Source: https://www.scribd.com/doc/25161995/Supreme-Court-of-the-State-of-New
Timestamp: 2017-10-19 04:18:32
Document Index: 385866563

Matched Legal Cases: ['§ 112', '§ 62', '§14', '§14', '§14', '§175', '§ 175', '§50', '§ 111']

Supreme Court of the State of New | Fraud | Salary
THE PEOPLE OF THE STATE OF NEW YORK, BY ANDREW M. CUOMO, ATTORNEY GENERAL OF THE STATE OF NEW YORK, Petitioners, - against SOUNDVIEW MANAGEMENT ENTERPRISES LLC Respondent.
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AFFIRMATION OF MITRA HORMOZI
Date filed: January 13,2010
Mitra Hormozi, an attorney duly admitted to practice in the courts of the State of New York, affirms the following statements to be true under penalties of perjury:
INTRODUCTION AND SUlVIMARY OF ARGUMENT
I am the Special Deputy Chief of Staff in the office of Andrew M. Cuomo,
Attorney General of the State of New York. 2. I am familiar with the facts and circumstances of this case and submit this
affirmation in support of the Attorney General's motion under CPLR 2308(b) to compel Respondent Soundview Management Enterprises LLC to comply with a subpoena duces tecum issllcd and served by the Office of the New York State Attorney General ("OAG") pursuant to Ncw York Executivc Law section 63(12), Ncw York Not-For-Profit Corporation Law scction 112(b). and New York Estates, Powers and Trusts Law section 8-1.4(i). The subpoena was
served on Respondent on August 25, 2009. A copy of the subpoena and the affidavit of service are attached hereto as Exhibits A and B respectively. 3. The facts set forth in this affinnation are based on my personal knowledge and on
information contained in OAG's files and are believed to be true and correct. 4. As set forth in detail below, for approximately nine (9) months OAG has been
conducting an investigation of Comprehensive Community Development Corp., a tax-exempt 501(c)(3) corporation registered with the State of New York and doing business as "Soundview Healthcare Network" ("Soundview"). In the course of its investigation, OAG has developed extensive evidence of potential violations of the New York Not-For-Profit Corporation Law by Soundview and various of its officers and directors, including but not limited to Pedro Espada, Jr., a New York State Senator, who is also the President and Chief Executive Officer of Soundview. 5. The evidence reveals, for example, that Soundview, a not-for-profit corporation,
entered into contracts with a for-profit company owned and controlled exclusively by Mr. Espada called Soundview Management Enterprises, LLC ("Espada Management Company"). This contract allowed Mr. Espada effectively to siphon off and otherwise divert money from Soundview for Mr. Espada's own personal and political benefit. Documentary evidence indicates that a significant portion of the funds paid by Soundview to Espada Management Company were Llsed to pay Mr. Espada's campaign expenses including printing, campaign office rent, and personnel costs. It also appears that Sound view directly, or indirectly through Espada Management Company, paid expenses relating to Mr. Espada's campaign and paid workers who
were dispatched to work on Mr. Espada's campaign, all in direct violation of the not-for-profit laws.! 6. Moreover, notwithstanding how the monies were used, it appears that the contract
between Soundview and Espada Management Company is itself improper. Pursuant to the contract, Espada Management Company was and is paid almost $400,000.00 per year to provide maintenance services to Soundview. But Board minutes produced by Soundview provide no valid justification for awarding Mr. Espada's privately owned company such a lucrative contract-especially where, prior to the contract being executed, maintenance services were provided by an entity wholly owned by Soundview. It thus appears that the Mr. Espada (as President of Soundview) and the Soundview Board members violated their fiduciary duties by approving and entering into such a contract in the first place. 7. GAG is investigating claims of labor law violations at Espada Management
Company and has uncovered evidence that Espada Management Company engages in myriad labor law violations designed to further enhance the company's profits at the expense of its employees. GAG is also investigating possible tax liability issues concerning Mr. Espada and the associated companies.
These types of improprieties are similar to cel1ain illegal acts that tainted at least one of Mr. Espada's earlier campaigns for public office. In 2005, four (4) Soundview employees-three of whom still work for Soundview-pleaded guilty to diverting Sound view monies and grants to pay campaign expenses for Mr. Espada. The legal fees of these convicted employees were paid by Soundview, which may also be a violation of the not-for-profit law, and is currently under investigation by GAG.
In connection with its investigation, GAG issued and served a subpoena on
Espada Management Company on August 25, 2009 (see Ex. A hereto). Espada Management Company has refused to comply in any meaningful way with OAG's subpoena, thereby necessitating this motion to compel.
'OAG's Legal Authority to Issue the Subpoena 9. The subpoena duces tecum was issued pursuant to New York Executive Law
section 63(12), New York Not-For-Profit Corporation Law section 112(b), and New York Estates, Powers and Trusts Law section 8-1.4(i). 10. Executive Law Section 63(12) provides: Whenever any person shall engage in repeated fraudulent or illegal acts or otherwise demonstrate persistent fraud or illegality in the carrying on, conducting or transaction of business, the attorney general may apply, ... for an order enjoining the continuance of such business activity or of any fraudulent or illegal acts, directing restitution and damages ... and the court may award the relief applied for or so much thereof as it may deem proper. The word "fraud" or "fraudulent" as used herein shall include any device, scheme or artifice to defraud and any deception, misrepresentation, concealment, suppression, false pretense, false promise or unconscionable contractual provisions....
In connection with any such application, the attorney
general is authorized to take proof and make a determination of the relevant facts and to issue subpoenas in accordance with the civil practice law and rules. Such authorization shall not abate or terminate by reason of any action or proceeding brought by the attorney general under this section.
New York Not-For-Profit Corporation Law section 112 provides that OAG may
bring an action or special proceeding against a charitable organization to enforce the requirements of New York State's Not-For-Profit laws, see NY Not-For-Profit Corp. Law
S112(a), and that, in connection with any such action or special proceeding, GAG may "take
proof and issue subpoenas in accordance with the civil practice law and rules," id. at § 112(b)(6). 12. Finally, New York Estates, Powers and Trusts Law section 8-1.4(i) provides:
The attorney general may investigate transactions and relationships of trustees for the purpose of determining whether or not property held for charitable purposes has been and is being properly administered. The attorney general, his or her assistants, deputies or such other officers as may be designated by him or her, are empowered to subpoena any trustee, agent, fiduciary, beneficiary, institution, association or corporation or other witness, examine any such witness under oath and, for this purpose, administer the necessary oaths, and require the production of any books or papers which they deem relevant to the inquiry. 13. OAG's authority to issue subpoenas and take testimony under these statutes has
been broadly construed. In construing section 63(12), for example, courts have held that "the Attorney General enjoys a presumption that he is acting in good faith and must show only that the materials sought bear a reasonable relation to the subject matter under investigation and to the public purpose to be achieved." Anheuser-Busch, Inc. v. Abrams, 71 N.Y.2d 327,331-32 (1988) (citations and quotation marks omitted). Indeed, a subpoena issued by the Attorney General pursuant to Executive Law § 62(13) "should be limited or quashed only where the information sought is 'utterly ilTelevant to any proper inquiry'" Abrams v. Thompso!l, 150 A.D.2d 679, 680 (2d Dep't 1989) (citatio"ns omitted); Ahrams v. ThnrwllY Food Market & Shopping C('lller, Inc.,
147' A.D.2d 143, 146 (2d Dep't 1989); Pavillion A/?ency Inc. v. Spit:::.er, 9 Misc. 3d 626 (Sup. Ct.
New York Co. 2005).
Background of OAG's Investigation
14. OAG is conducting an investigation of Comprehensive Community Development
Corp., a tax-exempt 501(c)(3) corporation registered with the State of New York and subject to, among other things, the provisions of the New York Not-For-Profit Corporation Law. Comprehensive Community Development Corp. does business under the name "Soundview Healthcare Network" ("Soundview"). Soundview's main office is located at 731 White Plains Road, Bronx, New York 10473. Soundview also operates three other satellite clinics located in the Bronx. 2 Pedro Espada, Jr. ("Mr. Espada"), a New York State Senator, is the President and Chief Executive Officer of Soundview. Kenneth Brennan is Soundview's Chief Financial Officer. 15. OAG's investigation of Soundview involves, among other issues, possible
violations by Soundview's Board of Directors and various officers of their fiduciary obligations to Soundview, including but not limited to the duty of care, the duty of loyalty, and the duty of obedience. OAG's Factual Predicate for the Subpoena to Espada Management Company 16. Espada Management Company was formed in mid-2007. (See Exhibit C.) Its
address is the same as Soundview's, i.e., 731 White Plains Road, Bronx, New York 10473, and
A fourth satellite location, Jessica Guzman Medical Center (located at 616 Castle Hill Avenue, Bronx, New York 10472), was closed in or around March 2009.
witnesses have told GAG that the offices for Espada Management Company are located within the SOLlndview clinic. Mr. Espada is the sole principal of Espada Management Company. 17. Pursuant to a contract dated January 15,2008 (attached hereto as Exhibit D),
Soundview agreed to have Espada Management Company provide janitorial services for Soundview's main office and satellite locations beginning on February 1,2008. the contract provides (see Ex. D at para. 3.1): "As compensation to [Espada Management Company] for Basic Janitorial Services provided under this Agreement, [Soundview] shall pay [Espada Management Company] an additional monthly fee (the "Additional Management Fee") as listed on Schedule A upon fifteen (15) days from receipt of invoice." Attached to the contract-which is one of only two documents produced by Espada Management Company in response to the sUbpoena-are two pages marked "Schedule A-Basic Management Fee." The first shows only the figure $1,000. (Id. at p. 10.) The second (id. at p. 12) shows the following table: Soundview Health Center 731 White Plains Road Bronx, New York 10473 Burnside Medical Center 165 E. Burnside Avenue Bronx, New York 10473 Castle Hi II Medical Center 616 Castle Hill Avenue Bronx, New York 10473 DiaJlo Medical Center 1760 Westchester Avenue Bronx, New York 10472 $9,000.00
Delany Sisters Health Center 821-7 East 233rd Street Bronx, New York 10466
"Basic Janitorial Services" are defined in Exhibit A of the contract to include mopping, dusting, vacuuming, buffing/waxing, janitorial (including hauling of trash), and monthly interior window washing. (Id. at 8.) The contract also shows that additional fees might be paid by Soundview to Espada Management Company in exchange for "Optional Services," such as painting or purchasing supplies. (Id. at 9.) 18. Thus, Soundview agreed by contract in early 2008 to pay Espada Management
Company at least $33,000.00 per month, or $396,000.00 per year, for janitorial services. The only reference to the market cost of janitorial services in the Board minutes produced by Soundview is in the minutes dated January 31,2005 (see Ex. Eat p. 1), which reflect that the market cost of janitorial services as of that date was allegedly $270,000.00 per year. At that point, Soundview was using a wholly-owned affiliate called Community Expansion Development Corporation ("Expansion") to provide maintenance services (id. at p. 2); because Expansion was a wholly-owned for-profit company, all profits, if any, earned by Expansion would have been retained by Soundview. 19. Analysis of Expansion's and Espada Management Company's bank records
further reveals, among other things, that: (i) Espada Management Company took over at least one of Expansion's other maintenance service contracts (related to a separately owned on-site pharmacy), thereby earning at least another $2,010.00 per month that previously had been paid to
Expansion; (ii) Espada Management Company apparently started providing janitorial services to additional companies that might otherwise have been serviced by Expansion (which appears to have ceased operating altogether); (iii) Espada Management Company cashed several checks made out to Expansion (under the name "CEDC" or "Community Expansion Development Corporation"); and (iv) Espada Management Company, rather than Expansion or Soundview, collects "rents" or "usage fees" from the Pharmacy and from people and entities, such as Weight Watchers, that utilize Soundview's facilities for weekly or monthly meetings. In other words, evidence collected to date indicates that revenues that should properly belong to Soundview are being given to Espada Management Company. 20. Board minutes produced by Soundview fail to provide any information that
explain: (i) why the purported costs of maintenance services rose from $270,000.00 annual1y in 2005 to $396,000.00 annually in 2008; (ii) why the contract for maintenance services was taken away from Expansion, a wholly-owned affiliate of Soundview, and given to outside vendor Espada Management Company, a private company of which Mr. Espada is a principal; (iii) how such a move, i.e., from essentially in-house services to a private outside vendor, would save money for, or in any way benefit, Soundview; or (iv) why Espada Management Company is now receiving monies, by contract or by "rent" collection, that previously went to Expansion or Soundview (directly or through the wholly-owned Expansion). 21. Moreover, a former employee of Expansion, and later Espada Management
Company, informs OAG that there was no change to the business from the time it was known as Expansion to the time it became known as Espada Management Company, other than a "change
of name.") The other change, of course, was in ownership; while Expansion was wholly owned by Soundview-such that the profits of Expansion, if any, would belong to the charity-Espada Management Company is privately owned. The profits of Espada Management Company, if any, would belong to Espada Management Company's principal, i.e., Mr. Espada. 12. According to the 2008 General Ledger produced by Soundview, Espada
Management Company was paid over $341,000.00 from Soundview in 2008. (See excerpts of 2008 General Ledger attached hereto as Exhibit F. 23.
Documents produced by Soundview indicate that Espada Management Company
pays no rental or lease fees to Soundview (see Ex. D at para. 2.4)), and that its contract with Soundview provides that Soundview will provide supplies to Espada Management Company (or that Espada Management Company will be paid for purchasing its own supplies) (id. at p. 9). In addition, documents subpoenaed from Espada Management Company's payroll company indicate that Espada Management Company's salary and wage costs were only approximptely $180,00.00 in 2008, i.e., only fifty three percent (53%) of the total fees paid to Espada Management Company by Soundview that year. This does not include monies paid to Espada
J Because OAG believes that revealing witnesses' names at this time would compromise its on­ going investigation, OAG respectfully requests that, if the Court believes the individuals' identities are necessary for the Court to rule on this motion to compel, OAG should be permitted to provide that information to the Court ill camera. See, e.g., Matter ofAm. Dental Coop., Inc. v. ,\ttorney Gell. (~l the State of N. Y., 127 A.D.2d 274, 280 (l st Dep't 1987).
.. According to the General Ledger produced by Soundview, the total amount paid by Soundview in 2008 for "maintenance services" was $384,988.02. Of that amount, the General Ledger reflects that $29,000.00 was paid to Expansion in January 2008. (See general/y Ex. F.) These documents contain names and social security numbers of individual employees. If 10
Management Company by other entities, such as the on-site pharmacy, utilizing its services. If those monies are counted, as well, then Espada Management Company's salary and wage expenses as compared to its revenue are significantly lower still. It is unclear what, if any, additional, legitimate costs Espada Management Company might incur as would justify an additional approximately $160,000.00 per year in fees charged to Soundview. 24. Based on documentary evidence and witness testimony, it also appears that
Espada Management Company was used as a conduit of funds from Soundview to Mr. Espada's campaign. For example, we are informed by witnesses that Espada Management Company paid at least some of the salary and wage costs incurred in connection with Mr. Espada's campaign, and Espada Management Company's bank records show numerous payments made directly by Espada Management Company for or on behalf of the campaign. GAG has found no public disclosure of this by Espada Management Company or Mr. Espada, whether on campaign disclosure reports or elsewhere. 25. The witnesses' testimony appears to be corroborated by documents subpoenaed
from Espada Management Company's payroll company, which reveal the following quarterly trends in Espada Management Company's salary and wage costs:
necessary. GAG is happy
provide them to the Court for ill call/era review.
15 14 14 15 16 13 18
Reported salaries/wages
$30,816 $50,487 $59,765 $40,291 $35,779 $34,274 $36,577
Average salaries/wages per employee
$2,054 $3,606 $4,269 $2,686 $2,236 $2,636 $2,032
Q12008 Q22008 Q32008 Q42008 Q12009 Q22009 Q32009
Thus, documents indicate that Espada Management Company's salary and wage costs spiked dramatically in the months leading up to the 2008 general election in which Mr. Espada was elected to the New York State Senate. This is so despite the fact that the number of workers remained basically constant both before and after the election; instead, certain key employees who are believed to have worked on the campaign, such as Mr. Espada's son Pedro G. Espada, were hired or paid more during those months. Espada Management Company's salary and wage costs went down immediately and significantly following the election. 26. For example, Pedro G. Espada's salary and wages from Espada Management
Company almost doubled in the months leading up to the election. The quarterly breakdown of his salary and wages is as follows: Ql, $9,920.00; Q2, $15,190.00; Q3, $17,825.00; and Q4, $7,905.00. During that same time, Pedro G. Espada was paid $106,719.00 by Soundview. He was reported by both entities as working full-time (or more). Pedro G. Espada stopped appearing on the Espada Management Company's payroll immediately post-election.
() This number includes ill.!. employees reported as working at Espada Management Company in the relevant quarter. regardless of whether they worked for only a few weeks or for the entire 12
Espada Management Company was not disclosed as a contributor of funds or
services to Mr. Espada's campaign: indeed, Mr. Espada did not even form a campaign committee for the 2008 election, and thus filed no campaign disclosures at all. Although Mr. Espada's political action committee, Espada for the People, filed four disclosure reports in 2008, none disclose that Espada Management Company made significant monetary and in-kind contributions to Mr. Espada's campaign. 28. To the extent that Espada Management Company, by disguising and failing to
disclose its contributions to Mr. Espada's campaign, sought to evade the campaign finance laws (laws both limiting contributions and requiring disclosure), Espada Management Company and its principals, officers, and directors may be liable for, among other things, violations of the Election Law or common law fraud. See, e.g., Election Law §14-114 (setting forth campaign contribution limits); Election Law §14-120 (requiring that campaign contributions be under the true name of contributor): see also Election Law §14-126(4) (criminalizing knowing evasion of campaign contribution limitations); Penal Law §175.l0 (falsifying business records in the first degree); see also id. at § 175.05(2) and (3) (falsifying business records in the second degree). 29. In addition, Soundview is a not-for-profit 501(c)(3) tax-exempt charitable
organization that is prohibited by federal law (and its own Certificate of Incorporation, attached hereto as Exhibit G) from engaging in any political activities. See 26 U.S.c. §50l(c)(3). If it is determined that Soundview, or any of its officers, directors, or employees while being paid by . S(mndview for services rendered to Soundview, engaged in any political activities for Mr.
quurter.
Espada's campaign, then GAG may bring an action or special proceeding under the Not-For­ Profit Laws to, inter alia, "annul the corporate existence or dissolve [Soundview for acting] beyond its capacity or power" or "procure a judgment removing a director of a corporation for cause." NY Not-For-Profit Corp. Law § 111(a)(1) & (4). GAG may also seek to have Soundview's 501(c)(3) tax exempt status revoked. 30. Finally, because the officers and directors of Soundview are obligated to act at all
times in the best interest of Soundview, and to avoid all transactions that are not fair and reasonable to Soundview-especially those transactions that provide personal benefits to an officer or director, or a family member of either-it appears that they may have violated, among other fiduciary obligations, the duty of loyalty and the duty of obedience. Espada Management Company's Refusal to Comply with the Subpoena 31. The Subpoena was served on August 25, 2009. (See Ex. A.) A second copy,
attached hereto as Exhibit H, was served, with counsel's consent, by a facsimile sent to counsel on August 18, 1009. Espada Management Company thereafter retained new counsel, who agreed on September 9,2009, to produce the first set of responsive documents on or before September
11,1009. (See Letter from AAG Darcy M. Goddard to Richard St. Paul, counsel to Espada
Management Company, dated September 9,2009, attached hereto as Exhibit I.) 31. Instead, on September 11,2009, counsel for Espada Management Company sent
one document-i.e., the janitorial services contract-from Espada Management Company that was respollsi ve to the Subpoena, stating:
Please be further advised that my client makes these documents available voluntalily and in the spirit of cooperation; Despite a prima facie review of said subpoena with cause to believe that issuing the subpoena of such documents as it relates to the above one or more entities is outside the scope of the legal jurisdiction of your office as provided by applicable laws.
(See Letter from Richard St. Paul, counsel to Espada Management Company, to AAG Darcy M.
Goddard, dated September 11,2009, attached hereto as Exhibit J.) Counsel also expressed concern as to the supposed confidentiality of some unidentified responsive documents. (See id.) 33. By telephone, and by letter dated September 14, 2009, OAG advised counsel for
Espada Management Company as follows: We refer you to, inter alia, the plain language of New York Estates, Powers and Trusts Law section 8-1.4(i) and New York Executive Law section 63(12), both of which vest the Office of the New York State Attorney General ("OAG") with broad authority to issue investigatory subpoenas such as these.... Abundant case law supports a broad reading of this statutory language. See, e.g., American Dental Cooperative, Inc. v. Attomey Gen. of New York, 127 A.D.2d 274 (1st Dep't 1987); Abrams v. Thompson, 150 A.D.2d 679 (2d Dep't 1989); Pavillion Agency Inc. v. Spitzer, 9 Misc. 3d 626 (Sup. C.t. New York Co. 2005). . .. To the extent your clients have confidentiality concerns, we refer you to the provisions in the Public Officers Law relating to the Freedom of Information Law ("FOIL") and note that you may invoke its protections in the letter accompanying your clients' productions.
(See Letter from AAG Darcy M. Goddard to Richard St. Paul, counsel to Espada Management
Company, dated September 14, 2009, attached hereto as Exhibit K.) 34. On September 23,2009, counsel for Espada Management Company produced one
additional document: a Dcpal1mcnt of Labor filing made by Espada Management Company for thc quarter cnding June 30, 2009. Counsel's covcr letter stated, "Please be advised that a search
of other documents relevant to the subpoena is on going and [sic] will be provided expeditiously upon receipt and review." (See Letter from Richard S1. Paul, counsel to Espada Management Company, to AAG Darcy M. Goddard, dated September 21,2009, attached hereto as Exhibit L.) 35. To date, more than three (3) months later, no further documents have been
produced, and telephone calls and letters from GAG to counsel for Espada Management Company, both from AAG Goddard and from Chief of Staff Steven M. Cohen, have gone unanswered.
36. Based on the foregoing, and on additional information collected by GAG in the
course of its investigation, Espada Management Company's refusal to comply with the Subpoena is without any basis, legal or factual. The Subpoena (i) was validly served, (ii) is explicitly authorized by the relevant statutes under which it was issued, and (iii) seeks documents and information directly relevant to GAG's investigation both of Soundview, a 501(c)(3) charitable organization governed by New York's Not-For-Profit Law, and Espada Management Company. Respondent should be compelled to comply fully with the Subpoena. See, e.g., Thompson, 150 A.D.2d 679,680; Thruway Food Market & Shopping Center, Inc., 147 A.D.2d 143, 146. 37. Pursuant to CPLR 2308(b), Petitioners also request costs of $50.00 and a penalty
or $50.00.
38. No previous application has been made for any of the relief sought herein.
WHEREFORE, for the reasons stated herein, the Court should grant the Attorney General's motion to compel Respondent to comply fully with the subpoena duces tecum served on August 25, 2009. Dated: January 13,2010 New York, New York
Mi tra Hormozi
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