[iJn proceedings in a district court where a receiver is appointed for

Property, real, personal or mixed, situated in different districts,

Process may issue and be executed in any such districts as if the

property lay wholly within one district, but orders affecting the

property shall be entered of record in each of such districts.
29U.S.C. § 1692. This section provides for the issuance and execution of process; however, it does
not mention service of process. Contrary to Section 1692, other statutes that have been construed
to permit nationwide service of process include language not found in Section 1692. See 18 U.S.C.
§ 1965(b) (“process may be served in any judicial district of the United States”); 28 U.S.C. § 1697
(“process, other than subpoenas, may be served at any place within the United States”); 15 U.S.C.
§ 78aa (process “may be served in any other district of which the defendant is an inhabitant or
wherever the defendant may be found”). Section 1692 provides no similar language providing for
nationwide service of process and, therefore, does not create personal jurisdiction under Rule
A(K)Q)(D). See World Harvest, 2003 WL 22048047 at *3.

Based on the above, the receivership statutes fail to establish personal jurisdiction over the

Defendants.

13


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

Plaintiffs allege that this Court has personal jurisdiction over the Defendants based on:

(1) Defendants purposefully marketed their financial services to citizens of the United States and to
residents of the state of Illinois by providing Leadenhall and Axxess application forms and marketing
materials to Denson, knowing Denson would circulate the materials to potential investors in Illinois;
(2) Defendants purposely and systematically paid interest on behalf of Morningstar and C4T US
companies to investors in Illinois from Leadenhall’s corporate account in Florida in the form of
checks and wire transfers; (3) Defendants distributed bank credit and debit cards to residents of
Illinois, knowing that such cards would be utilized in banking and other financial institutions in

Illinois; (4) Defendants are part of a conspiracy to defraud and are, thus, subjected to the personal


Specific jurisdiction “refers to jurisdiction over a defendant in a suit ‘arising out of or related
to the defendant’s contacts with the forum.” RAR, 107 F.3d at 1277, quoting Helicopteros 486 U.S.
408 (1984). To determine whether specific jurisdiction exists, this Court must determine whether
the Defendants have “purposefully established minimum contacts within [I!linois]” and whether
those contacts would make personal jurisdiction reasonable and fair under the circumstances. Burger
King Corp. v. Rudzewicz, 471 U.S. 462, 474 (1985). Defendants must have “purposefully availed”
itself of the privilege of conducting activities within the forum state, invoking the benefits and
protections of its laws such that they would “reasonably anticipate being haled into court there.”
Asahi-Metal Indus. Co. v. Superior Court, 480 U.S. 102, 109 (1987) (Asahi-Metal). The plaintiff
must establish that haling the defendant into court is consistent with the Fourteenth Amendment’s
due process clause. LFG, 78 F.Supp.2d at 734.

The due process requirement is met if: (1) the defendant has sufficient minimum contacts
with the forum state; (2) the claims asserted arise or result from the defendant’s forum-related
activities; and (3) the exercise of jurisdiction is reasonable. Evromarket, 96 F.Supp.2d at 834.

A defendant need not be physically present in the jurisdiction to have sufficient minimum
contacts if the defendant does something by which he purposefully availed himself the privilege of
conducting activities in the forum state. Hanson v. Denckla, 357 U.S. 235, 252-54 (1958). The
critical inquiry is whether “the defendant’s conduct and connection with the forum state are such that
he should reasonably anticipate being haled into court” in the forum state. World-Wide Volkswagen
Corp. v. Woodson, 444 U.S. 286, 297 (1980).

Here, the Defendants allegedly provided materials that could be used to solicit business to

a third party. However, there are no allegations that such materials were ever distributed or used in


Gause’s statement on other occasions prior to the close of discovery and that Plaintiffs failed to
inform Defendants of these additional statements.

Based on the above, Plaintiffs failed to timely produce statements by Gause that related to
the personal jurisdiction issue before the Court. Plaintiffs also failed to offer any justification for
their failure to timely produce or identify Gause and his statements. Accordingly, Plaintiffs’ Exhibit
No. 5 is stricken.

A Plaintiff has the burden of establishing a prima facie case of personal jurisdiction. See
Steel Warehouse of Wisc., Inc. v. Leach, 154 F.3d 712, 714 (7th Cir. 1998). When deciding whether
the plaintiffhas made a necessary showing, a court can look to affidavits and exhibits submitted by
each party. Turnock v. Cope, 816 F.2d 332, 333 (7th Cir. 1987) (Turnock). When determining
whether the plaintiff has met the burden of establishing a prima facie case of jurisdiction, this Court
must take jurisdictional allegations in the complaint as true, unless controverted by the defendant.
See Turnock, 816 F.2d at 333. Additionally, all factual disputes must be resolved in favor of the
plaintiff. Turnock, 816 F.2d at 333.

A determination of whether this Court has personal jurisdiction over the non-resident
Defendants requires an examination of three sources of law: “(1) state statutory law, (2) state
constitutional law, and (3) federal constitutional law.” RAR, Inc. v. Turner Diesel Ltd., 107 F.3d
1272, 1276 (7th Cir. 1997) (RAR).

Under Illinois law, a defendant is subject to the jurisdiction of its courts if the cause of action
arises from several specified acts, including committing a tortious act within the state. 735 ILCS
5/2-209(a)(2). The statute also provides that an Illinois court may exercise jurisdiction on any basis

permitted by the state or federal constitution. 735 ILCS 5/2-209(c). Therefore, the statute authorizes


jurisdiction of this Court due to the contacts that Denson, Homa, and Gause had with investors in
Illinois; and (5) the receivership statutes of 28 U.S.C. §§ 754, 1692.
ANALYSIS

Initially, Defendants move to strike, pursuant to Federal Rule of Civil Procedure 37,
Plaintiffs’ Exhibit No. 5 (the “Gause Transcript”) that was submitted in support of Plaintiffs’
Response to Defendants’ Motion to Dismiss.

Pursuant to Federal Rule of Civil Procedure 37, a party that, without substantial justification,
fails to disclose information required by Rule, or to amend a prior response as required by Rule, is
not permitted to use such evidence at trial, at 2 hearing, or for a motion. Fed. R. Civ. P. 37(c)(1).

In the instant case, Defendants asked Plaintiffs to identify and produce statements of “any
person regarding any of the jurisdictional allegations set forth in the Complaint.” On May 30, 2003,
Plaintiffs identified James Owen in response to Defendants’ request. Pursuant to Court order,
Plaintiffs were given a further opportunity to produce all documents on the issue of personal
jurisdiction by October 22, 2003. Plaintiffs did not produce any additional statements or amend their
previous response.

However, in their response to the instant Motion to Dismiss, Plaintiffs attached excerpts of
a May 2, 2002 statement of Michael Gause, which includes statements regarding the personal
jurisdiction allegations. By letter dated January 8, 2004, Defendants notified Plaintiffs that their
previous answer appeared to be false and requested that Plaintiffs produce Gause’s complete
statement. Plaintiffs responded that they assumed that Defendants were either provided a copy of
Gause’s transcript or had access to it during discovery. Plaintiffs did not explain why they had not

previously disclosed Gause. Furthermore, Gause’s transcript reveals that Plaintiffs had taken


so as to maintain a presence here subjects him to personal jurisdiction of Illinois courts for all
matters. Aetna Cas. & Sur. Co. v. Crowther, Inc., 581 N.E.2d 833, 835 (Ill. App. Ct.1991). In order
to have general jurisdiction, the business activities of the defendant cannot be inadvertent, trivial or
sporadic; they must be intentional, substantial and continuous. Asset Allocation & Management Co.
v. Western Employers Ins. Co., 892 F.2d 566, 570 (7th Cir. 1989).

In the instant case, the Defendants are not subject to the general jurisdiction of this Court.
Defendants’ activities in Illinois were not “substantial” or “continuous and systematic.” The only
activities by the Defendants directed at Illinois were the mailing of interest checks and credit/debit
card statements to Illinois residents. However, only 14 account/card holders, or 0.5% of those who
invested in C4T, had an Illinois address. The banking and credit card services provided by the
Defendants took place in the Bahamas and were governed by Bahamian law. The Defendants did
not maintain any accounts in Illinois, perform any credit card services in Illinois, and did not
negotiate any contracts for such services in Illinois. Defendants’ minimal activities with Hlinois fail
to establish general jurisdiction. See Federated Rural Elec. Ins. Corp. v. Inland Power & Light Co.,
18 F.3d 389, 395 (7th Cir. 1994) (Federated) (defendant’s activities of sending premium payments
to resident in Wisconsin; backing the sale of bonds, some of which were sold to Wisconsin residents;
and defendant’s communications with Wisconsin resident by mail and phone were insufficient to
subject defendant to personal jurisdiction in Wisconsin); Asset Allocation & Mgmt. Co. v. Western
Employees Ins. Co., 892 F.2d 566, 570 (7th Cir. 1990) (Asset) (payments into Hlinois not sufficient
to subject payer to personal jurisdiction); Tri-Meats, Inc. v. NASL Corp., 2001 WL 292621 (N.D.
IN. March 26, 2001) (Zri-Meats) (wire transfers into Illinois not sufficient to subject transferor to

personal jurisdiction).


“Minute Order Form (06/97)

f

C

Af

United States District Court, Northern District of Iinois

T
Name of Assigned Judge Sitting Judge if Other
or Magistrate Judge John W. Darrah than Assigned Judge
CASE NUMBER 02 C 8655 DATE 3/22/2004
CASE Stenger, et. al. Vs. Leadenhall Bank & Trust Co. Ltd., et.al.
TITLE
[In the following box (a) indicate the party filing the motion, c.g., plaintiff, defendant, 3rd party plaintiff, and (b) state briefly the nature
he motion beit .
MOTION: of the motion being presented.}
DOCKET ENTRY:
qd) 0 Filed motion of [ use listing in “Motion” box above.]
(2) o Brief in support of motion due
(3) Oo Answer brief to motion due. . Reply to answer brief due.
(4) QO Ruling/Hearing on set for at
(5) o Status hearing[held/continued to] [set for/re-set for] on __ set for at
(6) oO Pretrial conference[held/continued to] (set for/re-set for] on set for at .
(7) a Trial{set for/re-set for] on at
(8) Qa [Bench/Jury trial] [Hearing] held/continued to at
(9) Oo This case is dismissed [with/without] prejudice and without costs[by/agreement/pursuant to]
DOFRCP4(m) OLocal Rule 41.1 COFRCP41(a)(1) O FRCP41(a)(2).
ao = {Other docket entry] For the reasons stated in the attached memorandum opinion and order,
defendants’ renewed motion to dismiss is granted. Defendants’ alternate motion to dismiss for non
conviens is denied as moot. Defendants’ motion to strike is granted. Enter Memorandum Opinion and
Order. Any pending dates and/or motions are terminated as moot.
dl) @ [For further detail see order attached to the original minute order.}
No notices required, advised in open court. . ‘Document
No notices required. sumer otvtees one Num ber
Notices mailed by judge's staff. ce a 7004
Notified counsel by telephone. TN doctored
ov | Dockcting to mail notices. / _— /
V_ | Mail AO 450 form. Leno Sig Sn ockese depury mt XD )
Copy to judge/magistrate judge.
A 4a 99 7004
a POY aba date mailed notice
courtroom OG Ae
MF deputy's

initials -
Date/time received in

central Clerk's Office

mailing deputy initials



Plaintiffs also contend that jurisdiction lies in this Court because the Defendants were part
of a conspiracy.

Under the “conspiracy theory of jurisdiction,” the Court may assert jurisdiction over all co-
conspirators based on their involvement in a conspiracy that occurred within the forum. See
Textor v. Board of Regents of Northern Ill. Univ., 71) F.2d 1387, 1392-93 (7th Cir. 1983) (Textor);
Kohler Co. vy. Kohler Int’l, Ltd., 196 F. Supp. 2d 690, 696-97 (N.D. Ill. 2002). Under this theory,
the plaintiff must make a prima facie showing of a conspiracy and a substantial act in furtherance
of the conspiracy in the forum state. See Textor, 711 F.2d at 1393. The substantial conspiratorial
act occurring in the forum state must be “sufficient to establish minimum contacts with and confer
jurisdiction over [the] nonresident defendants.” Zivitz v. Greenburg, 1999 WL 984397 (N.D. Ill.
Oct. 25, 1999).

Here, Plaintiffs have pled that the Defendants were in a conspiracy with Homa, Gause,
Denson, and C4T US to defraud investors and fraudulently convey funds from C4T US to
Morningstar. The allegations summarized above sufficiently plead a conspiracy by these actors.
The Defendants’ activities in furtherance of the conspiracy in Illinois are the repatriating of the
Illinois investor’s interest through the mailing of checks or by crediting the credit/debit card accounts
of the Illinois investors. However, these activities, at the most, involved 0.5% of the investors that
were allegedly damaged by Defendants’ conduct. These minimal activities do not constitute a
substantial act in furtherance of the conspiracy. See Zivitz v. Greenburg, 1999 WL 984397 (N.D.
Ill. Oct. 25, 1999); Asset, 892 F.2d at 570. Accordingly, personal jurisdiction over the present

Defendants cannot be based on the alleged conspiracy.

11


Illinois. Plaintiffs also allege that Defendants mailed interest checks and credit/debit card statements
to Illinois residents. However, as mentioned above, this involved only 14 account/card holders, or
0.5% of the those who invested in C4T, who have an Illinois address. These minimal activities are
insufficient bases for jurisdiction. See Federated, 18 F.3d at 395 (mailing of payments,
communication by phone and mail, and backing of sale of bonds insufficient contacts for purposes
of due process); Asset, 892 F.2d at 570 (payments into Illinois not sufficient to subject payer to
personal jurisdiction); Tri-Meats, 2001 WL 292621 at * 7 (wire transfers into Itinois not sufficient
to subject transferor to personal jurisdiction).

Furthermore, it would be unreasonable to bring the Defendants into Illinois to defend the
litigation.

The only alleged activity by the Defendants related to the present lawsuit toward Illinois is
the payment of interest to about one-half of one percent of all of the investors injured by the alleged
Ponzi scheme. The Defendants never actively sought any type of business relationship with residents
of Illinois and maintain no offices or personnel in Illinois. Other than the interest payments to these
few investors, no other activities related to the claims against the Defendants took place in Illinois
or were connected in any manner to Illinois. Furthermore, none of the parties are residents of Illinois,
and none have ties to Illinois. In addition, the burden of litigating in Illinois would also be
substantial because many of the prospective witnesses and most of the evidence are located in the
Bahamas.

Based on the above, Plaintiffs have failed to demonstrate a prima facie case that forcing the
Defendants to defend a lawsuit in Illinois does not violate the due process requirement of specific

jurisdiction.

10


the exercise of personal jurisdiction by the Illinois courts to the fullest constitutional limit; and the
statutory analysis collapses into a due process inquiry, and whether the defendant engaged in any of
the acts enumerated in the long-arm statute need not be considered by the court. Indianapolis Colts,
Inc. v. Metropolitan Baltimore Football Club Partnership, 34 F.3d 410, 411 (7th Cir. 1994) (Colts),
Euromarket Designs, Inc. v. Crate & Barrel Ltd., 96 F.Supp.2d 824, 834 (N.D.IIl. 2000)
(Euromarket); LaSalle National Bank v. Vitro, 85 F Supp.2d 857, 860 (N.D.Il. 2000); LFG, LLC.
v. Zapata Corp. 78 F.Supp.2d 731, 735 (N.D. Ill. 1999) (LFG).

The Due Process Clause permits an Illinois court to exercise jurisdiction over a non-resident
defendant only if the defendant has had “certain minimum contacts with [the state] such that the
maintenance of the suit does not offend ‘traditional notions of fair play and substantial justice.””
International Shoe Co. v. Washington, 326 U.S. 310, 316 (1945), quoting Milliken v. Meyer, 311
USS. 457, 463 (1940); Neuman & Assoc. v. Florabelle Flowers, 15 F.3d 721, 725 (7th Cir. 1994).
This determination depends on whether the plaintiff asserts general or specific jurisdiction against
the defendant. RAR, 107 F.3d at 1277. General jurisdiction requires a showing that the defendant
performed “substantial” or “continuous and systematic” activities in the forum state, and specific
jurisdiction requires a showing of minimum contacts with the forum state. Helicopteros Nacionales
de Colombia, S.A. v. Hall, 466 U.S. 408, 413-16 (1984) (Helicopteros).

“General jurisdiction . . . is for suits neither arising out of nor related to the defendant’s
contacts, and it is permitted only where the defendant has ‘continuous and systematic general
business contacts’ with the forum state.” RAR, 107 F.3d at 1277. A defendant with extensive
contacts in a state can be subject generally to the personal jurisdiction of that state’s courts.

Helicopteros, 466 U.S. at 414. A finding that a non-resident defendant is doing business in Illinois


company. Both Morningstar and Rolls Royce had accounts at Leadenhall. Morningstar was used
to receive investor funds into the scheme and, as such, was the conduit company for the flow of
investments into the scheme -- a so called “in” company. Rolls Royce was used to pay interest out
to investors and, as such, was the “out” company.

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

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

account in BAC Florida Bank/Popular Bank (“BAC Bank”) in Miami, Florida.


CONCLUSION
For the forgoing reasons, Plaintiffs have not established a prima facie case for personal
jurisdiction.
Accordingly, Defendants’ Renewed Motion to Dismiss is granted. Defendants’ alternate Motion

to Dismiss for Forum Non Conviens is denied as moot. Defendants’ Motion to Strike is granted.
‘4 ,

vn Goel. n r00y NWA

W. DARRAH
United States District Judge

14


receivership property for the benefit of investors.

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

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

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

Joseph Denson was a second-tier marketer, working directly below Gause. Denson’s

marketing and note-issuing companies were Morning Star and Rolls Royce Ltd., a Bahamian


UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION

PHILLIP S. STENGER, et al.,

Plaintiffs,
No. 02 C 8655
v.
Judge John W. Darrah
LEADENHALL BANK & TRUST COMPANY
LIMITED; a Bahamian limited partnership;
AXXESS INTERNATIONAL LIMITED,

a Bahamian limited partnership; and

AXXESS INTERNATIONAL BAHAMAS
LIMITED, a Bahamian limited partnership;

Defendants.

wwe eee Se SS SD

MEMORANDUM OPINION AND ORDER

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

BACKGROUND

Phillip S. Stenger and G. James Cleaver were appointed by the Grand Court of the Cayman
Islands, as the joint official liquidators of various related entities known as Cash 4 Titles (“C4T”),
including Morningstar Ltd., which is an entity incorporated in the Cayman Islands and doing
business in the United States. Stenger is also the receiver, appointed at the request of the United
States Securities & Exchange Commission, over the beneficial interests of Charles R. Homa,

D. Dean Pearson, and Michael Gause, and their related C4T entities. Stenger’s mandate as receiver

is to marshal, conserve, protect, hold funds, and operate and dispose of any assets constituting

_—

5


Lastly, Plaintiffs contend that personal jurisdiction over the nonresident Defendants can be
based on the receivership statutes because such statutes authorize extraterritorial service of process
in cases brought by receivers.

Federal Rule of Civil Procedure 4(k) provides, in pertinent part, that service of summons is
effective to establish personal jurisdiction over a defendant who could be subject to jurisdiction in
a court of the forum state when service is authorized by a federal. See Fed. R. Civ. P. 4(k)(1)(A) and
(D). Plaintiffs argue that the receivership statutes 28 U.S.C. §§ 754 and 1692 provide for nationwide
service and, thus, personal jurisdiction over the nonresident Defendants.

Section 754 provides:

A receiver in any civil action or proceeding involving property, real
or personal or mixed, situated in different districts shall, upon giving

bond as required by the court, be vested with complete jurisdiction
and control of all such property with the right to take position thereof.

eK

Such receiver shall ... file copies of the complaint and such order of

appointment in the district court for each district in which property is

located. The failure to file such copies in any district shall divest the

receiver of jurisdiction and control over ali such property in that

district.
28 U.S.C. § 754. This statute does not confer extraterritorial in personam jurisdiction; instead, it
permits the receiver to obtain in rem jurisdiction over receivership property. See Stenger v. World
Harvest Church, Inc., 2003 WL 22048047 (N.D. Ill. Aug. 2, 2003) (World Harvest). Furthermore,
Section 754 does not authorize extraterritorial service of process; therefore, it is does not confer

jurisdiction pursuant to Rule 4(k)(1)(D). See World Harvest, 2003 WL 22048047 at *2.

Section 1692, provides in pertinent part:

12