board
services.
•
If Mr. DeBenedictis acquired the furnishings of the Millbrook
house he did not pay any value for those assets.
The Examiner has concluded that these badges of fraud support a prima facie case
for Global Vision’s recovery of all of the transfers under DCL § 276.
The evidence may also support recovery of the transfers under a constructive
fraud theory. As noted above, Global Vision received no consideration for any of the transfers.
While the Examiner has not made a determination of Global Vision’s solvency, it made no
profits after 2002. Moreover, the witnesses testified that without the return of the funds from the
Bank of Ireland in 2003 (a year in which Mr. DeBenedictis, Mr. Malta, and Ms. Madden also
returned a total of $345,000 to the company) Global Vision would not have had the money
necessary to pay the taxes it owed for the years 2000-2003. Dr. Edelson testified that there were
times from 2004 to 2007 that Global Vision could not pay its obligations without infusions from
119
Mr. DeBenedictis.378 Mr. Dix and Dr. Edelson testified that it was the normal course of business
for Global Vision to write checks to pay its expenses before revenues to cover those checks were
received.379 It may, therefore, be possible to prove that Global Vision has been effectively
insolvent from and after 2003. There is certainly evidence that it was not generally able to pay
its debts as they came due from and after 2005, without additional funds supplied by Mr.
DeBenedictis and, upon occasion, Mr. Dix.380
Moreover, Global Vision had only $70,133 in stated capital. This sum appears
presumptively insufficient for a company with sales reaching $48 million and commensurate
operating, tax, and litigation liabilities.
Assuming evidence of insolvency or unreasonably small capital is developed
further, the transfers outlined above may also be recoverable by the Global Vision estate as
constructively fraudulent conveyances.
4.
Breaches of Fiduciary Duty, Mismanagement, Conversion, and
Corporate Waste
Corporate officers and directors may be liable to the corporation in damages for
amounts resulting from their breach of the duty of care and loyalty, waste of corporate assets,
and willful conversion or diversion of corporate assets.381 A director is liable for all wrongful
378
379
Edelson Dep. Tr. at 228-30; Dix Dep. Tr. at 66-69.
380
Edelson Dep. Tr. at 246-248; Dix Dep. Tr. at 76-80.
381
See Abrams v. Allen, 74 N.E.2d 305, 306-07 (N.Y. 1947) (collecting cases and finding that
defendants may be liable for actionable breach of duties in action alleging that defendant directors caused
corporation’s plants to be dismantled and production curtailed, not for any legitimate business reason but
solely to discourage and intimidate corporation’s employees); Hazard v. Wight, 94 N.E. 855, 857 (N.Y.
(continued…)
120
actions flowing from his actions, even if he did not benefit personally from such waste of
corporate assets. The factual evidence gathered during the investigation indicates that strong
claims exist against the Global Vision’s officers, directors and shareholders for breach of
fiduciary duty, mismanagement, corporate waste and conversion.
(a)
The Duty of Care
Under New York common law and statutory law,382 corporate officers and
directors owe the corporation and its shareholders a duty of care.383 Directors are charged with
performance of their duties “with that degree of care which an ordinarily prudent person in a like
position would use under similar circumstances.”384 The duty of care is to be measured by what
ordinarily prudent persons “would do in similar circumstances being in possession . . . of the
1911) (defendant who diverted corporate capital for his personal benefit thereby bestowed on corporation
a “cause of action against him for the damages it thereby sustained”); Gottfried v. Gottfried, 56 N.Y.S.2d
50, 56 (App. Div. 1945) (“A corporate officer who applies the funds of the corporation to purposes
beyond the scope of his authority is guilty of conversion, and the corporation may maintain an action for
money had and received against the recipient as well as any person who participates in the tort and
accepts its fruits.”) (citing Quintal v. Kellner, 189 N.E. 770, 772 (N.Y. 1934)).
382
The Bankruptcy Court should apply New York’s choice of law rules to determine which state’s
laws will govern the breach of duty claims against the Debtor’s officers and directors. Bianco v. Erskin
(In re Gaston & Snow), 243 F.3d 599, 602 (2d Cir. 2001), cert. denied, 122 S.Ct. 618. Pursuant to New
York’s choice of law rules – and specifically the “internal affairs doctrine” – a claim of breach of
fiduciary duty owed to a corporation is governed by the law of the state of incorporation. BBS Norwalk
One, Inc. v. Raccolta, Inc., 60 F.Supp. 2d 123, 129 (S.D.N.Y. 1999), aff’d 205 F.3d 1321. The Debtor is
incorporated under the laws of the State of New York; accordingly, New York law governs. Business law
decisions of the Delaware courts, however, are often cited by New York courts. See, e.g., Aronoff v.
Albanese, 446 N.Y.S. 2d 368, 370-71 (App. Div. 1982) (citing numerous Delaware cases in discussion
and analysis of corporate waste claim). Thus, the discussion herein will occasionally refer to Delaware
caselaw.
383
Gully v. Nat’l Credit Union Admin.Bd., 341 F.3d 155, 165 (2d Cir. 2003); Norlin Corp. v.
Rooney, Pace Inc., 744 F.2d 255, 264 (2d Cir. 1984); In re Global Serv. Group, LLC, 316 B.R. 451, 460
(Bankr. S.D.N.Y. 2004).
384
N.Y. Bus. Corp. Law § 717(a) (McKinney 2003).
121
knowledge and information they possessed or could have possessed by diligent attention to all
their duties. . . .”385 A director must undertake to collect information reasonably necessary to
make a well-informed business decision predicated on “reasonable diligence in gathering and
considering material information.”386 Once adequately informed, “[d]irectors must exercise their
honest judgment in the lawful and legitimate furtherance of corporate purposes.”387
The exercise of informed business judgment is typically evidenced through a duly
held board meeting, memorialized in minutes or resolutions of the board. Although small,
closely-held corporations may not be required to follow stringently corporate formalities if to do
so would be burdensome, the directors of a close corporation must still prove that informal
meetings occurred in which the reasonably informed directors made business decisions regarding
the company if they wish to establish that they took due care in their decision making.388
385
Syracuse Television v. Channel 9, Syracuse, Inc. 273 N.Y.S. 2d 16, 27 (Sup. Ct. 1966).
386
Hanson Trust, Plc. v. ML SCM Acquisition Inc., 781 F.2d 264, 274 (2d Cir. 1984) (internal
quotations omitted); see Roselink Investors v. Shenkman, 386 F.Supp. 2d 209, 220 (S.D.N.Y. 2004)
(internal quotations omitted) (“[D]irectors have a duty to inform themselves, prior to making business
decision, of all material information reasonably available to them.”).
387
Hanson Trust, Plc., 781 F.2d at 274 (quoting Auerbach v. Bennett, 419 N.Y.S.2d 920, 926 (N.Y.
1979)).
388
See RSL Comm. PLC v. Bildirici, No. 04-CV-5217, 2006 WL 2689869, at *7 (S.D.N.Y. Sept. 14,
2006) (“[W]hile it is clear that some of RSL Plc’s board members had some contact during the period in
question, Plaintiff does not concede that there were behind-the-scenes meetings where the business of
RSL, PLC was discussed by these members, let alone that there was an agreement not to have a board
meeting. At a minimum, Plaintiff’s allegations are sufficient to raise fact questions that cannot be
resolved by Defendants’ Motion to Dismiss.”).
122
Directors or officers may also violate the duty of care through lack of attention or
failure to adequately monitor or supervise officers or employees or other neglect of duty.389 In a
closely held corporation, where delegation of duties by directors is not extensive, directors are
more likely to be charged with knowledge of officers’ or employees’ wrongdoing.390 The
existence of “red flags” indicating suspicious activity by officers or employees may trigger a
duty to make reasonable inquiries and act with due care regarding the suspicions.391 Although
the standard of liability for lack of attention is high, “a sustained or systematic failure of the
board to exercise oversight . . . will establish the lack of good faith that is a necessary condition
to liability.”392
To establish a breach of the duty of care, the plaintiff must “establish that the
offending parties’ actions were ‘a substantial factor’ in causing an identifiable loss.”393 This
standard, which requires a showing of less than proximate cause, is justified “[because] breaches
of fiduciary relationship in any context comprise a special breed of cases that often loosen
normally stringent requirements of causation and damages.”394
389
BRODSKY & ADAMSKI, LAW OF CORP. OFFS. & DIRS.: RTS., DUTIES, & LIABILITIES § 2:17, at 270. See Manheim Dairy Co. v. Little Falls Nat. Bank, 54 N.Y.S.2d 345 (Sup. Ct. 1945).
390
Id. § 2:17, at 2-74 (citing Kelly v. Bell, 254 A.2d 62, 72 (Del. Ch. 1969), aff’d, 266 A.2d 878
(Del. 1970); Graham v. Allis-Chalmers Mfg. Co., 41 Del. Ch. 78 (1963)).
391
Id. § 2:17, at 2-75 (citations omitted).
392
In re Caremark Intern. Deriv. Lit., 698 A.2d 959, 971 (Del. Ch. 1996).
393
F.D.I.C. v. Bober, No. 95 Civ. 9529, 2003 WL 21976410, at *1 (S.D.N.Y. Aug. 19, 2003).
394
Milbank, Tweed, Hadley & McCloy v. Boon, 13 F.3d 537, 543 (2d Cir. 1994); N.W. Nat. Ins. Co.
v. Alberts, 769 F.Supp. at 498, 506 (S.D.N.Y. 1994).
123
(b)
The Duty of Loyalty
In addition to the duty of care, New York directors and officers are bound by their
duty of undivided loyalty to their corporations, a duty which encompasses good faith efforts to
insure that their personal profit is not at the expense of the corporation.395 The fiduciary duty of
loyalty imposes on directors an obligation not to “assume and engage in the promotion of
personal interests which are incompatible with the superior interests of their corporation . . . [as
directors and officers] owe the corporation their undivided and unqualified loyalty.”396
“Accordingly, directors should not be permitted to ‘profit personally at the expense of the
corporation, [n]or must they allow their private interests to conflict with corporate interests.”397
As the Higgins court explained: “Director conflicts of interest are typically found where either a
director stands to receive a personal benefit from the transaction at issue that is different from
that received by all shareholders, or where there is a loss of independence insofar as a director
with no personal interest in a transaction is otherwise controlled by an interested director.”398
395
See Meinhard v. Salmon, 249 N.Y. 458, 463-64 (N.Y. 1928).
396
Foley v. D’Agostino, 248 N.Y.S.2d 121, 128 (App. Div. 1964).
397
Higgins v. N.Y. Stock Exchange, 806 N.Y.S.2d 339, 357 (Sup. Ct. 2005) (quoting Foley, 248
N.Y.S.2d at 128).
398
Higgins, 806 N.Y.S.2d at 357 (citing Marx v. Akers, 644 N.Y.S.2d 121, 127-28 (N.Y. 1996)).
The prohibition against interested director transactions is codified in BCL § 713, which permits
transactions between the corporation and a director with a “substantial financial interest” only if the
conflict is disclosed to the corporation and approved by either a majority of disinterested directors or
shareholders. N.Y. Bus. Corp. Law § 713(a). The other common duty of loyalty problems relevant to the
claims against the Insiders – improper loans to directors and the usurpation of corporate opportunities –
are discussed at Sections B1 and B6, respectively, of this Report.
124
(c)
Waste
“The essence . . . of a claim of waste is the diversion of corporate assets for
improper or unnecessary purposes.”399 A transaction constitutes waste when “no person of
ordinary sound business judgment would say that the corporation received fair benefit.”400
Clearly inadequate consideration or the absence of consideration supports an allegation of
waste.401 Examples of acts of gift or waste include: a director improperly applying corporate
assets to his own use;402 the use of corporate funds to discharge personal obligations;403
distribution of surplus earnings under the guise of additional salaries to directors and officers,404
the transfer of assets without consideration;405 payment of a false or duplicative claim;406
misappropriation of corporate funds;407 and payment of excessive fees or salaries to directors.408
399
Aronoff v. Albanese, 446 N.Y.S.2d 368, 371 (App. Div. 1982) (citing Michelson v. Duncan, 407
A.2d 211, 217 (Del. 1979)).
400
Id.; Cohen v. Ayers, 596 F.2d 733, 741 (7th Cir. 1979) (applying New York law) (“The
possibility of waste arises only when the corporation gives something of value to another without
adequate consideration.”).
401
Aronoff, 85 A.D.2d at 5 (citing Gottlieb v. McKee, 34 Del.Ch. 537 (1954)).
402
Pollitz v. Wabash R.R. Co., 100 N.E. 721, 724 (N.Y. 1912).
403
Quintal v. Kellner, 189 N.E. 770, 771 (N.Y. 1934).
404
Godley v. Crandall & Godley Co., 105 N.E. 818, 820 (N.Y. 1914).
405
Meredith v. Camp Hill Estates, 430 N.Y.S.2d 383, 384 (App. Div . 1980).
406
See Continental Securities Co. v. Belmont, 99 N.E. 138, 139 (N.Y. 1912); Rapaport v. Schneider,
328 N.Y.S.2d 431, 433 (N.Y. 1972).
407
Capital Dist. Servs., Ltd. v. Ducor Express Airlines, Inc., No. 04 CV 5303, 2007 WL 1288046, at
*2 (E.D.N.Y. May 1, 2007).
408
See Saxe v. Brady, 184 A.2d 602, 610 (Del. Ch. 1962);
125
Directors are liable for every form of waste of assets regardless of whether it was intentional or
negligent (and whether or not they derived any benefit from it). 409
(d)
Business Judgment Rule
Notably, the business judgment rule, on which directors often rely for defense to
breaches of fiduciary duty claims, does not insulate decisions alleged to involve a breach of the
duty of loyalty,410 the waste of corporate assets,411 decisions which lack any legitimate business
purpose,412 or which result from an obvious and prolonged failure to exercise oversight or
supervision.413
409
See Rapoport v. Schneider, 328 N.Y.S.2d 431, 437 (N.Y. 1972) (“[i]t is and has always been
general law that a director may be held accountable for the waste of corporate assets whether intentional
or negligent without limitation to transactions from which he benefits.”); Ault v. Soutter, 611 N.Y.S.2d
187 (App. Div. 1994) (defendant found to have breached fiduciary duty on basis of illegal loan was
“accountable for the waste of corporate assets notwithstanding the absence of proof that he benefited
personally, and he is liable for all damages flowing from his breach of fiduciary duty as a director,
whether those consequential damages occurred during or after the actual period of his wrongful inaction”)
(citations omitted); Bertoni v. Catucci, 498 N.Y.S.2d 902, 904 (App. Div. 1986) (“In case of a breach of
trust by directors, the value of any corporate assets wasted and the amount of expense incurred as the
direct and natural result of their acts must be accounted for. Similarly, directors of a corporation who
violate their fiduciary duty may be held responsible for all damages naturally flowing from their
wrongdoing or misconduct, even though the precise result could not have been foreseen.”) (quoting 15
N.Y. Jur.2d, Business Relationships § 1071 (emphasis supplied in original)).
410
Wolf v. Rand, 658 N.Y.S.2d 708, 711 (App. Div. 1999) (“[T]he business judgment rule does not
protect corporate officials who engage in fraud or self-dealing . . . [or] corporate fiduciaries when they
make decisions affected by inherent conflict of interest.”).
411
Amfesco Indus., Inc. v. Greenblatt, 568 N.Y.S.2d 593, 595-96 (App. Div. 1991).
412
Patrick v. Allen, 355 F.Supp. 2d 704, 712 (S.D.N.Y. 2005) (denying a motion to dismiss where
directors approved leasing of corporation’s sole asset at a below market rate to an exclusive golf club of
which directors were members).
413
See Joy v. North, 692 F.2d 880, 886 (2d Cir. 1982) (citations omitted).
126
In addition, the business judgment rule applies only when judgments have been
made.414 The rule “has no role where directors have either abdicated their functions, or absent a
conscious decision, failed to act.”415
The rule assumes that reasonable diligence has been
exercised. Decisions made without any deliberation are not protected by the business judgment
rule.416 Thus, where the directors’ “methodologies and procedures are so restricted in scope, so
shallow in execution, or otherwise so pro forma or halfhearted as to constitute a pretext or sham,
[ ] inquiry into their acts is not shielded by the business judgment rule.”417
(e)
Breaches of the Duty of Care and Duty of Loyalty;
Commission of Waste
Throughout its history, Global Vision’s business has been managed with a marked
lack of observance of corporate formalities. Mr. DeBenedictis and Dr. Edelson testified that
there were no annual meetings of shareholders or directors between 2000 and 2004, when the
transfers to or for the benefit of Insiders took place.
Global Vision has not produced
documentation of any kind relating to the transfers other than the general ledgers on which those
loans are reflected. There are no loan agreements between Global Vision and the Insiders and no
board resolutions approving actions with respect to interested directors. Millions of dollars were
transferred to enterprises unrelated to Global Vision. Assets were purchased with Global Vision
funds (for the benefit of an Insider) that that have no bearing on the business of the company,
414
See MARC J. LANE, REPRESENTING CORPORATE OFFICERS & DIRECTORS §3.11[C][1], at 3-18
(Supp. 2006) (citing Gimbel v. Signal Cos., 316 A.2d 599, 609 (Del. Ch. 1974) (further citations
omitted)).
415
Id. (citing Aronson v. Lewis, 473 A.2d 805, 813 (Del. 1984)).
416
See Hanson Trust, Plc v. ML SCM Acquisition, Inc., 781 F.2d 264, 274 (2d Cir. 1986).
417
Id. at 274 (internal quotations and citations omitted).
127
that weren’t carried as assets on the company’s books at all, much less in their full value, and
which ultimately resulted in significant losses.
The directors collectively abdicated their supervisory responsibilities.
They
exercised no diligence whatsoever in monitoring Global Vision’s finances. Dr. Edelson, who
claims to be the majority shareholder as well as the Chairman of the Board, never saw financial
statements of the company, and claims have been completely in the dark about the loans to the
other shareholders. Mr. DeBenedictis had some inkling that money was going to the Maltas, but
he did not know that Robert Malta was telling Ms. Madden to write checks directly to the
vendors. While he claimed in a declaration provided in the California Action that the Board had
approved the loans to the shareholders as being in the best interest of Global Vision,418 there is no
documentary evidence that the Board ever in fact considered the issue much less made an
informal decision. Nevertheless, Mr. DeBenedictis has testified that the directors approved the
loans.
The Global Vision officers and directors breached their duty of care and loyalty;
committed gross acts of corporate waste; and failed to supervise those managing Global Vision’s
business so to prevent such Insiders from converting its corporate assets for their own use, by
(among other things):
•
418
acquiescing in or otherwise failing to monitor and supervise
individuals in control of Global Vision’s finances to prevent the
diversion of millions of dollars of Global Vision’s assets by the
Maltas to themselves and relatives and to or on behalf of unrelated
businesses and enterprises;
DeBenedictis Ex. 2.
128
•
acquiescing in or otherwise failing to monitor and supervise
individuals in control of Global Vision’s finances to prevent the
diversion of millions of dollars of Global Vision’s assets by Mr.
Imbriolo for his own personal benefit, including without limitation,
for the purchase, furnishing, restoration and maintenance of the
Millbrook house, to bank accounts here and abroad over which
only he had control and the conversion of $300,000 in certified
checks;
•
acquiescing in or otherwise failing to prevent Robert Malta from
utilizing Global Vision’s funds to pay debts he owed to Robert
DeBenedictis;
•
acquiescing in or otherwise failing generally to prevent large sums
of money to be advanced to or for the benefit of Insiders without
informed board consideration as to how such advances would
benefit Global Vision;
•
failing to insure that Global Vision’s taxes were paid on a timely
manner (and thus avoiding the payment of large penalties) or
otherwise causing Global Vision to establish reserves for tax
obligations;
•
failing to ensure that Global Vision, its employees, and third party
vendors though which it marketed its products acted at all time in
compliance with federal statutes and regulations governing the
manufacture, marketing and sale of Global Vision’s OTC drug
products, cosmetics and dietary supplements, thus causing Global
Vision to have to fund millions of dollars in defense of class action
suits;
•
failing to cause Global Vision to establish reserves for any
potential liability arising out of the pending class actions;
•
acquiescing in or otherwise failing to prevent a substantial
corporate opportunity (Triton) from being usurped by a group of
Insiders;
•
failing to take any action to recover the unpaid amounts of the
distributions from the Maltas, Ms. Madden, and Mr. Imbriolo
when the company’s profits declined and funds were needed to pay
creditors;
129
•
failing to prevent Ms. Madden, Mr. Imbriolo, and Robert Malta
from obtaining reimbursement of their personal expenses from the
company.
•
permitting Ms. Madden, Mr. Imbriolo, Ms. Urban, and Robert
Malta to operate expensive luxury cars, unnecessary for Global
Vision’s business, paid for by Global Vision, to garage those cars
at Global Vision’s expense, to pay for a driver for Mr. Imbriolo’s
car with Global Vision money, and to pay parking and traffic fines
for one or more of the Insiders;
•
permitting Robert Malta to conduct himself as if he and not his
brother Enrico was a shareholder and director of Global Vision
(and thus gain access to Global Vision funds for his own personal
use);
•
permitting Global Vision to fund a 401(k) plan for the shareholders
with Stonewall Solutions through the mechanism of the “virtual
director” operation, although Mr. Malta and Mr. DeBenedictis
were not employees of Global Vision, and although Ms. Madden
was no longer an employee after July 2004.
•
permitting Global Vision’s accountants to deduct “deferred salary”
and “expenses” from the Insiders’ loan accounts to reduce those
loan obligations on the books, with no commensurate benefit to
Global Vision; and
•
generally failing in almost every respect to make informed
decisions about what was in the best interest of Global Vision and
instead allowing Global Vision’s assets to be dissipated by the
Insiders for their own benefit rather than utilizing those assets to
establish and expand a financially stable business.
This conduct gives rise to valid prima facie claims against the directors for their
breach of the duty of care and loyalty, mismanagement, conversion, and corporate waste on a
number of grounds.
130
5.
Usurpation of Corporate Opportunity: Triton Technologies.
The Examiner has concluded that Global Vision has a prima facie case against
Mr. Dix, Ms. Madden, and Mr. DeBenedictis for their usurpation of the Triton Technologies
investment.
The obligation of undivided loyalty to the corporation prohibits a fiduciary from
appropriating a business opportunity that belongs to the corporation.419 This restriction applies to
key management personnel and employees, as well as officers and directors.420
A corporate opportunity is “any property, information, or prospective business
dealing in which the corporation has an interest or tangible expectancy or which is essential to its
existence or logically and naturally adaptable to its business.”421 Where the corporation has “an
‘interest’ or ‘tangible expectancy’ in the opportunity,”422 or where an opportunity is the same as
or is “necessary” for, or essential to, the line of business of the corporation,423 the directors may
not usurp the opportunity for their own benefit.”424
419
Matter of Greenberg, 614 N.Y.S.2d 825, 827 (App. Div. 1994) (“[An officer or director’s]
dealings with respect to corporate assets are subject to close scrutiny and must be characterized by
absolute good faith; he may not appropriate corporate assets or opportunities to himself or to a new
corporation formed for that purpose.”); Alexander & Alexander of New York, Inc. v. Fritzen, 542
N.Y.S.2d 530, 533 (App. Div. 1989) (“[C]orporate fiduciaries cannot, without consent, divert and exploit
for their own benefit any opportunity that should be deemed an asset of the corporation.”).
420
See Alexander & Alexander, 542 N.Y.S.2d at 533-34, Representing Corporate Officers &
Directors § 5.01, at 5-3 (2006 supp.).
421
Matter of Greenberg, 614 N.Y.S.2d at 827 (citing Alexander & Alexander, 542 N.Y.S.2d at 534).
422
Alexander & Alexander, 542 N.Y.S.2d at 534 (citing Blaustein v. PanAmerican Petroleum &
Transat Co., 56 N.E.2d 705, 713 (N.Y. 1944) (additional citations omitted).
423
Alexander & Alexander, 542 N.Y.S.2d at 534.
424
In some cases, when at the beginning of the employment or fiduciary relationship, the parties
understood, or it is reasonable to conclude that the parties understood, that the employee officer or
(continued…)
131
Courts have refused to grant relief against officers and directors when the
complaining corporation has explicitly rejected the opportunity425 or is legally or financially
unable to take advantage of the opportunity.426 For a corporate rejection to be valid, however,
full disclosure of all the significant facts and circumstances is necessary, including the
fiduciary’s interest in appropriating the opportunity.427 If the court finds insufficient disclosure,
or lack of good faith on the part of the disinterested board members, the “rejection” of the
opportunity by the board may be insufficient to bar a corporate opportunity claim. Moreover,
courts in New York disapprove of the exception to the doctrine because it creates an incentive
for officers and directors to divert opportunities.
It would be imprudent to hold that employees and corporate officers could
exploit opportunities solely on the grounds of the legal inability of a
corporation, especially if the claimed inability may be easily eliminated,
for availability of the defense of corporate inability reduces the incentive
for executives to seek effective solutions to corporate problems.
director would simultaneously pursue other interests, even ones related to or in direct competition with
the business of the corporation, courts may find the corporation consented to the directors’ pursuit of
transactions. However, even in those cases the director or officer bears the burden of proving such
consent. See Kaplan v. Fenton, 278 A.2d 834, 836 (Del. 1971); Alexander & Alexander, 542 N.Y.S.2d at
535 (citing Burg v. Horn, 380 F.2d at 897, 900); See Miller Mf’g Co. v. Zeiler, 424 N.Y.S.2d 225, 228
(App. Div. 1980) (in light of the corporation’s knowledge, consent, and acquiescence,” the corporate
opportunity was not wrongfully diverted).
425
See Kaplan v. Fenton, 278 A.2d at 836.
426
See Hewlett v. Staff, 652 N.Y.S.2d 350, 351-52 (App. Div. 1997) (the majority shareholder of a
corporation did not breach a duty to the minority when they sold the corporation’s debts at a discount
because there was no factual allegation that the company could have paid off the debt even with the
discount); DiPace v. Figueroa, 637 N.Y.S.2d 220, 224 (App. Div. 1996) (a shareholder’s purchase of a
building and land housing corporation’s business was not a usurpation because the sellers unequivocally
stated that they would not have sold to the corporation).
427
Lane, Representing Corporate Officers & Directors, § 5.10 at 5-20 (2006 Supp.) (citing Valle v.
North Jersey Auto Club, 359 A.2d 504, 508-09 (N.J. Super. Ct. App. Div. 1976)), aff’g as modified, 376
A.2d 1192 (N.J. 1997).
132
Knowledge as to whether a business was financially able to make an
acquisition or legally capable of undertaking a particular venture, or
whether the corporation could have easily overcome either disability, if
one did exist, is generally within the unique knowledge of the diverting
fiduciary or employee. Permitting claims of disability to become the
subject of judicial controversy when they can only be disproven by others
with great difficulty and at considerable expense is to encourage
employees and fiduciaries to divert corporate opportunities knowing that
the diversion may not be effectively challenged.428
If a fiduciary uses his position to usurp a corporate opportunity, a court will
generally impress a constructive trust in favor of the corporation, thereby denying the fiduciary
the benefits of his breach of loyalty.429 If the diversion is ongoing, or otherwise cannot be
remedied by the imposition of a constructive trust, the court may order injunctive relief.430 In
cases in which the imposition of a constructive trust would be inequitable or impractical, the
court may order an accounting, so that the company may determine the amounts that the disloyal
fiduciary gained as a result of diverting the opportunity.431 Money damages will be awarded, in
addition to or instead of equitable relief, so long as computing the damages is not “impracticable
and inefficient” compared to equitable relief.432 With respect to usurpation of a new venture, lost
428
Alexander & Alexander, 542 N.Y.S2d at 534; see Irving Trust Co. v. Deutsch, 73 F.2d 121, 124
(2d Cir. 1934) cert. denied, 294 U.S. 709 (1935) (“[i]f directors are permitted to justify their conduct on
such a theory, there will be a temptation to refrain from exerting their strongest efforts on behalf of the
corporation.”).
429
See, e.g., Matter of Birnbaum v. Birnbaum, N.Y.S.2d 982, 988-89 (App. Div. 1990) (imposing a
constructive trust to recover the present appreciated value of the plaintiff’s misappropriated interest in a
partnership).
430
See Poling Transat Corp. v. A&P Tanker Corp., 443 N.Y.S.2d 895 (App. Div. 1981).
431
See Wolff v. Wolff, 499 N.Y.S.2d 665, 666-67 (N.Y. 1986); Gargano v. V.C. & J. Constr. Corp.,
538 N.Y.S.2d 955 (App. Div. 1989) (ordering an accounting where the defendant acquired property in his
own name as payment for a debt to the corporation).
432
See Poling Transat Corp., 443 N.Y.S.2d at 897.
133
profits are recoverable if (1) the loss of profits has been caused by the defendant’s breach of
duty, and (2) the profits are capable of proof with reasonable certainty.433 A court may order the
recovery of damages based on the disgorgement of the profits gained by the disloyal fiduciary or
on the lost profits that the company would have gained if the opportunity had not been
diverted.434
Mr. Dix, Ms. Madden, and Mr. DeBenedictis purchased a 51% interest in Triton,
which operated a business closely related to Global Vision’s operations – a business which
provides an essential service for Global Vision, which the company now performs for itself inhouse. They did not obtain approval of the sole disinterested member of the board of directors –
Dr. Edelson – before they made the purchase or even bring the opportunity before the board for
consideration.
Legal counsel was not sought for Global Vision to determine whether an
investment in Triton was available to Global Vision or whether it was appropriate for the
individuals to make the investment. Instead, they borrowed funds, interest free, from Global
Vision to pay for their purchase, and they used Global Vision’s funds to advance the credit to
Triton that was their personal obligation under the stock purchase agreement. The Examiner has
concluded that these individuals usurped a corporate opportunity that belonged to Global Vision,
and that a constructive trust should be imposed on all of the profits attributable to their original
Triton share holdings.
433
Kenford Co., Inc. v. County of Erie, 502 N.Y.S.2d 131, 132 (N.Y. 1986).
434
See Gomez v. Bicknell, 756 N.Y.S.2d 209, 214 (App. Div. 2002).
134
6.
Piercing The Corporate Veil
(a)
Introduction
The facts supporting the fraudulent conveyance, breach of duty, mismanagement,
and corporate waste claims against the shareholders (and putative shareholders, Imbriolo and
Robert Malta) also support veil piercing or alter ego claims against these same individuals.
Thus, if the Global Vision estate lacks sufficient resources to pay allowed claims in full, Global
Vision has grounds for seeking recovery of any shortfalls from the Insiders predicated on alter
ego or veil piercing theories.
Generally, the principle of limited liability protects corporate shareholders from
personal liability for corporate obligations. Courts will, however, in appropriate circumstances,
disregard corporate form, or “pierce the corporate veil,” so as to impose liability on
shareholders435 for corporate debts.436
435
Some New York authority supports the view that a nonshareholder may be held liable for
corporate debts through a veil piercing claim. See Matter of Morris v. New York State Dept. of Taxation
& Fin., 588 N.Y.S.2d 927, 929 (App. Div. 1992) (accepting argument that nonshareholder director and
officer was in a position to dominate the corporation with respect to transactions at issue, and stating that
“we perceive that we should be concerned with ‘reality and not form [and] with how the corporation
operated and [the nonshareholder insider’s] relationship to that operation.”) (citations omitted). In
reviewing this case on appeal, the New York Court of Appeals noted that it had found “no definitive
authority on the issue of whether a nonshareholder could be personally liable under a theory of piercing
the corporate veil,” but declined to decide the issue, finding that the plaintiff’s had failed to prove fraud or
wrongdoing necessary to sustain a veil-piercing claim. See Morris v. New York State Dept. of Taxation &
Fin, 603 N.Y.S.2d 807, 811 (N.Y. 1993). See also F. HODGE O’NEAL & ROBERT B. THOMPSON, 2
O’NEAL AND THOMPSON’S CLOSE CORPORATIONS AND LLCS: LAW AND PRACTICE § 8:18 (REV. 3D ED.
2007) (stating that “an individual who is not a shareholder has also been found liable under a piercing
theory where he was the active force in the entity” (citing Fontana v. TLD Builders, Inc., 840 N.E. 2d 767
(Ill. App. Ct. 2005), appeal denied, 852 N.E.2d 239 (Ill. 2006). Under this line of cases, alter ego claims
lie against Mr. Imbriolo and Robert Malta whether or not they are shareholders of record.
135
The doctrine of piercing the corporate veil is employed by a party seeking to
“circumvent the limited liability of the owners and hold them liable for some underlying
corporate obligation.”437 As the Court of Appeals stated in Morris v. New York State Department
of Taxation:
[t]he concept [of veil piercing] is equitable in nature and assumes
that the corporation itself is liable for the obligation sought to be
imposed. . . . Thus, an attempt of a third party to pierce the
corporate veil does not constitute a cause of action independent of
that against the corporation; rather it is an assertion of facts and
circumstances which will persuade the court to impose the
corporate obligation on its owners.438
A veil-piercing claim may be asserted by a bankruptcy trustee under the “strongarm” provisions of section 544 of the Bankruptcy Code, which permits the trustee, generally, to
assert claims that belong to the debtor’s creditors under state law.439 Because piercing the
corporate veil redresses a general injury to creditors, rather than a particularized injury belonging
to a single creditor, the right to assert the veil-piercing claim belongs exclusively to the trustee
436
Under New York choice of law principles, the law of the state of incorporation determines when
the corporate form will be disregarded and liability will be imposed on shareholders. Fletcher v. Atex,
Inc., 68 F.3d 1451, 1456 (2d Cir. 1995). Because the Debtor is a New York corporation, New York law
applies.
437
Mars Electronics of N.Y., Inc. v. U.S.A. Direct, Inc., 28 F.Supp. 2d 91, 97 appeal dismissed 199
F.3d 1322 (2d Cir. 1999), aff’d 242 F.3d 366 (2d Cir. 2000) (E.D.N.Y. 1993) (quoting Morris, 603 N.Y.
S.2d at 810).
438
Morris, 603 N.Y.S. 2d at 810.
439
See In re Keene Corp., 164 B.R. 844, 851 (Bankr. S.D.N.Y. 1994) (citing St. Paul Fire & Marine
Ins. Co. v. PepsiCo, Inc., 884 F.2d 688, 700 (2d Cir. 1989)). In PepsiCo the Second Circuit Court of
Appeals stated: “If a claim is a general one, with no particularized injury arising from it, and if that claim
could be brought by any creditor of the debtor, the trustee is the proper person to assert the claim, and the
creditors are bound by the outcome of the trustee’s action.” St. Paul Fire & Marine Ins. Co, 884 F.2d. at
701.
136
once bankruptcy ensues.440
No individual creditor can assert the claim unless it has been
abandoned by the trustee or the creditor obtains relief from the automatic stay.441
(b)
Elements Of The Veil Piercing Claim
Piercing the corporate veil “necessarily turns upon the facts and equities of a
given situation.”442 While there are no definitive rules governing when a court may exercise the
power to pierce, the Morris court stated that piercing requires, at a minimum, a showing that
“(1) the owners exercised complete domination of the corporation in respect to the transaction
attacked; and (2) that such domination was used to commit a fraud or wrong against the plaintiff
which resulted in plaintiff’s injury.”443 The court explained: “[w]hile complete domination of the
corporation is the key to piercing the corporate veil, especially when the owners use the
440
Keene, 164 B.R. at 850-51. The Keene court held that standing under § 544 of the Bankruptcy
Code is a function of state law, and that New York law vested veil-piercing claims in the bankruptcy
trustee. See id. at 852 (“The New York cases are in accord; under New York law, the trustee has standing
to assert claims based upon piercing the corporate veil or alter ego liability, and creditors are precluded
from pursuing those claims until they have been abandoned.”) (citations omitted).
441
Id. at 852.
442
Mars Elecs., 28 F.Supp. 2d at 97; see Morris, 603 N.Y.S.2d at 10 (“Because a decision whether
to pierce the corporate veil in a given instance will necessarily depend on the attendant facts and equities,
the New York cases may not be reduced to definitive rules governing the varying circumstances when the
power may be exercised.”).
443
Morris, 603 N.Y.S.2d at 810-11 (emphasis added); see American Fuel Corp. v. Utah Energy Dev.
Co., 122 F.3d 130, 134 (2d Cir. 1997) (citing Morris for applicable New York law on piercing the veil);
Thrift Drug, Inc., v. Universal Prescription Adm’rs, 131 F.3d 95, 97 (2d Cir. 1997) (same). Prior to
Morris, the Court of Appeals for the Second Circuit had interpreted New York law as permitting a
plaintiff to pierce the corporate veil in either of two situations: “to prevent fraud or other wrong,” or “in
the case of complete domination and control, ‘as where a parent dominates and controls a subsidiary’.”
Mars Electronics, 28 F.Supp.2d at 97 (quoting Thrift Drug, 131 F.3d at 97, and discussing effect of
Morris on New York veil-piercing standards). “Morris rejected this either/or dichotomy and it is now
clear that under New York law a plaintiff seeking to pierce the corporate veil must prove both complete
domination and that the domination was used to commit a fraud with respect to the transaction at issue.”
Id. (citing American Fuel Corp., 122 F.3d at 134).
137
corporation as a mere device to further their personal rather than the corporate business, such
domination, standing alone is not enough; some showing of a wrongful or unjust act toward [the]
plaintiff is required. . . . The party seeking to pierce the corporate veil must establish that the
owners, through their domination, abused the privilege of doing business in the corporate form to
perpetrate a wrong or injustice against the party such that a court in equity will intervene.”444
(1)
Domination and Control
The following factors, while not exclusive, are often considered by New York
courts to determine whether an entity is “dominated and controlled” to such an extent to allow
veil-piercing:
444
(1)
the absence of the formalities and paraphernalia that are
part and parcel of the corporate existence, e.g., failure to
keep corporate records,445 and the making of undocumented
loans;446
(2)
inadequate capitalization;447
Morris, 603 N.Y.S.2d at 811.
445
Wm. Passalacqua Builders, Inc. v. Resnick Developers, Inc., 933 F.2d 131, 139 (2d Cir. 1997);
William Wrigley Jr. Co. v. Waters, 890 F.2d 594, 600 (2d Cir. 1989).
446
Petersen v. Vallenzano, 1992 WL 116427, at *3 (S.D.N.Y. 1992).
447
Passalacqua, 933 F.2d at 139; Wrigley, 890 F.2d at 600. Capital in this context refers to the
corporation’s net assets. No formula determines whether a company is adequately capitalized. As a
general rule, “shareholders should provide unencumbered capital reasonably adequate for a corporation’s
prospective liabilities; if the capital is illusory or trifling compared with the business to be done and the
risks of loss, this may provide grounds for denying the separate entity privilege.” 1 Fletcher Cyc. Corp.
§ 41.33, (2007). See JSC Foreign Econ. Assoc. Technostroyexport v. Int’l. Dev. & Trade Servs. Inc., 386
F.Supp.2d 461, 473 (S.D.N.Y. 2005) (company was undercapitalized and corporate veil could be pierced
when company was initially capitalized with $10,000 and was either insolvent or had net worth ranging
from $6,418 to $55,588 during relevant period of time, despite millions of dollars in revenues); Capital
Distrib. Servs., Ltd. v. Ducor Express Airlines, Inc., 2007 WL 1288046, at *3–4 (E.D.N.Y. 2007)
(company was undercapitalized when the company’s principals fraudulently transferred $300,000 out of
(continued…)
138
(3)
whether funds are put in and taken out of the corporation
for personal rather than corporate purposes,448 or the
commingling of corporate and personal funds;449
(4)
siphoning or diversion of corporate funds;450
(5)
insolvency at the time of the challenged transaction;451
(6)
nonfunctioning of nondominant officers and directors;452
(7)
stripping of corporate assets in anticipation of impending
legal liability;453
(8)
loans to dominant shareholder or affiliates of dominant
shareholder without any identified corporate purpose;454
its bank accounts, leaving the company with less than $1,000, when the transfers occurred on the same
day that the company was served with process in a complaint that resulted in a $900,000 judgment).
448
Passalacqua, 933 F.2d at 139.
449
Wrigley, 890 F.2d at 600.
450
Wrigley, 890 F.2d at 601. Such siphoning of assets may include “corporate payments of
excessive salaries or other fees, unfair self-dealing, unsecured interest-free “loans” from the corporation
or other withdrawals. LAW OF CORPORATE OFFICERS & DIRECTORS, § 20:8, at 20-24 (citations omitted);
see JSC Foreign Econ. Assoc., 386 F.Supp.2d at 473-74 (piercing was justified when defendants had
diverted corporate funds for their personal use because millions in dollars of payments for company sales
transactions were wired directly into Swiss bank accounts of the owners; the owner and his son were paid
consulting fees, even though there was no evidence that they provided any consulting services; the
company paid $150,000 for a personal investment of the owner, which apparently lacked any corporate
purpose; $9.9 million of company receipts were classified as loans to the owner that were used fund and
purchase the renovation of apartments by owners; and company funds were diverted at a time that the
owners were making large purchases of art and real estate, the origin of the funds for which remained
unexplained).
451
Wingley, 890 F.2d at 601.
452
Id.
453
Kinetic Instruments, Inc. v. Lares, 802 F.Supp. 976, 985 (S.D.N.Y. 1992) (citing Minnesota
Mining & Mfg. Co. v. Eco Chem., Inc., 757 F.2d 1256, 1264 (Fed. Cir. 1985) (quoting 1 W. FLETCHER,
CYC. CORP. § 45 (rev. ed. 1983)); cf. Godwin Realty Assocs. v. CATV Enterprises, Inc., 712 N.Y.S.2d 39,
41 (App. Div. 2000) (“The stripping of corporate assets by shareholders to render the corporation
judgment proof constitutes fraud or wrong justifying piercing the corporate veil.”).
454
Thrift Drug, Inc. v. Universal Prescription Admin., 131 F.3d 95, 97-98 (2d Cir. 1997).
139
(9)
overlap in ownership, officers, directors, and personnel;455
(10)
common office space, address and telephone numbers of
corporate entities;
(11)
whether the controlling shareholder dealt with the
dominated corporations at arm’s length; and
(12)
whether the corporation in question had property that was
used by the controlling shareholder as if it were its own.456
“No one factor dominates, nor need every factor be satisfied. Rather, the factors are used to
consider whether the policy in favor of corporate of the corporate form is outweighed by the
policy in favor of disregarding the form given the totality of the evidence.”457
(2)
Fraud or Wrongdoing
The second element necessary to sustain a veil-piercing claim in New York is a
showing that the defendant’s domination and control of the company resulted in a fraud or wrong
that injured the plaintiff. A plaintiff is “not required to plead or prove actual fraud in order to
pierce the corporate defendant’s corporate veil, but [must prove] only that the individual
defendant’s control of the corporate defendant was used to perpetrate a wrongful or unjust act
toward the plaintiff.”458
455
The mere prospect of an unsatisfied judgment against the debtor
Passalacqua, 933 F.2d at 139.
456
Id. The list of factors set forth by the Passalacqua court were applied in the context of a parentsubsidiary veil-piercing claim; thus, some of the Passalacqua terminology is not relevant in the case of a
veil-piercing claim against an individual shareholder, and has, accordingly, been altered here to account
for the different context. Courts apply the Passalacqua factors, with appropriate changes in emphasis, to
individual shareholder cases. See JSC Foreign Econ. Assoc., 386 F.Supp. 2d at 472.
457
Petersen, 1992 WL 116427, at *3 (citing Passalacqua, 933 F.2d at 139).
458
Rotella v. Derner, 723 N.Y.S.2d at 802 (App. Div. 2001) (quoting Lederer v. King, 625 N.Y.S.2d
149, 150 (App. Div. 1995); see Studley v. Lefrak, 425 N.Y.S.2d 65, 66 (N.Y. 1979) (“Although proof of
fraud is relevant in such a suit it is not essential”).
140
corporation is insufficient to satisfy the fraud or wrongdoing standard, but the inability of an
undercapitalized corporation to satisfy a legitimate obligations may suffice.459 Conversion of
corporate assets, constructive or actual fraudulent conveyances, diversion of assets to avoid a
judgment, and the diversion of funds before a claim is made but after a defendant has notice of a
potential claim, constitute fraud or wrongdoing for purposes of stating a veil-piercing claim.460
(c)
Liability of DeBenedictis, the Maltas and Madden on Veil
Piercing Grounds
The shareholders paid little to no attention to corporate form; utilized Global
Vision’s assets as if the assets belonged to them; diverted and permitted others to divert Global
Vision’s funds for investments (Millbrook home) that were unrelated to Global Vision’s
business, provided no benefit, and resulted in substantial losses, to Global Vision; acquiesced in
or approved very large undocumented loans ($12 million) to shareholders (or putative
shareholders) for which no interest has ever been paid and substantial amounts of principal
459
See Rotella, 723 N.Y.S.2d at 802 (“Where, as here, an undercapitalized corporation is unable to
pay a judgment debt and there has been a disregard of corporate formalities and personal use of corporate
funds . . . [there is] sufficient evidence of wrongdoing to justify piercing the corporate veil.) (citations
omitted).
460
Mars Electronics, 28 F.Supp.2d at 99 (veil piercing proper when defendant converted corporate
assets and caused corporation to enter into fraudulent conveyances); In re Montclair Homes, 200 B.R. at
100 (facts indicated conclusively that defendant’s domination and control resulted in wrongful or unjust
act when defendant siphoned assets in order to judgment proof company and then filed no asset chapter 7
case after waiting for insider preference period to expire); JSC Foreign ECar. Assoc. 386 F.Supp.2d at
476 (“[T]he diversion of funds before a claim is made but after a defendant has notice of a potential claim
can constitute a wrong for the purposes of piercing the corporate veil.”); Godwin Realty Assocs., 275
A.D.2d at 270 (“The stripping of corporate assets by shareholders to render the corporation judgment
proof constitutes a fraud or wrong justifying piercing the corporate veil.”); Dirs Guild of Am., Inc. v.
Garrison Prods., Inc., 733 F.Supp.755, 762 (S.D.N.Y. 1990) (veil could be pierced when controlling
shareholder allowed corporation to carry on business without insufficient assets to meet its debts in order
to defeat legitimate creditor claims).
141
remains unpaid; placed assets out of reach of creditors (Chicago Equities, Dublin Press, and
Bank of Ireland accounts); permitted certain individuals (two shareholders and an officer) to
usurp a substantial corporate opportunity (approximately $7 million) for Global Vision so that
they could reap the benefit of that opportunity (while initially using Global Vision’s funds to do
so) – all to the detriment (and ultimate bankruptcy) of Global Vision. The Examiner has
concluded that this evidence supports veil piercing claims against the Insiders to the extent that
there are insufficient estate assets to pay creditors in full.
7.
Recovery of Officers’ Compensation: The “Faithless Servant”
Doctrine
Under the “faithless servant” doctrine an employer is entitled to the return of
compensation paid to the employee during his period of disloyalty.461 Courts have applied this
principle to corporate officers, holding that an officer’s breach of the duty of loyalty justifies the
forfeiture of compensation.462 The doctrine embraces salary, benefits, and other payments related
to the faithless servant’s employment.463 A bankruptcy trustee has standing to bring a faithless
servant action based on the breach of fiduciary duty.464
461
See Maritime Fish Prods., Inc. v. World-Wide Fish Prods., Inc., 474 N.Y.S.2d 281, 285 (App.
Div. 1984); In re O.P.M. Leasing Servs., Inc., 21 B.R. 986, 991 (Bankr. S.D.N.Y. 1982) (“It is wellestablished law in New York that a faithless employee’s breach of fiduciary duties to his corporation
forfeits his rights to compensation for services rendered by him, and if he is paid without knowledge [by
the corporation] of his disloyalty, he may be compelled to return what he has improperly received”).
462
In re O.P.M. Leasing Servs., Inc., 21 B.R. at 991 (Bankr. S.D.N.Y. 1982); Wilshire Oil Co. of
Texas v. Riffle, 406 F.2d 1061, 1062 (10th Cir. 1969), cert denied, 396 U.S. 843 (1969).
463
See O.P.M. Leasing 21 B.R. at 992.
464
Id.
142
Global Vision may have a cause of action under this doctrine against Mr. Imbriolo
and Ms. Madden. Mr. Imbriolo has failed to account for over $800,000 million diverted to his
companies from 2002 to July 2003 while he was an officer of the company, and for $300,000 in
missing certified checks. He received $824,400 in the form of pay and other cash transfers
during those years and there are grounds to contend that he should repay all of these funds to the
estate.
Further investigation is indicated to determine whether Ms. Madden may also be
liable to the estate under this theory. She was the CFO and the bookkeeper on duty during the
time the Maltas and Mr. Imbriolo paid themselves more than $10 million, and she did nothing to
stop the transfers. Moreover, she may have had conflicting loyalties to the Maltas, with whom
she had a longstanding relationship and for whom she continued to work after her employment at
Global Vision.465
8.
Potential Preference Claims
Section 547(b) of the Bankruptcy Code permits a trustee to avoid any transfer of
an interest of the debtor in property (i) to or for the benefit of a creditor, (ii) for or on account of
an antecedent debt, (iii) made while the debtor was insolvent, (iv) made on or within 90 days
before bankruptcy (one year for insiders), and (v) that enables the creditor to receive more than it
would receive in a Chapter 7 case if the transfer had not been made. The trustee has the burden
465
Mr. DeBenedictis testified that the checks written to the Maltas’ restaurant vendors have
disappeared from Global Vision files. DeBenedictis Dep. Tr. at 216-19.
143
of proof on each of these elements.466 However, insolvency is presumed during the 90 days
immediately preceding the petition,467 and the last requirement is satisfied if the claim of the
creditor is a general unsecured claim.468
When a transfer is made to an insider the reach back period for preference
avoidance is one year.469 The longer period “is designed to inhibit insiders – entities normally
privy to inside financial information long before it becomes available to arm’s-length creditors –
from influencing the insolvent debtor to deplete its remaining assets for the insider’s benefit, to
the detriment of non-insider creditors.”470 Congress considered an insider to be “one who has a
sufficiently close relationship with the debtor that his conduct is made subject to closer scrutiny
than those dealing at arms length with the debtor.”471
The Bankruptcy Code definition of insider is not exclusive. Under §101(31)(B)
of the Bankruptcy Code, if the debtor is a corporation, insider includes the following specified
466
11 U.S.C. § 547(g).
467
11 U.S.C. § 547(f). The presumption may be rebutted. Lawson v. Ford Motor Co. (In re Roblin
Indus., Inc.), 78 F.3d 30, 34 (2d Cir. 1996).
468
McColley v. Navaro Gem Ltd. (In re Candor Diamond Corp.), 68 B.R. 588, 594-95 (Bankr.
S.D.N.Y. 1986) (“To establish a preferential transfer requires the trustee to show that the creditor received
more than he would have had the transfer not been made, had the case been under chapter 7 and had the
creditor received payment only to the extent provided by the Code . . . . As a practical matter, this element
of a preference is almost always satisfied where a debtor transfers property to an unsecured creditor . . . .
and the creditor would receive less than 100% in a Chapter 7 liquidation.”)
469
11 U.S.C. § 547(b)(1)(B).
470
Travelers Ins. Co. v. Cambridge Meridian Group, Inc. (In re Erin Food Servs., Inc.), 980 F.2d
792, 796 (lst Cir. 1992); see also DeRosa v. Buildex Inc. (In re F&S Cent. Mfg. Corp.), 53 B.R. 842, 848
(Bankr. E.D.N.Y. 1985) (“The insider provisions were enacted to protect general creditors from
overreaching by those with power or special influence over the debtor”).
471
H.R. Rep No. 95-595 (1978), at 312, reprinted in 1978 U.S.C.C.A.N. 5963, 6269; S. Reat No. 95989, at 25 (1978), reprinted in 1978 U.S.C.C.A.N. 5787, 5810.
144
persons and entities: a director of the debtor; an officer of the debtor; a person in control of the
debtor; and a relative of a general partner, director, officer, or person in control of the debtor.472
Courts determine whether a creditor is an insider on a case-by-case basis.473
When analyzing whether a person is a “person in control” insider, the courts will
consider how much control that individual was able to exert over the debtor’s affairs.474 Courts
have generally focused on two factors: (1) the closeness of the relationship between the
transferee and the debtor; and (2) whether the transactions between the transferee and the debtor
were conducted at arm’s length.475
The reach of “insider status is considerably expanded because an “affiliate, or
insider of an affiliate as if such affiliate were the debtor,” is also an insider.476
Notably,
“affiliate” extends to entities that are under common control with the debtor. Thus, for example,
472
11 U.S.C. § 101(31)(B).
473
See Mishkin v. Siclari (In re Adler, Coleman Clearing Corp.), 277 B.R. 520, 564-65 (Bankr.
S.D.N.Y. 2002) (“The Court is not limited to [§101(31)], and may consider whether one is an insider
based on a totality of the circumstances . . . [t]he analysis is a fact intensive one, which is done on a caseby-case basis”) (citations omitted).
474
See, e.g., CPY Co. v. Ameriscribe Corp. (In re Chas. AT Young Co.), 145 B.R. 131, 136 (Bankr.
S.D.N.Y. 1992) (“Therefore, insider status must be determined on a case by case basis through
examination of the totality of the circumstances and the creditor’s degree of involvement in the debtor’s
affairs”).
475
See Browning Interests v. Allison (Matter of Holloway), 955 F.2d 1008, 1011-14 (5th Cir. 1992)
(former wife who had been divorced from the debtor for over eleven years prior to making loan was an
insider for purpose of determining whether transfer was fraudulent conveyance given duration of
marriage, continued frequent contact, and unreasonableness of loan) (citations omitted); Adler, Coleman
Clearing Corp., 277 B.R. at 565 (close personal friend of head trader with debtor’s introducing broker for
which debtor had served as a clearing firm, who plead guilty of securities fraud, was an insider for
purposes of equitable subordination of the customer claim).
476
11 U.S.C. §§ 101(31)(E), 101(2).
145
businesses owned by Robert DeBenedictis may be considered insiders for purposes of the
preference statute.
Mr. DeBenedictis is the 60% owner of 227 E. 56th Street Company LLP, which
owns the building at that address and which is Global Vision’s landlord. Provided the lease is
not assumed in the bankruptcy case, Mr. DeBenedictis’s ownership interest in the landlord
permits the Global Vision estate to recover preferential payments made to the landlord under the
lease within the 12 months prior to the Petition Date. These payments total $564,702.
Mr. DeBenedictis owned 36% of Triton between August 18, 2006 and January 2,
2007, when he gave half of his interest in Triton to Mr. Imbriolo. His ownership of more than
20% of Triton during any portion of the 12 months preceding the Petition Date renders Triton an
Insider for purposes of the preference analysis, permitting the estate to recover any preferential
payments Triton received the extended preference period while Mr. DeBenedictis held more than
20% of the Triton stock. Triton received a total of $363,548 during the relevant period of time.
Global Vision therefore has a prima facie case to recover those payments as preferences.
Mr. Dix advanced $20,000 to Global Vision during the preference period to
enable the company to meet payroll obligations. All of those advances were repaid to Mr. Dix
before the Petition Date. Global Vision therefore has a prima facie case to recover those
payments as preferences.
146
9.
Statute of Limitations
Because many of the actions at issue with respect to the Insiders occurred several
years before the Petition Date, the Examiner has investigated whether claims against the Insiders
would be barred by the relevant statutes of limitations.477 Most of the state law causes of action
discussed below have six-year statutes of limitations. The Examiner has concluded that good
arguments exist for tolling the applicable statutes of limitations.
Section 213(7) of the New York Civil Practice Law and Rules (the “CPLR”)
provides for a six-year limitations period applicable to “an action by or on behalf of the
corporation against a present or former director, officer, or stockholder, for an accounting, or to
procure a judgment on the ground of fraud, or to enforce a liability, penalty or forfeiture, or to
recover damages for waste or for an injury to property for an accounting in connection
therewith.”478 State and federal courts have held that this six-year statute of limitations applies to
all breach of fiduciary duty and corporate mismanagement claims brought against officers and
directors by or on behalf of the corporation.479 The six-year limitations period of CPLR 213(7)
477
Under federal choice of law rules, the bankruptcy court should apply the New York statute of
limitations to underlying substantive claims governed by New York law. Official Comm. of Asbestos
Claimants of G-I Holding, Inc. v. Heyman, 227 B.R. 20, 29-30 (Bankr. S.D.N.Y. 2002).
478
N.Y. C.P.L.R. § 213(7).
479
Lippe v. Bairnco Corp., 230 B.R. 906, 913-14 (S.D.N.Y. 1999) (six year statute of limitations
period applies to claims for breach of fiduciary duty and unlawful payment of dividends); Whitney
Holdings, Ltd. v. Givotovsky, 988 F.Supp. at 732, 741-42 (S.D.N.Y. 1997) (“Where, as here, a corporation
sues a former officer, director and shareholder for breach of fiduciary duty, CPLR 213(7) governs.”); In
re Argo Commc’n. Corp., 134 B.R. 776, 787 (Bankr. S.D.N.Y. 1991); Matter of Skorr v. Skorr Steel Co.,
Inc., 814 N.Y.S.2d 250, 251 (App. Div. 2006), 29 A.D.3d 594, 595 (2d Dep’t 2006) (shareholder
derivative claims alleging misappropriation of corporate opportunity, diversion of corporate assets, and
breach of fiduciary duty were subject to six year statute of limitations under CPLR 213(7)); Rupert v.
Tigue, N.Y.S.2d 502, 503 (App. Div. 1999) action brought under BCL § 720 for an accounting, recovery
(continued…)
147
also applies to claims against officer and directors for payment of unlawful dividends.480 Breach
of fiduciary duty claims accrue when the wrongful action constituting the breach occurs, or, in
the case of claims based on actual fraud upon reasonable discovery of the breach.481
Actions to recover the illegal loans made to directors under BCL § 714 are most
likely subject to a six-year limitations period, either as claims involving breaches of fiduciary
duty under CPLR § 213(7) or as actions to enforce a contract under CPLR § 213(2).482 The
cause of action to recover an amount due under a loan that lacks a specific repayment term
accrues on the date that the loan is made.483
of wrongfully diverted funds and property, and damages, subject to six year limitations period under
CPLR 213(7)); Toscano v. Toscano, (applying six-year period to action alleging diversion of corporate
assets, misappropriation, and breach of fiduciary duty); Finlayson v. Death, No. 0807-07 2008 WL
412623, at *4 (N.Y. Sup., Jan. 22, 2008) (shareholder derivative action, regardless of theory underlying
the claim, is subject to six-year limitations period). Some cases have held that damage claims arising
from breaches of fiduciary duty are subject to the three year limitations period applicable to actions “to
recover for an injury to property” under CPLR § 214(4), or “to recover upon liability, penalty or forfeiture
created or imposed by statute” under CPLR § 214(2). See, e.g., Purves v. ICM Artists, Ltd., 119 B.R. 407,
410-11 (S.D.N.Y. 1990) (three-year statute of limitations applies to claims under NYBCL § 720(b)). The
reasoning of these cases has been rejected by the Southern District of New York. See, e.g., Whitney
Holdings, 988 F.Supp at 742 (“Section 213(7) supplants all other statutes of limitation potentially
applicable to a suit on a corporation’s claim against its director, officer or shareholder.”)
480
Lippe, 230 B.R. at 913-914.
481
Whitney Holding., 988 F.Supp. at 743-44 (analyzing the legislative history of CPLR § 213(7) and
concluding that, except in cases of actual fraud, breach of fiduciary duty claims accrue upon breach, not
upon discovery).
482
CPLR § 213(2) provides that an action “upon a contractual obligation or liability, express or
implied” must be commenced within six years. The defendants may argue that enforcement of the illegal
loans, which are undocumented, may be barred by the statute of frauds. A statute of frauds defense is not
available, however, when the defendant has partially performed the agreement by repaying a portion of
the loan. See In re Design Concepts, Ltd., 741 N.Y.S.2d 93, 94 (App. Div. 2002).
483
See In re Kharisma Jewelry, Inc., 165 B.R. 371, 373-74 (Bankr. E.D.N.Y. 1994) (citing The
Bradford, Eldred & Cuba R.R. Co. v. The New York Lake Erie & W.R.R. Co., 25 N.E. 499, 501 (N.Y.
1890).
148
A cause of action based on constructive fraud in New York is governed by a sixyear statute of limitations under CPLR §213(8), and such a cause of action accrues at the time
the fraudulent conveyance occurs.484 A cause of action based on actual fraud must be brought
within six years of the date that the fraud or conveyance occurs or within two years of the date
that the fraud should have been discovered, whichever is longer.485
The Examiner believes that the running of the statute of limitations also may be
tolled with respect to certain of the claims and defendants. Under New York law, the limitations
period for claims arising out of a fiduciary relationship does not commence until the fiduciary
has openly repudiated his or her fiduciary obligation or the relationship has been otherwise
terminated.486 Thus, the statute of limitations is currently tolled with respect to breach of duty
claims against Mr. DeBenedictis and Dr. Edelson, who continue to serve as directors of the
Debtor, and is tolled against the former directors until the date that they resigned their positions.
For Ms. Madden and Enrico Malta, the period would be tolled until July 2004, when they
resigned as shareholders and directors.
Similarly, under the “adverse domination” doctrine, the statute of limitations is
equitably tolled “while a corporate plaintiff continues under the domination of the
484
Liberty Co. v. Boyle, 708 N.Y.S.2d 122, 125 (App. Div. 2000) (citing Wall Street Assoc., 684
N.Y.S.2d at 248.
485
Id.
486
Golden Pacific Bancorp v. F.D.I.C., 273 F.3d 509, 519 (2d Cir. 2001); Finlayson, 2008 WL
412623, at *4 (repudiation occurred sufficient to begin the running of limitations period when director
denied an obligation to return money he had admittedly taken from the corporation).
149
wrongdoers.”487
Global Vision has been continuously under the control of a group of
wrongdoing shareholders, officers, and directors. The statute of limitations should be tolled with
respect to the estate’s breach of duty claims against each of them for that reason as well.488
Domination and control by wrongdoers also supports the tolling of the statute
with respect to fraudulent transfer claims against the Insiders.489 In addition, under the general
doctrine of equitable tolling, the statute of limitations is tolled in cases where “the defendant is
shown to have engaged in conduct, often itself fraudulent, that concealed from the plaintiff the
existence of the cause of action.”490 Finally, with respect to actions by the estate to recover the
shareholder loans, the running of the limitations period may have been tolled as a result of the
Insiders’ partial repayment of the loans.491
487
Michelsen v. Penney, 135 F.2d 409, 415-16 (2d Cir. 1943); see Van Schaick v. Aron, 10 N.Y.S.2d
550, 561-62 (Sup. Ct. 1938); In re Everfresh Beverages, Inc., 238 B.R. 558, 577 (Bankr. S.D.N.Y. 1999)
(holding, for purposes of 12(b)(6) ruling, that plaintiffs pleaded facts sufficient support equitable tolling
when they alleged debtor’s insider dominated and controlled company during period in which fraudulent
transfers occurred).
488
See Michelsen v. Penney, 135 F.2d at 416, n.2.
489
Everfresh Beverages, Inc., 238 B.R. at 577 (Bankr. S.D.N.Y. 1999).
490
680 Fifth Avenue Assocs., 218 B.R. at 318 (Bankr. S.D.N.Y. 1998).
491
See Skaneateles Savings Bank v. Modi Assocs., 668 N.Y.S.2d 819, 820-21 (App. Div. 1998)
(holding that partial payment of principal or interest under demand note renewed statute of limitations
when voluntarily and deliberately made under circumstances that amount to an acknowledgement of an
existing liability or obligation); Lew Morris Demolition Co., Inc. v. Bd. Ed. City of New York, 387
N.Y.S.2d 409, 411 (“In order that a part payment shall have the effect of tolling a time-limitation period,
[. . . .] it must be shown that there was a payment of a portion of an admitted debt, made and accepted as
such, accompanied by circumstances that amount to an absolute and unqualified acknowledgement by the
debtor of more being due, from which a promise may be inferred to pay the remainder.”).
150
The foregoing constitutes the Examiner’s Report in accordance with the issues set
forth in the Examiner Order.
Dated: New York, New York
April 25, 2008
Respectfully,
/s/ Dianne F. Coffino
Dianne F. Coffino, as Examiner (DC 2672)
COVINGTON & BURLING LLP
Attorneys for the Examiner
The New York Times Building
620 Eighth Avenue
New York, NY 10018
Tel: (212) 841-1000
Fax: (212) 841-1010
By:
/s/ Susan Power Johnston
Susan Power Johnston (SJ 9386)
151

Examiner`s Report

Transcription

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