[2014] NY AG takes on Manhattan Club

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

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

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

A. The Manhattan Club ...................................................................................................10
B. All Respondents are Involved in the Offering of Real Estate Securities at the
Manhattan Club ..........................................................................................................12
C. Sponsor and the Eichners Certified the Offering Plan .................................................13
D. In 2014, NYAG Opened an Investigation and Uncovered Fraud in the Offering of
Real Estate Securities at the Manhattan Club ............................................................14

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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